-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FqJ6K4zn8nfomCSLVrwrnive1a4z4eLPj61Ml1X+HhKSD1N/U3fB5598PFwQzlBM sxcC+8tUYwlyX4182EEStw== 0000950123-00-003001.txt : 20000331 0000950123-00-003001.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950123-00-003001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LORAL SPACE & COMMUNICATIONS LTD CENTRAL INDEX KEY: 0001006269 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 133867424 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14180 FILM NUMBER: 586000 BUSINESS ADDRESS: STREET 1: 600 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126971105 MAIL ADDRESS: STREET 1: 600 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 10-K 1 LORAL SPACE & COMMUNICATIONS LTD. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-14180 LORAL SPACE & COMMUNICATIONS LTD. C/O LORAL SPACECOM CORPORATION 600 THIRD AVENUE NEW YORK, NEW YORK 10016 TELEPHONE: (212) 697-1105 JURISDICTION OF INCORPORATION: BERMUDA IRS IDENTIFICATION NUMBER: 13-3867424 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained in the registrant's 2000 definitive proxy statement. At March 15, 2000, 249,507,509 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 $2.8 billion. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 2000 definitive proxy statement (to be filed not later than 120 days after the end of the registrant's fiscal year) 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS THE COMPANY OVERVIEW Loral Space & Communications Ltd. together with its subsidiaries ("Loral" or the "Company") is one of the world's leading satellite communications companies, with substantial activities in satellite manufacturing and satellite-based communications services. We have assembled the building blocks necessary to provide a seamless, global networking capability for the information age. Our four operating segments are: Fixed Satellite Services. Through the Loral Global Alliance, which currently consists of Loral Skynet, Loral CyberStar, Inc. ("Loral CyberStar"), our 49% owned affiliate Satelites Mexicanos, S.A. de C.V. ("Satmex"), and our 47% owned affiliate Europe*Star Limited ("Europe*Star"), we have become one of the world's leading providers of satellite services using geostationary communications satellites. We lease transponder capacity on our satellites to our customers who use the capacity for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television, or DTH. The Loral Global Alliance currently has ten high-powered geosynchronous satellites in orbit: the seven satellite Telstar fleet and three Satmex satellites, with footprints covering almost all of the world's population. Broadband Data Services. Through Loral CyberStar and our 82% owned subsidiary CyberStar, L.P. ("CyberStar LP", and together with Loral CyberStar, the "Loral CyberStar Group"), we currently (i) deliver U.S.-based Internet content via satellite to more than 130 Internet Service Providers, or ISPs, in more than 32 foreign countries, which reach approximately seven million residential customers around the world, (ii) distribute high-speed data over private corporate very small aperture terminal, or VSAT, networks, which reach approximately 2.5 million corporate desktops around the world, and (iii) offer business television, or BTV, services by satellite to corporations. Our broadband strategy will build on these existing resources and will initially focus on two attractive opportunities for early market entry: consumer broadband services and streaming media services. Satellite Manufacturing and Technology. Space Systems/Loral, Inc. ("SS/L") is one of the world's leading manufacturers of satellites and space systems, providing its customers with a full suite of services, including: developing custom designs to meet their requirements, manufacturing and testing, and arranging for launch services and insurance. Global Mobile Telephone Service. We are the managing general partner and 40% owner of Globalstar, L.P. ("Globalstar"). Globalstar owns and operates a 52-satellite constellation, including four in-orbit spares, that forms the backbone of a global telecommunications network designed to serve virtually every populated area of the world. In the first quarter of 2000, the Globalstar system commenced operations, and as of February 29, 2000, there were 14 gateways available for service covering 78 countries. Billable service has commenced in 20 countries, including Austria, Argentina, Brazil, Canada, Greece, Italy, South Korea, Switzerland and the United States. Our strategy is to capitalize on our market position and advanced technologies to offer value-added satellite-based services as part of the evolving worldwide communications networks. Where appropriate, we seek to form strategic alliances with major telecommunications service providers and equipment manufacturers to enhance and expand our satellite-based service opportunities. For example, we are a partner in SkyBridge Limited Partnership ("SkyBridge"), a partnership led by Alcatel, that is building a low earth orbit satellite system for the delivery of broadband and multimedia services worldwide. We, together with partners, also act as the Globalstar service provider in Canada, Mexico, Brazil and Russia. Loral was incorporated on January 12, 1996 as a Bermuda exempt company and has its registered and principal executive offices at Cedar House, 41 Cedar Avenue, Hamilton, HM 12, Bermuda. 1 3 FIXED SATELLITE SERVICES Following our acquisition of the Loral Skynet business from AT&T in March 1997, we have rapidly established ourselves through a series of subsequent acquisitions and joint venture transactions as one of the world's leading providers of fixed satellite services. These satellites, which are known as GEO satellites, fly in geosynchronous earth orbit approximately 22,000 miles above the Equator. In this orbit, the satellites remain in a fixed position relative to points on the earth's surface. GEO satellites provide reliable, high bandwidth services anywhere in their coverage areas and therefore serve as the backbone for many forms of telecommunications. In the United States and other developed countries, customers lease transponder capacity primarily for distribution of network and cable television programming, for DTH video transmission and for live video feeds from breaking news and sporting events. In the developing world, a substantial portion of such capacity is dedicated to long-distance telephone service as well as television services. GEO satellites are increasingly used throughout the world for international Internet communications, high-speed data services for businesses through VSAT networks, and for distance learning and educational television. Loral Global Alliance Through the Loral Global Alliance, we offer our customers an integrated portfolio of satellite capacity that provides "one stop shopping" for local, regional and global GEO satellite services. The alliance, which consists of Loral Skynet, Loral CyberStar, Satmex and Europe*Star, currently has ten satellites in orbit with a total of 195 C-band and 297 Ku-band 36 MHz transponder-equivalents and a collective footprint covering almost all of the world's population. As of December 31, 1999, Loral Global Alliance backlog (including 100% of Satmex backlog) totaled $1.5 billion, comprised of leases with customers having an average term of approximately 4.5 years, utilizing approximately 268 36 MHz transponder-equivalents, with approximately 146 additional 36 MHz transponder-equivalents available for lease, excluding 21 36 MHz transponders not available due to previous sales or other events. Moreover, in January 2000, Telstar 12 commenced service with 57 36 MHz transponder-equivalents, of which 51 were available for lease. Discussions set forth in Part I regarding the number of transponders are in 36 MHz equivalents, unless otherwise noted. The Loral Global Alliance provides for cross-selling arrangements among the alliance members' respective sales forces and for cooperative marketing and promotional activities. We believe that these arrangements will enable the members of the alliance to compete more effectively in sales of communications satellite services worldwide. In addition, the alliance offers in-orbit backup capabilities for its members in regions where members' fleets have overlapping coverage. Loral Skynet Loral Skynet's core business is providing satellite capacity to support distribution of U.S. television network programming. The ABC, CBS and Fox television networks are its major customers. All ABC, CBS and Fox stations have their antennae pointed at Loral Skynet's satellites, creating a configuration known as a "neighborhood" that is attractive to other users requiring similar distribution channels. Other Loral Skynet customers include HBO, Disney, Time Warner and third-party resellers, such as sports syndicators and distance learning providers. Loral Skynet currently has four high power GEO satellites in operation. Telstar 4 was placed in service in November 1995 and has 24 C-band and 24 Ku-band transponders. Telstar 4 provides coverage over the continental United States, Hawaii, Puerto Rico and the U.S. Virgin Islands. Telstar 5, with 24 C-band and 24 Ku-band transponders, was built by SS/L and was placed into service on July 1, 1997. Telstar 5 provides coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean and into Canada and portions of Latin America. As of December 31, 1999, Telstar 4 was operating at approximately 85% utilization and Telstar 5 was operating at approximately 77% utilization. Telstar 6, built by SS/L, was launched in February 1999 and commenced commercial operations in March 1999. Telstar 6 is a broadcast video and data communications satellite with 24 C-band and 24 Ku-band 2 4 transponders. It provides coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean and into Canada and portions of Latin America and as of December 31, 1999 was operating at approximately 52% utilization. Telstar 7, built by SS/L, was launched in September 1999 and commenced commercial operations in November 1999. Telstar 7 is a broadcast video and data communications satellite with 24 C-band and 24 Ku-band transponders. It provides coverage over the continental United States, Hawaii and Puerto Rico as well as parts of the Caribbean, Canada and Latin America and as of December 31, 1999 was operating at approximately 37% utilization. Loral CyberStar On March 20, 1998, we acquired Orion Network Systems, Inc., a rapidly growing provider of satellite-based communications services, which recently changed its name to Loral CyberStar, Inc. We completed our integration plan for Loral CyberStar and transferred management of Loral CyberStar's satellite capacity leasing and satellite operations to Loral Skynet, effective January 1, 1999. Loral CyberStar's leasing business currently provides satellite capacity for video distribution, satellite news gathering and other satellite services primarily to broadcasters, news organizations, telecommunications service providers and ISPs. Loral Cyberstar's customers include PSINet, HBO, Disney, Cable & Wireless and United Pan Europe Communications. Telstar 11 (formerly known as Orion 1), a high power satellite with 48 Ku-band transponders, commenced operations in January 1995, and provides coverage to 34 European countries, much of the United States and parts of Canada, Mexico and North Africa. As of December 31, 1999, Telstar 11 was operating at approximately 90% utilization. Telstar 12 (formerly known as Orion 2), a high power satellite with 57 Ku-band transponders, expands Loral CyberStar's European coverage and extends coverage to portions of the former Soviet Union, Latin America, the Middle East and South Africa. Telstar 12 was launched in October 1999 into 15 degrees W.L. and commenced operations in January 2000. Although Telstar 12 was originally intended to operate at 12 degrees W.L., Loral Cyberstar reached an agreement with Eutelsat to operate Telstar 12 at 15 degrees W.L. while Eutelsat continued to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral CyberStar's behalf. As part of this coordination effort, Loral CyberStar agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from APT Satellite Company Limited ("APT") all transponder capacity (except for one C-band transponder retained by APT) and existing customer leases on the Apstar IIR satellite for approximately $273 million. Insurance proceeds from the May 4, 1999 launch failure of the Orion 3 satellite were used to fund the initial payments and for a significant portion of the last installment of approximately $182 million in March 2000. Apstar IIR, which was manufactured by SS/L, was launched in October 1997 and has an estimated remaining useful life of approximately 13 years. Loral CyberStar has full use of 27 C-band and 24 Ku-band transponders aboard Apstar IIR for the remaining life of the satellite. Located at 76.5 degrees E.L., Apstar IIR covers a region that includes Asia, Europe, Africa and Australia, which represents over 75% of the world's population. Under the purchase agreement, Loral CyberStar will also have the option to lease replacement satellites from APT upon the end of life of Apstar IIR. In November 1999, the satellite was renamed Telstar 10/Apstar IIR. As of December 31, 1999, Telstar 10/Apstar IIR was operating at approximately 44% utilization. 3 5 Satmex In December 1997, a joint venture in which we hold a 65% economic interest completed the acquisition from the Mexican government of a 75% interest in Satmex. Satmex, which owns and operates three GEO communications satellites, is currently the dominant satellite communications company providing fixed satellite services in Mexico, and intends to expand its services to become a leading provider of satellite services throughout Latin America. Satmex provides satellite transmission capacity to broadcasting customers for network and cable television programming, DTH service and on-site transmission of live news reports, sporting events and other video feeds. Satmex also provides satellite transmission capacity to telecommunications service providers for public telephone networks in Mexico and elsewhere and to corporate customers for their private business networks for data, voice and video applications. Satmex has landing rights to provide broadcasting and telecommunications transmission capacity in Mexico, the United States, Canada and 23 nations and territories in the Latin American region. Satmex's broadcasting customers include Televisa and Television Azteca, and its telecommunications services customers include Telmex, Bell South and Interpacket. Satmex's satellites, Solidaridad 1, Solidaridad 2 and Satmex 5, have utilization rates as of December 31, 1999 of approximately 47%, 81% and 74%, respectively. These satellites have a total of 144 transponders operating in C- and Ku-bands, with an aggregate footprint covering substantially all of the continental United States and the Caribbean as well as all of Latin America, other than certain regions in Brazil. We believe that this capacity is one of the largest blocks of satellite capacity dedicated primarily to the Latin American region. Satmex holds 20-year concession titles to operate in these three orbital locations, each of which will expire on October 22, 2017. The concession titles are renewable thereafter, subject to certain conditions, for an additional 20-year term without additional payment. In addition, Satmex operates two satellite control centers. During 1999, Loral Skynet purchased three Ku-band transponders on the Satmex 5 satellite from Satmex for $25.5 million. Europe*Star In December 1998, we finalized our strategic partnership with Alcatel to jointly build and operate Europe*Star, a geostationary satellite system to be marketed as part of the Loral Global Alliance. Alcatel serves as the primary contractor while SS/L is providing the satellite bus and will test and integrate the satellites. Europe*Star, in which we own a 47% interest, will provide broadcast and telecommunications services via two high power all Ku-band satellites, which are expected to be launched in 2000 and 2002, respectively. Europe*Star intends to provide satellite services to Europe, Southeast Asia, the Middle East, South Africa and India. Total revenues for the fixed satellite services segment, including intercompany and affiliate sales, were $342 million, $254 million and $83 million for the years ended December 31, 1999, 1998 and 1997, respectively. The segment's intercompany sales were $11 million in 1999, $5 million in 1998 and $1 million in 1997. Affiliate sales for Satmex were $136 million in 1999 (including approximately $28 million to Loral companies), $105 million in 1998 and $13 million in 1997. The segment had EBITDA of $193 million, $171 million and $52 million for the years ended December 31, 1999, 1998 and 1997, respectively. Total assets for the segment were $3.9 billion, $3.4 billion and $1.8 billion as of December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999 and 1998, funded backlog for the segment was $1.5 billion and $746 million, respectively, including intercompany backlog of $3 million in 1999 and $6 million in 1998 and affiliate backlog for Satmex of $364 million in 1999 and $133 million in 1998. Approximately $340 million of the segment's 1999 external funded backlog is expected to be realized in 2000. 4 6 BROADBAND DATA SERVICES Through the Loral CyberStar Group we distribute multimedia (video, data and voice) and deliver Internet access and services to businesses and ISPs. Currently, we: - deliver U.S.-based Internet content via satellite to more than 130 ISPs in more than 32 foreign countries, which reach approximately seven million residential customers around the world; - distribute high-speed data over private corporate VSAT networks which currently reach approximately two-and-a-half million corporate desktops around the world; and - offer business television services by satellite to corporations for the delivery of teleconferences, distance learning and training, and special events. Satellite-based broadband delivery systems have a number of favorable technical characteristics, including point-to-multipoint broadcasting capability, geographic ubiquity, rapid deployment, high capacity and low cost. We believe that these characteristics will be of increasing importance in the near future as broadband Internet access becomes an increasingly universal requirement and Internet content continues to become richer and more complex, particularly in the most popular sites. Our broadband strategy will combine our existing resources and current business base with existing fiber-based terrestrial networks, new technologies and the resources of strategic partners to address both the expanding market for today's broadband services and to become a leading medium for delivery of even richer Internet content in the future. Our existing resources include: a current customer base of 130 ISPs and 250 enterprise customers; proprietary software for satellite delivery of large, complex files to multiple locations; satellite systems expertise; access to our GEO constellation and orbital slots around the world; access to fiber networks and Internet backbone entry (peering) points; network operating centers; alliances with high-technology providers; and a global sales force. We have identified two attractive opportunities for early market entry: consumer broadband services and streaming media services. Consumer Broadband Services We plan to serve the growing consumer broadband services market, initially in North America, with an affordable, ubiquitous, two-way, high-speed Internet access service employing a hybrid satellite/fiber network. When fully deployed, this network will be capable of serving at least ten million homes and small businesses. The network will offer point-to-point downlink data rates of 1.5 megabits per second and uplink data rates of 128 kilobits per second. In addition, the system will offer streaming multimedia in multicast mode at speeds of up to 30 megabits per second. The user will have access to stored or live multicasts and both real-time and non-real-time streaming services. The network will use four closely-located satellites that customers can access through a single compact satellite dish: Ku-band satellites for multicasting and Ka-band satellites with multiple spot beams for delivery of two-way point to point services. Because this high-capacity system can be rapidly deployed and will be available anywhere in the satellites' broad coverage area, end-users not served by digital subscriber lines, or DSL, or cable modems will be an important market. And because of the system's multimedia multicasting and competitive pricing, we expect to compete effectively in areas served by these terrestrial services as well. We intend to serve as the "wholesaler" of this connectivity service. We anticipate that our customers (ISPs, cable companies and telephone companies) will market and sell the service to their customers as a high-value extra feature in their own portfolio of services, emphasizing its "always-on" high-speed connectivity and multimedia multicasting capabilities. We believe our network will be attractive to our reseller customers because it provides an immediate national presence and preserves their ability to collect consumer viewing-habit information. The network will eventually consist of four satellites and fourteen gateways linked by fiber to the Internet backbone, all controlled by a fully backed-up network operations center. The consumer premises equipment 5 7 will consist of a set-top box with up to 30 gigabytes of storage connected to a single small satellite dish capable of seeing our four closely located broadband satellites. We are currently in discussions with several strategic partners who would participate in the development of the ground system and customer premises equipment for the delivery of this service. We will serve as the system integrator and principal owner and manager of this business, as we do for Globalstar. We plan to use Ku-band transponders on two satellites in Loral's current fleet, Telstar 4 and Telstar 6, along with our existing gateway and Internet peering site at Mount Jackson, Virginia, for the initiation of this two-way broadband service in early 2001. Two high-powered Ka-band satellites, each with 48 spot beams, are under construction at SS/L. They are scheduled to be launched in 2002 and 2003, expanding coverage to the entire Western Hemisphere. We currently estimate that the required investment for the consumer broadband services business in North America will be approximately $3 billion, with the services implemented and the associated investments made in several phases. Streaming Media Services We believe that streaming media -- the continuous distribution of rich video content -- will be an increasingly important component of total Internet traffic in the future, fueling end-user demand for faster delivery than the traditional architecture of the Internet will allow. In the workplace, these technologies will support more sophisticated work processes and greater productivity, and will be important components of on-line advertising, content and e-commerce. We plan to focus our marketing efforts initially on our existing base of ISP and corporate customers. We intend to exploit the technical advantages of satellites to deliver streaming media services more effectively than terrestrial alternatives. Instead of flooding the Internet with multiple point-to-point transmissions of these massive files, our system will move content directly from its source via satellite to multiple servers located at the "edge of the net," near the end user. This should eliminate bottlenecks, improve quality, lower cost and expand content choices and applications. We will be able to deliver content either as a constant stream or to cache servers in ISP or enterprise facilities for distribution as requested by the end-user. We intend to enter three streaming media business segments: - IP Transport Service to the Edge of the Net: Content and applications service providers with their own encoding capabilities will be able to use our network to update their servers at the edge of the Net and reach "new media" viewers with their product offerings more efficiently. - Content Aggregation Services: For customers who wish to outsource more of the streaming media distribution process, we will receive and store customer's content on our own servers at our satellite uplink facilities, encode the content into digital format, schedule and monitor transmission and provide customer care. This service will allow customers to distribute their customized broadband applications and content (particularly video) throughout the network to lower the cost and improve the speed and quality of delivery to the end-user. - Business Portal Service: We plan to offer enterprise customers a library of selected business-related content and applications (training, corporate communications, etc.), accessed through a single Internet site. We expect that this portal will derive revenue not only from hosting the video content, but also from advertising, e-commerce, subscriptions and pay-per-view services. We currently estimate the required investment for the streaming media services business at approximately $500 million. We expect to use strategic alliances to enhance the establishment and prospects of both our planned consumer broadband and streaming media businesses. We have extensive experience in forming technical and marketing partnerships, as we did with Globalstar. We have several partnerships with Alcatel, a leading provider of telecommunications services and technology, including DSL (digital subscriber lines), and owner of approximately 18% of CyberStar LP. During 1999, we formed several significant alliances with high- 6 8 technology companies to offer services that increase high-speed, uninterrupted access to the Internet and improve the efficiency of delivering multimedia products and services to corporations, broadcasters, content developers, ISPs and other enterprises. Among the most recently formed alliances are: an agreement to provide PSINet with a high-speed, satellite-based Internet link into South America; a trial with RealNetworks to offer satellite-based audio/video streaming media service to European ISP customers; and a joint marketing agreement with Akamai to improve delivery of web content to ISPs worldwide. On July 31, 1999, CyberStar LP acquired Global Access Services ("Global Access"), a business television unit of Williams Communications, Inc. for approximately $11 million in cash. Global Access provides business television, video conferencing and other communication services to companies in various parts of the world including Europe, South America, Asia and the Americas, through networks operated in Singapore, Dallas, London and Johannesburg. In December 1999, the Brazilian government awarded Loral CyberStar a license to deliver domestic and international data communications services in Brazil. Under this license -- one of the first to be awarded to a foreign company under the country's recent market-opening regulations -- Loral CyberStar can provide the Brazilian and the international business community with broadband data services capable of delivering content directly to the user's desktop, as well as a network infrastructure for advanced telecommunications services. Total revenues for the broadband data services segment were $85 million and $40 million for the years ended December 31, 1999 and 1998, respectively. EBITDA before development costs for the segment were losses of $8 million and $13 million in 1999 and 1998, respectively. Total development and start-up costs for Cyberstar LP were $27 million, $33 million and $33 million for 1999, 1998 and 1997, respectively. Total assets for the segment were $114 million, $153 million and $25 million as of December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999 and 1998, funded backlog for the segment was $236 million and $147 million, respectively, which was all from external sources. Approximately $85 million of 1999 external funded backlog is expected to be realized in 2000. SATELLITE MANUFACTURING AND TECHNOLOGY SS/L is a worldwide leader in the design, manufacture and integration of satellites and space systems. SS/L draws on its 40-year history, during which satellites manufactured by SS/L have achieved more than 700 years of cumulative on-orbit experience. SS/L also provides Loral with visibility into emerging and new satellite-based technologies and applications. SS/L manufactures satellites that provide telecommunications, weather forecasting and broadcast services. SS/L is the leading supplier of satellites to Intelsat, an international consortium of 135 member nations which is currently the world's largest operator of commercial communications satellites. Other customers include EchoStar, TCI, Globalstar, Loral Skynet, Sirius Satellite Radio (formerly known as CD Radio) and Cable & Wireless Optus of Australia. 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. We believe that SS/L's advanced manufacturing and testing facilities and long-term customer relationships have enabled SS/L to compete effectively in the commercial space systems marketplace. SS/L has a history of technical innovation that includes the first three-axis stabilized satellites, bipropellant propulsion systems for commercial satellites that permit significant increases in the satellites' payload and extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries with a life span of 10 years or more, the use of advanced composites to significantly enhance satellite performance at lighter weights and the first communications satellite with more than ten kilowatts of power. SS/L was also the first satellite manufacturer to employ heat pipes to control heat transfer in commercial satellites, thereby providing a more benign temperature environment and increased reliability. SS/L also created the first multi-mission geostationary satellite and was one of the first U.S. companies to acquire space technology from Russia's space industry, obtaining exclusive rights outside the former Eastern bloc to an electric propulsion subsystem that is five times more efficient than bipropellant propulsion systems. 7 9 SS/L is actively pursuing research and development projects for both communications payload equipment and supporting bus elements. SS/L recently announced that it will be developing new satellites that will be 40% more powerful than its existing satellites, significantly increasing both communications capacity and service quality. SS/L, Alcatel Space Industries and Finmeccanica S.p.A. have generally agreed to operate as a team on satellite programs worldwide. We believe that this strategic alliance has enhanced SS/L's technological and manufacturing capabilities and marketing resources and affords it improved access to international government and commercial customers. SS/L's major contracts fall into two categories: firm fixed-price contracts and cost-plus-award-fee contracts. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract. Risk of loss due to increased cost, therefore, is borne by SS/L. The majority of SS/L's contracts are fixed-price contracts. Under such contracts, SS/L may receive progress payments, or it may receive milestone payments upon the occurrence of certain program achievements. Under a cost-plus-award-fee contract, the contractor recovers its actual allowable costs incurred and receives a fee consisting of a base amount that is fixed at the inception of the contract (the base amount may be zero) and an award amount that is based on the customer's subjective evaluation of the contractor's performance based on criteria stated in the contract. Many of SS/L's contracts and subcontracts may be terminated at will by the customer or the prime contractor. In the event of a termination at will, SS/L is normally entitled to recover the purchase price for delivered items, reimbursement for allowable costs for work in process and an allowance for profit or an adjustment for loss, depending on whether completion of performance would have resulted in a profit or loss. No assurance can be given that these terminations will not occur in the future. Total revenues for the satellite manufacturing and technology segment, including intercompany sales, were $1.4 billion for each of the years ended December 31, 1999, 1998 and 1997, respectively. The segment's intercompany sales were $255 million in 1999, $272 million in 1998 and $199 million in 1997. The segment had EBITDA of $146 million in 1999 before a $44 million charge, and $118 million and $111 million in 1998 and 1997, respectively. The $44 million charge pertains to an agreement reached with ChinaSat to extend the delivery date of a satellite and other contract modifications, in return for two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR. After the charge, EBITDA for 1999 was $102 million. Total assets for the segment were $1.6 billion, $1.7 billion and $1.5 billion as of December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999 and 1998, funded backlog for the segment was $1.3 billion and $1.5 billion, respectively, including intercompany backlog of $256 million in 1999 and $111 million in 1998. Approximately $800 million of the 1999 external funded backlog is expected to be realized in 2000. Revenues recorded under contracts with Globalstar were $360 million, $599 million and $408 million for the years ended December 31, 1999, 1998 and 1997, respectively. In addition, sales to two other customers represented in excess of 10% of the Company's consolidated revenues in 1999 and 1998. For the years ended December 31, 1999, 1998 and 1997, the satellite manufacturing and technology segment expended $35 million, $35 million and $24 million for research and development projects, respectively. GLOBAL MOBILE TELEPHONE SERVICE Globalstar owns and operates a 52-satellite constellation, including four in-orbit spares, that forms the backbone of a global telecommunications network designed to serve virtually every populated area of the world. Globalstar's network, which we refer to as the Globalstar system, uses Qualcomm's patented CDMA (code division multiple access) technology to provide high-quality mobile and fixed telephone service to customers who live, work or travel beyond the reach of adequately developed communications networks. Qualcomm has agreed that Globalstar will be the only provider of mobile satellite services to which it will license its patented CDMA technology. 8 10 Globalstar's service provider partners, who are experienced telecommunications companies, are actively launching, or preparing to launch, service in key markets worldwide. Globalstar and its service provider partners have also begun intensive marketing campaigns and are adopting multifaceted, locally oriented marketing strategies to serve their markets. Under Globalstar's agreements with its service providers, these partners are the exclusive providers of Globalstar service within their assigned territory and will retain their exclusivity as long as they meet minimum performance goals. Under these agreements, Globalstar acts as a wholesaler of capacity on its space segment to its service providers. Globalstar has assigned the largest service territories to its founding strategic partners, including France Telecom, Vodafone AirTouch, ChinaSat, Elsacom and Dacom. In the first quarter of 2000, the Globalstar system commenced operations, and as of February 29, 2000, there were 14 gateways available for service covering 78 countries. By the end of 2000, we expect a total of 27 or more gateways to be available for service, covering approximately 131 countries. As of February 29, 2000, Globalstar service providers were providing billable service in 20 countries, including Austria, Argentina, Brazil, Canada, Greece, Italy, South Korea, Switzerland and the United States. By the end of 2000, service providers plan to have billable service available in a total of approximately 120 countries. The Globalstar system is designed to offer a cost-effective communications solution for areas underserved or unserved by existing telecommunications infrastructures. Globalstar mobile phones are simple to use -- just like ordinary cellular telephones -- and are among the smallest, lightest and least expensive satellite phones currently available. These phones are multimode, functioning as cellular phones where terrestrial cellular service is available and as satellite phones where cellular service is not available. Globalstar phones provide this multimode capability without separate modules or plug-ins. Globalstar pay phones and fixed wireless phones for business and residential use provide basic telephone service in rural villages and at remote industrial and residential sites. Globalstar phones have familiar features such as phone book, voicemail, short messaging service, and, in some service areas, call forwarding. Globalstar plans to introduce additional features this year, including data calls, Internet access through data packet switching, email and fax capability, caller ID and position location. Globalstar's utilization of Qualcomm's CDMA technology should enable it to swiftly adopt future improvements as this industry-leading wireless technology evolves. In addition, because the intelligence of the Globalstar system is located on the ground, future enhancements are easily implemented. Globalstar's full constellation has been launched and all satellites are performing normally. Based on Globalstar's experience to date, these satellites are now expected to have a useful life of 10 years, rather than the original expectation of 7 1/2 years. The Globalstar satellites use a simple, traditional "bent pipe" design, amplifying and reflecting received signals directly back to earth, with no intersatellite links. Gateways owned and operated by Globalstar service providers then connect customer calls through the existing public telephone network. As a result, the Globalstar system will complement and extend, rather than bypass, the existing telephone network infrastructure. Globalstar recently completed a period of intensive user trials in which over one million calls were placed under a variety of conditions, including simulations of full capacity utilization. Trial users rated call quality equal to, or better than, digital cellular connections. According to industry sources, more than 80% of the world's land mass is not covered by cellular service. Globalstar believes, based on market research, that its addressable market -- those who live, work or regularly travel to areas underserved or unserved by existing telecommunications infrastructure and who desire and have the ability to pay for telephone service such as that offered by Globalstar -- has approximately 40 million potential customers. Globalstar's first generation system is expected to have a system capacity of approximately seven million subscribers, less than one fifth of Globalstar's potential addressable market. In fact, because of the limited spectrum available for use by mobile satellite services like Globalstar, the combined capacity of Globalstar and the other existing and announced mobile satellite service systems are capable of serving only a portion of this market. 9 11 Globalstar's original consortium of 12 leading international telecommunications service providers and manufacturers has grown into an international organization with marketing channels in 131 countries and agreements with over 220 local service providers. Globalstar-supported cooperative advertising is creating brand awareness globally and within selected market segments, while sales channels are focused both on the mass market and targeted market segments, including: - government, including police, emergency and military users; - commercial freight and fishing vessels, cruise ships and recreational boats; - truck drivers and business travelers; - the forestry, mining, oil and gas and other natural resource industries; - wilderness guides and outdoor enthusiasts; - agribusiness; and - utilities. Globalstar's service providers have an existing customer base of more than 100 million cellular customers from which they intend to identify for direct marketing efforts those who work in, or frequently travel to, or through, areas without cellular service. Globalstar expects to spend $325 million for the enhancement of its system software, for the eight spare satellites being constructed by SS/L, and for financing provided to Globalstar's service providers to assist in the purchase of gateways, fixed access terminals and handsets (of which $231 million is expected to be received from the service providers as repayment of such financing). In addition, cash interest, preferred dividends and operating costs are expected to be approximately $125 million per quarter in 2000. Globalstar raised $268.5 million through the sale of equity interests on February 1, 2000. Globalstar believes that its cash on hand ($329 million at February 29, 2000), available credit under its two bank facilities and vendor financing arrangements (approximately $425 million at February 29, 2000), service revenues and other anticipated cash inflows will be sufficient to cover its expected cash outflows provided that its $250 million credit facility is renegotiated. If Globalstar cannot renegotiate its $250 million credit facility, it believes it will be able to obtain additional funds. There can be no assurance, however, that such funds will be available on favorable terms or on a timely basis, if at all. The global mobile telephone service segment had development and start-up costs of $184 million, $145 million and $87 million for the years ended December 31, 1999, 1998 and 1997, respectively. Total assets for the segment were $3.8 billion, $2.7 billion and $2.1 billion as of December 31, 1999, 1998 and 1997, respectively. 10 12 REGULATION As an operator of a privately-owned global satellite system, Loral is subject to: (i) the regulatory authority of the U.S. government; (ii) the regulatory authority of other countries in which Loral operates; (iii) the Intelsat consultation process; and (iv) the frequency coordination process of the International Telecommunications Union ("ITU"). U.S. REGULATION The ownership and operation of Loral's satellite systems in the U.S. is regulated by the Federal Communications Commission (the "FCC"). Loral is subject to the FCC's jurisdiction primarily for: (i) the licensing of satellites and earth stations; (ii) avoidance of interference with other radio stations; and (iii) compliance with FCC rules governing U.S.-licensed satellite systems. Violations of the FCC's rules can result in various sanctions including fines, loss of authorizations, or the denial of new authorizations or renewal authorizations. Loral is not regulated as a common carrier and, therefore, is not subject to rate regulation or the obligation not to discriminate among customers. Loral must pay FCC filing fees in connection with its space station and earth station applications; must pay annual regulatory fees that are intended to defray the FCC's regulatory expenses; must file annual status reports with the FCC; and, to the extent Loral is deemed to be providing interstate/international telecommunications, must contribute to funds used to support universal service. Authorization to Launch and Operate Satellites. The FCC grants authorizations to satellite operators that meet its legal, technical and financial qualification requirements. The FCC often receives applications from multiple operators to operate a satellite at a given orbital slot. There can be no assurance that in the process of resolving such mutually exclusive applications, Loral's application will be granted. Under the FCC's financial qualification rules, an applicant must demonstrate that it has sufficient funds to construct, launch, and operate each requested satellite for one year. Most satellite authorizations also include specific construction and launch milestones which Loral must meet. Licenses are issued for an initial ten-year term and the FCC gives licensees an "expectancy" with respect to the replacement of their authorized satellites. At the end of a ten-year license term, a satellite that has not been replaced, or that has been relocated to another orbital location following its replacement, may be allowed to continue operations for a limited period of time pursuant to a grant of special temporary authority from the FCC. Such operations, however, are subject to certain restrictions. Loral has final FCC authorization for the following satellites which operate in the C-band, the Ku-band, or both bands: Telstar 4 at 89(LOGO) W.L., Telstar 5 at 97(LOGO) W.L., Telstar 6 at 93(LOGO) W.L., Telstar 7 at 129(LOGO) W.L., Telstar 8 at 77(LOGO) W.L., Telstar 9 at 69(LOGO) W.L., Telstar 11 at 37.5(LOGO) W.L. and Orion A at 47(LOGO) W.L. Certain of these authorizations are subject to pending petitions for reconsiderations submitted by third parties, which are still pending. The final FCC authorizations for certain of these satellites also do not cover certain design changes or milestone extension requests that are the subject of pending modification applications. Certain of these applications have been opposed by other satellite operators. There can be no assurance that such design changes or milestone extensions will be granted by the FCC. The failure to obtain a milestone extension could result in the loss of the related FCC authorization. If Loral is unable to obtain FCC approval to implement its requested technical modifications for any particular authorization, it will be obligated to operate the related satellite in accordance with the original authorization. Loral has special temporary authority to operate an additional satellite, Telstar 12, at 15(LOGO) W.L., pending FCC action on its request for final authority. In addition, Loral has final authorization to operate at the following orbital slots: Ka-band at 89(LOGO) W.L., 81(LOGO) W.L., 93(LOGO) W.L., 115(LOGO) W. L., 78(LOGO) E.L. and 105.5(LOGO) E.L. and hybrid Ka/Ku-band at 47(LOGO) W.L. Loral has requested authority to implement inter-satellite links at all of these locations and has requested other technical modifications to certain of these authorizations. Certain applications to make this design modification and requests for milestones extensions to do so are pending before the FCC, which has not yet assigned the frequencies which will be used for inter-satellite links. Certain of these applications have been opposed by other satellite operators. There can be no assurance that the FCC will grant such modifications or milestone extensions. 11 13 Loral also has conditional authorizations and applications pending before the FCC for other orbital locations. Under the FCC's rules, an applicant may commence satellite construction prior to receiving an authorization to launch and operate, although it must notify the FCC that it intends to commence construction. Any construction engaged in is at the applicant's own risk. While Loral therefore may proceed with the construction of planned satellites without prior FCC approval, it must accept the risk that the FCC may not grant the application, may not assign the satellite to its proposed orbital location, or otherwise may act in a manner that limits or eliminates some or all of the value of the construction previously done on the satellite. Scope of Services Authorized. In 1996, the FCC largely eliminated the regulatory distinction between U.S. domestic satellites and U.S.-licensed international satellites. As a result, each of Loral's satellites may be used, to the extent technically feasible, to provide both U.S. domestic and international services. Coordination Requirements. The FCC requires applicants to demonstrate that their proposed satellites would be compatible with the operations of adjacent satellites. The FCC requires adjacent satellite operators to coordinate with one another to minimize frequency conflicts. The FCC reserves the right to require that an FCC licensed satellite be relocated to a different orbital location if it determines that such a change is in the public interest. The FCC might exercise this authority in instances where operators are unable to coordinate with each other. REGULATION BY NON-U.S. NATIONAL TELECOMMUNICATIONS AUTHORITIES Foreign laws and regulatory practices governing the provision of satellite services to licensed entities and directly to end users vary substantially from country to country. Some countries may require Loral to confirm that it has successfully completed technical consultation with Intelsat before providing services on a given satellite. See "-- Intelsat Consultation." In addition, Loral may be subject to communications and/or broadcasting laws with respect to its provision of international satellite services, which vary from country to country. Many countries have liberalized their regulations to permit entities to seek licenses to provide voice, data or video services. This trend should accelerate with the commitments by many World Trade Organization ("WTO") members, in the context of the WTO Agreement on Basic Telecommunications Services, to open their satellite markets to competition. Other countries, however, have maintained strict monopoly regimes. In such markets, the provision of service from Loral and other U.S.-licensed satellites may be more complicated. In addition to the orbital slots licensed by the FCC, Loral has been assigned orbital slots by certain other countries. For example, Loral has been authorized to use numerous Ku and Ka orbital slots by the Papua New Guinea government. In March 1999, the Brazilian telecommunications authority announced that Loral Skynet do Brasil had won Brazil's auction for its 63(LOGO) W.L. Ku-band orbital slot. Loral operates capacity on the Telstar 10/Apstar IIR C/Ku-band satellite licensed by China and located at 76.5(LOGO)E.L. Satmex, of which Loral owns 49%, is licensed by Mexico to operate the C/Ku-band satellites Solidaridad 1 at 109.2(LOGO)W.L., Solidaridad 2 at 113.0(LOGO) W.L., and Satmex 5 at 116.8(LOGO) W.L. Europe*Star, of which Loral owns 47%, is licensed by Germany to operate a Ka-band satellite at 45(LOGO) E.L. Loral's ability to provide satellite service in a particular country or region is subject to the technical constraints of its satellites, international coordination, local regulatory approval and any limitation as to the scope of the approval so obtained. Intelsat Consultation. In connection with its international satellite services, Loral must currently complete a consultation process with Intelsat under Article XIV of the Intelsat Agreement to ensure technical compatibility of Loral's facilities and their operation with the spectrum and orbital locations of existing or planned Intelsat satellites. This process, however, may be eliminated as a result of the privatization of Intelsat. The ITU Frequency Coordination Process. All satellite systems are subject to ITU frequency coordination requirements and must obtain appropriate authority to provide service in a given territory. The result of the required international coordination process may limit the extent to which all or some portion of a particular authorized orbital slot may be used for commercial operations, with a corresponding impact on the 12 14 useable capacity of a satellite at that location. In addition, the result of the process by which satellite systems must seek authorization to provide service in a given territory may limit the extent to which such service may be provided from a given orbital location. All of the registrations for Loral's satellites are or will be subject to the ITU coordination process. Only national governments file required coordination documents at the ITU. These documents are used by Loral and other satellite operators as a basis for coordination of satellite systems. There may be more than one ITU filing submitted for any particular orbital slot, or an orbital slot adjacent thereto, thus requiring coordination between or among the affected operators. The results of this coordination process may impose technical constraints on Loral's ability to operate its satellites at a given orbital location, if at all. Loral cannot guarantee successful frequency coordination for its satellites. See "Certain Factors That May Affect Future Results -- Our business is regulated, causing uncertainty and additional costs." GLOBALSTAR SYSTEM The Globalstar system requires regulatory authorization for two pairs of frequencies: user links (from the user to the satellites and vice versa) and feeder links (from the gateways to the satellites and vice versa). In January 1995, the FCC granted authority for the construction, launch and operation of the Globalstar system and assigned spectrum for its user links. A modification of this authorization in November 1996 assigned feeder link frequencies. This license is held by L/Q Licensee, a subsidiary of Loral/Qualcomm Partnership, L.P., which has agreed to use the FCC license exclusively for Globalstar's benefit. The FCC license grants authority to construct, launch and operate the Globalstar system with user links in the 1.6 and 2.4 GHz bands, consistent with the United States band plan for Mobile Satellite Services Above 1 GHz Systems, and feeder link frequencies in the 5 and 7 GHz bands. These feeder link frequencies were allocated internationally at the 1995 World Radiocommunication Conference, and the FCC assigned them for use by Globalstar in the United States in accordance with this international allocation. However, use of the feeder link frequencies remains subject to applicable restrictions, which may be promulgated in an FCC proceeding to adopt the international allocations into the U.S. Table of Frequency Allocations. The FCC initiated such a proceeding on August 4, 1998. The operation of Globalstar in the assigned user links and feeder links must be coordinated with licensees of other existing radio services operating in these bands in accordance with FCC and international rules and policies. Such coordination may adversely affect the usefulness of the frequencies for Globalstar's operations. The FCC license only authorizes the construction, launch and operation of Globalstar's satellite constellation. Separate authorizations must be obtained from the FCC for operation of gateways and Globalstar phones in the United States. Globalstar's U.S. service provider has received a license for the U.S. gateway, and its application for a license for Globalstar phones has been granted, although a petition for reconsideration remains pending. One of Globalstar's three manufacturers has obtained equipment authorization from the FCC for the Globalstar phones. Even though the Globalstar system is licensed to operate in the United States by the FCC, in order to provide service in other countries, Globalstar or its service providers must obtain the required regulatory authorizations in those countries. There can be no assurance that the required authorizations will be obtained in every country in which Globalstar proposes to operate or that they will be obtained in a timely manner, or that, if granted, they will authorize service on the same terms as the U.S. license. EXPORT REGULATION Exports from the United States of commercial communication satellites, and certain related items, technical data and services, are subject to United States export control laws and regulations. These export control laws and regulations affect the export of satellites and certain related items, technical data and services to foreign launch providers, insurers, customers, potential customers and business partners, as well as to foreign Loral employees, foreign regulatory bodies, foreign national telecommunications authorities and to foreign persons generally. Commercial communications satellites and certain related items, technical data and services have been added to the United States Munitions List and export jurisdiction over these satellites and 13 15 certain related items, technical data and services has been transferred to the U.S. Department of State and made subject to the Arms Export Control Act and the International Traffic in Arms Regulations. Other items, technical data and services exported by Loral remain subject to the export jurisdiction of the U.S. Department of Commerce, pursuant to the Export Administration Act and the Export Administration Regulations. U.S. Government licenses or other approvals generally must be applied for by Loral and obtained before such exports are made. There can be no assurance that such licenses or approvals will be granted. Also, licenses or approvals may be granted with limitations, provisos or other requirements imposed by the U.S. Government as a condition of approval, which may affect the scope of permissible activity under the license or approval. U.S. Government approval may be required before such satellites and related items, technical data and services are re-exported or transferred from one foreign person to another foreign person. There can be no assurance that such approvals will be granted. Also, such approvals may be granted subject to limitations, provisos or other requirements imposed by the U.S. Government as a condition of approval, which may affect the scope of permissible activity under the license or approval. See "Certain Factors That May Affect Future Results -- We are subject to export controls, which may result in delays, unforeseen additional costs and uncertainties in certain markets." 14 16 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 163 patents in the United States and 266 patents abroad and has applications for 84 patents pending in the United States and 269 patents pending abroad. SS/L patents include those relating to communications, station keeping, power control systems, antennae, filters and oscillators, phase arrays and thermal control as well as assembly and inspections technology. The SS/L patents that are currently in force expire between 2000 and 2018. In connection with the Globalstar system, Globalstar's design and development efforts have yielded 26 patents issued and 32 patents pending in the United States, as well as 22 patents issued and 142 patents pending internationally for various aspects of communications satellite system design and implementation of CDMA technology relating to the Globalstar system. Qualcomm has obtained more than 300 issued patents and has more than 800 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. Loral CyberStar and CyberStar LP have two and one patents in the United States, respectively. In addition, Loral CyberStar, Loral SpaceCom Corporation and CyberStar LP have one, three and 17 patents pending in the United States, respectively, and one, 11 and eight patents pending abroad, respectively. There can be no assurance that any of the pending patent applications by the Company or Globalstar will be issued. Moreover, because the U.S. patent application process is confidential, there can be no assurance that third parties, including competitors, do not have patents pending that could result in issued patents which the Company or Globalstar would infringe. In such an event, the Company or Globalstar could be required to pay royalties to obtain a license, which could increase costs. FOREIGN OPERATIONS Sales to foreign customers, primarily in Europe and Asia, represented 14%, 16% and 30% of the Company's consolidated revenues for the years ended December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999, 1998 and 1997, the Company had substantially all of its long-lived assets located in the United States with the exception of the in-orbit satellites. See "Certain Factors that May Affect Future Results -- We face risks in conducting business internationally" for a discussion of the risks related to operating internationally. EMPLOYEES As of December 31, 1999, the Company had approximately 4,000 full-time employees (including approximately 560 employees of Globalstar and Satmex), some of whom are subject to collective bargaining agreements. 15 17 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, we or our representatives have made or may make forward- looking statements, orally or in writing. They can be identified by the use of forward-looking words such as "believes", "expects", "plans", "may", "will", "would", "could", "should", "anticipates", "estimates", "project", "intend", or "outlook" or their negatives or other variations of these words or other comparable words, or by discussions of strategy that involve risks and uncertainties. Such forward-looking statements may be included in, but are not limited to, various filings made by us with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer. We warn you that forward-looking statements are only predictions. Actual events or results may differ materially as a result of risks that we face, including those presented below. The following are representative of factors that could affect the outcome of the forward-looking statements. WE HAVE SUBSTANTIAL DEBT AND GUARANTEE OBLIGATIONS. We and our subsidiaries and operating affiliates have a significant amount of outstanding debt and guarantee obligations. As of December 31, 1999: - Our consolidated total debt was $2.0 billion, of which $1.0 billion was recourse to the Loral parent company or our principal operating subsidiary, Loral SpaceCom Corporation. - Our unconsolidated affiliate, Globalstar, had $1.45 billion principal amount of senior notes outstanding, $400 million of term loans outstanding under its $500 million credit facility and vendor financing of $394 million, of which $282 million was provided by SS/L. Two of our subsidiaries have guaranteed Globalstar's obligations under its $500 million credit facility and secured their guarantees by a pledge of their stock, the Telstar 6 and Telstar 7 satellites and certain other assets. SS/L has guaranteed $11.7 million under Globalstar's $250 million credit facility, and Loral has agreed to reimburse Lockheed Martin Corporation up to $56 million if Lockheed Martin is required to fund its guarantee of that credit facility, which is currently undrawn. - Satmex, our 49%-owned Mexico affiliate, had total debt of $588 million. We have agreed to maintain certain assets in a trust to collateralize an obligation of Servicios Corporativos Satelitales, S.A. de C.V., the parent company of Satmex, in which we have a 65% interest. This obligation has an initial face amount of $125 million which accretes at 6.03% over a seven-year period, expiring in December 2004. We intend to use our available cash ($240 million at December 31, 1999) and the net proceeds from our February 2000 offering of preferred stock to help pay for the growth and operation of our businesses. If any of our subsidiaries or affiliates finds itself faced with an imminent default, we may be faced with a choice between providing additional support to that company or accepting the loss of some or all of our equity investment. THE ABILITY OF OUR SUBSIDIARIES AND AFFILIATES TO PAY DIVIDENDS TO US OR OTHERWISE SUPPORT OUR OBLIGATIONS IS LIMITED BY THE TERMS OF THEIR DEBT INSTRUMENTS. For example, under the terms of Loral SpaceCom Corporation's credit facility, it may pay dividends to us only if cumulative dividend payments do not exceed 50% of its cumulative consolidated net income and the ratio of its funded debt to EBITDA is less than 3.0 to 1.0. Loral SpaceCom Corporation's ability to repay cash advances made to it by its parent is also limited to $70 million and is further subject to there being at least $700 million in shareholders' equity. OUR CONSUMER BROADBAND AND STREAMING MEDIA STRATEGIES ARE SUBJECT TO SUBSTANTIAL FINANCING AND EXECUTION RISKS. We have recently announced our consumer broadband and streaming media strategies and are only now taking steps toward their implementation. Although we estimate that these projects will require an investment of approximately $3.5 billion, these projected costs are not based on bids from third parties, but rather on our own experience and estimates, so the actual cost could be considerably more. We do not have sufficient funds 16 18 on hand to finance our anticipated share of these costs. We expect third party strategic partners to bear a significant portion of these costs and to provide critical resources such as access to technology, content and customers, but we have no firm commitments from any prospective strategic partners at this time. We will face significant competition in both these businesses from terrestrial fiber optic, digital subscriber lines, or DSL, and broadband wireless ISPs, as well as from competing broadband satellite service providers. Competing satellite services providers will include Hughes Network Systems, in which America Online, the nation's largest ISP, has made a $1.5 billion investment in connection with a strategic alliance. We expect to compete with Hughes and other satellite-based broadband data services providers not only for customers but also for relationships with key content and equipment providers and marketing partners and for access to the capital markets. The streaming and multicast media services we plan to offer are new, and our predictions of rising demand for, and our manner of delivering, these services may be inaccurate. Moreover, our business plan depends on the development and volume production of low-cost customer premises equipment, and this might not occur. THE GLOBALSTAR SYSTEM HAS JUST COMMENCED OPERATIONS AND WE CANNOT PREDICT CUSTOMER DEMAND FOR THE SERVICE. Since telephone systems using low-earth orbit satellites are a new commercial technology, we cannot predict demand for Globalstar's service. The first company to launch service in this industry, Iridium L.L.C., filed for bankruptcy in August 1999. More recently, Iridium announced that it was terminating commercial service on March 17, 2000 and that it was commencing the process of liquidating its assets. If Globalstar fails to generate sufficient cash flow from operations through the marketing efforts of its service providers, it will be unable to fund its operating costs or service its debt. GLOBALSTAR DEPENDS ON SERVICE PROVIDERS TO MARKET ITS SERVICE AND IMPLEMENT IMPORTANT PARTS OF ITS SYSTEM AND ON OTHER THIRD PARTIES TO COMPLETE ITS SYSTEM. Globalstar depends on independent service providers to supply ground equipment and user terminals and to market Globalstar service in each country where it plans to operate, and we cannot be sure that these service providers will be successful. We expect that these service providers will operate in 125 countries, many of which have developing economies. Globalstar's strategy of focusing on areas that lack basic telephone service exposes it to the risk that customers in these countries will not be able to afford the service. Globalstar currently has no service provider for several important regions and countries, including India, Malaysia, Indonesia, the Philippines and other parts of Southeast Asia. If Globalstar cannot enlist suitable service providers in these territories, it will not be able to offer service in those areas. Globalstar service providers could fail to obtain local partners; to acquire, install or adequately maintain and operate the Globalstar gateways; or to obtain the regulatory licenses needed for service in their countries. If Globalstar is unable to offer service in any particular region or country, it will not benefit from the potential demand in that region or country. IF OUR BUSINESS PLAN DOES NOT SUCCEED, OUR OPERATIONS MIGHT NOT GENERATE ENOUGH CASH TO PAY OUR OBLIGATIONS. For the year ended December 31, 1999, we had a deficiency of earnings to cover fixed charges of $192 million. In addition to our debt service requirements, our core businesses are capital intensive and need substantial investment before returns on investment can be realized. For example, construction of satellites to expand our fixed satellite services business and to implement our broadband data services business will require us to make significant expenditures. Loral CyberStar also anticipates that it will have additional funding requirements in excess of cash from operations to fund the purchase of VSATs, other capital expenditures, senior note interest payments and other operating needs, which it will need to secure from us or externally. We are subject to substantial financial risks from possible delays or reductions in revenue, unforeseen capital needs or unforeseen expenses. Our ability to meet our obligations and execute our business plan could depend upon 17 19 our ability, and that of our operating subsidiaries and affiliates, to raise cash in the capital markets. We cannot be certain that this source of cash will be available in the future on favorable terms, if at all. LAUNCH FAILURES HAVE DELAYED SOME OF OUR OPERATIONS IN THE PAST AND MAY DO SO AGAIN IN THE FUTURE. We depend on third parties, in the United States and abroad, to launch our satellites. Satellite launches are risky, and launch attempts have ended in failure. We ordinarily insure against launch failures, but at considerable cost. The cost and the availability of insurance vary depending on market conditions and the launch vehicle used. Our insurance typically does not cover business interruption, and so launch failures result in uninsured economic losses. Replacement of a lost satellite typically requires up to 18 months from the time a contract is executed until the launch date of the replacement satellite. On May 4, 1999, the Orion 3 broadcast communications satellite was placed into a lower-than-expected orbit after its launch on a Boeing Delta III rocket. According to Boeing, the Delta III rocket apparently failed to complete its second stage burn, and, as a result, the satellite, manufactured by Hughes Space and Communications Corporation, achieved an orbit well below the planned final altitude. As a result, the satellite cannot be used for its intended purpose. This loss resulted in Loral CyberStar having to refund approximately $34 million to DACOM Corporation, representing the amount of the prepayments made by DACOM towards its purchase of eight transponders on Orion 3. In September 1998, a malfunction of a Zenit 2 rocket resulted in the loss of 12 Globalstar satellites shortly after lift-off from Kazakhstan and resulted in a significant delay in Globalstar's program schedule. AFTER LAUNCH, OUR SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURE, WHICH MAY RESULT IN UNINSURED LOSSES. Random failure of satellite components may result in damage to or loss of a satellite before the end of its expected life. Satellites are carefully built and tested and have certain redundant systems in case of failure. However, in-orbit failure may result from various causes including: - component failure; - loss of power or fuel; - inability to control positioning of the satellite; - solar and other astronomical events; and - space debris. Repair of satellites in space is not feasible. Many factors affect the useful lives of our satellites. These factors include: - fuel consumption; - the quality of construction; - gradual degradation of solar panels; and - the durability of components. Although some failures may be covered in part by insurance, they may result in uninsured losses as well. For example, when Loral Skynet experienced the total loss of two satellites in 1994 and 1997 while under AT&T's ownership, it suffered a substantial drop in its profits due to the loss of these revenue producing assets. Moreover, because Globalstar has a large constellation and will have a number of spare satellites, Globalstar currently does not intend to insure its satellites against in-orbit failures. Some of the satellites we currently have in-orbit have experienced operational problems: - In November 1995, a component on Telstar 11 malfunctioned, resulting in a two-hour service interruption. Full service was restored using a back-up component. If the back-up component fails, Telstar 11 would lose a significant amount of usable capacity. - On April 28, 1999, Satmex's Solidaridad 1 satellite experienced a loss of its primary satellite control processor. Service was restored after 14 hours, using the backup satellite control processor. Failure of 18 20 the backup satellite control processor would result in the loss of Solidaridad 1, which would be fully covered by insurance. A loss of transponders on a satellite can also adversely affect us. Prior to its acquisition by us, Loral Skynet sold several transponders outright to customers. Under the terms of the sales contracts, Loral Skynet continues to operate the satellites on which the transponders are located and provides a warranty for a period of 10 to 14 years. Depending on the contract, Loral Skynet may be required to replace any transponders failing to meet operating specifications. All customers are entitled to a refund equal to the reimbursement value in the event there is no replacement. The reimbursement value is determined based on the original purchase price plus an interest factor from the time the payment was received to acceptance of the transponder by the customer, reduced on a straight-line basis over the warranty period. WE DEPEND HEAVILY ON SPACE SYSTEMS/LORAL FOR A LARGE PORTION OF REVENUE AND OPERATING INCOME. SS/L generates a significant part of our revenue and operating income. SS/L, in turn, has historically derived a large part of its revenue and operating income from a few customers. For example, in the year ended December 31, 1999, three of SS/L's customers accounted for approximately 25%, 18% and 13% of Loral's consolidated revenues. As a result, our revenue and operating results would be hurt if completed or canceled contracts are not promptly replaced with new orders. Some of SS/L's customers are start-up companies, and there can be no assurance that these companies will have the ability to fulfill their payment obligations under their contracts with SS/L. SS/L's accounting for long-term contracts sometimes requires adjustments to profit and loss based on revised estimates during the performance of the contract. These adjustments may have a material effect on our results of operations in the period in which they are made. The estimates giving rise to these risks, which are inherent in long-term, fixed-price contracts, include the forecasting of costs and schedules, contract revenues related to contract performance, including revenues from orbital incentives, and the potential for component obsolescence due to procurements long ahead of assembly. SS/L MAY FORFEIT PAYMENTS FROM CUSTOMERS DUE TO SATELLITE FAILURES OR LOSSES AFTER LAUNCH OR BE LIABLE FOR PENALTY PAYMENTS UNDER CERTAIN CIRCUMSTANCES, AND THESE LOSSES MAY BE UNINSURED. Some of SS/L's satellite manufacturing contracts provide that some of the total price is payable as "incentive" payments earned over the life of the satellite. While insurance against loss of these payments has been available in the past, the cost and availability of such insurance are subject to wide fluctuations. In addition, SS/L is sometimes prohibited from insuring these incentive payments. Some of SS/L's contracts call for in-orbit delivery, transferring the launch risk to SS/L. SS/L generally insures against that exposure. SS/L records as revenue the present value of incentive payments as the costs associated with these incentive payments are incurred. SS/L generally receives the present value of these incentive payments if there is a launch failure or a failure is caused by customer error. SS/L forfeits these payments, however, if the loss is caused by satellite failure or as a result of its own error. In addition, some of SS/L's contracts provide that SS/L may be liable to a customer for penalty payments under certain circumstances, including upon late delivery of a satellite. These payments are not insured by SS/L. SS/L IS CURRENTLY IN ARBITRATION PROCEEDINGS WITH PANAMSAT CORPORATION OVER A SATELLITE REFLECTOR DISPUTE. In late 1998, following the launch of an SS/L-built satellite sold to PanAmSat, a manufacturing error was discovered that affected the geographical coverage of the Ku-band transponders on the satellite. On January 6, 2000, PanAmSat filed an arbitration proceeding in connection with this error claiming damages of $225 million for lost profits and increased sales and marketing costs. SS/L believes it has meritorious defenses to the claim and that its liability is limited to a loss of a portion of the applicable orbital incentives, the estimated impact of which is included in Loral's consolidated financial statements. PanAmSat has received a recovery from its insurance carrier that should reduce any damage claim. While this proceeding is in its very early stages, management believes that this matter will not have a material adverse effect on the financial condition or results of operations of Loral. 19 21 WE FACE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY. Some of our business is conducted outside the United States. We could be harmed financially and operationally by changes in foreign regulations and telecommunications standards, tariffs or taxes and other trade barriers. Customers in developing countries could have difficulty in obtaining the U.S. dollars they owe us, including as a result of exchange controls. Additionally, exchange rate fluctuations may adversely affect the ability of our customers to pay us in U.S. dollars. Moreover, if we ever need to pursue legal remedies against our foreign business partners or customers, we may have to sue them abroad, where it could be hard for us to enforce our rights. WE ARE SUBJECT TO EXPORT CONTROLS, WHICH MAY RESULT IN DELAYS, UNFORESEEN ADDITIONAL COSTS AND UNCERTAINTIES IN CERTAIN MARKETS. Like other exporters of space-related products and services, SS/L needs licenses from the U.S. government whenever it sells a satellite to a foreign customer or launches a satellite abroad. Foreign launches have been politically sensitive because of the relationship between launch technology and missile technology. U.S. government policy has limited, and is likely in the future to limit, launches from the former Soviet Union and China. For example, the U.S. government delayed a Globalstar launch from Kazakhstan by several months when it stopped granting case-by-case approval of launches from that location pending an intergovernmental agreement covering technology security matters. Changes in governmental policies, political leadership or legislation in the United States, Russia, Kazakhstan or China could adversely affect our ability to launch from these countries or materially increase the costs of doing so. On December 23, 1998, the Office of Defense Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended the previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension is to permit that agency to review the agreement for conformity with newly-enacted legislation (Section 74 of the Arms Export Control Act) with respect to the export of missile equipment or technology. SS/L has complied with ODTC's instructions and believes that a review of the agreement will show that its terms comply with the new law. The ODTC, however, has not yet completed its review, and the scheduled launch date for ChinaSat-8 is being delayed. In December 1999, we concluded an agreement with ChinaSat to extend the date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this extension and other modifications to the contract, we have agreed to provide the customer two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR for the life of those transponders. As a result, a net charge to earnings of $35 million was recorded by us. If the suspension is not lifted by July 31, 2000, ChinaSat could decide to terminate the contract. If such a termination were to occur, SS/L would have to refund advances received from ChinaSat ($134 million as of December 31, 1999), and may incur penalties of up to $13 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer. There can be no assurance, however, that SS/L will be able to find a replacement customer for the satellite or its Chinese launch vehicle. SS/L will incur a loss of approximately $35 million if it is unable to find a replacement customer for this launch vehicle. In February 1999, the U.S. government informed Hughes Space & Communications, Inc. that it intended to deny an export license for a telecommunications satellite it was building for Asia Pacific Mobile Telecommunications. We do not know what this denial may mean for future applications of export licenses to Chinese customers or the resolution of the ChinaSat-8 suspension. If the U.S. government continues to deny export licenses for satellites sold to the Chinese or other markets, SS/L's business could be hurt. In March 1999, jurisdiction for satellite licensing was transferred from the Commerce Department to the State Department and the State Department has issued regulations relating to the export of and disclosure of technical information related to, satellites and related equipment. SS/L anticipates that obtaining licenses and technical assistance agreements under these new regulations will take more time and will be considerably more burdensome than in the past. Delays in obtaining the necessary licenses and technical assistance agreements may delay SS/L's performance on existing contracts, and, as a result, SS/L may incur penalties or lose incentive payments under these contracts. In addition, such delays may have an adverse effect on SS/L's ability to compete against foreign satellite manufacturers for new satellite contracts. 20 22 SS/L IS THE TARGET OF A GRAND JURY INVESTIGATION WHICH MAY ADVERSELY AFFECT SS/L'S ABILITY TO EXPORT ITS PRODUCTS. SS/L could be accused of criminal violations of the export control laws arising out of the participation of its employees in a committee formed to review the findings of the Chinese regarding the 1996 crash of a Long March rocket in China. Under the applicable regulations, SS/L could be debarred from export privileges without being convicted of any crime if it is indicted for these alleged violations, and loss of export privileges would harm SS/L's business. Whether or not SS/L is indicted or convicted, SS/L will remain subject to the State Department's general statutory authority to prohibit exports of satellites and related services if it finds that SS/L has violated the Arms Export Control Act. Further, the State Department can suspend export privileges whenever it determines that grounds for debarment exist and that suspension "is reasonably necessary to protect world peace or the security or foreign policy of the United States." If SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it: - would be subject to a fine of $1 million per violation; - could be debarred from certain export privileges; and - could be debarred from participation in government contracts. Since some of SS/L's satellites are built for foreign customers and/or are launched on foreign rockets, a debarment would have a material adverse effect on SS/L's business, which in turn would affect us. WE SHARE CONTROL OF OUR AFFILIATES WITH THIRD PARTIES. Third parties have significant ownership, voting and other rights in many of our subsidiaries and affiliates. As a result, we do not always have full control over management of these entities and the rights of these third parties and fiduciary duties under applicable law could result in these entities taking actions not in our best interests or in refraining from taking actions that we deem advisable. To the extent that these entities are or become customers of SS/L, these conflicts could become acute. For example: - Although we are the managing general partner and largest equity owner of Globalstar, our control is limited by the supermajority rights of Globalstar's limited partners. - Primary operational control of Satmex is vested in Mexican nationals, as required by Mexican law, subject to certain supermajority rights which we retain. - The Europe*Star joint venture, initiated by Alcatel, is under its control, subject to our supermajority rights. - Future joint ventures between Alcatel and us within the Loral Global Alliance will be controlled by the initiating party, subject to supermajority rights in favor of the non-initiating party. - Alcatel is an investor in CyberStar LP and has supermajority rights in it. THERE ARE POTENTIAL CONFLICTING COMMERCIAL INTERESTS AMONG OUR SUBSIDIARIES AND AFFILIATES. Loral Skynet, Satmex, Loral CyberStar and Europe*Star have adopted a marketing policy that provides for collaboration and cross-selling of capacity among the Loral Global Alliance members. If, however, the members of the Loral Global Alliance do not collaborate but rather compete in areas of overlapping capacity, conflicting commercial interests among our subsidiaries and affiliates may arise. Both Loral Skynet and Loral CyberStar own or are building satellites whose coverage areas overlap with those of Satmex and Europe*Star. If Loral Skynet and Loral CyberStar do not collaborate with Satmex and Europe*Star, or vice versa, under the Loral Global Alliance, Loral Skynet and Loral CyberStar might compete directly with Europe*Star and Satmex for customers. Partners and affiliates of Globalstar, including companies affiliated with us, will be among Globalstar's service providers and may, therefore, have conflicts with Globalstar and/or us over service provider agreements. 21 23 OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS. Our business is regulated by authorities in more than 100 jurisdictions, including the Federal Communications Commission, the International Telecommunications Union, or ITU, and the European Union. As a result, some of the activities which are important to our strategy are beyond our control. The following are some strategically important activities which are regulated by various government authorities: - the expansion of Loral Skynet's operations beyond the domestic U.S. market; - the international service offered by the Loral CyberStar Group; - the manufacture, export and launch of satellites; - the expansion of Satmex's Latin American business; and - the implementation of Europe*Star's business plan. Regulatory authorities in the various jurisdictions in which we operate can modify, withdraw or impose charges or conditions upon the licenses which we need, and so increase our cost of doing business. The regulatory process also requires potentially costly negotiations with third parties operating or intending to operate satellites at or near orbital locations where we place our satellites so that the frequencies of the satellites do not interfere. For example, as part of our coordination effort on Telstar 12, we agreed to provide four 54 MHz transponders on Telstar 12 to Eutelsat for the life of the satellite. We also granted Eutelsat the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. Moreover, as part of this international coordination process, we continue to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. We cannot guarantee successful frequency coordination for our satellites. Our coordination efforts are subject to the regulatory regime of the ITU, which has rules and regulations governing the relative rights that companies have to orbital slots. For example, if Europe*Star does not have a satellite in its 45(LOGO) E.L. orbital location by July 2000, it would, under ITU regulations, lose its priority rights in that slot. Failure to successfully coordinate our satellites' frequencies or to resolve other required regulatory approvals could have a material adverse effect on our financial condition and on our results of operations. SS/L COMPETES WITH LARGE MANUFACTURERS THAT HAVE SIGNIFICANT RESOURCES. In the manufacture of our satellites, we compete with very large well-capitalized companies, including several of the world's largest corporations, such as Hughes Space & Communications, Inc., a subsidiary of General Motors Corporation, and Lockheed Martin. Hughes recently agreed to sell its satellite manufacturing operations to The Boeing Company, another large company. These companies have considerable financial resources which they may use to gain advantages in marketing and in technological innovation. SS/L's success will depend on its ability to innovate on a cost-effective and timely basis. WE COMPETE WITH OTHERS FOR MARKET SHARE AND CUSTOMERS; TECHNOLOGICAL DEVELOPMENTS FROM COMPETITORS OR OTHERS MAY REDUCE DEMAND FOR OUR SERVICES. We face competition in the provision of fixed satellite services from companies such as PanAmSat Corporation, GE Americom, SES Astra and quasi-governmental organizations such as Intelsat and Eutelsat. Competition in this market may cause downward price pressures, which may adversely affect our profits. The Loral CyberStar Group also faces competition in the provision of high-speed data communications, such as Internet applications, from providers of land-based data communications services, such as cable operators, digital subscriber line, or DSL, providers, wireless local loop providers and traditional telephone service providers. In addition, the Loral CyberStar Group may face competition in the future from proposed satellite systems, including Teledesic Corporation's proposed system and Hughes' Spaceway system. We cannot assure you that the Loral CyberStar Group will attract enough customers either to compete effectively or to implement fully its business plan. Globalstar faces intense competition for customers from various companies, including providers of land-based mobile phone services and fixed satellite systems. We cannot assure you that Globalstar will attract 22 24 enough subscribers either to compete effectively or to implement fully its current business plan. Moreover, if ICO Global emerges from its bankruptcy proceedings with a debt-free or reduced debt capital structure and a viable business plan, it would be in a position to compete more effectively with Globalstar. As land-based telecommunications services expand, demand for some satellite-based services may be reduced. New technology could render satellite-based services less competitive by satisfying consumer demand in other ways or through the use of incompatible standards. We also compete for local regulatory approval in places in which both we and a competitor may want to operate. We also compete for scarce frequency assignments and fixed orbital positions. WE RELY ON KEY PERSONNEL. We need highly qualified personnel. Except for Mr. Bernard L. Schwartz, our Chairman and Chief Executive Officer, none of our officers has an employment contract nor do we maintain "key man" life insurance. The departure of any of our key executives could have an adverse effect on our business. THE RIGHTS OF SHAREHOLDERS UNDER BERMUDA LAW ARE DIFFERENT FROM RIGHTS OF SHAREHOLDERS UNDER U.S. LAW. Since we are a Bermuda company, the principles of law that govern shareholder rights, the validity of corporate procedures and other matters are different from those that would apply if we were a U.S. company. For example, it is not certain whether a Bermuda court would enforce liabilities against us or our officers and directors based upon United States securities laws either in an original action in Bermuda or under a United States judgment. Bermuda law giving shareholders rights to sue directors is less developed than in the United States and may provide fewer rights. THE YEAR 2000 PROBLEM COULD CAUSE COMPLICATIONS. As of the date of this Report on Form 10-K, our computer systems and software programs are functioning properly. However, there is still a possibility that some computer systems and software programs may not function properly later in the Year 2000 and beyond because of a once common programming standard which used two digits instead of four digits to signify a year. This problem is often referred to as the "Year 2000" problem. If we are unable to fix a serious Year 2000 problem, there could be an interruption or failure in our operations. Likewise, if our suppliers or customers are unable to fix a material Year 2000 problem, a resulting interruption or failure of their business could hurt our company. ITEM 2. PROPERTIES The Company leases approximately 47,000 square feet for its corporate offices in New York. The Company's subsidiaries also maintain office space, manufacturing and telemetry, tracking and control facilities primarily in the United States. Management believes that the facilities are sufficient for its current operations. Fixed Satellite Services Loral Skynet owns two telemetry, tracking and control stations covering approximately 39,000 square feet on 220 acres in Hawley, Pennsylvania and Three Peaks, California and leases approximately 51,000 square feet of office space in Bedminster, New Jersey and Richmond, California. Broadband Data Services Loral CyberStar owns seven acres of land in Mt. Jackson, Virginia and leases approximately 78,000 square feet for office space worldwide and its operations center in Mt. Jackson, Virginia. CyberStar LP leases approximately 14,000 square feet for office space and its network operations center in Mountain View, California and approximately 37,000 square feet of office space in London, England, Plano, Texas and St. Paul, Minnesota. 23 25 Satellite Manufacturing and Technology SS/L's research, production and testing facilities are carried on in SS/L-owned facilities covering approximately 562,000 square feet on 84 acres in Palo Alto, California. In addition, SS/L leases approximately 780,000 square feet of space from various third parties in Palo Alto, California, Menlo Park, California and Mountain View, California. ITEM 3. LEGAL PROCEEDINGS Export Control Matters. Various agencies and departments of the U.S. government regulate Loral's ability to pursue business outside the United States. Exports of space-related products, services and technical information require U.S. government licenses. There can be no assurance that Loral or SS/L will be able to obtain necessary licenses or approvals, and the inability to do so, or the failure to comply with the terms thereof when granted, could have a material adverse effect on their respective businesses. On February 15, 1996, a Chinese Long March rocket carrying an Intelsat satellite built by SS/L crashed seconds after launch. Thereafter, at the request of insurance companies concerned about underwriting future Long March launches, the manufacturer of the Long March, China Great Wall Industries Corporation ("CGWIC"), asked SS/L employees and personnel from other interested companies to serve on a committee formed to consider whether studies of the crash made by the Chinese had correctly identified the cause of the failure. In meetings with CGWIC, the committee reviewed CGWIC's launch failure analysis, which consisted of a preliminary explanation for the crash (a failed solder joint) and CGWIC's plan for further studies it planned to make. In May 1996, an SS/L employee transmitted a copy of the committee's preliminary report to the members of the committee and, contrary to the intentions of SS/L's management, to CGWIC before consulting with the U.S. State Department. Upon becoming apprised of the facts, SS/L immediately informed the State Department, and thereafter submitted a detailed voluntary written disclosure to the State Department that included copies of the written materials provided to CGWIC and descriptions of the committee's meetings with the Chinese and of the events surrounding disclosure of the preliminary report. For the next 18 months, the Company had no notice of any adverse action being taken or contemplated in connection with the matter. SS/L is a target of a grand jury investigation being conducted by the U.S. Attorney for the District of Columbia as to whether an unlawful transfer of technology occurred in connection with the committee's work. The Company and several of its employees have received subpoenas from that grand jury. SS/L is not in a position to predict the outcome of this investigation. If SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it would be subject to a fine of $1 million for each violation, and could be debarred from certain export privileges and, possibly, from participation in government contracts. Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, such a debarment would have a material adverse effect on SS/L's business, which would in turn affect the Company. Indictment for such violations would subject SS/L to discretionary debarment from further export licenses. Under the applicable regulations, SS/L could be debarred from export privileges without being convicted of any crime if it is indicted for these alleged violations, and loss of export privileges would harm SS/L's business. Whether or not SS/L is indicted or convicted, SS/L will remain subject to the State Department's general statutory authority to prohibit exports of satellites and related services if it finds a violation of the Arms Export Control Act that puts SS/L's reliability in question, and it can suspend export privileges whenever it determines that grounds for debarment exist and that such suspension "is reasonably necessary to protect world peace or the security or foreign policy of the United States." As far as SS/L can determine, no sensitive information or technology was conveyed to the Chinese, and no secret or classified information was discussed with or reported to them. SS/L believes that its employees acted openly and in good faith and that none engaged in intentional misconduct. Accordingly, the Company does not believe that SS/L has committed a criminal violation of the export control laws. The Company does not expect the grand jury investigation or its outcome to result in a material adverse effect upon its business. However, there can be no assurance as to those conclusions. 24 26 In May 1997, SS/L applied for an export license for the launch of another SS/L satellite in China, which was granted following the required Presidential waiver in February 1998. The Company believes that the authorizations were properly granted, and does not believe that it or any of its officers acted improperly in obtaining them. The policy of the Bush administration, which has been continued under President Clinton, has been to grant such waivers routinely as being in the national interest; indeed, the Company is unaware of any requested waiver for a Chinese satellite launch ever having been denied. According to press reports, President Bush signed three waivers covering nine Long March launches, and President Clinton has signed eight waivers covering 11 Long March launches. This policy has, until recently, also enjoyed bipartisan Congressional support. On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the U.S. Department of State temporarily suspended the previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 program. According to ODTC, the purpose of the temporary suspension is to permit that agency to review the agreement for conformity with newly-enacted legislation (Section 74 of the Arms Export Control Act) with respect to the export of missile equipment or technology. SS/L has complied with ODTC's instructions, and believes that a review of the agreement will conclude that its terms comply with the new law. The ODTC, however, has not completed its review, and the scheduled launch date for ChinaSat-8 is being delayed. In December 1999, we concluded an agreement with ChinaSat to extend the date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this extension and other modifications to the contract, Loral has agreed to provide to the customer two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR for the customer's use for the life of those transponders. As a result, the Company recorded a net charge to earnings of $35 million. If the suspension is not lifted by July 31, 2000, ChinaSat could decide to terminate the contract. If such a termination were to occur, SS/L would have to refund advances received from ChinaSat ($134 million as of December 31, 1999) and may incur penalties of up to $13 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer. There can be no assurance, however, that SS/L will be able to find a replacement customer for the satellite or its Chinese launch vehicle. SS/L will incur a loss of approximately $35 million if it is unable to find a replacement customer for this launch vehicle. PanAmSat Arbitration. In late 1998, following the launch of an SS/L-built satellite sold to PanAmSat, a manufacturing error was discovered that affected the geographical coverage of the Ku-band transponders on the satellite. On January 6, 2000, PanAmSat filed an arbitration proceeding in connection with this error claiming damages of $225 million for lost profits, and increased sales and marketing costs. SS/L believes it has meritorious defenses to the claim and that its liability is limited to a loss of a portion of the applicable orbital incentives, the estimated impact of which is included in Loral's consolidated financial statements. PanAmSat has received a recovery from its insurance carrier that should reduce any damage claim. While this proceeding is in its very early stages, management believes that this matter will not have a material adverse effect on the financial condition or results of operations of Loral. CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral Fairchild"), a subsidiary of Loral Corporation, filed suit against a number of companies including Sony Corporation ("Sony"), Matsushita Electronics Corporation ("Matsushita") and NEC Corp. 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 appealed and sought certiorari unsuccessfully. Although Loral Fairchild has settled its claim against one of the other defendants for approximately $450,000 its claims against other defendants remain pending. In view of the court's decision, however, a substantial portion, but not all, of the damage claims against the other defendants are adversely affected. Matsushita has been granted a declaratory judgment that it has a valid and enforceable license under the CCD patents. In addition, a trial on Matsushita's claim against Loral Fairchild for tortious interference was conducted during July 1996, and a verdict was rendered in favor of Loral Fairchild in September 1997. Environmental Regulation. Operations at SS/L, Loral Skynet, Loral CyberStar, CyberStar LP and Globalstar are subject to regulation by various federal, state and local agencies concerned with environmental 25 27 control. The Company believes that these facilities are in substantial compliance with all existing federal, state and local environmental regulations. With regard to certain sites, environmental remediation is being performed by prior owners who retained liability for such remediation arising from occurrences during their period of ownership. To date, these prior owners have been fulfilling such obligations and the size and current financial condition of the prior owners make it probable that they will be able to complete their remediation obligations without cost to the Company or Globalstar. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 26 28 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 New York Stock Exchange ("NYSE") under the symbol LOR. The following table presents, the reported high and low sales prices of the Company's common stock as reported on the NYSE:
HIGH LOW ---- --- YEAR ENDED DECEMBER 31, 1999 Quarter ended March 31, 1999................................ $22 7/16 $14 7/16 Quarter ended June 30, 1999................................. 20 3/4 14 3/8 Quarter ended September 30, 1999............................ 22 7/8 16 1/4 Quarter ended December 31, 1999............................. 24 3/4 13 1/2 YEAR ENDED DECEMBER 31, 1998 Quarter ended March 31, 1998................................ $30 1/2 $19 Quarter ended June 30, 1998................................. 33 15/16 24 1/2 Quarter ended September 30, 1998............................ 31 7/8 12 1/8 Quarter ended December 31, 1998............................. 20 1/2 10 3/4
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 and will be paying dividends on its 6% Series D Convertible Redeemable Preferred Stock. Loral's indenture relating to its 9.5% senior notes also imposes limitations on Loral's ability to pay dividends to its shareholders. 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 8 to Loral's consolidated financial statements). The guarantee by certain Loral subsidiaries of Globalstar's $500 million credit facility restricts these subsidiaries from making dividend payments to Loral, if cash on hand at the subsidiaries is not at least $50 million and the subsidiaries do not hold an intercompany note from Loral for at least $100 million. Loral CyberStar's indentures relating to its senior notes and its senior discount notes also contain restrictions on Loral CyberStar's ability to make dividend payments to its parent. (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK At February 29, 2000, there were 6,866 holders of record of the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data has been derived from, and should be read in conjunction with, the related financial statements. 27 29 LORAL SPACE & COMMUNICATIONS LTD. (in thousands, except per share and ratio data)
NINE MONTHS YEARS ENDED DECEMBER 31, ENDED YEAR ENDED ------------------------------------ DECEMBER 31, MARCH 31, 1999 1998(1) 1997(1) 1996(1) 1996(1) ---------- ---------- ---------- ------------ ------------ STATEMENT OF OPERATIONS DATA: Revenues............................. $1,457,720 $1,301,702 $1,312,591 Management fee from affiliate........ -- $ 5,088 $ 5,608 Operating income (loss)(2)........... (62,263) (33,780) 13,552 (12,201) 2,587 Equity in net loss of affiliates(1)(3)................... (177,819) (120,417) (49,037) (4,709) (8,628) Net income (loss)(2)................. (201,916) (138,798) 40,004 8,877 (13,785) Preferred dividends and accretion(4)....................... (44,728) (46,425) (26,315) Net income (loss) applicable to common stockholders(2)............. (246,644) (185,223) 13,689 8,877 (13,785) Earnings (loss) per share -- basic and diluted........................ (.85) (.68) .06 .04 (.08) OTHER DATA: Ratio of earnings to fixed charges... 1.9x 3.7x Deficiency of earnings to cover fixed charges............................ $ 191,932 $ 140,438 CASH FLOW DATA: (Used in) provided by operating activities......................... $ (26,405) $ 86,795 $ (173,609) $ (3,003) $ (1,319) Used in investing activities......... 659,533 555,613 1,079,411 1,962 115,031 Provided by (used in) equity transactions....................... (24,633) 589,187 (18,097) 602,413 116,362 Provided by financing transactions... 403,664 199,856 316,912 583,292 Dividends paid per common share...... N/A
DECEMBER 31, ------------------------------------------------- MARCH 31, 1999 1998(1) 1997(1) 1996(1) 1996(1) ---------- ---------- ---------- ---------- ------------ BALANCE SHEET DATA: Cash and cash equivalents............ $ 239,865 $ 546,772 $ 226,547 $1,180,752 $ 12 Total assets......................... 5,610,421 5,229,215 3,010,447 1,699,326 354,396 Convertible preferreds(4)............ 583,292 Debt, including current portion...... 1,999,322 1,555,775 435,398 Non-current liabilities.............. 252,052 231,384 230,411 26,834 Shareholders' equity/Invested equity............................. 2,750,664 2,935,721 1,980,520 1,070,069 354,396
- --------------- (1) On March 20, 1998, Loral acquired all of the outstanding stock of Loral CyberStar in exchange for common stock of Loral. The 1998 financial information includes Loral Cyberstar commencing from April 1, 1998. In 1997, Loral increased its ownership in SS/L to 100%, prior to 1997, SS/L was accounted for under the equity method of accounting. On March 14, 1997, Loral acquired Loral Skynet from AT&T; Loral's financial information includes the results of Loral Skynet from that date. Financial information as of and for the year ended March 31, 1996, represents the space and communications operations of Loral Corporation ("Old Loral"). The results of operations for the year 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 results of operations for the year ended December 31, 1999 includes a pre-tax charge of $35 million ($21 million after taxes) relating to an agreement reached with a customer to extend the delivery date of a satellite and other modifications to the contract in return for providing transponders on another Loral satellite for their remaining lives. (3) The Company's principal affiliates are Globalstar, Satmex since November 17, 1997 and Europe*Star since December 1998. Loral also has investments in SkyBridge and other ventures, which are accounted for under the equity method. Loral sold its interest in K&F Industries, Inc. in 1997. (4) Convertible preferred equivalent obligations were exchanged for 6% Series C Preferred Stock and were reclassified to shareholders' equity in 1997 upon approval by the Company's shareholders. 28 30 SPACE SYSTEMS/LORAL, INC. (In thousands)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1996 1996 ------------ ---------- STATEMENT OF OPERATIONS DATA: Revenues.................................................... $1,017,653 $1,121,619 Gross profit................................................ 64,157 34,406 Net income.................................................. 31,025 12,367
DECEMBER 31, MARCH 31, 1996 1996 ------------ --------- BALANCE SHEET DATA: Cash and cash equivalents................................... $ 19,181 $ 126,863 Total assets................................................ 1,059,064 908,677 Long-term debt.............................................. 127,586 65,052 Shareholders' equity........................................ 478,893 447,868
GLOBALSTAR, L.P. (in thousands, except per partnership interest data)
CUMULATIVE MARCH 23, 1994 (COMMENCEMENT OF OPERATIONS) TO YEARS ENDED DECEMBER 31, DECEMBER 31, ---------------------------------------------------- 1999 1999(2) 1998(2) 1997 1996 1995 ----------------- -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues............................................... $ -- $ -- $ -- $ -- $ -- $ -- Operating loss......................................... 590,538 186,505 146,684 88,071 61,025 80,226 Net loss applicable to ordinary partnership interests............................................ 639,562 232,584 151,740 88,788 71,969 68,237 Net loss per weighted average ordinary partnership interest outstanding -- basic and diluted............ 3.99 2.69 1.74 1.53 1.50 Cash distributions per ordinary partnership interest... OTHER DATA: Deficiency of earnings to cover fixed charges(1)....... 466,369 330,475 184,683 81,869 N/A CASH FLOW DATA: Used in operating activities........................... 265,657 56,576 24,958 68,615 51,756 38,368 Used in investing activities........................... 2,734,313 721,733 682,884 622,004 379,130 280,345 Provided by partners' capital transactions............. 1,361,649 463,329 14,825 132,990 284,714 318,630 Provided by (used in) other financing activities....... 1,765,996 386,432 287,552 998,137 95,750 (1,875)
DECEMBER 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents(3)................................ $ 173,921 $ 56,739 $ 464,154 $ 21,180 $ 71,602 Globalstar System under construction........................ 3,181,189 2,302,333 1,626,913 891,033 400,257 Total assets................................................ 3,781,459 2,670,025 2,149,053 942,913 505,391 Vendor financing liability, including current portion....... 393,795 371,170 197,723 130,694 42,219 Debt........................................................ 1,799,111 1,396,175 1,099,531 96,000 Redeemable preferred partnership interests.................. 303,089 302,037 Partners' capital........................................... 1,028,329 602,401 380,828 315,186 386,838
- --------------- (1) The ratio of earnings to fixed charges is not meaningful as Globalstar was in the development stage until the first quarter of 2000 and, accordingly, has incurred operating losses. (2) The results of operations for 1999 and 1998, include launch related costs of $30 million and $17 million, respectively. (3) Includes restricted cash of $46 million and $0.5 million for 1999 and 1998, respectively, received from service providers for the purchase of gateways. 29 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters discussed in the following Management's Discussion and Analysis of Financial Condition and Results of Operations of Loral Space & Communications Ltd. and its subsidiaries ("Loral" or the "Company") are not historical facts, but are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, the Company or its representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts, such as in reports filed with the Securities and Exchange Commission (the "SEC"), press releases or statements made with the approval of an authorized executive officer of the Company. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend," or "outlook" or the negative of these words or other variations of these words or other comparable words, or by discussion of strategy that involve risks and uncertainties. These forward-looking statements are only predictions, and actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond the Company's control. Some of these factors and conditions include: (i) the Company and its subsidiaries and affiliates owe significant amounts of money; (ii) the Company's consumer broadband and streaming media strategies are subject to substantial financing and execution risks; (iii) Globalstar was a development-stage company through December 31, 1999, that may continue to lose money, have negative cash flow, require additional money and suffer delays in meeting its targets; (iv) launch failures may delay operations; (v) satellites may fail prematurely; (vi) dependence on operating subsidiaries, especially Space Systems/Loral, Inc. ("SS/L"), for operating income; (vii) severe competition in the Company's industries; and (viii) governmental or regulatory changes. For a detailed discussion of these factors and conditions, please refer to the periodic reports filed with the SEC by Loral, Globalstar, L.P. ("Globalstar"), Globalstar Telecommunications Limited ("GTL"), Loral CyberStar, Inc. ("Loral CyberStar"), formerly known as Loral Orion, Inc., and Satelites Mexicanos, S.A. de C.V. ("Satmex"). In addition, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. Loral is one of the world's leading satellite communications companies, with substantial activities in satellite manufacturing and satellite-based communications services. Loral has assembled the building blocks necessary to provide a seamless, global networking capability for the information age. Loral's four operating segments are: Fixed Satellite Services ("FSS"). Through the Loral Global Alliance, which currently consists of Loral Skynet, Loral CyberStar, its 49% owned affiliate Satmex, and its 47% owned affiliate Europe*Star Limited ("Europe*Star"), Loral has become one of the world's leading providers of satellite services using geostationary communications satellites. The Company leases transponder capacity on its satellites to its customers who use the capacity for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television. The Loral Global Alliance currently has ten high-powered geosynchronous satellites in orbit: the seven satellite Telstar fleet and three Satmex satellites, with footprints covering almost all of the world's population. Broadband Data Services. Through Loral CyberStar and its 82% owned subsidiary CyberStar, L.P. ("CyberStar LP"), Loral currently (i) delivers U.S.-based Internet content via satellite to more than 130 Internet Service Providers ("ISPs") in more than 32 foreign countries, which reach approximately seven million residential customers around the world, (ii) distributes high-speed data over private corporate very small aperture terminal ("VSAT") networks, which reach approximately 2.5 million corporate desktops around the world, and (iii) offers business television ("BTV") services by satellite to corporations. Loral's broadband strategy will build on these existing resources and will initially focus on two attractive opportunities for early market entry: consumer broadband services and streaming media services. Satellite Manufacturing and Technology. SS/L is one of the world's leading manufacturers of satellites and space systems, providing its customers with a full suite of services, including: developing 30 32 custom designs to meet their requirements, manufacturing and testing, and arranging for launch services and insurance. Global Mobile Telephone Service. Globalstar owns and operates a 52-satellite constellation, including four in-orbit spares, that forms the backbone of a global telecommunications network designed to serve virtually every populated area of the world. The Globalstar system commenced operations in the first quarter of 2000, and as of February 29, 2000, there were 14 gateways available for service covering 78 countries. Billable service has commenced in 20 countries, including Austria, Argentina, Brazil, Canada, Greece, Italy, South Korea, Switzerland and the United States. Loral is the managing general partner and owned 41%, 43% and 40% of Globalstar as of December 31, 1999, 1998 and 1997, respectively. In February 2000, Loral's ownership in Globalstar was reduced to 40% as a result of Globalstar issuing equity interests in connection with GTL's public offering of 8.1 million shares of common stock. CONSOLIDATED OPERATING RESULTS In evaluating financial performance, management uses revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") as a measure of a segment's profit or loss. The following discussion of revenues and EBITDA reflects the results of Loral's operating segments for the years ended December 31, 1999, 1998 and 1997. See Note 16 to Loral's consolidated financial statements for additional information on segment results. The remainder of the discussion relates to the consolidated results of Loral, unless otherwise noted. Operating Revenues:
YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- (IN MILLIONS) Fixed satellite services(1)................................. $ 341.8 $ 254.2 $ 83.0 Broadband data services(2).................................. 84.6 39.8 Satellite manufacturing and technology(3)................... 1,433.3 1,390.2 1,442.6 -------- -------- -------- Operating segment revenues.................................. 1,859.7 1,684.2 1,525.6 Affiliate eliminations(4)................................... (135.5) (104.8) (12.9) Intercompany eliminations(5)................................ (266.5) (277.7) (200.1) -------- -------- -------- Operating revenues as reported.............................. $1,457.7 $1,301.7 $1,312.6 ======== ======== ========
EBITDA(6):
YEARS ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ------- ------- ------- (IN MILLIONS) Fixed satellite services(1)................................. $ 193.1 $ 171.2 $ 51.8 Broadband data services(2).................................. (8.4) (13.3) Satellite manufacturing and technology(3)(7)................ 102.3 117.9 110.9 Corporate expenses(8)....................................... (39.3) (42.8) (26.9) ------- ------- ------- Segment EBITDA before development and start-up costs and eliminations(7)........................................... 247.7 233.0 135.8 Development and start-up costs(9): Broadband data services(2)................................ (27.2) (33.3) (32.6) Global mobile telephone service(10)....................... (184.2) (145.0) (87.1) ------- ------- ------- Total development and start-up costs........................ (211.4) (178.3) (119.7) ------- ------- ------- Segment EBITDA before eliminations(7)....................... 36.3 54.7 16.1 Affiliate eliminations(4)................................... 106.7 70.2 77.2 Intercompany eliminations(5)................................ (30.4) (23.7) (17.0) ------- ------- ------- EBITDA as reported(7)....................................... $ 112.6 $ 101.2 $ 76.3 ======= ======= =======
- --------------- (1) Fixed Satellite Services consists of 100% of the following companies since their respective dates of acquisition: Loral Skynet acquired on March 14, 1997; Loral CyberStar's transponder leasing business acquired on March 20, 1998; Satmex, a 49% equity investee, 31 33 acquired on November 17, 1997; and Europe*Star, a 47% equity investee, since December 1998. For the year ended December 31, 1999, Satmex's results include $25.5 million in revenues and $11.2 million of EBITDA from the sale of transponders to Loral Skynet. (2) Broadband Data Services consists of 100% of CyberStar LP (in which Loral owns an 82% equity interest) and 100% of Loral CyberStar's broadband data services business since its acquisition on March 20, 1998. (3) Satellite Manufacturing and Technology consists of 100% of SS/L's results. In February 1997, Loral agreed to acquire the remaining 49% of SS/L. (4) Represents amounts related to unconsolidated affiliates (Satmex, Europe*Star and Globalstar). These amounts are eliminated in order to arrive at Loral's consolidated results. Loral's proportionate share of these affiliates is included in equity in net loss from affiliates in Loral's consolidated statements of operations. (5) Represents the elimination of intercompany sales and EBITDA primarily for satellites under construction by SS/L for wholly owned subsidiaries, as well as eliminating sales for the lease of transponder capacity by Broadband Data Services from Fixed Satellite Services. (6) EBITDA (which is equivalent to operating income [loss] before depreciation and amortization, including amortization of unearned compensation) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of Loral's operating results. EBITDA is not an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. (7) Segment EBITDA before development and start-up costs and eliminations includes a charge of $44 million for Satellite Manufacturing and Technology relating to an agreement with ChinaSat to extend the delivery date of a satellite and other modifications to the contract in return for providing transponders on another Loral satellite for their remaining lives. The net charge to Loral after intercompany eliminations was $35 million. (8) Represents corporate expenses incurred in support of the Company's operations. (9) Represents EBITDA for CyberStar LP and Globalstar. (10) Includes 100% of Globalstar. EBITDA for 1999 and 1998 includes launch related costs of $30 million and $17 million, respectively. Loral owned 41%, 43% and 40% of Globalstar as of December 31, 1999, 1998 and 1997, respectively. 1999 COMPARED WITH 1998 Operating segment revenues for Loral were $1.9 billion for 1999 versus $1.7 billion in 1998, before intercompany and affiliate eliminations of $402 million in 1999 and $383 million in 1998. The increase in revenues was due primarily to growth in fixed satellite services as a result of the service start-up of Satmex 5 in January 1999, Loral Skynet's Telstar 6 satellite in March 1999 and the acquisition of Telstar 10/Apstar IIR in September 1999, increased growth in broadband data services, partially due to the acquisition of Global Access Services in July 1999, and increases in satellite manufacturing and technology. Also contributing to increased revenues was the inclusion of Loral CyberStar's leasing and data businesses for the full year in 1999 versus nine months in 1998 and other increased revenues at Satmex, primarily from the sale of three transponders to Loral Skynet. The increase in affiliate eliminations in 1999 reflects higher revenues for Satmex. EBITDA for operating segments before development and start-up costs and affiliate and intercompany eliminations, increased in 1999 to $248 million from $233 million in 1998. This increase arose primarily from growth in fixed satellite services due to the initiation of service on satellites added to our FSS fleet in 1999, increased margins in broadband data services, and increases at Satmex, primarily from the sale of three transponders to Loral Skynet. In addition, satellite manufacturing and technology's EBITDA grew $28 million to $146 million in 1999, before a $44 million charge relating to an agreement reached with ChinaSat to extend the delivery date of a satellite and other modifications to the contract in return for satellite capacity on another Company-owned satellite. After considering the charge, satellite manufacturing and technology's EBITDA was $102 million in 1999 versus $118 million in 1998. The net charge to Loral was $35 million, after considering the cost of the owned transponders and, as a result, intercompany eliminations were reduced by $9 million. Total investment in development and start-up costs increased in 1999 to $211 million, from 1998 costs of $178 million. While the investment required for CyberStar LP decreased to $27 million in 1999 from $33 million in 1998, costs related to the further development of Globalstar rose to $184 million in 1999 from $145 million in 1998, resulting from increased costs for the development of user terminals and in-house engineering, marketing, general and administrative costs in anticipation of the start of service and launch related costs. Affiliate eliminations increased in 1999, primarily as a result of Globalstar's increased development and start-up costs. As a result of the above, EBITDA as reported increased to $113 million in 1999 from $101 million in 1998. 32 34 Depreciation and amortization rose to $175 million in 1999 from $135 million in 1998, and excludes depreciation and amortization of unconsolidated affiliates of $65 million and $50 million for 1999 and 1998, respectively, primarily for Satmex. The increase primarily results from the depreciation of satellites placed in service in 1999, including Telstar 6, Telstar 7, Telstar 12, and Telstar 10/Apstar IIR and the inclusion of Loral CyberStar's depreciation and the amortization of cost in excess of Loral CyberStar's net assets acquired for the full year in 1999. Interest and investment income increased to $89 million in 1999 from $54 million in 1998, principally due to $16 million of non-cash income related to warrants received in connection with Globalstar's 1999 credit agreement (see Acquisitions and Investments in Affiliates) and $11 million of dividend income from Loral's investment in GTL preferred stock in January 1999. Interest expense was $89 million in 1999, net of capitalized interest of $84 million, versus $51 million in 1998, net of capitalized interest of $60 million. The increase in interest expense in 1999 was primarily due to including interest expense for Loral CyberStar for a full year in 1999, interest expense on the Company's 9.5% senior notes issued in January 1999 and increased interest expense on Loral SpaceCom Corporation's credit facility, due to higher rates and amounts outstanding in 1999, partially offset by increased capitalized interest in 1999. Capitalized interest is expected to be lower in 2000, due to the start of Globalstar telephone service in the first quarter of 2000 and the successful launches in 1999 of Telstar 6, Telstar 7 and Telstar 12. In 1998, the Company realized a $35 million gain on the sale of GTL common stock, which was mostly offset by the write-off of non-strategic investments in Asia Broadcasting and Communications Network, Ltd. and Continental Satellite Corporation of $30 million, which were determined to have no future value to Loral. These items resulted in a net gain on investments of $5 million in 1998. For 1999, the income tax benefit of $33 million included a non-recurring tax benefit of $34 million relating to a tax law change affecting the future utilization of Loral CyberStar's pre-acquisition loss carryforwards. Excluding this non-recurring benefit, the Company recorded an income tax provision of $1 million on a loss before income taxes of $62 million. For 1998, the Company recorded an income tax benefit of $4 million on a loss of $26 million before income taxes. In comparing 1999 to 1998, the change is primarily attributable to a decrease in net income from non-taxable jurisdictions in 1999. The minority interest benefit primarily reflects the reduction of CyberStar LP's loss attributed to CyberStar LP's other investor, who owned 17.6% as of December 31, 1999. The equity in net loss of affiliates was $178 million in 1999 compared to $120 million in 1998. Loral's share of Globalstar's losses, net of the related tax benefits, was $99 million in 1999 compared to $67 million in 1998. This increase is primarily due to Globalstar's increased development costs and marketing, general and administrative costs in 1999 and launch related costs of $30 million in 1999 related to excess launch capacity. As a result of its successful launch campaign during 1999, Globalstar does not anticipate using all the excess launch vehicle capacity it had contracted for and, accordingly, recorded a charge of $30 million. Globalstar has a remaining deposit balance of $45 million relating to backup launch capacity for three additional launches. In 1998, Globalstar incurred a $17 million charge related to the loss of satellites on launch failure. Loral's share of Satmex's loss was $33 million for 1999, after eliminating the profit on its sale of three transponders to Loral Skynet, and $16 million for 1998. Also included as equity in net loss of affiliates is Loral's share of Europe*Star's losses, SkyBridge Limited Partnership's losses, and losses from other affiliates, including $15 million, net of related tax benefits, principally related to Loral's proportionate share of the reduction in the carrying value of the transponders of the Mabuhay Space Holdings Limited joint venture (see Note 7 to Loral's consolidated financial statements). Preferred distributions of $45 million for 1999 and $46 million for 1998 relate to Loral's 6% Series C convertible redeemable preferred stock (the "Series C Preferred Stock"). As a result of the above, the net loss applicable to common stockholders for 1999 was $247 million or $0.85 per basic and diluted share, compared to a net loss applicable to common stockholders of $185 million or $0.68 per basic and diluted share for 1998. Basic and diluted weighted average shares were 290.2 million for 1999 and 273.4 million for 1998 (see Note 15 to Loral's consolidated financial statements). This increase is 33 35 primarily due to the 23 million shares issued to the public in June 1998 and the 18 million shares issued to acquire Loral CyberStar in March 1998. 1998 COMPARED WITH 1997 Total revenues for Loral's operating segments were $1.7 billion for 1998 versus $1.5 billion in 1997, before intercompany and affiliate eliminations of $383 million in 1998 and $213 million in 1997. The increase in revenues was due primarily to growth in fixed satellite services as a result of including Satmex for the full year, Loral CyberStar's leasing business for nine months, Loral Skynet's results for a full year in 1998 versus nine and a half months in 1997 and increased utilization of Loral Skynet's Telstar satellites. The growth in fixed satellite services was partially offset by a modest decline in satellite manufacturing revenues which primarily resulted from the debooking of three satellites for Asian customers at the end of 1997. The increase in affiliate eliminations in 1998 reflects the elimination of a full year of Satmex sales. The increase in intercompany eliminations in 1998 primarily reflects increased investment in satellite construction by SS/L for Loral's FSS segment. EBITDA for operating segments before development and start-up costs, and intercompany and affiliate eliminations, increased in 1998 to $233 million from $136 million in 1997, a year-over-year increase of 72%. This increase arose primarily from the growth in fixed satellite services due to increased utilization of Loral Skynet's Telstar satellites, the inclusion of Loral Skynet's results for a full year in 1998 versus nine and a half months in 1997, including the results of Loral CyberStar's leasing business subsequent to its acquisition, and including Satmex's results for a full year in 1998 and growth in satellite manufacturing and technology from increased margins. These increases were partially offset by including the results of Loral CyberStar's broadband data services business in 1998 and increased corporate expenses, which resulted primarily from costs incurred for the additional resources required to manage the substantial growth in Loral's businesses, along with increased legal and other costs in support of the Company's operations. Total development and start-up costs rose substantially in 1998 to $178 million, a 49% increase over 1997 spending of $120 million. While the investment required for CyberStar LP remained constant year-over-year at approximately $33 million, costs related to the further development of Globalstar rose to $145 million in 1998 from $87 million in 1997, due to increased activities in anticipation of the commencement of commercial service. Affiliate eliminations decreased in 1998 primarily as a result of eliminating a full year of Satmex's results for 1998 versus one and a half months in 1997, partially offset by the elimination of increased Globalstar costs and Europe*Star costs in 1998. Intercompany eliminations increased in 1998 primarily from increased investment in satellite construction by SS/L for Loral's FSS segment. As a result of the above, EBITDA as reported increased 33% to $101 million in 1998 from $76 million in 1997. Depreciation and amortization rose to $135 million in 1998 from $63 million in 1997, and excludes depreciation and amortization of unconsolidated affiliates of $50 million and $7 million for 1998 and 1997, respectively, primarily for Satmex. The increase primarily results from the inclusion of Loral CyberStar's depreciation and the amortization of cost in excess of its net assets acquired and from the inclusion of Loral Skynet's depreciation and amortization for a full year in 1998, which includes the depreciation of Loral Skynet's Telstar 5 satellite which was placed in service on July 1, 1997. Interest and investment income increased to $54 million in 1998 from $49 million in 1997. This increase is principally due to including Loral CyberStar's interest income in 1998, partially offset by lower cash balances available for investment in 1998. Interest expense of $51 million in 1998, net of capitalized interest of $60 million, reflects interest on borrowings under Loral SpaceCom Corporation's credit facility, other Loral debt and interest on Loral CyberStar's debt subsequent to its acquisition. Interest expense of $15 million in 1997, net of capitalized interest of $23 million, reflects interest on SS/L's debt assumed and interest on Loral's outstanding Convertible Preferred Equivalent Obligations ("CPEOs"). On June 5, 1997, the CPEOs were exchanged for the 6% Series C Preferred Stock. Loral realized a $35 million gain on the sale of GTL common stock, which was mostly offset by the write-off of non-strategic investments in Asia Broadcasting and Communications Network, Ltd. and in Continental 34 36 Satellite Corporation of $30 million, which were determined to have no future value to Loral. These items resulted in a net gain on investments of $5 million in 1998. In 1997, the Company realized a gain on investment of $80 million resulting from the sale of the stock of K&F Industries, Inc. ("K&F"), net of expenses. For 1998, the Company recorded an income tax benefit of 15.1% on its loss before income taxes, while for 1997, the Company recorded an income tax provision of 27.5% on income before income taxes. The benefit rate for 1998 is lower than the provision rate for 1997 primarily because of the Loral CyberStar non-deductible amortization of costs in excess of net assets acquired in the current year. The minority interest benefit in 1998 primarily reflects the reduction of CyberStar LP's loss attributed to CyberStar LP's other investor, who owned 17.6% as of December 31, 1998. The minority interest expense in 1997 also reflects the reduction of SS/L's income attributed to other partners' partial ownership in SS/L until Loral acquired the remaining 49% in February 1997, as compared to Loral's full ownership of SS/L in 1998 for the entire year. The equity in net loss of affiliates was $120 million in 1998 compared to $49 million in 1997. Loral's share of Globalstar's losses was $67 million in 1998 compared to $41 million in 1997. This increase was primarily due to Globalstar's increased development and start-up costs and Loral's increased ownership percentage in Globalstar in 1998 (42.6% as of December 31, 1998 versus 40.1% as of December 31, 1997) and Loral's proportionate share of a charge taken by Globalstar in 1998 as a result of a Zenit launch failure. Loral's share of Satmex's loss was $16 million and $6 million for the year ended December 31, 1998 and the period November 17, 1997 through December 31, 1997, respectively. Also included as equity in net loss of affiliates for 1998 is Loral's share of Europe*Star's losses, SkyBridge Limited Partnership's loss, net of the related tax benefit, and losses from other affiliates (see Note 7 to Loral's consolidated financial statements). Preferred distributions of $46 million and $26 million for the years ended December 31, 1998 and 1997, relate to the Series C Preferred Stock. The increase in 1998 reflects a full year of preferred distributions versus a partial year in 1997. The Series C Preferred Stock was issued in June 1997. As a result of the above, net loss applicable to common stockholders for 1998 was $185 million or $0.68 per basic and diluted share, compared to net income of $14 million or $0.06 per basic and diluted share, for 1997. Diluted weighted average shares were 273.4 million for 1998 and 243.6 million for 1997. This increase was primarily due to the 23 million shares issued to the public and the 18 million shares issued to acquire Loral CyberStar in 1998. RESULTS BY OPERATING SEGMENT Fixed Satellite Services FSS revenue (consisting of Loral Skynet, 100% of Satmex, and Loral CyberStar's revenues from leasing) increased to $342 million in 1999, from $254 million and $83 million in 1998 and 1997, respectively. EBITDA on the same basis increased to $193 million in 1999, from $171 million in 1998 and $52 million in 1997, respectively. In 1999, our FSS fleet increased to 10 operational satellites in-orbit, from five at the end of 1998. EBITDA margins are expected to increase in 2000, as utilization grows on the new satellites added to our fleet, without a proportionate growth in costs. Funded backlog for the fixed satellite services segment totaled $1.5 billion at the end of 1999, almost double the $746 million in backlog at year-end 1998, including intercompany backlog of $3 million and $6 million in 1999 and 1998, respectively, and affiliate backlog of $364 million and $133 million for Satmex in 1999 and 1998, respectively. The average contract length of funded backlog has grown from approximately 3.5 years at December 31, 1998, to approximately 4.5 years at December 31, 1999. Approximately $340 million of the 1999 funded backlog is expected to be realized in 2000. Capital expenditures for 1999 were approximately $575 million, which included $6 million and $150 million for Satmex and Europe*Star, respectively. In 2000, capital expenditures are expected to decrease, due to lower satellite spending. During the fourth quarter of 1998, Loral completed its integration plan for Loral CyberStar and transferred management of Loral CyberStar's satellite capacity leasing and satellite operations to Loral 35 37 Skynet, effective January 1, 1999. In addition to increasing the operational efficiency, capacity, flexibility and marketing reach of Loral's FSS services, the realignment permits Loral CyberStar to focus on and leverage its experience in the global broadband data services market. Broadband Data Services In order to align all of Loral's resources and activities in the developing broadband data services area, CyberStar LP's broadband business and Loral CyberStar's Internet and corporate data networking businesses have been reorganized and in 1999 began reporting to a group vice president. This alignment allows the business units to take advantage of the synergies they share. The reported results for the broadband data services segment include Loral CyberStar's operations relating to the provisioning of broadband data services, exclusive of transponder leasing, along with the results of CyberStar LP. Revenues for the broadband data services segment increased to $85 million in 1999 from $40 million in 1998, primarily from Loral CyberStar's corporate data networking and Internet and intranet services businesses and from its acquisition of Global Access Services ("Global Access") in July 1999. EBITDA before development and start-up costs in 1999 was a loss of approximately $8 million versus a loss of $13 million in 1998. Total development and start-up costs for CyberStar LP were $27 million (including $11 million of asset disposals resulting from changes in technology supporting its business strategy), $33 million and $33 million for 1999, 1998 and 1997, respectively. As of December 31, 1999 and 1998, funded backlog for the segment was $236 million and $147 million, respectively, which was all from external sources. Approximately $85 million of 1999 external funded backlog is expected to be realized in 2000. Capital expenditures in 1999 were approximately $19 million and are estimated to increase in 2000 (see Liquidity and Capital Resources). Satellite Manufacturing and Technology Revenues at SS/L, the Company's satellite manufacturing and technology subsidiary, before intercompany eliminations, were approximately $1.4 billion in 1999, 1998 and 1997, respectively. EBITDA in 1999, before intercompany eliminations and a $44 million charge, grew to $146 million from $118 million in 1998. The $44 million charge pertains to an agreement reached with ChinaSat to extend the delivery date of a satellite and other modifications to the contract in return for two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR (see Liquidity and Capital Resources). After the charge, EBITDA for 1999 was $102 million. EBITDA in 1998 rose to $118 million from $111 million in 1997. Funded backlog for SS/L as of December 31, 1999 and 1998 was $1.3 billion and $1.5 billion, respectively, including intercompany backlog of $256 million in 1999 and $111 million in 1998. Approximately $800 million of the 1999 funded backlog is expected to be realized in 2000. Revenues recorded under contracts with Globalstar for the years ended December 31, 1999, 1998 and 1997 were $360 million, $599 million and $408 million, respectively. Capital expenditures for 1999 were approximately $30 million and are estimated to increase moderately in 2000. Global Mobile Telephone Service Loral manages and is the largest equity owner of Globalstar, Loral's global mobile telephone service segment. Through December 31, 1999, Globalstar was a development stage partnership. Globalstar's development and start-up costs were $184 million in 1999 as compared to $145 million in 1998 and $87 million in 1997. The rise in costs in 1999 is due to increased development costs, marketing, general and administrative costs and launch related costs. Globalstar has expended significant funds for the construction, testing and deployment of the Globalstar system and expects deployment and system enhancement costs to continue throughout 2000. As a result of commencing commercial operations in the first quarter of 2000, Globalstar will start recognizing depreciation expense on the Globalstar system and will stop capitalizing interest on the Globalstar system under construction. ACQUISITIONS AND INVESTMENTS IN AFFILIATES The Company commenced operations in 1996 with equity holdings in SS/L, Globalstar and K&F. From 1997 through 1999, Loral accelerated its transformation from a company with extensive equity investments, to 36 38 a major satellite manufacturer and provider of satellite services by making a number of acquisitions and investments that significantly affected its results of operations and financial condition. Fixed Satellite Services Loral Skynet On March 14, 1997, Loral acquired Loral Skynet for $462.1 million in cash. The acquisition was accounted for as a purchase and the results of Loral Skynet have been consolidated by Loral from March 14, 1997. Loral CyberStar On March 20, 1998, Loral acquired all of the outstanding stock of Orion Network Systems, Inc. in exchange for Loral common stock. Loral issued 18 million shares of its common stock and assumed existing exercisable Orion options and warrants to purchase an aggregate of 1.4 million shares of Loral common stock. The resulting purchase price was $472.5 million. In November 1999, Orion changed its name to Loral CyberStar, Inc. Loral accounted for the acquisition as a purchase and its consolidated financial statements reflect the results of operations of Loral CyberStar from April 1, 1998. Satmex In connection with the privatization by the Mexican Government of its fixed satellite services business, Loral and Principia, S.A. de C.V. ("Principia"), formerly known as Telefonica Autrey, S.A. de C.V., formed a joint venture, Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding capital stock of Satmex for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Principia equity contribution of $50.9 million and debt originally issued by Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a wholly owned subsidiary of Holdings. As part of the acquisition Servicios also agreed to issue a seven-year Government Obligation ("Government Obligation") to the Mexican Government in consideration for the assumption by Satmex of the debt incurred by Servicios in connection with the acquisition. The Government Obligation had an initial face amount of $125 million, which accretes at 6.03% and expires in December 2004. The debt of Satmex and Holdings is non-recourse to Loral and Principia. However, Loral and Principia have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the value of the Government Obligation until maturity. As of December 31, 1999, Loral and Principia have pledged their respective shares in Holdings in such trust. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in Satmex. Loral has accounted for Satmex using the equity method since November 17, 1997. On March 30, 1999, Loral acquired 577,554 shares of preferred stock of Satmex at a purchase price of $30.3 million. The preferred stock has limited voting rights, pays a dividend in limited voting common stock of Satmex and is exchangeable, at Satmex's option, into limited voting common stock of Satmex based upon a predetermined exchange ratio. Europe*Star In December 1998, Loral finalized its strategic partnership with a subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary satellite system designed to provide broadcast and telecommunications services to Europe, the Middle East, Southeast Asia, India, and South Africa. Alcatel serves as the primary contractor of the Europe*Star turnkey system, while SS/L is providing the satellite bus and will test and integrate the satellites. Europe*Star is a member of the Loral Global Alliance of FSS providers, which is led by Loral Skynet. Through December 31, 1999, Loral has invested $66 million in Europe*Star. Broadband Data Services Loral CyberStar -- see Loral CyberStar above. 37 39 On July 31, 1999, CyberStar LP acquired Global Access, a business television unit of Williams Communications, Inc., for approximately $11 million in cash. Loral has accounted for the acquisition as a purchase and its consolidated financial statements include the results of Global Access from August 1, 1999. Global Access provides business television, video conferencing and other communication services to companies in various parts of the world, including Europe, South Africa, Australia, Asia and the Americas, through networks operated in Singapore, Dallas, London and Johannesburg. Satellite Manufacturing and Technology SS/L In February 1997, Loral agreed to increase its ownership in SS/L to 100% by acquiring the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies for $374 million in cash and Loral securities. The acquisition of the remaining equity interest in SS/L was accounted for as a purchase. Loral's consolidated financial statements for the year ended December 31, 1997 reflect the results of operations of SS/L from January 1, 1997 and the elimination of the minority interest of the SS/L equity not owned by Loral during the period. Prior to January 1, 1997, SS/L was accounted for using the equity method of accounting. Global Mobile Telephone Service Globalstar and GTL In each of 1998 and 1997, GTL effected a two-for-one stock split to shareholders in the form of a 100% stock dividend. As a result, all GTL share amounts are represented by equivalent partnership interests on an approximate four-for-one basis. Loral's original investment in Globalstar was made in 1994 in connection with its formation. Loral has continued to make investments in Globalstar since its inception, including the following transactions during the three years ended December 31, 1999: - In 1996, Loral purchased $102.5 million principal amount of GTL's 6 1/2% Convertible Preferred Equivalent Obligations for $99.4 million. On April 30, 1998, these securities were converted into 6,832,030 shares of GTL common stock, including shares issued in satisfaction of a required interest make-whole payment. - In March 1997, Loral exercised warrants to purchase 4,550,088 shares of GTL common stock at $6.63 per share, which were received in connection with Loral's partial guarantee of a $250 million Globalstar Credit Agreement. In April 1997, Loral exercised rights to purchase an additional 700,696 shares of GTL common stock at $6.63 per share distributed to the existing shareholders of GTL. The aggregate purchase price paid was $34.8 million. - During 1997, Loral acquired 2,748,372 Globalstar ordinary partnership interests from other Globalstar partners for $122.3 million in cash and 1,255,684 shares of Loral common stock. - In July 1998, Loral purchased 4.2 million Globalstar ordinary partnership interests from certain founding service providers for $420 million in cash. Concurrently, Loral sold 8.4 million shares of GTL common stock to persons or entities advised by or associated with Soros Fund Management LLC for $245 million in cash. As a result of this sale, Loral recognized a gain of approximately $35 million, which is included in gain on investments, net in the consolidated statement of operations. - In November 1998, Loral acquired 276,000 Globalstar ordinary partnership interests from other Globalstar partners in exchange for 717,600 shares of GTL common stock. - In January 1999, Loral purchased $150 million principal amount of GTL's 8% Series A convertible preferred stock, which is convertible into 6,449,865 shares of GTL's common stock. - In November 1999, Loral purchased 103,187 shares of GTL common stock for $2.7 million. 38 40 TAXATION Loral, as a Bermuda company, may be subject to U.S. federal, state and local income taxation at regular corporate rates on any income that is effectively connected with the conduct of a U.S. trade or business. When such income is deemed removed from the U.S. business, it is subject to an additional 30% "branch profits" tax. Loral expects that a significant portion of its worldwide income will be from non-U.S. sources and will not be effectively connected with a U.S. trade or business. The United States Treasury Department is, however, engaged in a project to draft and propose regulations that may recharacterize a substantial portion of Loral's income as derived from U.S. sources and as effectively connected with a U.S. trade or business so as to subject that income to regular U.S. Federal income tax and a 30% branch profits tax. The Company cannot predict the outcome of that regulatory project. Any portion of the Company's income from sources outside the United States, realized through Globalstar or otherwise, may be subject to taxation by foreign countries and the extent to which these countries may require the Company to pay tax or to make payments in lieu of tax cannot be determined in advance. However, based upon the Company's review of current tax laws, including applicable international tax treaties of certain countries that the Company believes to be among our key potential markets, the Company expects that a significant portion of the Company's worldwide income will not be subject to tax by Bermuda or by the other foreign countries from which the Company derives income. The Company's U.S. subsidiaries are subject to U.S. taxes on their worldwide income. In addition, a 30% U.S. withholding tax will be imposed on dividends and interest paid by such subsidiaries to Loral Space & Communications Ltd. LIQUIDITY AND CAPITAL RESOURCES Loral intends to capitalize on its innovative capabilities, market position and advanced technologies to offer value-added satellite-based services as part of the evolving worldwide communications networks and, where appropriate, to form strategic alliances with major telecommunications service providers and equipment manufacturers to enhance and expand its satellite-based communications service opportunities. In order to pursue such opportunities, Loral may seek funds from strategic partners and other investors, and through incurrence of debt or the issuance of additional equity. Debt In January 1999, Loral completed a private offering of senior notes, raising approximately $350 million from selling 9.5% senior notes due 2006, of which a portion was used to invest in $150 million face amount of GTL's $350 million offering of GTL Series A Preferred Stock, thereby maintaining Loral's prior proportionate ownership position in Globalstar. The Amended and Restated Credit Agreement, dated as of November 10, 1999, among Loral SpaceCom Corporation ("Loral SpaceCom"), SS/L and the banks party thereto (the "Credit Agreement"), provides for a $275 million term loan facility, a $500 million revolving credit facility, of which up to $175 million can be used for letters of credit and a separate $75 million letter of 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. As of December 31, 1999, there was $670 million of borrowings outstanding under this credit facility. The Company had outstanding letters of credit of approximately $118 million and $99 million as of December 31, 1999 and 1998, respectively. The Company also had a $12.5 million Canadian Dollar letter of credit outstanding at December 31, 1999. Loral CyberStar's outstanding debt as of December 31, 1999, of $965 million, is non-recourse to Loral, and includes certain restrictions on Loral CyberStar's ability to pay dividends or make loans to Loral. The accreted principal value of Loral CyberStar's senior notes and senior discount notes was $821 million at December 31, 1999. 39 41 Equity On February 18, 2000, Loral sold $400 million of 6% convertible redeemable preferred stock due 2007 in an offering exempt from registration. The preferred stock is convertible into approximately 20.2 million shares of common stock at a conversion price of $19.83 per share. Loral intends to apply the proceeds from the sale of the preferred stock for general corporate purposes, including investment in its broadband strategy and expansion of the Loral Global Alliance by acquisition of additional satellites and orbital slots. In February 2000, Loral and Lockheed Martin Corporation ("Lockheed Martin") filed certain notices under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with Lockheed Martin's plan to convert its 45,896,977 shares of Loral's Series A preferred stock into an equal number of shares of Loral common stock. The waiting period expired on March 5, 2000 and, accordingly, Lockheed Martin is now free to convert the Series A preferred stock at any time. In February 2000, Loral and Lockheed Martin also entered into an agreement pursuant to which Lockheed Martin agreed that it will not sell any of the Series A preferred stock or the Loral common stock into which it is convertible before May 19, 2000. Loral has agreed to use its best efforts to cause a registration statement relating to the common stock issuable upon conversion of the Series A preferred stock to be effective on or before May 19, 2000 and to maintain its effectiveness for at least 12 months thereafter. Loral has also agreed that it will refrain from selling equity securities in the public markets for its own account until the six month anniversary of the effective date of such registration statement. Cash As of December 31, 1999, Loral had $240 million of cash and cash equivalents. Loral intends to utilize its existing capital base and access to the capital markets to construct and operate additional satellites, make additional investments in Globalstar and Globalstar service provider opportunities, invest in its other core businesses, expand the Loral Global Alliance and pursue its broadband strategy. Restricted and Segregated Cash As of December 31, 1999, Loral CyberStar had approximately $50 million of restricted cash for interest payments on its senior notes and $137 million of segregated cash to be applied towards a portion of the final payment on the purchase of Telstar 10/Apstar IIR. Segregated cash increased as of December 31, 1999, as a result of receiving the insurance proceeds from the Orion 3 launch failure. Fixed Satellite Services Loral Skynet Loral Skynet currently has four high-power satellites in orbit, including Telstar 7, which was launched in September 1999 aboard an Ariane launch vehicle and started revenue generating service in November 1999. Loral intends to expand Loral Skynet's business to become a worldwide satellite service provider through the construction of additional satellites. Loral CyberStar Loral CyberStar currently has three satellites in orbit (Telstar 11, Telstar 12 and Telstar 10/Apstar IIR). Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L., and commenced operations in January 2000. Under an agreement reached with Eutelsat, Loral CyberStar agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral CyberStar's behalf. As part of this coordination effort, Loral CyberStar agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. 40 42 On May 4, 1999, the Orion 3 satellite was placed into a lower-than-expected orbit after its launch on a Delta III rocket. According to Boeing, the Delta III rocket apparently failed to complete its second stage burn, and, as a result, the satellite, manufactured by Hughes Space and Communications Corporation, achieved an orbit well below the planned final altitude. As a result, the satellite cannot be used for its intended purpose. The satellite and launch were fully insured for approximately $266 million, which was received in the third quarter of 1999. DACOM Corporation, a Korean communications company which had purchased eight transponders on Orion 3 for a total of $89 million, had made prepayments of approximately $34 million to the Company. Under the agreement with DACOM, the amount prepaid was refunded in July 1999. To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from APT Satellite Company Limited ("APT") the rights to all transponder capacity and existing customer leases on the Apstar IIR satellite (except for one C-band transponder retained by APT), and renamed the satellite the Telstar 10/Apstar IIR satellite, for approximately $273 million. Telstar 10/Apstar IIR, which was manufactured by SS/L, was launched in October 1997 and as of September 28, 1999, had an expected remaining useful life of 13 years. Loral CyberStar has full use of the transponders for the remaining life of Telstar 10/Apstar IIR. Located at 76.5 degrees E.L., Telstar 10/Apstar IIR covers a region that includes Asia, Europe, Africa and Australia, which represents over 75% of the world's population. Under the purchase agreement, Loral CyberStar will also have the option to lease from APT replacement satellites upon the end of life of Telstar 10/Apstar IIR. As of December 31, 1999, Loral CyberStar had made payments of approximately $91 million to APT and paid approximately $182 million in March 2000. Insurance proceeds from the Orion 3 failure were used to fund the initial payments made and a significant portion of the final payment. Based upon its current expectations for growth, Loral CyberStar anticipates it will have additional funding requirements over the next three years to fund the purchase of VSATs, senior note interest payments, other capital expenditures and other operating needs. Interest charges on the senior notes are fully provided for by restricted cash through July 2000. Loral CyberStar does not have a revolving credit facility. Accordingly, Loral CyberStar will need to secure funding from Loral, or raise additional financing. Sources of additional capital may include public or private debt, equity financings or strategic investments. To the extent that Loral CyberStar seeks to raise additional debt financing, its indentures limit the amount of such additional debt and prohibit Loral CyberStar from using Telstar 11, Telstar 12 and Telstar 10/Apstar IIR as collateral for indebtedness for money borrowed. If Loral CyberStar requires additional financing and is unable to obtain such financing from Loral or from outside sources in the amounts and at the times needed, there would be a material adverse effect on Loral CyberStar. Satmex Satmex currently has three satellites in orbit (Satmex 5, Solidaridad 1 and Solidaridad 2) and one satellite in inclined orbit (Morelos 2). On April 28, 1999, Solidaridad 1 experienced a loss of its primary satellite control processor. Service was restored after 14 hours, using the backup satellite control processor. Failure of the backup satellite control processor would result in the loss of Solidaridad 1, which would be fully covered by insurance. On March 31, 1999, Satmex redeemed $35 million of its secured floating rate notes using proceeds from the sale of preferred stock. On September 30, 1999, Satmex redeemed an additional $50 million of its secured floating rate notes. The related covenants of such debt restrict the ability of Satmex to pay dividends to Loral. On February 16, 2000, Satmex obtained amendments to certain of its debt agreements which adjust certain financial covenants. As a result, Satmex believes that its future operating cash flow and the availability of its revolving credit facility will be sufficient to service its interest and debt repayment requirements and ensure compliance with its debt agreements. 41 43 Broadband Data Services Loral's broadband strategy will build on its existing resources to address both the expanding market for today's broadband services and to become a leading medium for delivery of even richer Internet content in the future. The Company's initial focus will be on two attractive opportunities for early market entry: consumer broadband services and streaming media services. Consumer Broadband Services. The Company plans to serve the growing consumer broadband services market, initially in North America, with an affordable, ubiquitous, two-way, high-speed Internet access service employing a hybrid satellite/fiber network. When fully deployed, this network will be capable of serving at least ten million homes and small businesses at downstream connection speeds of up to 1.5 megabits per second. In addition, the system will offer streaming multimedia in multicast mode at speeds of up to 30 megabits per second and at upstream connection speeds of at least 128 kilobits per second. The Company intends to serve as the "wholesaler" of this connectivity service to ISPs, cable companies, and telephone companies who will market and sell the service to their customers as a high-value extra feature in their own portfolio of services. The Company currently estimates that the required investment for the consumer broadband services business in North America will be approximately $3 billion, with the services implemented and the associated investments made in several phases. Streaming Media Services. The Company intends to exploit the technical advantages of satellites to deliver streaming media services more effectively than terrestrial alternatives. Instead of flooding the Internet with multiple point-to-point transmissions of these massive files, the Company's system will move content directly from its source via satellite to multiple servers located at the "edge of the net," near the end user. This should eliminate bottlenecks, improve quality, lower cost and expand content choices and applications. The Company plans to focus its marketing efforts initially on its existing base of ISP and corporate customers. The Company intends to enter three streaming media business segments: transport services to the "edge of the net" for content and applications service providers; content aggregation services for customers wishing to outsource their streaming media distribution process; and development of a portal tailored for businesses. The Company currently estimates the required investment for the streaming media services business at approximately $500 million. The Company is seeking strategic partners to enhance the establishment and prospects of both the planned consumer broadband and streaming media businesses. The Company expects that such third party strategic partners will bear a significant portion of the costs of these projects. Satellite Manufacturing and Technology SS/L Due to the long lead times required to produce purchased parts and launch vehicles, the Company has entered into various purchase commitments with suppliers. These commitments aggregated approximately $685 million as of December 31, 1999. Global Mobile Telephone Service Globalstar In January 1999, Globalstar sold to GTL seven million units (face amount of $50 per unit) of 8% convertible redeemable preferred partnership interests ("8% RPPIs"), in connection with GTL's offering of seven million shares (face amount of $50 per share) of GTL 8% Series A convertible redeemable preferred stock (the "GTL Series A Preferred Stock"). The GTL Series A Preferred Stock is convertible into shares of GTL common stock at a conversion price of $23.2563 per share. Loral purchased three million shares or $150 million face amount of the GTL Series A Preferred Stock offered. Dividends on the 8% RPPIs and the GTL Series A Preferred Stock accrue at 8% per annum and are payable quarterly. In July 1999, Globalstar and GTL filed a shelf registration statement (the "Shelf Registration Statement") with the SEC covering up to $500 million of securities. Under the Shelf Registration Statement, Globalstar may, from time to time, offer debt securities, which may be either senior or subordinated or secured 42 44 or unsecured and GTL may, from time to time, offer shares of common stock, preferred stock or warrants, all at prices and on terms to be determined at the time of the offering. On August 5, 1999, Globalstar entered into a $500 million credit agreement with a group of banks for the build-out of the Globalstar system, of which $400 million was outstanding at December 31, 1999. The credit facility is guaranteed by Loral SatCom Ltd. and Loral Satellite, Inc., wholly owned subsidiaries of Loral. The guarantee is secured by the pledge of certain assets of Loral and its subsidiaries, including the stock of the guarantors and the Telstar 6 and Telstar 7 satellites. Based on third party valuations, management believes that the fair value of Telstar 6 and Telstar 7 is in excess of this $500 million credit agreement. As of December 31, 1999, the net book value of Telstar 6 and Telstar 7 was $392 million. The guarantee agreement contains customary financial covenants of the guarantors, including maintenance of a minimum collateral coverage ratio and maintenance of a combined minimum net worth and combined EBITDA. In addition, the guarantee agreement contains customary limitations on indebtedness, liens, fundamental changes, asset sales, dividends (except that the guarantors may pay dividends to their parents provided that combined aggregate cash on hand at the guarantors is at least equal to $50 million and the guarantors hold an intercompany note due from Loral for at least $100 million), investments, capital expenditures, creating liens other than those created pursuant to the guarantee and transactions with affiliates. In consideration for the guarantee, Loral received warrants to purchase 3,450,000 Globalstar partnership interests at an exercise price of $91 per interest, which were valued at $141 million (based on the guarantee provided). The exercise price was determined by reference to the fair market value of GTL's common stock on the closing date of the credit agreement, based on an approximate one partnership interest for four shares of GTL common stock exchange ratio. 50% of the warrants vested in February 2000. Assuming the guarantee remains in effect, an additional 25% will vest in August 2000 with the remaining 25% vesting in August 2001. The warrants expire in 2006. Globalstar may call the warrants after August 5, 2001 if GTL's common stock price exceeds $45.50 for a defined period. In December 1999, GTL completed a private offering of $150 million of 9% Series B convertible redeemable preferred stock (the "GTL Series B Preferred Stock"). GTL used the net proceeds from this offering to purchase 9% Series B convertible redeemable preferred partnership interests ("9% RPPIs") of Globalstar, the terms of which are generally similar to the terms of the GTL Series B Preferred Stock. Globalstar in turn is using such proceeds for the cost of the continued deployment of the Globalstar system and for general corporate purposes. In February 2000, GTL sold 8,050,000 shares of its common stock to the public under the Shelf Registration Statement. GTL used the net proceeds from the offering of approximately $268.5 million to purchase 1,987,654 ordinary partnership interests in Globalstar. Globalstar intends to use the offering proceeds for general corporate purposes, including: the acceleration of Globalstar's roll-out through increased support for service provider marketing activities and the funding of promotional discounts; development of new service features; and possible repayment of debt. SS/L has provided $330 million of billings deferred under its construction contracts with Globalstar; comprised of: $105 million of orbital incentives, of which $44 million was repaid in 1999 and $61 million is expected to be repaid in 2000; $90 million of vendor financing which bears interest at LIBOR plus 3% and is repayable over five years commencing in 2001; and $134 million of non-interest bearing vendor financing, due over five years in equal monthly installments, commencing in 2000. SS/L's terms with its subcontractors include $116 million of financing assumed by them, which is to be repaid on substantially similar terms (of which a portion is non-recourse to SS/L in the event of non-payment by Globalstar). In the first quarter of 2000, Globalstar commenced commercial service. Pursuant to the Globalstar partnership agreement, Loral is entitled to receive a managing partner's allocation of 2% of Globalstar's annual revenues under $500 million and 2.8% of annual revenues in excess of $500 million. Such allocation is reduced by 50% to the extent Globalstar has a net loss in any given year. Globalstar expects to spend $325 million for the enhancement of its system software, for the eight spare satellites being constructed by SS/L, and for financing provided to Globalstar's service providers to assist in the purchase of gateways, fixed access terminals and handsets (of which $231 million is expected to be received from the service providers as repayment of 43 45 such financing). In addition, cash interest, preferred dividends and operating costs are expected to be approximately $125 million per quarter in 2000. Globalstar believes that its cash on hand ($329 million at February 29, 2000), available credit under its two credit facilities and vendor financing arrangements (approximately $425 million at February 29, 2000), service revenues and other anticipated cash inflows will be sufficient to cover its expected cash outflows provided that its $250 million credit facility is renegotiated. If Globalstar cannot renegotiate its $250 million credit facility, it believes it will be able to obtain additional funds. There can be no assurance, however, that such funds will be available on favorable terms or on a timely basis, if at all. Qualcomm Incorporated ("Qualcomm") has agreed to provide Globalstar $500 million of vendor financing (for which the terms of $400 million are still being finalized). In connection with the agreement, Qualcomm is expected to receive warrants to purchase Globalstar partnership interests comparable to those received by Loral pursuant to Loral's guarantee of Globalstar's $500 million credit facility (see above). COMMITMENTS AND CONTINGENCIES In connection with the merger between Loral Corporation and Lockheed Martin, Lockheed Martin assumed approximately $206 million of the guarantee under Globalstar's $250 million 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 $250 million Globalstar credit agreement. Loral had a $115 million secured standby bank credit facility, which was undrawn as of December 31, 1999, supporting a guarantee of a $115 million term loan of an unaffiliated third party. The term loan was repaid by the unaffiliated third party on February 29, 2000, resulting in the expiration of the standby credit facility. Prior to its acquisition by Loral, Loral Skynet sold several transponders under which title to specific transponders was transferred to the customer. Under the terms of the sales contracts, Loral Skynet continues to operate the satellites on which the transponders are located and provides a warranty for a period of 10 to 14 years. Depending on the contract, Loral Skynet is required to replace any 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 replacement. The reimbursement value is determined based on the original purchase price plus an interest factor from the time the payment was received to acceptance of the transponder by the customer, reduced on a straight-line basis over the warranty period. In case of satellite failure, the reimbursement value may be paid from proceeds received from insurance policies. In 1997, two satellites built by SS/L experienced solar array circuit failures. SS/L settled one of the customer's claims in 1999 and the other customer's claims in 1997. In late 1998, following the launch of an SS/L-built satellite sold to PanAmSat, a manufacturing error was discovered that affected the geographical coverage of the Ku-band transponders on the satellite. On January 6, 2000, PanAmSat filed an arbitration proceeding in connection with this error claiming damages of $225 million for lost profits, and increased sales and marketing costs. SS/L believes it has meritorious defenses to the claim and that its liability is limited to a loss of a portion of the applicable orbital incentives, the estimated impact of which is included in Loral's consolidated financial statements. PanAmSat has received a recovery from its insurance carrier that should reduce any damage claim. While this proceeding is in its very early stages, management believes that this matter will not have a material adverse effect on the financial condition or results of operations of Loral. SS/L is a target of a grand jury investigation being conducted by the office of the U.S. Attorney for the District of Columbia with respect to possible violations of export control laws that may have occurred in connection with the participation of SS/L employees on a committee formed in the wake of the 1996 crash of a Long March rocket in China and whose purpose was to consider whether studies of the crash made by the Chinese had correctly identified the cause of the failure. The Company is not in a position to predict the direction or outcome of the investigation. If SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it would be subject to a fine of $1 million per violation and could be debarred from certain export privileges and, possibly, from participation in government contracts. Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, such a debarment would have a 44 46 material adverse effect on SS/L's business, and therefore the Company. Indictment for such violations would subject SS/L to discretionary debarment from further export licenses. Under the applicable regulations, SS/L could be debarred from export privileges without being convicted of any crime if it is indicted for these alleged violations, and loss of export privileges would harm SS/L's business. Whether or not SS/L is indicted or convicted, SS/L remains subject to the State Department's general statutory authority to prohibit exports of satellites and related services if it finds a violation of the Arms Export Control Act that puts SS/L's reliability in question, and it can suspend export privileges whenever it determines that grounds for debarment exist and that such suspension "is reasonably necessary to protect world peace or the security or foreign policy of the United States." As far as SS/L can determine, no sensitive information or technology was conveyed to the Chinese, and no secret or classified information was discussed with or reported to them. SS/L believes that its employees acted openly and in good faith and that none engaged in intentional misconduct. Accordingly, the Company does not believe that SS/L has committed a criminal violation of the export control laws. The Company does not expect the grand jury investigation or its outcome to result in a material adverse effect upon its business. However, there can be no assurance as to these conclusions. On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the U.S. Department of State temporarily suspended the previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension is to permit that agency to review the agreement for conformity with newly enacted legislation (Section 74 of the Arms Export Control Act) with respect to the export of missile equipment or technology. SS/L has complied with ODTC's instructions, and believes that a review of the agreement will show that its terms comply with the new law. The ODTC, however, has not yet completed its review, and the scheduled launch date for ChinaSat-8 is being delayed. In December 1999, Loral reached an agreement with ChinaSat to extend the date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this extension and other modifications to the contract, Loral has agreed to provide to the customer two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR for the life of those transponders. As a result, the Company recorded a net charge to earnings of $35 million. If the suspension is not lifted by July 31, 2000, ChinaSat could decide to terminate the contract. If such a termination were to occur, SS/L would have to refund advances received from ChinaSat ($134 million as of December 31, 1999) and may incur penalties of up to $13 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer. There can be no assurance, however, that SS/L will be able to find such a replacement customer for the satellite or its Chinese launch vehicle. SS/L will record a charge to earnings of approximately $35 million if it is unable to find a replacement customer for this launch vehicle. In March 1999, jurisdiction for satellite licensing was transferred from the Commerce Department to the State Department and the State Department has issued regulations relating to the export of, and disclosure of technical information related to, satellites and related equipment. SS/L anticipates that obtaining licenses and technical assistance agreements under these new regulations will take more time and will be considerably more burdensome than in the past. Delays in obtaining the necessary licenses and technical assistance agreements may delay SS/L's performance on existing contracts, and, as a result, SS/L may incur penalties or lose incentive payments under these contracts. In addition, such delays may have an adverse effect on SS/L's ability to compete against foreign satellite manufacturers for new satellite contracts. NET CASH PROVIDED BY/USED IN OPERATING ACTIVITIES Net cash used in operating activities for the year ended December 31, 1999 was $26 million, primarily due to increases in contracts-in-process of $85 million, deposits of $54 million and other assets of $64 million and a decrease in customer advances of $91 million. This was offset in part by the net loss as adjusted for non-cash operating items of $165 million, a decrease in inventories of $67 million and an increase in long-term liabilities of $61 million. Net cash provided by operating activities for the year ended December 31, 1998 was $87 million, primarily due to the net loss as adjusted for non-cash operating items of $108 million and increases in 45 47 customer advances of $54 million, long-term liabilities of $52 million and accrued expenses and other current liabilities of $19 million, offset by increases in inventories of $91 million and contracts-in-process of $72 million. NET CASH USED IN INVESTING ACTIVITIES Net cash used in investing activities for 1999 was $660 million, primarily as a result of $470 million of capital expenditures mainly for the construction of satellites, the $148 million cost of acquiring GTL Series A Preferred Stock, $44 million of capitalized interest on investments, $36 million of advances to affiliates and $107 million of other investments in affiliates, offset by a reduction in restricted and segregated cash of $156 million, used for the construction of Loral CyberStar satellites and interest payments on its senior notes. Net cash used in investing activities for 1998 was $556 million, primarily as a result of $489 million of capital expenditures mainly for the construction of satellites, the $175 million net cost of acquiring additional Globalstar partnership interests, $82 million of advances to affiliates, $25 million of capitalized interest on investments and $95 million of other investments in affiliates, offset by a reduction in restricted and segregated cash of $264 million, primarily used for the construction of Loral CyberStar satellites and interest payments on its senior notes and cash acquired in connection with the Loral CyberStar acquisition of $54 million. NET CASH PROVIDED BY FINANCING ACTIVITIES Net cash provided by financing activities was $379 million in 1999, due primarily to the net proceeds of $344 million from the Company's issuance of 9.5% senior notes, net borrowings under the Company's revolving credit facility of $70 million and proceeds from equity transactions of $20 million, offset in part by debt repayments of $23 million and preferred dividends of $45 million. During 1998, net cash provided by financing activities was $789 million, due primarily to net proceeds from equity transactions of $634 million, net borrowings under the Company's credit facilities of $178 million and contributions from minority partners of $21 million, partially offset by preferred dividends of $45 million. OTHER MATTERS Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Loral has not yet determined the impact that the adoption of SFAS 133 will have on its earnings or financial position. Loral is required to adopt SFAS 133 on January 1, 2001. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency The Company has limited involvement with derivative financial instruments and does not use such instruments for trading purposes. The derivative financial instruments are used to manage foreign currency exchange risk. As of December 31, 1999, the Company had foreign currency exchange contracts (forwards and swaps) with several banks to purchase and sell foreign currencies, primarily Japanese yen, aggregating $106.3 million. Such contracts were designated as hedges of certain foreign contracts and subcontracts to be performed by SS/L through May 2006. The fair value of these contracts, based on quoted market prices as of December 31, 1999, was $104.6 million. As of December 31, 1999, deferred gains on forward contracts to sell foreign currencies, primarily yen, were $2.0 million and deferred losses on forward contracts to purchase foreign currencies, primarily yen, were $0.3 million. 46 48 The Company is exposed to credit-related losses in the event of nonperformance by counter parties to these financial instruments, but does not expect any counter party to fail to meet its obligation. The maturity of foreign currency exchange contracts held as of December 31, 1999 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts and payments to vendors under subcontracts. These foreign exchange contracts mature as follows (in thousands):
TO PURCHASE TO SELL AS OF DECEMBER 31, 1999 -------------------- ------------------- AT AT AT AT YEARS TO CONTRACT MARKET CONTRACT MARKET MATURITY RATE RATE RATE RATE -------- -------- -------- -------- ------- 1................................. $ 62,077 $ 63,044 $16,166 $15,755 2 to 5............................ 7,276 6,575 12,101 11,819 6 to 10........................... 8,699 7,370 -------- -------- ------- ------- $ 69,353 $ 69,619 $36,966 $34,944 ======== ======== ======= ======= AS OF DECEMBER 31, 1998 $108,900 $112,837 $88,631 $76,911 ======== ======== ======= =======
The decrease in the value of foreign currency contracts reflects progress towards completion of the underlying construction contracts. Interest As of December 31, 1999 and 1998, the fair value of the Company's long-term debt was estimated to be $1.55 billion and $1.4 billion, respectively, using quoted market prices. The long-term debt carrying value exceeded fair value by $443 million and $173 million as of December 31, 1999 and 1998, respectively. Market risk on debt is estimated as the potential increase in annual interest expense resulting from a hypothetical one percent increase in interest rates and amounts to $18 million and $15 million for 1999 and 1998, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements and Financial Statement Schedules on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 47 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Information required for this item is presented in the Company's 2000 definitive proxy statement which is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning the executive officers of Loral as of March 1, 2000.
NAME AGE POSITION ---- --- -------- Bernard L. Schwartz.......... 74 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. Eric J. Zahler............... 49 President and Chief Operating Officer since February 2000. Prior to that Executive Vice President since November 1999. Prior to that 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. Michael P. DeBlasio.......... 63 First Senior Vice President since September 1998. Prior to that, First Senior Vice President and Chief Financial Officer since February 1998. Prior to that, Senior Vice President and Chief Financial Officer since March 1996. Prior to that, Senior Vice President -- Finance of Old Loral since 1979. Robert E. Berry.............. 71 Senior Vice President since November 1996 and Chairman of Space Systems/Loral since September 1999. Prior to that, President of Space Systems/Loral since 1990. Nicholas C. Moren............ 53 Senior Vice President and Treasurer since February 1998. Prior to that, Vice President and Treasurer since March 1996. Prior to that, Vice President and Treasurer of Old Loral since April 1991. Richard J. Townsend.......... 49 Senior Vice President and Chief Financial Officer since October 1998. Prior to that, Corporate Controller and Director of Strategy for ITT Industries since 1997. Prior to that, Vice President of Finance Worldwide Industries for IBM and various other financial management positions with IBM since 1979. Laurence D. Atlas............ 42 Vice President, Government Relations -- Telecommunications since May 1997. Prior to that, Associate Chief of the Common Carrier Bureau of the FCC since January 1995. Prior to that, Associate Chief of the FCC's Wireless Telecommunications Bureau since November 1994. Prior to that, associate in the law firm of Willkie Farr & Gallagher since 1982. W. Neil Bauer................ 53 Vice President since March 1998. Prior to that, Chief Executive Officer and President of Orion Network Systems, Inc. since September 1993.
48 50
NAME AGE POSITION ---- --- -------- Jeanette H. Clonan........... 51 Vice President -- Communications and Investor Relations since November 1996. Prior to that, Director -- Corporate Communications from June 1996. Prior to that, Vice President -- Corporate Relations of Jamaica Water Securities since September 1992. Terry J. Hart................ 53 Vice President since February 1998 and President of Loral Skynet since March 1997. Prior to that, Division Manager of AT&T Skynet Satellite Services since 1991. Stephen L. Jackson........... 58 Vice President -- Administration since March 1997. Prior to that, Vice President -- Administration of Old Loral since 1978. Avi Katz..................... 41 Vice President, General Counsel and Secretary since November 1999. Prior to that 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. John Klineberg............... 61 Vice President of Loral and President of Space Systems/Loral since September 1999. Prior to that, Executive Vice President of Satellite Constellation Establishment of Globalstar since January 1998. Prior to that, Executive Vice President, Globalstar Program at Space Systems/Loral from 1995 to January 1998. Prior to that, a variety of technical and management positions with NASA, including Director of the Goddard Space Flight Center and NASA's Lewis Research Center. Russell R. Mack.............. 45 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. Anthony J. Navarra........... 52 Vice President of Loral and President of Globalstar since September 1999 and President of GTL since February 2000. Prior to that, acting Chief Operating Officer of Globalstar since March 1999 and Executive Vice President of GTL since 1999. Prior to that, Vice President of GTL since 1995 and Executive Vice President, Strategic Development of Globalstar since March 1994. Harvey B. Rein............... 46 Vice President and Controller since April 1996. Prior to that, Assistant Controller of Old Loral since 1985. Thomas B. Ross............... 70 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. Janet T. Yeung............... 35 Vice President, Deputy General Counsel and Assistant Secretary since February 2000. Prior to that, Associate General Counsel and Assistant Secretary since November 1999. Prior to that, Associate General Counsel since February 1998. Prior to that, associate in the law firm of Willkie Farr & Gallagher since September 1991.
49 51 ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under Items 11, 12 and 13, is presented in the Company's 2000 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
PAGE ---- Index to Financial Statements............................... F-1 Loral Space & Communications Ltd. Independent Auditors' Report.............................. F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997....................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997........... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997....................... F-6 Notes to Consolidated Financial Statements................ F-7 Globalstar, L.P. Independent Auditors' Report.............................. * Consolidated Balance Sheets as of December 31, 1999 and 1998................................................... * Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 and cumulative........ * Consolidated Statements of Partners' Capital and Subscriptions Receivable for the period March 23, 1994 (commencement of operations) to December 31, 1999...... * Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 and cumulative........ * Notes to Consolidated Financial Statements................ * - --------------- * Incorporated herein by reference from the Annual Report on Form 10-K of Globalstar Telecommunications Limited and Globalstar, L.P. for the year ended December 31, 1999, pages F-1 through F-42. (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
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996, among Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., Loral General Partner, Inc., Loral Globalstar L.P., Loral Globalstar Limited, the Registrant and Lockheed Martin Corporation(1)
50 52
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.2 Amendment to Restructuring, Financing and Distribution Agreement, dated as April 15, 1996(1) 2.3 Agreement for the Purchase and Sale of Assets dated as of September 25, 1996 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(2) 2.4 First Amendment to Agreement for the Purchase and Sale of Assets dated as of March 14, 1997 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(3) 2.5 Agreement and Plan of Merger dated as of October 7, 1997 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(4) 2.6 First Amendment to Agreement and Plan of Merger dated as of February 11, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(5) 2.7 Second Amendment to Agreement and Plan of Merger dated as of March 20, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(12) 3.1 Memorandum of Association(1) 3.2 Memorandum of Increase of Share Capital(1) 3.3 Third Amended and Restated Bye-laws+ 3.4 Schedule IV to the Third Amended and Restated Bye-laws+ 4.1 Rights Agreement dated March 27, 1996 between the Registrant and The Bank of New York, Rights Agent(1) 4.2 Indenture dated as of January 15, 1999 relating to Registrant's 9 1/2% Senior Notes due 2006(14) 10.1 Shareholders Agreement dated as of April 23, 1996 between Loral Corporation and the Registrant(1) 10.1.1 Amended Shareholders Agreement dated as of March 29, 2000 between the Registrant and Lockheed Martin Corporation+ 10.2 Tax Sharing Agreement dated as of April 22, 1996 between Loral Corporation, the Registrant, Lockheed Martin Corporation and LAC Acquisition Corporation(1) 10.3 Exchange Agreement dated as of April 22, 1996 between the Registrant and Lockheed Martin Corporation(1) 10.4 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as of January 26, 1999 among Loral/Qualcomm Satellite Services, L.P., Globalstar Telecommunications Limited, AirTouch Satellite Services, Inc., Dacom Corporation, Dacom International, Inc., Hyundai Corporation, Hyundai Electronics Industries Co., Ltd., Loral/DASA Globalstar, L.P., Loral Space & Communications Ltd., San Giorgio S.p.A., TeleSat Limited, TE.S.AM and Vodafone Satellite Services Limited(14) 10.4.1 Amendment dated as of December 8, 1999 to the Amended and Restated Agreement of Limited Partnership of Globalstar, L.P.(15) 10.4.2 Amendment dated as of February 1, 2000 to the Amended and Restated Agreement of Limited Partnership of Globalstar, L.P.+ 10.5 Service Provider Agreements by and between Globalstar, L.P. and each of Loral General Partner, Inc. and Loral/DASA Globalstar, L.P.(8) 10.6 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.(8) 10.7 1996 Stock Option Plan(1)++ 10.7.1 Amendment to 1996 Stock Option Plan(14)++ 10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++ 10.9 Employment Agreement between the Registrant and Bernard L. Schwartz(1)++
51 53
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement between the Registrant and Bernard L. Schwartz(12)++ 10.10 Registration Rights Agreement dated as of August 9, 1996 among Loral Space & Communications Ltd., Lehman Brothers Capital Partners II, L.P., Lehman Brothers Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore Investment Partnership L.P. and Lehman Brothers Offshore Investment Partnership-Japan L.P.(9) 10.11 Registration Rights Agreement dated November 6, 1996 relating to the Registrant's 6% Convertible Preferred Equivalent Obligations due 2006(6) 10.12 Registration Rights Agreement (Series C Preferred Stock) dated as of March 31, 1997 between Loral Space & Communications Ltd. and Finmeccanica S.p.A. and dated as June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.13 Registration Rights Agreement (Common Stock) dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.14 Alliance Agreement dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI, Alcatel Espace and Finmeccanica S.p.A.(10) 10.15 Principal Stockholder Agreement dated as of October 7, 1997 among Loral Space & Communications Ltd., Loral Satellite Corporation, Orion Network Systems, Inc. and certain Orion stockholders signatory thereto(4) 10.16 Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc., the Banks parties thereto, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo di Torino S.p.A, individually and as Italian Export Financing and Arranger and as Selling Bank(11) 10.16.1 First Amendment dated as of May 7, 1998 to and of the Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc. and, the banks parties thereto(14) 10.16.2 Second Amendment dated as of September 4, 1998 to and of the Amended and Restated Credit Agreement dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc. and the banks parties thereto.+ 10.16.3 Third Amendment dated as of July 12, 1999 to and of the Amended and Restated Credit Agreement dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc. and the banks parties thereto.+ 10.16.4 Fourth Amendment dated as of November 10, 1999 to and of the Amended and Restated Credit Agreement dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/ Loral, Inc. and the banks parties thereto.+ 10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as of June 30, 1997(12) 10.18 Purchase and Sale Agreement dated November 17, 1997 between the Federal Government of the United Mexican States and Corporativo Satelites Mexicanos, S.A. de C.V. for the purchase and sale of the capital stock of Satelites Mexicanos, S.A. de C.V. (English translation of Spanish original)(12) 10.19 Amended and Restated Membership Agreement dated and effective as of August 21, 1998 among Loral Satmex Ltd. and Ediciones Enigma, S.A. de C.V. and Firmamento Mexicano, S. de R.L. de C.V.(14)
52 54
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.20 Letter Agreement dated December 29, 1997 between Loral Space & Communications Ltd., Telefonica Autrey S.A. de C.V., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. and Lehman Commercial Paper Inc. and related Agreement between the Federal Government of United Mexican States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma, S.A. de C.V., Loral Space & Communications Ltd., Loral Satmex Ltd. and Servicios Corporativos Satelitales, S.A. de C.V.(12) 10.21 Shareholders Agreement dated December 7, 1998 by and among Alcatel SpaceCom, Loral Space & Communications Ltd., Dr. Jurgen Schulte-Hillen and EuropeStar Limited(14) 10.22 Registration Rights Agreement dated as of January 21, 1999 relating to Registrant's 9 1/2% Senior Notes due 2006(14) 10.23 Guarantee and Collateral Agreement dated as of August 5, 1999, made by Loral Satcom Ltd. and Loral Satellite, Inc. in favor of Bank of America, National Association as Collateral Agent(16) 10.24 Lease Agreement dated as of August 18, 1999 by and between Loral Asia Pacific Satellite (HK) Limited and APT Satellite Company Limited(17) 10.25 Guarantee of Loral Space & Communications Ltd. dated August 18, 1999(17) 10.26 Registration Rights Agreement dated as of February 18, 2000 relating to Registrant's 6% Series D Convertible Redeemable Preferred Stock due 2007+ 12 Statement Re: Computation of Ratios+ 21 List of Subsidiaries of the Registrant+ 23 Consent of Deloitte & Touche LLP+ 27 Financial Data Schedule (EDGAR only)+ 99.1 Consolidated Financial Statements of Globalstar, L.P. and Independent Auditors' Report(13)
- --------------- (1) Incorporated by reference from the Registrant's Registration Statement on Form 10 (No. 1-14180). (2) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on September 27, 1996. (3) Incorporated by reference from the Registrant's Current Report on Form 8-K on March 28, 1997. (4) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on October 10, 1997. (5) Incorporated by reference from the Registrant's Registration Statement on Form S-4 filed on February 17, 1998 (File No. 333-46407). (6) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the nine month period ended December 31, 1996. (7) Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed by Globalstar Telecommunications Limited (File No. 0-25456). (8) Incorporated by reference from the Registration Statement on Form S-1 of Globalstar Telecommunications Limited (File No. 33-86808). (9) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on August 13, 1996. (10) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on July 8, 1997. (11) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on December 9, 1997. (12) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (13) Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 filed by Globalstar Telecommunications Limited and Globalstar, L.P. (File No. 0-25456). (14) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 53 55 (15) Incorporated by reference from the Current Report on Form 8-K filed on December 21, 1999 by Globalstar Telecommunications Limited and Globalstar, L.P. (16) Incorporated by reference from Registrant's Current Report on Form 8-K filed on August 6, 1999. (17) Incorporated by reference from Registrant's Current Report on Form 8-K filed on August 23, 1999. + Filed herewith. ++ Management compensation plan. (b) Reports on Form 8-K.
DATE OF REPORT DESCRIPTION -------------- ----------- September 28, 1999 Item 5 -- Other Events Lease Agreement relating to Apstar II-R
54 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LORAL SPACE & COMMUNICATIONS LTD. By: /s/ BERNARD L. SCHWARTZ ------------------------------------ Bernard L. Schwartz (Chairman of the Board and Chief Executive Officer) Date: March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ BERNARD L. SCHWARTZ Chairman of the Board, Chief March 29, 2000 - --------------------------------------------------- Executive Officer and Director Bernard L. Schwartz (Principal Executive Officer) /s/ HOWARD GITTIS Director March 29, 2000 - --------------------------------------------------- Howard Gittis /s/ ROBERT B. HODES Director March 29, 2000 - --------------------------------------------------- Robert B. Hodes /s/ GERSHON KEKST Director March 29, 2000 - --------------------------------------------------- Gershon Kekst /s/ CHARLES LAZARUS Director March 29, 2000 - --------------------------------------------------- Charles Lazarus /s/ MALVIN A. RUDERMAN Director March 29, 2000 - --------------------------------------------------- Malvin A. Ruderman /s/ E. DONALD SHAPIRO Director March 29, 2000 - --------------------------------------------------- E. Donald Shapiro /s/ ARTHUR L. SIMON Director March 29, 2000 - --------------------------------------------------- Arthur L. Simon /s/ DANIEL YANKELOVICH Director March 29, 2000 - --------------------------------------------------- Daniel Yankelovich /s/ RICHARD J. TOWNSEND Chief Financial Officer and March 29, 2000 - --------------------------------------------------- Senior Vice President Richard J. Townsend (Principal Financial Officer) /s/ HARVEY B. REIN Vice President and Controller March 29, 2000 - --------------------------------------------------- (Principal Accounting Officer) Harvey B. Rein
55 57 INDEX TO FINANCIAL STATEMENTS Loral Space & Communications Ltd. and Subsidiaries Independent Auditors' Report.............................. F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997....................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997........... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997....................... F-6 Notes to Consolidated Financial Statements................ F-7
F-1 58 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, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP San Jose, California February 22, 2000 (March 5, 2000 as to the second paragraph of Note 18) F-2 59 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, ------------------------ 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents................................. $ 239,865 $ 546,772 Restricted and segregated cash............................ 187,315 50,180 Accounts receivable, net.................................. 47,899 23,637 Contracts-in-process...................................... 439,921 355,196 Inventories............................................... 111,060 191,245 Other current assets...................................... 47,261 30,063 ---------- ---------- Total current assets.............................. 1,073,321 1,197,093 Property, plant and equipment, net.......................... 1,884,975 1,667,508 Cost in excess of net assets acquired, net.................. 946,781 966,260 Long-term receivables....................................... 167,464 161,977 Restricted and segregated cash.............................. 22,675 Investments in and advances to affiliates................... 1,098,003 938,551 Deposits.................................................... 195,875 140,970 Other assets................................................ 244,002 134,181 ---------- ---------- $5,610,421 $5,229,215 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 85,496 $ 22,736 Accounts payable.......................................... 207,362 213,507 Satellite purchase price payable.......................... 181,928 Accrued employment costs.................................. 44,797 44,256 Customer advances......................................... 67,725 158,192 Accrued interest and preferred dividends.................. 49,093 37,860 Other current liabilities................................. 37,770 34,890 Income taxes payable...................................... 19,708 17,630 ---------- ---------- Total current liabilities......................... 693,879 529,071 Deferred income taxes....................................... 38,370 Pension and other postretirement liabilities................ 51,601 50,470 Long-term liabilities....................................... 177,300 113,840 Long-term debt.............................................. 1,913,826 1,533,039 Minority interest........................................... 23,151 28,704 Commitments and contingencies (Notes 7, 8, 11 and 13) Shareholders' equity: Series A convertible preferred stock, $.01 par value; 150,000,000 shares authorized, 45,896,977 shares issued................................................. 459 459 Series B preferred stock, $.01 par value; 750,000 shares authorized and unissued................................ 6% Series C convertible redeemable preferred stock ($745,472 redemption value), $.01 par value; 20,000,000 shares authorized, 14,909,437 shares issued............ 735,437 735,437 Common stock, $.01 par value; 750,000,000 shares authorized, 245,204,432 and 243,861,719 shares issued................................................. 2,452 2,439 Paid-in capital........................................... 2,347,323 2,330,755 Treasury stock, at cost; 174,195 shares................... (3,360) (3,360) Unearned compensation..................................... (1,253) (8,231) Retained deficit.......................................... (409,301) (162,657) Accumulated other comprehensive income.................... 78,907 40,879 ---------- ---------- Total shareholders' equity........................ 2,750,664 2,935,721 ---------- ---------- $5,610,421 $5,229,215 ========== ==========
See notes to consolidated financial statements. F-3 60 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues from satellite sales......................... $1,178,193 $1,117,721 $1,243,255 Revenues from satellite services...................... 279,527 183,981 69,336 ---------- ---------- ---------- Total revenues...................................... 1,457,720 1,301,702 1,312,591 Costs of satellite sales.............................. 1,071,063 995,401 1,127,863 Costs of satellite services........................... 225,874 134,473 44,077 Selling, general and administrative expenses.......... 223,046 205,608 127,099 ---------- ---------- ---------- Operating income (loss)............................... (62,263) (33,780) 13,552 Interest and investment income........................ 89,422 53,867 49,069 Interest expense...................................... (89,297) (51,209) (15,230) Gain on investments, net.............................. 5,494 79,591 ---------- ---------- ---------- Income (loss) before income taxes, equity in net loss of affiliates and minority interest................. (62,138) (25,628) 126,982 Income tax expense (benefit).......................... (32,516) (3,871) 34,871 ---------- ---------- ---------- Income (loss) before equity in net loss of affiliates and minority interest............................... (29,622) (21,757) 92,111 Equity in net loss of affiliates...................... (177,819) (120,417) (49,037) Minority interest..................................... 5,525 3,376 (3,070) ---------- ---------- ---------- Net income (loss)..................................... (201,916) (138,798) 40,004 Preferred dividends and accretion..................... (44,728) (46,425) (26,315) ---------- ---------- ---------- Net income (loss) applicable to common stockholders... $ (246,644) $ (185,223) $ 13,689 ========== ========== ========== Earnings (loss) per share -- basic and diluted........ $ (0.85) $ (0.68) $ 0.06 ========== ========== ========== Weighted average shares outstanding: Basic............................................... 290,232 273,402 242,070 ========== ========== ========== Diluted............................................. 290,232 273,402 243,591 ========== ========== ==========
See notes to consolidated financial statements. F-4 61 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (in thousands, except per share amounts)
6% SERIES C SERIES A CONVERTIBLE CONVERTIBLE REDEEMABLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK --------------- ----------------- ---------------- SHARES SHARES SHARES PAID-IN TREASURY UNEARNED ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL STOCK COMPENSATION ------ ------ ------ -------- ------- ------ ---------- -------- ------------ Balance January 1, 1997........... 45,897 $459 191,092 $1,911 $1,058,822 Shares issued: Exercise of stock options and related tax benefits, net of shares tendered................ 208 2 2,015 $(1,680) Employee savings plan............ 352 4 6,997 Acquisition of equity interest in SS/L........................... 2,909 $149,600 8,043 80 130,820 Acquisition of Globalstar partnership interests.......... 1,256 13 17,474 Mandatory exchange of Convertible Preferred Equivalent Obligations, net of unamortized issue costs.................... 12,000 583,282 Unearned compensation............. 249 $ (249) Preferred dividends $3.00 per share............................ Accretion to redemption value..... 880 Net income........................ Other comprehensive income........ Comprehensive income.............. ------ ---- ------ -------- ------- ------ ---------- ------- ------- Balance December 31, 1997......... 45,897 459 14,909 733,762 200,951 2,010 1,216,377 (1,680) (249) Shares issued: Common stock and vested options issued to acquire Loral CyberStar...................... 17,969 179 468,846 Unvested options issued to acquire Loral CyberStar........ 4,512 (4,512) Loral CyberStar note conversion and fractional shares.......... 32 (5) Common stock sold to public, net............................ 23,000 230 601,586 Exercise of stock options and related tax benefits, net of shares tendered................ 739 8 8,112 (1,680) Employee savings plan............ 1,171 12 25,669 Unearned compensation............. 5,658 (5,658) Amortization of unearned compensation..................... 2,188 Preferred dividends $3.00 per share............................ Accretion to redemption value..... 1,675 Net loss.......................... Other comprehensive income........ Comprehensive loss................ ------ ---- ------ -------- ------- ------ ---------- ------- ------- Balance December 31, 1998......... 45,897 459 14,909 735,437 243,862 2,439 2,330,755 (3,360) (8,231) Shares issued: Exercise of stock options and related tax benefits........... 288 3 3,442 Employee savings plan............ 944 9 16,640 Forfeited unearned compensation... (3,755) 3,755 Unearned compensation............. 240 (240) Amortization of unearned compensation..................... 3,463 Preferred dividends $3.00 per share............................ Exercise of warrants for common stock............................ 110 1 1 Net loss.......................... Other comprehensive income........ Comprehensive loss................ ------ ---- ------ -------- ------- ------ ---------- ------- ------- Balance December 31, 1999......... 45,897 $459 14,909 $735,437 245,204 $2,452 $2,347,323 $(3,360) $(1,253) ====== ==== ====== ======== ======= ====== ========== ======= ======= ACCUMULATED RETAINED OTHER TOTAL EARNINGS COMPREHENSIVE SHAREHOLDERS' (DEFICIT) INCOME EQUITY --------- ------------- ------------- Balance January 1, 1997........... $ 8,877 $1,070,069 Shares issued: Exercise of stock options and related tax benefits, net of shares tendered................ 337 Employee savings plan............ 7,001 Acquisition of equity interest in SS/L........................... 280,500 Acquisition of Globalstar partnership interests.......... 17,487 Mandatory exchange of Convertible Preferred Equivalent Obligations, net of unamortized issue costs.................... 583,282 Unearned compensation............. Preferred dividends $3.00 per share............................ (25,435) (25,435) Accretion to redemption value..... (880) Net income........................ 40,004 Other comprehensive income........ $ 7,275 Comprehensive income.............. 47,279 --------- ------- ---------- Balance December 31, 1997......... 22,566 7,275 1,980,520 Shares issued: Common stock and vested options issued to acquire Loral CyberStar...................... 469,025 Unvested options issued to acquire Loral CyberStar........ Loral CyberStar note conversion and fractional shares.......... (5) Common stock sold to public, net............................ 601,816 Exercise of stock options and related tax benefits, net of shares tendered................ 6.440 Employee savings plan............ 25,681 Unearned compensation............. Amortization of unearned compensation..................... 2,188 Preferred dividends $3.00 per share............................ (44,750) (44,750) Accretion to redemption value..... (1,675) Net loss.......................... (138,798) Other comprehensive income........ 33,604 Comprehensive loss................ (105,194) --------- ------- ---------- Balance December 31, 1998......... (162,657) 40,879 2,935,721 Shares issued: Exercise of stock options and related tax benefits........... 3,445 Employee savings plan............ 16,649 Forfeited unearned compensation... Unearned compensation............. Amortization of unearned compensation..................... 3,463 Preferred dividends $3.00 per share............................ (44,728) (44,728) Exercise of warrants for common stock............................ 2 Net loss.......................... (201,916) Other comprehensive income........ 38,028 Comprehensive loss................ (163,888) --------- ------- ---------- Balance December 31, 1999......... $(409,301) $78,907 $2,750,664 ========= ======= ==========
See notes to consolidated financial statements. F-5 62 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Operating activities: Net income (loss).......................................... $(201,916) $ (138,798) $ 40,004 Non-cash items: Gain on investments, net................................. (5,494) (79,591) Equity in net loss of affiliates......................... 177,819 120,417 49,037 Minority interest........................................ (5,525) (3,376) 3,070 Deferred taxes........................................... (39,864) (5,940) 419 Non-cash interest and investment income.................. (22,877) (14,249) (1,739) Non-cash interest expense................................ 33,758 20,474 Depreciation and amortization............................ 174,906 135,029 62,764 Loss on ChinaSat agreement (Note 13)..................... 35,492 Loss on disposal of property, plant and equipment........ 12,696 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net................................... (19,360) (4,086) (5,351) Contracts-in-process....................................... (84,725) (72,413) (15,690) Inventories................................................ 67,117 (90,897) (23,753) Other current assets....................................... (13,098) 14,450 (8,958) Deposits................................................... (54,350) 14,000 (107,670) Long-term receivables...................................... (5,486) 6,662 (78,634) Other assets............................................... (63,739) (16,056) 9,616 Accounts payable........................................... (7,517) 9,048 27,845 Accrued expenses and other current liabilities............. 8,128 19,432 (36,602) Income taxes payable....................................... 6,914 (8,322) 24,873 Customer advances.......................................... (90,547) 54,090 (57,778) Long-term liabilities...................................... 61,000 51,844 24,529 Other...................................................... 4,769 980 --------- ---------- ----------- Cash (used in) provided by operating activities............. (26,405) 86,795 (173,609) --------- ---------- ----------- Investing activities: Cash acquired in connection with Loral CyberStar acquisition.............................................. 53,801 Acquisition of businesses, net of cash acquired............ (10,790) (6,877) (545,642) Proceeds from the sale of investment in affiliates, net.... 246,867 79,591 Investments in and advances to affiliates.................. (335,377) (624,079) (312,305) Other assets............................................... (45,715) Use and transfer of restricted and segregated cash......... 156,381 264,123 Capital expenditures....................................... (469,747) (489,448) (255,340) --------- ---------- ----------- Cash used in investing activities........................... (659,533) (555,613) (1,079,411) --------- ---------- ----------- Financing activities: Proceeds from the issuance of 9.5% senior notes, net....... 343,875 Proceeds from sale of common stock, net.................... 601,816 Proceeds from other stock issuances........................ 20,095 32,121 7,338 Borrowings (repayments) under revolving credit facility, net...................................................... 70,000 150,000 (4,000) Borrowings under note purchase facility.................... 12,581 38,423 38,958 Proceeds from issuance of term loan........................ 275,000 Repayments under term loan................................. (18,750) Repayments under Export-Import facility.................... (2,146) (2,146) (2,146) Repayments of other long-term obligations.................. (1,896) (7,819) Contributions from minority partners....................... 21,398 9,100 Preferred dividends........................................ (44,728) (44,750) (25,435) --------- ---------- ----------- Cash provided by financing activities....................... 379,031 789,043 298,815 --------- ---------- ----------- Decrease (increase) in cash and cash equivalents............ (306,907) 320,225 (954,205) Cash and cash equivalents -- beginning of period............ 546,772 226,547 1,180,752 --------- ---------- ----------- Cash and cash equivalents -- end of period.................. $ 239,865 $ 546,772 $ 226,547 ========= ========== =========== Non-cash activities: Common stock issued to acquire Loral CyberStar............. $ 469,025 ========== Unrealized gain on available-for-sale securities........... $ 38,909 $ 32,988 $ 7,275 ========= ========== =========== Mandatory exchange of Convertible Preferred Equivalent Obligations.............................................. $ 583,282 =========== Issuance of Series C Preferred Stock to acquire equity interest in SS/L......................................... $ 149,600 =========== Issuance of Loral common stock to acquire equity interest in SS/L and Globalstar partnership interests............. $ 148,387 =========== Deferred purchase price to acquire Globalstar partnership interests................................................ $ 24,787 =========== Supplemental information: Interest paid.............................................. $ 113,990 $ 68,485 $ 40,866 ========= ========== =========== Taxes paid................................................. $ 1,480 $ 9,789 $ 8,901 ========= ========== ===========
See notes to consolidated financial statements. F-6 63 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPAL BUSINESS Loral Space & Communications Ltd. together with its subsidiaries ("Loral" or the "Company") is one of the world's leading satellite communications companies with substantial activities in satellite manufacturing and satellite-based communications services. Loral has assembled the building blocks necessary to provide a seamless, global networking capability for the information age. Loral is organized into four distinct operating segments (see Note 16): Fixed Satellite Services ("FSS"): Leasing transponder capacity to customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"), through the activities of Loral Skynet, Loral CyberStar, Inc. ("Loral CyberStar"), formerly Loral Orion, Inc., Satelites Mexicanos, S.A. de C.V. ("Satmex") and Europe*Star Limited ("Europe*Star"), Broadband Data Services: Business in development, providing managed communications networks and Internet and intranet services through Loral CyberStar and delivering high-speed broadband data communications and business television services through CyberStar, L.P. ("CyberStar LP"), Satellite Manufacturing and Technology: Designing and manufacturing satellites and space systems and developing satellite technology for a broad variety of customers and applications through Space Systems/Loral, Inc. ("SS/L"), and Global Mobile Telephone Service: Operating a 52-satellite constellation, including four in-orbit spares, that forms the backbone of a global telecommunications network designed to serve virtually every populated area of the world (the "Globalstar System") owned by Globalstar, L.P. ("Globalstar"). Loral was formed to effectuate the distribution on April 23, 1996 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 between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Loral, a Bermuda company, has a December 31 year-end. The consolidated financial statements for the years ended December 31, 1999, 1998 and 1997, include Loral and the consolidated results of SS/L, Loral Skynet from March 14, 1997 and Loral CyberStar from April 1, 1998 (see Note 4) and have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). All intercompany transactions have been eliminated. Investments in Satmex, Europe*Star and Globalstar as well as other affiliates are accounted for using the equity method. Income and losses of affiliates are recorded based on Loral's beneficial interest. Intercompany profit arising from transactions between affiliates is eliminated to the extent of the Company's beneficial interest. The excess carrying value of these investments over Loral's interest in the underlying net assets is being amortized in accordance with Loral's policy for costs in excess of net assets acquired and, if applicable, begins upon the commencement of commercial service of the affiliate. Advances to affiliates consist of amounts due under extended payment terms (prior year amounts have been reclassified to present information on a comparable basis). Equity in losses of affiliates is not recognized after the carrying value of the investment has been reduced to zero, unless guarantees or other obligations exist. In connection with Loral's investment in Globalstar and Europe*Star, Loral capitalizes interest cost on its investment, until such entities commence commercial operations. Certain of the Company's affiliates are in the development stage or will start commercial operations in the near future and are subject to the risks associated with new businesses. F-7 64 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of expenses reported for the period. Actual results could differ from estimates. A significant portion of Loral's satellite manufacturing and technology revenue is associated with long-term contracts which require significant estimates. These estimates include forecasts of costs and schedules, estimating contract revenue related to contract performance (including orbital incentives) and the potential for component obsolescence in connection with long-term procurements. Significant estimates also include the estimated useful lives of the Company's satellites and the amortization period of cost in excess of net assets acquired. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. Restricted and Segregated Cash In connection with the acquisition of Loral CyberStar, Loral acquired cash and cash equivalents which are restricted in use to the payment of interest on Loral CyberStar's senior notes and payments for satellite construction. At December 31, 1999 and 1998, Loral CyberStar held $50.0 million and $72.9 million, respectively, of restricted cash for interest payments on its senior notes and $137.3 million of segregated cash at December 31, 1999 to be used towards the final payment on the purchase of Telstar 10/Apstar IIR (see Note 6). Concentration of Credit Risk Financial instruments which potentially subject Loral to concentrations of credit risk consist principally of cash and cash equivalents, foreign exchange contracts and contracts-in-process and long-term receivables. Loral's cash and cash equivalents are maintained with high-credit-quality financial institutions. Historically, Loral's customers have been primarily large multinational corporations and U.S. and foreign governments for which the creditworthiness was generally substantial. In recent years, the Company has added commercial customers which include companies in emerging markets or the development stage, some of which are highly leveraged or partially funded. Management believes that its credit evaluation, approval and monitoring processes combined with negotiated billing arrangements mitigate potential credit risks with regard to the Company's current customer base. Accounts Receivable As of December 31, 1999 and 1998, accounts receivable was reduced by an allowance for doubtful accounts of $4.6 million and $2.5 million, respectively. Inventories Inventories consist principally of parts and subassemblies used in the manufacture of satellites which have not been specifically identified to contracts-in-process, and are valued at the lower of cost or market. Cost is determined using the first-in-first-out (FIFO) or average cost method. F-8 65 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method for satellites, and related equipment, over the estimated useful lives of the related assets. Depreciation is provided primarily on an accelerated method for other owned assets over the estimated useful life of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Costs incurred in connection with the construction and successful deployment of the Company's satellites and related equipment are capitalized. Such costs include direct contract costs, allocated indirect costs, launch costs, launch insurance and construction period interest. Capitalized interest related to the construction of satellites for the years ended December 31, 1999, 1998 and 1997 was $40.8 million, $34.7 million and $9.4 million, respectively. All capitalized satellite costs are amortized over the estimated useful life of the related satellite. The estimated useful life of the satellites, ranging from 12 to 18 years, was determined by engineering analyses performed at the in-service date. Satellite lives are reevaluated periodically. Losses from unsuccessful launches and in-orbit failures of the Company's satellites, net of insurance proceeds, are recorded in the period a loss occurs. Cost in Excess of Net Assets Acquired The excess of the cost of purchased businesses over the fair value of net assets acquired is primarily being amortized over 40 years using the straight-line method. Accumulated amortization was $58.9 million and $32.2 million as of December 31, 1999 and 1998, respectively. Valuation of Long-Lived Assets and Cost in Excess of Net Assets Acquired The carrying value of Loral's long-lived assets, and cost in excess of net assets acquired is reviewed for impairment whenever events or changes in circumstances indicate that an asset may not be recoverable. The Company looks to current and future profitability, as well as current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Deposits Deposits primarily represent prepaid amounts on satellite launch vehicles which are expected to be utilized for the launch of customer or Company-owned satellites. Investments in Available-For-Sale Securities and Other Securities The Company's investment in Sirius Satellite Radio Inc. ("Sirius") (formerly known as CD Radio Inc.) and The Fantastic Corporation ("Fantastic") common stock are classified as available-for-sale, and are recorded at fair value, with the resulting unrealized gain or loss excluded from net income (loss) and reported as a component of other comprehensive income (see Notes 3 and 12). As of December 31, 1999 and 1998, the Company owned approximately 1.9 million shares of Sirius, acquired at an average cost of $13.16 per share. As of December 31, 1999, the Company owned approximately 11,500 shares of Fantastic, acquired at an average cost of $218.53 per share. These investments are included in other long-term assets. The Company has made certain other investments in non-marketable equity securities which are included in other long-term assets. In the fourth quarter of 1998, the Company wrote-off certain non-strategic investments totaling $29.5 million, which were determined to have no future value to Loral. F-9 66 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Revenue Recognition Revenue from satellite sales under long-term fixed-price contracts is recognized using the cost-to-cost percentage-of-completion method. Revenue includes estimated orbital incentives discounted to their present value at launch date. Costs include the development effort required for the production of high-technology satellites, non-recurring engineering and design efforts in early periods of contract performance, as well as the cost of qualification testing requirements. Revenue under cost-reimbursable type contracts is recognized as costs are incurred; incentive fees are estimated and recognized over the contract term. Contracts with the U.S. government are subject to termination by the U.S. government for convenience or for default. Other government contract risks include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under U.S. government contracts are subject to audit. Management believes the results of such audits will not have a material effect on Loral's financial position or its results of operations. Losses on contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable. In accordance with industry practice, contracts-in-process include unbilled amounts relating to contracts and programs with long production cycles, a portion of which may not be billable within one year. Loral Skynet and Loral CyberStar provide satellite capacity under lease agreements that generally provide for the use of satellite transponders 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 and broadband data services agreements is recognized as services are performed. Research and Development Independent research and development costs, which are expensed as incurred, were $64.7 million, $68.5 million and $56.8 million, respectively, for the years ended December 31, 1999, 1998 and 1997 and are included in selling, general and administrative expenses. Foreign Exchange Contracts Loral enters into foreign exchange contracts as hedges against exchange rate fluctuations of future accounts receivable and accounts payable under contracts-in-process which are denominated in foreign currencies. Realized and unrealized gains and losses on foreign exchange contracts designated as hedges are deferred and recognized over the lives of the related contracts-in-process. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), Loral accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Income Taxes Loral Space & Communications Ltd. is subject to U.S. federal, state and local income taxation at regular corporate rates plus an additional 30% "branch profits" tax on any income that is effectively connected with F-10 67 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) the conduct of a U.S. trade or business. U.S. subsidiaries are subject to regular corporate tax on their worldwide income. Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying tax rates in effect at the end of each year. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company has not yet determined the impact that the adoption of SFAS 133 will have on its earnings or financial position. The Company is required to adopt SFAS 133 on January 1, 2001. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year's presentation. 3. OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income are as follows (in thousands):
YEARS ENDED AS OF DECEMBER 31, DECEMBER 31, ------------------- ---------------------------- 1999 1998 1999 1998 1997 -------- -------- ------- ------- ------ Cumulative translation adjustment... $ (265) $ 616 $ (881) $ 616 Unrealized gains on available-for-sale securities..... 79,172 40,263 38,909 32,988 $7,275 ------- ------- ------- ------- ------ Accumulated other comprehensive income............................ $78,907 $40,879 $38,028 $33,604 $7,275 ======= ======= ======= ======= ======
4. ACQUISITIONS Fixed Satellite Services Loral Skynet On March 14, 1997, Loral acquired Loral Skynet from AT&T for $462.1 million in cash. The fair value of assets and liabilities recorded in connection with the purchase price allocation were $569.8 million and $107.7 million, respectively, including cost in excess of net assets acquired of $39 million. Loral's consolidated financial statements include the results of operations of Loral Skynet from the date of acquisition. Loral CyberStar On March 20, 1998, Loral acquired all of the outstanding stock of Loral CyberStar in exchange for Loral common stock. Loral issued 18 million shares of its common stock and assumed existing Loral CyberStar vested options and warrants to purchase 1.4 million shares of Loral common stock representing an aggregate F-11 68 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. ACQUISITIONS -- (CONTINUED) purchase price of $472.5 million. The purchase price represented $447.7 million in excess of Loral CyberStar's net book value, which was primarily allocated to cost in excess of net assets acquired of $619.7 million, and a fair value adjustment of $153.4 million to increase the carrying value of Loral CyberStar's senior notes and senior discount notes. In addition, Loral agreed to assume Loral CyberStar's unvested employee stock options, which resulted in a new measurement date and an unearned compensation charge of $4.5 million, which is being amortized over the vesting periods of the options. Loral's consolidated financial statements include Loral CyberStar's results of operations from April 1, 1998. Broadband Data Services Loral CyberStar -- see Loral CyberStar above. On July 31, 1999, Loral's subsidiary, CyberStar LP, acquired Global Access, a business television unit of Williams Communications, Inc., for approximately $11 million in cash. Global Access provides business television, video conferencing and other communication services to companies in various parts of the world through networks operated in Singapore, Dallas, London and Johannesburg. Approximately $8.2 million of the purchase price was allocated to cost in excess of net assets acquired, which is being amortized over 10 years. Loral's consolidated financial statements include Global Access's results of operations from August 1, 1999. Satellite Manufacturing and Technology SS/L On April 1, 1996, Loral had an effective 32.7% interest in SS/L. In 1996, Loral made a strategic decision to increase its ownership in SS/L to 100%. The first step in implementing this decision was the acquisition by Loral in August 1996 of the 18.3% interest in SS/L owned by certain partnerships affiliated with Lehman Brothers (the "Lehman Partnerships"). In February 1997, Loral agreed to acquire the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies (the "Alliance Partners") for $374 million. In March 1997, Loral acquired 24.5% of SS/L's common stock for $93.5 million in cash and $93.5 million of Loral's Convertible Preferred Equivalent Obligations ("CPEOs"). In June 1997, the Company acquired the remaining 24.5% of SS/L's common stock for $187 million in the form of 8,042,922 shares of Loral common stock and 1,063,663 shares of Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"). The aggregate purchase price of the 67.3% interest in SS/L acquired by Loral in 1996 and 1997 was $493.2 million. The purchase price represented $174.4 million in excess of SS/L's proportionate net book value which was allocated primarily to the incremental value of SS/L's investment in Globalstar of $62.2 million and cost in excess of net assets acquired of $105.9 million. The consolidated financial statements include the results of operations of SS/L since January 1, 1997, with a reduction for the earnings attributed to the minority shareholders. Prior to this date, the Company accounted for its investment in SS/L using the equity method. The three former Alliance Partners who accepted Loral securities in exchange for their SS/L shares continue to have certain rights as strategic partners of SS/L for as long as they continue to hold at least 81.6% of their Loral securities; in return, the parties have agreed generally to operate as a team on satellite programs worldwide. Each strategic partner is permitted one representative on SS/L's seven member Board of Directors; certain corporate actions require the vote of at least five members of the Board. In 1998, two of the strategic partners merged to form one company; the resulting entity, however, continued to have the right to designate two representatives to SS/L's Board of Directors. In the event certain actions are approved by the Board over the objection of one of the strategic partners, the strategic partner can elect to sell its Loral securities in the open market within 30 days and be reimbursed for the amount, if any, such proceeds are less than the original value of the securities received. In addition, the strategic partners have a right of first offer at F-12 69 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. ACQUISITIONS -- (CONTINUED) fair market value on SS/L shares in the event of a change of control (as defined) of either Loral or SS/L, including the right to use their Loral holdings as part of the SS/L purchase price. The above acquisitions were accounted for using the purchase method. The results of operations of Global Access are not considered material to the Company, accordingly, pro forma results have not been presented. Had the acquisition of Loral CyberStar occurred on January 1, 1998, 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, 1998 would have been: $1.3 billion, $205 million and $0.74, respectively. These results, which are based on various assumptions, are not necessarily indicative of what would have occurred had the acquisition been consummated on January 1, 1998. 5. CONTRACTS-IN-PROCESS AND LONG-TERM RECEIVABLES Contracts-in-Process
DECEMBER 31, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) U.S. government contracts: Amounts billed....................................... $ 9,003 $ 9,099 Unbilled receivables................................. 6,965 11,543 -------- -------- 15,968 20,642 -------- -------- Commercial contracts: Amounts billed....................................... 226,609 171,901 Unbilled receivables................................. 197,344 162,653 -------- -------- 423,953 334,554 -------- -------- $439,921 $355,196 ======== ========
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. Long-Term Receivables Billed receivables relating to long-term contracts are expected to be collected within one year. Loral classifies billings deferred and the orbital component of unbilled receivables expected to be collected beyond one year as long-term. Receivable balances related to satellite orbital incentive payments and billings deferred as of December 31, 1999 are scheduled to be received as follows (in thousands): 2000............................................. $ 136,399 2001............................................. 13,079 2002............................................. 48,331 2003............................................. 36,619 2004............................................. 14,678 Thereafter....................................... 54,757 --------- 303,863 Less current portion included in contracts-in-process........................... (136,399) --------- Long-term receivables $ 167,464 =========
F-13 70 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- (IN THOUSANDS) Land and land improvements.......................... $ 25,073 $ 25,073 Buildings........................................... 72,216 61,539 Leasehold improvements.............................. 19,289 16,906 Satellites in-orbit................................. 1,652,213 745,649 Satellites under construction....................... 77,370 690,661 Earth stations...................................... 53,309 52,914 Equipment, furniture and fixtures................... 259,640 216,294 Other construction in progress...................... 48,417 50,430 ---------- ---------- 2,207,527 1,859,466 Accumulated depreciation and amortization........... (322,552) (191,958) ---------- ---------- $1,884,975 $1,667,508 ========== ==========
On May 4, 1999, the Company's Orion 3 broadcast video and data communications satellite was placed into a lower-than-expected orbit after its launch on a Boeing Delta III rocket. According to Boeing, the Delta III rocket apparently failed to complete its second stage burn, and, as a result, the satellite, manufactured by Hughes Space and Communications Corporation, achieved an orbit well below the planned final altitude. As a result, the satellite cannot be used for its intended purpose. The satellite and launch were fully insured for approximately $266 million, which was received in the third quarter of 1999. DACOM Corporation, a Korean communications company which had purchased eight transponders on Orion 3 for a total of $89 million, had made prepayments of approximately $34 million to the Company. Under the agreement with DACOM, the amount prepaid was refunded in July 1999. To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from APT Satellite Company Limited ("APT") the rights to all transponder capacity and existing customer leases (except for one C-band transponder retained by APT) on the Telstar 10/Apstar IIR satellite, for $272.9 million. As of September 28, 1999, Telstar 10/Apstar IIR had an estimated remaining useful life of 13 years. Loral CyberStar has full use of the transponders for the remaining life of Telstar 10/Apstar IIR. Under the purchase agreement, Loral CyberStar will also have the option to lease from APT replacement satellites upon the end of life of Telstar 10/Apstar IIR. As of December 31, 1999, Loral CyberStar has made payments of approximately $91 million to APT and will pay approximately $182 million on March 27, 2000. Insurance proceeds from the Orion 3 failure were used to fund the initial payments made and will be used to fund a significant portion of the final payment. Loral has guaranteed Loral CyberStar's obligations to APT under the purchase agreement. Depreciation and amortization expense for property, plant and equipment was $139.9 million, $106.2 million and $52.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. Included in satellites in-orbit is the cost of satellite transponders where Loral has the rights to transponders for the remaining life of the related satellite, which amounted to $298.4 million at December 31, 1999. Accumulated depreciation and amortization as of December 31, 1999 includes $6.2 million, related to such transponder rights. F-14 71 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INVESTMENTS IN AND ADVANCES TO AFFILIATES Investments in and Advances to Affiliates consists of (in thousands):
DECEMBER 31, ---------------------- 1999 1998 ---------- -------- Globalstar, including advances of $219,823 and $184,311 at December 31, 1999 and 1998, respectively....................................... $ 878,140 $740,217 Satmex............................................... 70,747 74,159 Europe*Star.......................................... 62,300 45,413 SkyBridge............................................ 14,053 Other affiliates..................................... 86,816 64,709 ---------- -------- $1,098,003 $938,551 ========== ========
Equity in net loss of affiliates consists of (in thousands):
YEARS ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 --------- --------- -------- Globalstar, net of tax benefit........... $ (98,980) $ (67,016) $(40,877) Satmex................................... (33,403) (16,317) (6,396) Europe*Star.............................. (4,833) (3,624) SkyBridge, net of tax benefit............ (13,211) (25,465) (1,764) Other affiliates, net of tax benefit..... (27,392) (7,995) --------- --------- -------- $(177,819) $(120,417) $(49,037) ========= ========= ========
The consolidated statements of operations reflect the effects of the following amounts related to transactions with or investments in affiliates (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- Revenues from satellite sales.............. $409,431 $623,668 $420,370 Interest and investment income............. 30,052 8,464 8,390 Interest expense capitalized on development stage entities........................... 43,548 25,417 13,187 Elimination of Loral's proportionate share of intercompany profits.................. 4,541 7,225 6,876
Globalstar Loral is a founder and the managing general partner of Globalstar. Loral's investment in Globalstar consists of ordinary partnership interests in Globalstar, as well as common stock and convertible preferred stock interests in Globalstar Telecommunications Limited ("GTL"). GTL's sole business is acting as a general partner of Globalstar, and all funds raised by GTL to date have been used to purchase Globalstar securities. Partners in Globalstar have the right to convert their ordinary partnership interests into GTL common stock on an approximate one interest for four shares basis, under certain defined circumstances. As of December 31, 1999, Loral owned directly and indirectly approximately 24.8 million Globalstar ordinary partnership interests (corresponding to approximately 100.4 million equivalent shares of GTL common stock), or 41% of the total 59.8 million Globalstar ordinary partnership interests (corresponding to approximately 242.4 million equivalent shares of GTL common stock) outstanding. As of December 31, 1999, the market value of the 8.4 million shares of GTL stock owned by Loral, based on the last reported sale was F-15 72 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED) $368 million. On February 1, 2000, Loral's ownership in Globalstar was reduced to 40% as a result of GTL's sale of 8,050,000 common shares to the public and the accompanying issue of partnership interests by Globalstar. The excess carrying value of Loral's investment in Globalstar over its interest in the underlying net assets of Globalstar totalled $478 million at December 31, 1999 and will be amortized on a straight-line basis over a period of 20 years commencing in 2000. Loral's original investment in Globalstar was made in 1994 in connection with its formation. Loral has continued to make investments in Globalstar since its inception, including the following transactions during the three years ended December 31, 1999: - In 1996, Loral purchased $102.5 million principal amount of GTL's 6 1/2% Convertible Preferred Equivalent Obligations for $99.4 million. On April 30, 1998, these securities were converted into 6,832,030 shares of GTL common stock, including shares issued in satisfaction of a required interest make-whole payment. - In March 1997, Loral exercised warrants to purchase 4,550,088 shares of GTL common stock at $6.63 per share, which were received in connection with Loral's partial guarantee of a $250 million Globalstar Credit Agreement (see Note 13). In April 1997, Loral exercised rights to purchase an additional 700,696 shares of GTL common stock at $6.63 per share distributed to the existing shareholders of GTL. The aggregate purchase price paid was $34.8 million. - During 1997, Loral acquired 2,748,372 Globalstar ordinary partnership interests from other Globalstar partners for $122.3 million in cash and 1,255,684 shares of Loral common stock. - In July 1998, Loral purchased 4.2 million Globalstar ordinary partnership interests from certain founding service providers for $420 million in cash. Concurrently, Loral sold 8.4 million shares of GTL common stock to persons or entities advised by or associated with Soros Fund Management LLC for $245 million in cash. As a result of this sale, Loral recognized a gain of approximately $35 million, which is included in gain on investments, net in the consolidated statements of operations. - In November 1998, Loral acquired 276,000 Globalstar ordinary partnership interests from other Globalstar partners in exchange for 717,600 shares of GTL common stock. - In January 1999, Loral purchased $150 million principal amount of GTL's 8% Series A convertible redeemable preferred stock, which is convertible into 6,449,865 shares of GTL's common stock. - In November 1999, Loral purchased 103,187 shares of GTL common stock for $2.7 million. Also in 1999, Loral received warrants to purchase 3,450,000 Globalstar partnership interests at an exercise price of $91 per interest in consideration for the guarantee of Globalstar's $500 million credit agreement by certain of its subsidiaries and the pledge of certain assets, including the Telstar 6 and Telstar 7 satellites (see Note 13). The warrants were valued at $141 million, which was based on the guarantee provided. The exercise price was determined by reference to the fair market value of GTL's common stock on the closing date of the Credit Agreement, based on the approximate one partnership interest for four shares of GTL common stock exchange ratio. Assuming the guarantee remains in effect, the warrants vest 50% in February 2000, 25% in August 2000 and 25% in August 2001, and expire in 2006. Globalstar may call the warrants any time after August 2001 if GTL's common stock price exceeds $45.50 for a defined period. Loral has granted to certain of its officers and directors options to purchase 1,988,000 of its shares of GTL common stock. During 1999 and 1998, options were exercised to purchase 40,000 and 320,000 shares at a weighted average exercise price of $6.25 and $5.84 per share, respectively. At December 31, 1999, options to purchase 1,628,000 shares of common stock at a weighted average exercise price of $7.01 per share were outstanding. These options expire beginning in 2006. SS/L is the prime contractor for the construction and launch of Globalstar's satellites. SS/L has awarded subcontracts to third parties, including other investors in Globalstar, for substantial portions of the work under F-16 73 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED) these contracts. As of December 31, 1999, Loral had delivered and launched 48 of the 52 satellites required under the space segment contract (the final four satellites were successfully launched on February 8, 2000), and is constructing an additional eight spares under a separate contract. Billed and unbilled receivables and orbital incentives (described below) due within one year under these contracts were $59.4 million and $187.8 million, as of December 31, 1999 and 1998, respectively, and are included in contracts-in-process on the consolidated balance sheets. SS/L has provided $330 million of billings deferred under these construction contracts comprised of: $105 million of orbital incentives, of which $44 million was repaid in 1999 and $61 million is expected to be repaid in 2000; $90 million of vendor financing, which bears interest at LIBOR plus 3% and is repayable over five years commencing in 2001; and $134 million of non-interest bearing vendor financing, due over five years in equal monthly installments, commencing in 2000. SS/L's terms with its subcontractors include $116 million of financing assumed by them, which is to be repaid on substantially similar terms (of which a portion is non-recourse to SS/L in the event of non-payment by Globalstar) and is included in long-term liabilities on the consolidated balance sheets. In the first quarter of 2000, Globalstar commenced commercial service. Pursuant to the Globalstar partnership agreement, Loral is entitled to receive a managing partner's allocation of 2% of Globalstar's annual revenues under $500 million and 2.8% of annual revenues in excess of $500 million. Such allocation is reduced by 50% to the extent Globalstar has a net loss in any given year. Globalstar expects to spend $325 million for the enhancement of its system software, for the eight spare satellites being constructed by SS/L, and for financing provided to Globalstar's service providers to assist in the purchase of gateways, fixed access terminals and handsets (of which $231 million is expected to be received from the service providers as repayment of such financing). In addition, cash interest, preferred dividends and operating costs are expected to be approximately $125 million per quarter in 2000. Globalstar raised $268.5 million through the sale of equity interests on February 1, 2000. Globalstar believes that its cash on hand, available credit under its two bank facilities and vendor financing arrangements, service revenues and other anticipated cash inflows will be sufficient to cover its expected cash outflows provided that its $250 million credit facility is renegotiated. If Globalstar cannot renegotiate its $250 million credit facility, it believes it will be able to obtain additional funds. There can be no assurance, however, that such funds will be available on favorable terms or on a timely basis, if at all. Qualcomm Incorporated ("Qualcomm") has agreed to provide Globalstar $500 million of vendor financing (for which the terms of $400 million are still being finalized). In connection with the agreement, Qualcomm is expected to receive a number of warrants to purchase Globalstar partnership interests comparable to those received by Loral pursuant to Loral's guarantee of Globalstar's $500 million credit facility (see above). F-17 74 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED) The following table presents summary financial data for Globalstar as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 and cumulative (in thousands):
CUMULATIVE MARCH 23, 1994 (COMMENCEMENT OF OPERATIONS) YEARS ENDED DECEMBER 31, TO DECEMBER 31, ----------------------------- 1999 1999 1998 1997 --------------- -------- -------- ------- STATEMENT OF OPERATIONS DATA: Revenues.................................. $ -- $ -- $ -- $ -- Operating loss............................ 590,538 186,505 146,684 88,071 Net loss.................................. 526,620 180,364 129,543 67,586 Preferred distributions................... 112,942 52,220 22,197 21,202 Net loss applicable to ordinary partnership interests................... 639,562 232,584 151,740 88,788
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- BALANCE SHEET DATA: Current assets.............................................. $ 292,902 $ 236,288 Globalstar System under construction........................ 3,181,189 2,302,333 Total assets................................................ 3,781,459 2,670,025 Current liabilities......................................... 671,302 401,190 Long-term debt.............................................. 1,799,111 1,396,175 Long-term liabilities, including vendor financing........... 282,717 270,259 Partners' capital........................................... 1,028,329 602,401
Satmex In connection with the privatization by the Federal Government of Mexico (the "Mexican Government") of its fixed satellite services business, Loral and Principia, S.A. de C.V. ("Principia"), formerly known as Telefonica Autrey, S.A. de C.V., formed a joint venture, Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding capital stock of Satmex for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Principia equity contribution of $50.9 million and debt issued by a subsidiary of Holdings. As part of the acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a wholly owned subsidiary of Holdings, agreed to issue a seven-year obligation to the Mexican Government (the "Government Obligation") in consideration for the assumption by Satmex of the debt incurred by Servicios in connection with the acquisition. The Government Obligation had an initial face amount of $125 million, which accretes at 6.03% and expires in December 2004. The debt of Satmex and Servicios is non-recourse to Loral and Principia; however, Loral and Principia have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the value of the Government Obligation until maturity. As of December 31, 1999, Loral and Principia have pledged their respective shares in Holdings in such trust. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in Satmex. Loral and Principia are responsible for managing Satmex. They are entitled to receive an aggregate management fee, based on a sliding scale, applied to Satmex's quarterly gross revenues up to a maximum of 3.75% of each year's cumulative gross revenues. Loral and Principia agreed to waive such fee for 1999 and F-18 75 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED) 1998. Beginning in 1999, Loral licensed certain intellectual property to Satmex for a fee of up to 1.5% of Satmex's gross revenues, as defined, resulting in $1.3 million of fees. On March 30, 1999, Loral acquired 577,554 shares of preferred stock of Satmex at a purchase price of $30.3 million. The preferred stock has limited voting rights, pays a dividend in common stock of Satmex and is exchangeable, at Satmex's option, into common stock of Satmex based upon a predetermined exchange ratio. The following table presents summary financial data for Satmex as of December 31, 1999 and 1998 and for the years ended December 31, 1999 and 1998 and the period November 17, 1997 (date of investment) through December 31, 1997 (in thousands):
YEARS ENDED DECEMBER 31, NOVEMBER 17, 1997 ------------------------ TO 1999(1) 1998 DECEMBER 31, 1997 ---------- ---------- ------------------ STATEMENT OF OPERATIONS DATA: Revenues............................. $135,520 $104,779 $12,893 Operating income..................... 24,988 32,841 4,015 Net loss............................. 46,663 23,650 4,440 Net loss applicable to common stockholders....................... 47,793 23,650 4,440
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- BALANCE SHEET DATA: Current assets...................................... $ 36,461 $ 57,337 Total assets........................................ 1,038,594 1,137,964 Current liabilities................................. 23,845 93,116 Long-term liabilities............................... 121,213 85,535 Long-term debt...................................... 557,000 608,000 Shareholders' equity................................ 336,536 351,313
- --------------- (1) During 1999, Satmex sold three Ku-band transponders on Satmex 5 to Loral Skynet for $25.5 million, resulting in a gain of $11.2 million. Loral's proportionate share of the profit on these transponders of $3.6 million has been eliminated in Loral's consolidated results. Europe*Star In December 1998, Loral finalized its strategic partnership with a subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary satellite system anticipated to provide broadcast and telecommunications services to Europe, the Middle East, Southeast Asia, India and South Africa. Alcatel serves as the primary contractor of the Europe*Star turnkey system. SS/L is providing the satellite bus and will test and integrate the satellites. During 1999 and 1998, Loral invested $17 million and $49 million in Europe*Star, respectively, and at December 31, 1999 has a 47% ownership interest therein. SS/L is a subcontractor for the construction of Europe*Star's satellites. Billed and unbilled receivables from Europe*Star was $19.5 million as of December 31, 1999. There were no outstanding receivables at December 31, 1998. SkyBridge In June 1997, Loral and Alcatel formed a strategic partnership to jointly develop, deploy and operate high-speed global multimedia satellite networks that will bring high-bandwidth services to businesses and to F-19 76 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED) consumers. The agreement includes cross investments in Loral's geostationary (GEO) satellite-based CyberStar LP project and Alcatel's LEO satellite-based SkyBridge project. Each company participates in the development of the two projects. The SkyBridge project is currently in the development stage. As of December 31, 1999, Loral had contributed to SkyBridge and Alcatel had contributed to CyberStar LP approximately $46 million and $30 million, respectively. As of December 31, 1999, Loral owned approximately 15% of the outstanding partnership interests in SkyBridge. SS/L is a contractor for the construction of the SkyBridge satellites. There were no outstanding receivables related to this contract as of December 31, 1999. The following table presents summary financial data for SkyBridge as of December 31, 1999 and 1998 and for the years ended December 31, 1999 and 1998, for the period from February 26, 1997 to December 31, 1997, and cumulative (in thousands):
CUMULATIVE FEBRUARY 26, 1997 YEARS ENDED (INCEPTION) TO DECEMBER 31, FEBRUARY 26, 1997 DECEMBER 31, ------------------- TO 1999 1999 1998 DECEMBER 31, 1997 ----------------- -------- -------- ----------------- STATEMENT OF OPERATIONS DATA: Revenues.......................... $ -- $ -- $ -- $ -- Operating loss.................... 321,537 129,639 144,624 47,274 Net loss.......................... 314,988 126,749 141,714 46,525
DECEMBER 31, ----------------- 1999 1998 ------- ------- BALANCE SHEET DATA: Current assets.............................................. $46,572 $74,186 Total assets................................................ 46,811 74,585 Current liabilities......................................... 24,117 35,132 Net partners' capital....................................... 22,694 39,453
Other Affiliates Other affiliates include investments in partnerships where Loral and its partners are the exclusive service providers of Globalstar service and in Mabuhay Space Holdings Limited ("Mabuhay"), which owns and operates certain satellite transponders. Loral's proportionate share of losses from Mabuhay for 1999 was $15 million, net of related tax benefits, which primarily relates to a reduction in the carrying value of its satellite transponders in the fourth quarter. In December 1997, Loral sold its 22.5% equity interest in K&F for $80.6 million and recorded a $79.6 million gain on the sale. Prior to that date, 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. F-20 77 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. LONG-TERM DEBT
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- (IN THOUSANDS) Term loan, 7.1% and 6.7% at December 31, 1999 and 1998, respectively.............................................. $ 256,250 $ 275,000 Revolving credit facility, 7.1% and 6.7% at December 31, 1999 and 1998, respectively............................... 275,000 205,000 Note purchase facility...................................... 139,238 126,657 9.5% Senior notes due 2006.................................. 350,000 Export-Import credit facility............................... 12,872 15,018 Other....................................................... 591 605 Non-recourse debt of Loral CyberStar: 11.25% Senior notes due 2007 (principal amount $443 million)............................................... 501,734 507,573 12.5% Senior discount notes due 2007 (principal amount at maturity $484 million and accreted principal amount $378 million and $334 million at December 31, 1999 and 1998, respectively).................................... 448,409 408,812 Other..................................................... 15,228 17,110 ---------- ---------- Total debt.................................................. 1,999,322 1,555,775 Less, current maturities.................................... 85,496 22,736 ---------- ---------- $1,913,826 $1,533,039 ========== ==========
The Amended and Restated Credit Agreement, dated as of November 10, 1999, among Loral SpaceCom Corporation ("Loral SpaceCom"), a wholly owned subsidiary of Loral, SS/L and the banks party thereto (the "Credit Agreement") provides for a $275 million term loan facility, a $500 million revolving credit facility, of which up to $175 million can 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 was extended to mature on December 31, 2000. The term loan facility requires repayment in 12 consecutive quarterly installments beginning December 31, 1999. The first four installments are $18.75 million each with the final eight installments being $25 million each. Borrowings under the facilities are secured by the stock of Loral SpaceCom and SS/L and bear interest, at Loral SpaceCom's option, at various rates based on margins over the lead bank's base rate or the London Interbank Offer Rate ("LIBOR") for periods of one to six months. Loral SpaceCom pays a commitment fee on the unused portion of the facilities. The Credit Agreement contains customary covenants, including an interest coverage ratio and debt-to-capitalization ratios. In addition, the Credit Agreement contains limitations on indebtedness, liens, guarantee obligations, asset sales, dividends, investments and transactions with affiliates. Under the terms of the Credit Agreement, Loral SpaceCom may pay dividends to its parent if the cumulative dividend payments do not exceed 50% of cumulative net income, as defined, and the ratio of funded debt to EBITDA, as defined, is less than three to one. Notwithstanding this dividend payment limitation, as of December 31, 1999 Loral SpaceCom could pay a dividend to its parent of up to $70 million. As of December 31, 1999, and including the effect of borrowings expected to fund the roll-over of the note purchase facility discussed below, Loral SpaceCom could borrow an additional $56.9 million under the Credit Agreement. In 1994, SS/L entered into a $139.3 million note purchase facility with an Italian bank. Borrowings were determined by formula and were made in accordance with a specified schedule. The drawdown period expired on December 31, 1999. The outstanding principal is to be repaid on August 21, 2000. Interest is charged at a weighted average annual rate of 4.26% and is payable semi-annually. Interest, however, on any borrowings that occur after January 13, 1999 ($12.6 million at December 31, 1999) and until delivery of the satellites related F-21 78 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. LONG-TERM DEBT -- (CONTINUED) to the specific borrowings that have taken place will be at market rates for this period and not at the 4.26% rate. All borrowings under this facility reduce the amount available under the Credit Agreement. Upon maturity of this note, it will be rolled into the revolving credit facility under the Credit Agreement. On January 21, 1999, Loral sold $350 million principal amount of 9.5% Senior Notes due 2006 ("Senior Notes"). The Senior Notes are general unsecured obligations of Loral that: (1) are structurally junior in right of payment to all existing and future indebtedness of Loral's subsidiaries; (2) are equal in right of payment with all existing and future senior indebtedness of Loral (except as to assets pledged to secure such indebtedness); and (3) are senior in right of payment to any future indebtedness which is by its terms junior in right of payment to any senior indebtedness of Loral. Interest on the Senior Notes accrues at the rate of 9.5% per annum and is payable semi-annually. The Senior Notes will mature on January 15, 2006. Loral may redeem all or part of the Senior Notes on or after January 15, 2003. Prior to January 15, 2002, Loral may redeem up to 35% of the Senior Notes from the proceeds of certain equity offerings. Upon a change of control (as defined), each holder of Senior Notes will have the right to require Loral to repurchase such holder's Senior Notes at a price equal to 101% of the principal amount thereof plus accrued interest to the date of repurchase. SS/L borrowed a total of $42.9 million under an export-import credit facility (the "EX-IM Facility") with a Japanese bank. The EX-IM Facility is fully secured by a letter of credit arrangement with another bank. As of December 31, 1999, no amounts remained available for borrowing under this facility. The outstanding principal is to be repaid in semi-annual installments through November 1, 2005. Interest is charged at LIBOR less 1/4% and is payable semi-annually on May 1 and November 1. In connection with the Loral CyberStar acquisition, Loral did not assume Loral CyberStar's senior notes, senior discount notes or other debt instruments. Such debt is non-recourse to Loral and includes certain restrictions on Loral CyberStar's ability to pay dividends or make loans to Loral. The carrying value of the senior notes and senior discount notes was increased to reflect a fair value adjustment of $153.4 million based on quoted market prices at the date of acquisition. Such adjustment resulted in effective interest rates of 8.69% and 9.69% on the senior notes and senior discount notes, respectively, through maturity. The Loral CyberStar senior notes are due in 2007, bear interest of 11.25% and pay interest semi-annually. As of December 31, 1999 and 1998, Loral CyberStar had $50.0 million and $72.9 million, respectively, in restricted cash for future interest payments. The senior discount notes are due in 2007, bear interest of 12.5% and pay interest semi-annually commencing on July 15, 2002. The accreted principal value of the senior discount notes was $378 million and $334 million as of December 31, 1999 and 1998, respectively. Along with the issuance of each senior note and senior discount note, one warrant was issued to purchase shares of common stock. Upon the acquisition of Loral CyberStar, each warrant was converted so that it could purchase shares of Loral common stock. As of December 31, 1999, exercisable warrants for 143,838 shares of Loral common stock at an exercise price of $0.02 per share under the senior notes and 206,125 shares of Loral common stock at an exercise price of $0.03 per share under the senior discount notes are yet to be exercised. The aggregate maturities of total debt for the years 2000 through 2004 are as follows (in millions): $85.5, $104.7, $494.0, $3.9 and $3.9. F-22 79 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES The (benefit) provision for income taxes consists of the following (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- ------- ------- Current: U.S. federal............................... $ 5,591 $ 2,069 $27,204 State and local............................ 1,758 7,248 -------- ------- ------- 7,349 2,069 34,452 Deferred: U.S. federal............................... (44,766) (9,219) 1,762 State and local............................ 4,901 3,279 (1,343) -------- ------- ------- (39,865) (5,940) 419 -------- ------- ------- Total (benefit) provision for income taxes... $(32,516) $(3,871) $34,871 ======== ======= =======
The (benefit) provision for income taxes excludes: (i) current tax benefits related to the exercise of stock options, credited directly to shareholders' equity, of $0.4 million for the year ended December 31, 1998; (ii) a current tax benefit of $4.8 million and $0.3 million, and a deferred tax liability of $1.4 million and a deferred tax benefit of $2.1 million for the years ended December 31, 1999 and 1998, respectively, related to the Globalstar partnership loss, a deferred tax benefit of $1.8 million and $3.9 million for the years ended December 31, 1999 and 1998, respectively, related to the SkyBridge partnership loss, and a deferred tax benefit of $10.3 million for the year ended December 31, 1999, related to other affiliates which are included in equity in net loss of affiliates; and (iii) a current tax liability of $0.7 million for the year ended December 31, 1999 and a deferred tax benefit of $0.1 million and a deferred tax liability of $0.6 million for the years ended December 31, 1999 and 1998, respectively, related to the minority interest for CyberStar LP. The effective income tax rate differs from the statutory U.S. Federal income tax rate for the following reasons:
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Statutory U.S. federal income tax rate.......... 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax.................................... (7.0) (8.3) 3.0 Non-U.S. income and losses taxed at lower rates......................................... (10.4) 20.3 (15.0) Non-deductible amortization of cost in excess of net assets acquired........................... (14.0) (28.8) 2.6 Reverse valuation allowance for Loral CyberStar pre-acquisition loss.......................... 54.0 Other, net...................................... (5.3) (3.1) 1.9 ----- ----- ----- Effective income tax rate............. 52.3% 15.1% 27.5% ===== ===== =====
As of December 31, 1999, the Company had net operating loss carryforwards of approximately $382.2 million, which includes $136.4 million related to Loral CyberStar for its pre-acquisition tax years and $64.6 million related to foreign partner interests in Globalstar and CyberStar LP, as well as tax credit carryforwards of approximately $1.8 million, which expire at varying dates from 2003 through 2019. As a result of a tax law change during 1999, the Company reversed a portion of its valuation allowance relating to the Loral CyberStar pre-acquisition loss carryforwards. Due to uncertainties regarding its ability to realize the benefits from the balance of these pre-acquisition net operating loss carryforwards and certain other net deferred tax assets related to Loral CyberStar and the loss carryforwards related to the foreign partner interests in Globalstar and CyberStar LP, the Company has established a valuation allowance of $52.1 million against these net deferred tax assets. For the years ended December 31, 1999, 1998 and 1997, income (loss) F-23 80 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES -- (CONTINUED) before income taxes includes approximately $(20) million, $15 million and $72 million, respectively, of non-U.S. source income (loss). The significant components of the net deferred income tax asset (liability) are (in thousands):
DECEMBER 31, ---------------------- 1999 1998 --------- --------- Postretirement benefits other than pensions.......... $ 13,520 $ 15,547 Inventoried costs.................................... 55,158 44,288 Net operating loss and tax credit carryovers......... 138,724 124,270 Compensation and benefits............................ 12,548 11,655 Premium on senior notes.............................. 98,086 69,203 Investment in affiliates............................. 17,295 (6,051) Other, net........................................... (3,734) 271 Pension costs........................................ (3,436) (4,335) Property, plant and equipment........................ (129,530) (92,875) Income recognition on long-term contracts............ (130,780) (125,967) --------- --------- subtotal........................................... 67,851 36,006 Less valuation allowance............................. (52,095) (70,894) --------- --------- Net deferred income tax asset (liability).......... $ 15,756 $ (34,888) ========= =========
The net deferred income tax asset (liability) is classified as follows (in thousands):
DECEMBER 31, ------------------ 1999 1998 ------ -------- Other current assets..................................... $6,743 $ 3,482 ====== ======== Other assets............................................. $9,013 ====== Long-term deferred income tax liability.................. $(38,370) ========
10. SHAREHOLDERS' EQUITY Common Stock On June 29, 1998, Loral sold 23 million shares of its common stock for $27 per share. The net proceeds were $602 million, of which Loral used $175 million, net, to fund the purchase of Globalstar ordinary partnership interests (see Note 7). 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 before selling to an unaffiliated third party. On March 5, 2000, the Series A Preferred Stock became fully convertible into common stock (see Note 18). 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. Such stock is subject to certain voting limitations, restrictions on transfer and standstill provisions. F-24 81 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. SHAREHOLDERS' EQUITY -- (CONTINUED) Series B Preferred Stock The Series B Preferred Stock will, if issued, be junior to any other series of preferred stock which may be authorized and issued. The Series B Preferred Stock becomes issuable upon exercise by holders of rights issued under the Company's Rights Plan. The rights are issued with the Company's common stock and become detachable, and thus exercisable, only upon the occurrence of certain events. Each right, when it becomes exercisable, entitles the holder to purchase from the Company a unit consisting initially of one-thousandth of a share of Series B Preferred Stock at a purchase price of $50 per unit, subject to adjustment. 6% Series C Preferred Stock On November 1, 1996, the Company sold $600 million of 6% Convertible Preferred Equivalent Obligations, which were mandatorily exchanged on June 5, 1997 into shares of the Company's Series C Preferred Stock, resulting in a reclassification of these amounts into shareholders' equity. In addition, the Company issued additional CPEOs and shares of Series C Preferred Stock in connection with the acquisition of interests in SS/L and Globalstar. The Series C Preferred Stock has an aggregate liquidation preference equal to its $745 million aggregate redemption value and a mandatory redemption date of November 1, 2006. The Series C Preferred Stock is convertible into shares of common stock of the Company at a conversion price of $20 per share. As of December 31, 1999, the outstanding Series C Preferred Stock was convertible into 37,273,593 shares of Loral common stock. The Series C Preferred Stock is non-voting and 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). Stock Plans In April 1996, Loral established the 1996 Stock Option Plan. An aggregate of 18 million shares of common stock have been reserved for issuance. Under this plan, options are granted at the discretion of the Company's Board of Directors to employees of the Company and its affiliates. Such options become exercisable as determined by the Board, generally over five years, and generally expire no more than 10 years from the date of the grant. As discussed in Note 2, the Company continues to account for stock-based awards to employees using the intrinsic value method in accordance with APB 25, and its related interpretations. Accordingly, no compensation expense based on the fair value method has been recognized in the financial statements for employee stock arrangements. SFAS 123 requires the disclosure of pro forma net income and earnings per share as though the Company had adopted the fair value method. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, six to twelve months following vesting; stock volatility, 30% in 1999 and 25% for 1998 and 1997; risk free interest rate, 4.4% to 6.6% 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 1999, 1998 and 1997 awards, including stock- F-25 82 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. SHAREHOLDERS' EQUITY -- (CONTINUED) based compensation awards to employees of the Company's affiliates, had been amortized to expense over the vesting period of the awards, pro forma net (loss) income applicable to common stockholders and related earnings (loss) per share would have been $(254.7) million or $(.88) per diluted share, $(192.7) million or $(.70) per diluted share and $9.3 million or $.04 per diluted share for 1999, 1998 and 1997, respectively. A summary of the status of the Company's stock option plans as of December 31, 1999, 1998 and 1997 and changes during the periods then ended is presented below:
WEIGHTED- AVERAGE EXERCISE SHARES PRICE ---------- --------- Outstanding at January 1, 1997.............................. 6,411,500 $10.60 Granted at fair market value (weighted average fair value $3.98 per share).......................................... 642,500 14.41 Granted below fair market value (weighted average fair value $5.68 per share).......................................... 90,000 10.50 Exercised................................................... (207,750) 10.50 Forfeited................................................... (175,800) 12.98 ---------- ------ Outstanding at December 31, 1997............................ 6,760,450 10.90 Granted at fair market value (weighted average fair value $5.63 per share).......................................... 3,737,400 21.73 Granted below fair market value (weighted average fair value $12.11 per share)......................................... 600,000 11.72 Loral CyberStar stock options converted in connection with acquisition (weighted average fair value $11.84 per share).................................................... 1,443,240 14.78 Exercised................................................... (806,781) 12.15 Forfeited................................................... (857,477) 13.34 ---------- ------ Outstanding at December 31, 1998............................ 10,876,832 14.90 Granted at fair market value (weighted average fair value $5.48 per share).......................................... 3,799,100 16.62 Exercised................................................... (287,635) 13.01 Forfeited................................................... (1,031,433) 17.23 ---------- ------ Outstanding at December 31, 1999............................ 13,356,864 $15.25 ========== ====== Options exercisable at December 31, 1999.................... 5,667,416 $13.32 ========== ====== Options exercisable at December 31, 1998.................... 3,638,305 $12.44 ========== ====== Options exercisable at December 31, 1997.................... 2,014,250 $10.53 ========== ======
The following table summarizes information about Loral's outstanding stock options at December 31, 1999:
DECEMBER 31, 1999 ---------------------------------------------------------- OUTSTANDING ----------------------------------- EXERCISABLE WEIGHTED -------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICE RANGE NUMBER LIFE-YEARS PRICE NUMBER PRICE - -------------------- ---------- ----------- -------- --------- -------- $10.50 - $15.99................... 7,331,897 6.84 $11.51 4,444,418 $11.18 $16.00 - $23.99................... 3,789,627 9.35 16.83 575,930 17.09 $24.00 - $27.28................... 2,235,340 8.14 24.82 647,068 24.70 ---------- --------- 13,356,864 7.77 $15.25 5,667,416 $13.32 ========== =========
F-26 83 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. SHAREHOLDERS' EQUITY -- (CONTINUED) All options granted during the year were non-qualified stock options. As of December 31, 1999, 4,666,140 shares of common stock were available for future grant under the Plan. 11. 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. None of the employees associated with the acquisition of Loral CyberStar were transferred into these plans. The Company's funding policy is to fund the pension plan in accordance with the Internal Revenue Code and regulations thereon and to fund the supplemental retirement plan on an actuarial basis, including service cost and amortization amounts. Plan assets are generally invested in U.S. government and agency obligations and listed stocks and bonds. Other Benefits In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees and dependents. Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for the Company's pension plan. These benefits are funded primarily on a pay-as-you-go basis, with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets for the years ended December 31, 1999 and 1998, and a statement of the funded status as of December 31, 1999 and 1998, respectively.
PENSION BENEFITS OTHER BENEFITS -------------------- ------------------- 1999 1998 1999 1998 --------- -------- -------- -------- (IN THOUSANDS) Reconciliation of benefit obligation Obligation at January 1................... $ 225,957 $204,166 $ 37,187 $ 36,010 Service cost.............................. 8,821 8,340 1,580 1,460 Interest cost............................. 16,499 15,358 2,576 2,553 Participant contributions................. 1,375 1,228 654 593 Plan amendments........................... (422) Actuarial (gain) loss..................... (24,152) 7,231 (6,443) (1,406) Benefit payments.......................... (11,630) (9,944) (1,898) (2,023) --------- -------- -------- -------- Obligation at December 31................. $ 216,870 $225,957 $ 33,656 $ 37,187 --------- -------- -------- --------
F-27 84 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
PENSION BENEFITS OTHER BENEFITS -------------------- ------------------- 1999 1998 1999 1998 --------- -------- -------- -------- (IN THOUSANDS) Reconciliation of fair value of plan assets Fair value of plan assets at January 1.... $ 227,235 $198,013 $ 1,940 $ 2,022 Actual return on plan assets.............. 90,973 36,040 66 124 Employer contributions.................... 2,999 1,898 934 1,134 Participant contributions................. 1,375 1,228 654 683 Benefit payments.......................... (11,630) (9,944) (1,898) (2,023) --------- -------- -------- -------- Fair value of plan assets at December 31...................................... $ 310,952 $227,235 $ 1,696 $ 1,940 --------- -------- -------- -------- Funded status Funded (unfunded) status at December 31... $ 94,082 $ 1,278 $(31,960) $(35,247) Unrecognized prior service cost........... (338) (371) (8,926) (10,198) Unrecognized (gain) loss.................. (102,016) (8,270) 6,127 12,600 --------- -------- -------- -------- Net amount recognized..................... $ (8,272) $ (7,363) $(34,759) $(32,845) ========= ======== ======== ========
The following table provides the details of the net pension liability recognized in the balance sheet as of December 31, 1999 and 1998, respectively (in thousands):
1999 1998 -------- -------- Prepaid benefit cost........................................ $ 8,570 $ 10,262 Accrued benefit liability................................... (16,842) (17,625) -------- -------- Net amount recognized....................................... $ (8,272) $ (7,363) ======== ========
The Company has a supplemental retirement plan, which had an accumulated benefit obligation in excess of plan assets. The accumulated benefit obligation was $23.3 million and $25.1 million and the fair value of plan assets was $9.0 million and $8.6 million, as of December 31, 1999 and 1998, respectively. The following table provides the components of net periodic benefit cost for the plans for the years ended December 31, 1999, 1998 and 1997, respectively (in thousands):
PENSION BENEFITS OTHER BENEFITS ------------------------------ --------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- ------- ------- ------- Service cost..................... $ 8,821 $ 8,340 $ 6,539 $ 1,580 $ 1,460 $ 915 Interest cost.................... 16,499 15,358 14,278 2,576 2,553 2,315 Expected return on plan assets... (21,401) (18,531) (16,433) (184) (192) (196) Amortization of prior service cost........................... (34) 4 4 (1,272) (1,272) (1,272) Amortization of net loss......... 18 20 2 238 319 194 -------- -------- -------- ------- ------- ------- Net periodic benefit cost........ $ 3,903 $ 5,191 $ 4,390 $ 2,938 $ 2,868 $ 1,956 ======== ======== ======== ======= ======= =======
The principal actuarial assumptions were:
1999 1998 1997 ----- ----- ----- Discount rate............................................. 8.00% 7.00% 7.25% Expected return on plan assets............................ 9.50% 9.50% 9.50% Rate of compensation increase............................. 4.25% 4.25% 4.50%
F-28 85 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED) Actuarial assumptions used a health care cost trend rate of 8.05% decreasing gradually to 5.25% by 2003. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates for 1999 would have the following effects:
1% INCREASE 1% DECREASE ----------- ----------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost................................ $ 696,000 $ (545,000) Effect on the health care component of the accumulated postretirement benefit obligation.... 3,785,000 (3,099,000)
Employee Savings Plan The Company has an employee savings plan which provides that the Company match the contributions of participating employees up to a designated level. Under this plan, the matching contributions in Loral common stock or cash were $7.0 million, $6.1 million and $5.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. 12. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value: The carrying amount of cash and cash equivalents and restricted cash approximates fair value because of the short maturity of those instruments. The fair value of the investments in available-for-sale securities are based on market quotations. The fair value of the Company's long-term debt is based on carrying value for those obligations that have short-term variable interest rates on the outstanding borrowings and quoted market prices for obligations with long-term or fixed interest rates. The estimated fair values of the Company's financial instruments are as follows (in thousands):
DECEMBER 31, ---------------------------------------------------- 1999 1998 ------------------------ ------------------------ CARRYING CARRYING FAIR AMOUNT FAIR VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Cash and cash equivalents................. $ 239,865 $ 239,865 $ 546,772 $ 546,772 Restricted and segregated cash............ 187,315 187,315 72,855 72,855 Investments in available-for-sale securities.............................. 106,783 106,783 65,273 65,273 Long-term debt, including current maturities.............................. 1,999,322 1,554,979 1,555,775 1,382,890
The fair value of the investments in available-for-sale securities includes unrealized gains of $79 million and $40 million as of December 31, 1999 and 1998, respectively, which is included in accumulated other comprehensive income (see Note 3). Foreign Currency Hedges As of December 31, 1999 and 1998, the Company had foreign currency exchange contracts (forwards and swaps) with several banks to purchase and sell foreign currencies, primarily Japanese yen, aggregating $106.3 million and $197.5 million, respectively. Such contracts were designated as hedges of certain foreign contracts and subcontracts to be performed by SS/L through May 2006. The fair value of these contracts, based on quoted market prices, was $104.6 million and $189.7 million as of December 31, 1999 and 1998, respectively. As of December 31, 1999 and 1998, deferred gains on forward contracts to sell foreign currencies, F-29 86 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. FINANCIAL INSTRUMENTS -- (CONTINUED) primarily yen, were $2.0 million and $11.7 million, respectively, and deferred losses on forward contracts to purchase foreign currencies, primarily yen, were $0.3 million and $3.9 million, respectively. The Company is exposed to credit-related losses in the event of non-performance by counter parties to these financial instruments, but does not expect any counter party to fail to meet its obligation. The maturity of foreign currency exchange contracts held as of December 31, 1999 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts and payments to vendors under subcontracts. As of December 31, 1999, these foreign exchange contracts mature as follows (in thousands):
TO PURCHASE TO SELL ------------------- ------------------- AT AT AT AT CONTRACT MARKET CONTRACT MARKET YEARS TO MATURITY RATE RATE RATE RATE - ----------------- -------- ------- -------- ------- 1................................................... $62,077 $63,044 $16,166 $15,755 2 to 5.............................................. 7,276 6,575 12,101 11,819 6 to 10............................................. 8,699 7,370 ------- ------- ------- ------- $69,353 $69,619 $36,966 $34,944 ======= ======= ======= =======
13. COMMITMENTS AND CONTINGENCIES 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. On August 5, 1999, Globalstar entered into a $500 million credit agreement with a group of banks for the build-out of the Globalstar System of which $400 million was outstanding as of December 31, 1999. The credit facility is guaranteed by Loral SatCom Ltd. and Loral Satellite, Inc., wholly owned subsidiaries of Loral, for which Loral received warrants to purchase Globalstar partnership interests (see Note 7). The guarantee is secured by the pledge of certain assets of Loral and its subsidiaries, including the stock of the guarantors and the Telstar 6 and Telstar 7 satellites. Based on third party valuations, management believes that the fair value of Telstar 6 and Telstar 7 is in excess of this $500 million credit agreement. As of December 31, 1999, the net book value of Telstar 6 and Telstar 7 was $392 million. The guarantee agreement contains customary financial covenants of the guarantors, including maintenance of a minimum collateral coverage ratio and maintenance of a combined minimum net worth and combined earnings before interest, taxes, depreciation and amortization ("EBITDA"). In addition, the guarantee agreement contains customary limitations on indebtedness, liens, fundamental changes, asset sales, dividends (except that the guarantors may pay dividends to their parents provided that combined aggregate cash on hand at the guarantors is at least equal to $50 million and the guarantors hold an intercompany note due from Loral for at least $100 million), investments, capital expenditures, creating liens other than those created pursuant to the guarantee and transactions with affiliates. The Company had outstanding letters of credit of approximately $118 million and $99 million as of December 31, 1999 and 1998, respectively. The Company also had a $12.5 million Canadian Dollar letter of credit outstanding at December 31, 1999. F-30 87 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Loral had a $115 million secured standby bank credit facility, which was undrawn as of December 31, 1999, supporting a guarantee of a $115 million term loan of an unaffiliated third party. The term loan was repaid by the unaffiliated third party in February 2000, resulting in the expiration of the standby credit facility. Due to the long lead times required to produce purchased parts and launch vehicles, the Company has entered into various purchase commitments with suppliers. These commitments aggregated approximately $685 million as of December 31, 1999. Prior to its acquisition by Loral, Loral Skynet sold several transponders under which title to specific transponders was transferred to the customer. Under the terms of the sales contracts, Loral Skynet continues to operate the satellites on which the transponders are located and provides a warranty for a period of 10 to 14 years. Depending on the contract, Loral Skynet is required to replace any 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 replacement. The reimbursement value is determined based on the original purchase price plus an interest factor from the time the payment was received to acceptance of the transponder by the customer, reduced on a straight-line basis over the warranty period. In case of satellite failure, the reimbursement value may be paid from proceeds received from insurance policies. In 1997, two satellites built by SS/L experienced solar array circuit failures. SS/L settled one of the customer's claims in 1999 and the other customer's claims in 1997. In late 1998, following the launch of an SS/L-built satellite sold to PanAmSat, a manufacturing error was discovered that affected the geographical coverage of the Ku-band transponders on the satellite. On January 6, 2000, PanAmSat filed an arbitration proceeding in connection with this error claiming damages of $225 million for lost profits, and increased sales and marketing costs. SS/L believes it has meritorious defenses to the claim and that its liability is limited to a loss of a portion of the applicable orbital incentives, the estimated impact of which is included in Loral's consolidated financial statements. PanAmSat has received a recovery from its insurance carrier that should reduce any damage claim. While this proceeding is in its very early stages, management believes that this matter will not have a material adverse effect on the financial condition or results of operations of Loral. SS/L is a target of a grand jury investigation being conducted by the office of the U.S. Attorney for the District of Columbia with respect to possible violations of export control laws that may have occurred in connection with the participation of SS/L employees on a committee formed in the wake of the 1996 crash of a Long March rocket in China and whose purpose was to consider whether studies of the crash made by the Chinese had correctly identified the cause of the failure. The Company is not in a position to predict the direction or outcome of the investigation. If SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it would be subject to a fine of $1 million per violation and could be debarred from certain export privileges and, possibly, from participation in government contracts. Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, such a debarment would have a material adverse effect on SS/L's business and, therefore, the Company. Indictment for such violations would subject SS/L to discretionary debarment from further export licenses. Under the applicable regulations, SS/L could be debarred from export privileges without being convicted of any crime if it is indicted for these alleged violations, and loss of export privileges would harm SS/L's business. Whether or not SS/L is indicted or convicted, SS/L remains subject to the State Department's general statutory authority to prohibit exports of satellites and related services if it finds a violation of the Arms Export Control Act that puts SS/L's reliability in question, and it can suspend export privileges whenever it determines that grounds for debarment exist and that such suspension "is reasonably necessary to protect world peace or the security or foreign policy of the United States." As far as SS/L can determine, no sensitive information or technology was conveyed to the Chinese, and no secret or classified information was discussed with or reported to them. SS/L believes that its employees F-31 88 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) acted openly and in good faith and that none engaged in intentional misconduct. Accordingly, the Company does not believe that SS/L has committed a criminal violation of the export control laws. The Company does not expect the grand jury investigation or its outcome to result in a material adverse effect upon its business. However, there can be no assurance as to these conclusions. On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the U.S. Department of State temporarily suspended the previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension is to permit that agency to review the agreement for conformity with newly-enacted legislation (Section 74 of the Arms Export Control Act) with respect to the export of missile equipment or technology. SS/L has complied with ODTC's instructions, and believes that a review of the agreement will show that its terms comply with the new law. The ODTC, however, has not yet completed its review, and the scheduled launch date for ChinaSat-8 is being delayed. In December 1999, Loral reached an agreement with ChinaSat to extend the date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this extension and other modifications to the contract, Loral has agreed to provide to the customer two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR for the customer's use for the life of those transponders. As a result, the Company recorded a charge to earnings of $35 million. If the suspension is not lifted by July 31, 2000, ChinaSat could decide to terminate the contract. If such a termination were to occur, SS/L would have to refund advances received from ChinaSat ($134 million as of December 31, 1999) and may incur penalties of up to $13 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer. There can be no assurance that SS/L will be able to find such a replacement customer for the satellite or its Chinese launch vehicle. SS/L will record a charge to earnings of approximately $35 million if it is unable to find a replacement customer for this launch vehicle. In March 1999, jurisdiction for satellite licensing was transferred from the Commerce Department to the State Department, and the State Department has issued regulations relating to the export of, and disclosure of technical information related to, satellites and related equipment. SS/L anticipates that obtaining licenses and technical assistance agreements under these new regulations will take more time and will be considerably more burdensome than in the past. Delays in obtaining the necessary licenses and technical assistance agreements may delay SS/L's performance on existing contracts, and, as a result, SS/L may incur penalties or lose incentive payments under these contracts. In addition, such delays may have an adverse effect on SS/L's ability to compete against foreign satellite manufacturers for new satellite contracts. Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L. and commenced commercial operations in December 1999. Under an agreement reached with Eutelsat, Loral CyberStar agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat will continue to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and will assert its priority rights over such location on Loral CyberStar's behalf. As part of this coordination effort, Loral CyberStar agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. Lease Arrangements 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, net of sublease income of $4.5 million, $2.6 million and F-32 89 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) $2.1 million, was $39.8 million, $26.4 million and $17.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. Future minimum payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following as of December 31, 1999 (in thousands): 2000.............................................. $ 23,992 2001.............................................. 21,735 2002.............................................. 20,779 2003.............................................. 16,687 2004.............................................. 8,796 Thereafter........................................ 41,313 -------- $133,302 ========
Future minimum payments have been reduced by minimum sublease rentals of $20.2 million due in the future under non-cancellable subleases. Future minimum lease receipts due from customers under non-cancelable operating leases for transponder capacity on satellites in-orbit and for service agreements as of December 31, 1999, are as follows (in thousands): 2000............................................. $ 320,677 2001............................................. 223,870 2002............................................. 177,214 2003............................................. 116,347 2004............................................. 95,474 Thereafter....................................... 420,028 ---------- $1,353,610 ==========
14. RELATED PARTY TRANSACTIONS In connection with contract performance, Loral provided services to and acquired services from Lockheed Martin. A summary of such transactions and balances as of December 31, 1999 and 1998, and for the three years ended December 31, 1999, respectively, is as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- ------- ------- Revenue from services sold.................................. $ 399 $ 1,301 $ 3,550 Cost of purchased goods and services........................ 151,053 70,569 78,160 Balance at year end: Receivable................................................ $ 916 $ 2,159 Payable................................................... 60,496 4,317 -------- ------- Net payable................................................. $ 59,580 $ 2,158 ======== =======
F-33 90 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. RELATED PARTY TRANSACTIONS -- (CONTINUED) Loral's sales to, purchase from, and balances with the Alliance Partners (see Note 4), including the effect of the related party transactions in Note 7, as of the years ended December 31, 1999 and 1998, and for the three years ended December 31, 1999, respectively, were as follows (in thousands):
1999 1998 1997 ------- -------- -------- Revenue from goods and services sold........................ $13,360 $ 40,791 $ 39,303 Cost of purchased goods and services........................ 80,130 190,070 147,777 Balance at year end: Receivable................................................ $ 1,524 $ 6,579 Payable................................................... 17,190 72,807 ------- -------- Net payable................................................. $15,666 $ 66,228 ======= ========
15. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed based upon the weighted average number of shares of common stock and the Series A Preferred Stock outstanding. Diluted earnings (loss) per share excludes the assumed conversion of the Series C Preferred Stock as the effect would have been antidilutive for the years ended December 31, 1999, 1998 and 1997, respectively. For the years ended December 31, 1999 and 1998, weighted options equating to approximately 1.2 million and 1.8 million shares, respectively, as calculated using the treasury stock method, were excluded from the calculation of diluted loss per share, as the effect would have been antidilutive. The following table sets forth the computation of basic and diluted earnings per share:
YEARS ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income (loss)...................................... $(201,916) $(138,798) $ 40,004 Preferred dividends and accretion...................... (44,728) (46,425) (26,315) --------- --------- -------- Numerator for basic and diluted earnings per share -- net income (loss) applicable to common stockholders........................................ $(246,644) $(185,223) $ 13,689 ========= ========= ======== Denominator: Weighted average shares: Common stock........................................ 244,335 227,505 196,173 Series A Preferred Stock............................ 45,897 45,897 45,897 --------- --------- -------- Denominator for basic earnings per share............... 290,232 273,402 242,070 Effect of dilutive securities: Employee stock options.............................. 1,521 --------- --------- -------- Denominator for diluted earnings per share............. 290,232 273,402 243,591 ========= ========= ======== Basic and diluted earnings (loss) per share.............. $ (0.85) $ (0.68) $ 0.06 ========= ========= ========
F-34 91 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SEGMENTS Loral has four reportable business segments: Fixed Satellite Services, Broadband Data Services, Satellite Manufacturing and Technology and Global Mobile Telephone Service (see Note 1). In evaluating financial performance, management uses revenues and earnings before interest, taxes and depreciation and amortization ("EBITDA") as the measure of a segment's profit or loss. Segment results include the results of its subsidiaries and its affiliates, Satmex, Europe*Star and Globalstar, which are accounted for using the equity method in these consolidated financial statements. Intersegment revenues primarily consists of satellites under construction by Satellite Manufacturing and Technology for Fixed Satellite Services and Global Mobile Telephone Service and sales by Fixed Satellite Services to Broadband Data Services for the lease of transponder capacity. The accounting policies of the reportable segments are the same as those described in Note 2. F-35 92 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SEGMENTS -- (CONTINUED) Summarized financial information concerning the reportable segments is as follows (in thousands): 1999 SEGMENT INFORMATION
SATELLITE GLOBAL FIXED BROADBAND MANUFACTURING MOBILE SATELLITE DATA AND TELEPHONE SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL ----------- ----------- ------------- ---------- ------------ ----- REVENUES AND EBITDA: Revenues from external customers.......... $ 302,879 $ 84,658 $ 776,557 $ 1,164,094 Intersegment revenues..................... 38,946 656,714 695,660 ---------- -------- ---------- ----------- Gross revenues............................ $ 341,825 $ 84,658 $1,433,271 1,859,754 ========== ======== ========== Revenues of unconsolidated affiliates(6)........................... (135,520) Intercompany revenues(7).................. (266,514) ----------- Consolidated revenues..................... $ 1,457,720 =========== EBITDA before development and start-up costs and eliminations.................. $ 193,099 $ (8,376) $ 102,307 $ (39,283) $ 247,747 Development and start-up costs(8)......... (27,248) $ (184,194) (211,442) ---------- -------- ---------- ---------- ---------- ----------- EBITDA before eliminations................ $ 193,099 $(35,624) $ 102,307 $ (184,194) $ (39,283) 36,305 ========== ======== ========== ========== ========== EBITDA of unconsolidated affiliates(6).... 106,709 Intercompany EBITDA(7).................... (30,371) ----------- EBITDA(9)................................. 112,643 Depreciation and amortization(10)......... 174,906 ----------- Operating loss............................ $ (62,263) =========== OTHER DATA: Depreciation and amortization before affiliate eliminations(10).............. $ 171,317 $ 20,080 $ 40,747 $ 6,344 $ 4,169 $ 242,657 ========== ======== ========== ========== ========== Depreciation and amortization of unconsolidated affiliates(6)(10)........ (67,751) ----------- Depreciation and amortization(10)......... $ 174,906 =========== Capital expenditures before affiliate eliminations............................ $ 575,447 $ 19,051 $ 30,240 $ 695,395 $ 854 $ 1,320,987 ========== ======== ========== ========== ========== Capital expenditures of unconsolidated affiliates(6)........................... (851,240) ----------- Capital expenditures...................... $ 469,747 =========== Total assets before affiliate eliminations............................ $3,901,262 $114,120 $1,641,233 $3,781,459 $1,212,029 $10,650,103 ========== ======== ========== ========== ========== Total assets of unconsolidated affiliates(6)........................... (5,039,682) ----------- Total assets.............................. $ 5,610,421 ===========
- --------------- (1) Fixed Satellite Services consists of 100% of the following companies since their respective dates of acquisition. Loral Skynet acquired on March 14, 1997; Loral CyberStar's transponder leasing business acquired on March 20, 1998; Satmex, a 49% equity investee, acquired on November 17, 1997; Europe*Star, a 47% equity investee, since December 1998. For the year ended December 31, 1999, Satmex's results includes $25.5 million in revenues and $11.2 million in EBITDA, respectively, from the sale of transponders to Loral Skynet. (2) Broadband Data Services consists of 100% of CyberStar LP and 100% of Loral CyberStar's broadband data services business since its acquisition on March 20, 1998. (3) Satellite Manufacturing and Technology consists of 100% of SS/L's results. In February 1997, Loral agreed to acquire the remaining 49% of SS/L. (4) Consists of 100% of Globalstar. Loral owned 41%, 43% and 40% at December 31, 1999, 1998 and 1997, respectively. (5) Represents unallocated corporate expenses incurred in support of the Company's operations. (6) Represents amounts related to unconsolidated affiliates (Satmex, Europe*Star and Globalstar). These amounts are eliminated in order to arrive at Loral's consolidated results. Loral's proportionate share of these affiliates is included in equity in net loss from affiliates in Loral's consolidated statements of operations. (7) Represents the elimination of intercompany sales and EBITDA, primarily for satellites under construction by SS/L for wholly-owned subsidiaries; as well as eliminating sales for the lease of transponder capacity by Broadband Data Services from Fixed Satellite Services. (8) Represents EBITDA for CyberStar LP and Globalstar. (9) EBITDA (which is equivalent to operating income/loss before depreciation and amortization, including amortization of unearned compensation) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of Loral's operating results. EBITDA is not an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. (10) Includes amortization of unearned stock compensation charges. F-36 93 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SEGMENTS -- (CONTINUED) 1998 SEGMENT INFORMATION
SATELLITE GLOBAL FIXED BROADBAND MANUFACTURING MOBILE SATELLITE DATA AND TELEPHONE SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL ----------- ----------- ------------- ---------- ------------ ----- REVENUES AND EBITDA: Revenues from external customers....... $ 248,904 $ 39,856 $ 500,918 $ 789,678 Intersegment revenues.................. 5,301 889,253 894,554 ---------- -------- ---------- ---------- Gross revenues......................... $ 254,205 $ 39,856 $1,390,171 1,684,232 ========== ======== ========== Revenues of unconsolidated affiliates(6)........................ (104,779) Intercompany revenues(7)............... (277,751) ---------- Consolidated revenues.................. $1,301,702 ========== EBITDA before development and start-up costs and eliminations............... $ 171,239 $(13,306) $ 117,920 $ (42,826) $ 233,027 Development and start-up costs(8)...... (33,354) $ (144,953) (178,307) ---------- -------- ---------- ---------- ---------- ---------- EBITDA before eliminations............. $ 171,239 $(46,660) $ 117,920 $ (144,953) $ (42,826) 54,720 ========== ======== ========== ========== ========== EBITDA of unconsolidated affiliates(6)........................ 70,184 Intercompany EBITDA(7)................. (23,655) ---------- EBITDA(9).............................. 101,249 Depreciation and amortization(10)...... 135,029 ---------- Operating loss......................... $ (33,780) ========== OTHER DATA: Depreciation and amortization before affiliate eliminations(10)........... $ 130,793 $ 10,193 $ 39,696 $ 1,731 $ 2,981 $ 185,394 ========== ======== ========== ========== ========== Depreciation and amortization of unconsolidated affiliates(6)(10)..... (50,365) ---------- Depreciation and amortization(10)...... $ 135,029 ========== Capital expenditures before affiliate eliminations......................... $ 638,924 $ 27,287 $ 39,650 $ 564,629 $ 2,387 $1,272,877 ========== ======== ========== ========== ========== Capital expenditures of unconsolidated affiliates(6)........................ (783,429) ---------- Capital expenditures................... $ 489,448 ========== Total assets before affiliate eliminations......................... $3,371,073 $152,667 $1,673,030 $2,670,025 $1,238,434 $9,105,229 ========== ======== ========== ========== ========== Total assets of unconsolidated affiliates(6)........................ (3,876,014) ---------- Total assets........................... $5,229,215 ==========
F-37 94 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SEGMENTS -- (CONTINUED) 1997 SEGMENT INFORMATION
SATELLITE GLOBAL FIXED BROADBAND MANUFACTURING MOBILE SATELLITE DATA AND TELEPHONE SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL ----------- ----------- ------------- ---------- ------------ ----- REVENUES AND EBITDA: Revenue from external customers...... $ 82,229 $ 822,885 $ 905,114 Intersegment revenue................. 800 619,715 620,515 ---------- ---------- ----------- Gross revenue........................ $ 83,029 $1,442,600 1,525,629 ========== ========== Revenue of unconsolidated affiliates(6)...................... (12,893) Intercompany revenue(7).............. (200,145) ----------- Consolidated revenue................. $ 1,312,591 =========== EBITDA before development and start-up costs and eliminations.... $ 51,821 $ 110,936 $(26,932) $ 135,825 Development and start-up costs(8).... $(32,612) $ (87,055) (119,667) ---------- -------- ---------- ---------- -------- ----------- EBITDA before eliminations........... $ 51,821 $(32,612) $ 110,936 $ (87,055) $(26,932) 16,158 ========== ======== ========== ========== ======== EBITDA of unconsolidated affiliates(6)...................... 77,197 Intercompany EBITDA(7)............... (17,039) ----------- EBITDA(9)............................ 76,316 Depreciation and amortization(10).... 62,764 ----------- Operating income..................... $ 13,552 =========== OTHER DATA: Depreciation and amortization before affiliate eliminations(10)......... $ 31,825 $ 78 $ 35,308 $ 1,016 $ 1,387 $ 69,614 ========== ======== ========== ========== ======== Depreciation and amortization of unconsolidated affiliates(6)(10)... (6,850) ----------- Depreciation and amortization(10).... $ 62,764 =========== Capital expenditures before affiliate eliminations....................... $ 212,183 $ 2,623 $ 39,416 $ 589,373 $ 4,149 $ 847,744 ========== ======== ========== ========== ======== Capital expenditures of unconsolidated affiliates(6)....... (592,404) ----------- Capital expenditures................. $ 255,340 =========== Total assets before affiliate eliminations....................... $1,825,845 $ 24,921 $1,483,759 $2,149,053 $711,017 $ 6,194,595 ========== ======== ========== ========== ======== Total assets of unconsolidated affiliates(6)...................... (3,184,148) ----------- Total assets......................... $ 3,010,447 ===========
F-38 95 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SEGMENTS -- (CONTINUED) Revenue by Customer Location The following table presents revenues by country based on customer location for the years ended December 31, 1999, 1998 and 1997 (in thousands).
1999 1998 1997 ---------- ---------- ---------- United States.......................................... $1,248,990 $1,096,497 $ 924,468 People's Republic of China............................. 12,460 48,985 102,147 Japan.................................................. 56,322 53,567 45,179 France................................................. 65,115 43,702 40,719 Philippines............................................ 1,301 8,877 34,629 Thailand............................................... 850 9 77,422 Indonesia.............................................. 1,947 71,880 Other.................................................. 70,735 50,065 16,147 ---------- ---------- ---------- $1,457,720 $1,301,702 $1,312,591 ========== ========== ==========
During 1999, three customers of the Satellite Manufacturing and Technology segment accounted for 25%, 18% and 13% of consolidated revenues. During 1998, three commercial customers of the Satellite Manufacturing and Technology segment accounted for approximately 46%, 20% and 11%, respectively, of consolidated revenues. During 1997, one customer of the Satellite Manufacturing and Technology segment accounted for approximately 31% of consolidated revenues (see Note 7). With the exception of the Company's satellites in-orbit (see Note 6), the Company's long-lived assets are primarily located in the United States. 17. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share amounts)
QUARTER ENDED ------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30,(1) DECEMBER 31,(1) --------- -------- ---------------- --------------- YEAR ENDED DECEMBER 31, 1999 Revenues....................... $305,926 $378,437 $347,152 $426,204 EBITDA (see Note 16)........... 36,627 43,542 35,939 (3,465) Operating income (loss)........ (1,166) 2,059 (8,585) (54,571) Loss before income taxes, equity in net loss of affiliates and minority interest..................... 4,201 3,147 8,303 46,487 Net loss....................... 38,501 38,068 12,464 112,883 Preferred dividends and accretion.................... 11,607 11,606 11,606 9,909 Net loss applicable to common shareholders................. 50,108 49,674 24,070 122,792 Loss per share -- basic and diluted(2)................... 0.17 0.17 0.08 0.42 Market price per share High......................... 22 7/16 20 3/4 22 7/8 24 3/4 Low.......................... 14 7/16 14 3/8 16 1/4 13 1/2
F-39 96 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. QUARTERLY FINANCIAL INFORMATION -- (CONTINUED)
QUARTER ENDED ------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30,(3) DECEMBER 31,(3) --------- -------- ---------------- --------------- YEAR ENDED DECEMBER 31, 1998 Revenues........................ $295,213 $248,260 $289,588 $468,641 EBITDA (see Note 16)............ 18,410 12,175 19,936 50,728 Operating income (loss)......... 982 (26,266) (19,519) 11,023 Income (loss) before income taxes, equity in net loss of affiliates and minority interest...................... 7,928 (31,299) 16,088 (18,345) Net loss........................ 15,443 58,973 10,699 53,683 Preferred dividends and accretion..................... 11,606 11,607 11,606 11,606 Net loss applicable to common shareholders.................. 27,049 70,580 22,305 65,289 Loss per share -- basic and diluted(2).................... 0.11 0.27 0.08 0.23 Market price per share High.......................... 30 1/2 33 15/16 31 7/8 20 1/2 Low........................... 19 24 1/2 12 1/8 10 3/4
- --------------- (1) The quarter ended September 30, 1999 includes a non-recurring benefit of $34 million relating to a tax law change affecting the utilization of Loral CyberStar's pre-acquisition loss carryforwards. The results of operations for the quarter ended December 31, 1999 includes a pre-tax charge of $35 million ($21 million after taxes) relating to an agreement reached with a customer to extend the delivery date of a satellite and other modifications to the contract in return for satellite capacity. (2) The quarterly earnings per share information is computed separately for each period. Therefore, the sum of such quarterly per share amounts may differ from the total for the year. (3) The results of operations for the quarter ended September 30, 1998, includes a $35 million pre-tax gain on the sale of stock in an affiliate. The results of operations for the quarter ended December 31, 1998 includes a pre-tax loss recorded on the write-off of non-strategic investments of $29.5 million. 18. SUBSEQUENT EVENTS In February 2000, Loral sold $400 million of 6% Series D convertible redeemable preferred stock due 2007 in an offering exempt from registration. The preferred stock is convertible into approximately 20.2 million shares of common stock at a conversion price of $19.83 per share. Loral intends to apply the proceeds from the sale of the preferred stock for general corporate purposes, including investment in its broadband strategy and expansion of the Loral Global Alliance by acquisition of additional satellites and orbital slots. In February 2000, Loral and Lockheed Martin filed certain notices under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with Lockheed Martin's plan to convert its 45,896,977 shares of Loral's Series A preferred stock into an equal number of shares of Loral common stock. The waiting period expired on March 5, 2000 and accordingly, Lockheed Martin is now free to convert the Series A preferred stock at any time. In February 2000, Loral and Lockheed Martin also entered into an agreement pursuant to which Lockheed Martin agreed that it will not sell any of the Series A preferred stock or the Loral common stock into which it is convertible before May 19, 2000. Loral has agreed to use its best efforts to cause a registration statement relating to the common stock issuable upon conversion of the Series A preferred stock to be effective on or before May 19, 2000 and to maintain its effectiveness for at least 12 months thereafter. Loral has also agreed that it will refrain from selling equity securities in the public markets for its own account until the six month anniversary of the effective date of such registration statement. F-40 97 INDEPENDENT AUDITORS' REPORT We have audited the consolidated financial statements of Loral Space & Communications Ltd. (a Bermuda company) as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 22, 2000 (March 5, 2000 as to the second paragraph of Note 18), 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 San Jose, California February 22, 2000 S-1 98 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT LORAL SPACE & COMMUNICATIONS LTD. BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 99,211 $ 401,269 Other current assets...................................... 3,275 1,147 ---------- ---------- Total current assets........................................ 102,486 402,416 Note receivable from unconsolidated subsidiary.............. 200,000 346,600 Investments in affiliates................................... 729,900 620,202 Investment in unconsolidated subsidiaries................... 1,985,619 1,257,827 Due from unconsolidated subsidiaries........................ 20,506 289,609 Other assets................................................ 115,256 72,277 ---------- ---------- $3,153,767 $2,988,931 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and other current liabilities............ $ 1,958 $ 31,041 Accrued interest and preferred dividends.................. 22,787 8,928 Income taxes payable...................................... 5,019 2,844 Deferred income taxes..................................... 9,390 1,796 ---------- ---------- Total current liabilities................................... 39,154 44,609 Deferred income taxes....................................... 13,949 6,819 Long-term liabilities....................................... 1,782 Long-term debt.............................................. 350,000 Commitments and contingencies Shareholders' equity: Series A convertible preferred stock, $.01 par value; 150,000,000 shares authorized, 45,896,977 shares issued................................................. 459 459 Series B preferred stock, $.01 par value; 750,000 shares authorized and unissued................................ 6% Series C convertible redeemable preferred stock ($745,472 redemption value), $.01 par value; 20,000,000 shares authorized, 14,909,437 shares issued............ 735,437 735,437 Common stock, $.01 par value; 750,000,000 shares authorized, 245,204,432 and 243,861,719 shares issued.......................................... 2,452 2,439 Paid-in capital........................................... 2,347,323 2,330,755 Treasury stock, at cost; 174,195 shares................... (3,360) (3,360) Unearned compensation..................................... (1,253) (8,231) Retained deficit.......................................... (409,301) (162,657) Accumulated other comprehensive income.................... 78,907 40,879 ---------- ---------- Total shareholders' equity.................................. 2,750,664 2,935,721 ---------- ---------- $3,153,767 $2,988,931 ========== ==========
See note to financial statements. S-2 99 LORAL SPACE & COMMUNICATIONS LTD. STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 --------- --------- -------- Costs and expenses....................................... $ 45,716 $ 34,112 $ 14,123 --------- --------- -------- Operating loss........................................... (45,716) (34,112) (14,123) Interest and investment income........................... 67,037 53,217 60,915 Interest expense......................................... 695 Gain on sale of investments, net......................... 15,494 79,591 --------- --------- -------- Income before income taxes and equity in net loss of unconsolidated subsidiaries and affiliates............. 21,321 34,599 125,688 Income taxes............................................. 13,150 9,872 19,644 --------- --------- -------- Income before equity in net loss of unconsolidated subsidiaries and affiliates............................ 8,171 24,727 106,044 Equity in net loss of unconsolidated subsidiaries........ (58,452) (47,041) (19,243) Equity in net loss of affiliates......................... (151,635) (116,484) (46,797) --------- --------- -------- Net income (loss)........................................ (201,916) (138,798) 40,004 Preferred dividends and accretion........................ (44,728) (46,425) (26,315) --------- --------- -------- Net income (loss) applicable to common stockholders...... $(246,644) $(185,223) $ 13,689 ========= ========= ======== Earnings (loss) per share: Basic and diluted...................................... $ (0.85) $ (0.68) $ 0.06 ========= ========= ======== Weighted average shares outstanding: Basic.................................................. 290,232 273,402 242,070 ========= ========= ======== Diluted................................................ 290,232 273,402 243,591 ========= ========= ========
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- ------- Net income (loss)......................................... $(201,916) $(138,798) $40,004 Other comprehensive income - unrealized gains on available-for-sale securities and accumulated translation adjustment of subsidiaries.................. 38,028 33,604 7,275 --------- --------- ------- Comprehensive income (loss)............................... $(163,888) $(105,194) $47,279 ========= ========= =======
See notes to financial statements. S-3 100 LORAL SPACE & COMMUNICATIONS LTD. STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 --------- --------- ----------- Operating activities: Net income (loss)......................................... $(201,916) $(138,798) $ 40,004 Non-cash items: Gain on investments....................................... (15,494) (79,591) Equity in net loss of affiliates.......................... 151,635 116,484 46,797 Equity in net loss of unconsolidated subsidiaries......... 58,452 47,041 19,243 Deferred income taxes..................................... 15,636 10,359 (2,158) Non-cash interest and investment income................... (11,451) (6,012) (1,739) Depreciation and amortization............................. 78 Changes in operating assets and liabilities, net of acquisitions: Due from unconsolidated subsidiaries...................... (15,351) (44,520) (244,898) Accounts payable and other current liabilities............ (29,083) 1,854 4,218 Accrued interest and preferred dividends.................. 13,859 (773) 3,283 Income taxes payable...................................... 2,175 (9,160) 10,741 Other..................................................... 728 (8,951) (64,630) --------- --------- ----------- Cash used in operating activities........................... (15,316) (47,970) (268,652) --------- --------- ----------- Investing activities: Proceeds from the sale of investments, net of expenses.... 246,868 79,591 Investment in affiliates.................................. (250,794) (510,497) (250,496) Investments in unconsolidated subsidiaries................ (340,979) (50,569) (144,060) Other assets.............................................. (52,454) --------- --------- ----------- Cash used in investing activities........................... (591,773) (314,198) (367,419) --------- --------- ----------- Financing activities: Proceeds from sale of common stock, net................... 601,816 (Issuance) repayment of note to unconsolidated subsidiary.............................................. (14,211) 2,400 (349,000) Proceeds from the issuance of 9.5% senior notes, net...... 343,875 Proceeds from other stock issuances....................... 20,095 32,121 7,338 Preferred dividends....................................... (44,728) (44,750) (25,435) --------- --------- ----------- Cash provided by (used in) financing activities............. 305,031 591,587 (367,097) --------- --------- ----------- (Decrease) increase in cash and cash equivalents............ (302,058) 229,419 (1,003,168) Cash and cash equivalents -- beginning of period............ 401,269 171,850 1,175,018 --------- --------- ----------- Cash and cash equivalents -- end of period.................. $ 99,211 $ 401,269 $ 171,850 ========= ========= =========== Non-cash transactions: Common stock issued to acquire Loral CyberStar............ $ 469,025 ========= Unrealized gain on available-for-sale securities.......... $ 38,909 $ 32,988 $ 7,275 ========= ========= =========== Contributions to capital of receivables from unconsolidated subsidiaries............................. $ 445,265 ========= 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 =========== Deferred purchase price to acquire Globalstar partnership interests............................................... $ 24,787 =========== Supplemental information: Interest paid............................................. $ 16,071 $ 2,023 $ 22,823 ========= ========= =========== Taxes paid................................................ $ -- $ 8,586 $ 6,205 ========= ========= ===========
See notes to financial statements. S-4 101 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. This condensed financial information should be read in conjunction with the consolidated financial statements of Loral, included in Loral's Annual Report on Form 10-K for the year ended December 31, 1999. Loral's significant transactions with its subsidiaries other than the investment account and related equity in net loss of unconsolidated subsidiaries are the management fee charged by Loral SpaceCom Corporation ("SpaceCom") to Loral and intercompany payables and receivables resulting primarily from the funding of the construction of satellites for the Fixed Satellite Services segment. The note receivable, which was originally due from SpaceCom relating to the Loral Skynet acquisition, has been assumed by Loral Space & Communications Corporation ("LSC"). The note bears interest at 8.2% per annum with the final due date being October 1, 2008. Interest payments are deferred until October 1, 2001, when LSC will begin to make semi-annual installments of $30 million on the last day of April and October of each year until the note is paid in full. No cash dividends were paid to Loral by its subsidiaries or its affiliates during the years ended December 31, 1999, 1998 and 1997.
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996, among Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., Loral General Partner, Inc., Loral Globalstar L.P., Loral Globalstar Limited, the Registrant and Lockheed Martin Corporation(1) 2.2 Amendment to Restructuring, Financing and Distribution Agreement, dated as April 15, 1996(1) 2.3 Agreement for the Purchase and Sale of Assets dated as of September 25, 1996 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(2) 2.4 First Amendment to Agreement for the Purchase and Sale of Assets dated as of March 14, 1997 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(3) 2.5 Agreement and Plan of Merger dated as of October 7, 1997 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(4) 2.6 First Amendment to Agreement and Plan of Merger dated as of February 11, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(5) 2.7 Second Amendment to Agreement and Plan of Merger dated as of March 20, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(12) 3.1 Memorandum of Association(1) 3.2 Memorandum of Increase of Share Capital(1) 3.3 Third Amended and Restated Bye-laws+ 3.4 Schedule IV to the Third Amended and Restated Bye-laws+ 4.1 Rights Agreement dated March 27, 1996 between the Registrant and The Bank of New York, Rights Agent(1) 4.2 Indenture dated as of January 15, 1999 relating to Registrant's 9 1/2% Senior Notes due 2006(14) 10.1 Shareholders Agreement dated as of April 23, 1996 between Loral Corporation and the Registrant(1)
S-5 102
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1.1 Amended Shareholders Agreement dated as of March 29, 2000 between the Registrant and Lockheed Martin Corporation+ 10.2 Tax Sharing Agreement dated as of April 22, 1996 between Loral Corporation, the Registrant, Lockheed Martin Corporation and LAC Acquisition Corporation(1) 10.3 Exchange Agreement dated as of April 22, 1996 between the Registrant and Lockheed Martin Corporation(1) 10.4 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as of January 26, 1999 among Loral/Qualcomm Satellite Services, L.P., Globalstar Telecommunications Limited, AirTouch Satellite Services, Inc., Dacom Corporation, Dacom International, Inc., Hyundai Corporation, Hyundai Electronics Industries Co., Ltd., Loral/DASA Globalstar, L.P., Loral Space & Communications Ltd., San Giorgio S.p.A., TeleSat Limited, TE.S.AM and Vodafone Satellite Services Limited(14) 10.4.1 Amendment dated as of December 8, 1999 to the Amended and Restated Agreement of Limited Partnership of Globalstar, L.P.(15) 10.4.2 Amendment dated as of February 1, 2000 to the Amended and Restated Agreement of Limited Partnership of Globalstar, L.P.+ 10.5 Service Provider Agreements by and between Globalstar, L.P. and each of Loral General Partner, Inc. and Loral/DASA Globalstar, L.P.(8) 10.6 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.(8) 10.7 1996 Stock Option Plan(1)++ 10.7.1 Amendment to 1996 Stock Option Plan(14)++ 10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++ 10.9 Employment Agreement between the Registrant and Bernard L. Schwartz(1)++ 10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement between the Registrant and Bernard L. Schwartz(12)++ 10.10 Registration Rights Agreement dated as of August 9, 1996 among Loral Space & Communications Ltd., Lehman Brothers Capital Partners II, L.P., Lehman Brothers Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore Investment Partnership L.P. and Lehman Brothers Offshore Investment Partnership-Japan L.P.(9) 10.11 Registration Rights Agreement dated November 6, 1996 relating to the Registrant's 6% Convertible Preferred Equivalent Obligations due 2006(6) 10.12 Registration Rights Agreement (Series C Preferred Stock) dated as of March 31, 1997 between Loral Space & Communications Ltd. and Finmeccanica S.p.A. and dated as June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.13 Registration Rights Agreement (Common Stock) dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.14 Alliance Agreement dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI, Alcatel Espace and Finmeccanica S.p.A.(10) 10.15 Principal Stockholder Agreement dated as of October 7, 1997 among Loral Space & Communications Ltd., Loral Satellite Corporation, Orion Network Systems, Inc. and certain Orion stockholders signatory thereto(4) 10.16 Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc., the Banks parties thereto, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo di Torino S.p.A, individually and as Italian Export Financing and Arranger and as Selling Bank(11)
S-6 103
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.16.1 First Amendment dated as of May 7, 1998 to and of the Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc. and, the banks parties thereto(14) 10.16.2 Second Amendment dated as of September 4, 1998 to and of the Amended and Restated Credit Agreement dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc. and the banks parties thereto.+ 10.16.3 Third Amendment dated as of July 12, 1999 to and of the Amended and Restated Credit Agreement dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc. and the banks parties thereto.+ 10.16.4 Fourth Amendment dated as of November 10, 1999 to and of the Amended and Restated Credit Agreement dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/ Loral, Inc. and the banks parties thereto.+ 10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as of June 30, 1997(12) 10.18 Purchase and Sale Agreement dated November 17, 1997 between the Federal Government of the United Mexican States and Corporativo Satelites Mexicanos, S.A. de C.V. for the purchase and sale of the capital stock of Satelites Mexicanos, S.A. de C.V. (English translation of Spanish original)(12) 10.19 Amended and Restated Membership Agreement dated and effective as of August 21, 1998 among Loral Satmex Ltd. and Ediciones Enigma, S.A. de C.V. and Firmamento Mexicano, S. de R.L. de C.V.(14) 10.20 Letter Agreement dated December 29, 1997 between Loral Space & Communications Ltd., Telefonica Autrey S.A. de C.V., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. and Lehman Commercial Paper Inc. and related Agreement between the Federal Government of United Mexican States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma, S.A. de C.V., Loral Space & Communications Ltd., Loral Satmex Ltd. and Servicios Corporativos Satelitales, S.A. de C.V.(12) 10.21 Shareholders Agreement dated December 7, 1998 by and among Alcatel SpaceCom, Loral Space & Communications Ltd., Dr. Jurgen Schulte-Hillen and EuropeStar Limited(14) 10.22 Registration Rights Agreement dated as of January 21, 1999 relating to Registrant's 9 1/2% Senior Notes due 2006(14) 10.23 Guarantee and Collateral Agreement dated as of August 5, 1999, made by Loral Satcom Ltd. and Loral Satellite, Inc. in favor of Bank of America, National Association as Collateral Agent(16) 10.24 Lease Agreement dated as of August 18, 1999 by and between Loral Asia Pacific Satellite (HK) Limited and APT Satellite Company Limited(17) 10.25 Guarantee of Loral Space & Communications Ltd. dated August 18, 1999(17) 10.26 Registration Rights Agreement dated as of February 18, 2000 relating to Registrant's 6% Series D Convertible Redeemable Preferred Stock due 2007+ 12 Statement Re: Computation of Ratios+ 21 List of Subsidiaries of the Registrant+ 23 Consent of Deloitte & Touche LLP+ 27 Financial Data Schedule (EDGAR only)+ 99.1 Consolidated Financial Statements of Globalstar, L.P. and Independent Auditors' Report(13)
- --------------- (1) Incorporated by reference from the Registrant's Registration Statement on Form 10 (No. 1-14180). (2) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on September 27, 1996. S-7 104 (3) Incorporated by reference from the Registrant's Current Report on Form 8-K on March 28, 1997. (4) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on October 10, 1997. (5) Incorporated by reference from the Registrant's Registration Statement on Form S-4 filed on February 17, 1998 (File No. 333-46407). (6) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the nine month period ended December 31, 1996. (7) Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed by Globalstar Telecommunications Limited (File No. 0-25456). (8) Incorporated by reference from the Registration Statement on Form S-1 of Globalstar Telecommunications Limited (File No. 33-86808). (9) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on August 13, 1996. (10) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on July 8, 1997. (11) Incorporated by reference from the Registrant's Current Report on Form 8-K filed on December 9, 1997. (12) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (13) Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 1998 filed by Globalstar Telecommunications Limited and Globalstar, L.P. (File No. 0-25456). (14) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (15) Incorporated by reference from the Current Report on Form 8-K filed on December 21, 1999 by Globalstar Telecommunications Limited and Globalstar, L.P. (16) Incorporated by reference from Registrant's Current Report on Form 8-K filed on August 6, 1999. (17) Incorporated by reference from Registrant's Current Report on Form 8-K filed on August 23, 1999. + Filed herewith. ++ Management compensation plan.
DATE OF REPORT DESCRIPTION -------------- ----------- September 28, 1999 Item 5 -- Other Events Lease Agreement relating to Apstar II-R
S-8 EX-3.3 2 THIRD AMENDED & RESTATED BYE-LAWS 1 EXHIBIT 3.3 THIRD AMENDED AND RESTATED BYE-LAWS OF LORAL SPACE & COMMUNICATIONS LTD. 2 3.3 Third Amended and Restated Bye-Laws Page As adopted at the Annual Meeting of Shareholders of the above Company on May 18, 1999. (ii) 3 TABLE OF CONTENTS
Page ---- INTERPRETATION............................................................................................1 REGISTERED OFFICE.........................................................................................4 SHARE CAPITAL AND VARIATION OF RIGHTS.....................................................................5 SHARES....................................................................................................8 CERTIFICATES.............................................................................................10 LIEN.....................................................................................................11 CALLS ON SHARES..........................................................................................13 FORFEITURE OF SHARES.....................................................................................15 REGISTER OF SHAREHOLDERS.................................................................................18 REGISTER OF DIRECTORS AND OFFICERS.......................................................................18 TRANSFER OF SHARES.......................................................................................19 TRANSMISSION OF SHARES...................................................................................20 INCREASE OF CAPITAL......................................................................................23 ALTERATION OF CAPITAL....................................................................................23 REDUCTION OF CAPITAL.....................................................................................25 GENERAL MEETINGS.........................................................................................25 NOTICE OF GENERAL MEETINGS...............................................................................27 PROCEEDINGS AT GENERAL MEETINGS..........................................................................29 VOTING...................................................................................................35 PROXIES AND CORPORATE REPRESENTATIVES....................................................................37
(i) 4
Page ---- APPOINTMENT AND REMOVAL OF DIRECTORS.....................................................................40 RESIGNATION AND DISQUALIFICATION OF DIRECTORS............................................................43 ALTERNATE DIRECTORS......................................................................................43 DIRECTORS' FEES AND ADDITIONAL REMUNERATION AND EXPENSES.................................................45 DIRECTORS' INTERESTS.....................................................................................46 POWERS AND DUTIES OF THE BOARD...........................................................................48 DELEGATION OF THE BOARD'S POWERS.........................................................................50 PROCEEDINGS OF THE BOARD.................................................................................52 OFFICERS.................................................................................................55 MINUTES..................................................................................................57 SECRETARY................................................................................................57 THE SEAL.................................................................................................58 DIVIDENDS AND OTHER PAYMENTS.............................................................................59 RESERVES.................................................................................................62 CAPITALIZATION OF PROFITS................................................................................62 RECORD DATES.............................................................................................64 ACCOUNTING RECORDS.......................................................................................64 AUDIT....................................................................................................65 SERVICE OF NOTICES AND OTHER DOCUMENTS...................................................................66 WINDING UP...............................................................................................67 INDEMNITY................................................................................................68 ALTERATION OF BYE-LAWS...................................................................................69
(ii) 5 Page ---- SCHEDULE I SERIES A PREFERRED SHARES SCHEDULE II SERIES B PREFERRED SHARES SCHEDULE III 6% SERIES C CONVERTIBLE REDEEMABLE PREFERRED SHARES (iii) 6 THIRD AMENDED AND RESTATED BYE-LAWS OF LORAL SPACE & COMMUNICATIONS LTD. INTERPRETATION 1. In these Bye-Laws unless the context otherwise requires: (a) "Bermuda" means the Islands of Bermuda; (b) "Board" means the Board of Directors of the Company or the Directors present at a meeting of Directors at which there is a quorum; (c) "Bye-Laws" means these Second Amended and Restated Bye-Laws in their present form or as from time to time amended; (d) "Common Shares" means the Common Shares of par value $0.01 per share; (e) "the Companies Acts" means every Bermuda statute from time to time in force concerning companies insofar as the same applies to the Company; (f) "Company" means the company incorporated in Bermuda under the name of LORAL SPACE & COMMUNICATIONS LTD. on the 12th day of January, 1996; (g) "paid up" means paid up or credited as paid up; 7 (h) "Preferred Shares" means the Series A Preferred Shares, the Series B Preferred Shares and any other series of preferred shares of the Company designated as such by Resolution adopted from time to time. (i) "Register" means the Register of Shareholders of the Company; (j) "Registered Office" means the registered office for the time being of the Company; (k) "Resolution" means a resolution of the Shareholders or, where required, of a separate class or separate classes of Shareholders, adopted in general meeting in accordance with the provisions of these Bye-Laws; (l) "Seal" means the common seal of the Company and includes any duplicate thereof; (m) "Secretary" includes a temporary or assistant Secretary and any person appointed by the Board to perform any of the duties of the Secretary; (n) "Series A Preferred Shares" means the Series A Convertible Non-Voting Preferred Shares of par value $0.01 per share; (o) "Series B Preferred Shares" means the Series B Preferred Shares of par value $0.01 per share issued in -2- 8 accordance with the shareholders right plan referred to in Bye-Law 4; (p) "Shareholder" means a shareholder or member of the Company; (q) "shares" means Common Shares or Preferred Shares, or both, as the case may be. -3- 9 2. For the purposes of these Bye-Laws: (a) A corporation shall be deemed to be present in person if its representative duly authorized pursuant to the Companies Acts is present; (b) Words importing only the singular number include the plural number and vice versa; (c) Words importing only the masculine gender include the feminine and neuter genders respectively; (d) Words importing persons include companies or associations or bodies of persons, whether corporate or un-incorporate; (e) Reference to writing shall include typewriting, printing, lithography, photography and other modes of representing or reproducing words in a legible and non-transitory form; (f) Any words or expressions defined in the Companies Acts in force at the date when these Bye-Laws or any part thereof are adopted shall bear the same meaning in these Bye-Laws or such part (as the case may be). REGISTERED OFFICE 3. The Registered Office shall be at such place in Bermuda as the Board shall from time to time appoint. -4- 10 SHARE CAPITAL AND VARIATION OF RIGHTS 4. (a) The respective rights and restrictions attached to the Series A Preferred Shares, the Series B Preferred Shares and the Series C Preferred Shares are set forth in Schedules I, II and III (as the same may be amended from time to time) to these Bye-Laws, which Schedules shall be deemed to be incorporated in and from part of this Bye-Law 4. (b) In addition to the Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares, the Board shall be authorized to issue other preference shares and such shares may be issued from time to time, in one or more series with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as may be designated by the Board prior to the issuance of such series, and the Board is hereby expressly authorized to fix by resolution or resolutions prior to such issuance such designations, preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions, including without limiting the generality of the foregoing, the following: (i) the designation of such series or class; (ii) the dividend rate of such series or class, the conditions and dates upon which such dividends will be payable, the -5- 11 relation which such dividends will bear to the dividends payable on any other class or classes of shares or any other series of any class of shares of the Company, and whether such dividends will be cumulative or non-voting; (iii) the redemption provisions and times, prices and other terms and conditions of such redemption, if any, for such series or class, which may include provisions that they are to be redeemed on the happening of a specified event or on a given date, that they are liable to be redeemed at the option of the Company or that if authorized by the Memorandum of Association of the Company, that they are liable to be redeemed at the option of the holder; (iv) the terms and amount of any sinking fund provided for the purchase or redemption of the shares of such series or class; (v) the terms and conditions, if any, on which shares of such series or class shall be convertible into, or exchangeable for, shares of the Company or any other securities, including the price or prices, or the rates of exchange thereof; (vi) the voting rights, if any; (vii) the restrictions, if any, on the issue or reissue of any additional preference shares; and -6- 12 (viii) the rights of the holders of such series or class upon the liquidation, dissolution or distribution of assets of the Company. The designations, preferences and relative, participating, optional or other special rights or qualifications, limitations or restrictions thereof, of each additional series, if any, may differ from those of any or all other series outstanding. 5. The Company may adopt a scheme or arrangement (hereinafter called a "shareholder rights plan") providing for the creation and issuance of rights entitling the Shareholders of the Company or certain of them, to purchase from the Company shares of any class or assets of the Company or a subsidiary of the Company or otherwise, and the terms and conditions of such shareholder rights plan and the rights may be amended or modified as the Directors or any committee thereof may determine. 6. Subject to the Companies Acts, all or any of the special rights for the time being attached to any class of shares for the time being issued may, unless otherwise provided in the rights attaching to or by the term of issue of the shares of that class, from time to time (whether or not the Company is being wound up), be altered or abrogated with the sanction of a Resolution passed at a separate general meeting of the holders of shares of that class by a majority of the votes cast. To any -7- 13 such separate general meeting, all the provisions of these Bye-Laws as to general meetings of the Company shall mutatis mutandis apply, but so that the necessary quorum shall be two or more persons holding or representing by proxy thirty-three per cent of the shares of the relevant class; provided, however, that if the Company or a class of Shareholders shall have only one Shareholder present in person or by proxy, one Shareholder shall constitute the necessary quorum. 7. The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be altered by the creation or issue of further shares ranking pari passu therewith. SHARES 8. (a) Subject to the provisions of these Bye-Laws, the unissued shares of the Company (whether forming part of the original capital or any increased capital) shall be at the disposal of the Board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the Board may determine. (b) The Board may issue its shares in fractional denominations and deal with such fractions to the same extent as -8- 14 its whole shares and shares in fractional denominations shall have in proportion to the respective fractions represented thereby all the rights of the whole shares including (but without limiting the generality of the foregoing) the right to vote, to receive dividends and distributions and to participate in a winding up. 9. The Board may in connection with the issue of any shares exercise all powers of paying commission and brokerage conferred or permitted by law. 10. The Company shall be entitled to treat the holder of record of any share or shares of capital stock as the holder in fact thereof. Accordingly, except as ordered by a court of competent jurisdiction or as required by law, no person shall be recognized by the Company as holding any share upon trust and the Company shall not be bound by or required in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share or (except only as otherwise provided in these Bye-Laws or by law) any other right in respect of any share except an absolute right to the entirety thereof in the registered holder. CERTIFICATES -9- 15 11. The shares shall be issued in registered form and shall be evidenced by share certificates in such form as the Directors may from time to time prescribe. The preparation, issue and delivery of share certificates shall be governed by the Companies Acts. In the case of a share held jointly by several persons, delivery of a certificate to one of several joint holders shall be sufficient delivery to all. 12. If a share certificate is defaced, lost or destroyed, it may be replaced without fee but on such terms (if any) as to evidence and indemnity and to payment of the costs and out of pocket expenses of the Company in investigating such evidence and preparing such indemnity as the Board or the Company's transfer agent may think fit and, in case of defacement, on delivery of the old certificate to the Company. 13. All certificates for shares (other than letters of allotment, scrip certificates and other like documents) shall, except to the extent that the terms and conditions for the time being relating thereto otherwise provide, be issued under the Seal. Each certificate shall be signed by the Chairman of the Board, President or a Vice-President and also by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall be sealed with the seal of the Company, which may be facsimile. If the certificate is signed by either a -10- 16 transfer agent or a transfer clerk acting on behalf of the Company and a registrar, the signature or any such officer of the Company and the signature of a transfer agent acting on behalf of the Company may be facsimile. In the case of any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers of the Company, whether because of death, resignation or otherwise, such certificate or certificates may nevertheless be adopted by the Company and be used and delivered as though the officer or officers who signed the said certificate or certificates or whose facsimile signature or signature shall have been used thereon had not ceased to be such officer or officers of the Company. The Board may by resolution determine, either generally or in any particular case, that any signatures on any such certificates need not be autographic but may be affixed to such certificates by some mechanical means or may be printed thereon or that such certificates need not be signed by any persons. LIEN 14. The Company shall have a first and paramount lien on every share (not being a fully paid share) for all moneys, whether presently payable or not, called or payable, at a date fixed by or in accordance with the terms of issue of such share -11- 17 in respect of such share, and the Company shall also have a first and paramount lien on every share (other than a fully paid share) standing registered in the name of a Shareholder, whether singly or jointly with any other person, for all the debts and liabilities of such Shareholder or his estate to the Company, whether the same shall have been incurred before or after notice to the Company of any interest of any person other than such Shareholder, and whether the time for the payment or discharge of the same shall have actually arrived or not, and notwithstanding that the same are joint debts or liabilities of such Shareholder or his estate and any other person, whether a Shareholder or not. The Company's lien on a share shall extend to all dividends payable thereon. The Board may at any time, either generally or in any particular case, waive any lien that has arisen or declare any share to be wholly or in part exempt from the provisions of this Bye-Law. 15. The Company may sell, in such manner as the Board may think fit, any share on which the Company has a lien but no sale shall be made unless some sum in respect of which the lien exists is presently payable nor until the expiration of fourteen days after a notice in writing, stating and demanding payment of the sum presently payable and giving notice of the intention to sell -12- 18 in default of such payment, has been served on the holder for the time being of the share. 16. The net proceeds of sale by the Company of any shares on which it has a lien shall be applied in or towards payment or discharge of the debt or liability in respect of which the lien exists so far as the same is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the share prior to the sale) be paid to the holder of the share immediately before such sale. For giving effect to any such sale the Board may authorize some person to transfer the share sold to the purchaser thereof. The purchaser shall be registered as the holder of the share and he shall not be bound to see to the application of the purchase money, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the sale. CALLS ON SHARES 17. The Board may from time to time make calls upon the Shareholders in respect of any moneys unpaid on their shares (whether on account of the par value of the shares or by way of premium) and not by the terms of issue thereof made payable at a date fixed by or in accordance with such terms of issue, and each Shareholder shall (subject to the Company serving upon him at -13- 19 least fourteen days' notice specifying the time or times and place of payment) pay to the Company at the time or times and place so specified the amount called on his shares. A call may be revoked or postponed as the Board may determine. 18. A call may be made payable by installments and shall be deemed to have been made at the time when the resolution of the Board authorizing the call was passed. 19. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. 20. If a sum called in respect of the share shall not be paid before or on the day appointed for payment thereof the person from whom the sum is due shall pay interest on the sum from the day appointed for the payment thereof to the time of actual payment at such rate as the Board may determine, but the Board shall be at liberty to waive payment of such interest wholly or in part. 21. Any sum which, by the terms of issue of a share, becomes payable on allotment or at any date fixed by or in accordance with such terms of issue, whether on account of the nominal amount of the share or by way of premium, shall for all the purposes of these Bye-Laws be deemed to be a call duly made, notified and payable on the date on which, by the terms of issue, the same becomes payable and, in case of non-payment, all the -14- 20 relevant provisions of these Bye-Laws as to payment of interest, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified. 22. The Board may on the issue of shares differentiate between the allottees or holders as to the amount of calls to be paid and the times of payment. FORFEITURE OF SHARES 23. If a Shareholder fails to pay any call or installment of a call on the day appointed for payment thereof, the Board may at any time thereafter during such time as any part of such call or installment remains unpaid serve a notice on him requiring payment of so much of the call or installment as is unpaid, together with any interest which may have accrued. 24. The notice shall name a further day (not being less than 14 days from the date of the notice) on or before which, and the place where, the payment required by the notice is to be made and shall state that, in the event of nonpayment on or before the day and at the place appointed, the shares in respect of which such call is made or installment is payable will be liable to be forfeited. The Board may accept the surrender of any share liable to be forfeited hereunder and, in such case, references in these Bye-Laws to forfeiture shall include surrender. -15- 21 25. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which such notice has been given may at any time thereafter, before payment of all calls or installments and interest due in respect thereof has been made, be forfeited by a resolution of the Board to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited shares and not actually paid before the forfeiture. 26. When any share has been forfeited, notice of the forfeiture shall be served upon the person who was before forfeiture the holder of the share; but no forfeiture shall be in any manner invalidated by any omission or neglect to give such notice as aforesaid. 27. A forfeited share shall be deemed to be the property of the Company and may be sold, re-offered or otherwise disposed of either to the person who was, before forfeiture, the holder thereof or entitled thereto or to any other person upon such terms and in such manner as the Board shall think fit, and at any time before a sale, re-allotment or disposition the forfeiture may be canceled on such terms as the Board may think fit. 28. A person whose shares have been forfeited shall thereupon cease to be a Shareholder in respect of the forfeited shares but shall, notwithstanding the forfeiture, remain liable -16- 22 to pay to the Company all moneys which at the date of forfeiture were presently payable by him to the Company in respect of the shares with interest thereon at such rate as the Board may determine from the date of forfeiture until payment, and the Company may enforce payment without being under any obligation to make any allowance for the value of the shares forfeited. 29. An affidavit in writing that the deponent is a Director or the Secretary and that a share has been duly forfeited on the date stated in the affidavit shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. The Company may receive the consideration (if any) given for the share on the sale, re-allotment or disposition thereof and the Board may authorize some person to transfer the share to the person to whom the same is sold, re-allotted or disposed of, and he shall thereupon be registered as the holder of the share and shall not be bound to see to the application of the purchase money (if any) nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the forfeiture, sale, re-allotment or disposal of the share. REGISTER OF SHAREHOLDERS 30. The Register of Shareholders of the Company containing the names and addresses of the Shareholders and the number of -17- 23 shares held by them respectively, shall be kept in the manner prescribed by the Companies Acts at the Registered Office by the Secretary or at the offices of the transfer agent of the Company or at such other location as may be authorized by the Board from time to time. Unless the Board otherwise determines, the Register of Shareholders shall be open to inspection at the Registered Office of the Company in the manner prescribed by the Companies Acts between 10:00 a.m. and 12:00 noon on every working day. Unless the Board so determines, no Shareholder or intending Shareholder shall be entitled to have entered in the Register any indication of any trust or any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share and if any such entry exists or is permitted by the Board it shall not be deemed to abrogate any provisions of Bye-Law 10. REGISTER OF DIRECTORS AND OFFICERS 31. The Secretary shall establish and maintain a register of the Directors and Officers of the Company as required by the Companies Acts. The register of Directors and Officers shall be open to inspection in the manner prescribed by the Companies Acts between 10:00 a.m. and 12:00 noon on every working day. TRANSFER OF SHARES -18- 24 32. Subject to the Companies Acts and to such of the restrictions contained in these Bye-Laws as may be applicable, any Shareholder may transfer all or any of his shares by an instrument of transfer in the usual common form or in any other form which the Board may approve or in accordance with the general rules and standard practices of any exchange on which such shares are then listed. 33. The instrument of transfer of a share shall be signed by or on behalf of the transferor and where any share is not fully paid the transferee, and the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the Register in respect thereof. All instruments of transfer when registered may be retained by the Company. The Board may, in its absolute discretion and without assigning any reason therefor, decline to register any transfer of any share which is not a fully-paid share. The Board may also decline to register any transfer unless: (a) the instrument of transfer is duly stamped, if required, and lodged with the Company, accompanied by the certificate for the shares to which it relates, and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer, -19- 25 (b) the instrument of transfer is in respect of only one class of share, (c) where applicable, the permission of the Bermuda Monetary Authority with respect thereto has been obtained. Subject to any directions of the Board from time to time in force, the Secretary may exercise the powers and discretions of the Board under this Bye-Law and Bye-Laws 32 and 34. 34. If the Board declines to register a transfer it shall, within three months after the date on which the instrument of transfer was lodged, send to the transferee notice of such refusal. 35. No fee shall be charged by the Company for registering any transfer, probate, letters of administration, certificate of death or marriage, power of attorney, distringas or stop notice, order of court or other instrument relating to or affecting the title to any share, or otherwise making an entry in the Register relating to any share. TRANSMISSION OF SHARES 36. In the case of the death of a Shareholder, the survivor or survivors, where the deceased was a joint holder, and the estate representative, where he was sole holder, shall be the only person recognized by the Company as having any title to his shares; but nothing herein contained shall release the estate of -20- 26 a deceased holder (whether the sole or joint) from any liability in respect of any share held by him solely or jointly with other persons. For the purpose of this Bye-Law, estate representative means the person to whom probate or letters of administration has or have been granted in Bermuda or, failing any such person, such other person as the Board may in its absolute discretion determine to be the person recognized by the Company for the purpose of this Bye-Law. 37. Any person becoming entitled to a share in consequence of the death of a Shareholder or otherwise by operation of applicable law may, subject as hereafter provided and upon such evidence being produced as may from time to time be required by the Board as to his entitlement, either be registered himself as the holder of the share or elect to have some person nominated by him registered as the transferee thereof. If the person so becoming entitled elects to be registered himself, he shall deliver or send to the Company a notice in writing signed by him stating that he so elects. If he shall elect to have his nominee registered, he shall signify his election by signing an instrument of transfer of such share in favor of his nominee. All the limitations, restrictions and provisions of these Bye-Laws relating to the right to transfer and the registration of transfer of shares shall be applicable to any such notice or -21- 27 instrument of transfer as aforesaid as if the death of the Shareholder or other event giving rise to the transmission had not occurred and the notice or instrument of transfer was an instrument of transfer signed by such Shareholder. 38. A person becoming entitled to a share in consequence of the death of a Shareholder or otherwise by operation of applicable law shall (upon such evidence being produced as may from time to time be required by the Board as to his entitlement) be entitled to receive and may give a discharge for any dividends or other moneys payable in respect of the share, but he shall not be entitled in respect of the share to receive notices of or to attend or vote at general meetings of the Company or, save as aforesaid, to exercise in respect of the share any of the rights or privileges of a Shareholder until he shall have become registered as the holder thereof. The Board may at any time give notice requiring such person to elect either to be registered himself or to transfer the share and if the notice is not complied with within sixty days the Board may thereafter withhold payment of all dividends and other moneys payable in respect of the shares until the requirements of the notice have been complied with. -22- 28 39. Subject to any directions of the Board from time to time in force, the Secretary may exercise the powers and discretions of the Board under Bye-Laws 36, 37 and 38. INCREASE OF CAPITAL 40. The Company may from time to time increase its capital by such sum to be divided into shares of such par value as the Company by Resolution shall prescribe. 41. The Company may, by the Resolution increasing the capital, direct that the new shares or any of them shall be offered in the first instance either at par or at a premium or (subject to the provisions of the Companies Acts) at a discount to all the holders for the time being of shares of any class or classes in proportion to the number of such shares held by them respectively or make any other provision as to the issue of the new shares. 42. The new shares shall be subject to all the provisions of these Bye-Laws with reference to lien, the payment of calls, forfeiture, transfer, transmission and otherwise. ALTERATION OF CAPITAL 43. The Company may from time to time by Resolution: (a) divide its shares into several classes and attach thereto respectively any preferential, deferred, qualified or special rights, privileges or conditions; -23- 29 (b) consolidate and divide all or any of its share capital into shares of larger par value than its existing shares; (c) sub-divide its shares or any of them into shares of smaller par value than is fixed by its memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived; (d) make provision for the issue and allotment of shares which do not carry any voting rights; (e) cancel shares which, at the date of the passing of the Resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so canceled; and (f) change the denomination of its share capital. Where any difficulty arises in regard to any division, consolidation, or sub-division under this Bye-Law, the Board may settle the same as it thinks expedient and, in particular, may arrange for the sale of the shares representing fractions and the distribution of the net proceeds of sale in due proportion amongst the Shareholders who would have been entitled to the fractions, and for this purpose the Board may authorize some person to transfer the shares representing fractions to the -24- 30 purchaser thereof, who shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. 44. Subject to the Companies Acts and to any confirmation or consent required by law or these Bye-Laws, the Company may by Resolution from time to time convert any preference shares into redeemable preference shares. REDUCTION OF CAPITAL 45. Subject to the Companies Acts, its memorandum and any confirmation or consent required by law or these Bye-Laws, the Company may from time to time by Resolution authorize the reduction of its issued share capital or any capital redemption reserve fund or any share premium or contributed surplus account in any manner. 46. In relation to any such reduction, the Company may by Resolution determine the terms upon which such reduction is to be effected including in the case of a reduction of part only of a class of shares, those shares to be affected. GENERAL MEETINGS 47. (a) The Board shall convene and the Company shall hold general meetings as Annual General Meetings in accordance with the requirements of the Companies Acts at such times and places -25- 31 as the Board shall appoint. The Board may, whenever it thinks fit, and shall, at the written request of shareholders holding not less than 10% of the paid-up capital of the Company carrying the right to vote at such proposed meeting, convene general meetings other than Annual General Meetings which shall be called Special General Meetings. With respect to Special General Meetings, any written request by a Shareholder under the Act shall not be valid unless it states the purpose of the proposed meeting and is delivered to the Chairman of the Board at the registered office of the Company no less than six weeks nor more than ten weeks prior to the date proposed for such meeting or the latest date at which such meeting must be held at the request of such shareholders pursuant to the provisions of the Companies Act and shall otherwise comply with the provisions of U.S. securities laws. Any Shareholder's notice relating to the conduct of business other than the election of Directors must contain certain information about such business and about the proposing Shareholders including, without limitation, a brief description of the business such Shareholder proposed to bring before the meeting, the reasons for conducting such business at such meeting, the name and address of such shareholder, the class and number of shares of the Company beneficially owned by the such Shareholder, and any material interest of such Shareholder in the -26- 32 business so proposed. If the Chairman of the Board or other officer presiding at such meeting determines that any business brought before a meeting was not brought in accordance with the provisions set forth above, such business will not be conducted at the meeting. (b) Until such time as the appointment by the Company of a resident representative under section 130 (2) of the Companies Act becomes effective, the Company may act by resolution in writing signed by all the shareholders who at the date of such resolution would be entitled to attend a shareholder meeting. Thereafter, the taking of shareholder action by way of written resolution shall be expressly prohibited. NOTICE OF GENERAL MEETINGS 48. An Annual General Meeting shall be called by not less than 20 days' notice in writing and a Special General Meeting shall be called by not less than 30 days' notice in writing. The notice shall be exclusive of the day on which it is served or deemed to be served and of the day for which it is given, and shall specify the place, day and time of the meeting, and, in the case of a Special General Meeting, the general nature of the business to be considered. Notice of every general meeting shall be given in any manner permitted by Bye-Laws 124, 125 and 126 to -27- 33 all Shareholders other than those which, under the provisions of these Bye-Laws or the terms of issue of the shares they hold, are not entitled to receive such notice from the Company. Notwithstanding that a meeting of the Company is called by shorter notice than that specified in this Bye-Law, it shall be deemed to have been duly called if it is so agreed: (i) in the case of a meeting called as an Annual General Meeting, by all the shareholders entitled to attend and vote thereat; (ii) in the case of any other meeting, by a majority in number of the Shareholders having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving that right. 49. The accidental omission to give notice of a meeting or (in cases where instruments of proxy are sent out with the notice) the accidental omission to send such instrument of proxy to, or the non-receipt of notice of a meeting or such instrument of proxy by, any person entitled to receive such notice shall not invalidate the proceedings at that meeting. PROCEEDINGS AT GENERAL MEETINGS 50. (a) No business shall be transacted at any Annual General Meeting of the Shareholders unless such business has been brought before the meeting by, or at the direction of the -28- 34 Chairman of the Board or by Shareholders who have given written notice of their intent to bring such business before the meeting not less than 6 weeks nor more than 10 weeks prior to the first anniversary of the previous year's Annual General Meeting. No business shall be transacted at any special general meeting of the Shareholders unless such business has been stated in the notice of such meeting sent to the Shareholders prior to the meeting. (b) No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the appointment, choice or election of a chairman which shall not be treated as part of the business of the meeting. Save as otherwise provided by these Bye-Laws, Shareholders together representing in person or by proxy and entitled to vote more than 50% of the voting capital of the Company shall be a quorum for all purposes; provided, however, that if the Company shall have only one Shareholder, one Shareholder present in person or by proxy shall constitute the necessary quorum. 51. If within five minutes (or such longer time as the chairman of the meeting may determine to wait) after the time appointed for the meeting, a quorum is not present, the meeting, if convened on the requisition of Shareholders, shall be -29- 35 dissolved. In any other case, it shall stand adjourned to such other day and such other time and place as the chairman of the meeting may determine, without notice other than announcement at the meeting, until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. 52. Except as otherwise provided in these Bye-Laws and subject to the provisions of the Companies Act, any question proposed for the consideration by the Shareholders shall be decided on by a simple majority of the votes cast by Shareholders entitled to vote at such meeting. 53. (a) Notwithstanding the provisions of these Bye-laws, the affirmative vote of Shareholders holding at least 80% of the shares of the Company carrying voting rights then outstanding shall be necessary to approve any Business Combination proposed by an Interested Shareholder, as these terms are defined below, provided that such additional voting requirement shall not apply if: (i) the Business Combination was approved by not less than a majority of the Continuing Directors (as defined below) or (ii) a series of conditions are satisfied requiring (1) that the consideration to be paid to the Company's Shareholders in the Business Combination must be at least equal to the higher of (x) -30- 36 the highest per-share price paid by the Interested Shareholder in acquiring any Common Shares during the two years prior to the announcement date of the Business Combination or in the transaction in which it became an Interested Shareholder (the "Determination Date"), whichever is higher or (y) the fair market value per Common Shares on the announcement date or Determination Date, whichever is higher, in either case appropriately adjusted for any shares dividend, stock split, combination of shares or similar event (any non-cash consideration is treated similarly) and (2) certain "procedural" requirements are complied with, such as the solicitation of proxies pursuant to the rules of the Securities and Exchange Commission and no decrease in regular dividends (if any) after the Interested Shareholder became an Interested Shareholder (except as approved by a majority of the Continuing Directors). (b) An "Interested Shareholder" is defined as anyone who is the beneficial owner of more than 15% shares carrying voting rights, other than the Company and any employee stock plans sponsored by the Company, and includes any person who is an assignee of, or has succeeded to any voting shares in a transaction not involving a public offering that were at any time within the prior two-year period beneficially owned by, an Interested Shareholder. The term "beneficial owner" includes -31- 37 persons directly and indirectly owning or having the right to acquire or vote the shares. Interested Shareholders participate fully in all shareholder voting. (c) A "Business Combination" includes the following transactions: (i) merger or consolidation of the Company or subsidiary with an Interested Shareholder or with any other corporation or entity which is, or after such merger or consolidation would be, an affiliate of an Interested Shareholder; (ii) the sale or other disposition by the Company or subsidiary of assets having a fair market value of $5,000,000 or more if an Interested Shareholder (or an affiliate thereof) is a party to the transaction; (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company proposed by or on behalf of an Interested Shareholder (or an affiliate thereof); or (iv) any reclassification of securities, recapitalization, merger with a subsidiary, or other transaction which has the effect, directly or indirectly, of increasing the proportionate share of any class of the outstanding shares (or securities convertible into shares) of the Company or a subsidiary owned by an Interested Shareholder (or an affiliate thereof). Determinations of the fair market value of any non-cash consideration are made by a majority of the Continuing Directors. -32- 38 (d) As used in these Bye-Laws, the term "Continuing Directors", means any member of the Board of Directors of the Company, while such person is a member of the Board, who is not an affiliate or associate or representative of the Interested Shareholder and was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director while such successor is a member of the Board, who is not an affiliate or associate or representative of the Interested Shareholder and is recommended or elected to succeed the Continuing Director by a majority of Shareholder Continuing Directors. 54. A meeting of the Shareholders or any class thereof may be held by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously and participation in such a meeting shall constitute presence in person at such meeting. 55. Each Director shall be entitled to attend and speak at any general meeting of the Company. 56. The Chairman (if any) of the Board or, in his absence, the President shall preside as chairman at every general meeting. If there is no such Chairman or President, or if at any meeting neither the Chairman nor the President is present within five -33- 39 minutes after the time appointed for holding the meeting, or if neither of them is willing to act as chairman, the Directors present shall choose one of their number to act or if one Director only is present he shall preside as chairman if willing to act. If no Director is present or if each of the Directors present declines to take the chair, the persons present and entitled to vote on a poll shall elect one of their number to be chairman. 57. The chairman of the meeting may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting from which the adjournment took place. When a meeting is adjourned for three months or more, notice of the adjourned meeting shall be given as in the case of an original meeting. 58. Save as expressly provided by these Bye-Laws, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting. VOTING 59. Save where a greater majority is required by the Companies Acts or these Bye-Laws, any question proposed for -34- 40 consideration at any general meeting shall be decided as set forth in Bye-Law 52 above. 60. At any general meeting, a Resolution put to the vote of the meeting shall be decided on a poll in accordance with the provisions of the Companies Act. 61. Each Shareholder present in person or by proxy shall have one vote for each share held. The result of the poll shall be deemed to be the Resolution of the meeting at which the poll demanded. 62. Votes may be cast either personally or by proxy. 63. A person entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way. 64. In the case of an equality of votes at a general meeting, the chairman of such meeting shall not be entitled to a second or casting vote. 65. In the case of joint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register in respect of the joint holdings. 66. A Shareholder who is a patient for any purpose of any statute or applicable law relating to mental health or in respect -35- 41 of whom an order has been made by any Court having jurisdiction for the protection or management of the affairs of persons incapable of managing their own affairs may vote, whether on a show of hands or on a poll, by his receiver, committee, curator bonis or other person in the nature of a receiver, committee or curator bonis appointed by such Court and such receiver, committee, curator bonis or other person may vote on a poll by proxy, and may otherwise act and be treated as such Shareholder for the purpose of general meetings. 67. No Shareholder shall, unless the Board otherwise determines, be entitled to vote at any general meeting unless all calls or other sums presently payable by him in respect of shares in the Company have been paid. 68. If (i) any objection shall be raised to the qualification of any voter or (ii) any votes have been counted which ought not to have been counted or which might have been rejected or (iii) any votes are not counted which ought to have been counted, the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any Resolution unless the same is raised or pointed out at the meeting or, as the case may be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the chairman of the -36- 42 meeting and shall only vitiate the decision of the meeting on any Resolution if the chairman decides that the same may have affected the decision of the meeting. The decision of the chairman on such matters shall be final and conclusive. PROXIES AND CORPORATE REPRESENTATIVES 69. The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney authorized by him in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorized to sign the same. 70. Any Shareholder may appoint a standing proxy or (if a corporation) representative by depositing at the Registered Office a proxy or (if a corporation) an authorization and such proxy or authorization shall be valid for all general meetings and adjournments thereof as the case may be, until notice of revocation is received at the Registered Office. Where a standing proxy or authorization exists, its operation shall be deemed to have been suspended at any general meeting or adjournment thereof at which the Shareholder is present or in respect to which the Shareholder has specially appointed a proxy or representative. The Board may from time to time require such evidence as it shall be necessary as to the due execution and continuing validity of any such standing proxy or authorization -37- 43 and the operation of any such standing proxy or authorization shall be deemed to be suspended until such time as the Board determines that it has received the requested evidence or other evidence satisfactory to it. 71. Subject to Bye-Law 70, the instrument appointing a proxy together with such other evidence as to its due execution as the Board may from time to time require, shall be delivered at the Registered Office (or at such place as may be specified in the notice convening the meeting or in any notice of any adjournment or, in either case, in any document sent therewith) prior to the holding of the relevant meeting or adjourned meeting at which the person named in the instrument proposes to vote or, in the case of a poll taken subsequently to the date of a meeting or adjourned meeting, before the time appointed for the taking of the poll and in default the instrument of proxy shall not be treated as valid. 72. Instruments of proxy shall be in any common form or in such other form as the Board may approve and the Board may, if it thinks fit, send out with the notice of any meeting forms of instruments of proxy for use at that meeting. The instrument of proxy shall be deemed to confer authority to demand or join in demanding a poll and to vote on any amendment of a Resolution put to the meeting for which it is given as the proxy think fit. The -38- 44 instrument of proxy shall unless the contrary is stated therein be valid as well for any adjournment of the meeting as for the meeting to which it relates. 73. A vote given in accordance with the term of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the instrument of proxy or of the authority under which it was executed, provided that no instrument in writing of such death, insanity or revocation shall have been received by the Company at the Registered Office (or such other place as may be specified for the delivery of instruments of proxy in the notice convening the meeting or other documents sent therewith) one hour at least before the commencement of the meeting or adjourned meeting, or the taking of the poll. 74. Subject to the Companies Acts, the Board may at its discretion waive any of the provisions of these Bye-Laws related to proxies or authorizations and, in particular, may accept such verbal or other assurances as it thinks fit as to the right of any person to attend and vote on behalf of any Shareholder at general meetings. APPOINTMENT AND REMOVAL OF DIRECTORS 75. The number of Directors shall be such number not less than two nor more than 15 as the Company by Resolution may from -39- 45 time to time determine and shall serve unless removed until their successors are appointed in accordance with the provisions of these Bye-Laws. 76. Nominations of persons for election to the Board at an Annual General Meeting may be made by the Board and any number of Shareholders holding at least 5% of the total voting rights of all Shareholders or no less than 100 Shareholders who have given written notice to the Secretary of the Company not less than 6 weeks nor more than 10 weeks prior to the anniversary of the previous year's Annual General Meeting, provided that no person other than a Director whose term shall have expired at an Annual General Meeting shall be eligible for election by the Shareholders unless the person has been recommended by the Directors in the notice of Annual General Meeting sent to the Shareholders. 77. Any Shareholder's notice to the Company proposing to nominate a person for election as a Director must contain the identity and address of the nominating shareholder, the class and number of shares of the Company which are owned by such Shareholder and all information regarding the proposed nominee that would be required to be included in a proxy statement soliciting proxies for the proposed nominee and such other information as shall be necessary to enable the Board to evaluate -40- 46 the proposed nomination. If the Chairman of the Board or other officer presiding at a meeting determines that a person was not nominated in accordance with the provisions set forth above, such person will not be eligible for election as a Director. 78. The Directors shall be divided into three classes, as nearly equal to in number as possible. One class of Directors shall be elected for term expiring at the Annual General Meeting of the Shareholders to be held in 1997, another class shall be elected for a term expiring at the Annual General Meeting of the shareholders to be held in 1998, and another class shall be elected for a term expiring at the Annual General Meeting of the Shareholders to be held in 1999. Members of each class shall hold office unless earlier removed until their successors are elected or appointed. At each succeeding Annual General Meeting the successors of the class of Directors whose term expires at the meeting shall be elected by a majority vote of all votes cast at such meeting to hold office for a term expiring at the Annual General Meeting of the Shareholders held in the third year following the year of their election. 79. The Company shall at the Annual General Meeting and may by Resolution determine the number of Directors and may by Resolution determine that one or more vacancies in the Board shall be deemed casual vacancies for the purposes of these Bye- -41- 47 Laws. Without prejudice to the power of the Company by Resolution in pursuance of any of the provisions of these Bye-Laws to appoint any person to be a Director, any vacancy on the Board may be filled by the Directors, so long as a quorum of Directors remains in office. 80. Directors may be removed by the vote of the Shareholders at a Special General Meeting specifically called for that purpose and only for cause. A Director may not be removed at a Special General Meeting unless notice of any such meeting shall have been served upon the Director concerned not less than 14 days before the meeting and such Director has been given an opportunity to be heard at that meeting. Any Resolution contemplating the removal of any Director must be adopted by Shareholders holding not less than eighty percent (80%) of the shares of the Company at the time in issue and outstanding and entitled to vote generally in the election of Directors. Any vacancy created by the removal of a Director at a Special General Meeting may be filled at such meeting by the election of another Director in his or her place, or in the absence of such election, by the Board. RESIGNATION AND DISQUALIFICATION OF DIRECTORS 81. The office of a Director shall be vacated upon the happening of any of the following events: -42- 48 (a) if he resigns his office by notice in writing delivered to the Registered Office or tendered at a meeting of the Board; (b) if he becomes of unsound mind or a patient for any purpose of any statute or applicable law relating to mental health and the Board resolves that his office is vacated; (c) if he becomes bankrupt or compounds with his creditors; (d) if he is prohibited by law from being a Director; (e) if he ceases to be a Director by virtue of the Companies Acts or is removed from office pursuant to these Bye-Laws. ALTERNATE DIRECTORS 82. The Company may by Resolution elect any person or persons to act as Directors in the alternative to any of the Directors or may authorize the Board to appoint such Alternate Directors and a Director may appoint and remove his own Alternate Director. Any appointment or removal of an Alternate Director by a Director shall be effected by depositing a notice of appointment or removal with the Secretary at the Registered Office, signed by such Director, and such appointment or removal shall become effective on the date of receipt by the Secretary. Any Alternate Director may be removed by Resolution of the -43- 49 Company and, if appointed by the Board, may be removed by the Board. Subject as aforesaid, the office of Alternate Director shall continue until the next annual election of Directors or, if earlier, the date on which the relevant Director ceases to be a Director. An Alternate Director may also be a Director in his own right and may act as alternate to more than one Director. 83. An Alternate Director shall be entitled to receive notices of all meetings of Directors, to attend, be counted in the quorum and vote at any such meeting at which any Director to whom he is alternate is not personally present, and generally to perform all the functions of any Director to whom he is alternate in his absence. 84. Every person acting as an Alternate Director shall (except as regards powers to appoint an alternate and remuneration) be subject in all respects to the provisions of these Bye-Laws relating to Directors and shall alone be responsible to the Company for his acts and defaults and shall not be deemed to be the agent of or for any Director for whom he is alternate. An Alternate Director may be paid expenses and shall be entitled to be indemnified by the Company to the same extent mutatis mutandis as if he were a Director. Every person acting as an Alternate Director shall have one vote for each Director for whom he acts as alternate (in addition to his own -44- 50 vote if he is also a Director). The signature of an Alternate Director to any resolution in writing of the Board or a committee of the Board shall, unless the terms of his appointment provides to the contrary, be as effective as the signature of the Director or Directors to whom he is alternate. DIRECTORS' FEES AND ADDITIONAL REMUNERATION AND EXPENSES 85. The amount, if any, of Directors' fees shall from time to time be determined by the Board and in the absence of a determination to the contrary, such fees shall be deemed to accrue from day to day. Each Director may be paid his reasonable traveling, hotel and incidental expenses in attending and returning from meetings of the Board or committees constituted pursuant to these Bye-Laws or general meetings and shall be paid all expenses properly and reasonably incurred by him in the conduct of the Company's business or in the discharge of his duties as a Director. Any Director who, by request, goes or resides abroad for any purposes of the Company or who performs services which in the opinion of the Board go beyond the ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine, and such extra remuneration shall be in addition to any remuneration provided for by or pursuant to any other Bye-Law. -45- 51 DIRECTORS' INTERESTS 86. (a) A Director may hold any other office or place of profit with the Company (except that of auditor) in conjunction with his office of Director for such period and upon such terms as the Board may determine, and may be paid such extra remuneration therefor (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine, and such extra remuneration shall be in addition to any remuneration provided for by or pursuant to any other Bye-Law. (b) A Director may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director. (c) Subject to the provisions of the Companies Acts, a Director may notwithstanding his office be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise interested; and be a Director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in, any body corporate promoted by the Company or in which the Company is interested. The Board may also cause the voting power conferred by the shares in any other Company held or owned by the Company -46- 52 to be exercised in such manner in all respects as it thinks fit, including the exercise thereof in favor of any resolution appointing the Directors or any of them to be Directors or officers of such other company, or voting or providing for the payment of remuneration to the Directors or officers of such other company. (d) So long as, where it is necessary, he declares the nature of his interest at the first opportunity at a meeting of the Board or by writing to the Directors as required by the Companies Acts, a Director shall not by reason of his office be accountable to the Company for any benefit which he derives from any office or employment to which these Bye-Laws allow him to be appointed or from any transaction or arrangement in which these Bye-Laws allow him to be interested, and no such transaction or arrangement shall be liable to be avoided on the ground of any interest or benefit. (e) Subject to the Companies Acts and any further disclosure required thereby, a general notice to the Directors by a Director or officer declaring that he is a Director or officer or has an interest in a person and is to be regarded as interested in any transaction or arrangement made with that person, shall be a sufficient declaration of interest in relation to any transaction or arrangement so made. -47- 53 POWERS AND DUTIES OF THE BOARD 87. Subject to the provisions of the Companies Acts and these Bye-Laws, the Board shall manage the business of the Company and may pay all expenses incurred in promoting and incorporating the Company and may exercise all the powers of the Company. No alteration of these Bye-Laws shall invalidate any prior act of the Board which would have been valid if that alteration had not been made. The powers given by this Bye-Laws shall not be limited by any special power given to the Board by these Bye-Laws and a meeting of the Board at which a quorum is present shall be competent to exercise all the powers, authorities and discretions for the time being vested in or exercisable by the Board. 88. The Board may exercise all the powers of the Company to borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any other persons. 89. All checks, promissory notes, drafts, bills of exchange and other instruments, whether negotiable or transferable or not, and all receipts for money paid to the Company shall be signed, -48- 54 drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time by resolution determine. 90. The Board on behalf of the Company may provide benefits, whether by the payment of gratuities or pensions or otherwise, for any person including any Director or former Director who has held any executive office or employment with the Company or with any body corporate which is or has been a subsidiary or affiliate of the Company or a predecessor in the business of the Company or of any such subsidiary or affiliate, and to any member of his family or any person who is or was dependent on him, and may contribute to any fund and pay premiums for the purchase or provision of any such gratuity, pension or other benefit, or for the insurance of any such person. 91. The Board may from time to time appoint one or more of its body to hold an executive office with the Company for such period and upon such terms as the Board may determine and may revoke or terminate any such appointments. Any such revocation or termination as aforesaid shall be without prejudice to any claim for damages that such Director may have against the Company or the Company may have against such Director for any breach of any contract of service between him and the Company which may be involved in such revocation or termination. Any person so -49- 55 appointed shall receive such remuneration (if any) (whether by way of salary, commission, participation in profits or otherwise) as the Board or any committee thereof may determine, and either in addition to or in lieu of his remuneration as a Director. DELEGATION OF THE BOARD'S POWERS 92. The Board may by power of attorney appoint any company, firm or person or any fluctuating body of persons, whether nominated directly or indirectly by the Board, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board under these Bye-Laws) and for such period and subject to such conditions as it may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney and of such attorney as the Board may think fit, and may also authorize any such attorney to sub-delegate all or any of the powers, authorities and discretions vested in him. 93. The Board may entrust to and confer upon any Director or officer any of the powers exercisable by it upon such terms and conditions with such restrictions as it thinks fit, and either collaterally with, or to the exclusion of, its own powers, and may from time to time revoke or vary all or any of such -50- 56 powers but no person dealing in good faith and without notice of such revocation or variation shall be affected thereby. 94. The Board may delegate any of its powers, authorities and discretions to committees, consisting of such person or persons (whether a member or members of its body or not) as it thinks fit. Any committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations which may be imposed upon it by the Board. PROCEEDINGS OF THE BOARD 95. The Board may meet for the dispatch of business, adjourn and otherwise regulate its meetings as it thinks fit. Questions arising at any meeting shall be determined by a majority of the votes cast. In the case of an equality of votes the motions shall be deemed to have been lost. A Director may, and the Secretary on the requisition of a Director shall, at any time summon a meeting of the board. 96. Notice of a meeting of the board shall be deemed to be duly given to a Director if it is given to him personally or by word of mouth or sent to him by post, cable, telex, telecopier or other mode of representing or reproducing words in a legible and non-transitory form at his last known address or any other address given by him to the Company for this purpose. A Director may waive notice of any meeting either prospectively or -51- 57 retroactively or at such meeting to which the notice would have applied. 97. (a) The quorum necessary for the transaction of business at any meeting of the Board shall be two individuals until such time as the appointment by the Company of a resident representative under section 130(2) of the Companies Acts becomes effective. Thereafter, the quorum shall be a majority of the Board. Any Director who ceases to be a Director at a meeting of the Board may continue to be present and to act as a Director and be counted in the quorum until the termination of the meeting if no other Director objects and if otherwise a quorum of Directors would not be present. (b) A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or proposed contact, transaction or arrangement with the Company and has complied with the provisions of the Companies Acts and these Bye-Laws with regard to disclosure of his interest shall be entitled to vote in respect of any contract, transaction or arrangement in which he is so interested and if he shall do so his vote shall be counted, and he shall be taken into account in ascertaining whether a quorum is present. 98. So long as a quorum of Directors remains in office, the continuing Directors may act notwithstanding any vacancy in the -52- 58 Board but, if no such quorum remains, the continuing Directors or a sole continuing Director may act only for the purpose of calling a general meeting. 99. The Chairman (if any) of the Board or, in his absence, the President shall preside as chairman at every meeting of the Board. If there is no such Chairman or President, or if at any meeting the Chairman or the President is not present within five minutes after the time appointed for holding the meeting, or is not willing to act as chairman, the Directors present may choose one of their number to be chairman of the meeting. 100. The meetings and proceedings of any committee consisting of two or more members shall be governed by the provisions contained in these Bye-Laws for regulating the meetings and proceedings of the Board so far as the same are applicable and are not superseded by any regulations imposed by the Board. 101. A resolution in writing signed by all the Directors for the time being entitled to receive notice of a meeting of the Board or by all the members of a committee for the time being shall be as valid and effectual as a resolution passed at a meeting of the Board or, as the case may be, of such committee duly called and constituted. Such resolution may be contained in one document or in several documents in the like form each signed -53- 59 by one or more of the Directors or members of the committee concerned. 102. A meeting of the Board or a committee appointed by the Board may be held by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously and participation in such a meeting shall constitute presence in person at such meeting. 103. All acts done by the Board or by any committee or by any person acting as a Director or member of a committee or any person duly authorized by the Board or any committee, shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of any member of the Board or such committee or person acting as aforesaid or that they or any of them were disqualified or had vacated their office, be as valid as if every such person had been duly appointed and was qualified and had continued to be a Director, member of such committee or person so authorized. OFFICERS 104. (a) The officers of the Company shall include a President and a Vice-President or a Chairman of the Board of Directors and a Deputy Chairman who shall be Directors and, subject to Bye-Law 104(c) below, who may be elected by the Board -54- 60 as soon as possible after each Annual General Meeting. In addition, the Board may appoint any person whether or not he is a Director to hold such office as the Board may from time to time determine. Any person elected or appointed pursuant to this Bye-Law shall hold office for such period and upon such terms as the Board may determine and the Board may revoke or terminate any such election or appointment with or without cause, at any time by the affirmative vote of a majority of the Directors then in office. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board. Any such revocation or termination shall be without prejudice to any claim for damages that such officer may have against the Company or the Company may have against such officer for any breach of any contract of service between him and the Company which may be involved in such revocation or termination. Save as provided in the Companies Acts or these Bye-Laws, the powers and duties of the officers of the Company shall be such (if any) as are determined from time to time by the Board. (b) Any officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein and, if no time be specified at the time of its receipt by the president, vice-president or secretary, the -55- 61 acceptance of which resignation shall not be necessary to make it effective. (c) Until such time as the appointment by the Company of a resident representative under section 130 (2) of the Companies Act becomes effective, the Shareholder of the Company may appoint the officers of the Company upon such terms and conditions as the Shareholder may determine. (d) The salaries of the Chairman of the Board, the Chairman of the Executive Committee, if any, the President, any Vice-President, the Secretary and the Treasurer shall be fixed by the Board. The salaries of all other officers and agents of the Company shall be fixed by the Board or by such officer or officers as the Board may designate. MINUTES 105. The Directors shall cause minutes to be made and books kept for the purpose of recording: (a) all appointments of officers made by the Directors; (b) the names of the Directors and other persons (if any) present at each meeting of Directors and of any committee; (c) of all proceedings at meetings of the Company, of the holders of any class of shares in the Company, and of committees; -56- 62 (d) of all proceedings of managers (if any). SECRETARY 106. The Secretary shall be appointed by the Board at such remuneration (if any) and upon such terms as it may think fit and any Secretary so appointed may be removed by the Board. The duties of the Secretary shall be those prescribed by the Companies Acts together with such other duties as shall from time to time be prescribed by the Board. 107. A provision of the Companies Acts or these Bye-Laws requiring or authorizing a thing to be done by or to a Director and the Secretary shall not be satisfied by its being done by or to the same person acting both as Director and as, or in the place of, the Secretary. THE SEAL 108. (a) The Seal shall consist of a circular metal device with the name of the Company around the outer margin thereof and the country and year of incorporation across the center thereof. Should the Seal not have been received at the Registered Office in such form at the date of adoption of this Bye-Law then, pending such receipt any document requiring to be scaled with the Seal shall be sealed by affixing a red wafer seal to the document with the name of the Company, and the country and year of incorporation type written across the center thereof. -57- 63 (b) The Board shall provide for the custody of every Seal. A Seal shall only be used by authority of the Board or of a committee constituted by the Board. Subject to Companies Acts, any instrument to which a Seal is affixed may be signed by a Director or an Officer of the Company, or by any person who has been authorized by the Board either generally or specifically to attest to the use of a Seal. DIVIDENDS AND OTHER PAYMENTS 109. The Board may from time to time declare cash dividends or distributions out of contributed surplus to be paid to the Shareholders according to their rights and interests including such interim dividends as appear to the Board to be justified by the position of the Company. The Board may also pay any fixed cash dividend which is payable on any shares of the Company half yearly or on such other dates, whenever the position of the Company, in the opinion of the Board, justifies such payment. 110. Except insofar as the rights attaching to, or the terms of issue of, any share otherwise provide: (a) all dividends or distributions out of contributed surplus may be declared and paid according to the amounts paid-up on the shares in respect of which the dividend or distribution is paid, and an amount paid-up on a share in advance of calls may be treated for the purpose of this Bye-Law as paid-up on the share; -58- 64 (b) dividends or distributions out of contributed surplus may be apportioned and paid pro rata according to the amounts paid-up on the shares during any portion or portions of the period in respect of which the dividend or distribution is paid. 111. The Board may deduct from any dividend, distribution or other moneys payable to a Shareholder by the Company on or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise in respect of shares of the Company. 112. No dividend, distribution or other moneys payable by the Company on or in respect of any Common Share shall bear interest against the Company. 113. Any dividend, distribution, interest or other sum payable in cash to the holder of shares may be paid by check, warrant or other means approved by the Board, in the case of a check or warrant sent through the post addressed to the holder at his address in the Register or, in the case of joint holders, addressed to the holder whose name stands first in the Register in respect of the shares at his registered address as appearing in the Register or addressed to such person at such address as the holder or joint holders may in writing direct. Every such check or warrant shall, unless the holder or joint holders -59- 65 otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first in the Register in respect of such shares, and shall be sent at his or their risk and payment of the check or warrant by the bank on which it is drawn shall constitute a good discharge to the Company. Any one of two or more joint holders may give effectual receipts for any dividends, distributions or other moneys payable or property distributable in respect of the shares held by such joint holders. 114. Any dividend or distribution out of contributed surplus unclaimed for a period of six years from the date of declaration of such dividend or distribution shall be forfeited and shall revert to the Company and the payment by the Board of any unclaimed dividend, distribution, interest or other sum payable on or in respect of the share into a separate account shall not constitute the Company a trustee in respect thereof. 115. The Board may direct payment or satisfaction of any dividend or distribution out of contributed surplus wholly or in part by the distribution of specific assets, and in particular of paid-up shares or debentures of any other company, and where any difficulty arises in regard to such distribution or dividend the Board may settle it as it thinks expedient, and in particular, may authorize any person to sell and transfer any fractions or -60- 66 may ignore fractions altogether, and may fix the value for distribution or dividend purposes of any such specific assets and may determine that cash payments shall be made to any Shareholders upon the footing of the values so fixed in order to secure equality of distribution and may vest any such specific assets in trustees as may seem expedient to the Board. RESERVES 116. The Board may, before recommending or declaring any dividend or distribution out of contributed surplus, set aside such sums as it thinks proper as reserves which shall, at the discretion of the Board, be applicable for any purpose of the Company and pending such application may, also at such discretion, either be employed in the business of the Company or be invested in such investments as the Board may from time to time think fit. The Board may also without placing the same to reserve carry forward any sums which it may think it prudent not to distribute. CAPITALIZATION OF PROFITS 117. The Company may, upon the recommendation of the Board, at any time and from time to time pass a Resolution to the effect that it is desirable to capitalize all or any part of any amount for the time being standing to the credit of any reserve or fund which is available for distribution or to the credit of any share -61- 67 premium account or any capital redemption reserve fund and accordingly that such amount be set free for distribution amongst the Shareholders or any class of Shareholders who would be entitled thereto if distributed by way of dividend and in the same proportions, on the footing that the same be not paid in cash but be applied either in or towards paying up amounts for the time being unpaid on any shares in the Company held by such Shareholders respectively or in payment up in full of unissued shares, debentures or other obligations of the Company, to be allotted, distributed and credited as fully paid amongst such Shareholders, or partly in one way and partly in the other, and the Board shall give effect to such Resolution, provided that for the purpose of this Bye-Law, a share premium account and a capital redemption reserve fund may be applied only in paying up of unissued shares to be issued to such Shareholders credited as fully paid and provided further that any sum standing to the credit of a share premium account may only be applied in crediting as fully paid shares of the same class as that from which the relevant share premium was derived. 118. Where any difficulty arises in regard to any distribution under the last preceding Bye-Law, the Board may settle the same as it thinks expedient and, in particular, may authorize any person to sell and transfer any fractions or may -62- 68 resolve that the distribution should be as nearly as may be practicable in the correct proportion but not exactly so or may ignore fractions altogether, and may determine that cash payments should be made to any Shareholders in order to adjust the rights of all parties, as may seem expedient to the Board. The Board may appoint any person to sign on behalf of the persons entitled to participate in the distribution any contract necessary or desirable for giving effect thereto and such appointment shall be effective and binding upon the Shareholders. RECORD DATES 119. Notwithstanding any other provisions of these Bye-Laws, the Company may by Resolution or the Board may fix any date as the record date for any dividend, distribution, allotment or issue and for the purpose of identifying the persons entitled to receive notices of general meetings. Any such record date may be on or at any time before or after any date on which such dividend, distribution, allotment or issue is declared, paid or made or such notice is dispatched. ACCOUNTING RECORDS 120. The Board shall cause to be kept accounting records sufficient to give a true and fair view of the state of the Company's affairs and to show and explain its transactions, in -63- 69 accordance with the Companies Acts and the provisions of United States securities laws. 121. The records of account shall be kept at the Registered Office or at such other place or places as the Board thinks fit, and shall at all times be open to inspection by the Directors: PROVIDED that if the records of account are kept at some place outside Bermuda, there shall be kept at an office of the Company in Bermuda such records as will enable the Directors to ascertain with reasonable accuracy the financial position of the Company at the end of each three-month period. No Shareholder (other than an officer of the Company) shall have any right to inspect any accounting record or book or document of the Company except as conferred by law or authorized by the Board or by Resolution. 122. A copy of every balance sheet and statement of income and expenditure, including every document required by law to be annexed thereto, which is to be laid before the Company in general meeting, together with a copy of the auditors' report, shall be sent to each person entitled thereto in accordance with the requirements of the Companies Acts. AUDIT 123. Save and to the extent that an audit is waived in the manner permitted by the Companies Acts, auditors shall be appointed and their duties regulated in accordance with the -64- 70 Companies Acts, any other applicable law and such requirements not inconsistent with the Companies Acts as the Board may from time to time determine. SERVICE OF NOTICES AND OTHER DOCUMENTS 124. Any notice or other document (including a share certificate) may be served on or delivered to any Shareholder by the Company either personally or by sending it through the post (by air mail where applicable) in a pre-paid letter addressed to such Shareholder at his address as appearing in the Register or by delivering it to or leaving it at such registered address. In the case of joint holders of a share, service or delivery of any notice or other document on or to one of the joint holders shall for all purposes be deemed as sufficient service on or delivery to all the joint holders. Any notice or other document if sent by post shall be deemed to have been served or delivered seven days after it was put in the post, and in proving such service or delivery, it shall be sufficient to prove that the notice or document was properly addressed, stamped and put in the post. 125. Any notice of a general meeting of the Company shall be deemed to be duly given to a Shareholder if it is sent to him by cable, telex, telecopier or other mode of representing or reproducing words in a legible and non-transitory form at his address as appearing in the Register or any other address given -65- 71 by him to the Company for this purpose. Any such notice shall be deemed to have been served twenty-four hours after its dispatch. 126. Any notice or other document delivered, sent or given to a Shareholder in any manner permitted by these Bye-Laws shall, notwithstanding that such Shareholder is then dead or bankrupt or that any other event has occurred, and whether or not the Company has notice of the death or bankruptcy or other event, be deemed to have been duly served or delivered in respect of any share registered in the name of such Shareholder as sole or joint holder unless his name shall, at the time of the service or delivery of the notice or document, have been removed from the Register as the holder of the share, and such service or delivery shall for all purposes be deemed as sufficient service or delivery of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share. WINDING UP 127. If the Company shall be wound up, the liquidator may, with the sanction of a Resolution of the Company and any other sanction required by the Companies Acts, divide amongst the Shareholders in specie or kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purposes set such values -66- 72 as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the Shareholders or different classes of Shareholders. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trust for the benefit of the contributories as the liquidator, with the like sanction, shall think fit, but so that no Shareholder shall be compelled to accept any shares or other assets upon which there is any liability. INDEMNITY 128. (a) Subject to the proviso below, every Director, officer of the Company and member of a committee constituted under Bye-Law 94 shall be indemnified out of the funds of the Company against all civil liabilities, loss, damage or expense (including but not limited to liabilities under contract, tort and statute or any applicable foreign law or regulation and all reasonable legal and other costs and expenses properly payable) incurred or suffered by him as such Director, officer or committee member and the indemnity contained in this Bye-Law shall extend to any person acting as a Director, officer or committee member in the reasonable belief that he has been so appointed or elected notwithstanding any defect in such appointment or election PROVIDED ALWAYS that the indemnity -67- 73 contained in this Bye-Law shall not extend to any matter which would render it void pursuant to the Companies Acts. (b) The rights to indemnification, reimbursement or advancement of expenses provided by, or granted pursuant to, this Bye-Law shall not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled. 129. Every Director, officer and member of a committee duly constituted under Bye-Law 94 of the Company shall be indemnified out of the funds of the Company against all liabilities incurred by him as such Director, officer or committee member in defending any proceedings, whether civil, criminal or administrative, in which judgment is given in his favor, or in which he is acquitted, or in connection with any application under the Companies Acts in which relief from liability is granted to him by the court. 130. To the extent that any Director, officer or member of a committee duly constituted under Bye-Law 94 is entitled to claim an indemnity pursuant to these Bye-Laws in respect of amounts paid or discharged by him, the relative indemnity shall take effect as an obligation of the Company to reimburse the person making such payment or effecting such discharge. ALTERATION OF BYE-LAWS -68- 74 131. The Directors may from time to time revoke, alter, amend or add to these Bye-Laws provided that no such revocation, alteration, amendment or addition with respect to Bye-Laws 47(b), 53 and 75 to 81 (inclusive) and shall be operative unless and until it is confirmed at subsequent general meeting of the Company where the amendments have been approved by Shareholders holding not less than 80% of the shares of the Company issued and outstanding and entitled to vote generally; and all other Bye-Law amendments shall be approved by Shareholders holding not less than a majority of the shares issued and outstanding and entitled to vote. -69- 75 SCHEDULE I SERIES A PREFERRED SHARES 1. Number and Designation. The Company shall have a class of Series A Preferred Shares with such number of shares authorized as shall be set from time to time by Resolution adopted at a general meeting of the Shareholders and as set forth in the Bye-Laws of the Company. 2. Dividends and Distributions. (a) Subject to sections (2)(b) and (4) below, the Company shall pay, and the holders of the Series A Preferred Shares shall be entitled to receive, and to share equally and ratably, share for share with the Common Shares, in such dividends and distributions on the Common Shares or the Series A Preferred Shares as may be declared from time to time by the Board of Directors, whether payable in cash, property or securities of the Company. The record date for determining the holders of Series A Preferred Shares entitled to receive dividends and distributions shall be the same as the record date for determining the holders of Common Shares entitled to receive dividends and distributions. Dividends and distributions shall be paid to the holders of Series A Preferred Shares entitled to receive such dividends and distributions at the close of business 76 on the date on which such dividends and distributions are paid or made by the Company in respect of the Common Shares. (b) In the event that the Company declares and pays a dividend or makes any distribution on its Common Shares in the form of (x) additional Common Shares, (y) options, warrants or rights to acquire Common Shares or (z) other securities of the Company convertible into or exchangeable for Common Shares, the holders of the Series A Preferred Shares shall receive in lieu of such securities: (1) an equal number of shares of additional Series A Preferred Shares, in the case of clause (x) above; (2) options, warrants or rights to acquire an equal number of additional Series A Preferred Shares on terms otherwise identical to such options, warrants or rights distributed to the holders of Common Shares, in the case of clause (y) above; and (3) securities convertible into or exchangeable for an equal number of Series A Preferred Shares on terms otherwise identical to the convertible or exchangeable securities distributed to the holders of Common Shares, in the case of clause (z) above. (c) All dividends or distributions paid with respect to the Series A Preferred Shares shall be paid pro rata to the holders entitled thereto. (d) Each fractional Series A Preferred Share outstanding shall be entitled to a ratable proportionate amount -2- 77 of all dividends and other distributions accruing, paid or made with respect to each outstanding Series A Preferred Share and all such dividends and other distributions with respect to such outstanding fractional shares shall be payable in the same manner and at such times as provided for in sections (2)(a), (2)(b) and (4) hereof with respect to dividends and other distributions on each outstanding Series A Preferred Share. 3. Voting Rights. (a) Each issued and outstanding Series A Preferred Share shall be entitled to one vote for each Common Share into which such Series A Preferred Share is convertible, with respect to any matter presented to the shareholders of the Company for their action or consideration and shall be included in determining the number of shares voting or entitled to vote on any such matter; provided, however, that holders of Series A Preferred Shares shall not vote with respect to the election of directors of the Company. Except as otherwise provided herein or by law, the holders of the Series A Preferred Shares shall vote together with the holders of the Common Shares as a single class. (b) In addition to the voting rights set forth above, the consent of the holders of at least a majority of the Series A Preferred Shares at the time outstanding voting together as a single class, shall be necessary for any amendment to the Memorandum of Association or Bye-Laws of the Company, if such -3- 78 amendment would adversely affect the rights, powers, privileges or preferences of the Series A Preferred Shares. 4. Rights on Liquidation. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Series A Preferred Shares then outstanding shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Common Shares by reason of their ownership thereof, an amount equal to $.01 per share for each outstanding Series A Preferred Share. If upon the occurrence of such event the assets thus distributed among the holders of Series A Preferred Shares shall be insufficient to permit the payment to such holders of the full preferential amount, the entire assets of the Company legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Shares. After the payment or distribution to the holders of the Series A Preferred Shares of such preferential amount and the payment (the "Other Liquidating Preference Payment") of the lesser of (i) the liquidation preference or (ii) the par value of any other preferred shares then outstanding (the "Other Preferred Shares"), if any, then the holders of the Series A Preferred Shares, the holders of the Other Preferred Shares and the holders of Common Shares shall be entitled to receive ratably -4- 79 (based, in the case of the Series A Preferred Shares and the Other Preferred Shares, if they are convertible into Common Shares, on the number of Common Shares into which such Series A Preferred Shares and Other Preferred Shares were last convertible) all remaining assets of the Company to be distributed; provided, however, that if any Other Preferred Shares shall have priority liquidation rights vis-a-vis the Common Shares (other than the Other Liquidating Preference Payment), then the Series A Preferred Shares shall, in a liquidating distribution, be treated ratably with the most senior of such Other Preferred Shares. 5. Conversion. (a) Each Series A Preferred Share may be converted, at the option of the holder thereof, at any time (i) after the HSR Clearance Date or (ii) upon the transfer (in accordance with the provisions of the Shareholders Agreement) of such Series A Preferred Share to a Person other than a Shareholder or any Affiliate thereof, in the manner hereinafter provided, into one (subject to any adjustment required below) fully paid and nonassessable Common Shares; provided however, that on any liquidation of the Company, the right of conversion shall terminate at the close of business on the business day immediately preceding the date fixed for the payment of any -5- 80 amounts distributable on liquidation to the holders of the Series A Preferred Shares. (b) Each conversion of Series A Preferred Shares into Common Shares shall be effected by the prior written notice thereof by the holder of the Series A Preferred Shares and the surrender of the certificates representing the shares to be converted at the principal office of the Company (or such other office or agency of the Company as the Company may designate by notice in writing to the holders of the Series A Preferred Shares as shown on the books of the Company) at any time during normal business hours. Such notice shall state the name or names (with addresses) and denominations in which the certificate or certificates for such Common Shares are to be issued and shall include instructions for reasonable delivery thereof. Each conversion shall be deemed to have been effected as of the close of business on the date on which such certificates have been surrendered and such notice has been received. At such time, the rights of the holders of the surrendered Series A Preferred Shares as such holder shall cease, and the Person in whose name the certificates for Common Shares will be issued upon such conversion shall be deemed to have become the holder of record of the Common Shares represented thereby. -6- 81 (c) Promptly after the surrender of the certificates and the receipt of written notice, the Company shall issue and deliver in accordance with the surrendering holder's instructions (i) the certificates for the Common Shares issuable upon such conversion and (ii) certificates representing any surrendered Series A Preferred Shares which were delivered to the Company in connection with such conversion but which were not requested to be converted and, therefore, were not converted. (d) The issuance of certificates for Common Shares upon conversion of Series A Preferred Shares shall be made without charge to the holders of such shares for any cost incurred by the Company in connection with such conversion and the related issuance of Common Shares. (e) The Company shall at all times reserve and keep available out of its authorized but unissued Common Shares, solely for the purpose of issuance upon the conversion of the Series A Preferred Shares, such number of Common Shares issuable upon conversion of all outstanding Series A Preferred Shares. All Common Shares which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such Common Shares may be so issued without violation of any applicable law -7- 82 or governmental regulation or any requirement of any domestic securities exchange upon which Common Shares may be listed (except for official notice of issuance which shall be immediately transmitted by the Company upon issuance). (f) The Company shall not close its books against the transfer of Series A Preferred Shares in any manner which would interfere with the timely conversion of any Series A Preferred Shares. The Company shall assist and cooperate with any holder of Series A Preferred Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Series A Preferred Shares hereunder (including, without limitation, making any filings required to be made by the Company). 6. Share Splits; Adjustments. (a) If the Company shall in any manner subdivide (by share split, share dividend or otherwise) or combine (by reverse share split or otherwise) the outstanding Common Shares, the outstanding Series A Preferred Shares shall be proportionately subdivided or combined, as the case may be, and effective provision shall be made for the protection of all conversion and voting rights of the Series A Preferred Shares hereunder. (b) If the Company shall issue any shares of its capital shares in a reclassification of the Common Shares -8- 83 (including any such reclassification in connection with a merger, consolidation or other business combination involving the Company), or in any other similar transaction affecting the Company or the number or value of Common Shares outstanding, effective provision shall be made for the protection of all conversion and voting rights of the Series A Preferred Shares hereunder. (c) The terms "HSR Clearance Date" and "HSR Act" as used herein shall have the meanings set forth in the Shareholders Agreement. 7. General Provisions. (a) The term "Affiliate" as used herein shall have the meaning set forth in the Shareholders Agreement. (b) The term "Antitrust Authority" as used herein shall have the meaning set forth in the Shareholders Agreement. (c) The term "Person" as used herein means an individual or a company, partnership, association, trust or any other entity or organization. (d) The term "outstanding" when used herein with reference to shares, shall mean issued shares. (e) The term "Shareholders Agreement" as used herein means that certain Shareholders Agreement to be entered into between Loral Corporation ("Loral") and the Company substantially -9- 84 in the form attached to that certain Distribution Agreement dated as of January 7, 1996 between Loral and the Company. (f) The term "Shareholders" as used herein shall have the meaning set forth in the Shareholders Agreement. (g) Subject to Section 3 hereof, any right, preference, privilege or power of, or restriction provided for the benefit of, the Series A Preferred Shares set forth herein may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) with the consent of the holders of not less than a majority of the Series A Preferred Shares then outstanding, and any amendment or waiver so effected shall be binding upon the Company and all holders of Series A Preferred Shares. -10- 85 SCHEDULE II SERIES B PREFERRED SHARES 1. Number and Designation. The Company shall have a class of preferred shares denominated "Series B Preferred Shares" with such number of shares authorized as shall be set from time to time by Resolution adopted at a general meeting of the Shareholders of the Company 2. Dividends and Distributions. (a) Subject to the prior and superior rights of the holders of any shares of any series of preferred shares ranking prior and superior to the Series B Preferred Shares with respect to dividends, the holders of Series B Preferred Shares, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the fifteenth day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a Series B Preferred Share or a fraction thereof, in an amount per Share (rounded to the nearest cent), subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate 86 per Share amount of all cash dividends, and 1,000 times the aggregate per Share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in Common Shares or a subdivision of the outstanding Common Shares (by -2- 87 reclassification or otherwise), declared on the Common Shares since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any Series B Preferred Share or a fraction thereof. In the event the Company shall at any time (i) declare any dividend on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of Shares, then in each such case the amount to which holders of Series B Preferred Shares were entitled immediately prior to such event pursuant to the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (b) The Company shall declare a dividend or distribution on the Series B Preferred Shares as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Shares (other than a dividend payable in Common Shares). (c) Dividends shall begin to accrue and be cumulative on the outstanding Series B Preferred Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such -3- 88 Series B Preferred Shares, unless the date of issue of such Shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such Shares shall begin to accrue from the date of issue of such Shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series B Preferred Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Series B Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such Shares shall be allocated pro rata on a share-by-share basis among all such Shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series B Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of Series B Preferred Shares shall have the following voting rights: -4- 89 (a) Subject to the provision for adjustment hereinafter set forth, each Series B Preferred Share shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the Shareholders of the Company. In the event the Company shall at any time (i) declare any dividend on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of Shares, then in each such case the number of votes per Share to which holders of the Series B Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (b) Except as otherwise provided herein or by law, the holders of Series B Preferred Shares and the holders of Common Shares shall vote together as one class on all matters submitted to a vote of Shareholders of the Company. (c) (i) If at any time dividends on any Series B Preferred Shares shall be in arrears in an amount equal to six quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default -5- 90 period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all Series B Preferred Shares then outstanding shall have been declared and paid or set apart for payment. During each default period, holders of the Series B Preferred Shares with dividends in arrears in an amount equal to six quarterly dividends thereon, together with holders of any other shares of the Company upon which similar voting rights have been conferred and are exercisable (collectively, the "Defaulted Shares") voting as a class, irrespective of series, shall have the right to elect two Directors. (ii) During any default period, such voting right of the holders of Series B Preferred Shares may be exercised initially at a special general meeting called pursuant to subparagraph (iii) of this Section 3(c) or at any Annual General Meeting of Shareholders, and thereafter at Annual General Meetings of Shareholders, provided that neither such voting right nor the right of the holders of any other shares upon which similar voting rights have been conferred, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of 10% in number of the Defaulted Shares outstanding shall be present in person or by proxy. The -6- 91 absence of a quorum of the holders of Common Shares shall not affect the exercise by the holders of the Defaulted Shares of such voting right. At any meeting at which the holders of the Defaulted Shares shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board as may then exist up to two Directors or, if such right is exercised at an Annual General Meeting, to elect two Directors. If the number which may be so elected at any special general meeting does not amount to the required number, the holders of the Defaulted Shares shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Defaulted Shares shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of the Defaulted Shares as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series B Preferred Shares. (iii) Unless the holders of the Defaulted Shares shall, during an existing default period, have previously exercised their right to elect Directors, the Board may order, or -7- 92 any Shareholder or Shareholders owning in the aggregate not less than 10% of the total number of Defaulted Shares outstanding, irrespective of series, may request, the calling of a special meeting of the holders of the Defaulted Shares, which meeting shall thereupon be called by the Chairman of the Board of the Company. Notice of such meeting and of any Annual General Meeting at which holders of the Defaulted Shares are entitled to vote pursuant to this paragraph (c)(iii) shall be given to each holder of record of Defaulted Shares by mailing a copy of such notice to him at his last address as the same appears on the books of the Company. Such meeting shall be called for a time not earlier than 30 days and not later than 40 days after such order or request or in default of the calling of such meeting within 40 days after such order or request, such meeting may be called on similar notice by any Shareholder or Shareholders owning in the aggregate not less than 10% of the total number of Defaulted Shares outstanding and at least 50% of the total voting rights held by all such Shareholders. Notwithstanding the provisions of this paragraph (c)(iii), no such special general meeting shall be called during the period within 60 days immediately preceding the date fixed for the next Annual General Meeting of the Shareholders. -8- 93 (iv) In any default period, the holders of Common Shares, and other classes of shares of the Company if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of the Defaulted Shares shall have exercised their right to elect two Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Defaulted Shares shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (c)(ii) of this section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of shares which elected the Director whose office shall have become vacant. References in this paragraph (c) to Directors elected by the holders of a particular class of shares shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Defaulted Shares as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Defaulted Shares as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the Bye-Laws irrespective of any -9- 94 increase made pursuant to the provisions of paragraph (c)(ii) of this section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the Bye-Laws). Any vacancies in the Board of Directors affected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (d) Except as set forth herein, holders of Series B Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Shares as set forth herein) for taking any corporate action. 4. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series B Preferred Shares as provided in section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on the Series B Preferred Shares outstanding shall have been paid in full, the Company shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Shares; -10- 95 (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Preferred Shares, except dividends paid ratably on the Series B Preferred Shares and all such parity shares on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Preferred Shares, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity shares in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series B Preferred Shares; (iv) purchase or otherwise acquire for consideration any Series B Preferred Shares, or any shares of stock ranking on a parity with the Series B Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to all holders of such shares upon such terms as the Board, after consideration of the respective annual dividend rates and other relative rights and preferences of the -11- 96 respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of the Company unless the Company could, under paragraph (a) of this section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any Series B Preferred Share purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. 6. Liquidation, Dissolution or Winding-up. (a) Upon any liquidation (voluntary or otherwise), dissolution or winding-up of the Company, no distribution shall be made to the holders of shares ranking junior (either as to dividends or upon liquidation, dissolution or winding-up) to the Series B Preferred Shares unless, prior thereto, the holders of Series B Preferred Shares shall have received $1.00 per Share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment. Thereafter, the holders of Series B Preferred Shares shall be entitled to receive an aggregate amount per Share, subject to the -12- 97 provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per Share to holders of Common Shares. Following the payment of the foregoing, holders of Series B Preferred Shares and holders of Common Shares shall receive their ratable and proportionate share of the remaining assets to be distributed. (b) In the event however, that there are not sufficient assets available to permit payment in full of the Series B Preferred Shares liquidation preference and the liquidation preferences of all other series of preferred shares, if any, which rank on a parity with the Series B Preferred Shares, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. (c) In the event the Company shall at any time (i) declare any dividend on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares (by reclassification or otherwise), or (iii) combine the outstanding Common Shares into a smaller number of Shares, then in each such case the aggregate amount to which holders of Series B Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of Common Shares outstanding immediately after such -13- 98 event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. 7. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other shares or securities, cash and/or any other property, then in any such case the Series B Preferred Shares shall at the same time be similarly exchanged or changed in an amount per Share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of shares, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. In the event the Company shall at any time (i) declare any dividend on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares (by reclassification or otherwise), or (iii) combine the outstanding Common Shares into a smaller number of Shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series B Preferred Shares shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of -14- 99 Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. 8. No Redemption. The Series B Preferred Shares shall not be redeemable. 9. Ranking. The Series B Preferred Shares shall rank junior to all other series of the Company's preferred shares as to payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. 10. Amendment. The Bye-Laws of the Company shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series B Preferred Shares so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding Series B Preferred Shares voting separately as a class. 11. Fractional Shares. Series B Preferred Shares may be issued in fractions of a Share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series B Preferred Shares. -15- 100 SCHEDULE III 6% SERIES C CONVERTIBLE REDEEMABLE PREFERRED SHARES 1. Number and Designation. The Company shall have a class of 6% Series C Convertible Redeemable Preferred Shares (the "Series C Preferred Shares"), par value U.S. $.01 per share, with such number of shares authorized as shall be set from time to time by Resolution adopted at a general meeting of the shareholders of the Company and as set forth in the Bye-Laws of the Company. Unless otherwise specified, references herein to any "Section" refer to the Section number specified in this Schedule III. 2. Issuance. (a) The Series C Preferred Shares shall be issued, upon mandatory exchange of the 6% Convertible Preferred Equivalent Obligations due 2006 of the Company (the "CPEOs"), in whole but not in part, in an aggregate liquidation preference equal to the aggregate principal amount of the CPEOs then outstanding, on such date as may be determined by the Board of Directors (or any committee thereof) of the Company. Upon any such exchange, holders of outstanding CPEOs will be entitled to receive one Series C Preferred Share, having a liquidation preference of $50.00, for each $50.00 principal amount of CPEOs, -16- 101 together with a payment in cash of accrued interest due and unpaid on the CPEOs to the Mandatory Exchange Date (as defined below). (b) The Company may issue Series C Preferred Shares in addition to those issued pursuant to Section 2(a) and (b) above as may be determined from time to time by the Board of Directors (or any committee thereof) of the Company. 3. Liquidation Preference. (a) Certificate for Series C Preferred Shares shall be issuable only in registered form without coupons and only with a liquidation preference of $50.00 per share and any integral multiple thereof. The Company hereby appoints The Bank of New York as its initial Registrar for the Series C Preferred Shares. 4. Registration; Transfer. (a) The Series C Preferred Shares have not been registered under the United States Securities Act of 1933 (the "Securities Act") and may not be resold, pledged or otherwise transferred prior to the date when they no longer constitute "restricted" shares under Rule 144(k) under the Securities Act other than (1) to the Company, (2) to "qualified institutional buyers" pursuant to and in compliance with Rule 144A under the Securities, (3) pursuant to and in compliance with Regulation S under the Securities Act, (4) to -17- 102 "accredited investors" as defined in Rule 501(A) under the Securities Act, (5) pursuant to an exemption from registration under the Securities Act, or (6) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of Bermuda or any state of the United States. (b) Series C Preferred Shares issued upon conversion of CPEOs held by Qualified Institutional Buyers ("QIBs") in reliance on Rule 144A ("Rule 144A") under the United States Securities Act of 1933, as amended (the "Securities Act"), as provided in the Purchase Agreement for such CPEOs, shall be issued in the form of one or more permanent global Series C Preferred Shares in definitive, fully registered form without interest coupons with the Global Series C Preferred Shares Legend and the Restricted Series C Preferred Shares Legend set forth on the form of such Series C Preferred Share (each, a "Global Series C Preferred Share"), which shall be deposited on behalf of the holders of the Series C Preferred Shares represented thereby with the Registrar, at its New York office, as custodian for The Depository Trust Company, New York, New York ("DTC") or its nominees and their respective successors (the "Depositary"), and registered in the name of the Depositary or a nominee of the Depositary, duly -18- 103 executed by the Company and authenticated by the Registrar as hereinafter provided. The aggregate liquidation preference of the Global Series C Preferred Share may from time to time be increased or decreased by adjustments made on the records of the Registrar and the Depositary or its nominee as hereinafter provided. (c) This paragraph shall apply only to a Global Series C Preferred Share deposited with or on behalf of the Depositary. The Company shall execute and the Registrar shall, in accordance with this Section, authenticate and deliver initially one or more Global Series C Preferred Shares that (i) shall be registered in the name of Cede & Co. or other nominee of Cede & Co. and (ii) shall be delivered by the Registrar to Cede & Co. or pursuant to instructions received from Cede & Co. or held by the Registrar as custodian for the Depositary pursuant to a FAST Balance Certificate Agreement between the Depositary and the Registrar. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Schedule with respect to any Global Series C Preferred Share held on their behalf by the Depositary or by the Registrar as the custodian of the Depositary or under such Global Series C Preferred Share, and the Depositary may be treated by the Company, the Registrar and -19- 104 any agent of the Company or the Registrar as the absolute owner of such Global Series C Preferred Share for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Registrar or any agent of the Company or the Registrar from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Series C Preferred Share. Except as provided in Section 5(b) hereof, owners of beneficial interests in Global Series C Preferred Shares will not be entitled to receive physical delivery of certificated Series C Preferred Shares. (d) Purchasers of Series C Preferred Shares who are not QIBs will receive certificated Series C Preferred Shares bearing the Restricted Series C Preferred Shares Legend set forth on the form of such Series C Preferred Shares ("Restricted Series C Preferred Shares"). Restricted Series C Preferred Shares will bear a Restricted Series C Preferred Shares Legend unless removed in accordance with Section 5(b) and may not be exchanged for a Global Series C Preferred Share, or interest therein, at any time, except as set forth in paragraph (d) of this Section. -20- 105 (e) Purchasers of Restricted Series C Preferred Shares in reliance of Regulation S under the Securities Act ("Regulation S") may exchange such Restricted Series C Preferred Shares for a beneficial interest in a Global Series C Preferred Share following the expiration of the "40-day restricted period" within the meaning of Regulation S by delivering (1) any such Restricted Series C Preferred Share, duly endorsed as provided herein; (2) instructions from such holder directing the Registrar to create a beneficial interest in such Global Series C Preferred Share and the authorized denomination or denominations of such beneficial interest to be created; and (3) such other certificates, legal opinions or other information as the Company may reasonably require. (f) After a transfer of any Series C Preferred Shares during the period of the effectiveness of a Shelf Registration Statement with respect to such Series C Preferred Shares, all requirements pertaining to legends on such Series C Preferred Share will cease to apply, the requirements requiring any such Series C Preferred Share issued to certain holders be issued in global form will cease to apply, and a certificated Series C Preferred Share without legends will be available to the holder of such Series C Preferred Shares. -21- 106 5. Paying Agent and Conversion Agent. (a) The Company shall maintain in the Borough of Manhattan, City of New York, State of New York and in a European city (i) an office or agency where Series C Preferred Shares may be presented for payment ("Paying Agent") and (ii) an office or agency where Series C Preferred Shares may be presented for conversion ("Conversion Agent"). The Company may appoint the Registrar, the Paying Agent and the Conversion Agent and may appoint one or more additional paying agents and one or more additional conversion agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent and, with respect to payments hereunder by delivery of Common Shares, may include the Stock Transfer Agent, and the term "Conversion Agent" includes any additional conversion agent. The Company may change any Paying Agent or Conversion Agent without prior notice to any holder. The Company shall notify the Registrar of the name and address of any Agent appointed by the Company. If the Company fails to appoint or maintain another entity as Paying Agent or Conversion Agent, the Registrar shall act as such. The Company or any of its Affiliates may act as Paying Agent, Registrar, co-registrar or Conversion Agent. -22- 107 Neither the Company nor the Registrar shall be required (i) to issue, authenticate or register the transfer of or exchange any Series C Preferred Share during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Series C Preferred Shares selected for redemption under Section 10(b) hereof and ending at the close of business on the day of such mailing or (ii) to register the transfer of or exchange any Series C Preferred Share so selected for redemption in whole or in part, except the unredeemed portion of any Series C Preferred Share being redeemed in part. (b) Notwithstanding any provision to the contrary herein, so long as a Global Series C Preferred Share remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Series C Preferred Share, in whole or in part, or of any beneficial interest therein, shall only be made in accordance with Section 4 hereof and this Section; provided, however, that beneficial interests in a Global Series C Preferred Share may be transferred to persons who take delivery thereof in the form of a beneficial interest in the same Global Series C Preferred Share in accordance with the transfer restrictions set forth in the Restricted Series C Preferred Shares Legend and under the heading "Notice to Investors" in the Offering Memorandum. -23- 108 (i) Except for transfers or exchanges made in accordance with any of clauses (b)(ii) through (iv) of this Section, transfers of a Global Series C Preferred Share shall be limited to transfers of such Global Series C Preferred Share in whole, but not in part, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee. (ii) If an owner of a beneficial interest in a Global Series C Preferred Share deposited with the Depositary or with the Registrar as custodian for the Depositary wishes at any time to transfer its interest in such Global Series C Preferred Share to a person who is required to take delivery thereof in the form of a Restricted Series C Preferred Share, such owner may, subject to the rules and procedures of the Depositary, cause the exchange of such interest for one or more certificates evidencing such Restricted Series C Preferred Share. Upon receipt by the Registrar, at its office in The City of New York of (1) instructions from the Depositary directing the Registrar to authenticate and deliver one or more Restricted Series C Preferred Shares of the same aggregate liquidation preference as the beneficial interest in the Global Series C Preferred Share to be -24- 109 exchanged, such instructions to contain the name or names of the designated transferee or transferees, the authorized denomination or denominations of the Restricted Series C Preferred Shares to be so issued and appropriate delivery instructions, (2) a certificate in the form of Exhibit A attached hereto given by the owner of such beneficial interest and stating that the person transferring such interest in such Global Series C Preferred Share reasonably believes that the person acquiring the Restricted Series C Preferred Shares for which such interest is being exchanged is an "accredited investor" (as defined in Rule 501(a) of Regulation D under the Securities Act) and is acquiring such Restricted Series C Preferred Shares having an aggregate liquidation preference of not less than $250,000 for its own account or for one or more accounts as to which the transferee exercises sole investment discretion, (3) a certificate in the form of Exhibit B attached hereto given by the person acquiring the Restricted Series C Preferred Shares for which such interest is being exchanged, to the effect set forth therein, and (4) such other certifications, legal opinions or other information as the Company may reasonably require to confirm that such transfer is being -25- 110 made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Registrar will instruct the Depositary to reduce or cause to be reduced such Global Series C Preferred Share by the aggregate liquidation preference of the beneficial interest therein to be exchanged and to debit or cause to be debited from the account of the person making such transfer the beneficial interest in the Global Series C Preferred Share that is being transferred, and concurrently with such reduction and debit, the Company shall execute, and the Registrar shall authenticate and deliver, one or more Restricted Series C Preferred Shares of the same aggregate liquidation preference in accordance with the instructions referred to above. (iii) If a holder of a Restricted Series C Preferred Share wishes at any time to transfer such Restricted Series C Preferred Share to a person who is required to take delivery thereof in the form of a Restricted Series C Preferred Share, such holder may, subject to the restrictions on transfer set forth herein and in such Restricted Series C Preferred Share, cause the exchange of such Restricted Series C Preferred Share for one or more -26- 111 certificates evidencing such Restricted Series C Preferred Shares. Upon receipt by the Registrar, at its office in The City of New York of (1) such Restricted Series C Preferred Share, duly endorsed as provided herein, (2) instructions from such holder directing the Registrar to authenticate and deliver one or more certificates evidencing Restricted Series C Preferred Shares, such instructions to contain the name of the transferee and the authorized denomination or denominations of the Restricted Series C Preferred Shares to be so issued and appropriate delivery instructions, (3) a certificate from the holder of the Restricted Series C Preferred Share to be exchanged in the form of Exhibit A attached hereto, (4) a certificate in the form of Exhibit B attached hereto given by the person acquiring the Restricted Series C Preferred Shares for which such interest is being exchanged, to the effect set forth therein, and (5) such other certifications, legal opinions or other information as the Company may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Registrar shall cancel or cause to be cancelled such Restricted Series C Preferred -27- 112 Share and concurrently therewith, the Company shall execute, and the Registrar shall authenticate and deliver, one or more Restricted Series C Preferred Shares of the same aggregate liquidation preference, in accordance with the instructions referred to above. (iv) In the event that a Global Series C Preferred Share is exchanged for Series C Preferred Shares in definitive registered form pursuant to this Section, prior to the effectiveness of a Shelf Registration Statement with respect to such Series C Preferred Shares, such Series C Preferred Shares may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of clauses (ii) and (iii) above (including the certification requirements intended to ensure that such transfers comply with Rule 144A or Regulation S under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Company. (c) Except in connection with a Shelf Registration Statement contemplated by and in accordance with the terms of a Registration Rights Agreement dated November 6, 1996, relating to the CPEOs and the Series C Preferred Shares, between the Company -28- 113 and the initial purchasers of the CPEOs (the "Registration Rights Agreement"), if Series C Preferred Shares are issued upon the transfer, exchange or replacement of Series C Preferred Shares bearing the Restricted Series C Preferred Shares Legend set forth on the form of such Series C Preferred Shares, or if a request is made to remove such Restricted Series C Preferred Shares Legend on Series C Preferred Shares, the Series C Preferred Shares so issued shall bear the Restricted Series C Preferred Shares Legend, or the Restricted Series C Preferred Shares Legend shall not be removed, as the case may be, unless there is delivered to the Company such satisfactory evidence, which may include an opinion of counsel licensed to practice law in the State of New York, as may be reasonably required by the Company, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A, Rule 144 or Regulation S under the Securities Act or, with respect to Restricted Series C Preferred Shares, that such Series C Preferred Shares are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon provision of such satisfactory evidence, the Registrar, at the direction of the Company, shall authenticate and deliver Series C Preferred Shares that do not bear the legend. -29- 114 (d) The Registrar shall have no responsibility for any actions taken or not taken by the Depositary. (e) Each holder of a Series C Preferred Share agrees to indemnify the Company and the Registrar against any liability that may result from the transfer, exchange or assignment of such holder's Series C Preferred Share in violation of any provision of this Schedule and/or applicable U.S. Federal or State securities law; provided, however, that such indemnity shall not apply to acts of willful misconduct or gross negligence on the part of the Company or the Registrar, as the case may be. (f) Payments (whether in cash or, as permitted by Sections 10(a) hereof, in Common Shares) due on the Series C Preferred Shares shall be payable at the office or agency of the Company maintained for such purpose in The City of New York and at any other office or agency maintained by the Company for such purpose. If any such payment is in cash, it shall be payable by United States dollar check drawn on, or wire transfer (provided that appropriate wire instructions have been received by the Registrar at least 15 days prior to the applicable date of payment) to a United Stated dollar account maintained by the holder with, a bank located in New York City; provided, that at the option of the Company payment of dividends in cash may be -30- 115 made by check mailed to the address of the Person entitled thereto as such address shall appear in the Series C Preferred Share Register. 6. Dividend Rights. (a) The Company shall pay, and the holders of the Series C Preferred Shares shall be entitled to receive, dividends from the date of initial issuance of such Series C Preferred Shares at a rate of 6% per annum on the amount of the liquidation preference of the Series C Preferred Shares. Dividends will be computed on the basis of a 360-day year of twelve 30-day months and will be payable quarterly in cash in arrears on February 1, May 1, August 1 and November 1 of each year (each a "Dividend Payment Date"), commencing on the first Dividend Payment Date following the initial issuance date of the Series C Preferred Shares, until the liquidation preference thereof is paid or made available for payment. The Company may elect to defer dividend payments on any Dividend Payment Date. (b) If (i) on or prior to May 5, 1997, a shelf registration statement with respect to resales of the Series C Preferred Shares and the Common Shares issuable upon conversion thereof has not been filed with the Securities and Exchange Commission or (ii) on or prior to July 4, 1997, such shelf registration statement is not declared effective (each, a "Registration -31- 116 Default"), additional dividends will accrue on the Series C Preferred Shares, from and including the day following such Registration Default to but excluding the day on which such Registration Default has been cured. Additional dividends will be paid quarterly in arrears in cash, with the first quarterly payment due on the first Dividend Payment Date following the date on which such additional dividends begin to accrue, and will accrue at a rate per annum of 0.25% of the liquidation preference of this Series C Preferred Share, to and including the 90th day following such Registration Default and thereafter at a rate per annum of 0.50% until such Registration Default has been cured. 7. Payment of Dividend; Mechanics of Payment; Dividend Rights Preserved. (a) Dividends on any Series C Preferred Share which are payable, and are punctually paid or duly provided for, on any Dividend Payment Date (February 1, May 1, August 1, and November 1 of each year) shall be paid in cash in arrears to the Person in whose name that Series C Preferred Share (or one or more predecessor Series C Preferred Shares) is registered at the close of business on the Regular Record Date for such dividend, provided, however, that the Company may make a Deferral Election on any Dividend Payment Date. Arrearages of deferred but unpaid dividends accruals ("Dividend Arrearages") will not themselves -32- 117 bear interest, but so long as any Dividend Arrearage remains outstanding, the Company will be prohibited from paying (i) dividends on its Common Shares and (ii) dividends on any other Series of Preferred Shares (other than pro rata dividends on the Series A Preferred Shares and any other series of preferred shares ranking pari passu with the Preferred Shares). In the event that the Company fails to pay the dividends due for an aggregate of six quarterly payments, the holders will have the rights and remedies described below in Section 8. (b) In the event the Board of Directors makes a Deferral Election in respect of any Dividend Payment Date, the Company shall deliver to holders the Dividend Payment Notice not later than 5 Business Days prior to the Dividend Payment Date. (c) Any Dividend Arrearage on any Series C Preferred Share may be paid by the Company in any lawful manner not inconsistent with the requirements of any securities exchange on which the Series C Preferred Shares may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Registrar of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Registrar. -33- 118 (d) Subject to the foregoing provisions of this Section, each Series C Preferred Share delivered under this Schedule upon registration of transfer of or in exchange for or in lieu of any other Series C Preferred Share shall carry the rights to dividends accrued and unpaid, and to accrue, which were carried by such other Series C Preferred Share. (e) Series C Preferred Shares surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Dividend Payment Date to the opening of business on such Dividend Payment Date (except Series C Preferred Shares called for redemption on a Redemption Date within such period) must be accompanied by payment in cash of an amount equal to the accrued but unpaid dividends thereon which the registered holder is to receive on such Dividend Payment Date in respect of the Series C Preferred Shares so surrendered; provided, that no payment shall be owed or payable to any converting holder if the Board of Directors of the Company shall have elected to defer the dividends payment to be made on such Dividend Payment Date pursuant to paragraph (a) of this Section. No other adjustment for dividends, including for any Dividend Arrearages, is to be made upon conversion. Fractional Common Shares will not be -34- 119 issued upon conversion, but in lieu thereof the Company will pay a cash adjustment in the manner set forth in Section 11(c). (f) The Company shall make all dividend payments (including Dividend Arrearages) in respect of the Series C Preferred Shares in cash. 8. Voting Rights. (a) Holders of Series C Preferred Shares will not be entitled to any voting rights unless the Company has not paid scheduled dividend payments for an aggregate of six quarterly payments (a "Deferral Trigger Event"). If a Deferral Trigger Event occurs while any Series C Preferred Shares are outstanding, the number of Directors constituting the Board of Directors of the Company will be adjusted to permit the holders of a majority of the then Outstanding Series C Preferred Shares, voting separately and as a class, to elect two Directors (the "Series C Preferred Shares Directors") to the Board of Directors. The voting rights set forth in the preceding sentence will continue until such time as all dividends in arrears on the Series C Preferred Shares are paid in full in cash, at which time the term of any Director elected pursuant to the provisions of the preceding sentence shall terminate. At any time after voting power to elect Directors shall have become vested and be continuing in the holders of the Series C Preferred Shares -35- 120 pursuant to the second preceding sentence, or if a vacancy shall exist in the offices of Directors elected by the holders of the Series C Preferred Shares, the Board of Directors may, and upon written request of the holders of record of at least 25% of the Outstanding Series C Preferred Shares addressed to the Chairman of the Board of the Company, shall, call a special meeting of the holders of the Series C Preferred Shares for the purpose of electing the Directors which such holders are entitled to elect. At any meeting held for the purpose of electing Directors at which the holders of Series C Preferred Shares shall have the right, voting together as a separate class, to elect Directors as aforesaid, the presence in person or by proxy of the holders of at least a majority of the Outstanding Series C Preferred Shares shall be required to constitute a quorum of such Series C Preferred Shares. Any vacancy occurring in the office of a Director elected by the holders of the Series C Preferred Shares may be filled by the remaining Director elected by the holders of the Series C Preferred Shares unless and until such vacancy shall be filled by the holders of the Series C Preferred Shares. The Directors to be elected by the holders of the Series C Preferred Shares shall agree, prior to their election to office, to resign upon any termination of the right of the holders of Series C -36- 121 Preferred Shares to vote as a class for Directors as herein provided, and upon such termination the Directors then in office elected by the holders of the Series C Preferred Shares shall forthwith resign. (b) In addition to the voting rights set forth above, with the consent of the holders of not less than two-thirds of the Outstanding Series C Preferred Shares, by act of said holders delivered to the Company and the Registrar, the Company, when authorized by a resolution of the Board of Directors, may enter into amendment hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Schedule or of modifying in any manner the rights of the holders of Series C Preferred Shares under this Schedule; provided, however, that no such modification or amendment may, without the consent of the holders of each Outstanding Series C Preferred Share affected thereby, (i) change the Mandatory Redemption Date of any Series C Preferred Share, or the due date of any dividend on, any Series C Preferred Shares, or reduce the liquidation preference or Redemption Price thereof or the rate of dividends thereon, or change the place of payment where, or the coin or currency in which, any Series C Preferred Share or any payment thereon is payable, or impair the right to institute suit -37- 122 for the enforcement of any such payment on or after the Mandatory Redemption Date (or on or after other Redemption Dates), or adversely affect the rights to convert any Series C Preferred Share as provided in Section 11 hereof, or adversely affect the right to require the Company to redeem the Series C Preferred Shares as provided in Section 10 hereof, or modify the provisions of this Schedule with respect to the ranking of the Series C Preferred Shares in a manner adverse to the holders, or (ii) reduce the percentage of the Outstanding Series C Preferred Shares the consent of whose holders is required for any such modification, or the consent of whose holders is required for any waiver (of compliance with certain provisions of this Schedule) provided for in this Schedule, or (iii) modify any of the provisions of this Section except to increase any such percentage or to provide that certain other provisions of this Schedule cannot be modified or waived without the consent of the holder of each Outstanding Series C Preferred Share affected thereby. In addition, but subject to the foregoing, the Consent of the holders of at least a majority of the Series C Preferred Shares at the time Outstanding voting together as a single class, shall be necessary for any amendment to the Bye-Laws of the Company, if such amendment would have the effect of amending any provision of -38- 123 this Schedule in a manner that is adverse to the interests of the holders of the Series C Preferred Shares. (c) Neither (i) the creation, authorization or issuance of any Junior Shares or Parity Shares including additional Series C Preferred Shares, nor (ii) the increase or decrease in the amount of authorized capital stock of any class, including Series C Preferred Shares, shall (A) require the consent of holders of Series C Preferred Shares or (B) be deemed to affect adversely the rights, preferences, privileges or voting rights of Series C Preferred Shares. 9. Ranking. (a) The Series C Preferred Shares will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank (i) senior to all classes of Common Shares and to each other class of capital stock or series of preferred shares created hereafter by the Company, the terms of which do not expressly provide that it ranks on a parity with the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with all classes of Common Shares of the Company, as "Junior Shares"); or (ii) on a parity with the Company's Series A Preferred Shares and each other class of capital stock or series of preferred shares created hereafter by the Company, the terms -39- 124 of which expressly provide that such class or series will rank on a parity with the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as "Parity Shares"). The Company may not authorize any new class of capital stock or series of preferred shares the terms of which expressly provide that such class or series will rank senior to the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company without the approval of each holder of the Outstanding Series C Preferred Shares. (b) No cash payments of liquidation preference or dividends on the Series C Preferred Shares may be made and no Series C Preferred Shares may be redeemed, retired or purchased for cash (excepting payment for fractional shares) if the Company is then in default in the payment of any Debt Obligations or if at the time any other Event of Default under the terms of any Debt Obligations exists permitting acceleration thereof. Upon any payment or distribution of assets of the Company in the event of any insolvency, reorganization, liquidation or similar proceeding, all Debt Obligations must be repaid in full (including any dividend thereon accruing after the commencement of any proceeding) before the holders will be entitled to receive -40- 125 or retain any payment. Payments on the Series C Preferred Shares may not be declared due and payable prior to the Mandatory Redemption Date because of the failure to make dividend payments when due or to make payments with respect to any applicable redemption or under the terms of any Debt Obligations. (c) No full dividends may be declared or paid or funds set apart for the payment of dividends on any Parity Shares for any period unless full cumulative dividends shall have been or contemporaneously are declared and paid (or are deemed declared and paid) in full or declared and a sum in cash sufficient for such payment is set apart for such payment of the Series C Preferred Shares. If full dividends are not so paid, the Series C Preferred Shares will share dividends pro rata with any Parity Shares. No dividends may be paid or set apart for such payment on other series of Junior Shares (except dividends on Junior Shares payable in additional Junior Shares) and no Junior Shares or Parity Shares may be repurchased, redeemed or otherwise retired nor may funds be set apart for payment with respect thereto, if full cumulative dividends have not been paid in full on the Series C Preferred Shares. Payments of Dividend Arrearages and dividends in connection with any optional redemption may be declared and paid at any time, without -41- 126 reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. So long as any Series C Preferred Shares are outstanding, the Company shall not make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any Parity Share or Junior Share or any warrants, rights, calls or options exercisable for or convertible into any Parity Share or Junior Share, and shall not permit any company or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Share or Junior Share or any such warrants, rights, calls or options unless full cumulative dividends determined in accordance herewith on the Series C Preferred Shares have been paid in full. (d) In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Series C Preferred Shares then Outstanding shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Common Shares or Junior Shares by reason of their ownership thereof, an amount equal to $50.00 per share for each outstanding Series C Preferred -42- 127 Share, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding up (including an amount equal to a pro rata dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding-up). If upon the occurrence of such event the assets thus distributed among the holders of Series C Preferred Shares shall be insufficient to permit the payment to such holders of the full preferential amount, the entire assets of the Company legally available for distribution shall be distributed ratably based upon their respective liquidation preference, among the holders of the Series C Preferred Shares pari passu with the holders of all Parity Shares. After payment of the full preferential amount (and, if applicable, an amount equal to a pro rata dividend to the holders of Outstanding Series C Preferred Shares), such holders shall not be entitled to any further participation in any distribution of assets of the Company. 10. Optional and Mandatory Redemption. (a) The Series C Preferred Shares (i) may be redeemed at any time commencing November 5, 1999, in cash, in whole or in part, at the election of the Company (the "Optional Redemption"), at a redemption price equal to the percentage of the liquidation preference set forth -43- 128 below plus accrued and unpaid dividends, if any, to the date of redemption (the "Optional Redemption Date") if redeemed in the 12-month period ending on November 1st of the following years:
Year Redemption Price ---- ---------------- 2000 102% 2001 101%
and thereafter at a redemption price equal to 100% of the liquidation preference to be redeemed plus accrued and unpaid dividends, if any, to the Optional Redemption Date and (ii) (if not earlier redeemed or converted) shall be mandatorily redeemed by the Company on November 1, 2006 (the "Mandatory Redemption Date") at a redemption price of 100% of the liquidation preference per Share plus accrued and unpaid dividends, if any (including all Dividend Arrearages), to the Mandatory Redemption Date. The Company may make any payments in respect of the liquidation preference due on the Series C Preferred Shares on the Mandatory Redemption Date, (i) in cash, (ii) by delivery of Common Shares (in the manner described below); or (iii) through any combination of the foregoing. If the Company elects to deliver any Common Shares in payment of the liquidation preference on the Mandatory Redemption Date, the Company shall deliver, in the aggregate, the number of Common Shares equal to -44- 129 (I) the aggregate liquidation preference that is not paid in cash divided (II) by the Average Market Value of the Common Shares. No fractional Common Shares will be delivered to a holder, but the Company shall instead pay a cash adjustment determined as set forth in Section 11(c) hereof. Any portion of liquidation preference that is not paid through the delivery of Common Shares shall be paid in cash. (b) In the event of a redemption of less than all of the Series C Preferred Shares, the Series C Preferred Shares will be chosen for redemption by the Registrar from the outstanding Series C Preferred Shares not previously called for redemption, pro rata or by lot or by such other method as the Registrar shall deem fair and appropriate. If fewer than all of the Series C Preferred Shares represented by any share certificate are so to be redeemed, (1) the Company shall issue a new certificate for the shares not redeemed and (2) if any Shares represented thereby are converted before termination of the conversion right with respect to such Shares, such converted Shares shall be deemed (so far as may be) to be the Shares selected for redemption. Series C Preferred Shares which have been converted during a selection of Series C Preferred Shares to be redeemed shall be treated by -45- 130 the Registrar as outstanding for the purpose of such selection but not for the purpose of the payment of the Redemption Price. (c) In the event the Company elects to effect an Optional Redemption, the Company shall deliver the Redemption Notice to the holders no later than 10 Business Days before the Redemption Date. Whenever a Redemption Notice is required to be delivered to the holders, such Notice shall provide the information set forth in the definition thereof and be given by first class mail, postage prepaid to each holder of Series C Preferred Shares to be redeemed, at his address appearing in the Series C Preferred Share Register. In addition, all Redemption Notices shall identify the Series C Preferred Shares to be redeemed (including CUSIP number) and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) if less than all the outstanding Series C Preferred Shares are to be redeemed, the identification (and, in the case of partial redemption, the certificate number, the total number of shares represented thereby and the number of such shares being redeemed on the Redemption Date) of the particular Series C Preferred Shares to be redeemed; -46- 131 (4) that on the Redemption Date the Redemption Price, together with (unless the Redemption Date shall be a Dividend Payment Date) dividends accrued and unpaid to the Redemption Date, will become due and payable upon each such Series C Preferred Share to be redeemed and that dividends thereon will cease to accrue on and after said date; (5) the conversion price, the date on which the right to convert Series C Preferred Shares to be redeemed will terminate and the place or places where such Series C Preferred Shares may be surrendered for conversion; and (6) the place or places where such Series C Preferred Shares are to be surrendered for payment of the Redemption Price. The Redemption Notice shall be given by the Company or, at the Company's request, by the Registrar in the name and at the expense of the Company; provided, that if the Company so requests, it shall provide the Registrar adequate time, as reasonably determined by the Registrar, to deliver such notices in a timely fashion. (d) Prior to any Redemption Date in connection with an Optional Redemption, the Company shall deposit with the Registrar or with -47- 132 a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust) an amount of consideration sufficient to pay the Redemption Price of and (except if the Redemption Date shall be a Dividend Payment Date) accrued but unpaid dividends on all the Series C Preferred Shares which are to be redeemed on that date other than any Series C Preferred Shares called for redemption on that date which have been converted in Common Shares prior to the date of such deposit. If any Series C Preferred Share called for redemption is converted, any cash deposited with the Registrar or with any Paying Agent or so segregated and held in trust for the redemption of such Series C Preferred Share shall (subject to any right of the holder of such Series C Preferred Share or any predecessor Series C Preferred Share to receive accrued but unpaid dividends thereon as provided in Section 7(e)) be paid or delivered to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. (e) Notice of redemption having been given as aforesaid, the Series C Preferred Shares so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and -48- 133 accrued but unpaid dividends) dividends on such Series C Preferred Shares shall cease to accrue. Upon surrender of any such Series C Preferred Share for redemption in accordance with said notice, such Series C Preferred Share shall be paid, subject to Section 7(e), by the Company at the Redemption Price, together with accrued but unpaid dividends to the Redemption Date. If any Series C Preferred Share called for redemption shall not be so paid upon surrender thereof for redemption, the Redemption Price thereof, exclusive of accrued but unpaid dividends, shall, until paid, bear interest from the Redemption Date at the rate borne by the Series C Preferred Shares. (f) Any certificate that represents more than one Series C Preferred Share and is to be redeemed only in part shall be surrendered at any office or agency of the Company designated for that purpose (with, if the Company or the Registrar so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by, the holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Registrar shall authenticate and deliver to the holder of such Series C Preferred Share without service charge, a new Series C -49- 134 Preferred Share certificate or certificates, representing any number of Series C Preferred Shares as requested by such holder, in aggregate amount equal to and in exchange for the number of shares not redeemed and represented by the Series C Preferred Share certificate so surrendered. (g) Unless the Company defaults in making a redemption payment, or the Paying Agent is prohibited from making such payment pursuant to this Schedule, dividends shall cease to accrue on the Series C Preferred Shares or portions of them called for redemption on or after the Redemption Date. If a Series C Preferred Share is redeemed subsequent to a Record Date with respect to any Dividend Payment Date specified above and on or prior to such Dividend Payment Date, then any accrued but unpaid dividends will be paid to the person in whose name such Series C Preferred Share is registered at the close of business on such Record Date. 11. Conversion. (a) Subject to and upon compliance with the provisions of this Schedule, at the option of the holder thereof, any Series C Preferred Share may be converted at the liquidation preference thereof into fully paid and nonassessable Common Shares (calculated as to each conversion to the nearest 1/100 of a share), at the Conversion Price, determined as hereinafter provided, in effect at the time of conversion. Such -50- 135 conversion right shall expire at the close of business on the Business Day preceding the Mandatory Redemption Date. In case a Series C Preferred Share is called for redemption, such conversion right in respect of the Series C Preferred Share so called shall expire at the close of business on the Business Day preceding the Redemption Date, unless the Company defaults in making the payment due upon redemption. The price at which Common Shares shall be delivered upon conversion (herein called the "Conversion Price") shall be initially $20.00 per Common Share. The Conversion Price shall be adjusted in certain instances as provided in Section 11(d) and Section 11(e). (b) In order to exercise the conversion privilege, the holder of any Series C Preferred Share to be converted shall surrender the certificate for such Share, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose, accompanied by written notice to the Company at such office or agency that the holder elects to convert such Share or, if fewer than all of the Series C Preferred Shares represented by a single share certificate are to be converted, the number of shares represented thereby to be converted. Except as provided in Section 7(e), no payment or -51- 136 adjustment shall be made upon any conversion on account of any dividends accrued on the Series C Preferred Shares surrendered for conversion or on account of any dividends on the Common Shares issued upon conversion. In no event shall the Company be obligated to pay any converting holder any unpaid Dividend Arrearages upon conversion. Series C Preferred Shares shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holders of such Shares as holders shall cease, and the person or persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full Common Shares issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 11(c) hereof. In the case of any conversion of fewer than all the Series C Preferred Shares evidenced by a certificate, upon such conversion the Company shall execute and the Registrar shall authenticate -52- 137 and deliver to the holder thereof, at the expense of the Company, a new certificate or certificates representing the number of unconverted Series C Preferred Shares. (c) No fractional Common Shares shall be issued upon the conversion of a Series C Preferred Share. If more than one Series C Preferred Share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate Series C Preferred Shares so surrendered. Instead of any fractional Common Share which would otherwise be issuable upon conversion of any Series C Preferred Share, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the closing price (as defined in Section 11(d)(vii) per Common Share at the close of business on the Business Day prior to the day of conversion. (d) The Conversion Price shall be adjusted from time to time by the Company as follows: (i) If the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Shares in Common Shares, the Conversion Price in effect at the opening of business on the date following the date fixed -53- 138 for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the Record Date (as defined in Section 11(d)(vii)) fixed for such determination and the denominator shall be the sum of such number of Shares and the total number of Shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Record Date. If any dividend or distribution of the type described in this Section 11(d)(i) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared. (ii) If the Company shall offer or issue rights or warrants to all holders of its outstanding Common Shares entitling them to subscribe for or purchase Common Shares at a price per share less than the Current Market Price (as defined in Section 11(d)(vii)) on the Record Date fixed for the determination of shareholders entitled to receive such -54- 139 rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such Record Date by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the Record Date plus the number of Common Shares which the aggregate offering price of the total number of Common Shares subject to such rights or warrants would purchase at such Current Market Price and of which the denominator shall be the number of Common Shares outstanding at the close of business on the Record Date plus the total number of additional Common Shares subject to such rights or warrants for subscription or purchase. Such adjustment shall become effective immediately after the opening of business on the day following the Record Date fixed for determination of shareholders entitled to purchase receive such rights or warrants. To the extent that Common Shares are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect had the -55- 140 adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of Common Shares actually delivered. If such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of shareholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase Common Shares at less than such Current Market Price, and in determining the aggregate offering price of such Common Shares, there shall be taken into account any consideration received for such rights or warrants, with the value of such consideration, if other than cash, to be determined by the Board of Directors. (iii) If the outstanding Common Shares shall be subdivided into a greater number of Common Shares, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, if the outstanding Common Shares shall be combined into a smaller number of Common Shares, the Conversion Price in -56- 141 effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (iv) If the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 11(d)(i) applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding any rights or warrants of a type referred to in Section 11(d)(ii) and dividends and distributions paid exclusively in cash and excluding any capital stock, evidences of indebtedness, cash or assets distributed upon a merger or consolidation to which Section 11(e) applies) (the foregoing hereinafter in this Section 11(d)(iv) called the "Distributed Securities"), then, in each such case, the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record -57- 142 Date (as defined in Section 11(d)(vii)) with respect to such distribution by a fraction of which the numerator shall be the Current Market Price (determined as provided in Section 11(d)(vii)) on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) on such date of the portion of the Distributed Securities so distributed applicable to one Common Share and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following the Record Date; provided, however, that, in the event the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one Common Share is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Series C Preferred Shares shall have the right to receive upon conversion of a Series C Preferred Share (or any portion thereof) the amount of Distributed Securities such holder would have received had such holder converted such Series C Preferred Share (or portion thereof) -58- 143 immediately prior to such Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 11(d)(iv) by reference to the actual or when issued trading market for any securities comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price pursuant to Section 11(d)(vii) to the extent possible. Rights or warrants distributed by the Company to all holders of Common Shares entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Dilution Trigger Event"): (i) are deemed to be transferred with such Common Shares; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Shares, shall be deemed not to have been distributed for purposes of this Section 11(d)(iv) (and no -59- 144 adjustment to the Conversion Price under this Section 11(d)(iv) shall be required) until the occurrence of the earliest Dilution Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment to the Conversion Price under this Section 11(d)(iv) shall be made. If any such rights or warrants, including any such existing rights or warrants distributed prior to the date of this Indenture, are subject to subsequent events, upon the occurrence of each of which such rights or warrants shall become exercisable to purchase different securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants without exercise by the holder thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Dilution Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 11(d) was made, (1) in the case of any such rights or warrants which shall all have -60- 145 been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Dilution Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Shares with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Shares as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued. Notwithstanding any other provision of this Section 11(d)(iv) to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any shareholder rights plan) shall be deemed not to have been distributed for purposes of this Section 11(d)(iv) if the Company makes proper provision so that each holder of Series C Preferred Shares who converts a -61- 146 Series C Preferred Share (or any portion thereof) after the date fixed for determination of shareholders entitled to receive such distribution shall be entitled to receive upon such conversion, in addition to the Common Shares issuable upon such conversion, the amount and kind of such distributions that such holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted such Series C Preferred Share into a Common Share. For purposes of this Section 11(d)(iv) and Sections 11(d)(i) and (ii), any dividend or distribution to which this Section 11(d)(iv) is applicable that also includes Common Shares, or rights or warrants to subscribe for or purchase Common Shares to which Section 11(d)(ii) applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock or rights or warrants to which Section 11(d)(ii) applies (and any Conversion Price reduction required by this Section 11(d)(iv) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such Common Shares or such -62- 147 rights or warrants (and any further Conversion Price reduction required by Sections 11(d)(i) and 11(d)(ii) with respect to such dividend or distribution shall then be made), except that (1) the Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution", "Record Date fixed for such determination" and "Record Date" within the meaning of Section 11(d)(i) and as "the date fixed for the determination of shareholders entitled to receive such rights or warrants", "the Record Date fixed for the determination of the shareholders entitled to receive such rights or warrants" and "such Record Date" within the meaning of Section 11(d)(ii), and (2) any Common Shares included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 11(d)(i). (v) If the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares cash (excluding any cash that is distributed upon a merger or consolidation to which Section 11(e) applies or as part of a -63- 148 distribution referred to in Section 11(d)(iv)) in an aggregate amount that, combined together with (1) the aggregate amount of any other such distributions to all holders of its Common Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 11(d)(v) has been made, and (2) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) of consideration payable in respect of any tender offer by the Company for all or any portion of the Common Shares concluded within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to Section 11(d)(vi) has been made, exceeds 10% of the product of the Current Market Price (determined as provided in Section 11(d)(vii)) on the Record Date with respect to such distribution times the number of Common Shares outstanding on such date, then, and in each such case, immediately after the close of business on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the -64- 149 Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction (i) the numerator of which shall be equal to the Current Market Price on the Record Date less an amount equal to the quotient of (x) the excess of such combined amount over such 10% and (y) the number of Common Shares outstanding on the Record Date and (ii) the denominator of which shall be equal to the Current Market Price on such Record Date; provided, however, that, if the portion of the cash so distributed applicable to one Common Share is equal to or greater than the Current Market Price of the Common Shares on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Series C Preferred Shares shall have the right to receive upon conversion of a Series C Preferred Share (or any portion thereof) the amount of cash such holder would have received had such holder converted such Series C Preferred Share (or portion thereof) immediately prior to such Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. Any cash distribution to all holders of Common -65- 150 Shares as to which the Company makes the election permitted by Section 11(d)(xii) and as to which the Company has complied with the requirements of such Section shall be treated as not having been made for all purposes of this Section 11(d)(v). (vi) If a tender offer made by the Company or any of its subsidiaries for all or any portion of the Common Shares expires and such tender offer (as amended upon the expiration thereof) requires the payment to shareholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that, combined together with (1) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors), as of the expiration of such tender offer, of consideration payable in respect of any other tender offers, by the Company or any of its subsidiaries for all or any portion of the Common Shares -66- 151 expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this Section 11(d)(vi) has been made and (2) the aggregate amount of any distributions to all holders of the Common Shares made exclusively in cash within 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to Section 11(d)(v) has been made, exceeds 10% of the product of the Current Market Price (determined as provided in Section 11(d)(vii)) as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended) times the number of Common Shares outstanding (including any tendered shares) at the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date of the Expiration Time by a fraction of which the numerator shall be the number of Common Shares outstanding (including any tendered shares) at the Expiration Time multiplied by the Current Market Price of -67- 152 the Common Shares on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of Common Shares outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price of the Common Shares on the Trading Day next succeeding the Expiration Time, such reduction (if any) to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender offer had not been made. If the application of this Section 11(d)(vi) to any tender offer would result in -68- 153 an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 11(d)(vi). (vii) For purposes of this Section 11(d), the following terms shall have the meaning indicated: "closing price" with respect to any securities on any day means the closing price on such day or, if no such sale takes place on such day, the average of the reported high and low prices on such day, in each case on The Nasdaq National Market or the New York Stock Exchange, as applicable, or, if such security is not listed or admitted to trading on such national market or exchange, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the high and low prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated or a similar generally accepted reporting service, or, if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good -69- 154 faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors. "Current Market Price" means the average of the daily closing prices per Common Share for the 10 consecutive trading days immediately prior to the date in question; provided, however, that (A) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 11(d)(i), (ii), (iii), (iv), (v), or (vi) occurs during such 10 consecutive trading days, the closing price for each trading day prior to the "ex" date for such other event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (B) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 11(d)(i), (ii), (iii), (iv), (v) or (vi) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the -70- 155 closing price for each trading day on and after the "ex" date for such other event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event and (C) if the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (A) or (B) of this proviso, the closing price for each trading day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 11(d)(iv) or (v), whose determination shall be conclusive and described in a resolution of the Board of Directors) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one Common Share as of the close of business on the day before such "ex" date. For purposes of any computation under Section 11(d)(vi), the Current Market Price on any date shall be deemed to be the average of the daily closing prices per Common Share for such day and the next two succeeding trading days; provided, -71- 156 however, that, if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 11(d)(i), (ii), (iii), (iv), (v), or (vi) occurs on or after the Expiration Time for the tender or exchange offer requiring such computation and prior to the day in question, the closing price for each trading day on and after the "ex" date for such other event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date (I) when used with respect to any issuance or distribution, means the first date -72- 157 on which the Common Shares trade regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (II) when used with respect to any subdivision or combination of Common Shares, means the first date on which the Common Shares trade regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective and (III) when used with respect to any tender or exchange offer means the first date on which the Common Shares trade regular way on such exchange or in such market after the Expiration Time of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to this Section 11(d), such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of this Section 11(d) and to avoid unjust or inequitable results, as determined in good faith by the Board of Directors. "fair market value" shall mean the amount which a willing buyer would pay a willing seller in an arm's-length transaction. "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Shares have the right to receive any cash, securities or other property or in which the Common Shares (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of shareholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). -73- 158 (viii) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 11(d)(viii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made by the Company and shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. No adjustment need be made for a change in the par value or no par value of the Common Shares. (ix) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Registrar an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to each holder of Series C Preferred Shares at such holder's -74- 159 last address appearing on the register of holders maintained for that purpose within 20 days of the effective date of such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. (x) In any case in which this Section 11(d) provides that an adjustment shall become effective immediately after a Record Date for an event, the Company may defer until the occurrence of such event issuing to the holder of any Series C Preferred Share converted after such Record Date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Common Shares issuable upon such conversion before giving effect to such adjustment. (xi) For purposes of this Section 11(d), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company shall not pay any dividend or make any distribution on Common Shares held in the treasury of the Company. -75- 160 (xii) In lieu of making any adjustment to the Conversion Price pursuant to Section 11(d)(v), the Company may elect to reserve an amount of cash for distribution to the holders of Series C Preferred Shares upon the conversion of the Series C Preferred Shares so that any such holder converting Series C Preferred Shares will receive upon such conversion, in addition to the Common Shares and other items to which such holder is entitled, the full amount of cash which such holder would have received if such holder had, immediately prior to the Record Date for such distribution of cash, converted its Series C Preferred Shares into Common Shares, together with any interest accrued with respect to such amount, in accordance with this Section 11(d)(xii) The Company may make such election by providing an Officers' Certificate to the Registrar to such effect on or prior to the payment date for any such distribution and depositing with the Registrar on or prior to such date an amount of cash equal to the aggregate amount that the holders of Series C Preferred Shares would have received if such holders had, immediately prior to the Record Date for such distribution, converted all the Series C Preferred Shares into Common Shares. Any such funds so deposited by the -76- 161 Company with the Registrar shall be invested by the Registrar in U.S. Government Obligations with a maturity not more than three months from the date of issuance. Upon conversion of Series C Preferred Shares by a holder thereof, such holder shall be entitled to receive, in addition to the Common Shares issuable upon conversion, an amount of cash equal to the amount such holder would have received if such holder had, immediately prior to the Record Date for such distribution, converted its Series C Preferred Shares into Common Shares, along with such holder's pro rata share of any accrued interest earned as a consequence of the investment of such funds. Promptly after making an election pursuant to this Section 11(d)(xii), the Company shall give or shall cause to be given notice to all holders of Series C Preferred Shares of such election, which notice shall state the amount of cash per $50 of liquidation preference of Series C Preferred Shares such holders shall be entitled to receive (excluding interest) upon conversion of the Series C Preferred Shares as a consequence of the Company having made such election. (xiii) Whenever the conversion price is adjusted as provided in Section 11(d), the Company shall compute the -77- 162 adjusted conversion price in accordance with Section 11(d) and shall prepare a certificate signed by any Vice President or the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based and the effective date of such adjustment, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of Series C Preferred Shares. (e) In case of any consolidation of the Company with, or merger of the Company into, any other corporation, or in case of any merger of another corporation into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Shares of -78- 163 the Company), or in case of any conveyance or transfer of the properties and assets of the Company substantially as an entirety, the holder of each Series C Preferred Share then outstanding shall have the right thereafter, during the period such Series C Preferred Share shall be convertible as specified in Section 11(a), to convert such Series C Preferred Share only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of shares of Common Shares of the Company into which such Series C Preferred Share might have been converted immediately prior to such consolidation, merger, conveyance or transfer, assuming such holder of Common Shares of the Company failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer (provided that, if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer is not the same for each Common Share of the Company in respect of which such rights of election shall not have been exercised ("nonelecting share"), then for the purpose of this Section the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting shares). Such securities shall provide for adjustments which, for events subsequent to the effective date of the triggering event, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section. The above provisions of this Section shall similarly apply to successive consolidations, mergers, conveyances or transfers. (f) In case: -79- 164 (1) the Company shall declare a dividend (or any other distribution) on its Common Shares payable otherwise than in cash out of its earned surplus; or (2) the Company shall authorize the granting to all holders of its Common Shares of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (3) of any reclassification of the Common Shares of the Company (other than a subdivision or combination of its outstanding Common Shares), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or the sale or transfer of all or substantially all the assets of the Company; or (4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed with the Registrar and at each office or agency maintained for the purpose of conversion of Series C Preferred Shares, and shall cause to be mailed to all holders at their last addresses as they shall appear in the Series C Preferred Shares Register, at least 20 days (or 10 days in any case specified in clause (1) or (2) above) prior to the applicable date hereinafter specified, a notice stating (x) the -80- 165 date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give the notice requested by this Section or any defect therein shall not affect the legality or validity of any dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or the vote upon any such action. (h) The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Shares, for the purpose of effecting the conversion of Series C Preferred Shares, the full number of Common Shares then -81- 166 issuable upon the conversion of all outstanding Series C Preferred Shares. (i) The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Common Shares on conversion of Series C Preferred Shares pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Shares in a name other than that of the holder of the Series C Preferred Share or Series C Preferred Shares to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. 12. Consolidation, Merger, Conveyance or Transfer. (a) The Company shall not consolidate with or merge into any other company or convey or transfer its properties and assets substantially as an entirety to any person, unless (i) the Series C Preferred Shares shall have converted into or exchanged for and shall become shares of such resulting, surviving or transferee person, having in respect of such resulting, surviving or transferee person the same powers, preference and relative participating, optional or other special rights and the -82- 167 qualifications, limitations or restrictions thereon, that the Series C Preferred Shares had immediately prior to such transaction and (ii) the Company shall have delivered to the Registrar an Officer's Certificate and an opinion of counsel, each stating that such consolidation, merger, conveyance or transfer complies with this Section 12 and that all conditions precedent herein provided for relating to such transaction have been complied with. (b) Upon any consolidation or merger or any conveyance or transfer of the properties and assets of the Company substantially as an entirety in accordance with Section 12(b), the successor company formed by such consolidation or into which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Schedule with the same effect as if such successor company had been named as the Company herein, and thereafter the predecessor company shall be relieved of all obligations and covenants under this Schedule and the Series C Preferred Shares. 13. Registration Rights. Pursuant to a Registration Rights Agreement, dated November 6, 1996 (the "Closing Date"), between the Company and the Initial Purchasers (the "Registration Rights -83- 168 Agreement"), the Company has agreed for the benefit of the holders, that it will within 180 days after the Closing Date, file a shelf registration statement (the "Shelf Registration Statement") with the Securities and Exchange Commission (the "Commission") with respect to resales of the Series C Preferred Shares and Common Shares issuable upon conversion thereof; (ii) will use its best efforts to cause, within 240 days after the Closing Date, such Shelf Registration Statement to be declared effective by the Commission; and (iii) subject to certain exceptions, the Company will maintain such Shelf Registration Statement continuously effective under the Securities Act until such date as of which neither the Series C Preferred Shares nor the Common Shares issuable upon conversion thereof shall constitute restricted securities pursuant to Rule 144(k) under the Securities Act or all the Series C Preferred Shares and the Common Shares issuable upon conversion thereof have been sold pursuant to such Shelf Registration Statement. 14. SEC Reports; Reports by Company. Whether or not required by the rules and regulations of the SEC, so long as any Series C Preferred Shares are outstanding, the Company shall file with the Commission and, if requested, furnish to the holders of Series C Preferred Shares all quarterly and annual financial -84- 169 information required to be contained in a filing with the Commission on Forms 10-Q and 10-K, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to annual information only, a report thereon by the Company's certified independent accountants; 15. Definitions. For purposes of this Schedule, the following terms shall have the meaning set forth below: Business Day: each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to be closed. Closing Date: November 6, 1996 Common Shares: Common shares of the Company, par value $.01 per share. CPEOs: Convertible Preferred Equivalent Obligations due 2006 of the Company. Commission: the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the adoption of this Schedule such Commission is not existing and performing the duties now assigned to it, then the body performing such duties at such time. -85- 170 Company: Loral Space & Communications Ltd. Company Order: a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, provided, however, that any person duly designated by the Chairman of the Board, the President, a Vice President or any other officer of the Company may sign or execute on behalf of any or all such persons listed above. Debt Obligations: the principal of, premium, if any, interest and other amounts due on any indebtedness, whether now outstanding or hereafter created, incurred, assumed or guaranteed by the Company, for money borrowed from others (including obligations under capitalized leases, purchase money indebtedness or any trade credit), liabilities incurred in the ordinary course of business, commitment, standby and other fees due and payable to financial institutions with respect to credit facilities that may be maintained by the Company or in connection with the acquisition by the Company of any other business or entity, or in respect of letters of credit or bid, performance or surety bonds issued for the account or on the credit of the Company, and, in each case, all renewals, extensions and refundings thereof. -86- 171 Deferral Trigger Event: the Company has deferred the payment of dividends due under the Series C Preferred Shares in an aggregate equal to six quarterly dividend payments Dividend Arrearage: the amount of dividend payments that the Company has elected to defer pursuant to a Deferral Election that remains unpaid. Dividend Payment Date: the dates specified in a Series C Preferred Share as the fixed dates on which a dividend is due and payable; provided, however, that if such date shall not be a Business Day, then such date shall be the next Business Day. Junior Shares: all classes of Common Shares and each other class of capital stock or series of preferred shares created hereafter by the Company, the terms of which do not expressly provide that it ranks on a parity with the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company; Mandatory Redemption Date: November 1, 2006. Oustanding: when used with respect to Series C Preferred Shares means, as of the date of termination, all Series C Preferred Shares theretofore authenticated and delivered under this Schedule, except (i) Series C Preferred Shares theretofore converted into Common Shares in accordance with Section 11 hereof -87- 172 and Series C Preferred Shares theretofore canceled by the Registrar or delivered to the Registrar for cancellation; (ii) Series C Preferred Shares for whose payment or redemption money in the necessary amount has been theretofore deposited with the Registrar or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the holders of such Series C Preferred Shares; provided, that, if such Series C Preferred Shares are to be redeemed, notice of such redemption has been duly given pursuant to this Schedule or provision therefor satisfactory to the Registrar has been made; and (iii) Series C Preferred Shares (x) that are mutilated, destroyed, lost or stolen which the Company has decided to pay or (y) in exchange for or in lieu of which other Series C Preferred Shares have been authenticated and delivered pursuant to this Schedule, provided, however, that, in determining whether the holders of the Series C Preferred Shares have given any request, demand, authorization, direction, notice, consent or waiver or taken any other action hereunder, Series C Preferred Shares owned by the Company or any other obligor upon the Series C Preferred Shares or any affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether -88- 173 the Registrar shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Series C Preferred Shares which the Registrar has actual knowledge of being so owned shall be so disregarded. Series C Preferred Shares so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Registrar the pledgee's right so to act with respect to such Series C Preferred Shares and that the pledgee is not the Company or any other obligor upon the Series C Preferred Shares or any affiliate of the Company or of such other obligor. Parity Shares: the Series A Preferred Shares and each other class of capital stock or series of preferred shares created hereafter by the Company, the terms of which expressly provide that such class or series will rank on a parity with the Series C Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution. Registrar: The Bank of New York. Series C Preferred Shares Directors: the Directors who may be elected to the Company's Board of Directors by the holders of the Series C Preferred Shares in the case of a Deferral Trigger Event in respect of the Series C Preferred Shares. -89- 174 EXHIBIT A FORM OF TRANSFER CERTIFICATE FOR TRANSFER FROM GLOBAL SERIES C PREFERRED SHARE OR RESTRICTED SERIES C PREFERRED SHARE TO RESTRICTED SERIES C PREFERRED SHARE (Transfers pursuant to Section _______________ or Section ________________ of the Schedule) The Bank of New York, as Trustee 101 Barclay Street, Floor 21 West New York, New York 10286 Attn: Corporate Trust Trustee Administration Re: Loral Space & Communications Ltd. 6% Series C Convertible Redeemable Preferred Shares Reference is hereby made to Schedule III to the Bye-Laws of Loral Space & Communications Ltd. Capitalized terms used but not 175 defined herein shall have the meanings given them in the Schedule. This letter relates to U.S. $__________ aggregate liquidation preference of Series C Preferred Shares which are held [in the form of the [Restricted] [Global] Security (CUSIP No. ) with the Depositary] * in the name of [name of transferor] (the "Transferor") to effect the transfer of the Series C Preferred Shares. - -------------------- * Insert, if appropriate. 176 In connection with such request, and in respect of such Series C Preferred Shares, the Transferor does hereby certify that such Series C Preferred Shares are being transferred in accordance with (i) the transfer restrictions set forth in the Series C Preferred Shares and (ii) to a transferee that the Transferor reasonably believes is an "accredited investor" (as defined in Rule 501(a) of Regulation D under the Securities Act of 1933) and is acquiring at least $250,000 liquidation preference of Series C Preferred Shares for its own account or for one or more accounts as to which the transferee exercises sole investment discretion and (iii) in accordance with applicable securities laws of any state of the United States or any other jurisdiction. [Name of Transferor] by: ---------------------------- Name: Title: Dated: 177 cc: Loral Space & Communications Ltd. 600 Third Avenue New York, New York 10016 Attn: General Counsel 178 EXHIBIT B FORM OF ACCREDITED INVESTOR TRANSFEREE CERTIFICATE (Transfers pursuant to Section _________ and Section ___________ of the Schedule) The Bank of New York, as Trustee 101 Barclay Street, Floor 21 West New York, New York 10286 Attn: Corporate Trust Trustee Trust Administration Re: Loral Space & Communications Ltd. 6% Series C Convertible Redeemable Preferred Shares Reference is hereby made to Schedule III to the Bye-Laws of the Company. Capitalized terms used but not defined herein shall have the meanings given them in the Schedule. This letter relates to U.S. $__________ aggregate liquidation preference of Series C Preferred Shares which are held [in the form of the [Restricted] [Global] Series C Preferred Share (CUSIP No. ___) with the Depositary] in the name of [name of transferor] 179 (the "Transferor") to effect the transfer of the Securities to the undersigned. In connection with such request, and in respect of such Series C Preferred Shares, we confirm that: 1. We understand that the Securities have not been registered under the U.S. Securities Act of 1933 (the "Securities Act"), and are being sold to us in a transaction that is exempt from the registration requirements of the Securities Act. 2. We are a corporation, partnership or other entity having such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Series C Preferred Shares, and we are (or any account for which we are purchasing under paragraph 4 below is) an accredited investor as defined in Rule 501(a) under the Securities Act, able to bear the economic risk of our proposed investment in the Series C Preferred Shares. 3. We are acquiring the Series C Preferred Shares for our own account (or for accounts as to which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the Series C Preferred Shares, subject, -2- 180 nevertheless, to the understanding that the disposition of our property shall at all times be and remain within our control. 4. We are, and each account (if any) for which we are purchasing Securities is, purchasing Series C Preferred Shares having an aggregate liquidation preference of not less than $250,000. 5. We understand that (a) the Series C Preferred Shares will be delivered to us in registered form only and that the certificate delivered to with respect to the Securities will bear a legend substantially to the following effect: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED PRIOR TO THE DATE ON WHICH THIS SECURITY NO LONGER CONSTITUTES A "RESTRICTED" SECURITIES UNDER RULE 144(k) UNDER THE SECURITIES ACT OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON -3- 181 RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), AND, IF SUCH TRANSFER IS BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED IN THE INDENTURE (AS DEFINED BELOW) PRIOR TO THE EXPIRATION OF THE "40 DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (4) TO AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS SECURITY IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS SECURITY PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40 DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER THE SECURITIES ACT), (5) PURSUANT TO AN -4- 182 EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AN ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (0)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT." -5- 183 and (b) such certificates will be reissued without the foregoing legend only in accordance with the terms of the Schedule. 6. We agree that in the event that at some future time we wish to dispose of any of the Series C Preferred Shares, we will not do so unless: (a) the Series C Preferred shares are sold to the Company or any Subsidiary thereof; (b) the Series C Preferred Shares are sold to a qualified institutional buyer in compliance with Rule 144A under the Securities Act; (c) the Series C Preferred Shares are sold to an accredited investor, as defined in Rule 501(a) under the Securities Act, acquiring at least $250,000 liquidation preference of the Series C Preferred Shares that, prior to such transfer, furnishes to the Registrar a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Series C Preferred Shares (the form of which letter can be obtained from such Registrar); (d) the Series C Preferred Shares are sold outside the United States in compliance with Rule 903 or Rule 904 under the Securities Act; -6- 184 (e) the Series C Preferred Shares are sold by us pursuant to Rule 144 under the Securities Act; or (f) the Series C Preferred Shares are sold pursuant to an effective registration statement under the Securities Act. Very truly yours, [PURCHASER] by: -------------------- Name: Title: Dated: cc: Loral Space & Communications Ltd. 600 Third Avenue New York, New York 10016 -7- EX-3.4 3 SCHEDULE IV TO 3RD AMENDED & RESTATED BYE-LAWS 1 EXHIBIT 3.4 1 EXECUTION COPY SCHEDULE IV 6% Series D Convertible Redeemable Preferred Shares due 2007 Loral Space & Communications Ltd., an exempted company organized under the laws of Bermuda (the "Company"), certifies that pursuant to the authority contained in its Memorandum of Association (the "Memorandum of Association") and its Bye-Laws (the "Bye-Laws"), and in accordance with Bermuda law, the Board of Directors (or a duly authorized committee thereof) of the Company at meetings duly called and held on February 7, 2000, and February 14, 2000, duly approved and adopted the following resolution, which resolution remains in full force and effect on the date hereof: RESOLVED, that pursuant to the authority vested in the Board of Directors by the Memorandum of Association and Bye-Laws, the Board of Directors does hereby designate, create, authorize and provide for the issue of a series of preference stock having the following designation, voting powers, preferences and relative, participating, optional and other special rights: Capitalized terms used herein are defined in Section 15. 1. Number and Designation. The Company shall have a class of preference shares, which shall be designated as its 6% Series D Convertible Redeemable Preferred Shares due 2007 (the "Series D Preferred Shares"), par value U.S.$0.01 per share, with 9,600,000 shares initially authorized and, subject to the limitations set forth herein, such number of additional shares as are authorized from time to time by resolution of the Board of Directors of the Company and as set forth in the Bye-Laws of the Company. Unless otherwise specified, references herein to any "Section" refer to the Section number specified in this Schedule IV. 2 2 2. Issuance. The Company may issue Series D Preferred Shares from time to time as may be determined by the Board of Directors (or any committee thereof) of the Company. 3. Registered Form; Liquidation Preference; Registrar. Certificates for Series D Preferred Shares shall be issuable only in registered form and only with a liquidation preference of U.S.$50 per share. The Company hereby appoints The Bank of New York as its initial Registrar and Transfer Agent (the "Registrar") for the Series D Preferred Shares. 4. Registration; Transfer. (a) The Series D Preferred Shares have not been registered under the United States Securities Act of 1933 (the "Securities Act") and may not be resold, pledged or otherwise transferred prior to the date when they no longer constitute "restricted securities" for purposes of Rule 144(k) under the Securities Act other than (i) to the Company, (ii) to "qualified institutional buyers" ("QIBs") pursuant to and in compliance with Rule 144A ("Rule 144A") under the Securities Act, (iii) pursuant to and in compliance with Rule 904 of Regulation S under the Securities Act ("Regulation S"), (iv) pursuant to an exemption from registration under the Securities Act, or (v) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of Bermuda or any state of the United States. Until such time as determined by the Company and the Registrar, certificates evidencing the Series D Preferred Shares shall contain a legend (the "Restricted Shares Legend") evidencing the foregoing restrictions in substantially the form set forth on the form of Series D Preferred Share attached hereto as Exhibit A. (b) Series D Preferred Shares issued to QIBs in reliance on Rule 144A or sold in reliance on Regulation S, as provided in the Purchase Agreement, shall be issued in the form of one or more permanent global Series D Preferred Shares in definitive, fully registered form with the global legend (the "Global Shares Legend") and the Restricted Shares Legend set forth on the form of Series D Preferred Share attached hereto as Exhibit A (each, a "Global Series D Preferred Share"), which shall be deposited on behalf of the 3 3 holders of the Series D Preferred Shares represented thereby with the Registrar, at its New York office, as custodian for The Depository Trust Company, New York, New York ("DTC") or its nominee and their respective successors (the "Depositary"), and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and countersigned and registered by the Registrar as hereinafter provided. The aggregate liquidation preference of the Global Series D Preferred Share may from time to time be increased or decreased by adjustments made on the records of the Registrar and the Depositary or its nominee as hereinafter provided. (c) This paragraph shall apply only to a Global Series D Preferred Share deposited with or on behalf of the Depositary. The Company shall execute and the Registrar shall, in accordance with this Section, countersign and deliver initially one or more Global Series D Preferred Shares that (i) shall be registered in the name of Cede & Co. or other nominee of the Depositary and (ii) shall be delivered by the Registrar to Cede & Co. or pursuant to instructions received from Cede & Co. or held by the Registrar as custodian for the Depositary pursuant to an agreement between the Depositary and the Registrar. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Schedule with respect to any Global Series D Preferred Share held on their behalf by the Depositary or by the Registrar as the custodian of the Depositary or under such Global Series D Preferred Share, and the Depositary may be treated by the Company, the Registrar and any agent of the Company or the Registrar as the absolute owner of such Global Series D Preferred Share for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Registrar or any agent of the Company or the Registrar from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of the Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Series D Preferred Share. Except as provided in Section 5(b), owners of beneficial interests in Global Series D Preferred Shares will not be entitled to receive physical delivery of certificated Series D Preferred Shares. 4 4 (d) No certificate evidencing Series D Preferred Shares shall be valid unless it bears the countersignature of the Registrar. 5. Paying Agent and Conversion Agent. (a) The Company shall maintain in the Borough of Manhattan, City of New York, State of New York (i) an office or agency where Series D Preferred Shares may be presented for payment (the "Paying Agent") and (ii) an office or agency where Series D Preferred Shares may be presented for conversion (the "Conversion Agent"). The Company may appoint the Registrar, the Paying Agent and the Conversion Agent and may appoint one or more additional paying agents and one or more additional conversion agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent and, with respect to payments hereunder by delivery of Common Shares, may include the Common Share Transfer Agent, and the term "Conversion Agent" includes any additional conversion agent. The Company may change any Paying Agent or Conversion Agent without prior notice to any holder. The Company shall notify the Registrar of the name and address of any Paying Agent or Conversion Agent appointed by the Company. If the Company fails to appoint or maintain another entity as Paying Agent or Conversion Agent, the Registrar shall act as such. The Company or any of its Affiliates may act as Paying Agent, Registrar, coregistrar or Conversion Agent. 5 5 (b) Notwithstanding any provision to the contrary herein, so long as a Global Series D Preferred Share remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Series D Preferred Share, in whole or in part, or of any beneficial interest therein, shall only be made in accordance with Section 4 and this Section 5; provided, however, that beneficial interests in a Global Series D Preferred Share may be transferred to persons who take delivery thereof in the form of a beneficial interest in the same Global Series D Preferred Share in accordance with the transfer restrictions set forth in the Restricted Shares Legend: (i) Except for transfers or exchanges made in accordance with any of clauses (b)(ii) through (v) of this Section 5, transfers of a Global Series D Preferred Share shall be limited to transfers of such Global Series D Preferred Share in whole, but not in part, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee. (ii) If an owner of a beneficial interest in a Global Series D Preferred Share deposited with the Depositary or with the Registrar as custodian for the Depositary wishes at any time to transfer its interest in such Global Series D Preferred Share to a person who is required to take delivery thereof in the form of Restricted Series D Preferred Shares, such owner may, subject to the rules and procedures of the Depositary, cause the exchange of such interest for one or more certificates evidencing such Restricted Series D Preferred Shares. Upon receipt by the Registrar, at its office in The City of New York of (A) instructions from the Depositary directing the Registrar to countersign and deliver one or more Restricted Series D Preferred Shares equal in number of shares to the beneficial interest in the Global Series D Preferred Share to be exchanged, such instructions to contain the name or names of the designated transferee or transferees, the number of Restricted Series D Preferred Shares to be so issued and appropriate delivery instructions, (B) a certificate in the form of Exhibit B attached hereto given by the transferor, to the effect set forth therein, and (C) such other certifications, legal opinions or other information as 6 6 the Company, the Depositary or the Registrar may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Registrar will instruct the Depositary to reduce or cause to be reduced such Global Series D Preferred Share by the number of shares of the beneficial interest therein to be exchanged and to debit or cause to be debited from the account of the person making such transfer the beneficial interest in the Global Series D Preferred Share that is being transferred, and concurrently with such reduction and debit, the Company shall execute, and the Registrar shall countersign and deliver, one or more Restricted Series D Preferred Shares representing the same number of shares in accordance with the instructions referred to above. (iii) If a holder of Restricted Series D Preferred Shares wishes at any time to transfer all or part of such Restricted Series D Preferred Shares to a person who is required to take delivery thereof in the form of Restricted Series D Preferred Shares, such holder may, subject to the restrictions on transfer set forth herein and in the certificate representing such Restricted Series D Preferred Shares, cause the exchange of such Restricted Series D Preferred Shares for one or more certificates evidencing such Restricted Series D Preferred Shares. Upon receipt by the Registrar, at its office in The City of New York of (A) such Restricted Series D Preferred Shares, duly endorsed as provided herein, (B) instructions from such holder directing the Registrar to authenticate and deliver one or more certificates evidencing Restricted Series D Preferred Shares, such instructions to contain the name of the transferee and the number of the Restricted Series D Preferred Shares to be so issued and appropriate delivery instructions, (C) a certificate from the holder of the Restricted Series D Preferred Shares to be exchanged in the form of Exhibit B attached hereto given by the transferor, to the effect set forth therein, and (D) such other certifications, legal opinions or other information as the Company or the Registrar may reasonably require to confirm that such transfer is being made pursuant to an 7 7 exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Registrar shall cancel or cause to be canceled such Restricted Series D Preferred Share and concurrently therewith, the Company shall execute, and the Registrar shall countersign and deliver, one or more Restricted Series D Preferred Shares representing the number of shares transferred in accordance with the instructions referred to above. (iv) If a holder of Restricted Series D Preferred Shares wishes at any time to transfer all or part of such Restricted Series D Preferred Shares to a person who is eligible to take delivery thereof in the form of a beneficial interest in a Global Series D Preferred Share, such holder may, subject to the restrictions on transfer set forth herein and in the certificate representing such Restricted Series D Preferred Shares, cause the exchange of such Restricted Series D Preferred Shares for beneficial interests in a Global Series D Preferred Share. Upon receipt by the Registrar, at its office in The City of New York of (A) such Restricted Series D Preferred Shares, duly endorsed as provided herein, (B) instructions from such holder directing the Registrar to increase the Global Series D Preferred Share, such instructions to contain the name of the transferee and appropriate account information, (C) a certificate from the holder of the Restricted Series D Preferred Shares to be exchanged in the form of Exhibit B attached hereto given by the transferor, to the effect set forth therein, and (D) such other certifications, legal opinions or other information as the Company, the Depositary or the Registrar may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Registrar shall cancel or cause to be canceled such Restricted Series D Preferred Shares and concurrently therewith, the Registrar will instruct the Depositary to increase or cause to be increased the Global Series D Preferred Share by the aggregate number of shares of the Restricted Series D Preferred Shares to be exchanged and to credit or cause to be credited to the account of 8 8 the transferee the beneficial interest in the Global Series D Preferred Share that is being transferred. (v) In the event that a Global Series D Preferred Share is exchanged for Series D Preferred Shares in definitive registered form pursuant to this Section, prior to the effectiveness of a Shelf Registration Statement with respect to such Series D Preferred Shares, such Series D Preferred Shares may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of clauses (ii), (iii) and (iv) above (including the certification requirements intended to ensure that such transfers comply with Rule 144A or Regulation S or are otherwise exempt under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Company, the Depositary or the Registrar. (c) Except in connection with a Shelf Registration Statement contemplated by and in accordance with the terms of the Registration Rights Agreement relating to the Series D Preferred Shares, Common Shares issuable (A) as dividends thereon, (B) on conversion thereof or (C) in redemption thereof, and any securities into which such Series D Preferred Shares or Common Shares shall be converted or into which they shall be changed by operation of law or otherwise (collectively, the "Registrable Securities"), if Series D Preferred Shares are issued upon the transfer, exchange or replacement of Series D Preferred Shares bearing the Restricted Shares Legend, or if a request is made to remove such Restricted Shares Legend on Series D Preferred Shares, the Series D Preferred Shares so issued shall bear the Restricted Shares Legend, or the Restricted Shares Legend shall not be removed, as the case may be, unless there is delivered to the Company and the Registrar such satisfactory evidence, which may include an opinion of counsel licensed to practice law in the State of New York, as may be reasonably required by the Company or the Registrar, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A or Rule 144 or, with respect to Restricted Series D Preferred Shares, that such Series D Preferred Shares are not "restricted securities" within the meaning of Rule 144 under 9 9 the Securities Act. Upon provision of such satisfactory evidence, the Registrar, at the direction of the Company, shall countersign and deliver Series D Preferred Shares that do not bear the Restricted Shares Legend. (d) The Registrar shall have no responsibility for any actions taken or not taken by the Depositary. (e) Each holder of a Series D Preferred Share agrees to indemnify the Company and the Registrar against any liability that may result from the transfer, exchange or assignment of such holder's Series D Preferred Share in violation of any provision of this Schedule and/or applicable U.S. Federal or State securities law; provided, however, that such indemnity shall not apply to acts of wilful misconduct or gross negligence on the part of the Company or the Registrar, as the case may be. (f) Payments (whether in cash or, as permitted by Section 11, in Common Shares) due on the Series D Preferred Shares shall be payable at the office or agency of the Company maintained for such purpose in The City of New York and at any other office or agency maintained by the Company for such purpose. If any such payment is in cash, it shall be payable by United States dollar check drawn on, or wire transfer (provided that appropriate wire instructions have been received by the Registrar at least 15 days prior to the applicable date of payment) to a United States dollar account maintained by the holder with, a bank located in New York City; provided that at the option of the Company payment of dividends in cash may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Series D Preferred Share register. 6. Dividend Rights. (a) The Company shall pay, and the holders of the Series D Preferred Shares shall be entitled to receive, cumulative dividends from the date of initial issuance of such Series D Preferred Shares at a rate of 6% per annum on the amount of the liquidation preference of the Series D Preferred Shares. Dividends will be computed on the basis of a 360-day year of twelve 30-day months and will be payable quarterly, subject to Section 11, (i) in cash, (ii) by delivery of Common Shares or (iii) through any combination of the foregoing in arrears on February 15, May 15, August 15 and November 15 of each year 10 10 (each a "Dividend Payment Date"), commencing May 15, 2000 until the liquidation preference thereof is paid or made available for payment provided, however, that if such date is not a Business Day, then the Dividend Payment Date shall be the next Business Day. The Company may elect not to declare dividend payments on any Dividend Payment Date; provided, however, that dividends on the Series D Preferred Shares will accrue whether or not the Company has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. The Company will take all actions required or permitted under The Companies Act 1981 of Bermuda (the "Companies Act") to permit the payment of dividends on the Series D Preferred Shares. Arrearages of unpaid dividends ("Accumulated Dividends") will not themselves bear interest or be added to the liquidation preference of the Series D Preferred Shares. (b) Pursuant to the terms of the Registration Rights Agreement, a "Registration Default" will occur (i) if the Company fails to file a shelf registration statement (the "Shelf Registration Statement") with respect to resales of the Registrable Securities within 90 days after the Closing Date; (ii) if the Shelf Registration Statement is not declared effective on or prior to the date that is 180 days after the Closing Date; and (iii) if the Shelf Registration Statement has been declared effective by the SEC and such Shelf Registration Statement ceases to be effective or to be usable as contemplated by Section 2(b) of the Registration Rights Agreement at any time during the Shelf Registration Period (as defined in the Registration Rights Agreement) (without being succeeded by a post-effective amendment to such Shelf Registration Statement that cures such failure and that is itself declared effective) for any period of 10 consecutive Trading Days or for any 20 Trading Days in any 180-day period in connection with resales of Transfer Restricted Securities (provided, that the 11 11 Company will have the option of suspending the effectiveness of the Shelf Registration Statement, or of notifying holders of Transfer Restricted Securities that the Shelf Registration Statement shall be deemed not to be effective (in which case the Shelf Registration Statement shall be deemed not to be effective for purposes of the Series D Preferred Shares), without becoming obligated to pay Preferred Shares Liquidated Damages for periods of up to a total of 60 days in any calendar year if the Board of Directors of the Company determines that compliance with the disclosure obligations necessary to maintain the effectiveness of the Shelf Registration Statement at such time could reasonably be expected to have an adverse effect on the Company or a pending corporate transaction) (each of the foregoing clauses (i) through (iii), a "Registration Default") and additional dividends ("Preferred Shares Liquidated Damages") will accrue on the Series D Preferred Shares, from and including the date of such Registration Default to but excluding the day on which such Registration Default has been cured. In the event of each such Registration Default, the Company shall pay Preferred Shares Liquidated Damages to each holder of Series D Preferred Shares that are Transfer Restricted Securities at a rate of 0.25% per annum of the liquidation preference of such Series D Preferred Shares, which shall accrue from the date of the Registration Default to and including the 90th day following such Registration Default and increase by 0.25% for each subsequent 90 day period; provided, however, that such Preferred Shares Liquidated Damages may not accrue at any time at a rate greater than 1.00% per annum of the liquidation preference of the Series D Preferred Shares. Following the cure of all Registration Defaults, the accrual of Preferred Shares Liquidated Damages with respect to such Series D Preferred Shares shall cease (without in any way limiting the effect of any subsequent Registration Default). 7. Payment of Dividend; Mechanics of Payment; Dividend Rights Preserved. (a) Dividends on any Series D Preferred Share which are payable, and are punctually paid or duly provided for, on any Dividend Payment Date shall be paid in arrears to the person in whose name such Series D Preferred Share (or one or more predecessor Series D 12 12 Preferred Shares) is registered at the close of business on the next preceding February 1, May 1, August 1 and November 1 (each, together with any record date established for the payment of Accumulated Dividends, a "Dividend Record Date"). (b) No dividend whatsoever shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Series D Preferred Shares with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid, or declared and a sufficient sum set apart for the payment of such dividends, upon all outstanding Series D Preferred Shares. Unless full cumulative dividends on all outstanding Series D Preferred Shares for all past dividend periods shall have been declared and paid, or declared and a sufficient sum for the payment thereof set apart, then: (i) no dividend (other than (A) with respect to Junior Shares or Parity Shares, a dividend payable solely in any Junior Shares or Parity Shares, respectively, or (B) with respect to Parity Shares, a partial dividend paid pro rata on such Parity Shares and the Series D Preferred Shares) shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any Junior Shares or Parity Shares, respectively; (ii) no other distribution shall be declared or made upon, or any sum set apart for the payment of any distribution upon, any Junior Shares or Parity Shares, other than a distribution consisting solely of Junior Shares or Parity Shares, respectively; (iii) no Junior Shares or Parity Shares or any warrants, rights, calls or options exercisable for or convertible into any Parity Share or Junior Share shall be purchased, redeemed or otherwise acquired (other than in exchange for other Junior Shares or Parity Shares, respectively) by the Company or any of its subsidiaries; and (iv) no monies shall be paid into or set apart or made available for a sinking or other like fund for the purchase, redemption or other acquisition of any Junior 13 13 Shares or Parity Shares or any warrants, rights, calls or options exercisable for or convertible into any Parity Share or Junior Share by the Company or any of its subsidiaries. Holders of the Series D Preferred Shares will not be entitled to any dividends, whether payable in cash, property or stock, in excess of the full cumulative dividends as herein described. In the event that the Company fails to pay the dividends due for six consecutive quarterly payments, the holders will have the rights and remedies set forth in Section 8. (c) Dividends (including Accumulated Dividends) may be paid, subject to Section 11, (i) in cash, (ii) by delivery of Common Shares or (iii) through any combination of the foregoing. The Company will notify the Registrar and make a public announcement no later than the close of business on the tenth Business Day prior to the Record Date for each dividend as to whether it will pay such dividend and, if so, the form of consideration it will use to make such payment. (d) Any Accumulated Dividends on any Series D Preferred Share may be paid, subject to Section 11, by the Company in any lawful manner (which shall include the establishment of a record date not more then 45 days prior to the payment thereof) not inconsistent with the requirements of any securities exchange on which the Series D Preferred Shares may be listed, and upon such notice (which shall precede the record date by at least ten Business Days) as may be required by such exchange, if, after notice given by the Company to the Registrar of the proposed payment pursuant to this clause (d), such manner of payment shall be deemed practicable by the Registrar. (e) Subject to the foregoing provisions of this Section 7, each Series D Preferred Share delivered under this Schedule upon registration of transfer of or in exchange for or in lieu of any other Series D Preferred Share shall carry the rights to dividends accumulated and unpaid, and to accrue, which were carried by such other Series D Preferred Share. 14 14 (f) The holder of record of a Series D Preferred Share at the close of business on a Dividend Record Date with respect to the payment of dividends on the Series D Preferred Shares will be entitled to receive such dividends with respect to such Series D Preferred Share on the corresponding Dividend Payment Date, notwithstanding the conversion of such share after such Dividend Record Date and prior to such Dividend Payment Date. A Series D Preferred Share surrendered for conversion during the period from the close of business on any Dividend Record Date to the opening of business of the corresponding Dividend Payment Date must be accompanied by a payment in cash, Common Shares or a combination thereof, depending on the method of payment that the Company has chosen to pay such dividend, in an amount equal to such dividend payable on such Dividend Payment Date, unless such Series D Preferred Shares has been called for Mandatory Conversion pursuant to Section 10(b) on a Mandatory Conversion Date occurring during the period from the close of business on any Dividend Record Date to the close of business on the Business Day immediately following the corresponding Dividend Payment Date. The dividend payment with respect to a Series D Preferred Share called for Mandatory Conversion pursuant to Section 10(b) on a Mandatory Conversion Date occurring during the period from the close of business on any Dividend Record Date to the close of business on the Business Day immediately following the corresponding Dividend Payment Date will be payable on such Dividend Payment Date to the record holder of such share on such Dividend Record Date if such share has been converted after such Dividend Record Date and prior to such Divided Payment Date. Notwithstanding the immediately preceding three sentences of this Section 7(f), no payment shall be owed or payable to or by any converting holder if the Board of Directors of the Company shall have elected to defer the dividend payment to be made on such Dividend Payment Date pursuant to Section 6(a). Fractional Common Shares will not be issued upon conversion, but in lieu thereof the Company will pay a cash adjustment in the manner set forth in Section 11(c). (g) No payment or adjustment will be made by the Company upon conversion of Series D Preferred Shares for accumulated and unpaid dividends or for dividends with respect to the Common Shares issued upon such conversion. 15 15 8. Voting Rights. (a) Holders of Series D Preferred Shares will not be entitled to any voting rights unless (i) required by law or (ii) the Company has not paid scheduled dividend payments for six consecutive quarterly payments (a "Voting Rights Triggering Event"). If a Voting Rights Triggering Event occurs while any Series D Preferred Shares are outstanding, the number of directors constituting the Board of Directors of the Company will be adjusted to permit the holders of the then Outstanding Series D Preferred Shares, voting separately and as a class, to elect such number of members to the Board of Directors of the Company as will constitute at least 20% of the then existing Board of Directors before such election (rounded to the nearest whole number), provided, however, that such number shall be no less than one nor greater than two (the "Series D Preferred Share Directors"), and the number of members of the Company's Board of Directors will be immediately and automatically increased by one or two, as the case may be. The voting rights set forth in the preceding sentence will continue until such time as all dividends in arrears on the Series D Preferred Shares are paid in full, at which time the term of any Series D Preferred Share Director shall terminate. At any time after voting power to elect Directors shall have become vested and be continuing in the holders of the Series D Preferred Shares pursuant to the second preceding sentence, or if a vacancy shall exist in the offices of Series D Preferred Share Directors, the Board of Directors may, and upon written request of the holders of record of at least 25% of the Outstanding Series D Preferred Shares addressed to the Chairman of the Board of the Company, shall, call a special meeting of the holders of the Series D Preferred Shares for the purpose of electing the Series D Preferred Share Directors that such holders are entitled to elect. At any meeting held for the purpose of electing Series D Preferred Share Directors, the presence in person or by proxy of the holders of at least a majority of the Outstanding Series D Preferred Shares shall be required to constitute a quorum of such Series D Preferred Shares. Any vacancy occurring in the office of a Series D Preferred Share Director may be filled by the remaining Series D Preferred Share Director unless and until such vacancy shall be filled by the holders of the Series D Preferred Shares. The Series D Preferred Share Directors shall agree, prior to their election to office, to resign upon any termination of the right of the holders of Series D Preferred Shares to 16 16 vote as a class for Directors as herein provided, and upon such termination the Series D Preferred Share Directors then in office shall forthwith resign. (b) In addition to the voting rights set forth above, the approval of the holders of at least two-thirds of the then Outstanding Series D Preferred Shares voting or consenting, as the case may be, as one class, will be required for the Company to amend the Memorandum of Association, this Schedule or the Bye-Laws, so as to affect adversely the rights, preferences, privileges or voting rights of holders of the Series D Preferred Shares or authorize the issuance of any additional Series D Preferred Shares (other than Series D Preferred Shares to be sold pursuant to the Purchase Agreement); provided, however, that no such modification or amendment may, without the consent of the holders of each Outstanding Series D Preferred Share affected thereby, (i) change the Mandatory Redemption Date, or the due date of any dividend on, any Series D Preferred Shares, or reduce the liquidation preference or redemption price thereof or the rate of dividends thereon, or change the place of payment where, or the coin or currency in which, any Series D Preferred Share or any payment thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Mandatory Redemption Date, or adversely affect the rights to convert any Series D Preferred Share as provided in Section 12, or modify the provisions of this Schedule with respect to the ranking of the Series D Preferred Shares in a manner adverse to the holders, (ii) alter the voting rights with respect to the Series D Preferred Shares or reduce the percentage of the Outstanding Series D Preferred Shares the consent of whose holders is required for any such modification, or the consent of whose holders is required for any waiver of compliance with provisions of this Schedule or (iii) modify any of the provisions of this Section 8 except to increase any such percentage or to provide that certain other provisions of this Schedule cannot be modified or waived without the consent of the holder of each Outstanding Series B Preferred Share affected thereby. (c) The Company will not authorize or issue any new class of Senior Shares or any obligation or security convertible or exchangeable into or evidencing a right to purchase shares of any class or series of Senior Shares, 17 17 without the approval of the holders of at least two-thirds of the then Outstanding Series D Preferred Shares, voting or consenting, as the case may be, as one class. (d) Except as set forth in Section 8(c) with respect to Senior Shares, neither (i) the creation, authorization or issuance of any Junior Shares, Parity Shares or Senior Shares or (ii) the increase or decrease in the amount of authorized capital stock of any class, including any preference shares, shall require the consent of the holders of the Series D Preferred Shares or shall be deemed to affect adversely the rights, preferences, privileges, special rights or voting rights of holders of Series D Preferred Shares. Furthermore, the consent of the holders of Series D Preferred Shares will not be required for the Company to authorize, create (by way of reclassification or otherwise) or issue any Parity Shares or any obligation or security convertible or exchangeable into, or evidencing a right to purchase, shares of any class or series of Parity Shares. 9. Ranking. (a) The Series D Preferred Shares will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank (i) senior to all Common Shares (whether issued in one or more classes) and to each other class of capital stock or series of preference shares created after February 15, 2000 by the Company, the terms of which do not expressly provide that it ranks senior to or on a parity with the Series D Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with all Common Shares (whether issued in one or more classes) of the Company, as "Junior Shares"); (ii) on a parity with the shares of Series A Preferred Shares, the shares of Series C Preferred Shares, additional Series D Preferred Shares issued by the Company and each other class of capital stock or series of preference shares created after February 15, 2000 by the Company, the terms of which expressly provide that such class or series will rank on a parity with the Series D Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to as "Parity Shares"); and (iii) junior to each class of capital stock or series of preference shares created after February 15, 2000 in compliance with Section 8(c) by the 18 18 Company, the terms of which expressly provide that such class or series will rank senior to the Series D Preferred Shares as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Shares"). (b) No dividend whatsoever shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Series D Preferred Shares with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid, or declared and a sufficient sum set apart for the payment of such dividends, upon all outstanding Senior Shares. (c) In the event of any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the Series D Preferred Shares then Outstanding shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Common Shares or Junior Shares by reason of their ownership thereof, an amount equal to $50 per share for each outstanding Series D Preferred Share, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (including Preferred Shares Liquidated Damages) thereon to the date fixed for liquidation, dissolution or winding-up (including an amount equal to a pro rata dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding-up). If upon the occurrence of such event the assets thus distributed among the holders of Series D Preferred Shares shall be insufficient to permit the payment to such holders of the full preferential amount, the entire assets of the Company legally available for distribution shall be distributed ratably based upon their respective liquidation preference, among the holders of the Series D Preferred Shares pari passu with the holders of all Parity Shares. After payment of the full preferential amount (and, if applicable, an amount equal to a pro rata dividend to the holders of Outstanding Series D Preferred Shares), such holders shall not be entitled to any further participation in any distribution of assets of the Company. 10. Mandatory Conversion; Mandatory Redemption. (a) The Series D Preferred Shares may be converted at any time commencing on or after February 15, 2003, in whole or 19 19 from time to time in part, at the election of the Company ("Mandatory Conversion"), into that number of shares of Common Shares per share of Series D Preferred Share equal to $50.00 (the liquidation preference per share of Series D Preferred Share) divided by the then prevailing Conversion Price if the Conversion Condition has been met. The "Conversion Condition" shall have been met if the Current Market Value of the Common Shares of the Company equals or exceeds 115% of the then prevailing Conversion Price for at least 20 Trading Days in any consecutive 30-day trading period, including the last Trading Day of such 30-day period, ending on the Trading Day prior to the issuance of the press release announcing a Mandatory Conversion referred to in Section 10(b) below. (b) To exercise a Mandatory Conversion, the Company shall issue a press release announcing such Mandatory Conversion prior to the opening of business on the first Trading Day after the Conversion Condition has been met. The Company shall give notice ("Mandatory Conversion Notice") of a Mandatory Conversion by mail or by publication (with subsequent prompt notice by mail) to the holders of the Series D Preferred Shares not more than four Business Days after the date of the press release announcing the Mandatory Conversion. For purposes of the immediately preceding sentence, a notice by publication shall include, without limitation, a press release by the Company to Dow Jones News Services or Bloomberg News Services. Each conversion date ("Mandatory Conversion Date") will be a date selected by Company and shall be not less than 30 days and not more than 60 days after the date of the related press release. In addition to any information required by applicable law or regulation, each Mandatory Conversion Notice shall state (i) the Mandatory Conversion Date, (ii) the number of Common Shares to be issued upon conversion of each Series D Preferred Share, (iii) the number of Series D Preferred Shares to be converted (and, if fewer than all the Series D Preferred Shares are to be converted, the number of Series D Preferred Shares to be converted from such holder), (iv) the place(s) where the Series D Preferred Shares are to be surrendered for delivery of Common Shares, and (v) that dividends on the Series D Preferred Shares to be converted will cease to accumulate on such Mandatory Conversion Date. 20 20 (c) The dividend payment with respect to a Series D Preferred Share called for Mandatory Conversion on a date during the period from the close of business on any Record Date for the payment of dividends to the close of business on the Business Day immediately following the corresponding Dividend Payment Date will be payable on such Dividend Payment Date to the record holder of such share on such Record Date if such share has been converted after such Record Date and prior to such Dividend Payment Date. Except as provided in the immediately preceding sentence, no payment or adjustment will be made upon a Mandatory Conversion of Series D Preferred Shares for accumulated and unpaid dividends or for dividends with respect to the Common Shares issued upon such conversion. On and after the Mandatory Conversion Date, dividends will cease to accrue on shares of Series D Preferred Shares called for Mandatory Conversion and all rights of holders of such shares will terminate except for the right to receive the Common Shares of the Company issuable upon Mandatory Conversion. (d) No Mandatory Conversion may be authorized or made unless, prior to giving the applicable Mandatory Conversion Notice, all accumulated and unpaid dividends for periods ended prior to the date of such redemption notice shall have been paid in cash or, subject to Section 11, in Common Shares. (e) In the event of a Mandatory Conversion of fewer than all the Series D Preferred Shares, the Series D Preferred Shares will be chosen for Mandatory Conversion by the Registrar from the Outstanding Series D Preferred Shares not previously called for Mandatory Conversion, pro rata or by lot or by such other method as the Registrar shall deem fair and appropriate, provided that the Company may convert (an "Odd-lot Conversion") all shares held by holders of fewer than 100 Series D Preferred Shares (or by holders that would hold fewer than 100 Series D Preferred Shares following such conversion) prior to its conversion of other Series D Preferred Shares. If fewer than all the Series D Preferred Shares represented by any share certificate are so to be converted, the Company shall issue a new certificate for the shares not converted. 21 21 (f) The Series D Preferred Shares (if not earlier converted) shall be mandatorily redeemed (the "Mandatory Redemption") by the Company on February 15, 2007 (the "Mandatory Redemption Date" provided, however, that if such date is not a Business Day, then the Mandatory Redemption Date shall be the next Business Day), at a redemption price of 100% of the liquidation preference per share plus accumulated and unpaid dividends and Preferred Shares Liquidated Damages, if any, to the Mandatory Redemption Date. (g) The Company may, as provided in Section 11, make any payments in respect of the liquidation preference due on the Series D Preferred Shares on the Mandatory Redemption Date, (i) in cash, (ii) by delivery of Common Shares or (iii) through any combination of the foregoing. 11. Method of Payments. (a) The Company may make any payments due on the Series D Preferred Shares, including dividend payments and Mandatory Redemption payments described in Section 11(b), (i) in cash, (ii) by delivery of Common Shares or (iii) through any combination of the foregoing. (b) The Company will make each dividend payment and each Mandatory Redemption payment on the Series D Preferred Shares in cash, except to the extent it has elected to make all or any portion of such payment in Common Shares. The Company may not make any such payment, or any portion thereof (other than a Mandatory Redemption Payment, or portion thereof), in Common Shares unless, on the date of such payment, the Shelf Registration Statement covers the resale of such shares and is effective or is no longer required to be effective in order to effect any resales of such shares. If the Company elects to make any such payment, or any portion thereof, in Common Shares, such shares shall be valued for such purpose (i) in the case of any dividend payment, or portion thereof, at 95% of the Average Market Value and (ii) in the case of any Mandatory Redemption payment, or portion thereof, at 100% of the Average Market Value. If, as a matter of law, including Bermuda law, the Company is not able to issue Common Shares in payment of the Mandatory Redemption price, then the Company may, at its option, cause the Series D Preferred 22 22 Shares to be converted on the Mandatory Redemption Date into the same number of Common Shares as the Company could otherwise have issued in satisfaction of the Mandatory Redemption price. The Company shall give the holders of Series D Preferred Shares notice at least 30 days prior to the Mandatory Redemption Date of (i) the form of consideration the Company will use to make payments due on the Mandatory Redemption Date and (ii) if any such payments are to be made in Common Shares of the Company, whether the Company will issue such Common Shares or convert the Series D Preferred Share into such Common Shares. (c) No fractional Common Shares will be delivered to the holders of the Series B Preferred Shares, but the Company will instead pay a cash adjustment to each holder that would otherwise be entitled to a fraction of a Common Share. The amount of such cash adjustment will be determined based on the proceeds received by the Registrar from the sale of that number of Common Shares, which the Company will deliver to the Registrar for such purpose, equal to the aggregate of all such fractions (round up to the nearest whole share). The Registrar is authorized and directed to sell such shares at the best available prices and distribute the proceeds to the holders in proportion to their respective interests therein. The Company will pay the expenses of the Registrar with respect to such sale, including brokerage commissions. (d) Any portion of any payment on or in respect of the Series D Preferred Shares that is declared and not paid through the delivery of Common Shares will be paid in cash. (e) Prior to the issuance of any Common Shares pursuant to this Section 11, the Company shall have provided for the listing or quotation of such Common Shares on the New York Stock Exchange, the Nasdaq National Market or any other SEC recognized, national securities exchange or automated quotation system in the United States upon which the Common Shares are then listed or quoted. 12. Conversion. (a) Subject to and upon compliance with the provisions of this Schedule, at the option of the holder thereof, any Series D Preferred Share may be converted at any time after February 18, 2000 at the 23 23 liquidation preference thereof into fully paid and nonassessable Common Shares (calculated as to each conversion to the nearest 1/100 of a share), at the Conversion Price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on the Business Day next preceding the Mandatory Redemption Date. The price at which Common Shares shall be delivered upon conversion (herein called the "Conversion Price") shall be initially $19.8303 per Common Share. The Conversion Price shall be adjusted in certain instances as provided in Section 12(d) and Section 12(e). (b) In order to exercise the conversion privilege, the holder of any Series D Preferred Share to be converted shall surrender the certificate for such share, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose, accompanied by written notice to the Company at such office or agency that the holder elects to convert such share or, if fewer than all the Series D Preferred Shares represented by a single share certificate are to be converted, the number of shares represented thereby to be converted. No payment or adjustment shall be made by the Company upon any conversion on account of any dividends accrued on the Series D Preferred Shares surrendered for conversion or on account of any dividends on the Common Shares issued upon conversion. In no event shall the Company be obligated to pay any converting holder any unpaid Accumulated Dividends upon conversion. Series D Preferred Shares shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such shares for conversion in accordance with the foregoing provisions, and at such time the rights of the holders of such shares as holders shall cease, and the person or persons entitled to receive the Common Shares issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Shares at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full Common Shares issuable 24 24 upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 12(c). In the case of any conversion of fewer than all the Series D Preferred Shares evidenced by a certificate, upon such conversion the Company shall execute and the Registrar shall countersign and deliver to the holder thereof, at the expense of the Company, a new certificate or certificates representing the number of unconverted Series D Preferred Shares. (c) No fractional Common Shares shall be issued upon the conversion of a Series D Preferred Share. If more than one Series D Preferred Share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate number of Series D Preferred Shares so surrendered. Instead of any fractional Common Share which would otherwise be issuable upon conversion of any Series D Preferred Share, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the closing price (as defined in Section 12(d)(vii)) per Common Share at the close of business on the Business Day prior to the day of conversion. 25 25 (d) The conversion price shall be adjusted from time to time by the Company as follows: (i) if the Company shall hereafter pay a dividend or make a distribution to holders of the outstanding Common Shares in Common Shares, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the Common Share Record Date (as defined in Section 12(d)(vii)) fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the Common Share Record Date. If any dividend or distribution of the type described in this Section 12(d)(i) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared; (ii) if the Company shall offer or issue rights or warrants to holders of its outstanding Common Shares entitling them to subscribe for or purchase Common Shares at a price per share less than the Current Market Price (as defined in Section 12(d)(vii)) on the Common Share Record Date fixed for the determination of shareholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such Common Share Record Date by a fraction of which the numerator shall be the number of Common Shares outstanding at the close of business on the Common Share Record Date plus the number of Common Shares which the aggregate offering price of the total number of Common Shares subject to such rights or warrants would purchase at such Current Market Price and of which the denominator shall be the number of Common Shares outstanding at the close of 26 26 business on the Common Share Record Date plus the total number of additional Common Shares subject to such rights or warrants for subscription or purchase. Such adjustment shall become effective immediately after the opening of business on the day following the Common Share Record Date fixed for determination of shareholders entitled to purchase or receive such rights or warrants. To the extent that Common Shares are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of Common Shares actually delivered. If such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of shareholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase Common Shares at less than such Current Market Price, and in determining the aggregate offering price of such Common Shares, there shall be taken into account any consideration received for such rights or warrants, with the value of such consideration, if other than cash, to be determined by the Board of Directors; (iii) if the outstanding Common Shares shall be subdivided into a greater number of Common Shares, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, if the outstanding Common Shares shall be combined into a smaller number of Common Shares, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective; 27 27 (iv) if the Company shall, by dividend or otherwise, distribute to holders of its Common Shares any class of capital stock of the Company (other than any dividends or distributions to which Section 12(d)(i) applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding any rights or warrants of a type referred to in Section 12(d)(ii) and dividends and distributions paid exclusively in cash and excluding any capital stock, evidences of indebtedness, cash or assets distributed upon a merger or consolidation to which Section 12(e) applies) (the foregoing hereinafter in this Section 12(d)(iv) called the "Distributed Securities"), then, in each such case, the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Common Share Record Date (as defined in Section 12(d)(vii)) with respect to such distribution by a fraction of which the numerator shall be the Current Market Price (determined as provided in Section 12(d)(vii)) on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) on such date of the portion of the Distributed Securities so distributed applicable to one Common Share and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following the Common Share Record Date; provided, however, that, in the event the then fair market value (as so determined) of the portion of the Distributed Securities so distributed applicable to one Common Share is equal to or greater than the Current Market Price on the Common Share Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Series D Preferred Shares shall have the right to receive upon conversion of a Series D Preferred Share (or any portion thereof) the amount of Distributed Securities such holder would have received had such holder converted such Series D Preferred Share (or portion thereof) immediately prior to such Common Share Record Date. If such dividend or distribution is not 28 28 so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 12(d)(iv) by reference to the actual or when issued trading market for any securities constituting all or part of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price pursuant to Section 12(d)(vii) to the extent possible. Rights or warrants distributed by the Company to holders of Common Shares entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Dilution Trigger Event"): (A) are deemed to be transferred with such Common Shares; (B) are not exercisable; and (C) are also issued in respect of future issuances of Common Shares, shall be deemed not to have been distributed for purposes of this Section 12(d)(iv) (and no adjustment to the Conversion Price under this Section 12(d)(iv) shall be required) until the occurrence of the earliest Dilution Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment to the Conversion Price under this Section 12(d)(iv) shall be made. If any such rights or warrants, including any such existing rights or warrants distributed prior to the first issuance of Series D Preferred Shares, are subject to subsequent events, upon the occurrence of each of which such rights or warrants shall become exercisable to purchase different securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants, without exercise by the holder thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Dilution Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to the 29 29 Conversion Price under this Section 12(d) was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Dilution Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Shares with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Shares as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued. Notwithstanding any other provision of this Section 12(d)(iv) to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any shareholder rights plan) shall be deemed not to have been distributed for purposes of this Section 12(d)(iv) if the Company makes proper provision so that each holder of Series D Preferred Shares who converts a Series D Preferred Share (or any portion thereof) after the date fixed for determination of shareholders entitled to receive such distribution shall be entitled to receive upon such conversion, in addition to the Common Shares issuable upon such conversion, the amount and kind of such distributions that such holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted such Series D Preferred Share into a Common Share. For purposes of this Section 12(d)(iv) and Sections 12(d)(i) and (ii), any dividend or distribution to which this Section 12(d)(iv) is applicable that also includes Common Shares, or rights or warrants to subscribe for or purchase Common Shares to which Section 12(d)(ii) applies (or both), shall be deemed instead to be (A) a dividend or distribution of 30 30 the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such Common Shares or rights or warrants to which Section 12(d)(ii) applies (and any Conversion Price reduction required by this Section 12(d)(iv) with respect to such dividend or distribution shall then be made) immediately followed by (B) a dividend or distribution of such Common Shares or such rights or warrants (and any further Conversion Price reduction required by Sections 12(d)(i) or 12(d)(ii) with respect to such dividend or distribution shall then be made), except that (1) the Common Share Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution", "the Common Share Record Date fixed for such determination" and "the Common Share Record Date" within the meaning of Section 12(d)(i) and as "the date fixed for the determination of shareholders entitled to receive such rights or warrants", "the Common Share Record Date fixed for the determination of the shareholders entitled to receive such rights or warrants" and "such Common Share Record Date" for purposes of Section 12(d)(ii), and (2) any Common Shares included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" for the purposes of Section 12(d)(i). (v) If the Company shall, by dividend or otherwise, distribute to holders of its Common Shares cash (excluding any cash that is distributed upon a merger or consolidation to which Section 12(e) applies or as part of a distribution referred to in Section 12(d)(iv)) in an aggregate amount that, combined together with (A) the aggregate amount of any other such distributions to holders of its Common Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 12(d)(v) has been made, and (B) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) of consideration payable in respect of 31 31 any tender offer by the Company for all or any portion of the Common Shares concluded within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to Section 12(d)(vi) has been made, exceeds 10% of the product of the Current Market Price (determined as provided in Section 12(d)(vii)) on the Common Share Record Date with respect to such distribution times the number of Common Shares outstanding on such date, then, and in each such case, immediately after the close of business on such date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Common Share Record Date by a fraction (1) the numerator of which shall be equal to the Current Market Price on the Common Share Record Date less an amount equal to the quotient of (x) the excess of such combined amount over such 10% and (y) the number of Common Shares outstanding on the Common Share Record Date and (2) the denominator of which shall be equal to the Current Market Price on such Common Share Record Date; provided, however, that, if the portion of the cash so distributed applicable to one Common Share is equal to or greater than the Current Market Price of the Common Shares on the Common Share Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Series D Preferred Shares shall have the right to receive upon conversion of a Series D Preferred Share (or any portion thereof) the amount of cash such holder would have received had such holder converted such Series D Preferred Share (or portion thereof) immediately prior to such Common Share Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. Any cash distribution to holders of Common Shares as to which the Company makes the election permitted by Section 12(d)(xii) and as to which the Company has complied with the requirements of such Section 12(d)(xii) shall be treated as not having been made for all purposes of this Section 12(d)(v). 32 32 (vi) if a tender offer made by the Company or any of its subsidiaries for all or any portion of the Common Shares expires and such tender offer (as amended upon the expiration thereof) requires the payment to shareholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that, combined together with (A) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors), as of the expiration of such tender offer, of consideration payable in respect of any other tender offers, by the Company or any of its subsidiaries for all or any portion of the Common Shares expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this Section 12(d)(vi) has been made and (B) the aggregate amount of any distributions to all holders of the Common Shares made exclusively in cash within 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to Section 12(d)(v) has been made, exceeds 10% of the product of the Current Market Price (determined as provided in Section 12(d)(vii)) as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended) times the number of Common Shares outstanding (including any tendered shares) at the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date of the Expiration Time by a fraction of which the numerator shall be the number of Common Shares outstanding (including any tendered shares) at the Expiration Time multiplied by the Current Market Price of the Common Shares on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market 33 33 value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of Common Shares outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price of the Common Shares on the Trading Day next succeeding the Expiration Time, such reduction (if any) to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender offer had not been made. If the application of this Section 12(d)(vi) to any tender offer would result in an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 12(d)(vi). (vii) For purposes of this Section 12(d), the following terms shall have the meaning indicated: "Beneficial Ownership" means a beneficial owner as determined in accordance with Rule 13d-3 promulgated by the SEC under the Exchange Act. "Change of Control" means the occurrence of any of the following transactions or series of transactions in which less than 50% of the consideration to be received by holders of the Common Shares of the Company (excluding amounts payable in respect of appraisal rights and cash in lieu of fractional shares) in such transaction or series of transactions consists of shares of common stock traded or to be traded immediately following such transaction of series of transactions on a national securities exchange or the Nasdaq National Market: (i) the acquisition (directly or indirectly, through a purchase, 34 34 merger or other acquisition transaction or series of transactions, other than any acquisition by the Company, any of its subsidiaries or pursuant to an employee benefit plan of the Company) by any person of Beneficial Ownership of 80% or more of both the total voting power and value of all shares of capital stock of the Company entitled to vote generally in elections of the members of the Board of Directors of the Company, or (ii) any consolidation or merger of the Company with or into any other entity, any merger of another entity into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the properties and assets of the Company to another person or entity, other than (A) any transaction pursuant to which holders of the voting stock of the Company immediately prior to such transaction are entitled to exercise, directly or indirectly, 20% or more of the total voting power of all shares of the capital stock of the Company entitled to vote generally in the election of directors of the continuing or surviving entity immediately after such transaction, or (B) any merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Shares of the Company solely into shares of common stock of the surviving entity. "Change of Control Average" has the meaning set forth in Section 12(d)(xiii). "closing price" with respect to any securities on any day means the closing price on such day or, if no such sale takes place on such day, the average of the reported high and low prices on such day, in each case on the Nasdaq National Market or the New York Stock Exchange, as applicable, or, if such security is not listed or admitted to trading on such national market or exchange, on the principal national securities exchange or quotation system in the United States on which such security is quoted or listed or 35 35 admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system in the United States, the average of the high and low prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated or a similar generally accepted reporting service in the United States, or, if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors. "Common Share Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Shares have the right to receive any cash, securities or other property or in which the Common Shares (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of shareholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). "Current Market Price" means the average of the daily closing prices per Common Share for the 10 consecutive Trading Days immediately prior to the date in question; provided, however, that (A) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 12(d)(i), (ii), (iii), (iv), (v) or (vi) occurs during such 10 consecutive Trading Days, the closing price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (B) if the "ex" date for any event (other 36 36 than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 12(d)(i), (ii), (iii), (iv), (v) or (vi) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the closing price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event and (C) if the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (A) or (B) of this proviso, the closing price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 12(d)(iv) or (v), whose determination shall be conclusive and described in a resolution of the Board of Directors) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one Common Share as of the close of business on the day before such "ex" date. For purposes of any computation under Section 12(d)(vi), the Current Market Price on any date shall be deemed to be the average of the daily closing prices per Common Share for such day and the next two succeeding Trading Days; provided, however, that, if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 12(d)(i), (ii), (iii), (iv), (v) or (vi) occurs on or after the Expiration Time for the tender or exchange offer requiring such computation and prior to the day in question, the closing price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such closing price by the reciprocal of the fraction by which the Conversion Price is so required to be 37 37 adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date (1) when used with respect to any issuance or distribution, means the first date on which the Common Shares trade regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of Common Shares, means the first date on which the Common Shares trade regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective and (3) when used with respect to any tender or exchange offer means the first date on which the Common Shares trade regular way on such exchange or in such market after the Expiration Time of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to this Section 12(d), such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of this Section 12(d) and to avoid unjust or inequitable results, as determined in good faith by the Board of Directors. "fair market value" shall mean the amount which a willing buyer would pay a willing seller in an arm's-length transaction. "Temporary Conversion Price Adjustment Period" has the meaning set forth in Section 12(d)(xiii). "Person" includes any syndicate or group which would be deemed to be a "person" under Section 13d-3 of the Exchange Act. (viii) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 12(d)(viii) are not required to be made shall be carried forward and taken into account in any 38 38 subsequent adjustment. All calculations under this Section 12 shall be made by the Company and shall be made to the nearest cent. No adjustment need be made for a change in the par value or no par value of the Common Shares. (ix) Except in the case of a Change of Control as provided in Section 12(d)(xiii), whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Registrar an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to each holder of Series D Preferred Shares at such holder's last address appearing on the register of holders maintained for that purpose within 20 days of the effective date of such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. (x) In any case in which this Section 12(d) provides that an adjustment shall become effective immediately after a Common Share Record Date for an event, the Company may defer until the occurrence of such event issuing to the holder of any Series D Preferred Share converted after such Common Share Record Date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Common Shares issuable upon such conversion before giving effect to such adjustment. (xi) For purposes of this Section 12(d), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not pay any dividend or make any distribution on Common Shares held in the treasury of the Company. 39 39 (xii) In lieu of making any adjustment to the Conversion Price pursuant to Section 12(d)(v), the Company may elect to reserve an amount of cash for distribution to the holders of Series D Preferred Shares upon the conversion of the Series D Preferred Shares so that any such holder converting Series D Preferred Shares will receive upon such conversion, in addition to the Common Shares and other items to which such holder is entitled, the full amount of cash which such holder would have received if such holder had, immediately prior to the Common Share Record Date for such distribution of cash, converted its Series D Preferred Shares into Common Shares, together with any interest accrued with respect to such amount, in accordance with this Section 12(d)(xii). The Company may make such election by providing an Officers' Certificate to the Registrar to such effect on or prior to the payment date for any such distribution and depositing with the Registrar on or prior to such date an amount of cash equal to the aggregate amount that the holders of Series D Preferred Shares would have received if such holders had, immediately prior to the Common Share Record Date for such distribution, converted all the Series D Preferred Shares into Common Shares. Any such funds so deposited by the Company with the Registrar shall be invested by the Registrar in unconditional U.S. Government obligations with a maturity not more than three months from the date of issuance. Upon conversion of Series D Preferred Shares by a holder thereof, such holder shall be entitled to receive, in addition to the Common Shares issuable upon conversion, an amount of cash equal to the amount such holder would have received if such holder had, immediately prior to the Common Share Record Date for such distribution, converted its Series D Preferred Shares into Common Shares, along with such holder's pro rata share of any accrued interest earned as a consequence of the investment of such funds. Promptly after making an election pursuant to this Section 12(d)(xii), the Company shall give or shall cause to be given notice to all holders of Series D Preferred Shares of such election, which notice shall state the amount of cash per Series D Preferred Share such holders shall be entitled to receive (excluding interest) upon conversion of the Series D Preferred 40 40 Shares as a consequence of the Company having made such election. (xiii) if a Change of Control occurs, the Conversion Price shall be reduced for a period of 30 days (the "Temporary Conversion Price Adjustment Period") commencing on the day the Company gives notice by mail (as described below) to the holders of Series D Preferred Shares of such Change of Control to the arithmetic average of the volume-weighted average daily trading prices of the Common Shares of the Company (the "Change of Control Average") during ten Trading Days ending on the fifth Business Day prior to the date of the closing of the Change of Control; provided, however, such a reduction of the Conversion Price shall only be made if the Change of Control Average is less than the Conversion Price then in effect. After a Temporary Conversion Price Adjustment Period, the Conversion Price shall be the Conversion Price prevailing immediately prior to such Temporary Conversion Price Adjustment Period. In the event that any adjustment to the Conversion Price other than an adjustment pursuant to this Section 12(d)(xiii) shall occur during a Temporary Conversion Price Adjustment Period, such other adjustment shall be reflected (i) in the Conversion Price during a Temporary Conversion Price Adjustment Period and (ii) in the Conversion Price immediately after the Temporary Conversion Price Adjustment Period. Within 30 days after the occurrence of a Change of Control, the Company shall give notice by mail to the holders of the Series D Preferred Shares of any Change of Control resulting in an adjustment to the Conversion Price. In addition to any information required by applicable law or regulation, a notice of a Change of Control shall state (i) the first and last date of the Temporary Conversion Price Adjustment Period, (ii) the Conversion Price in effect immediately prior to the Temporary Conversion Price Adjustment Period, and (iii) the Conversion Price in effect during the Temporary Conversion Price Adjustment Period. (e) Subject to Section 13, in case of any consolidation of the Company with, or merger of the Company into, any other corporation, or in case of any merger of 41 41 another corporation into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancelation of outstanding shares of Common Shares of the Company), or in case of any sale, conveyance or transfer of all or substantially all the assets of the Company, the holder of each Series D Preferred Share then outstanding shall have the right thereafter, during the period such Series D Preferred Share shall be convertible as specified in Section 12(a), to convert such Series D Preferred Share only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of shares of Common Shares of the Company into which such Series D Preferred Share might have been converted immediately prior to such consolidation, merger, conveyance or transfer, assuming such holder of Common Shares of the Company failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer (provided that, if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer is not the same for each Common Share of the Company in respect of which such rights of election shall not have been exercised ("nonelecting share"), then for the purpose of this Section 12 the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting shares). Such securities shall provide for adjustments which, for events subsequent to the effective date of the triggering event, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 12. The above provisions of this Section 12 shall similarly apply to successive consolidations, mergers, conveyances or transfers. (f) In case: (i) the Company shall declare a dividend (or any other distribution) on its Common Shares payable otherwise than in cash out of its earned surplus; or (ii) the Company shall authorize the granting to all holders of its Common Shares of rights or warrants 42 42 to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (iii) of any reclassification of the Common Shares of the Company (other than a subdivision or combination of its outstanding Common Shares), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or the sale, conveyance or transfer of all or substantially all the assets of the Company; or (iv) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; then the Company shall cause to be filed with the Registrar and at each office or agency maintained for the purpose of conversion of Series D Preferred Shares, and shall cause to be mailed to all holders at their last addresses as they shall appear in the Series D Preferred Shares register, at least 20 Business Days (or 10 Business Days in any case specified in clause (i) or (ii) above) prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give the notice required by this Section 12(f) or any defect therein shall not affect the legality or validity of any dividend, distribution, right, warrant, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up, or the vote upon any such action. (g) The Company shall at all times reserve and keep available, free from preemptive rights, out of its 43 43 authorized but unissued Common Shares, for the purpose of effecting the conversion of Series D Preferred Shares, the full number of Common Shares then issuable upon the conversion of all outstanding Series D Preferred Shares. (h) The Company will pay any and all taxes that may be payable in respect of the issue or delivery of Common Shares on conversion of Series D Preferred Shares pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Shares in a name other than that of the holder of the Series D Preferred Share or Series D Preferred Shares to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid or is not payable. 13. Consolidation, Merger, Conveyance or Transfer. Without the vote or consent of the holders of a majority of the then Outstanding Series D Preferred Shares, the Company may not consolidate or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, any person unless (a) the entity formed by such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (in any such case, the "resulting entity") is a corporation organized and existing under the laws of Bermuda, the United States or any State thereof or the District of Columbia; (b) if the Company is not the resulting entity, the Series D Preferred Shares are converted into or exchanged for and become shares of such resulting entity, having in respect of such resulting entity the same (or more favorable) powers, preferences and relative, participating, optional or other special rights that the Series D Preferred Shares had immediately prior to such transaction; (c) immediately after giving effect to such transaction, no Voting Rights Triggering Event has occurred and is continuing and (d) the Company shall have delivered to the Registrar an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger, conveyance or transfer complies with this Section 13 44 44 and that all conditions precedent herein provided for relating to such transaction have been complied with. 14. SEC Reports; Reports by Company. So long as any Series D Preferred Shares are outstanding, the Company shall file with the SEC and, within 15 days after it files them with the SEC, with the Registrar and, if requested, furnish to the holders of Series D Preferred Shares all annual, quarterly and current reports and the information, documents, and other reports that the Company is required to file with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC Reports"). In the event the Company is not required or shall cease to be required to file SEC Reports pursuant to the Exchange Act, the Company will nevertheless file such reports with the SEC (unless the SEC will not accept such a filing). Whether or not required by the Exchange Act to file SEC Reports with the SEC, so long as any Series D Preferred Shares are Outstanding, the Company will furnish or cause to be furnished copies of the SEC Reports to the holders of Series D Preferred Shares at the time the Company is required to make such information available to the Registrar and to prospective investors who request it in writing. In addition, the Company has agreed that, for so long as any Series D Preferred Shares remain outstanding, it will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under Securities Act. 15. Definitions. For purposes of this Schedule, the following terms shall have the meaning set forth below: "Accumulated Dividends" has the meaning set forth in Section 6(a). "Agent Members" has the meaning set forth in Section 4(c). "Average Market Value" of the Common Shares means the arithmetic average of the Current Market Value of the Common Shares for the ten Trading Days ending on the second Business Day prior to (i) in the case of the payment of any dividend, the Record Date for such dividend and (ii) in the case of any other payment, the date of such payment. 45 45 "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to be closed. "Bye-Laws" has the meaning set forth in the Recitals. "Closing Date" means any Closing Date under the Purchase Agreement. "closing price" has the meaning set forth in Section 12(d)(vii). "Common Share Record Date" has the meaning set forth in Section 12(d)(vii). "Common Shares" means common shares of the Company, par value $0.01 per share. "Companies Act" has the meaning set forth in Section 6(a). "Company" has the meaning set forth in the Recitals. "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary. "Conversion Agent" has the meaning set forth in Section 5(a). "Conversion Condition" has the meaning set forth in Section 10(a). "Conversion Price" has the meaning set forth in Section 12(a). "Current Market Price" has the meaning set forth in Section 12(d)(vii). 46 46 "Current Market Value" of the Common Shares means the average volume-weighted daily trading price of the Common Shares as reported on the New York Stock Exchange, the Nasdaq National Market or such other SEC-recognized national securities exchange or trading system which the Company may from time to time designate, upon which the greatest number of the Common Shares are then listed or traded, for the Trading Day in question. "Depositary" has the meaning set forth in Section 4(b). "Dilution Trigger Event" has the meaning set forth in Section 12(d)(iv). "Distributed Securities" has the meaning set forth in Section 12(d)(iv). "Dividend Payment Date" means each February 15, May 15, August 15 and November 15; provided, however, that if such date shall not be a Business Day, then such date shall be the next Business Day. "Dividend Record Date" has the meaning set forth in Section 7(a). "DTC" has the meaning set forth in Section 4(b). "Exchange Act" means the Securities Exchange Act of 1934. "Expiration Time" has the meaning set forth in Section 12(d)(vi). "fair market value" has the meaning set forth in Section 12(d)(vii). "Global Series D Preferred Share" has the meaning set forth in Section 4(b). "Global Shares Legend" has the meaning set forth in Section 4(b). "Initial Purchasers" means Lehman Brothers Inc., Banc of America Securities LLC, Bear, Stearns & Co. Inc., 47 47 ING Barings LLC, C.E. Unterberg, Towbin, Credit Lyonnais Securities (USA) Inc. and SG Cowen Securities Corporation. "Junior Shares" has the meaning set forth in Section 9(a). "Mandatory Conversion" has the meaning set forth in Section 10(a). "Mandatory Conversion Date" has the meaning set forth in Section 10(b). "Mandatory Conversion Notice" has the meaning set forth in Section 10(b). "Mandatory Redemption" has the meaning set forth in Section 10(f). "Mandatory Redemption Date" has the meaning set forth in Section 10(f). "Memorandum of Association" has the meaning set forth in the Recitals. "nonelecting share" has the meaning set forth in Section 12(e). "Odd-lot Conversion" has the meaning set forth in Section 10(e). "Officers' Certificate" means a certificate of the Company signed in the name of the Company by its Chairman of the Board, its President or a Vice President and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary. "Outstanding" means when used with respect to Series D Preferred Shares means, as of the date of determination, all Series D Preferred Shares theretofore authenticated and delivered under this Schedule, except (a) Series D Preferred Shares theretofore converted into Common Shares in accordance with Sections 10 or 12 and Series D Preferred Shares theretofore canceled by the Registrar or delivered to the Registrar for cancelation; (b) Series D Preferred Shares for whose payment or 48 48 redemption money in the necessary amount has been theretofore deposited with the Registrar or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the holders of such Series D Preferred Shares; provided that, if such Series D Preferred Shares are to be redeemed, notice of such redemption has been duly given pursuant to this Schedule or provision therefor satisfactory to the Registrar has been made; and (c) Series D Preferred Shares (x) that are mutilated, destroyed, lost or stolen which the Company has decided to pay or (y) in exchange for or in lieu of which other Series D Preferred Shares have been authenticated and delivered pursuant to this Schedule; provided, however, that, in determining whether the holders of the Series D Preferred Shares have given any request, demand, authorization, direction, notice, consent or waiver or taken any other action hereunder, Series D Preferred Shares owned by the Company or any other obligor upon the Series D Preferred Shares or any affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Registrar shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Series D Preferred Shares which the Registrar has actual knowledge of being so owned shall be so disregarded. Series D Preferred Shares so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Registrar the pledgee's right so to act with respect to such Series D Preferred Shares and that the pledgee is not the Company or any other obligor upon the Series D Preferred Shares or any affiliate of the Company or of such other obligor. "Parity Shares" has the meaning set forth in Section 9(a). "Paying Agent" has the meaning set forth in Section 5(a). "Preferred Shares Liquidated Damages" has the meaning set forth in Section 6(b). 49 49 "Purchase Agreement" means the Purchase Agreement dated February 14, 2000, among the Company and the Initial Purchasers. "Purchased Shares" has the meaning set forth in Section 12(d)(vi). "QIBs" has the meaning set forth in Section 4(a). "Registrar" has the meaning set forth in Section 3. "Registrable Securities" has the meaning set forth in Section 5(c). "Registration Default" has the meaning set forth in Section 6(b). "Registration Rights Agreement" means the Registration Rights Agreement dated as of February 18, 2000, among the Company and the Initial Purchasers. "Regulation S" has the meaning set forth in Section 4(a). "Restricted Shares Legend" has the meaning set forth in Section 4(a). "resulting entity" has the meaning set forth in Section 13. "Rule 144A" has the meaning set forth in Section 4(a). "SEC" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the adoption of this Schedule such commission is not existing and performing the duties now assigned to it, then the body performing such duties at such time. "SEC Reports" has the meaning set forth in Section 14. 50 50 "Securities Act" has the meaning set forth in Section 4(a). "Senior Shares" has the meaning set forth in Section 9(a). "Series A Preferred Shares" means the Series A Convertible Preferred Stock, $0.01 par value, of the Company. "Series C Preferred Shares" means the 6% Series C Convertible Redeemable Preferred Stock due 2006, $0.01 par value, of the Company. "Series D Preferred Share Directors" has the meaning set forth in Section 8(a). "Series D Preferred Shares" has the meaning set forth in Section 1. "Shelf Registration Statement" has the meaning set forth in Section 6(b)(i). "Trading Day" means any Business Day on which the Common Shares are traded on a national, SEC-recognized exchange or trading system. "Transfer Restricted Securities" means each Registrable Security until the earlier of (A) the second anniversary of the last Closing Date pursuant to the Purchase Agreement and (B) such time as (1) such Registrable Security shall no longer constitute a restricted security for purposes of Rule 144(k) of the Securities Act or (2) such Registrable Security has been sold pursuant to the Shelf Registration Statement. "Voting Rights Triggering Event" has the meaning set forth in Section 8(a). 51 51 IN WITNESS WHEREOF, the Company has caused this Schedule to be duly executed and attested as of this 18th day of February, 2000. LORAL SPACE & COMMUNICATIONS LTD. by: /s/Eric J. Zahler ------------------------------ Name: Eric J. Zahler Title: President and Chief Operating Officer ATTEST: by: /s/Janet T. Yeung ------------------------------ Name: Janet T. Yeung Title: Associate General Counsel and Assistant Secretary 52 EXHIBIT A FACE OF SECURITY [Restricted Shares Legend (include if Security is not registered under the U.S. Securities Act of 1933): THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A OR REGULATION S THEREUNDER. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, REPRESENTS, ACKNOWLEDGES AND AGREES FOR THE BENEFIT OF THE ISSUERS THAT: (I) IT HAS ACQUIRED A "RESTRICTED" SECURITY WHICH HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT; (II) IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE WHEN THIS SECURITY NO LONGER CONSTITUTES A "RESTRICTED" SECURITY UNDER RULE 144(K) OF THE SECURITIES ACT EXCEPT (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY APPLICABLE JURISDICTION; AND (III) IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THIS SECURITIES OF THE RESALE RESTRICTIONS SET FORTH IN (II) ABOVE. ANY OFFER, SALE OR OTHER DISPOSITION PURSUANT TO THE FOREGOING CLAUSES (II)(E) AND (F) IS SUBJECT TO THE RIGHT OF THE ISSUER OF THIS SECURITY AND THE TRANSFER AGENT FOR SUCH SECURITIES TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS OR OTHER INFORMATION ACCEPTABLE TO THEM IN 53 FORM AND SUBSTANCE. IN ANY CASE THE HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THIS SECURITY EXCEPT AS PERMITTED BY THE SECURITIES ACT.] [Global Shares Legend (include if Security is issued as a global certificate): UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OF PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE PREFERRED STOCK SCHEDULE REFERRED TO BELOW. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH REGISTRAR AND TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.] Number of Shares Number: ____ ____ Shares 144A CUSIP NO.: 543885 60 2 Regulation S CUSIP NO.: G56462 16 4 6% SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK DUE 2007 OF LORAL SPACE & COMMUNICATIONS LTD. 54 LORAL SPACE & COMMUNICATIONS LTD., an exempted company organized under the laws of Bermuda (the "Company"), hereby certifies that [HOLDER] (the "Holder") is the registered owner of fully paid and non-assessable preference securities of the Company designated the 6% Series D Convertible Redeemable Preferred Stock due 2007, par value U.S.$0.01 and liquidation preference U.S.$50.00 per share (the "Preferred Stock"). The shares of Preferred Stock are transferable on the books and records of the Registrar, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Stock represented hereby are issued and shall in all respects be subject to the provisions of the schedule to the Bye-Laws of the Company dated February 18, 2000, as the same may be amended from time to time in accordance with its terms (the "Preferred Stock Schedule"). Capitalized terms used herein but not defined shall have the meaning given them in the Preferred Stock Schedule. The Company will provide a copy of the Preferred Stock Schedule to a Holder without charge upon written request to the Company at its principal place of business. Reference is hereby made to select provisions of the Preferred Stock set forth on the reverse hereof, and to the Preferred Stock Schedule, which select provisions and the Preferred Stock Schedule shall for all purposes have the same effect as if set forth at this place. Upon receipt of this certificate, the Holder is bound by the Preferred Stock Schedule and is entitled to the benefits thereunder. Unless the Transfer Agent's valid countersignature appears hereon, the shares of Preferred Stock evidenced hereby shall not be entitled to any benefit under the Preferred Stock Schedule or be valid or obligatory for any purpose. 55 IN WITNESS WHEREOF, the Company has executed this certificate as of the date set forth below. LORAL SPACE & COMMUNICATIONS LTD., By: -------------------------- Name: Title: [Seal] By: -------------------------- Name: Title: Dated: COUNTERSIGNED AND REGISTERED THE BANK OF NEW YORK as Transfer Agent, By: ---------------------- Authorized Signatory Dated: 56 REVERSE OF SECURITY LORAL SPACE & COMMUNICATIONS LTD. 6% Series B Convertible Redeemable Preferred Stock due 2007 Dividends on each share of Preferred Stock shall be payable at a rate per annum set forth in the face hereof or as provided in the Preferred Stock Schedule (including Preferred Stock Liquidated Damages). Dividends may be paid, at the option of the Company, in cash, or, subject to certain limitations, in shares of Common Stock of the Company or a combination of cash and shares of Common Stock of the Company. The shares of Convertible Preferred Stock shall be convertible into the Company's Common Stock in the manner and according to the terms set forth in the Preferred Stock Schedule. The Company shall furnish to any Holder upon request and without charge, a full summary statement of the designations, voting rights preferences, limitations and special rights of the shares of each class or series authorized to be issued by the Company so far as they have been fixed and determined and the authority of the Board of Directors to fix and determine the designations, voting rights, preferences, limitations and special rights of the class and series of shares of the Company. 57 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of Preferred Stock evidenced hereby to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints: - -------------------------------------------------------------------------------- agent to transfer the shares of Preferred Stock evidenced hereby on the books of the Transfer Agent and Registrar. The agent may substitute another to act for him or her. Date: ------------------------------------ Signature: ------------------------------- (Sign exactly as your name appears on the other side of this Convertible Preferred Stock Certificate) 58 Signature Guarantee:_____________________(1) - -------- (1) Signature must be guaranteed by an "eligible guarantor institution" (i.e., a bank, stockbroker, savings and loan association or credit union) meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934. 59 NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Preferred Stock) The undersigned hereby irrevocably elects to convert (the "Conversion") _________ shares of 6% Series D Convertible Redeemable Preferred Stock due 2007 (the "Preferred Stock"), represented by stock certificate No(s). (the "Preferred Stock Certificates") into shares of common stock, par value U.S.$0.01 per share ("Common Stock"), of Loral Space & Communications Ltd. (the "Company") according to the conditions of the schedule to the Company's Bye-Laws establishing the terms of the Preferred Stock (the "Preferred Stock Schedule"), as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the holder for any conversion, except for transfer taxes, if any. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof).* The undersigned represents and warrants that all offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon conversion of the Preferred Stock shall be made pursuant to registration of the Common Stock under the Securities Act of 1933 (the "Act"), or pursuant to any exemption from registration under the Act. Any holder, upon the exercise of its conversion rights in accordance with the terms of the Preferred Stock Schedule and the Preferred Stock, agrees to be bound by the terms of the Registration Rights Agreement. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in or pursuant to the Preferred Stock Schedule. Date of Conversion: -------------------------- Applicable Conversion Price: ----------------- Number of shares of 60 Preferred Stock to be Converted: ------------- Number of shares of Common Stock to be Issued: ------------------- Signature: ----------------------------------- Name: ---------------------------------------- Address:** ----------------------------------- Fax No.: ------------------------------------- *The Company is not required to issue shares of Common Stock until the original Preferred Stock Certificate(s) (or evidence of loss, theft or destruction thereof) to be converted are received by the Company or its Transfer Agent. The Company shall issue and deliver shares of Common Stock to an overnight courier not later than three business days following receipt of the original Preferred Stock Certificate(s) to be converted. **Address where shares of Common Stock and any other payments or certificates shall be sent by the Company. 61 [Global Share Schedule: (include if Security is issued as a global certificate)] SCHEDULE OF EXCHANGES FOR GLOBAL SECURITY The initial number of Series D Preferred Shares represented by this Global Series D Preferred Share shall be _______. The following exchanges of a part of this Global Series D Preferred Share have been made:
- ----------------------------------------------------------------------------------------------------------------------------------- Number of shares Amount of decrease in Amount of increase in represented by this Global number of shares number of shares Series D Preferred Share represented by this Global represented by this Global following such decrease or Signature of authorized Date of Exchange Series D Preferred Share Series D Preferred Share increase officer of Registrar ---------------- ------------------------ ------------------------ -------- -------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
EXHIBIT B 62 FORM OF TRANSFER CERTIFICATE (Transfers pursuant to Section 5(b)(ii), Section 5(b)(iii) or Section 5(b)(iv) of the Schedule) The Bank of New York, as Transfer Agent 101 Barclay Street, Floor 21 West New York, New York 10286 At: Stock Transfer Administration Re: Loral Space & Communications Ltd. 6% Series D Convertible Redeemable Preferred Shares due 2007 (the "Series D Preferred Shares") Reference is hereby made to Schedule IV (the "Schedule") to the Bye-laws of Loral Space & Communications Ltd. Capitalized terms used but not defined herein shall have the meanings given them in the Schedule. This letter relates to __________ Series D Preferred Shares (the "Securities") which are held [in the form of the [Global] Security (CUSIP No. __) with the Depositary](2) in the name of [name of transferor] (the "Transferor") to effect the transfer of the Securities. In connection with such request, and in respect of Securities, the Transferor does hereby certify the Securities are being transferred (i) in accordance with applicable securities laws of any state of the United States or any other jurisdiction and (ii) in accordance with their terms: - ------------------- (2) Insert, if appropriate. 63 CHECK ONE BOX BELOW: (1) [ ] to a transferee that the Transferor reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the Securities Act purchasing for its own account or for the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A; (2) [ ] outside the United States to a Non-U.S. Person in a transaction complying with Rule 904 of Regulation S under the Securities Act; (3) [ ] pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available); or (4) [ ] in accordance with another exemption from the registration requirements of the Securities Act (based upon an opinion of counsel if the Company so requests). [Name of Transferor] by: ------------------------ Name: Title: Dated: cc: Loral Space & Communications Ltd. 600 Third Avenue New York, NY 10016 At.: Corporate Secretary EX-10.1.1 4 AMENDED SHAREHOLDERS AGREEMENT 1 SHAREHOLDERS AGREEMENT DATED AS OF MARCH 29, 2000 BY AND BETWEEN LOCKHEED MARTIN CORPORATION AND LORAL SPACE & COMMUNICATIONS LTD. 2 SHAREHOLDERS AGREEMENT This SHAREHOLDERS AGREEMENT is entered into as of March 29, 2000 (this "Agreement"), by and between Lockheed Martin Corporation, a Maryland Corporation ("LMC"), and Loral Space & Communications Ltd., a Bermuda Company (the "Company"). LMC and those of its Affiliates (as defined in Section 1.1(a) hereof), if any, that are transferees with respect to any of the Equity Securities (as defined in Section 1.1(e)) are collectively referred to herein as the "Shareholders." RECITALS WHEREAS, LMC owns 45,896,978 shares of Series A Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock"), of the Company (together with the shares of common stock of the Company into which the Preferred Stock is convertible, the "Shares"); WHEREAS, the Company completed an offering of 8,000,000 shares of 6% Series D Convertible Redeemable Preferred Stock due 2007 (with an underwriters' overallotment option to purchase an additional 1,600,000 shares of Preferred Stock) on February 18, 2000, at a price of $50.00 per share (the "Rule 144A Offering") pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"); WHEREAS, LMC desires to effect the sale of the Shares but has agreed to withdraw its demand registration request and has agreed not to effect sales of the Shares from the date of the Letter Agreement (as defined below) until the earlier of (i) 90 days (or such shorter period as the Company shall advise is required, upon the advice of its investment bankers) after the closing of the Rule 144A Offering or (ii) May 31, 2000 (the "Lock Up Period"), subject to certain terms and conditions contained in a letter agreement between LMC and the Company dated February 11, 2000 (the "Letter Agreement"); WHEREAS, LMC, as the successor in interest to Loral Corporation, and the Company entered into a Shareholders Agreement dated April 23, 1996 (the "Original Shareholders Agreement"); and WHEREAS, LMC and the Company wish to terminate the Original Shareholders Agreement and replace it with this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 3 I. STANDSTILL AND VOTING PROVISIONS 1.1. Restrictions on Certain Actions by the Shareholders. (a) During the Term (as defined in Article III below), each Shareholder will not, and will cause each of its Affiliates (such term, as used in this Agreement, as defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), not to, singly or as part of a partnership, limited partnership, syndicate or other group (as those terms are used in Section 13(d)(3) of the Exchange Act), directly or indirectly: (i) acquire, offer to acquire, or agree to acquire, by purchase, gift or otherwise, any Equity Securities, except pursuant to a stock split, stock dividend, rights offering, recapitalization, reclassification, merger, consolidation, corporate reorganization or similar transaction; provided that at any time in which the Shareholders hold, in the aggregate, less than twenty percent (20%) of the Total Voting power, then the Shareholders may acquire Equity Securities so that the Shareholders hold, in the aggregate, up to twenty percent (20%) of the Total Voting Power; (ii) make, or in any way actively participate in, any "solicitation" of "proxies" to vote (as such terms are defined in Rule 14a-1 under the Exchange Act), solicit any consent or communicate with or seek to advise or influence any third party with respect to the voting of any Equity Securities or become a "participant" in any "election contest" (as such terms are defined or used in Rule 14a-11 under the Exchange Act), in each case with respect to the Company; (iii) form, join or encourage the formation of, any "person" or "group" within the meaning of Section 13(d) of the Exchange Act with respect to any Equity Securities; provided that this Section 1.1(a)(iii) shall not prohibit any such arrangement solely among the Shareholders and any of their respective Affiliates; (iv) deposit any Equity Securities into a voting trust or subject any such Equity Securities to any arrangement or agreement with respect to the voting thereof; provided that this Section 1.1(a)(iv) shall not prohibit any such arrangement solely among the Shareholders and any of their respective Affiliates; (v) initiate, propose or otherwise solicit Shareholders for the approval of one or more shareholder proposals with respect to the Company as described in Rule 14a-8 under the Exchange Act, or induce or attempt to induce any other third party to initiate any shareholder proposal; (vi) seek to place a representative on the Board of Directors of the Company or seek the removal of any member of the Board of Directors of the Company, except with the approval of the Board of Directors or management of the Company; 2 4 (vii) except with the approval of the Board of Directors or management of the Company, call or seek to have called any meeting of the shareholders of the Company; (viii) otherwise act to seek to control the management or policies of the Company, except with the approval of the Board of Directors or management of the Company; (ix) sell or otherwise transfer in any manner any Equity Securities to any "person" (within the meaning of Section 13(d)(3) of the Exchange Act) who, immediately following such sale or transfer, would, to the best of the Shareholder's knowledge, own more than four percent (4%) of any class of Equity Securities or who, without the approval of the Board of Directors of the Company, (A) has publicly proposed a business combination or similar transaction with, or a change of control of, the Company or who has publicly proposed a tender offer for Equity Securities or (B) who has discussed with the Company or any of its respective Affiliates the possibility of proposing a business combination or similar transaction with, or a change in control of, the Company; (x) sell or otherwise transfer in any manner to any person (as defined in clause (ix) above) in any single transaction or series of related transactions more than 2% of the outstanding Equity Securities; (xi) solicit, seek to effect, negotiate with or provide any information to any other party with respect to, or make any statement or proposal, whether written or oral, to the Board of Directors of the Company or any director or officer of the Company or otherwise make any public announcement or proposal whatsoever with respect to, any form of business combination transaction involving the Company, including, without limitation, a merger, exchange offer or liquidation of the Company's assets, or any corporate reorganization or similar transaction with respect to the Company, except in each case with the approval of the Board of Directors or management of the Company; or (xii) instigate or encourage any third party to do any of the foregoing. Notwithstanding clauses (ix) and (x) of this Section 1.1(a), the Shareholders (A) may effect any transaction under the Registration Statement (as defined in Section 2.1 hereof) in a bona fide underwritten offering reasonably calculated to achieve broad distribution, (B) also may effect any transaction (other than an underwritten offering) under the Registration Statement so long as it does not violate the provisions of clause (ix) of this Section 1.1(a), and (C) also may sell any number of the Shares to an investment banking firm for resale so long as such investment banking firm agrees that any resales of the Shares will be made in a manner consistent with the restrictions of clauses (ix) and (x) of this Section 1.1(a). 3 5 (b) The parties agree that the provisions of Section 1.1(a) (except clauses (ix) and (x) thereof) and Section 1.3 may not be amended to expand the Shareholders' rights thereunder. (c) In addition to the restrictions set forth in Section 1.1(a) hereof, the Shareholders agree not to sell or transfer or enter into any agreement to sell or transfer any of the Shares during the Lock Up Period; provided, however, that the Shareholders may sell or transfer or enter into an agreement to sell or transfer all or any portion of the Shares during the Lock Up Period if during the Lock Up Period the Company (i) effects a Conflicting Sale (as defined in Section 2.1(c) hereof) or (ii) files any registration statement (other than registration statements relating to the Shares, shares issued in the Rule 144A Offering and the shares issuable in respect thereof, and shares issued under registration statements relating solely to stock option, executive compensation or benefit plans, and no other shares; provided, however, that in any event, no securities other than the Shares shall be included in the prospectus that covers the Shares) for the benefit of any party (including itself) other than the Shareholders. (d) Notwithstanding the provisions of this Section 1.1, nothing herein shall apply with respect to any Equity Securities acquired from any person other than a Shareholder (i) held by any pension, retirement or other benefit plan managed by any Shareholder or any of its subsidiaries or other Affiliates or (ii) held in any account managed for the benefit of another person, by any subsidiary or other Affiliate of any of the Shareholders which is engaged in the financial services business. In addition, notwithstanding the provisions of this Section 1.1, nothing herein shall prohibit or restrict any (i) transfer of Equity Securities to or among any of the subsidiaries or other Affiliates of any of the Shareholders (provided that such subsidiary or Affiliate agrees to be bound to the provisions of this Agreement, upon which such subsidiary or Affiliate shall be entitled to all rights and benefits, and shall be subject to all obligations, of a Shareholder under this Agreement); (ii) assignment, pledge, mortgage, hypothecation, or other encumbrance or transfer of all or any of a Shareholder's Equity Securities in connection with any bona fide financing arrangement entered into by such person or otherwise in connection with any indebtedness owed by such Shareholder; provided that in the event that the Shareholder in question defaults, the creditor's rights and obligations with respect to the voting and transfer of such Equity Securities shall be the same as the Shareholder in question had under the provisions of this Agreement and the creditor in question shall be deemed to be a Shareholder under this Agreement for such purposes; or (iii) transfer of Equity Securities pursuant to any merger, consolidation, corporate reorganization, restructuring or any other similar transaction affecting the Company or pursuant to any involuntary transfer. (e) For the purposes of this Agreement, (i) the term "Equity Securities" shall mean the Preferred Stock and any securities entitled to vote generally in the election of directors of the Company, or any direct or indirect rights or options to acquire any such securities or any securities convertible or exercisable into or exchangeable for such securities; (ii) the term "Voting Power" shall mean the voting power in the general election of directors of the Company; (iii) the term "Total Voting Power" shall mean the total combined Voting Power of all the Equity Securities then outstanding, including, without limitation, the Preferred Stock, and, insofar as the Preferred Stock is concerned, it is deemed to have Voting Power equal to that of the Common Stock into which it is convertible; (iv) the term "Change of Control" shall mean the occurrence 4 6 of any of the following events: (A) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner of Equity Securities which represent at least forty percent (40%) of the Total Voting Power, or (B) during any one-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; and (v) the term "beneficial owner," and terms having similar import, shall mean any direct or indirect "beneficial owner," as such term is defined in Rules 13d-3 and 13d-5 under the Exchange Act. 1.2. HSR Clearance. (a) At any time after the date hereof (but subject to the provisions of Section 1.2(b) hereof), following a written request by LMC to the Company (such request, the "HSR Notice"), the Company and the Shareholders will (i) take promptly all actions necessary to make the filings required of the Shareholders, the Company or any of their respective Affiliates under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act") with respect to the right to convert Preferred Stock and continue to own the securities so received, the ownership and voting of Equity Securities by the Shareholders, any of the transactions contemplated by this Agreement or any other similar matters (all such exercise, ownership, voting, transaction and other similar matters, the "Filing Matters"), (ii) comply at the earliest practicable date with any request for additional information or documentary material received by the Company or the Shareholders or any of their Affiliates from any of the Federal Trade Commission, the Antitrust Division of the Department of Justice, state attorneys general, the Securities and Exchange Commission ("SEC"), or other governmental or regulatory authorities (all such authorities, the "Antitrust Authorities"), and (iii) cooperate with each other in connection with any of the filings referred to in clause (i) above and in connection with resolving any investigation or other inquiry commenced by any of the Antitrust Authorities. To the extent reasonably requested by LMC, the Company shall use all reasonable efforts to resolve such objections, if any, as may be asserted with respect to the Filing Matters. If any administrative, judicial or legislative action or proceeding is instituted (or threatened to be instituted) challenging any aspect of the Filing Matters as violative of any antitrust law, each of the Shareholders and the Company shall cooperate with each other to contest and resist any such action or proceeding, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) (an "Action") that is in effect and that restricts, prevents or prohibits the exercise by the Shareholders of the right to convert Preferred Stock and continue to own the securities so received, or the exercise by LMC of its rights with respect to the ownership and voting of Equity Securities or any of the transactions contemplated by this Agreement (any such decree, judgment, injunction or other order is hereafter referred to as an "Order"), including, without limitation, by pursuing all reasonable avenues of administrative and judicial appeal, provided that nothing contained in this Section 1.2(a) shall be construed to require any party hereto to hold separate or divest any of their respective assets or businesses or agree to any substantive 5 7 restriction thereon or on the conduct thereof. Each of the Company and LMC shall promptly inform the other party of any material communication received by such party from any Antitrust Authority regarding any of the Filing Matters or any of the other transactions contemplated hereby. For the purposes this Agreement, the term "HSR Clearance Date" shall mean the first date on which (x) any applicable waiting period under the HSR Act with respect to the Filing Matters shall have expired or been terminated, (y) there shall not be pending any Action commenced by any Antitrust Authority relating to any of the Filing Matters or any of the other transactions contemplated hereby, and (z) there shall not be in effect any Order. (b) Notwithstanding the provisions of Section 1.2(a) above, in the event that LMC delivers the HSR Notice to the Company, the Company shall be entitled to postpone for a reasonable period of time (but in no event later than 45 days), any filing referred to in Section 1.2(a)(i) above if the Company determines in its reasonable judgment and in good faith that such filing would delay the obtaining of any approval from an Antitrust Authority with respect to any announced or imminent material acquisition or disposition which would require a filing by the Company under the HSR Act. In the event of such postponement, the Company shall have the right to withdraw its HSR Notice and may deliver any such HSR Notice at any time thereafter. (c) LMC and the Company acknowledge that the waiting period under the HSR Act expired on March 5, 2000. 1.3 Voting and Related Matters. (a) General Voting Provisions. Prior to the HSR Clearance Date, no Shareholder shall have the right to convert Preferred Stock into common stock or the right to vote any Equity Securities with respect to the election of directors of the Company. Following the HSR Clearance Date, each Shareholder shall have the right to vote its Equity Securities to the extent permitted by the terms thereof on any matters submitted to a vote of the shareholders of the Company, provided that following the HSR Clearance Date any Shareholder shall have the right to vote any Equity Securities to the extent permitted by the terms thereof with respect to the election of directors of the Company without restriction, provided that in the event of an "election contest" (as such term is used in Rule 14a-11 under the Exchange Act) each Shareholder shall have the right to vote in the election contest only (i) as recommended by the Board of Directors or management of the Company or (ii) in the same proportions as the holders of Equity Securities (other than Shareholders) vote their Equity Securities. On each matter with respect to which a Shareholder is entitled to vote pursuant to this Section 1.3, each such Shareholder shall be present, in person or represented by proxy, at all such shareholder meetings of the Company so that all Equity Securities beneficially owned by it shall be counted for the purpose of determining the presence of a quorum at such meetings. For purposes of this Section 1.3, all references to the term "vote" shall include the execution and delivery of any written consent with respect to the taking of any shareholder action in lieu of a meeting of shareholders. (b) Special Limitation on Company Actions. The Company will not propose, and will use its best efforts to prevent, the adoption of any amendment to the charter documents of the Company that would adversely affect the rights of the Shareholders under this Agreement. 6 8 1.4 Certain Notices. Promptly, but in any event within 15 days following any repurchase by the Company of any of its outstanding Equity Securities, which repurchase has the effect of increasing the Total Voting Power of all Shareholders to an amount in excess of 20% of the Total Voting Power of all persons, the Company shall give written notice thereof to each Shareholder. II. REGISTRATION RIGHTS; SALES OF EQUITY SECURITIES 2.1 Registration and Blackout Period. (a) On or before April 15, 2000, the Company shall prepare and file on Form S-3 if permitted, or otherwise on the appropriate form, a registration statement (the "Registration Statement") under the Securities Act (the securities subject to such registration being referred to as the "Subject Securities") to register the Shares or other securities of the Company held by LMC or any Shareholder (any such Shareholder being referred to as a "Registering Shareholder"). Such registration shall be effected in accordance with the intended method or methods of disposition specified by the Registering Shareholder (including, but not limited to, Rule 415 (or any successor rule to similar effect) promulgated under the Securities Act). In connection therewith, the Company (i) shall use its best efforts to cause such securities to be registered under the Securities Act as soon as reasonably practicable with the objective of having the Registration Statement declared effective on or before the end of the Lock Up Period; (ii) shall prepare and timely file with the SEC periodic reports required to be filed by the Company under the Exchange Act, and such amendments and post-effective amendments, supplements and other filings under the Securities Act, and otherwise use its best efforts to maintain the effectiveness of the Registration Statement for a period of 12 months following the end of the Lock Up Period (or any longer period as contemplated in this Section 2.1(a)) and ensure that the Registration Statement and related prospectus comply with the requirements of the securities laws; (iii) shall arrange, in good faith consultation with LMC to accommodate prior commitments and critical business needs, for senior management of the Company who generally participate in "road shows" for the Company (including those individuals participating in the road show for the Rule 144A Offering), to be available to the Registering Shareholders and prospective investors for road show presentations to substantially the same extent with respect to at least one underwritten public offering (it being understood that the Company will in good faith consider a request for a second road show, provided that the Company shall not have an obligation for a second road show) consistent with those generally conducted by the Company when it issues equity securities for its own account, with all reasonable expenses (expenses customarily borne by the Company in connection with the offering of securities for its own account being deemed reasonable) to be borne by the Registering Shareholders; and (iv) covenants and agrees not to make any Conflicting Sale (as defined in Section 2.1(c) hereof) during the period commencing on the date of the Letter Agreement and ending on the later of the six month anniversary of the end of the Lock Up Period or the date that is six months after the Registration Statement is declared effective (the "Loral Lock Up Period"). Notwithstanding the foregoing to the contrary, (x) the Loral Lock Up Period will be extended for a period equal to any Blackout Period (as defined below) occurring during the Loral Lock Up Period and (y) the period during which the Company is required to use its best efforts in maintaining the 7 9 effectiveness of the Registration Statement in clause (ii) of the third sentence will be extended for a period equal to any Blackout Period occurring during the time the Registration Statement is to be effective. Notwithstanding the restrictions in clauses (ii), (iii) and (iv) of this Section 2.1(a), on the day that the Shareholders no longer beneficially own at least 3,000,000 shares of the Company's common stock (including all shares issuable upon conversion of any Preferred Stock that the Shareholders own) (the "Early Termination Date"), clauses (ii), (iii) and (iv) of this Section 2.1(a) shall be of no further force or effect, provided that if the Shareholders shall have completed an underwritten public offering of the Company's common stock within 90 days of the Early Termination Date and the managing underwriter of that offering so requests in writing, the provisions of clause (iv) shall nonetheless survive in accordance with their terms until the earliest of: (A) the 90th day following the Early Termination Date, (B) the date such clause would have otherwise expired, (C) if the Shareholders have any Shares remaining after that offering, the date the lock-up period agreed to by the Shareholders and their underwriters with respect to their remaining Shares terminates or is earlier released, and (D) the date the Shareholders' managing underwriter releases the Company from such lock-up provisions. Each Registering Shareholder agrees to provide all such information and materials and to take all such action as may be reasonably required in order to permit the Company to comply with all applicable requirements of the Securities Act and the SEC and to obtain any desired acceleration of the effective date of the Registration Statement. If the offering is to be underwritten, the managing underwriter or underwriters shall be selected by LMC and shall be reasonably satisfactory to the Company. (b) Following the Loral Lock Up Period and for so long as the Company is required to use its best efforts to maintain the effectiveness of the Registration Statement in accordance with Section 2.1(a) hereof, each of the Shareholders and the Company will refrain from selling or transferring or entering into an agreement to sell or transfer any shares of the Company's common stock or any securities convertible into or exchangeable for shares of the Company's common stock (other than sales or transfers pursuant to the terms of securities outstanding on the date of receipt of the written request contemplated by this Section 2.1(b) and sales or transfers pursuant to stock option or other executive compensation or benefit plans) upon one (but not more than one) written request (such written request to be made in accordance with Section 4.4 hereof) made by the other party in connection with any offering of the Company's common stock or securities convertible into or exchangeable for the Company's common stock in a public offering or Rule 144A transaction until after the close of business on the 21st day following receipt of such written request. (c) For the purposes of this Article II, (i) the term "Blackout Period" means (A) any period that the Registration Statement cannot be used by the Registering Shareholders as a result of a stop order issued by the SEC or developments in the business or affairs of the Company that the Company advises LMC in writing must be reflected in an amendment or supplement to the Registration Statement or the related prospectus and (B) with respect 8 10 solely to clause (ii) of the third sentence of Section 2.1(a), for any period during which sales of Shares are prohibited by Section 2.1(b); and (ii) the term "Conflicting Sale" means any sale or transfer, or entering into an agreement to sell or transfer, by the Company of any shares of the Company's common stock or any securities convertible into or exchangeable for shares of the Company's common stock (other than a sale or transfer in the Rule 144A Offering, sales or transfers pursuant to the terms of securities outstanding on the date of the Letter Agreement (as such terms exist on the date thereof) and sales or transfers pursuant to stock option or other executive compensation or benefit plans) (A) in any offering registered under the Securities Act of 1933, (B) in any offering pursuant to Rule 144A or (C) in a private placement, unless the purchaser agrees (I) not to make any offer or sale of, or to enter into any agreement to offer or sell, any such shares or securities for at least one year or such longer period as the Company is required to use its best efforts to maintain the effectiveness of the Registration Statement, and (II) not to otherwise sell or transfer or enter into any agreement to sell or transfer any such shares or securities except to a person who agrees in writing to the same restrictions. The Company warrants and agrees not to waive or amend the agreements contemplated by clauses (I) and (II) of the preceding sentence without LMC's prior written consent, which may be given or withheld in LMC's sole discretion, (y) to take such actions (including placing a restrictive legend on any certificates representing any securities) as may be reasonable and customary in connection with restrictions of the type set forth in clauses (I) and (II), and (z) to direct the registrar and transfer agent for its securities (including the Company itself if it is acting as its own registrar or transfer agent) not to issue any securities upon transfer without a written acknowledgement from the Company confirming that the transfer is not in violation of clause (I) or (II). Notwithstanding the foregoing, a "Conflicting Sale" shall not include the issuance in one or more transactions by the Company of shares of its common stock to holders of its 6% Series C Convertible Redeemable Preferred Stock (the "Series C Preferred") in connection with the exchange by such holders of their shares of Series C Preferred for the Company's common stock, provided that the total number of shares of the Company's common stock to be issued in such exchanges shall not exceed in the aggregate the sum of (x) the shares of the Company's common stock issuable upon conversion of the Series C Preferred and (y) three million shares of the Company's common stock. (d) The Company shall not grant to any other holder of its securities, whether currently outstanding or issued in the future, any incidental or piggyback registration rights with respect to the Registration Statement, and without the prior consent of the Registering Shareholders, the Company will not itself, and will not permit any other holder of its securities to, participate in any offering made pursuant to the Registration Statement (except as contemplated by Section 1.1(c)). If the Registering Shareholders consent to the inclusion of offers and sales of any other securities in the Registration Statement pursuant to this Section 2.1 and the underwriter(s) retained in connection with such registration subsequently advise the Registering Shareholders that such offering would be adversely affected by the inclusion of such other securities, the Registering Shareholders may in their sole discretion exclude all or some of such securities from such registration. 9 11 (e) The registration contemplated by this Agreement shall not be deemed to have been effected (and, therefore, not requested for purposes of this Section 2.1), (i) unless it has become effective or (ii) if after it has become effective such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason other than a misrepresentation or an omission by the Registering Shareholders and, as a result thereof, the Subject Securities requested to be registered cannot be completely distributed in accordance with the plan of distribution set forth in the Registration Statement. (f) Except for the pending transfer of the Shares by LMC to its wholly owned subsidiary, Lockheed Martin Investments Inc., LMC represents to the Company that, on or prior to the date hereof, LMC has not sold, assigned, pledged, mortgaged, hypothecated or otherwise encumbered or transferred, and has not entered into any agreements or arrangements with any third party to sell, assign, pledge, mortgage, hypothecate or otherwise encumber or transfer any of the Shares. 2.2 Non-Affiliate. The Company agrees to accept an opinion of LMC's in-house counsel to the effect that neither LMC nor any other Shareholder is an "affiliate" of the Company within the meaning of Rule 144 under the Securities Act, and covenants and agrees upon receipt of such opinion to (a) deliver a letter or certificate to LMC or such other Shareholder for distribution to potential purchasers confirming the foregoing, (b) direct the registrar and transfer agent for its Shares to issue certificates without restrictive legends to purchasers of the Shares, (c) acknowledge the ability under this Agreement of LMC and such other Shareholders to sell the Shares without volume limitations other than the limitations contemplated by clauses (ix) and (x) of Section 1.1(a), and (d) otherwise take no actions inconsistent with offers or sales of Shares by the Shareholders in accordance with this Agreement. 2.3 Registration Mechanics. (a) In connection with any offering of Subject Securities registered pursuant to Section 2.1 herein, the Company shall (i) furnish to the Registering Shareholders such number of copies of any prospectus (including preliminary and summary prospectuses) and conformed copies of the Registration Statement (including amendments or supplements thereto and, in each case, all exhibits) and such other documents as any Registering Shareholder may reasonably request; (ii) (A) use its best efforts to register or qualify the Subject Securities covered by the Registration Statement under such blue sky or other state securities laws for offer and sale as the Registering Shareholders shall reasonably request and (B) keep such registration or qualification in effect for so long as the Registration Statement remains in effect; provided that the Company shall not be obligated to qualify to do business as a foreign corporation under the laws of any jurisdiction in which it shall not then be qualified or to file any general consent to service of process in any jurisdiction in which such a consent has not been previously filed or subject itself to taxation in any jurisdiction wherein it would not otherwise be subject to tax but for the requirements of this Section 2.3; (iii) use its best efforts to cause all Subject Securities covered by the Registration Statement to be registered with or approved by such other federal or state government agencies or authorities as may be necessary, in the opinion of counsel to the 10 12 Registering Shareholders, to enable the Registering Shareholders to consummate the disposition of such Subject Securities; (iv) notify the Registering Shareholders any time when a prospectus relating thereto is required to be delivered under the Securities Act upon discovery that, or upon the happening of any event as a result of which, the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and (subject to the good faith determination of the Company's Board of Directors as to whether to permit sales under the Registration Statement), at the request of any Registering Shareholder promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances under which they were made; (v) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC; (vi) use its best efforts to list the Subject Securities covered by such registration statement on the New York Stock Exchange or on any other exchange on which the Subject Securities are then listed, if required by the rules of any such exchange; (vii) use its best efforts to obtain a "cold comfort" letter from the independent public accountants for the Company in customary form and covering matters of the type customarily covered by such letters as may be reasonably requested by the Registering Shareholders in the event of a registration effected pursuant to Section 2.1 hereof; (viii) execute and deliver all instruments and documents (including in an underwritten offering an underwriting agreement in customary form) and take such other actions and obtain such certificates and opinions as the Registering Shareholders reasonably request in order to effect an underwritten public offering; and (ix) before filing the Registration Statement or any amendment or supplement thereto, and as far in advance as is reasonably practicable, furnish to each Registering Shareholder and its counsel copies of such documents. In connection with any offering of Subject Securities registered pursuant to Section 2.1, the Company shall (x) furnish to the underwriter, if any, unlegended certificates representing ownership of the Subject Securities being sold in such denominations as requested and (y) instruct any transfer agent and registrar of the Subject Securities to release any stop transfer orders with respect to such Subject Securities. (b) Before filing with the SEC the Registration Statement or any amendments or supplements thereto, the Company shall furnish to the Registering Shareholders or their respective counsel copies of all such documents proposed to be filed, in order to give the Registering Shareholders or their respective counsel sufficient time to review such documents, and such documents may thereafter be filed subject to any timely and reasonable comments of the Registering Shareholders or their respective counsel. The Company shall (i) deliver promptly to the Registering Shareholders or their respective counsel copies of all written communications between the Company and the SEC relating to such registration statement, and (ii) advise the Registering Shareholders or their respective counsel promptly of, and provide the Registering Shareholders or their respective counsel with the opportunity to participate in (to the extent reasonably practicable), all telephonic and other non-written communications between the Company and the SEC relating to such registration statement. The Company shall respond promptly to any comments from the SEC with respect thereto, after consultation with the Registering Shareholders or their respective counsel, and shall take such other actions as shall be 11 13 reasonably required in order to have such registration statement declared effective under the Securities Act as soon as reasonably practicable as set forth in Section 2.1(a). (c) Each Registering Shareholder agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in clause (iv) of Section 2.3(a), it will forthwith discontinue its disposition of Subject Securities pursuant to the Registration Statement relating to such Subject Securities until its receipt of the copies of the supplemented or amended prospectus contemplated by clause (iv) of Section 2.3(a) and, if so directed by the Company, will deliver to the Company all copies (other than permanent file copies) then in its possession of the prospectus relating to such Subject Securities current at the time of receipt of such notice. If any Registering Shareholder's disposition of Subject Securities is discontinued pursuant to the foregoing sentence, unless the Company thereafter extends the effectiveness of the Registration Statement to permit dispositions of Subject Securities by the Registering Shareholder for an aggregate of 60 days (or 90 days, if the Company is eligible to use a Form S-3, or successor form), whether or not consecutive, or, if longer, the period contemplated by Section 2.1(a), the registration contemplated by this Agreement shall not be deemed to have been effected. 2.4 Expenses. The Registering Shareholders shall pay all agent fees and commissions and underwriting discounts and commissions related to Subject Securities being sold by the Registering Shareholders and the fees and disbursements of its counsel and accountants and the Company to the extent permitted by applicable law shall pay all fees and disbursements of its counsel and accountants in connection with the Registration Statement. All other fees and expenses in connection with the Registration Statement (including, without limitation, all registration and filing fees, all printing costs, all fees and expenses of complying with securities or blue sky laws) shall to the extent permitted by applicable law be borne equally by the Registering Shareholders and the Company; provided that the Registering Shareholders shall not be obligated to pay any expenses relating to work that would otherwise be incurred by the Company including, but not limited to, the preparation and filing of periodic reports with the SEC. 2.5 Indemnification and Contribution. (a) In the case of any offering registered pursuant to this Article II, the Company agrees to indemnify and hold each Registering Shareholder, each underwriter, if any, of the Subject Securities under such registration and each person who controls any of the foregoing within the meaning of Section 15 of the Securities Act, and any officer, employee or partner of the foregoing, harmless against any and all losses, claims, damages, or liabilities (including reasonable legal fees and other reasonable expenses incurred in the investigation and defense thereof) to which they or any of them may become subject under the Securities Act or otherwise (collectively "Losses"), insofar as any such Losses shall arise out of or shall be based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement relating to the sale of such Subject Securities (as amended if the Company shall have filed with the SEC any amendment thereof), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a 12 14 material fact contained in the prospectus relating to the sale of such Subject Securities (as amended or supplemented if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that the indemnification contained in this Section 2.5 shall not apply to such Losses which shall arise primarily out of or shall be based primarily upon any such untrue statement or alleged untrue statement, or any such omission or alleged omission, which shall have been made in reliance upon and in conformity with information furnished in writing to the Company by the Registering Shareholders or any such underwriter, as the case may be, specifically for use in connection with the preparation of the Registration Statement or prospectus contained in the registration statement or any such amendment thereof or supplement therein. (b) In the case of each offering registered pursuant to this Article II, the Registering Shareholders and each underwriter, if any, participating therein shall agree, substantially in the same manner and to the same extent as set forth in the preceding paragraph, severally to indemnify and hold harmless the Company and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, and the directors and executive officers of the Company, with respect to any statement in or omission from the Registration Statement or the prospectus contained in the Registration Statement (as amended or as supplemented, if amended or supplemented as aforesaid) if such statement or omission shall have been made in reliance upon or in conformity with information furnished in writing to the Company by the Registering Shareholders or such underwriter, as the case may be, specifically for use in connection with the preparation of the Registration Statement or the prospectus contained in the Registration Statement or any such amendment thereof or supplement thereto. (c) Each party indemnified under this Section 2.5 shall, promptly after receipt of notice of the commencement of any claim ("Claim") against such indemnified party in respect of which indemnity may be sought hereunder, notify the indemnifying party in writing of the commencement thereof. The failure of any indemnified party to so notify an indemnifying party shall not relieve the indemnifying party from any liability in respect of such Claim which it may have to such indemnified party on account of the indemnity contained in this Section 2.5, unless (and only in the event) the indemnifying party was materially prejudiced by such failure, and in no event shall such failure relieve the indemnifying party from any other liability which it may have to such indemnified party. In case any Claim in respect of which indemnification may be sought hereunder shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may desire, jointly with any other indemnifying party similarly notified to assume the defense thereof through counsel reasonably satisfactory to the indemnified party by notifying the indemnified party in writing of such election within 10 days after receipt of the indemnified party's initial notice of the Claim, and after such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 2.5 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation (unless such indemnified party reasonably objects to such assumption on the grounds that there may be defenses available to it 13 15 which are different from or in addition to those available to such indemnifying party in which event the indemnified party shall be reimbursed by the indemnifying party for the reasonable expenses incurred in connection with retaining separate legal counsel). If the indemnifying party undertakes to defend against such Claim within such 10-day period, the indemnifying party shall control the investigation, defense and settlement thereof; provided that (i) the indemnifying party shall use its reasonable efforts to defend and protect the interests of the indemnified party with respect to such Claim, (ii) the indemnified party, prior to or during the period in which the indemnifying party assumes control of such matter, may take such reasonable actions as the indemnified party deems necessary to preserve any and all rights with respect to such matter, without such actions being construed as a waiver of the indemnified party's rights to defense and indemnification pursuant to this Agreement, and (iii) the indemnifying party shall not, without the prior written consent of the indemnified party, consent to any settlement which (A) imposes any Losses on the indemnified party (other than those Losses which the indemnifying party agrees to promptly pay or discharge), and (B) with respect to any non-monetary provision of such settlement, would be likely, in the indemnified party's reasonable judgment, to have an adverse effect on the business operations, assets, properties or prospects of any Shareholder (in the event that Registering Shareholder or any of its Affiliates is the indemnified party), or the Company (in the event that the Company is an indemnified party) or such indemnified party. If the indemnifying party does not undertake within such 10-day period to defend against such Claim, then the indemnifying party shall have the right to participate in any such defense at its sole costs and expense, but the indemnified party shall control the investigation, defense and settlement thereof (provided that the indemnified party may not settle any such Claim without obtaining the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld by the indemnifying party; provided that in the event that the indemnifying party is in material breach at such time of the provisions of this Section 2.5, then the indemnified party shall not be obligated to obtain such prior written consent of the indemnifying party) at the reasonable cost and expense of the indemnifying party (which shall be paid by the indemnifying party promptly upon presentation by the indemnified party of invoices or other documentation evidencing the amounts to be indemnified). In addition to the foregoing, no indemnifying party shall, without the prior written consent of the indemnified party, affect any settlement of any pending or threatened proceeding in respect of which the indemnified party could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability arising out of such claim or proceeding. (d) If the indemnification provided for in this Section 2.5 is unavailable to an indemnified party or is insufficient to hold such indemnified party harmless from any Losses in respect of which this Section 2.5 would otherwise apply by its terms (other than by reason of exceptions provided herein), then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the amount paid or payable by such indemnified party as a result of such Losses, in such proportion as is appropriate to reflect the relative benefits received by and fault of the indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the offering to which such contribution relates as well as any other relevant equitable considerations. The relative benefit shall be determined by reference to, among other things, the amount of proceeds received by each party from the offering to which such contribution relates. The relative fault 14 16 shall be determined by reference to, among other things, each party's relative knowledge and access to information concerning the matter with respect to which the claim was asserted, and the opportunity to correct and prevent any statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include any legal or other fees or expenses incurred by such party in connection with any investigation or proceeding, to the extent such party would have been indemnified for such expenses if the indemnification provided for in this Section 2.5 was available to such party. (e) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 2.5 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 2.6 Rule 144. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any Shareholder, make publicly available other information), and it will take such further action as any Shareholder may reasonably request, all to the extent required from time to time to enable such Shareholder to sell Subject Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Shareholder, the Company will deliver to such Shareholder a written statement as to whether it has complied with such requirements. III. TERM 3.1 Term. The term (the "Term") of this Agreement shall commence on the date hereof and shall continue, unless specifically provided otherwise in this Agreement, until the earlier of (a) the date on which LMC and its Affiliates, on a fully diluted basis, beneficially own no Equity Security, (b) April 23, 2006, or (c) a Change in Control (as defined in Section 1.1(e) hereof). Upon expiration of the Term, the provisions of this Agreement shall terminate, and be of no further force or effect, automatically without any further action on the part of any parties hereto, provided that the provisions of Article II and Article IV shall continue without regard to the term limitation set forth in this sentence; provided further that no such termination shall relieve any party of any liability to the other party hereto, to the extent such liability is incurred prior to the expiration of the Term. IV. MISCELLANEOUS 4.1 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior negotiations, 15 17 commitments, agreements and understandings, including the Letter Agreement, both written and oral, between the parties or any of them with respect to the subject matter hereof. 4.2 Fees and Expenses. Except as otherwise provided in this Agreement, all costs and expenses incurred by the Shareholders and the Company in connection with consummating such party's obligations hereunder or otherwise shall be paid by the party incurring such cost or expense. 4.3 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES THEREOF (EXCEPT IN THOSE CIRCUMSTANCES WHERE THE CORPORATE LAW OF THE COMPANY'S JURISDICTION OF ORGANIZATION REQUIRES THE APPLICATION OF THE LAW OF THE COMPANY'S JURISDICTION OF ORGANIZATION WITH RESPECT TO A PARTICULAR MATTER). 4.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon (a) transmitter's confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier or when delivered by hand or (c) the expiration of five business days after the day when mailed by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice): (a) If to any of the Shareholders, to: c/o Lockheed Martin Corporation 6801 Rockledge Drive Bethesda, MD 20817 Telephone: (301) 897-6125 Telecopy No.: (301) 897-6333 Attention: General Counsel with a copy to: King & Spalding 1730 Pennsylvania Avenue, NW Washington, DC 20006 Telephone: (202) 737-0500 Telephone: (202) 626-3737 Attention: Glenn C. Campbell (b) If to the Company, to: Loral Space & Communications Ltd. c/o Loral SpaceCom Corporation 600 Third Avenue 16 18 New York, NY Telephone: (212) 697-1105 Telecopy No.: (212) 602-9805 Attention: General Counsel with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019 Telephone: (212) 821-8000 Telecopy No.: (212) 821-8111 Attention: Bruce R. Kraus, Esq. In addition to providing any notice required to be given by the Company pursuant to its Certificate of Incorporation in the manner specified therein, the Company shall send to each Shareholder by telecopy in accordance with this Section 4.4 a copy of each such notice. 4.5 Successors and Assigns; Reclassifications; No Third Party Beneficiaries. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto (whether by operation of law or otherwise) without the prior written consent of the other parties hereto (which consent may not be reasonably withheld), except that any party shall have the right, without the consent of any other party hereto, to assign all or a portion of its rights, interests, and obligations hereunder to one or more direct or indirect subsidiaries, but no such assignment of obligation shall relieve the assigning party from its responsibility therefor. In the event of any recapitalization or reclassification of any Equity Securities, or any merger, consolidation or other transaction with like effect, the securities issued in replacement or exchange for such Equity Securities shall be deemed Equity Securities hereunder. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement; provided that the indemnified parties referred to in Section 2.5 hereof are intended to be third party beneficiaries of the provisions of Section 2.5 hereof, and shall have the right to enforce such provisions as if they were parties hereto. 4.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 4.7 Further Assurances. Each party hereto or person subject hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as any other party hereto or person subject hereto may reasonably request in order to carry out the intent and 17 19 accomplish the purpose of this Agreement and the consummation of the transactions contemplated hereby. 4.8 Interpretation. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Unless otherwise specified in this Agreement, all references in this Agreement to "days" shall be deemed to be references to calendar days. 4.9 Legal Enforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without affecting the validity or enforceability of the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 4.10 Consent to Jurisdiction. Each of the parties hereto irrevocably and unconditionally (a) agrees that all suits, actions or other legal proceedings arising out of this Agreement or any of the transactions contemplated hereby (a "Suit") shall be brought and adjudicated solely in the United States District Court for the District of Delaware, or, if such court will not accept jurisdiction, in the Delaware Chancery Court or any court of competent civil jurisdiction sitting in New Castle County, Delaware, (b) submits to the non-exclusive jurisdiction of any such court for the purpose of any such Suit and (c) waives and agrees not to assert by way of motion, as a defense or otherwise in any such Suit, any claims that it is not subject to the jurisdiction of the above courts, that such Suit is brought in an inconvenient forum or that the venue of such Suit is improper. Each of the parties hereto also irrevocably and unconditionally consents to the service of any process, summons, pleadings, notices or other papers in a manner permitted by the notice provisions of Section 4.4 hereof and agrees that any such form of service shall be effective in connection with any such Suit; provided that nothing contained in this Section 4.10 shall affect the right of any party to serve process, pleadings, notices or other papers in any other manner permitted by applicable law. 4.11 Specific Performance. Each of the parties hereto acknowledges and agrees that in the event of any breach of this Agreement, each non-breaching party would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties hereto (a) will waive, in any action for specified performance, the defense of adequacy of a remedy at law and (b) shall be entitled, in addition to any other remedy to which they may be entitled at law or in equity, to compel specific performance of this Agreement in any action instituted in any court referred to in Section 4.10 hereof. 18 20 IN WITNESS WHEREOF, each of the parties has caused this Shareholders Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written. LOCKHEED MARTIN CORPORATION By: /s/ Janet McGregor Name: Title: LORAL SPACE & COMMUNICATIONS LTD. By: /s/ Avi Katz Name: Title: 19 EX-10.4.2 5 AMEND. TO AMENDED & RESTATED AGREEMENT OF LP 1 EXHIBIT 10.4.2 AMENDMENT to the AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of GLOBALSTAR, L.P. AMENDMENT (this "Amendment"), dated as of February 1, 2000 to the AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of GLOBALSTAR, L.P., a Delaware limited partnership ("Globalstar" or the "Partnership"), dated as of January 26, 1999 (the "Partnership Agreement"), by and among LORAL/QUALCOMM SATELLITE SERVICES, L.P., a Delaware limited partnership ("LQSS"), GLOBALSTAR TELECOMMUNICATIONS LIMITED, a Bermuda company ("GTL") and the limited partners signatories thereto as set forth on the signature pages hereto (collectively, the "Limited Partners" and together with LQSS and GTL, the "Partners"), as amended on December 8, 1999. WHEREAS, GTL is making an offering (the "Common Stock Offering") of 8,050,000 shares of common stock, par value $1.00 per share (the "Common Stock"). WHEREAS, the Partnership requires additional capital to accomplish its purposes; and WHEREAS, it is in the best interest of the Partnership to acquire such additional capital by contribution from GTL of the proceeds of the Common Stock Offering and for the Partnership to issue to GTL ordinary partnership interests in connection therewith. NOW, THEREFORE, the Partners, in consideration of the premises and their mutual agreements as hereinafter set forth, do hereby agree to amend the Partnership Agreement as follows: 1. AMENDMENT TO SECTION 2.1. Section 2.1 of the Partnership Agreement is hereby amended as follows: The definition of "Authorized Partnership Interests" set forth in Section 2.1 shall be deleted and replaced in its entirety with the following: "Authorized Partnership Interests" means the sum of (i) 55,448,837 Partnership Interests, (ii) 4,769,231 Partnership Interests, (iii) the number of Ordinary Partnership Interests issuable upon exercise of the warrants issuable to certain Partners or Affiliates thereof and to GTL in connection with the guarantee of the Partnership's obligations under the Globalstar Credit Agreement, (iv) the number of Series A Preferred Partnership Interests issued to GTL in connection with GTL's offering of the Series A Preferred Stock, including as a result of the exercise by the purchasers thereof of the option to purchase additional shares thereof under the purchase agreement relating thereto, (v) the number of Series B Preferred Partnership Interests issuable to GTL in connection with GTL's offering of the Series B Preferred Stock Offering, including as 2 a result of the exercise by the purchasers thereof of the option to purchase additional shares thereof under the purchase agreement relating thereto, (vi) the number of Ordinary Partnership Interests issuable upon conversion or exchange of the Series A Preferred Partnership Interests or Series B Preferred Partnership Interests or in satisfaction of any distribution, make-whole or redemption payment thereon, (vii) the number of Ordinary Partnership Interests issuable upon exercise of the warrants issuable to certain Partners of Globalstar, L.P., Loral/Qualcomm Satellite Services, L.P. or Loral/Qualcomm Partnership, L.P. or Affiliates thereof in connection with the guarantee of the Partnership's obligations under the $500 million credit agreement with Bank of America and the other lenders parties thereto, (viii) the number of Ordinary Partnership Interests issuable upon exercise of the Warrants issuable to Qualcomm Incorporated and its Affiliates in connection with up to $500 million of vendor financing provided by Qualcomm Incorporated to the Partnership, (ix) the number of Ordinary Partnership Interests or PPIs that may be issued in connection with an offering of common stock, preferred stock, OPIs, PPIs, or any other equity interests of GTL or the Partnership, in an aggregate offering amount equal to the difference between 300 million and the gross proceeds of the Series B Preferred Stock Offering including Ordinary Partnership Interests issuable upon conversion or exchange of any PPIs issued in connection with such offering, or in satisfaction of any distribution, distribution make-whole payment, or redemption payment thereon and (x) the number of Ordinary Partnership Interests issuable to GTL in connection with the Common Stock Offering; provided, however, that any greater number of Authorized Partnership Interests may be authorized from time to time with the Consent of the Partners. 2. DEFINED TERMS. Capitalized terms used herein not otherwise defined shall have the meanings set forth in the Partnership Agreement, as amended. 3. AMENDMENT TO SCHEDULE A. Schedule A to the Partnership Agreement is hereby amended, as of the date hereof, as revised by the Managing General Partner to reflect the issue of OPIs to GTL in connection with the Common Stock Offering. 4. EFFECTIVENESS. This Amendment shall become effective as of the date set forth above and when GTL shall have contributed the proceeds of the Common Stock Offering to the Partnership and the Partnership shall have issued the Ordinary Partnership Interests to GTL. 5. COUNTERPARTS. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto. 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. -2- 3 IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered by their respective duly authorized officer as of the day and year first above written. LORAL/QUALCOMM SATELLITE SERVICES, L.P. by LORAL/QUALCOMM PARTNERSHIP, L.P. its General Partner by LORAL GENERAL PARTNER, INC. its General Partner By: /s/Eric J. Zahler ------------------------------------ Name: Eric J. Zahler Title: Executive Vice President GLOBALSTAR TELECOMMUNICATIONS LIMITED By: /s/Eric J. Zahler ------------------------------------ Name: Eric J. Zahler Title: Executive Vice President Limited Partners: AIRTOUCH SATELLITE SERVICES, INC. DACOM CORPORATION DACOM INTERNATIONAL, INC. HYUNDAI CORPORATION HYUNDAI ELECTRONICS INDUSTRIES CO., LTD. LORAL/DASA GLOBALSTAR, L.P. LORAL SPACE & COMMUNICATIONS LTD. SAN GIORGIO S.p.A. TELESAT LIMITED TE. SA. M. VODASTAR CELLULAR LIMITED VODAFONE SATELLITE SERVICES LIMITED BY : LORAL/QUALCOMM SATELLITE SERVICES, L.P. by LORAL/QUALCOMM PARTNERSHIP, L.P. its General Partner by LORAL GENERAL PARTNER, INC. its General Partner By: /s/Eric J. Zahler ----------------------------------------- Name: Eric J. Zahler as Attorney-in-Fact EX-10.16.2 6 2ND AMENDMENT TO AMENDED & RESTATED CREDIT AGREE. 1 EXHIBIT 10.16.2 1 SECOND AMENDMENT SECOND AMENDMENT, dated as of September 4, 1998 (this "Amendment"), to and of the Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among LORAL SPACECOM CORPORATION (the "Borrower"), SPACE SYSTEMS/LORAL, INC. ("SS/L"), the Banks from time to time parties thereto (the "Banks"), ISTITUTO BANCARIO SAN PAOLO DI TORINO S.P.A. ("San Paolo"), individually and as selling bank (in such capacity, the "Selling Bank"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank of America"), as administrative agent (in such capacity, the "Administrative Agent") and as issuing bank, THE CHASE MANHATTAN BANK, as syndication agent and NATIONSBANK OF TEXAS, N.A., as documentation agent. W I T N E S S E T H : WHEREAS, the Borrower has requested that the Credit Agreement be amended as more fully set forth below; and WHEREAS, the Required Banks are willing to agree to such amendment; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. Section 2. Amendment of Subsection 1.1 (Definitions). Subsection 1.1 of the Credit Agreement is hereby amended by deleting the defined terms "Export Maturity Date" and "Export Termination Date" and substituting in lieu thereof the following new defined terms in proper alphabetical order: "`Export Maturity Date': June 30, 1999." 2 2 "`Export Termination Date': 23 months from the earlier of the average date of the final acceptance of satellite deliveries under the contract with Alenia to which the Export Loan Agreement relates and December 31, 1998, but in no event later than November 30, 2000." Section 3. Conditions Precedent. This Amendment shall become effective as of the date (the "Amendment Effective Date") that the Administrative Agent shall have received counterparts of this Amendment, duly executed by the Borrower, SS/L, the Selling Bank and the Required Banks. Section 4. Legal Obligation. The Company represents and warrants to each Bank that this Amendment constitutes the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyances, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. Section 5. Continuing Effect. Except for the amendments expressly provided herein, the Credit Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. The amendments provided herein shall be limited precisely as drafted and shall not be construed to be an amendment or waiver of any other provision of the Credit Agreement other than as specifically provided herein. Section 6. Expenses. The Borrower agrees to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Amendment and any other documents prepared in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. SECTION 7. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 3 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. LORAL SPACECOM CORPORATION By:/s/Nicholas C. Moren ------------------------------------ Title: Senior Vice President and Treasurer SPACE SYSTEMS/LORAL, INC. By:/s/Nicholas C. Moren ------------------------------------ Title: Senior Vice President and Treasurer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent and as a Bank By:/s/Steve A. Aronowitz ------------------------------------ Title: Managing Director BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Issuing Bank By:/s/Steve A. Aronowitz ------------------------------------ Title: Managing Director ISTITUTO BANCARIO SAN PAOLO DI TORINO, S.P.A., as Selling Bank and in its individual capacity By:/s/Instituto Bancario San Paolo Di Torino S.P.A., ------------------------------------------------- Title: By:/s/Instituto Bancario San Paolo Di Torino S.P.A., ------------------------------------------------- Title: 4 4 THE CHASE MANHATTAN BANK By:/s/Richard C. Smith ------------------------------------ Title: Vice President NATIONSBANK OF TEXAS, N.A. By: ------------------------------------ Title: THE BANK OF NEW YORK By:/s/Ken Sneider ------------------------------------ Title: Vice President BARCLAYS BANK PLC By: ------------------------------------ Title: CREDIT LYONNAIS, NEW YORK BRANCH By: ------------------------------------ Title: 5 5 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By:/s/Andreas Neumeier ------------------------------------ Title: Vice President By:/s/Joel Makowsky ------------------------------------ Title: Vice President THE INDUSTRIAL BANK OF JAPAN, LIMITED By:/s/J. Kenneth Biegen ------------------------------------ Title: Senior Vice President and Treasurer MELLON BANK N.A. By: ------------------------------------ Title: THE SANWA BANK, LIMITED, NEW YORK BRANCH By:/s/The Sanwa Bank, Limited, New York Branch -------------------------------------------- Title: SOCIETE GENERALE By: ------------------------------------ Title: 6 6 THE SUMITOMO BANK LIMITED By: ------------------------------------ Title: BANK OF MONTREAL By: ------------------------------------ Title: THE BANK OF NOVA SCOTIA By:/s/The Bank of Nova Scotia ------------------------------------ Title: BANQUE NATIONALE DE PARIS By:/s/Richard L. Sted ------------------------------------ Title: Senior Vice President By:/s/Sophie Revillard Kaufman ------------------------------------ Title: Vice President PARIBAS By:/s/John W. Kopcha ------------------------------------ Title: Vice President By:/s/Matthew C. Bishop ------------------------------------ Title: Assistant Vice President 7 7 BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH By:/s/Alexander Kohnert ------------------------------------ Title: Vice President By:/s/James H. Boyle ------------------------------------ Title: Second Vice President CIBC INC. By:/s/William J. Damm ------------------------------------ Title: Executive Director CITICORP USA, INC. By:/s/Citicorp USA, INC ------------------------------------ Title: FUJI BANK, LIMITED By: ------------------------------------ Title: THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED By:/s/The Long-Term Credit Bank of Japan Limited --------------------------------------------- Title: 8 8 THE MITSUBISHI TRUST AND BANKING CORPORATION By:/s/Scott J. Paige ------------------------------------ Title: Senior Vice President NATIONAL CITY BANK By: ------------------------------------ Title: PNC BANK, NATIONAL ASSOCIATION By:/s/Steffen W. Crowther ------------------------------------ Title: Vice President THE TOKAI BANK, LIMITED NEW YORK BRANCH By:/s/The Tokai Bank, Limited New York Branch ------------------------------------ Title: THE TOYO TRUST & BANKING CO., LTD. By:/s/The Toyo Trust & Banking Co., Ltd. ------------------------------------ Title: YASUDA TRUST AND BANKING COMPANY, LIMITED By: ------------------------------------ Title: 9 9 CREDITO ITALIANO By:/s/Credito Italiano ------------------------------------ Title: By:/s/Credito Italiano ------------------------------------ Title: EX-10.16.3 7 3RD AMENDMENT TO AMENDED & RESTATED CREDIT AGREE. 1 EXHIBIT 10.16.3 1 EXECUTION COPY THIRD AMENDMENT THIRD AMENDMENT, dated as of July 12, 1999 (this "Amendment"), to and of the Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among LORAL SPACECOM CORPORATION (the "Borrower"), SPACE SYSTEMS/LORAL, INC. ("SS/L"), the Banks from time to time parties thereto (the "Banks"), ISTITUTO BANCARIO SAN PAOLO DI TORINO S.P.A. ("San Paolo"), individually and as selling bank (in such capacity, the "Selling Bank"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank of America"), as administrative agent (in such capacity, the "Administrative Agent") and as issuing bank, THE CHASE MANHATTAN BANK, as syndication agent and NATIONSBANK OF TEXAS, N.A., as documentation agent. W I T N E S S E T H : WHEREAS, pursuant to the Credit Agreement, the Borrower was permitted to use the proceeds of the Term Loans and a portion of the Revolving Credit Facility to refinance and retire Intercompany Debt ("Intercompany Debt") owed by the Borrower to Loral Space and Communications Ltd. ("Loral-Bermuda") on the Closing Date so long as at least $200,000,000 of such Intercompany Debt remained outstanding as of the Closing Date; 2 2 WHEREAS, a portion of the Intercompany Debt is evidenced by a Promissory Note between the Borrower and Loral-Bermuda dated March 14, 1997 in an outstanding principal amount of $361,000,000 (the "Intercompany Note"); WHEREAS, the Borrower wishes to amend the Credit Agreement to permit the Borrower to make a prepayment of the Intercompany Note in cash or certain assets to the extent the principal amount thereof exceeds $200,000,000, which prepayment would have been permitted if made on the Closing Date; WHEREAS, in connection with the foregoing, the Borrower has requested that the Credit Agreement be amended as more fully set forth below; and WHEREAS, the Required Banks are willing to agree to such amendment upon terms and subject to the conditions set forth below; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein (including the recitals hereto) as therein defined. Section 2. Amendment of Subsection 9.2(c) (Limitation on Indebtedness). Subsection 9.2(c) is hereby amended by adding after the word "refinancing" appearing in the parenthetical contained therein the following: "and by any amount representing accrued or deferred interest accrued prior to or during the period of any extensions or renewals". Section 3. Amendment of Subsection 9.6 (Limitation on Sale of Assets). Subsection 9.6 is hereby amended by (a) deleting the word "or" appearing at the end of paragraph (g) thereof and (b) adding after paragraph (h) thereof the following: "; or (i) upon any termination of the lease agreement described in Item 2 on Schedule 9.9, the Borrower may take any actions required in connection with such termination to effectuate such termination, including transferring any of its rights under transponder capacity contracts in connection with any such termination." 3 3 Section 4. Amendment of Subsection 9.9 (Transactions with Affiliates). Subsection 9.9 of the Credit Agreement is hereby amended by deleting the words "in effect on the Closing Date" appearing in such subsection and by correcting the heading on Schedule 9.9 to the Credit Agreement (Certain Agreements) so that it reads "Schedule 9.9." Section 5. Amendment of Subsection 9.10 (Limitation on Intercompany Debt). Subsection 9.10 of the Credit Agreement is hereby amended to permit the Borrower to prepay the outstanding principal amount of the Intercompany Note from time to time to the extent the aggregate principal amount thereof exceeds $200,000,000 at such time (it being understood that the principal amount of the Intercompany Note may be increased to the extent the interest payable thereon is capitalized and such increase in the principal of the Intercompany Note shall not be subject to subsection 9.11), such prepayment to be made in cash or in assets of the Borrower consisting of the Borrower's ownership interests (valued at book value) in Telstar 6 and Telstar 7 and the FCC licenses relating thereto (any such prepayment with such assets shall be permitted under subsection 9.6 and shall not be included for purposes of determining compliance with any Dollar limitation contained therein). Section 6. Conditions Precedent. This Amendment shall become effective as of the date (the "Amendment Effective Date") that the Administrative Agent shall have received counterparts of this Amendment, duly executed by the Borrower, SS/L, and the Required Banks. Section 7. Legal Obligation. The Borrower represents and warrants to each Bank that the Credit Agreement and this Amendment constitute legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyances, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. Section 8. Continuing Effect. Except for the amendments expressly provided herein, the Credit Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. The amendments provided herein shall be limited precisely as drafted and shall not be construed to be an amendment or waiver of any other provision of the Credit Agreement other than as specifically provided herein. Section 9. Expenses. The Borrower agrees to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Amendment and any other documents prepared in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. SECTION 10. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT 4 4 SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 5 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. LORAL SPACECOM CORPORATION By:/s/Eric Zahler --------------------------------- Title: Vice President SPACE SYSTEMS/LORAL, INC. By:/s/Eric Zahler --------------------------------- Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent, Issuing Bank and a Bank By:/s/Steve A. Arnoowitz --------------------------------- Title: Managing Director SAN PAOLO IMI S.p.A., as Selling Bank and in its individual capacity By:/s/San Paolo IMI S.p.A. --------------------------------- Title: By:/s/San Paolo IMI S.p.A. --------------------------------- Title: THE CHASE MANHATTAN BANK By: --------------------------------- Title: 6 6 THE BANK OF NEW YORK By:/s/The Bank of New York --------------------------------- Title: BARCLAYS BANK PLC By: --------------------------------- Title: CREDIT LYONNAIS, NEW YORK BRANCH By:/s/John P. Judge --------------------------------- Title: Vice President DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By:/s/Joel Makowsky --------------------------------- Title: Vice President By:/s/Andreas Neumeier --------------------------------- Title: Vice President THE INDUSTRIAL BANK OF JAPAN, LIMITED By:/s/J. Kenneth Biegen --------------------------------- Title: Senior Vice President 7 7 MELLON BANK N.A. By: --------------------------------- Title: THE SANWA BANK, LIMITED, NEW YORK BRANCH By: --------------------------------- Title: SOCIETE GENERALE By:/s/Jose A. Moreno --------------------------------- Title: Director THE SUMITOMO BANK LIMITED By:/s/The Sumitomo Bank Limited --------------------------------- Title: BANK OF MONTREAL By: --------------------------------- Title: THE BANK OF NOVA SCOTIA By:/s/J. Alan Edwards --------------------------------- Title:Authorized Signatory 8 8 BANQUE NATIONALE DE PARIS By:/s/Richard L. Sted --------------------------------- Title: Senior Vice President By:/s/Sophie Revillard Kaufman --------------------------------- Title: Vice President PARIBAS By: --------------------------------- Title: By: --------------------------------- Title: BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH By:/s/Alexander Kohnert --------------------------------- Title: First Vice President By:/s/James H. Boyle --------------------------------- Title: Vice President CIBC INC. By:/s/Harold Birk --------------------------------- Title: Executive Director CIBC World Markets Corp. As Agent 9 9 CITIBANK, N.A. By: --------------------------------- Title: FUJI BANK, LIMITED By:/s/Teiji Teramoto --------------------------------- Title: Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED By:/s/Nozomi Moue --------------------------------- Title: Deputy General Manager THE MITSUBISHI TRUST AND BANKING CORPORATION By: --------------------------------- Title: NATIONAL CITY BANK By: --------------------------------- Title: PNC BANK, NATIONAL ASSOCIATION By:/s/Steffen W. Crowther --------------------------------- Title: Vice President 10 10 THE TOKAI BANK, LIMITED NEW YORK BRANCH By: --------------------------------- Title: THE TOYO TRUST & BANKING CO., LTD. By: --------------------------------- Title: UNICREDITO ITALIANO By:/s/Unicredito Italiano --------------------------------- Title: By:/s/Unicredito Italiano --------------------------------- Title: BANKERS TRUST COMPANY By:/s/Bankers Trust Company --------------------------------- Title: EX-10.16.4 8 4TH AMENDMENT TO AMENDED & RESTATED CREDIT AGREE. 1 EXHIBIT 10.16.4 1 FOURTH AMENDMENT FOURTH AMENDMENT, dated as of November 10, 1999 (this "Amendment"), to and of the Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among LORAL SPACECOM CORPORATION (the "Borrower"), SPACE SYSTEMS/LORAL, INC. ("SS/L"), the Banks from time to time parties thereto (the "Banks"), ISTITUTO BANCARIO SAN PAOLO DI TORINO S.P.A. ("San Paolo"), individually and as selling bank (in such capacity, the "Selling Bank"), BANK OF AMERICA, N.A. ("Bank of America"), as administrative agent (in such capacity, the "Administrative Agent") and as issuing bank, THE CHASE MANHATTAN BANK, as syndication agent and NATIONSBANK OF TEXAS, N.A., as documentation agent. W I T N E S S E T H : WHEREAS, the Credit Agreement provides for the issuance of Additional Letters of Credit from time to time during the period ending November 14, 1999 (the "Additional Letters of Credit Termination Date") on terms and conditions set forth in the Credit Agreement; and WHEREAS, the Borrower has requested that the Credit Agreement be amended to extend the Additional Letters of Credit Termination Date on the terms set forth herein; and WHEREAS, the Additional Letters of Credit Banks and the Required Banks are willing to agree to such amendment upon terms and subject to the conditions set forth below; and WHEREAS, the Borrower has requested that the Credit Agreement be amended to extend the Export Maturity Date on the terms set forth herein; and WHEREAS, the Selling Bank and the Required Banks are willing to agree to such amendment upon terms and subject to conditions set forth below; NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein (including the recitals hereto) as therein defined. 2 2 Section 2. Amendment of Subsection 1.1(Definitions). Subsection 1.1 of the Credit Agreement is hereby amended as follows: (a) by adding the following new defined terms in proper alphabetical order: "'Additional Letters of Credit Commitment Period': the period from and including the Closing Date to but not including the Additional Letters of Credit Termination Date or such earlier date on which the Additional Letters of Credit Commitments shall terminate as provided herein." "'Additional Letters of Credit Termination Date': December 31, 2000, or such earlier date as the Additional Letters of Credit Commitments shall terminate as provided herein." (b) by deleting the defined term "Export Maturity Date" and substituting in lieu thereof the following new defined term in proper alphabetical order: "'Export Maturity Date': December 31, 1999." Section 3. Amendment of Subsection 2.1(d) (Commitments) . Subsection 2.1(d) of the Credit Agreement is hereby amended by deleting the phrase "period ending November 14, 1999" from the third line thereof and substituting in lieu thereof the phrase "Additional Letters of Credit Commitment Period". Section 4. Amendment of Subsection 4.1(b) (Issuance of Syndicated Letters of Credit) . Subsection 4.1(b) of the Credit Agreement is hereby amended by deleting such subsection 4.1(b) in its entirety and substituting in lieu thereof the following: "(b) Each Standby L/C, Performance Letter of Credit and Commercial L/C issued hereunder shall, among other things, (i) be in such form requested by the Borrower from the Issuing Bank as shall be acceptable to the Issuing Bank in its sole discretion and (ii) have an expiry date occurring not later than the fifth Business Day preceding the Revolving Credit Termination Date or the Additional Letters of Credit Termination Date, in the case of Additional Letters of Credit" Section 5. Amendment of Subsection 4.5(a) (Syndicated Letter of Credit Fees). Subsection 4.5(a) of the Credit Agreement is hereby amended by deleting "50%" in clause (i)(y) thereof and substituting in lieu thereof "75%". Section 6. Assignment and Acceptance. Effective immediately upon the execution of this Amendment by the Borrower, SS/L and the Required Banks (prior to giving effect to this Amendment), each Additional Letters of Credit Bank (prior to giving effect to this Amendment) hereby irrevocably sells and assigns to the Persons listed on Schedule I hereto without recourse to such Additional Letters of Credit Banks, and each such Person hereby 3 3 irrevocably purchases and assumes from such Additional Letters of Credit Banks without recourse to such Additional Letters of Credit Banks, the Additional Letters of Credit Commitments such that, after giving effect thereto, the Additional Letters of Credit Commitments of the Banks shall be as set forth on such Schedule I. The provisions of Sections 6, 7, 8 and 9 of Exhibit B to the Credit Agreement are hereby incorporated herein matatis mutandis with respect to the assignment provided for in this Section 6. Section 7. Conditions Precedent. This Amendment (other than Section 2(b) and Section 5 hereof) shall become effective as of the date (the "Amendment Effective Date") that the Administrative Agent shall have received counterparts of this Amendment, duly executed by the Borrower, SS/L, the Additional Letters of Credit Banks (after giving effect to Section 6) and the Required Banks. Section 2(b) of this Amendment shall become effective as of the date that the Administrative Agent shall have received counterparts of this Amendment, duly executed by the Borrower, SS/L, the Selling Bank and the Required Banks. Section 5 of this Amendment shall become effective as of the date that the Administrative Agent shall have received counterparts of this Amendment, duly executed by the Borrower, SS/L and the Required Banks. Section 8. Legal Obligation. The Borrower represents and warrants to each Bank that the Credit Agreement and this Amendment constitute legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyances, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. Section 9. Continuing Effect. Except for the amendments expressly provided herein, the Credit Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. The amendments provided herein shall be limited precisely as drafted and shall not be construed to be an amendment or waiver of any other provision of the Credit Agreement other than as specifically provided herein. Section 10. Expenses. The Borrower agrees to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Amendment and any other documents prepared in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. SECTION 11. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 4 4 Section 12. Counterparts. This Amendment may be executed in any number of counterparts, each of which when executed and delivered, shall be deemed an original, and all such counterparts, taken together, shall constitute but one and the same instrument. [SIGNATURES FOLLOW] 5 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. As to Amendment (other than Section 2(b) and Section 5): LORAL SPACECOM CORPORATION By:/s/Nicholas C. Moren ---------------------------------- Title: Senior Vice President SPACE SYSTEMS/LORAL, INC. By:/s/Nicholas C. Moren ---------------------------------- Title: Senior Vice President As to Section 2(b) of Amendment: LORAL SPACECOM CORPORATION By:/s/Nicholas C. Moren ---------------------------------- Title: Senior Vice President SPACE SYSTEMS/LORAL, INC. By:/s/Nicholas C. Moren ---------------------------------- Title: Senior Vice President 6 6 As to Section 5 of Amendment: LORAL SPACECOM CORPORATION By:/s/Nicholas C. Moren ---------------------------------- Title: Senior Vice President SPACE SYSTEMS/LORAL, INC. By:/s/Nicholas C. Moren ---------------------------------- Title: Senior Vice President As to Amendment (other than Section 2(b) and Section 5): BANK OF AMERICA, N.A., as Administrative Agent, Issuing Bank and a Bank By:/s/Steve A. Aronowitz ---------------------------------- Title: Managing Director As to Section 2(b) of Amendment: BANK OF AMERICA, N.A., as Administrative Agent, Issuing Bank and a Bank By:/s/Steve A. Aronowitz ---------------------------------- Title: Managing Director As to Section 5 of Amendment: BANK OF AMERICA N.A., as Administrative Agent, Issuing Bank and a Bank By:/s/Steve A. Aronowitz ---------------------------------- Title: Managing Director 7 7 As to Amendment (other than Section 2(b) and Section 5): SAN PAOLO IMI S.p.A., as Selling Bank and in its individual capacity By: ---------------------------------- Title: By: ---------------------------------- Title: As to Section 2(b) of Amendment: SAN PAOLO IMI S.p.A., as Selling Bank and in its individual capacity By:/s/Luca Sacchi ---------------------------------- Title:Vice President By:/s/Carlo Tersico ---------------------------------- Title: DGM As to Section 5 of Amendment: SAN PAOLO IMI S.p.A., as Selling Bank and in its individual capacity By:/s/Luca Sacchi ---------------------------------- Title:Vice President By:/s/Carlo Tersico ---------------------------------- Title: DGM 8 8 As to Amendment (other than Section 2(b) and Section 5): THE CHASE MANHATTAN BANK By:/s/The Chase Manhattan Bank ---------------------------------- Title: As to Section 2(b) of Amendment: THE CHASE MANHATTAN BANK By:/s/The Chase Manhattan Bank ---------------------------------- Title: As to Section 5 of Amendment: THE CHASE MANHATTAN BANK By:/s/The Chase Manhattan Bank ---------------------------------- Title: As to Amendment (other than Section 2(b) ans Section 5): THE BANK OF NEW YORK By:/s/The Bank of New York ---------------------------------- Title: As to Section 2(b) of Amendment: THE BANK OF NEW YORK By:/s/The Bank of New York ---------------------------------- Title: 9 9 As to Section 5 of Amendment: THE BANK OF NEW YORK By:/s/The Bank of New York ---------------------------------- Title: As to Amendment (other than Section 2(b) and Section 5): BARCLAYS BANK PLC By:/s/L. Peter Yetman ---------------------------------- Title: Director As to Section 2(b) of Amendment: BARCLAYS BANK PLC By:/s/L. Peter Yetman ---------------------------------- Title: Director As to Section 5 of Amendment: BARCLAYS BANK PLC By:/s/L. Peter Yetman ---------------------------------- Title: Director As to Amendment (other than Section 2(b) and Section 5): CREDIT LYONNAIS, NEW YORK BRANCH By:/s/John P. Judge ---------------------------------- Title: Vice President 10 10 As to Section 2(b) of Amendment: CREDIT LYONNAIS, NEW YORK BRANCH By:/s/L. Peter Yetman ---------------------------------- Title: Vice President As to Section 5 of Amendment: CREDIT LYONNAIS, NEW YORK BRANCH By:/s/L. Peter Yetman ---------------------------------- Title: Vice President As to Amendment (other than Section 2(b) and Section 5): DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By:/s/Virginia Mahler Cosenza ---------------------------------- Title: Vice President By:/s/Joel Makowsky ---------------------------------- Title: Vice President As to Section 2(b) of Amendment: 11 11 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By:/s/Virginia Mahler Cosenza ---------------------------------- Title: Vice President By:/s/Joel Makowsky ---------------------------------- Title: Vice President As to Section 5 of Amendment: DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By:/s/Virginia Mahler Cosenza ---------------------------------- Title: Vice President By:/s/Joel Makowsky ---------------------------------- Title: Vice President As to Amendment (other than Section 2(b) and Section 5): THE INDUSTRIAL BANK OF JAPAN, LIMITED By:/s/Takuya Honjo ---------------------------------- Title: Senior Vice President As to Section 2(b) of Amendment: THE INDUSTRIAL BANK OF JAPAN, LIMITED By:/s/Takuya Honjo ---------------------------------- Title: Senior Vice President 12 12 As to Section 5 of Amendment: THE INDUSTRIAL BANK OF JAPAN, LIMITED By:/s/Takuya Honjo ---------------------------------- Title: Senior Vice President As to Amendment (other than Section 2(b) and Section 5): MELLON BANK N.A. By: ---------------------------------- Title: As to Section 2(b) of Amendment: MELLON BANK N.A. By: ---------------------------------- Title: As to Section 5 of Amendment: MELLON BANK N.A. By: ---------------------------------- Title: As to Amendment (other than Section 2(b) and Section 5): THE SANWA BANK, LIMITED, NEW YORK BRANCH By: ---------------------------------- Title: 13 13 As to Section 2(b) of Amendment: THE SANWA BANK, LIMITED, NEW YORK BRANCH By:/s/Stephen C. Small ---------------------------------- Title: As to Section 5 of Amendment: THE SANWA BANK, LIMITED, NEW YORK BRANCH By:/s/Stephen C. Small ---------------------------------- Title: Vice President As to Amendment (other than Section 2(b) and Section 5): SOCIETE GENERALE By:/s/Jose A. Moreno ---------------------------------- Title:Director As to Section 2(b) of Amendment: SOCIETE GENERALE By:/s/Jose A. Moreno ---------------------------------- Title:Director As to Section 5 of Amendment: SOCIETE GENERALE By:/s/Jose A. Moreno ---------------------------------- Title:Director 14 14 As to Amendment (other than Section 2(b) and Section 5): THE SUMITOMO BANK LIMITED By: ---------------------------------- Title: As to Section 2(b) of Amendment: THE SUMITOMO BANK LIMITED By: ---------------------------------- Title: As to Section 5 of Amendment: THE SUMITOMO BANK LIMITED By: ---------------------------------- Title: 15 15 As to Amendment (other than Section 2(b) and Section 5): BANK OF MONTREAL By: ---------------------------------- Title: As to Section 2(b) of Amendment: BANK OF MONTREAL By: ---------------------------------- Title: As to Section 5 of Amendment: BANK OF MONTREAL By: ---------------------------------- As to Amendment (other than Section 2 (b) and Section 5): THE BANK OF NOVA SCOTIA By:/s/J. Alan Edwards ---------------------------------- Title: Authorized Signatory As to Section 2(b) of Amendment: THE BANK OF NOVA SCOTIA By:/s/J. Alan Edwards ---------------------------------- Title: Authorized Signatory 16 16 As to Section 5 of Amendment: THE BANK OF NOVA SCOTIA By:/s/J. Alan Edwards ---------------------------------- Title: Authorized Signatory As to Amendment (other than Section 2(b) and Section 5): BANQUE NATIONALE DE PARIS By:/s/Sophie Revillard Kaufman ---------------------------------- Title: Vice President By:/s/Gwen Abbott ---------------------------------- Title: Assistant Vice President As to Section 2(b) of Amendment: BANQUE NATIONALE DE PARIS By:/s/Sophie Revillard Kaufman ---------------------------------- Title: Vice President By:/s/Gwen Abbott ---------------------------------- Title: Assistant Vice President As to Section 5 of Amendment: BANQUE NATIONALE DE PARIS By:/s/Sophie Revillard Kaufman ---------------------------------- Title: Vice President By:/s/Gwen Abbott ---------------------------------- Title: Assistant Vice President 17 17 As to Amendment (other than Section 2(b) and Section 5): PARIBAS By: ---------------------------------- Title: Vice President By: ---------------------------------- Title: As to Section 2(b) of Amendment: PARIBAS By: ---------------------------------- Title: By: ---------------------------------- Title: As to Section 5 of Amendment: PARIBAS By: ---------------------------------- Title: By: ---------------------------------- Title: 18 18 As to Amendment (other than Section 2(b) and Section 5): BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH By:/s/Hereward Drummond ---------------------------------- Title: Senior Vice President By:/s/Hereward Drummond ---------------------------------- Title: Vice President As to Section 2(b) of Amendment: BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH By:/s/Hereward Drummond ---------------------------------- Title: Senior Vice President By:/s/Hereward Drummond ---------------------------------- Title: Vice President As to Section 5 of Amendment: BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH By:/s/Hereward Drummond ---------------------------------- Title: Senior Vice President By:/s/Hereward Drummond ---------------------------------- Title: Vice President 19 19 As to Amendment (other than Section 2(b) and Section 5): CIBC INC. By:/s/Harold Birk ---------------------------------- Title: Executive Director CIBC Work Markets Corp. As Agent As to Section 2(b) of Amendment: CIBC INC. By:/s/Harold Birk ---------------------------------- Title: Executive Director CIBC Work Markets Corp. As Agent As to Section 5 of Amendment: CIBC INC. By:/s/Harold Birk ---------------------------------- Title: Executive Director CIBC Work Markets Corp. As Agent As to Amendment (other than Section 2(b) and Section 5): CITICORP USA, INC. By:/s/Walter L. Larsen ---------------------------------- Title: Managing Director As to Section 2(b) of Amendment: CITICORP USA, INC. By:/s/Walter L. Larsen ---------------------------------- Title: Managing Director 20 20 As to Section 5 of Amendment: CITICORP USA, INC. By:/s/Walter L. Larsen ---------------------------------- Title: Managing Director As to Amendment (other than Section 2(b) and Section 5): FUJI BANK, LIMITED By:/s/Fuji Bank, Limited ---------------------------------- Title: As to Section 2(b) of Amendment: FUJI BANK, LIMITED By:/s/Fuji Bank, Limited ---------------------------------- Title: As to Section 5 of Amendment: FUJI BANK, LIMITED By:/s/Fuji Bank, Limited ---------------------------------- Title: As to Amendment (other than Section 2(b) and Section 5): GENERAL ELECTRIC CAPITAL CORPORATION By:/s/Karl Kieffer ---------------------------------- Title: Duly Authorized Signatory 21 21 As to Section 2(b) of Amendment: GENERAL ELECTRIC CAPITAL CORPORATION By:/s/Karl Kieffer ---------------------------------- Title: Duly Authorized Signatory As to Section 5 of Amendment: GENERAL ELECTRIC CAPITAL CORPORATION By:/s/Karl Kieffer ---------------------------------- Title: Duly Authorized Signatory As to Amendment (other than Section 2(b) and Section 5): THE MITSUBISHI TRUST AND BANKING CORPORATION By:/s/Scott J. Paige ---------------------------------- Title: Senior Vice President As to Section 2(b) of Amendment: THE MITSUBISHI TRUST AND BANKING CORPORATION By:/s/Scott J. Paige ---------------------------------- Title: Senior Vice President As to Section 5 of Amendment: THE MITSUBISHI TRUST AND BANKING CORPORATION By:/s/Scott J. Paige ---------------------------------- Title: 22 22 As to Amendment (other than Section 2(b) and Section 5): NATIONAL CITY BANK By:/s/Joseph D. Robison ---------------------------------- Title: Vice President As to Section 2(b) of Amendment: NATIONAL CITY BANK By:/s/Joseph D. Robison ---------------------------------- Title: Vice President As to Section 5 of Amendment: NATIONAL CITY BANK By:/s/Joseph D. Robison ---------------------------------- Title: Vice President As to Amendment (other than Section 2(b) and Section 5): PNC BANK, NATIONAL ASSOCIATION By:/s/Steffen W. Crowther ---------------------------------- Title:Vice President As to Section 2(b) of Amendment: PNC BANK, NATIONAL ASSOCIATION By:/s/Steffen W. Crowther ---------------------------------- Title:Vice President 23 23 As to Section 5 of Amendment: PNC BANK, NATIONAL ASSOCIATION By:/s/Steffen W. Crowther ---------------------------------- Title:Vice President As to Amendment (other than Section 2(b) and Section 5): THE TOKAI BANK, LIMITED NEW YORK BRANCH By: ---------------------------------- Title: As to Section 2(b) of Amendment: THE TOKAI BANK, LIMITED NEW YORK BRANCH By:/s/Shinichi Nakatani ---------------------------------- Title: Assistant General Manager As to Section 5 of Amendment: THE TOKAI BANK, LIMITED NEW YORK BRANCH By: ---------------------------------- Title: As to Amendment (other than Section 2(b) and Section 5): THE TOYO TRUST & BANKING CO., LTD. By: ---------------------------------- Title: 24 24 As to Section 2(b) of Amendment: THE TOYO TRUST & BANKING CO., LTD. By:/s/Takeo Nagatani ---------------------------------- Title: Asistant General Manager International Department As to Section 5 of Amendment: THE TOYO TRUST & BANKING CO., LTD. By:/s/Takeo Nagatani ---------------------------------- Title: Asistant General Manager International Department As to Amendment (other than Section 2(b) and Section 5): UNICREDITO ITALIANO By:/s/Unicredito Italiano ---------------------------------- Title: By:/s/Unicredito Italiano ---------------------------------- Title: As to Section 2(b) of Amendment: UNICREDITO ITALIANO By:/s/Unicredito Italiano ---------------------------------- Title: By:/s/Unicredito Italiano ---------------------------------- Title: 25 25 As to Section 5 of Amendment: UNICREDITO ITALIANO By:/s/Unicredito Italiano ---------------------------------- Title: By:/s/Unicredito Italiano ---------------------------------- Title: As to Amendment (other than Section 2(b) and Section 5): BANKERS TRUST COMPANY By:/s/Bankers Trust Company ---------------------------------- Title: As to Section 2(b) of Amendment: BANKERS TRUST COMPANY By:/s/Bankers Trust Company ---------------------------------- Title: As to Section 5 of Amendment: BANKERS TRUST COMPANY By:/s/Bankers Trust Company ---------------------------------- Title: EX-10.26 9 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.26 1 EXECUTION COPY LORAL SPACE & COMMUNICATIONS LTD. 8,000,000 Shares of 6% Series D Convertible Redeemable Preferred Stock due 2007 (Liquidation Preference of $50 Per Share) REGISTRATION RIGHTS AGREEMENT New York, New York February 18, 2000 Lehman Brothers Inc. as Representative of the Purchasers named in Schedule I hereto c/o Lehman Brothers Inc. 3 World Financial Center 200 Vesey Street New York, New York 10285 Dear Sirs: 2 2 Loral Space & Communications Ltd., a Bermuda company (the "Company"), proposes to issue and sell to you (the "Purchasers"), upon the terms set forth in the Purchase Agreement dated February 14, 2000 (the "Purchase Agreement"), among the Company and the Purchasers named in Schedule I hereto, 9,600,000 shares (including up to 1,600,000 shares that the Company has granted the Purchasers an option to purchase pursuant to the Purchase Agreement) of its 6% Series D Convertible Redeemable Preferred Stock due 2007, par value $0.01 per share, liquidation preference of $50 per share (the "Preferred Stock") (such issuance and sale, the "Initial Placement"). The Preferred Stock will be convertible into shares of Common Stock, par value $.01 per share, of the Company (the "Common Stock") at the conversion price set forth in the Final Memorandum (as defined below). For purposes of this Agreement, the term "Securities" shall refer to the Preferred Stock, all shares of Common Stock issued (i) as dividends thereon, (ii) on conversion thereof or (iii) in redemption thereof, and any securities into which such shares of Preferred Stock or Common Stock shall be converted or into which they shall be changed by operation of law or otherwise. In satisfaction of a condition to your obligations under the Purchase Agreement, the Company agrees with you (i) for your benefit and (ii) for the benefit of the holders of the Securities (including you) from time to time until the earlier of (i) the second anniversary of the last Closing Date (as defined below) and (ii) such time as (A) such Securities shall no longer constitute restricted securities for purposes of Rule 144(k) of the Act (as defined below) or (B) all such Securities have been sold pursuant to the Shelf Registration Statement (as defined below) (each of the foregoing a "Holder" and together the "Holders"), as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" means the Securities Act of 1933 and the rules and regulations of the Commission promulgated thereunder. 3 3 "Affiliate" of any specified person means any other person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Closing Date" has the meaning set forth in the Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Damages Payment Date" means each of the quarterly dividend payment dates set forth in the schedule to the Bye-Laws of the Company setting forth the terms of the Preferred Stock. "Exchange Act" means the Securities Exchange Act of 1934 and the rules and regulations of the Commission promulgated thereunder. "Final Memorandum" has the meaning set forth in the Purchase Agreement. "First Closing Date" has the meaning set forth in the Purchase Agreement. "Holder" has the meaning set forth in the preamble hereto. "Incorporated Documents" means filings made by the Company with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act and incorporated by reference in the Shelf Registration Statement. "Initial Placement" has the meaning set forth in the preamble hereto. "Majority Holders" means the Holders of a majority of the shares of the Preferred Stock entitled to be registered under a Shelf Registration Statement; provided, 4 4 however, that Holders of Common Stock issued in respect of the Preferred Stock shall be deemed to be Holders of the number of shares of Preferred Stock which, when converted, would have resulted in such number of shares of Common Stock. "Managing Underwriters" means the investment banker or investment bankers and manager or managers that shall administer an underwritten offering of the securities covered by the Shelf Registration Statement. "Preferred Stock" has the meaning set forth in the preamble hereto. "Prospectus" means the prospectus included in any Shelf Registration Statement, as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Securities or Common Stock issuable upon conversion thereof covered by such Shelf Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Securities" has the meaning set forth in the preamble hereto. "Shelf Registration Period" has the meaning set forth in Section 2(b) hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 2 hereof which covers some of or all the Securities, on an appropriate form under Rule 415 under the Act or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Transfer Agent" means The Bank of New York. "Transfer Restricted Securities" means each Security until the earlier of (i) the second anniversary of the last Closing Date and (ii) such time as (A) such Security shall no longer constitute a restricted security 5 5 for purposes of Rule 144(k) of the Act or (B) such Security has been sold pursuant to the Shelf Registration Statement. "underwriter" means any underwriter of Securities in connection with an offering thereof under a Shelf Registration Statement. 2. Shelf Registration; Suspension of Use of Prospectus. (a) The Company shall prepare and not later than 90 days following the First Closing Date, file with the Commission and thereafter use its reasonable efforts to cause to be declared effective under the Act, as promptly as practicable but no later than 180 days following the First Closing Date (the "Effectiveness Target Date"), a registration statement (a "Shelf Registration Statement"), relating to the offer and sale of the Transfer Restricted Securities by the Holders from time to time in accordance with the methods of distribution set forth in such Shelf Registration Statement and Rule 415 under the Securities Act. The sole and exclusive remedy available to the Holders in the event that a Shelf Registration Statement is not filed or, if relevant, declared effective within the time periods specified in this Section 2(a) is the collection of additional dividends in accordance with Section 6 and the terms of the Preferred Stock. (b) The Company shall use its reasonable efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders until the earlier of (i) the second anniversary of the last Closing Date and (ii) such time as (A) the Securities shall no longer constitute restricted securities for purposes of Rule 144(k) of the Act or (B) all Securities have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its reasonable efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Securities covered thereby not to be able to offer and sell such Securities during that period, unless such action is (i) required by applicable law or (ii) taken pursuant to Section 2(c) hereof, and, in 6 6 either case, so long as the Company promptly thereafter complies with the requirements of Section 3(i) hereof, if applicable. (c) The Company may suspend the use of the Prospectus for a period not to exceed 60 days (or such longer period as is reasonably necessary under the circumstances) in any calendar year for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, public filings with the Commission, pending corporate developments and similar events. (d) Notwithstanding any other provisions of this Agreement to the contrary, the Company shall cause any Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Act and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3. Registration Procedures. In connection with any Shelf Registration Statement, the following provisions shall apply: (a) The Company shall furnish to you, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use its best efforts to reflect in each such document, when so filed with the Commission, such comments as you reasonably may propose; provided, however, that the Company shall be required only to furnish an Incorporated Document to you as promptly as practicable following its filing with the Commission. (b) The Company shall ensure that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto complies in all material respects 7 7 with the Act, (ii) any Shelf Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise you and the Holders and, if requested by you or any such Holder, confirm such advice in writing: (i) when a Shelf Registration Statement and any amendment thereto has been filed with the Commission and when the Shelf Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Shelf Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise you and the Holders and, if requested by you or any such Holder, confirm such advice in writing: (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Shelf Registration Statement or the initiation of any proceedings for that purpose; (ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities included in any Shelf Registration Statement for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and 8 8 (iii) of the suspension of the use of the Prospectus pursuant to Section 2(c) hereof or of the happening of any event that requires the making of any changes in the Shelf Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made); provided that such notice shall not be required to specify the nature of the event giving rise to the notice requirement hereunder. (d) The Company shall use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of any Shelf Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of Securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including documents incorporated by reference therein, financial statements and schedules, and, if the Holder so requests in writing, all exhibits (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of Securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Securities in connection with the offering and sale of the Securities covered by the Prospectus or any amendment or supplement thereto. 9 9 (g) Prior to any offering of Securities pursuant to any Shelf Registration Statement, the Company shall register or qualify or cooperate with the Holders of Securities included therein and their respective counsel in connection with the registration or qualification of such Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things reasonably necessary or advisable to enable the offer and sale in such jurisdictions of the Securities covered by such Shelf Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (h) The Company shall cooperate with the Holders of Securities to facilitate the timely preparation and delivery of certificates representing Securities to be sold pursuant to any Shelf Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of Securities pursuant to such Shelf Registration Statement. (i) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) above, the Company shall, if required pursuant to the Act or paragraph (c)(2)(iii) above, as promptly as practicable prepare a post-effective amendment to any Shelf Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the Securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (j) Not later than the effective date of any Shelf Registration Statement hereunder, the Company 10 10 shall provide a CUSIP number for each class of Securities registered under such Shelf Registration Statement, and provide the Transfer Agent with printed certificates for such Securities, in a form eligible for deposit with The Depository Trust Company. (k) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Shelf Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act. (l) The Company may require each Holder of Securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such Securities as the Company may from time to time reasonably require for inclusion in such Shelf Registration Statement. Any Holder who fails to provide such information shall not be entitled to use the Prospectus. (m) The Company shall, if requested, promptly incorporate in a prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters and Majority Holders reasonably agree should be included therein and shall make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment. (n) The Company shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of any Securities, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 5 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any), with respect to all parties to be indemnified 11 11 pursuant to Section 5, it being understood that all underwriting discounts and commissions, and all other underwriting fees, associated with such agreement in connection with such offering of the Securities shall, except as otherwise expressly agreed herein (including those expenses covered by Section 4), be for the account of the Holders or the underwriters. (o) The Company shall (i) make reasonably available for inspection by Holders of Securities to be registered thereunder and any Managing Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and any attorney, accountant or other agent retained by the Majority Holders of Securities to be registered thereunder or by any such Managing Underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company; (ii) cause the officers, directors and employees of the Company to supply all relevant information reasonably requested by any such Holders or Managing Underwriter, attorney, accountant or agent in connection with such Shelf Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company in good faith, as confidential at the time of delivery of such information shall be kept confidential by any such Holders and Managing Underwriter, attorney, accountant or agent, unless disclosure thereof is made in connection with a court proceeding or required by law, or such information has become available (not in violation of this Agreement) to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Holders of Securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Holders and Managing Underwriter, if any) addressed to each selling Holder and the underwriters, if any, covering such 12 12 matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by the Majority Holders of the Securities covered by such Shelf Registration Statement and by such Managing Underwriter; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, use its reasonable best efforts to retain any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Shelf Registration Statement), addressed to each selling Holder of Securities registered thereunder and the underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 3(i) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 3(o) shall be performed at (A) the effectiveness of such Shelf Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. 4. Registration Expenses. The Company shall bear all expenses incurred in connection with the performance of the Company's obligations under Sections 2 and 3 hereof and shall reimburse the Holders for the reasonable and duly documented fees and disbursements of (i) counsel designated by the Majority Holders to act as counsel for the Holders in connection therewith or (ii) in the absence of such selection of counsel by the Majority Holders, one firm designated by the underwriters to act as counsel for the Holders in connection therewith. It is understood, however, that as except provided in this Section 4, the Holders shall pay all their own costs and expenses, including stock transfer taxes due upon resale by them of any of the 13 13 Securities covered by a Shelf Registration Statement and any advertising expenses incurred in connection with any offers and sales they make. 5. Indemnification and Contribution. (a) In connection with any Shelf Registration Statement, the Company agrees to indemnify and hold harmless each Holder of the securities covered thereby (including the Purchasers), the directors, officers, employees and agents of each such Holder and each person who controls any such Holder within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Shelf Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that (i) the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder specifically for inclusion therein, (ii) the Company shall not be liable to any indemnified party under this indemnity agreement with respect to any Shelf Registration Statement or Prospectus to the extent that any such loss, claim, damage or liability of such indemnified party results solely from an untrue statement of a material fact contained in, or the omission of a material fact from, the Shelf Registration Statement or Prospectus which untrue statement or omission was corrected in an amended or supplemented Shelf Registration Statement or Prospectus, if (A) the person 14 14 alleging such loss, claim, damage or liability was not sent or given, at or prior to the written confirmation of such sale, a copy of the amended or supplemented Shelf Registration Statement or Prospectus, (B) the Company had previously furnished copies thereof to such indemnified party and (C) such delivery of a prospectus is finally judicially determined to be required by the Act and was not so made and (iii) the Company will not be liable to any indemnified party under this indemnity agreement with respect to any Shelf Registration Statement or Prospectus to the extent that any such loss, claim, damage or liability of such indemnified party results (a) from the use of a Shelf Registration Statement during a period when a stop order has been issued in respect thereof or any proceedings for that purpose have been initiated or (b) from the use of the Prospectus during a period when the use of the Prospectus has been suspended in accordance with Section 3(c)(2)(iii) hereof, provided, in each case, that Holders received prior notice of such stop order, initiation of proceedings or suspension. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company also agrees to indemnify or contribute to Losses, as provided in Section 5(d), of any underwriters of Securities registered under a Shelf Registration Statement, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Holders provided in this Section 5(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 3(n) hereof. (b) Each Holder of Securities covered by a Shelf Registration Statement (including the Purchasers) severally agrees to indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii) each of its officers who signs such Shelf Registration Statement and (iv) each person who controls the Company within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement 15 15 will be in addition to any liability which any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or in addition to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the 16 16 indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 5 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively, "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Shelf Registration Statement which resulted in such Losses; provided, however, that in no case shall the Purchasers be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Security, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such underwriter under the Shelf Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net 17 17 proceeds from the Initial Placement (before deducting expenses). Benefits received by the Purchasers shall be deemed to be equal to the total purchase discounts and commissions, and benefits received by any other Holders shall be deemed to be equal to the value such Holders realize by receiving Securities registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Shelf Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 5, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Shelf Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 5 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in Section 5 hereof, and will survive the sale by a Holder of Securities covered by a Shelf Registration Statement. 18 18 6. Liquidated Damages. (a) The Company and the Purchasers agree that the Holders of Transfer Restricted Securities shall suffer damages if the Company fails to fulfill its obligations pursuant to Section 2 hereof and that it would not be possible to ascertain the extent of such damages. Accordingly, the Company hereby agrees to pay liquidated damages ("Preferred Stock Liquidated Damages") to each Holder of Transfer Restricted Securities under the circumstances and to the extent set forth below: (i) from 90 days following the First Closing Date, if the Shelf Registration Statement is not filed with the Commission within 90 days following the First Closing Date; and (ii) from the Effectiveness Target Date if the Shelf Registration Statement is not effective on or prior to the Effectiveness Target Date; and (iii) if the Shelf Registration Statement has been declared effective by the Commission and such Shelf Registration Statement ceases to be effective or to be usable as contemplated by Section 2(b) at any time during the Shelf Registration Period (without being succeeded by a post-effective amendment to such Shelf Registration Statement that cures such failure and that is itself immediately declared effective) for any period of ten consecutive trading days that are also business days or for any 20 trading days that are also business days in any 180-day period in connection with resales of Transfer Restricted Securities (provided, that the Company will have the option of suspending the effectiveness of the Shelf Registration Statement, without becoming obligated to pay Preferred Stock Liquidated Damages, for periods of up to a total of 60 days in any calendar year if the Board of Directors of the Company determines that compliance with the disclosure obligations necessary to maintain the effectiveness of the Shelf Registration Statement at such time could reasonably be expected to have an adverse effect on the Company or a pending corporate transaction) 19 19 (each of the foregoing clauses (i) through (iii), a "Registration Default"). (b) In the event of each such Registration Default, the Company shall pay Preferred Stock Liquidated Damages to each Holder of shares of Preferred Stock that are Transfer Restricted Securities at a rate of 0.25% of the liquidation preference of the shares of Preferred Stock constituting Transfer Restricted Securities, which shall accrue from the date of the Registration Default to and including the 90th day following such Registration Default and increase by 0.25% for each subsequent 90 day period; provided, however, that the rate of such Preferred Stock Liquidated Damages may not exceed 1.00% of the Liquidation Preference of the Preferred Stock at any time. Following the cure of all Registration Defaults relating to any shares of Preferred Stock that are Transfer Restricted Securities, the accrual of Preferred Stock Liquidated Damages with respect to such shares of Preferred Stock that are Transfer Restricted Securities shall cease (without in any way limiting the effect of any subsequent Registration Default). A Registration Default under clause 6(a)(i) above shall be cured on the date that the Shelf Registration Statement is filed with the Commission. A Registration Default under clause 6(a)(ii) above shall be cured on the date that the Shelf Registration Statement is declared effective by the Commission. A Registration Default under clause 6(a)(iii) above shall be cured on the date the Shelf Registration Statement is declared effective or becomes usable. (c) The Company shall notify the Transfer Agent within one business day after (i) each and every date on which a Registration Default occurs and (ii) in the event of a Registration Default under Section 6(a)(i), the Effectiveness Target Date. Preferred Stock Liquidated Damages shall be paid by the Company to the record Holders of shares of Preferred Stock that are Transfer Restricted Securities on each Damages Payment Date by mailing checks to their registered addresses as they appear in the Preferred Stock register if no such accounts have been specified on or before the Damages Payment Date; provided that any Preferred Stock Liquidated Damages accrued with respect to any Preferred Stock or portion thereof called for redemption on a redemption date or converted into Common Stock on a conversion date prior to the Damages Payment Date, shall, in 20 20 any such event, be paid instead to the Holder that submitted such Preferred Stock for redemption or conversion on the applicable redemption date or conversion date, as the case may be, on such date (promptly following the conversion date, in the case of conversion of Preferred Stock). Each obligation to pay Preferred Stock Liquidated Damages shall be deemed to commence accruing on the date of the applicable Registration Default and to cease accruing when all Registration Defaults have been cured. (d) All Preferred Stock Liquidated Damages with respect to any shares of Preferred Stock that are Transfer Restricted Securities, that remain unpaid when such Securities cease to be Transfer Restricted Securities or cease to be outstanding, shall remain unpaid obligations of the Company until they have been paid in full. 7. Rules 144 and 144A. The Company shall use its reasonable efforts to file the reports required to be filed under the Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, will, upon the request of any Holder of Transfer Restricted Securities, make publicly available other information so long as necessary to permit sales of its securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder of Transfer Restricted Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Transfer Restricted Securities without registration under the Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). The Company will provide a copy of this Agreement to prospective purchasers of Securities identified to the Company by the Purchasers upon written request. Upon such request of any Holder of Transfer Restricted Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. 21 21 8. Miscellaneous. (a) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Majority Holders; provided that, with respect to any matter that directly or indirectly affects the rights of the Purchasers hereunder, the Company shall obtain the written consent of the Purchasers against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose Securities are being sold pursuant to a Shelf Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Shelf Registration Statement. 22 22 (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telecopier, or air courier guaranteeing overnight delivery: (1) if to a Holder, at the most current address given by such holder to the Company in accordance with the provisions of this Section 8(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar of the Securities, with a copy in like manner to Lehman Brothers Inc.; (2) if to you, initially at the address set forth in the Purchase Agreement; and (3) if to the Company, initially at its address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Purchasers or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Securities. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Securities and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 23 23 (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (h) Jurisdiction; Consent to Service of Process. THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURTS LOCATED IN THE CITY OF NEW YORK FOR ANY LAWSUITS, CLAIMS OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND AGREES NOT TO COMMENCE ANY SUCH LAWSUIT, CLAIM OR OTHER PROCEEDING EXCEPT IN SUCH COURTS. THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY LAWSUIT, CLAIM, OR OTHER PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES DISTRICT COURTS LOCATED IN THE CITY OF NEW YORK, AND HEREBY FURTHER IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH LAWSUIT, CLAIM OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE COMPANY HAS APPOINTED AVI KATZ AT 600 THIRD AVENUE, NEW YORK, NEW YORK 10016, U.S.A. (HEREINAFTER REFERRED TO IN SUCH CAPACITY AS THE "PROCESS AGENT"), AS ITS AUTHORIZED AGENT UPON WHOM PROCESS MAY BE SERVED IN ANY SUCH SUIT OR PROCEEDING. THE COMPANY REPRESENTS TO YOU THAT IT HAS NOTIFIED THE PROCESS AGENT OF SUCH DESIGNATION AND APPOINTMENT AND THAT THE PROCESS AGENT HAS ACCEPTED THE SAME IN WRITING. THE COMPANY HAS AUTHORIZED AND DIRECTED THE PROCESS AGENT TO ACCEPT SUCH SERVICE. IF THE PROCESS AGENT SHALL CEASE TO ACT AS THE COMPANY'S AGENT FOR SERVICE OF PROCESS, THE COMPANY SHALL APPOINT WITHOUT DELAY ANOTHER SUCH AGENT AND NOTIFY YOU OF SUCH APPOINTMENT. THE COMPANY FURTHER AGREES THAT SERVICE OF PROCESS UPON THE PROCESS AGENT AND WRITTEN NOTICE OF SAID SERVICE TO THE COMPANY MAILED BY FIRST CLASS MAIL OR DELIVERED TO THE PROCESS AGENT SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE 24 24 SERVICE OF PROCESS UPON IT IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT YOUR RIGHT OR THE RIGHT OF ANY PERSON CONTROLLING ANY OF YOU TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. THE COMPANY AGREES THAT A FINAL ACTION IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER LAWFUL MANNER. (i) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (j) Securities Held by the Company, etc. Whenever the consent or approval of Holders of a specified percentage of principal amount or liquidation preference, as the case may be, of Securities is required hereunder, Securities held by the Company or their respective Affiliates (other than subsequent Holders of Securities if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 25 25 If the foregoing is in accordance with your understanding of our agreement, please sign and return to Lehman Brothers Inc. a counterpart hereof, whereupon this Agreement will become a binding agreement among the Company and the several Purchasers in accordance with its terms. Very truly yours, LORAL SPACE & COMMUNICATIONS LTD. by:/s/Avi Katz ----------------------------- Name: Avi Katz Title:Vice President, General Counsel and Secretary The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written. LEHMAN BROTHERS INC. BANC OF AMERICA SECURITIES LLC BEAR, STEARNS & CO. INC. ING BARINGS LLC C.E. UNTERBERG, TOWBIN CREDIT LYONNAIS SECURITIES (USA) INC. SG COWEN SECURITIES CORPORATION by LEHMAN BROTHERS INC. by /s/David Brand ---------------------------- Name: David Brand Title:Managing Director EX-12 10 STATEMENT RE: COMPUTATION OF RATIOS 1 EXHIBIT 12 LORAL SPACE & COMMUNICATIONS LTD. COMPUTATION OF DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES AND RATIO OF EARNINGS TO COVER FIXED CHARGES (in thousands, except ratios) (Unaudited)
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- ------------ Earnings: Income (loss) before income taxes, equity in net loss of affiliates and minority interest................. $(62,138) $(25,628) $126,982 Plus fixed charges: Interest expense.................................... 173,612 111,334 37,871 Interest component of rent expense(1)............... 9,953 6,600 4,400 Less capitalized interest.............................. 84,315 60,125 22,641 -------- -------- -------- Earnings available to cover fixed charges................ $ 37,112 $ 32,181 $146,612 ======== ======== ======== Fixed charges(2)......................................... $229,044 $172,619 $ 78,568 ======== ======== ======== Deficiency of earnings to cover fixed charges............ $191,932 $140,438 ======== ======== Ratio of earnings to cover fixed charges................. 1.9x ========
- --------------- (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. The effective tax rate for 1999 excludes the effect of a $34 million tax benefit affecting the utilization of Loral CyberStar's pre-acquisition loss carryforwards. EX-21 11 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 LORAL SPACE & COMMUNICATIONS AS OF FEBRUARY 29,2000, ACTIVE SUBSIDIARIES, ALL 100% OWNED DIRECTLY OR INDIRECTLY (EXCEPT AS NOTED BELOW) CONSIST OF THE FOLLOWING: EXHIBIT 21 LORAL SPACE & COMMUNICATIONS CORPORATION DELAWARE LORAL GENERAL PARTNER, INC. DELAWARE LORAL HOLDINGS, INC. DELAWARE LORAL SATELLITE, INC. DELAWARE LORAL SPACECOM DBS HOLDINGS, INC. DELAWARE LORAL SPACECOM DBS, INC. DELAWARE CONTINENTAL SATELLITE CORPORATION (1) CALIFORNIA LORAL CYBERSTAR, INC. DELAWARE LORAL CYBERSTAR GLOBAL SERVICES, INC. DELAWARE LORAL CYBERSTAR INTERNATIONAL, INC. DELAWARE LORAL ORION-EUROPE GMBH (2) GERMANY LORAL CYBERSTAR JAPAN, INC. DELAWARE ONS MAURITIUS MAURITIUS LORAL CYBERSTAR SERVICES, INC. DELAWARE ORIONNET, INC. DELAWARE ORION FINANCIAL PARTNERSHIP (3) DELAWARE LORAL CYBERSTAR HOLDINGS L.L.C. DELAWARE LORAL ASIA PACIFIC SATELLITE (HK) LTD HONG KONG LORAL CYBERSTAR AMERICAS DO BRASIL LTDA BRAZIL LORAL CYBERSTAR DO BRASIL LTDA BRAZIL LORAL CYBERSTAR ARGENTINA SRL ARGENTINA LORAL SPACECOM CORPORATION DELAWARE LORAL COMMUNICATIONS SERVICES, INC. DELAWARE LORAL SKYNET INTERNATIONAL, INC. DELAWARE LORAL GROUND SERVICES, LLC DELAWARE LORAL DE EQUADOR LTDA EQUADOR SPACE SYSTEMS/LORAL, INC. DELAWARE INTERNATIONAL SPACE TECHNOLOGY, INC. (4) DELAWARE COSMOTECH (4) RUSSIAN FEDERATION SS/L EXPORT CORPORATION U.S. VIRGIN ISLANDS LGP (BERMUDA) LTD. BERMUDA LORAL CYBERSTAR LTD. BERMUDA LORAL BROADBAND HOLDINGS, L.P. DELAWARE LORAL CYBERSTAR L.L.C. DELAWARE CYBERSTAR, L.P. (5) DELAWARE CYBERSTAR LICENSEE, L.L.C. (5) DELAWARE CYBERSTAR INTERNATIONAL, L.L.C. (5) DELAWARE CYBERSTAR SERVICES, L.L.C. (5) DELAWARE GLOBAL ACCESS TELECOMMUNICATIONS SERVICES LTD (5) UNITED KINGDOM CYBERSTAR, L.L.C. (5) DELAWARE LORAL GLOBAL SERVICES N.V. NETHERLANDS ANTILLES LORAL GLOBAL SERVICES B.V. NETHERLANDS LORAL HOLDINGS LTD. BERMUDA LORAL SPACE DO BRASIL LTDA. BRAZIL LORAL SKYNET DO BRASIL LTDA. BRAZIL LORAL LICENSING LTD. BERMUDA LORAL SATMEX LTD. BERMUDA LORAL SATCOM LTD. BERMUDA LORAL SATELLITE LTD BERMUDA LORAL SPACE LICENSING LTD BERMUDA TABLE (1) ONLY 86% OWNED DIRECTLY OR INDIRECTLY (2) ONLY 99.5% OWNED DIRECTLY OR INDIRECTLY (3) ONLY 50% OWNED DIRECTLY OR INDIRECTLY (4) ONLY 42.9% OWNED DIRECTLY OR INDIRECTLY (5) ONLY 82.4% OWNED DIRECTLY OR INDIRECTLY EX-23 12 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 CONSENT OF DELOITTE & TOUCHE LLP We consent to the incorporation by reference in Registration Statement Nos. 333-26517, 333-46407 and 333-51133 on Form S-3 and Nos. 333-14863, 333-61723 and 333-49091 on Form S-8 of Loral Space & Communications Ltd. (a Bermuda company) of our reports with respect to the consolidated financial statements of Loral Space & Communications Ltd. 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, 1999. DELOITTE & TOUCHE LLP San Jose, California March 28, 2000 EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF LORAL SPACE & COMMUNICATIONS LTD. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 239,865 0 487,820 4,649 111,060 1,073,321 2,207,527 (322,552) 5,610,421 693,879 1,913,826 459 735,437 2,452 2,073,512 5,610,421 1,457,720 1,457,720 1,296,937 1,519,983 0 0 89,297 (62,138) (32,516) (201,916) 0 0 0 (246,644) (0.85) (0.85)
EX-27.1 14 RESTATED FINANCIAL DATA SCHEDULE
5 This Restated Financial Data Schedule contains summary financial information extracted from the financial statements of Loral Space & Communications Ltd. for the fiscal year ended December 31, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 546,772 0 378,833 2,521 191,245 1,197,093 1,859,466 (191,958) 5,229,215 529,071 1,533,039 459 735,437 2,439 2,197,386 5,229,215 1,301,702 1,301,702 1,129,874 1,335,482 0 0 51,209 (25,628) (3,871) (185,223) 0 0 0 (185,223) (0.68) (0.68) Note: The adoption of SFAS 128 had no effect on reported earnings per share for the year ended December 31, 1998.
-----END PRIVACY-ENHANCED MESSAGE-----