-----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, W2q7DZrHu7vDWS9uh+tgVUlboUlap169z+ph9ubFiUPgEzIXhBFOhDY5A+NpH8R5 FFUIgQmHfEoeCIKfyAPFwg== 0000950123-98-003250.txt : 19980401 0000950123-98-003250.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950123-98-003250 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE 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: 98584118 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, 1997 ------------------------ Commission file number 1-14180 LORAL SPACE & COMMUNICATIONS LTD. 600 Third Avenue New York, New York 10016 Telephone: (212) 697-1105 Jurisdiction of incorporation: Bermuda IRS identification number: 13-3867424 ------------------------ Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.01 par value................................ New York Stock Exchange
The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or such shorter period as the registrant was required to file such reports and has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained in the registrant's definitive proxy statement incorporated by reference in Part III of this Form 10-K. At February 27, 1998, 201,074,069 common shares were outstanding, and the aggregate market value of such shares (based upon the closing price on the New York Stock Exchange) held by non-affiliates of the registrant was approximately $5.0 billion. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1998 definitive proxy statement are incorporated by reference into Part III. The financial statements required by Rule 3.09 of Regulation S-X of the registrant's significant investee, Globalstar, L.P., are incorporated by reference herein from the Annual Report on Form 10-K filed by Globalstar Telecommunications Limited and Globalstar, L.P. ================================================================================ 2 PART I ITEM 1. BUSINESS THE COMPANY Loral Space & Communications Ltd. and subsidiaries ("Loral" or the "Company") is one of the world's leading satellite communications companies, with substantial interests in the design, manufacture and operation of geosynchronous ("GEO") and low-earth-orbit ("LEO") satellite systems. Loral also provides a broad array of satellite-based services. Since its formation in 1996, Loral has assembled the building blocks essential to the creation of a seamless, global networking capability for the information age. Through a series of acquisitions commencing in August 1996 and concluding in June 1997, Loral implemented its strategic decision to increase its ownership in Space Systems/Loral, Inc. ("SS/L") to 100%. SS/L, one of the world's leading satellite manufacturers, draws on a 40-year heritage, with more than 630 years of cumulative on-orbit experience, and provides Loral with visibility into emerging and new satellite-based technologies and applications. In addition to SS/L's satellite manufacturing business, through a series of strategic acquisitions, Loral has established itself as one of the world's leading providers of satellite-based services. In March 1997, Loral acquired Skynet Satellite Services ("Skynet"), a leading domestic satellite service provider, from AT&T for $462.1 million in cash. Skynet owns and operates the Telstar satellite network, which provides coverage over the continental United States, Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands. With the launch of additional Telstar satellites, Skynet intends to become a worldwide satellite communications service provider. In December 1997, a joint venture in which Loral holds a 65% economic interest, completed the acquisition from the Mexican government of a 75% interest in Satelites Mexicanos, S.A. de C.V. ("SatMex"). SatMex, which owns and operates three geosynchronous communications satellites, is the dominant satellite communications company currently providing services in Mexico and intends to expand its services to become a leading provider of satellite services throughout Latin America. Most recently, on March 20, 1998, Loral acquired Orion Network Systems, Inc. ("Orion"). Orion, a rapidly growing provider of satellite-based communications services, focuses primarily on three businesses -- private communications network services, Internet services and video distribution and other satellite transmission services. Orion currently owns and operates one GEO satellite and is constructing two additional GEO satellites to be launched in the fourth quarter of 1998 and the second quarter of 1999. The footprints of these satellites will, in the aggregate, cover over 85% of the world's population. In addition, Loral is developing CyberStar, a proposed worldwide high-speed broadband data communications system. CyberStar plans to offer business and home users worldwide a variety of low-cost, interactive multimedia communications services via high speed digital signals. Initially, CyberStar intends to offer service in the United States using leased capacity on Skynet's Telstar 5 satellite, and plans in the future to migrate its service to a worldwide system of three GEO satellites. Loral manages and currently owns, directly and indirectly, approximately 40% (38% on a fully diluted basis) of Globalstar, L.P. ("Globalstar"). Globalstar will operate a worldwide, LEO satellite-based digital telecommunications system (the "Globalstar System(TM)") that is scheduled to commence service in early 1999. The Globalstar System is designed to enable local service providers to offer low-cost, high quality wireless voice telephony and data services in virtually every populated area of the world. Loral, together with partners, will act as the Globalstar service provider in Canada, Mexico and Brazil. In February 1998, Loral announced a strategic partnership with Alcatel Alsthom of France to jointly build and operate Europe*Star, a multiple geostationary satellite system that will provide broadcast and telecommunications services to Europe, Southeast Asia, the Middle East, South Africa and India. Europe*Star will become part of the Skynet global alliance which intends to offer an integrated, worldwide portfolio of satellite capacity, under the Skynet brand name. Loral is pursuing additional satellite-based communications service opportunities throughout the world. For instance, in August 1997, SS/L established a joint venture with Mabuhay Philippines Satellite Corporation to provide satellite-based services to the Philippines. Loral owns approximately 12% of CD Radio, Inc., a company that will provide digital audio radio service to automobiles by satellite. 1 3 Loral's strategy is to capitalize on its innovative capabilities, market position and advanced technologies to offer value-added satellite-based services as part of the evolving worldwide communications networks and, where appropriate, to form strategic alliances with major telecommunications service providers and equipment manufacturers to enhance and expand its satellite communications service opportunities. The following table presents a brief description of the orbital slots that the Company and its affiliates are authorized to use. All satellite systems are subject to international frequency coordination requirements and must obtain appropriate authority ("landing rights") to provide service in a given territory.
ORBITAL FREQUENCY/ SATELLITE LOCATION TRANSPONDERS COVERAGE AREA ------------------- ------------------ ----------------- -------------------- Loral Skynet(1) Telstar 303(2) 120 degreesW.L. 18 C-band (36 North America MHz) Telstar 4 89 degreesW.L. 24 C-band (36 North America MHz) 16 Ku-band (54 MHz) Telstar 5(3) 97 degreesW.L. 24 C-band (36 North America MHz), 28 Ku-band (24 x 27 MHz, 4 x 54 MHz) Telstar 6 93 degreesW.L. C- and Ku-band North America Telstar 7 129 degreesW.L. C- and Ku-band North America, including Alaska Telstar 8 77 degreesW.L. C- and Ku-band North America Telstar 9 69 degreesW.L. C- and Ku-band North America SatMex Morelos II 116.8 degreesW.L. C-band (12 x 36 Mexico Domestic MHz, 6 x 72 MHz), Ku-band (4 x 108 MHz) SatMex 5(4) 116.8 degreesW.L. C-band (24 x 36 Americas MHz), Ku-band (24 x 36 MHz) Solidaridad 1 109.2 degreesW.L. C-band (12 x 36 Mexico & Portions of MHz, 6 x 72 MHz), Latin America Ku-band (16 x 54 MHz) Solidaridad 2 113.0 degreesW.L. C-band (12 x 36 Mexico & Portions of MHz,6 x 72 MHz), Latin America Ku-band (16 x 54 MHz) Loral Orion(5) Orion 1 37.5 degreesW.L. Ku-band (28 x 54 Europe, SE Canada, MHz, 6x36 MHz) U.S., East of the Rockies and parts of Mexico. Orion 2(6) 12 degreesW.L. Ku-band Eastern U.S., SE Canada, Europe, CIS, Middle East, North Africa and Latin America, S. Africa Orion 3 139 degreesE.L. C- and Ku-band China, Japan, Korea, India, Hawaii, SE Asia, Australia, New Zealand, Eastern Russia, Oceana 47 degreesW.L. Ku-band Americas, Europe & Africa
2 4
ORBITAL FREQUENCY/ SATELLITE LOCATION TRANSPONDERS COVERAGE AREA ------------------- ------------------ ----------------- -------------------- 135 degreesW.L.(6) Ku-band North America, Hawaii, Puerto Rico, U.S. Virgin Islands 144 degreesE.L. C- and Ku band China, Japan, Korea, India, Hawaii, SE Asia, Australia, New Zealand, Eastern Russia, Oceana 89 degreesW.L. Ka-band Americas 78 degreesE.L. Ka-band Russia, India, China, Europe, Africa, CIS, Australia, Asia 81 degreesW.L. Ka-band Americas 126.5 degreesE.L. Ka-band Asia, Russia, Australia, Oceana CyberStar 115 degreesW.L. Ka-band (spot North America beams) 93 degreesW.L. Ka-band (spot North and South beams) America(7) 105.5 degreesE.L. Ka-band (spot Asia-Pacific beams) Globalstar(8) 56 satellites, LEO 1610-1621.35 MHz, Global 2483.5-2500 MHz, feeder links in C-band R/L DBS 61.5 degreesW.L. 11-Odd numbered Eastern United DBS channels 1-21 States 166 degreesW.L. 11-Odd numbered Western United DBS channels 1-21 States
- --------------- (1) In addition to the orbital slots listed in the table above, Loral has applications pending at 77 degreesW.L. for use of the Extended C/Ku-band frequencies, at 81 degreesW.L. for use of Ku/Extended Ku-band frequencies and at 135 degreesW.L., 115 degreesW.L., 95 degreesW.L. and 58 degreesW.L. for use of the V-band frequency. In addition, Loral has International Telecommunication Union filings at 3.5 degreesE.L., 11 degreesE.L., 30 degreesE.L., 80 degreesE.L., 105.5 degreesE.L. and 135 degreesE.L. for use of the V-band frequency. (2) Currently operating in inclined orbit beyond its designed life. Subject to FCC approval, can be expected to continue to generate modest revenues for approximately one year. (3) This satellite is licensed pursuant to a grant of special temporary authority that expires May 18, 1998. Prior to that date, Loral anticipates that the FCC will grant a permanent authorization or extend the temporary authority. (4) SatMex 5 is under construction and is scheduled for launch in the fourth quarter of 1998 to replace Morelos II. (5) In addition to the orbital slots listed in the table above, Loral Orion has applications pending at 126 degreesE.L. for use of the Ku/Extended Ku/C and Extended C-band frequencies and at 139 degreesE.L., 15 degreesW.L. and 67 degreesW.L. for use of the Ka-band frequency. (6) These satellites are conditionally licensed by the FCC, subject to an appropriate showing of Loral's financial capability to construct, launch and operate the satellites. (7) The FCC license does not describe a particular coverage area. (8) In addition to the constellation in the table above, Globalstar has applications pending for an 80 satellite LEO system using the V-band frequency and for a second generation Globalstar system comprised of 64 LEO satellites and four GEO satellites (at 80 degreesW.L., 10 degreesE.L., 100 degreesE.L. and 170 degreesE.L.) using the 2 GHz frequency. 3 5 Loral was formed to effectuate the distribution (the "Distribution") of the space and telecommunications businesses of Loral Corporation ("Old Loral") to shareholders of Old Loral in connection with the merger (the "Merger") of Old Loral into a subsidiary of Lockheed Martin Corporation ("Lockheed Martin"). The Distribution was made on April 23, 1996. SPACE SYSTEMS/LORAL SS/L is a worldwide leader in the design, manufacture and integration of telecommunications, weather and direct broadcast satellites with 40 years of experience. As one of the premier providers of satellites and other space systems, SS/L competes principally on the basis of technical excellence, a long record of reliable performance, competitive pricing and on-orbit delivery packages. The Company believes that SS/L's advanced manufacturing and testing facilities and long-term customer relationships have enabled SS/L to compete effectively in the commercial space systems marketplace. SS/L is the leading supplier of satellites to Intelsat, an international consortium of 135 member nations and the world's largest operator of commercial communications satellites. Other significant customers include CD Radio, Chinasat, Globalstar, MCI, PanAmSat, Loral Skynet and TCI. SS/L has a broad range of technical capabilities in spacecraft design, as well as all critical spacecraft subsystems, and maintains a completely integrated complex of satellite manufacturing, assembly, integration and testing facilities. The satellites built by SS/L have accumulated more than 630 years of service in space. SS/L has a history of technical innovation that includes the first three-axis stabilized satellites, bipropellant propulsion systems for commercial satellites that permit significant increases in the satellites' payload and extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries with a life span of 10 years or more, the use of advanced composites to significantly enhance satellite performance at lighter weights and the first communications satellite with more than ten kilowatts of power. SS/L also created the first multi-mission geostationary satellite and was the first U.S. company to exchange space technology with Russia's space industry, obtaining exclusive rights outside the former Eastern bloc to an electric propulsion subsystem that is five times as efficient as bipropellant propulsion systems. Since 1990, SS/L has shortened delivery schedules significantly, increased spacecraft reliability and increased spacecraft power. In March and June 1997, Loral acquired the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies (the "Alliance Partners") for $374 million paid in cash and Loral securities. SS/L and three of the Alliance Partners have agreed generally to operate as a team on satellite programs worldwide, to coordinate research and development activities and to share technological resources. SS/L believes that this strategic alliance has enhanced its technological and manufacturing capabilities and marketing resources and affords it access to international government and commercial customers more effectively than its U.S.-based competitors. For example, through the alliance, SS/L has been able to supply satellite payloads in support of Aerospatiale's prime contract under the Eutelsat, Thaicom and Sirius programs. TECHNICAL CAPABILITIES Active research and development projects are underway for both communications and payload equipment and supporting bus elements. Highlights of the payload program include the development of active microwave components, which are among the lightest and most compact in the industry, and high power handling state-of-the-art multiplexers and antennas that can be customized for various customer requirements within a year of satellite delivery. Investments in state-of-the-art computer-aided design and modeling tools have enabled SS/L to eliminate expensive and time-consuming prototyping of most equipment, thereby further reducing production time. SS/L's capabilities in spacecraft bus technologies are extensive, including its efforts in composite structural design, which, with certain exceptions, allows structural components to be manufactured of light-weight/high-strength composite materials. SS/L was also the first to employ heat pipes in its bus to control heat transfer in commercial satellites, thereby providing a more benign temperature environment and increased reliability. Nickel hydrogen batteries, when combined with SS/L's patented thermal management 4 6 system, provide one of the most efficient space batteries ever produced. A new technology currently being developed by SS/L could result in the doubling of such efficiency within the next three years. A new telemetry and command system employing serial interfaces was introduced in 1997. SATELLITE CONTRACTS SS/L's major contracts fall into two categories: firm fixed-price contracts and cost-plus-award-fee contracts. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract. Risk of loss due to increased cost, therefore, is borne by SS/L. Under fixed-price contracts requiring work with lead times in excess of six months prior to delivery, SS/L may receive progress payments, generally in an amount equal to between 80% and 95% of monthly costs, or it may receive milestone payments upon the occurrence of certain program achievements. Under a cost-plus-award-fee contract, the contractor recovers its actual allowable costs incurred and receives a fee consisting of a base amount that is fixed at the inception of the contract (the base amount may be zero) and an award amount that is based on the customer's subjective evaluation of the contractor's performance in terms of the criteria stated in the contract. Many of SS/L's contracts and subcontracts provide that such contracts and subcontracts may be terminated at will by the customer or the prime contractor, respectively. In the event of a termination at will, SS/L is normally entitled to recognize the purchase price for delivered items, reimbursement for allowable costs for work in process and an allowance for profit thereon or adjustment for loss if completion of performance would have resulted in a loss. While SS/L has not experienced material contract terminations in the past, no assurance can be given that such terminations will not occur in the future. SKYNET Skynet's customers lease transponder capacity to distribute network television programming to local affiliate stations, collect live video feeds for the reporting of news and sporting events and to offer direct-to-home subscription and pay-per-view television programming, distance learning and educational television, as well as business services such as VSAT networks, data distribution for information services and other business television services. Skynet's customers include, among others, the ABC and Fox television networks. As a result, local affiliates of these networks have antennas pointed at Skynet's satellites. This configuration creates a "neighborhood" attractive to other users requiring similar distribution channels, giving Skynet a competitive advantage in serving both television networks and television programming syndicates. Other Skynet customers include third party resellers, such as sports syndicators, who contract with major television programmers and distance learning providers. Skynet currently has two high-powered satellites in orbit. Telstar 4, which was placed in service in November 1995, is equipped with 24 C-band and 24 Ku-band transponders and provides coverage over the continental United States, Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands. The 52-transponder Telstar 5, built by SS/L, was successfully launched in May 1997 and placed into service on July 1, 1997. Telstar 5 provides coverage over the continental United States, Puerto Rico, the Caribbean and into Canada and Latin America. In addition, Telstar 303, which has exceeded its 10-year design life, is now in inclined orbit and generates modest revenues from customers that have tracking antennas or do not require continuously-available service. Skynet plans to construct, launch and operate four additional high powered C/Ku band satellites. The addition of these satellites will substantially increase Skynet's capacity within the United States and will extend its coverage area to Canada and Mexico, subject to obtaining rights from regulatory authorities in those countries. Telstar 6, which is being built by SS/L, will have 24 C-band and 28 Ku-band transponders and is scheduled to be launched and placed into service in the second half of 1998. Telstar 7, which is also under construction by SS/L, will have 24 C-band and 32 Ku-band transponders and is scheduled for launch in the first quarter of 1999. Telstar 8, which is expected to have 24 C-band and 32 Ku-band transponders, and 5 7 Telstar 9, which is expected to have 24 C-band and 28 Ku-band transponders, are currently scheduled for delivery and launch in 2001 and 2000, respectively. In addition to providing transponder capacity in the domestic U.S. market, Skynet plans to offer satellite services worldwide. Skynet is coordinating the formation of a global alliance among Skynet, SatMex, Orion and Europe*Star. This alliance will offer an integrated, worldwide portfolio of satellite capacity under the Skynet brand name and will employ, among other things, a complementary marketing strategy to provide customers with "one stop shopping" for local, regional and global satellite services. SATMEX In connection with the privatization by the Federal Government of Mexico (the "Mexican Government") of its fixed satellite services business, Loral and Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture, Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Telefonica Autrey equity contribution of $50.9 million and debt issued by Holdings. As part of the acquisition, Holdings issued a $125.1 million seven year obligation bearing interest at 6.03% to the Mexican Government (the "Government Obligation") in consideration for the assumption by SatMex of the debt incurred by Holdings in connection with the acquisition. The debt of SatMex and Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica Autrey have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the value of the Government Obligation until maturity. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in SatMex. SatMex is the dominant provider of fixed satellite services in Mexico and provides broadcasting and telecommunications capacity to approximately 180 customers. SatMex provides satellite transmission capacity to broadcasting customers for network and cable television programming, direct-to-home television service and on-site transmission of live news reports, sporting events and other video feeds. SatMex also provides satellite transmission capacity to telecommunications service providers for public telephone networks in Mexico and elsewhere and corporate customers for their private business networks with data, voice and corporate video applications. SatMex has landing rights to provide broadcasting and telecommunications transmission capacity in 15 nations in the region, including the United States. SatMex's broadcasting customers include Televisa, MVS Mutivision and Television Azteca, and its telecommunications services customers include Telmex, Bancomer, Pemex, Cemex and the Mexican subsidiaries of Ford and Chrysler. SatMex believes that it has one of the largest aggregate satellite capacities dedicated primarily to the Latin American region, with 132 36 MHz transponder-equivalents currently in operation. SatMex's three satellites (Solidaridad 1, Solidaridad 2 and Morelos II) are in geostationary orbit at 109.2 WL, 113.0 WL and 116.8 WL, respectively, with aggregate footprints covering Mexico, the southern and eastern United States, Central America, the Caribbean and most of South America. SatMex holds 20-year concession titles to operate in these three orbital locations at certain C- and Ku-band frequencies expiring October 22, 2017. The concession titles are renewable thereafter, subject to certain conditions, for an additional 20-year term without additional payment. In addition, SatMex operates two satellite control centers. SatMex has contracts for the construction and launch of SatMex 5, the replacement for Morelos II, which is scheduled to launch in the fourth quarter of 1998. SatMex 5 has been designed to increase SatMex's total capacity to 144 36 MHz transponder-equivalents, with a substantial increase in power and an extension of SatMex's footprint to include substantially all of the continental United States and the Caribbean, as well as all of Latin America, other than certain remote regions of Brazil. 6 8 ORION On March 20, 1998, Loral acquired Orion in exchange for Loral common stock. Loral issued 17.9 million shares of its common stock and assumed existing Orion options and warrants to purchase 1.9 million shares of Loral common stock representing an aggregate purchase price of $467.0 million. Orion is a rapidly growing provider of a satellite-based communications services, focused primarily on private communications network services, Internet services and video distribution and other satellite transmission services. Orion provides multinational corporations with private communications networks designed to carry high-speed data, fax, video teleconferencing, voice and other specialized services. The Orion satellite's coverage reaches all locations within its footprint, enabling the delivery of high-speed data to customers in emerging markets and remote locations which lack the necessary infrastructure to support these services. Orion also offers high speed Internet access and transmission services to companies outside the United States seeking to avoid "last mile" terrestrial connections and to bypass congested regional Internet network routes. In addition, Orion provides satellite capacity for video distribution, satellite news gathering and other satellite services primarily to broadcasters, news organizations and telecommunications service providers. Orion provides its services directly to customer premises using VSATs. Orion believes that demand for satellite-based communications services will continue to grow due to the expansion of businesses beyond the limits of wide bandwidth terrestrial infrastructure, accelerating demand for high speed data services, growing demand for Internet and intranet services, especially outside the United States, increased size and scope of television programming distribution, worldwide deregulation of telecommunications markets and continuing technological advancement. Satellites are able to provide reliable, high bandwidth services anywhere in their coverage areas, and Orion believes that it is well positioned to satisfy market demand for these services. Orion commenced operations of Orion 1, a high power Ku-band satellite with 34 Ku-band transponders, in January 1995. Orion 1 provides coverage of 34 European countries, much of the United States and parts of Canada, Mexico and North Africa. Through arrangements with local ground operators, Orion currently has the ability to deliver network services to and among points in 27 European countries, portions of the United States and a limited number of Latin American countries. As of December 31, 1997, Orion serviced 301 customers through 682 sites in service. Orion 2, which will be a high power satellite with 30 Ku-band transponders, will expand Orion's European coverage and extend coverage to portions of the Commonwealth of Independent States, Latin America and the Middle East. Orion 2 will significantly increase Orion's pan-European capacity, currently the area of strongest demand for Orion's services. Orion recently commenced selling services in certain areas of Latin America. Orion 2 is scheduled to be launched in the second quarter of 1999. Orion 3, which will be a high power satellite with 33 Ku-band transponders and 10 C-Band transponders, will cover broad areas of the Asia Pacific region, including China, Japan, Korea, India, Southeast Asia, Australia, New Zealand, Eastern Russia and Hawaii. Orion 3's footprint will provide Orion with the ability to distribute programming from the United States via Hawaii to most of the Asia Pacific region. Orion has already taken a number of steps to establish an early market presence in Asia, and has entered into an $89 million lease for eight of Orion 3's transponders. Orion 3 is scheduled to be launched in the fourth quarter of 1998. In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover over 85% of the world's population. CYBERSTAR Loral is developing CyberStar, a proposed worldwide high-speed broadband data communications system. CyberStar plans to offer business and home users worldwide a variety of low-cost, interactive multimedia communications services via high speed digital signals. Initially, CyberStar intends to offer service in the United States using leased Ku-band transponder capacity on Skynet's Telstar 5 satellite. CyberStar's 7 9 satellite-based services will include high speed Internet access, data broadcasting, broadband interconnection, intranet muticasting, real-time streaming and other data services. CyberStar service, expected to commence in the second half of 1998, will be delivered to consumers, businesses and private networks worldwide through a network of local and regional service providers. In the future, CyberStar intends to offer services through a dedicated worldwide constellation of three geostationary satellites utilizing the Ka-band. CyberStar holds FCC licenses to orbital slots covering North and South America, Asia, Europe and the Middle East. GLOBALSTAR The Globalstar System(TM) is designed to enable local service providers to offer low-cost, high quality wireless voice telephony and data services in virtually every populated area of the world. Globalstar's designated service providers have agreed to offer Globalstar service and seek to obtain all necessary local regulatory approvals in more than 100 nations, accounting for approximately 88% of the world's population. The Globalstar System's worldwide coverage is designed to enable its service providers to extend modern telecommunications services to millions of people who currently lack basic telephone service and to enhance wireless telecommunications in areas underserved or not served by existing or future cellular systems, providing a telecommunications solution in parts of the world where the build-out of terrestrial systems cannot be economically justified. The Globalstar System has been designed to provide services at prices comparable to today's cellular service and substantially lower than the prices announced by Globalstar's anticipated principal competitors. Globalstar service providers will set their own retail pricing in their assigned service territories and will pay Globalstar approximately $0.35 to $0.55 per minute on a wholesale basis. Globalstar users will make and receive calls through a variety of Globalstar user terminals, including hand-held and vehicle-mounted units similar to today's cellular telephones, fixed telephones similar either to phone booths or ordinary wireline telephones, and data terminals and facsimile machines. Dual-mode and tri-mode Globalstar user terminals will provide access to both the Globalstar System and the subscriber's land-based cellular service. Each Globalstar user terminal will communicate through one or more satellites to a local Globalstar service provider's interconnection point (known as a gateway) which will, in turn, connect into existing telecommunications networks. As of February 27, 1998, each of the elements of the Globalstar System -- space and ground segments, digital communications technology, user terminal supply, service provider arrangements and licensing -- is on schedule to commence commercial operations in early 1999 following the launch of 44 satellites in 1998. The remaining 12 satellites, including eight in-orbit spares, will be launched in early 1999. Space Segment. On February 14, 1998, Globalstar launched its first four satellites. The next four Globalstar satellites, which will be launched on a Boeing Delta II launch vehicle, are at the Cape Canaveral launch site and are expected to be launched in late April 1998. In addition, satellite and major subsystem assembly, integration and testing necessary for the first launch on an Ukranian Zenit launch vehicle are underway. Production is proceeding for the remaining satellites to meet scheduled launch dates. Globalstar's launch providers have signed definitive agreements for the launch of the Globalstar satellite constellation, providing a variety of launch options and considerable launch flexibility. Mission operations preparations and launch vehicle production and dispenser development are on schedule. Ground Segment. Globalstar purchased 38 gateways under contracts totaling approximately $340 million. Globalstar has entered into contracts and discussions to resell such gateways to its partners and service providers. The first four Globalstar gateways, which are to be located in Australia, France, South Korea and the United States, are completed. These gateways will support Globalstar's data network, monitor the initial launch and orbital placement of Globalstar's first satellites, and serve as prototypes for production gateways that will support Globalstar service. Construction of the remaining 34 gateways is proceeding on schedule for the initiation of commercial service in 1999. In addition, Globalstar's satellite operations control center facility has been completed. 8 10 Digital Communications Technology. Qualcomm's CDMA technology has now been successfully deployed in South Korea, Hong Kong and cities in the United States supporting terrestrial personal communications services and digital cellular service, and its CDMA implementation for Globalstar has been successfully demonstrated in a simulated satellite environment. This demonstration validated Globalstar's encoding, modulation, control software, time and frequency distribution and up/down links between satellites, gateways and handsets. User Terminal Supply. Qualcomm/Sony and two other manufacturers, Ericsson and TELITAL, are developing Globalstar's user terminals and production orders were issued in the fourth quarter of 1997. In December 1997, an order for 40,000 fixed access terminals totaling $84 million was placed with Ericsson. Globalstar expects to recover this cost through the resale of these terminals to vendors. Service Providers. Globalstar and its partners have been seeking alliances with service providers throughout the world and have entered into a number of agreements in specific territories. Globalstar believes that these relationships with in-country service providers will facilitate the granting of local regulatory approvals -- particularly where the service provider and the licensing authority are one and the same -- as well as provide local marketing and technical expertise. Licensing. In January 1995, the FCC granted authority for the construction, launch and operation of the Globalstar System and assigned spectrum for its user links. Later that year, the 1995 World Radiocommunications Conference ("WRC95") allocated feeder link spectrum on an international basis for mobile satellite services ("MSS") systems such as Globalstar, and in November 1996 the FCC authorized Globalstar's feeder links. Globalstar's current budgeted expenditures for the cost for the design, construction and deployment of the Globalstar System, including working capital, cash interest on borrowings and operating expenses are approximately $2.7 billion. Globalstar has raised or received commitments for approximately $2.6 billion in equity, debt and vendor financing. In addition, Globalstar has agreed to purchase from SS/L eight additional spare satellites at a cost of $175 million. Further, in order to accelerate the deployment of gateways around the world, Globalstar has agreed to finance approximately $80 million of the cost of up to 32 of the initial 38 gateways. Globalstar expects to recover this financing upon resale of such gateways to its partners and service providers. The Globalstar System has been designed to address the substantial and growing demand for telecommunications services worldwide, particularly in developing countries. More than three billion people today live without residential telephone service, many of them in rural areas where the cost of installing wireline service is prohibitively high. Moreover, even where telephone infrastructure is available in developing countries, outdated equipment often leads to unreliable local service and limited international access. The number of worldwide fixed phone lines has increased from 469 million in 1988 to 753 million in 1996 and is projected to increase to 1.2 billion by 2002. Nonetheless, during the same period, waiting lists for fixed service have increased from 30 million to 45 million, resulting in an average waiting time before installation of approximately one and a half years. Similarly, the cellular market has grown from four million worldwide subscribers in 1988 to an estimated 123 million in 1996 and is projected to increase to 334 million by 2001. At that time, it is projected that only 40% of the world's population will live in areas with cellular coverage. The remaining 60% of the world's population will have access to wireless telephone service principally through satellite-based systems like the Globalstar System. Globalstar believes that its addressable market exceeds 30 million people. The Globalstar System has been designed with attributes which the Company believes compare favorably to other proposed global MSS systems including: Globalstar's unique combination of CDMA technology and path diversity through multiple satellite coverage, which will reduce call interruptions and signal blockage from obstructions and will use satellite power more efficiently; a proven space segment design without complex intersatellite links or on-board call processing and a ground segment with flexible, low-cost gateways and competitively priced Globalstar user terminals; lower average wholesale prices than other proposed MSS systems and gateways installed in most major countries, minimizing tail charges (i.e. amounts charged by 9 11 carriers other than the Globalstar service provider for connecting a Globalstar call through its network), resulting in low costs for domestic and regional calls, which will account for the vast majority of Globalstar's anticipated usage. CUSTOMERS Sales to foreign customers, primarily Asia, represented 30% of revenues in 1997. Sales to the U.S. government represented 7% of revenues for 1997 and sales to Globalstar represented 31% of revenues for 1997. BACKLOG At December 31, 1997, funded backlog was approximately $1.8 billion including $188 million of intercompany backlog. Approximately 47% of funded backlog, excluding intercompany backlog, at December 31, 1997 is expected to be recognized as revenues in 1998. RESEARCH AND DEVELOPMENT For the year ended December 31, 1997, the Company expended approximately $56.8 million for company sponsored research and development projects. PATENTS AND PROPRIETARY RIGHTS SS/L relies, in part, on patents, trade secrets and know-how to develop and maintain its competitive position. It holds 130 patents in the United States and 213 patents abroad and has applications for 59 patents pending in the United States and 162 patents pending abroad. SS/L holds patents relating to communications, station keeping, power control systems, antennae, filters and oscillators, phase arrays and thermal control as well as assembly and inspections technology. The SS/L patents that are currently in force expire between 1998 and 2016. In connection with the Globalstar System, Globalstar's design and development efforts have yielded nine patents issued and 30 patents pending in the United States, as well as 13 patents issued and 152 patents pending internationally for various aspects of communications satellite system design and implementation of CDMA technology relating to the Globalstar System. Qualcomm has obtained 149 issued patents and 380 patents pending in the United States applicable to Qualcomm's implementation of CDMA. The issued patents cover, among other things, Globalstar's process of combining signals received from multiple satellites to improve the signal received and minimize call fading. There can be no assurance that any of the pending patent applications by SS/L or Globalstar will be issued. Moreover, because the U.S. patent application process is confidential, there can be no assurance that third parties, including competitors of SS/L and Globalstar, do not have patents pending that could result in issued patents which SS/L or Globalstar would infringe. In such an event, SS/L or Globalstar could be required to redesign its system or satellite, as the case may be, or pay royalties to obtain a license, which could increase cost or delay implementation of the system or construction of the satellite, as the case may be. EMPLOYEES As of December 31, 1997, the Company had approximately 3,300 full-time employees, some of whom are subject to collective bargaining agreements. CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer of the Company. 10 12 Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a wide variety of factors and conditions, including, but not limited to, the factors summarized below. RISKS OF OPERATIONS IN THE SPACE ENVIRONMENT Satellites operate in a distant, hostile environment. Despite costly high reliability parts and significant on ground testing to assure reliability for their designed lives, satellites remain vulnerable to complete or partial failure or degradation from hazards which include space debris, solar and other astronomical events, acts of war and component failure. Repair of satellites in space is not practicable. In addition, a number of factors affect the useful lives of Globalstar's, Skynet's, SatMex's and Orion's satellites, including the quality of construction, expected gradual environmental degradation of solar panels and the durability of component parts. Random failure of satellite components could result in damage to or loss of a satellite ("cold failures"). The first-generation Globalstar satellite constellation (including spares) is designed to operate at full performance for a minimum of 7 1/2 years, after which performance is expected to gradually decline. However, there can be no assurance of the constellation's useful life. Globalstar anticipates using funds from operations to develop a second generation of satellites. If sufficient funds from operations are not available and Globalstar is unable to obtain financing for the second-generation constellation, Globalstar will not be able to deploy a second-generation constellation to replace first-generation satellites at the end of their useful lives. In November 1995, an Orion 1 component supporting nine transponders serving the European portion of Orion 1's footprint experienced an anomaly that resulted in a service interruption lasting approximately two hours. Full service was restored using redundant equipment. These transponders generate a majority of Orion's revenues. Orion believes, based on Orion's own investigations and the manufacturer's, and based upon advice from Orion's engineering consultant that because the redundant component is functioning in accordance with specifications and the performance record of similar components is strong, the anomalous behavior is unlikely to affect the expected performance of the satellite over its useful life. There has been no further effect on Orion's ability to service customers. However, if the currently operating component fails, Orion 1 would experience a significant loss of usable capacity, resulting in lost service and a corresponding adverse effect on Orion's results of operations. In 1994 and 1997 (prior to the acquisition by Loral), Skynet experienced the loss of its Telstar 402 and Telstar 401 satellites, respectively, resulting in lost service and a corresponding adverse effect on Skynet's results of operations. Certain of SS/L's contracts provide that a portion of the total contract price is payable in the form of "incentive" payments earned during the life of the satellite in orbit as its mission is performed. Although SS/L generally receives the present value of such incentive payments in the event of launch failure or one caused by customer error, it forfeits such revenues if the loss is caused by system failure or an error on its part. While insurance against loss of such payments has been available in the past, its cost and availability are subject to substantial fluctuations. In addition, SS/L is prohibited under agreements with certain of its customers from insuring its orbital incentives. Certain of SS/L's contracts call for on-orbit delivery, allocating launch risk to SS/L. It is SS/L's intention to obtain insurance for that exposure. However, SS/L cannot predict whether, and there can be no assurance that, insurance against launch failure and loss of incentive payments will continue to be available on reasonable terms. LAUNCH RISK AND VEHICLE ACCESS About 15% of commercial satellite launches have historically resulted in loss before the payload reaches its planned orbit ("hot failures"). While Loral ordinarily obtains insurance against loss due to hot failures, such events can nevertheless disrupt and delay business schedules and cause substantial uninsured losses above and beyond the insured cost of the lost satellite. Loral's ability to place satellites in orbit, and SS/L's ability to perform its on-orbit delivery contracts depend on the availability of launch vehicles and the requisite insurance. Launch slots are limited, and the launch insurance market has been subject to considerable fluctuation. Different launch facilities and vehicles have different success records, but Loral, for business or scheduling reasons does not always use, or have available to it, the most successful facilities and vehicles for its 11 13 launches. The cost and availability of launch insurance varies from time to time so there is no assurance that such insurance will shield every future loss. Moreover, the availability of launches from the republics of the former Soviet Union and the People's Republic of China are affected by U.S. government policies and international agreements. Changes in governmental policies or political leadership in the United States, Russia, Kazakhstan or China could affect Loral's ability to launch from these countries. LEVERAGE Many of the Loral businesses are capital intensive, requiring high initial investments in the expectation of future revenues requiring relatively low marginal costs. At December 31, 1997, Loral's outstanding debt was $435.4 million. In addition, Loral had outstanding at December 31, 1997 Series C Convertible Redeemable Preferred Stock having a redemption value of $745.5 million, which may be payable at Loral's option in cash, common stock of Loral or a combination thereof. On November 14, 1997, the Company, through its wholly owned subsidiary Loral SpaceCom Corporation, entered into an $850 million credit facility with a group of banks. SS/L will also require continuous investment to maintain its technological position and the fixed satellite service businesses are at the beginning of a planned expansion. At December 31, 1997, Loral had a ratio of earnings to fixed charges of 1.9:1. Orion has approximately $747.1 million of publicly-traded debt outstanding. Such debt is non-recourse to Loral. A significant portion of the SatMex purchase price was financed with debt, including the Government Obligation. The debt of SatMex and Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica Autrey have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the Government Obligation until maturity. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in SatMex. Globalstar is still in the development stage. At December 31, 1997, Globalstar had outstanding long-term indebtedness of $1.1 billion. The outstanding Globalstar debt is non-recourse to Loral. Loral is subject to substantial financial risks in the face of possible delays or reductions in revenue realization, unforeseen capital requirements or unanticipated expenses attributable to the factors described in this document. Such risks could result not only in adverse financial results due to ongoing debt service charges, but also in the necessity for additional financing which could result in increased debt and debt service costs, potential dilution of equity interests resulting from issuances of debt or equity, rights to distributions senior to those of the holders of Loral common stock, and covenants restricting distributions to holders of Loral common stock. OBSOLESCENCE DUE TO RAPID TECHNOLOGICAL CHANGE In common with all high technology enterprises, Loral's businesses are subject to obsolescence due to new technological developments. The rapid pace of technological change exposes Loral to risk of loss due to the deployment of superior technologies by competitors. Loral is also dependent upon technologies developed by third parties to implement key aspects of its strategy to integrate its satellite systems with terrestrial networks. SS/L, Skynet, SatMex, Orion and Globalstar, in particular, are susceptible to such risks. As land-based telecommunications services expand, demand for certain types of satellite-based services may be reduced. New technology used by competitors could render Skynet, Globalstar, SatMex or Orion less competitive by satisfying consumer demand in alternative ways or through the use of incompatible telecommunications standards. In addition, SS/L's success depends on its ability to introduce innovative new products and services on a cost-effective and timely basis. THE GLOBALSTAR SYSTEM The Globalstar System will consist of 56 satellites (including eight in-orbit spares) in low earth orbit together with ground facilities in numerous remote and sometimes primitive regions. Its operating facilities 12 14 will be in more than 100 countries, many of which are based on emerging economies, eventually connecting hundreds of thousands of mobile and fixed telephone handsets. While Loral believes that each component of the Globalstar System, and the Globalstar System as a whole, is capable of performing as designed, no such complex, dispersed space/earth communications network has ever been operated commercially. Until the Globalstar System has operated as a whole in its actual space/earth environment, there can be no assurance that losses due to delays, failures and unforeseen additional costs will not occur. Globalstar's financial objectives are, in part, based on estimates as to the potential market for Globalstar System services and the price that users will be willing and able to pay, which cannot be practically validated until commercial operations have begun. There can be no assurance that such economic assumptions are justified. Globalstar is scheduled to begin commercial operations in early 1999. Successful commencement of operations will require successful implementation of each of the elements of the Globalstar System -- space and ground segments, digital communications technology, user terminal supply, service provider arrangements and licensing. Globalstar launched four satellites on February 14, 1998 and expects to launch an additional 40 satellites during 1998 and 12 satellites, including eight in-orbit spares, in early 1999. However, there can be no assurance that schedule delays will not occur. Loral's equity in net loss attributable to its interest in Globalstar for the year ended December 31, 1997 was $42.5 million as compared to $18.1 million for the nine months ended December 31, 1996. Globalstar is expending significant funds for the construction, testing and deployment of the Globalstar System and such losses are expected to continue through commencement of revenue generating service operations. COMPETITION Each of Loral's businesses is subject to intense competition from entities, including several of the world's largest corporations, as well as governments and quasi-governmental organizations, which are larger and which may bring greater financial and operating resources to bear in competing as to marketing, regulation and technology. Loral competes for customers and for local regulatory approval in jurisdictions in which both Loral and a competing party may wish to operate. In addition, Loral competes for allocation of scarce frequency assignments and geosynchronous orbital slots. Competition comes not only from entities carrying on the same activities as Loral, but from others using alternative technologies such as terrestrial telecommunications and cable television, which themselves are constantly pursuing advanced technologies in order to enhance their competitive positions. In addition, as Loral expands into international markets, it will have to compete with international operators including Intelsat and PanAmSat. To the extent that these entities offer products and services which are more sophisticated, efficient or reliable than those of Loral, there could be a material adverse effect on the financial condition or results of operations of Loral. COMPETITIVE BIDDING SS/L generally obtains its contracts through competitive bidding. There can be no assurance that SS/L will continue to be successful in having its bids accepted or, if accepted, that awarded contracts will result in profitability for SS/L. SS/L has in the past submitted bids which would result in minimal or no profit due to a high level of non-recurring engineering costs. Such contracts are generally bid with the expectation of more profitable follow-on contracts as to which there is generally no advance assurance. To the extent that actual costs exceed the projected costs on which bids or contract prices were based, SS/L's profitability could be adversely affected. REGULATION Loral's activities, particularly the Globalstar System, Skynet, SatMex and Orion, are subject to licensing and regulation by authorities in more than 100 jurisdictions, including the United States, the International Telecommunications Union ("ITU") and the Commission of the European Union. Regulated activity includes the occupation of orbital positions ("orbital slots"), the pricing and quality of services, the use of frequency bands, competitive behavior, the export of space-related products and services (which frequently require licenses from the Department of State or the Department of Commerce), and other matters essential 13 15 to conduct of the business. The regulatory authorities, depending on the location, often have broad discretion over such activities, including frequently the power to modify, withdraw or impose charges or conditions upon, or delay the grant of, the rights required for the conduct of the business. In particular, in determining whether to grant Loral authorization, the FCC must evaluate whether certain FCC standards and financial qualification requirements are met. Many of the licenses Loral holds or has applied for have been contested by third parties, including competitors, which increase the risk of regulatory decisions adverse to Loral. In particular, two of Loral's Ka-band orbital slots for CyberStar are in positions that are subject to prior claims of parties from other countries. While regulation is an expected incident of international telecommunications business, and Loral expects to obtain the rights and licenses which it requires under satisfactory conditions, the broad reach of the Globalstar System, the expansion of Skynet's operations beyond the domestic U.S. market, the expansion of SatMex's Latin American presence, the proposed launch and operation of Orion 2 and Orion 3 and the development of other satellite services businesses, by becoming subject to such a large number of diverse regulatory regimes and political systems, entail unusual risks of unforeseen costs, delays and other burdens on planned performance. In addition, as part of the regulatory process for orbital slot allocation of its satellites, Loral is required to engage in frequency coordination with other satellite operators. Although the Loral Group has in the past been able to coordinate its existing satellites, there can be no assurance that satisfactory coordination will be achieved in the future for any of Loral's satellites. Orion has begun construction of Orion 2 and Orion 3 before completion of the required consultation with Intelsat and Eutelsat, receipt of final authority from the FCC (in the case of Orion 2) and completion of the ITU coordination process. Failure to obtain one or more necessary approvals on time would have an adverse effect on Orion's business or results of operations. POTENTIAL CONFLICTS OF INTEREST; LACK OF FULL CONTROL Loral has financed the development and acquisition of certain of its assets which it does not own completely through complex financial and governance arrangements. Loral is the managing general partner of Globalstar, but its governance rights are limited by rights of other partners and fiduciary duties that could result in Globalstar actions that are not in Loral's own best interests. In accordance with Mexican law, voting control of SatMex must be held by Mexican nationals. While Loral's investment will be protected by contractual rights and it is anticipated that SatMex will be managed in close coordination with the activities of Skynet, there can be no assurance that SatMex will be managed as it would be if it were a controlled subsidiary of Loral. Conflicts of interest may arise as a result of such arrangements and because some of Loral's businesses may compete with one another and are or may become customers of SS/L. Both Skynet and Orion own or are building satellites whose footprints overlap with those of SatMex's present and proposed satellites and will therefore compete directly with SatMex for customers in some of its markets. Although Skynet and Orion will adopt a marketing policy which will provide for cross-selling of capacity with SatMex and a process for allocating opportunities between the companies, situations may arise where SatMex and Loral will have a conflict. This conflict will become particularly acute if there is an oversupply of capacity in their markets. Partners and affiliates of Globalstar, including companies affiliated with Loral, will be among Globalstar's service provider customers and may therefore have conflicts with Globalstar and/or Loral as to service provider agreements. RISKS OF CONDUCTING INTERNATIONAL BUSINESS Operations in numerous countries outside the United States carry substantial managerial, operational, legal and political uncertainties apart from the technical risks of initiating a previously untried telecommunications system. Such operations are subject to changes in government regulations and telecommunications standards, tariffs or taxes and other trade barriers. In addition, Loral's agreements relating to local operations may be enforceable only in foreign jurisdictions so that it may be difficult for Loral to enforce its rights. Also, 14 16 limited availability of U.S. currency in local markets may prevent a service provider from making payments in U.S. dollars and exchange rate fluctuations may adversely affect Globalstar's, SatMex's and Orion's revenues. In connection with delayed payment in 1997 by two Asian customers for three satellites, SS/L stopped work, reduced backlog by $291 million, which will reduce future sales, and recorded a charge of $23 million. If the current programs for these three satellites are not restarted, the satellites will be sold to other customers. YEAR 2000 ISSUE The Company is evaluating the potential effect of the year 2000 on its information processing systems. It is not known at this time what modifications, if any, will be required. All costs associated with any modification will be expensed as incurred. RELIANCE ON KEY PERSONNEL The success of Loral is partially dependent upon the ability of Loral to attract and retain highly qualified personnel. Except for Mr. Bernard L. Schwartz, Loral's Chairman and Chief Executive Officer, none of the officers of Loral has an employment contract with Loral nor does Loral expect to maintain "key man" life insurance. The loss of any of these individuals and the subsequent effect on business relationships could have an adverse effect on the business or results of operations of Loral. DEPENDENCE ON SS/L Currently, SS/L generates a significant portion of Loral's revenue and operating income. Loral intends to capitalize on SS/L's capabilities, market position and advanced technologies to identify and develop additional space-based communications services opportunities. There can be no assurance that current or future satellite-based ventures entered into by Loral will result in revenues or operating income that will materially reduce its dependence on SS/L. SS/L has historically derived a large portion of its total revenues from a limited number of customers, and its revenues and operating results may be adversely affected in the event completed or canceled contracts are not promptly replaced. The financial results of long-term fixed-price contracts are recognized using the cost-to-cost percentage of completion method. Loral's statement of operations reflects revisions in revenue and profit estimates in the period in which the conditions that require the revision become known and can be estimated. Adjustments for profits and losses may therefore have a material effect on results for the period in question. The risks inherent in long-term, fixed-price contracts include the forecasting of costs and schedules, contract revenues related to contract performance (including revenues from orbital payments) and the potential for component obsolescence in connection with long-term procurements. In 1997, two in-orbit satellites built by SS/L experienced solar array circuit failures. One of the customers has asserted that, in light of the failures and uncertainty as to further failures, it has not accepted the satellite. Loral believes that the customer was contractually required to accept the satellite at completion of in-orbit testing and that risk of loss has passed to the customer. In addition, another customer has requested that SS/L structure an arrangement whereby a satellite under construction would be sold to another customer. Management believes that these matters will not have a material adverse effect on the financial condition or results of operations of Loral. ITEM 2. PROPERTIES The Company maintains office space, manufacturing and telemetry, tracking and control facilities primarily in the United States. SS/L's research, production and testing facilities are carried on in SS/L-owned facilities covering approximately 562,000 square feet on 29.4 acres in Palo Alto, California. In addition, SS/L leases 772,000 square feet of space from various third parties. Skynet owns two telemetry, tracking and control stations located in Hawley, Pennsylvania and Three Peaks, California and leases 26,000 square feet of office space. Orion leases approximately 50,000 square feet for office space and its satellite operations center. Management believes that the facilities are sufficient to allow the Company to conduct its operations. 15 17 ITEM 3. LEGAL PROCEEDINGS CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral Fairchild"), a subsidiary of Old Loral, filed suit (the "CCD Lawsuit") against a number of companies including Sony Corporation ("Sony"), Matsushita Electronics Corporation ("Matsushita") and NEC Corp. ("NEC") claiming that such companies had infringed Loral Fairchild's patents for a "charged coupled device" ("CCD"), commonly used as an optical sensor in video cameras and fax machines. Although the CCD patents have expired, Loral Fairchild is seeking reasonable royalties through the expiration date from a number of defendants. On February 22, 1996, a jury in the United States District Court for the Eastern District of New York found unanimously that Sony had infringed the CCD patents. The trial judge, however, in an order dated July 12, 1996, reversed the jury verdict. Loral Fairchild has appealed the court's decision. Loral Fairchild's claims against other defendants remain pending, but if the court's decision is affirmed on appeal, a substantial portion, but not all, of the damage claims against the other defendants would be adversely affected. Matsushita has been granted a declaratory judgment that it has a valid and enforceable license under the CCD patents. In addition, a trial on Matsushita's claim against Loral Fairchild for tortious interference was conducted during July 1996, and a verdict was rendered in favor of Loral Fairchild. Environmental Regulation. Operations at SS/L, Skynet, Orion, and Globalstar are subject to regulation by various federal, state and local agencies concerned with environmental control. The Company believes that these facilities are in substantial compliance with all existing federal, state and local environmental regulations. With regard to certain sites, environmental remediation is being performed by prior owners who retained liability for such remediation arising from occurrences during their period of ownership. To date, these prior owners have been fulfilling such obligations and the size and current financial condition of the prior owners make it probable that they will be able to complete their remediation obligations without cost to the Company and its subsidiaries or Globalstar. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 16 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS (a) MARKET PRICE AND DIVIDEND INFORMATION The Company's common stock is traded on the NYSE under the symbol LOR. The following table sets forth, for each of the periods indicated, the reported high and low sales prices per share of the Company's common stock as reported on the NYSE:
HIGH LOW ---- --- YEAR ENDING DECEMBER 31, 1997 Quarter ended March 31, 1997........................... $19 1/2 $14 1/8 Quarter ended June 30, 1997............................ 17 1/2 13 Quarter ended September 30, 1997....................... 21 14 1/16 Quarter ended December 31, 1997........................ 24 1/4 19
HIGH LOW ---- --- PERIOD ENDING DECEMBER 31, 1996 Quarter ended June 30, 1996............................ $18 1/2 $10 1/2 Quarter ended September 30, 1996....................... 16 5/8 11 1/8 Quarter ended December 31, 1996........................ 19 5/8 15 1/4
The Company does not currently anticipate paying any dividends or distributions on its common stock or the Series A Convertible Preferred Stock. As required, Loral is currently paying dividends on its 6% Series C Convertible Redeemable Preferred Stock. The credit facility maintained by the Company's wholly owned subsidiary, Loral SpaceCom Corporation ("Loral SpaceCom") restricts the ability of Loral SpaceCom to transfer cash or pay dividends to its parent (see Note 7 to Loral's consolidated financial statements). (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK At February 27, 1998, there were approximately 6,800 holders of record of the Company's common stock. 17 19 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data has been derived from, and should be read in conjunction with, the related financial statements. Historical financial information as of and for the three years in the period ended March 31, 1996, represents the space and communications operations of Old Loral. LORAL SPACE & COMMUNICATIONS LTD. (In thousands except per share data)
YEARS ENDED MARCH 31,(1) YEAR ENDED NINE MONTHS ENDED ----------------------------- DECEMBER 31, 1997(1) DECEMBER 31, 1996(1) 1996 1995 1994 -------------------- -------------------- -------- -------- ------- STATEMENT OF OPERATIONS DATA: Revenues..................... $1,312,591 Management fee from affiliate.................. $ 5,088 $ 5,608 $ 3,169 $ 2,981 Operating income (loss)...... 13,552 (12,201) 2,587 (33) 398 Equity in net income (loss) of affiliates(1)(2)........ (47,273) (4,709) (8,628) (8,988) 1,174 Net income (loss)............ 40,004 8,877 (13,785) (7,873) (3,694) Preferred dividends and accretion(3)............... (26,315) Net income (loss) applicable to common shareholders..... 13,689 8,877 (13,785) (7,873) (3,694) Earnings (loss) per share -- basic and diluted.......... .06 .04 (.08) N/A N/A CASH FLOW DATA: Used in operating activities................. $ 230,248 $ 3,003 $ 1,319 $ 8,439 $ 587 Used in investing activities................. 1,022,772 1,962 115,031 92,055 25,288 Provided by (used in) equity transactions............... (18,097) 602,413 116,362 100,494 25,875 Provided by financing transactions............... 316,912 583,292 Dividends paid per common share...................... N/A N/A N/A
DECEMBER 31, MARCH 31, ----------------------- ------------------------------ 1997 1996 1996 1995 1994 ---------- ---------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents................ $ 226,547 $1,180,752 $ 12 $ -- $ -- Total assets............................. 3,004,936 1,699,326 354,396 251,819 163,479 Convertible preferreds(3)................ 583,292 Debt..................................... 435,398 Non-current liabilities.................. 179,482 26,834 Shareholders' equity(4)/Invested equity................................. 1,973,245 1,070,069 354,396 251,819 159,198
- --------------- (1) In 1997, Loral increased its ownership in SS/L to 100% and, accordingly, the 1997 financial information includes the results of SS/L. In prior years SS/L was accounted for under the equity method of accounting. On March 14, 1997 Loral acquired Skynet from AT&T; Loral's financial information includes the results of Skynet from that date. Financial information as of and for the three years in the period ended March 31, 1996, represents the space and communications operations of Old Loral. The results of operations for the three years in the period ended March 31, 1996 include allocations and estimates of certain expenses of Loral based upon estimates of actual services performed by Old Loral on behalf of Loral. Interest expense was allocated to Loral based on Old Loral's historical weighted average interest rate applied to the average investment in affiliates. (2) The Company's affiliates are Globalstar and SatMex since November 17, 1997. Loral sold its interest in K&F Industries, Inc. in 1997. (3) Convertible preferreds were exchanged for 6% Series C Preferred Stock and were reclassified to shareholders' equity in 1997 upon approval by the Company's shareholders. (4) As of December 31, 1997, the book value per share of the Series A Preferred Stock and the common stock (which the Company is required to disclose herein in accordance with applicable Bermuda law) was $4.98 and $4.97, respectively. Book value per share represents the quotient obtained by dividing shareholders' equity, reduced by the Series C Preferred Stock redemption value, by the number of outstanding shares of common stock, giving effect to the conversion of the Series A Preferred Stock, plus, in the case of such preferred stock, the $.01 liquidation preference thereof. 18 20 SPACE SYSTEMS/LORAL, INC. (In thousands)
YEARS ENDED MARCH 31, NINE MONTHS ENDED -------------------------------- DECEMBER 31, 1996 1996 1995 1994 ------------------ ---------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues...................................... $1,017,653 $1,121,619 $633,717 $596,267 Gross profit.................................. 64,157 34,406 27,785 24,964 Net income.................................... 31,025 12,367 5,554 3,591
MARCH 31, -------------------------------- DECEMBER 31, 1996 1996 1995 1994 ----------------- ---------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents..................... $ 19,181 $126,863 $ 52,222 $ 26,578 Total assets.................................. 1,059,064 908,677 766,475 743,016 Long-term debt................................ 127,586 65,052 34,040 92,249 Shareholders' equity.......................... 478,893 447,868 435,501 429,947
GLOBALSTAR, L.P. (In thousands, except per partnership interest amounts)
YEAR ENDED DECEMBER 31, 1994 -------------------------------- CUMULATIVE PRE-CAPITAL MARCH 23, 1994 MARCH 23 SUBSCRIPTION PERIOD(1) (COMMENCEMENT YEARS ENDED (COMMENCEMENT --------------------------- OF OPERATIONS) TO DECEMBER 31, OF OPERATIONS) TO JANUARY 1 TO YEAR ENDED DECEMBER 31, ------------------------------- DECEMBER 31, MARCH 22, DECEMBER 31, 1997 1997 1996 1995 1994 1994 1993 ----------------- ------- --------- --------- ----------------- ------------ ------------ STATEMENT OF OPERATIONS DATA: Revenues................ $ -- $ -- $ -- $ -- $ -- $ -- $ -- Operating loss.......... 257,349 88,071 61,025 80,226 28,027 6,872 11,510 Net loss applicable to ordinary partnership interests............. 255,238 88,788 71,969 68,237 26,244 6,872 11,510 Net loss per weighted average ordinary partnership interest outstanding........... 1.74 1.53 1.50 0.73 Cash distributions per ordinary partnership interest-basic and diluted............... OTHER DATA: Deficiency of earnings to cover fixed charges(2)............ 184,683 81,869 N/A N/A CASH FLOW DATA: Used in operating activities............ 210,304 97,128 51,756 38,368 23,052 Used in investing activities............ 1,301,049 591,025 591,025 280,345 50,549 Provided by partners' capital transactions.......... 883,495 132,990 284,714 318,630 147,161 Provided by (used in) other financing activities............ 1,092,012 998,137 95,750 (1,875)
DECEMBER 31, ---------------------------------------------- 1997 1996 1995 1994 ---- ---- ---- ---- BALANCE SHEET DATA: Cash and cash equivalents........................... $ 464,154 $ 21,180 $ 71,602 $ 73,560 Total assets........................................ 2,149,053 942,913 505,391 151,271 Vendor financing liability.......................... 197,723 130,694 42,219 Debt................................................ 1,099,531 96,000 Redeemable preferred partnership interests.......... 303,089 302,037 Ordinary partners' capital.......................... 380,828 315,186 386,838 112,944
- --------------- (1) Reflects certain costs incurred by Loral and Qualcomm prior to March 23, 1994, which were reimbursed by Globalstar through a capital subscription credit or agreement for repayment in connection with the $275.0 million capital subscription and commencement of Globalstar's operations on March 23, 1994. (2) The ratio of earnings to fixed charges is not meaningful as Globalstar is in the development stage and, accordingly, has incurred operating losses. 19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Except for the historical information contained herein, the matters discussed in the following Management's Discussion and Analysis of Results of Operations and Financial Condition of the Company, Globalstar, SatMex and Orion, and elsewhere in this Annual Report, are forward-looking statements that involve risks and uncertainties, many of which may be beyond the companies' control. The actual results that the companies achieve may differ materially from any forward-looking projections due to such risks and uncertainties. Loral Space & Communications Ltd. and its subsidiaries (the "Company" or "Loral") is one of the world's leading satellite companies, with substantial activities in both satellite manufacturing and satellite-based communications services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and manufacturer of space systems. Loral Skynet ("Skynet"), acquired on March 14, 1997, is a leading provider of satellite communications services in the United States. Skynet owns and operates the Telstar satellite network and is expanding its business internationally. On November 17, 1997, a joint venture including Loral and another partner acquired 75% of SatMex, a satellite services provider to Mexico and South America. Loral also manages and is the largest equity owner of Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system scheduled for service initiation in early 1999. Loral is pursuing additional satellite-based communications service opportunities, including CyberStar, a proposed worldwide high-speed broadband data services system initially using leased Ku-band transponder capacity on Skynet's Telstar 5 satellite. In addition, on March 20, 1998, Loral acquired Orion Network Systems, Inc. ("Orion"), a corporate data networking and satellite services company with operations in the United States and Europe that will be expanded to Asia/ Pacific and South America in 1998 and the first half of 1999, respectively. Loral was formed to effectuate the distribution of Loral Corporation's ("Old Loral") space and telecommunications businesses (the "Distribution") to shareholders of Old Loral pursuant to a merger agreement (the "Merger") dated January 7, 1996 between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"). Loral operates on a December 31 fiscal year-end. The space and communications operations of Old Loral operated under a March 31 year-end. RESULTS OF OPERATIONS In 1997, Loral accelerated its transformation from a company with extensive equity investments to a major satellite manufacturer and provider of satellite services by making a number of acquisitions that significantly affected its results of operations. In February 1997, Loral agreed to acquire the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies (the "Alliance Partners") for $374 million paid in cash and Loral securities (see Note 3 to Loral's consolidated financial statements). On March 14, 1997, Loral acquired Skynet from AT&T for $462.1 million in cash. The acquisition of Skynet and the remaining equity interest in SS/L have been accounted for as purchases. Loral's consolidated financial statements for the year ended December 31, 1997, reflect the results of operations of SS/L from January 1, 1997, the elimination of the minority interest of the SS/L equity not owned by Loral during the period and the results of operations of Skynet from March 14, 1997. Prior to January 1, 1997, SS/L was accounted for using the equity method of accounting. In 1997, Loral increased its ownership of Globalstar by exercising existing warrants and rights to acquire 1,312,696 Globalstar ordinary partnership interests for $34.8 million in cash and by acquiring 2,748,372 Globalstar ordinary partnership interests from other Globalstar partners for $97.5 million in cash, 1,255,684 shares of Loral common stock and a deferred purchase price of $24.8 million. At December 31, 1997, Loral had a 40.1% interest in Globalstar's ordinary partnership interests. In connection with the privatization by the Mexican Government of its fixed satellite services business, Loral and Telefonica Autrey formed a joint venture, Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Telefonica Autrey equity contribution of $50.9 million and debt issued by Holdings. As part of the acquisition, Holdings issued a 20 22 $125.1 million seven year Government Obligation bearing interest at 6.03% to the Mexican Government in consideration for the assumption by SatMex of the debt incurred by Holdings in connection with the acquisition. The debt of SatMex and Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica Autrey have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation though December 30, 2000 and, thereafter, in an amount equal to 1.2 times the value of the Government Obligation until maturity. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in SatMex. Loral accounts for SatMex using the equity method. The consolidated financial statements reflect the equity in net loss of SatMex for the period November 17 to December 31, 1997. On March 20, 1998, Loral acquired all of the outstanding stock, as defined, of Orion in exchange for Loral common stock. Loral issued 17.9 million shares of its common stock and assumed existing Orion options and warrants to purchase 1.9 million shares of Loral common stock representing an aggregate purchase price of $467.0 million. Loral will include Orion's results from the date of acquisition using the purchase method of accounting. Orion is a provider of satellite-based communications services, focused primarily on private communications network services, Internet services and video distribution and other satellite transmission services. Orion provides multinational corporations with private communications networks designed to carry high speed data, fax, video teleconferencing, voice and other specialized services. Orion currently has one satellite in orbit and two satellites under construction. The cost of the two additional satellites under construction is fully funded. At December 31, 1997, Orion had unrestricted cash and cash equivalents of $70.0 million, restricted cash to be used for the satellites under construction and interest payments of $356.9 million and debt of $747.1 million which is expected to remain outstanding after the transaction. Orion's outstanding debt is non-recourse to Loral. Taxation: Loral is subject to U.S. Federal, state and local income taxation at regular corporate rates on any income that is effectively connected with the conduct of a U.S. trade or business. When such income is deemed removed from the U.S. business, it is subject to an additional 30% "branch profits" tax. Loral expects that a significant portion of its income will be from foreign sources and will not be effectively connected with a U.S. trade or business; some portion of this income, however, will be subject to taxation by certain foreign countries. The Company's U.S. subsidiaries are subject to U.S. taxes on their worldwide income. In addition, a 30% U.S. withholding tax will be imposed on dividends and interest paid by such subsidiaries to Loral Space & Communications Ltd. Comparison of Results of the Year Ended December 31, 1997 and the Nine Months Ended December 31, 1996 Revenues for the year ended December 31, 1997 totaled $1.5 billion before elimination of intercompany sales of $200.1 million. SS/L's sales were $1.4 billion before elimination of intercompany eliminations of $199.3 million. SS/L's commercial sales were $1.1 billion, including sales to Globalstar of $408.1 million, and sales to the U.S. government were $90.5 million. Skynet's sales were $69.3 million from date of acquisition to December 31, 1997. Revenue for the nine months ended December 31, 1996, represented management fees earned from SS/L of $5.1 million. 21 23 Earnings before interest, taxes, depreciation and amortization ("EBITDA")(1) for 1997 is as follows (in millions): SS/L........................................................ $99.7 Skynet -- from March 14, 1997............................... 42.0 Corporate expenses and intercompany eliminations............ (33.2) ------ EBITDA before development costs............................. 108.5 SatMex(2)................................................... 5.1 ------ Adjusted EBITDA before development costs(3)................. $113.6 ======
- --------------- (1) EBITDA should not be construed as an alternative to net income, as an indicator of a company's operating performance, as cash flow from operations or as a measure of a company's liquidity. (2) Represents Loral's proportionate share of SatMex's EBITDA from November 17, 1997. (3) Development costs for CyberStar were $32.2 million and Loral's proportionate share of Globalstar's development costs was $33.3 million. EBITDA before development costs was $108.5 million in 1997. CyberStar development costs were $32.2 million and depreciation and amortization was $62.7 million, resulting in operating income for 1997 of $13.6 million. The nine months ended December 31, 1996, reflected an operating loss of $12.2 million primarily due to corporate expenses of $17.3 million. In connection with delayed payment in 1997 by two Asian customers for three satellites, SS/L stopped work, reduced backlog by $291 million, which will reduce future sales, and recorded a charge of $23 million. If the current programs for these three satellites are not restarted, the satellites will be sold to other customers. Interest income of $49.1 million for the year ended December 31, 1997 represents $42.6 million of interest earned on the investment of available cash during the year and interest on the GTL Convertible Preferred Equivalent Obligations ("GTL Convertible Preferreds") held by Loral (See Note 6 to Loral's consolidated financial statements), and $6.5 million of interest earned on orbital incentive payments. Interest income for the nine months ended December 31, 1996 of $34.7 million reflects the investment of available cash during the period and interest on the GTL Convertible Preferreds. Interest expense of $15.2 million, net of capitalized interest of $22.6 million, for 1997, reflects the assumption of SS/L's debt, borrowings under the Credit Agreement (see Note 7 to Loral's consolidated financial statements) and interest on Loral's outstanding Convertible Preferred Equivalent Obligations ("CPEOs") until June 5, 1997, when the CPEOs were exchanged for Loral 6% Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"). Preferred dividends in 1997 of $26.3 million result from the exchange of the Company's CPEOs for Series C Preferred Stock. Interest expense for the nine months ended December 31, 1996 of $6.0 million reflects interest on the CPEOs for one quarter. The results of operations for 1997, reflect the gain on sale of K&F stock of $79.6 million, net of expenses. The Company's effective income tax rate for 1997 was 27.5%. The current year effective rate is lower than the statutory U.S. Federal income tax rate because, as a Bermuda company, a substantial portion of the Company's income is foreign source income not subject to Federal taxation. The minority interest expense in 1997 reflects the reduction of SS/L's income attributed to the Alliance Partners. The equity in net loss of affiliates for 1997 of $47.3 million reflects increased development costs at Globalstar as well as an increased ownership percentage by Loral in Globalstar. In addition, in connection with Loral's investment in SatMex in 1997, Loral recorded its share of SatMex's losses of $6.4 million. The equity in net loss of affiliates for the nine months ended December 31, 1996 reflects the Company's share of Globalstar losses of $18.1 million offset by the Company's share of SS/L's income of $13.4 million. In 1997, the Company discontinued using the equity method for SS/L and fully consolidated SS/L's results of operations. 22 24 As a result of the above, net income applicable to common stockholders for 1997 was $13.7 million, or $0.06 per diluted share, compared to $8.9 million, or $0.04 per diluted share, for the nine months ended December 31, 1996. Diluted weighted average shares were 243.6 million for 1997 and 229.4 million for the nine months ended December 31, 1996. Comparison of Results for the Nine Months Ended December 31, 1996 and 1995 For the nine months ended December 31, 1996, the consolidated financial statements include the accounts of Loral Space & Communications Ltd. and its subsidiaries. As such, the following discussion compares these results of operations with the unaudited nine months ended December 31, 1995. Old Loral operated under a March 31 year-end. The results of operations for the periods through March 31, 1996, include allocations and estimates of certain expenses of Loral based upon estimates of actual services performed by Old Loral on behalf of Loral. The amount of corporate office expenses for such periods has been estimated based primarily on the allocation methodology prescribed by government regulations pertaining to government contractors, which management of Loral believes is a reasonable allocation method. For the periods through March 31, 1996, interest was allocated to Loral based upon Old Loral's historical weighted average debt cost applied to the average investment in affiliates, which management of Loral believes to be a reasonable allocation method. Interest related to Old Loral's investment in Globalstar has been capitalized because Globalstar has not commenced its principal operations. The results of operations reflect net income of $8.9 million for the nine months ended December 31, 1996 as compared with a loss of $15.3 million for the same period in the prior year. This change is primarily attributable to interest earned during 1996 on the investment of available cash balances as compared with interest expense allocated from Old Loral during 1995. Total interest income, net for the nine months ended December 31, 1996 was $28.7 million. Management fees earned from SS/L of $5.1 million for the nine months ended December 31, 1996 represent an increase of $1.2 million over the nine months ended December 31, 1995. The management fees are based on SS/L sales which increased $250 million, or 32%, to $1.0 billion. Costs and expenses increased to $17.3 million for the nine months ended December 31, 1996 from $2.3 million for the nine months ended December 31, 1995. The primary reason for this increase is that 1996 expenses reflect the Company's operation of its satellite and telecommunications businesses on a stand-alone basis. Equity in net loss of affiliates decreased to $4.7 million for the nine months ended December 31, 1996 from $11.4 million for the comparable period in the prior year. This improvement is primarily due to increased net income of SS/L, partially offset by the loss of tax benefit for Globalstar losses following Loral's formation in Bermuda. The Company's effective income tax rate for the nine months ended December 31, 1996 was 17.7% compared with (35.0)% for the prior period. The current period effective rate is lower than the statutory U.S. Federal income tax rate because, as a Bermuda Company, a substantial portion of the Company's income is foreign source income not subject to federal taxation. SUMMARY RESULTS OF OPERATIONS OF AFFILIATES GLOBALSTAR Globalstar is a development stage partnership and has not commenced commercial service operations. The net loss applicable to ordinary partnership interests for the year ended December 31, 1997 was $88.8 million as compared to $56.6 million for the nine months ended December 31, 1996. The increase in the net loss is a result of increased marketing, general and administrative expenses of $10.7 million and an increase in development costs of $31.7 million as a result of increased activity in the development of Globalstar's user terminals, offset by an increase in interest income of $15.6 million as a result of higher average cash balances 23 25 outstanding. Globalstar is expending significant funds for the construction, testing and deployment of the Globalstar System and expects such losses to continue through commencement of revenue generating service operations. SATMEX For the period November 17, 1997 to December 31, 1997, SatMex had revenues, EBITDA, operating income and a net loss of $12.5 million, $10.5 million, $4.8 million and $13.1 million, respectively (unaudited). The net loss is primarily attributed to interest expense of $16.2 million on debt issued to finance the acquisition, which includes a charge for $8.9 million of fees associated with a bridge loan. SatMex expects such losses to continue through 1999 until funds from operations reduce outstanding debt. LIQUIDITY AND CAPITAL RESOURCES Loral intends to capitalize on its innovative capabilities, market position and advanced technologies to offer value-added satellite-based services as part of the evolving worldwide communications networks and, where appropriate, to form strategic alliances with major telecommunications service providers and equipment manufacturers to enhance and expand its satellite-based communications service opportunities. In order to pursue such opportunities, Loral may seek funds from strategic partners and other investors, through incurrence of debt or the issuance of additional equity. At December 31, 1997, Loral had $226.5 million of cash and cash equivalents. Loral intends to utilize its existing capital base and access to the capital markets to construct and operate additional satellites, make additional investments in Globalstar and Globalstar service provider opportunities and invest in additional satellite communications service opportunities. On November 14, 1997, the Company, through its wholly owned subsidiary Loral SpaceCom Corporation, entered into a $850 million credit facility with a group of banks (see Note 7 to Loral's consolidated financial statements). The facility consists of a $500 million revolving credit facility, a $275 million term loan and a $75 million letter of credit facility. The facility replaced SS/L's existing credit facility. The facility is secured by the stock of Loral SpaceCom Corporation and SS/L and contains various covenants including an interest coverage ratio, debt to capitalization ratios and restrictions on cash transfers to its parent. At December 31, 1997, there was $435.4 million outstanding under this agreement and other similar credit agreements with SS/L. Skynet: Skynet currently has two high-powered satellites operating in orbit. Loral intends to expand Skynet's business to become a worldwide satellite service provider through the construction of additional satellites and has four satellites under construction by SS/L. Loral anticipates that a portion of the funds required for construction of these additional satellites will be provided through additional borrowings or the issuance of additional equity. Globalstar: On February 14, 1998, Globalstar launched its first four satellites. Globalstar expects to begin commercial service in early 1999 following the launch of 44 satellites during 1998. The remaining 12 satellites, including eight in-orbit spares, will be launched in the first half of 1999. Globalstar's current budgeted expenditures for the design, construction and deployment of the Globalstar System, including working capital, cash interest on borrowings and operating expenses is approximately $2.7 billion. As of December 31, 1997, Globalstar had raised or received commitments for approximately $2.6 billion. In addition, Globalstar has agreed to purchase from SS/L eight additional spare satellites at a cost estimated at $175 million. Further, in order to accelerate the deployment of gateways around the world Globalstar has agreed to finance approximately $80 million of the cost of up to 32 of the initial 38 gateways. Globalstar expects to recover this financing upon resale of such gateways to its partners and service providers. 24 26 SS/L is the prime contractor for the design and construction of Globalstar's satellites. In connection therewith, SS/L and its subcontractors have committed $353 million of vendor financing to Globalstar, of which $121 million of such vendor financing is effectively borne by the subcontractors. Commitments and Contingencies: In connection with the Merger between Old Loral and Lockheed Martin, Lockheed Martin assumed approximately $206 million of the guarantee under the Globalstar Credit Agreement. The balance of $44 million of the guarantee was assumed by various Globalstar partners, including $11.7 million by SS/L. Loral has agreed to indemnify Lockheed Martin for its liability, if any, in excess of $150 million under its guarantee of the Globalstar Credit Agreement. Globalstar is currently financed without recourse to Loral other than the indemnification described above. In 1997, two in-orbit satellites built by SS/L experienced solar array circuit failures. One of the customers has asserted that, in light of the failures and uncertainty as to further failures, it has not accepted the satellite. Loral believes that the customer was contractually required to accept the satellite at completion of in-orbit testing and that risk of loss has passed to the customer. In addition, another customer has requested that SS/L structure an arrangement whereby a satellite under construction would be sold to another customer. Management believes that these matters will not have a material adverse effect on the financial condition or results of operations of Loral. Cash Used and Provided. Cash used in operating activities for the year ended December 31, 1997 was $230.2 million, primarily due to an increase in satellite contracts in process and inventories of $152.8 million, a decrease in customer advances of $57.8 million due to the progress on commercial satellite contracts and an increase in deposits of $107.7 million, offset by funds generated by earnings before depreciation and amortization, taxes, gain on sale of K&F stock, minority interest and equity in net loss of affiliates of $110.2 million. Cash used in operating activities for the nine months ended December 31, 1996, was $3.0 million, primarily due to increases in other current assets, offset by funds generated from earnings before depreciation, taxes and equity in net loss of affiliates of $17.5 million. Cash used in investing activities for the year ended December 31, 1997 was $1.0 billion primarily due to the purchase of Skynet and the SS/L equity interests (see Note 3 to Loral's consolidated financial statements); the purchase of equity interests in Globalstar and SatMex (see Note 6 to Loral's consolidated financial statements); capital expenditures of $255.3 million primarily for the construction of the Telstar satellites by SS/L for Skynet and facility expansion and renovation at SS/L; and other assets of $63.5 million, offset by the proceeds from the sale of K&F stock. Cash used in investing activities for the nine months ended December 31, 1996 was $2.0 million due primarily to the purchase of $2.5 million principal amount of GTL Convertible Preferred Equivalent Obligations in April 1996 and the purchase of SS/L equity interests, offset by the sale of certain fixed assets. Net cash provided by financing activities for the year ended December 31, 1997 and December 31, 1996 was $298.8 million and $1.2 billion, respectively, primarily as a result of borrowings under credit facilities in 1997 and the net proceeds from the Distribution and the net proceeds from the issuance of the CPEOs in 1996. YEAR 2000 ISSUE The Company is evaluating the potential effect of the year 2000 on its information processing systems. It is not known at this time what modifications, if any, will be required. All costs associated with any modification will be expensed as incurred. ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), and in February 1998, issued statement No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of 25 27 general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS 131 establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. SFAS 132 expands and standardizes the disclosure requirements for pensions and other postretirement benefits. The Company is required to adopt SFAS 130, SFAS 131 and SFAS 132 in 1998, and the Company's consolidated financial statements will reflect the appropriate disclosures. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has limited involvement with derivative financial instruments and does not use such instruments for trading purposes. The derivative financial instruments are used to manage foreign currency exchange risk. At December 31, 1997, the Company had foreign currency exchange contracts (forwards and swaps) with several banks to purchase and sell foreign currencies, primarily Japanese yen, aggregating $175.1 million. Such contracts were designated as hedges of certain foreign contracts and subcontracts to be performed by SS/L through May 2006. The fair value of these contracts, based on quoted market prices, was $139.0 million at December 31, 1997. At December 31, 1997, deferred gains on forward contracts to sell foreign currencies, primarily yen, were $26.6 million and deferred losses on forward contracts to purchase foreign currencies, primarily yen, were $9.5 million. The Company is exposed to credit-related losses in the event of nonperformance by counter parties to these financial instruments, but does not expect any counter party to fail to meet its obligation. The maturity of foreign currency exchange contracts held at December 31, 1997 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts and payments to vendors under subcontracts. These foreign exchange contracts mature as follows (in thousands):
TO PURCHASE TO SELL ------------------ ------------------ AT AT AT AT YEARS CONTRACT MARKET CONTRACT MARKET TO MATURITY RATE RATE RATE RATE ----------- -------- ------- -------- ------- 1.............................................. $68,582 $59,937 $ 20,711 $14,766 2 to 5......................................... 5,804 4,939 65,276 48,975 6 to 10........................................ 14,750 10,385 ------- ------- -------- ------- $74,386 $64,876 $100,737 $74,126 ======= ======= ======== =======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements and Financial Statement Schedules on pages 28 and 29. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 26 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Information required for this item is set forth in the Company's 1998 definitive proxy statement which is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION ---- --- -------- Bernard L. Schwartz........... 72 Chairman of the Board of Directors and Chief Executive Officer since January 1996. Prior to that, Chairman and Chief Executive Officer of Old Loral since 1972. Gregory J. Clark..... 55 President and Chief Operating Officer since January 1998. Prior to that, President of News Technology Group, a division of News Corporation, since September 1994. Prior to that, Director of Science and Technology of IBM in Australia since 1988. Michael P. DeBlasio........... 61 First Senior Vice President and Chief Financial Officer since February 1998. Prior to that, Senior Vice President and Chief Financial Officer since March 1996. Prior to that, Senior Vice President -- Finance of Old Loral since 1979. Robert E. Berry...... 69 Senior Vice President since November 1996 and President of Space Systems/Loral since 1990. Nicholas C. Moren.... 51 Senior Vice President and Treasurer since February 1998. Prior to that, Vice President and Treasurer since March 1996. Prior to that, Vice President and Treasurer of Old Loral since April 1991. Eric J. Zahler....... 47 Senior Vice President, General Counsel and Secretary since February 1998. Prior to that, Vice President, General Counsel and Secretary since March 1996. Prior to that, Vice President and General Counsel of Old Loral since April 1992. Prior to that, partner in the law firm of Fried, Frank, Harris, Shriver & Jacobson. W. Neil Bauer........ 51 Vice President since March 1998. Prior to that, Chief Executive Officer and President of Orion Network Systems, Inc. since September 1993. Prior to that, President of Orion Network Systems, Inc. since March 1993. Terry J. Hart........ 51 Vice President since February 1998 and President of Loral Skynet since March 1997. Prior to that, Division Manager of AT&T Skynet Satellite Services since 1991. Ronald C. Maehl...... 50 Vice President since February 1998 and President of CyberStar since March 1997. Prior to that, Senior Vice President of Strategic Ventures of SS/L since April 1996. Prior to that, Senior Vice President of Advance Programs of SS/L since January 1993. Laurence D. Atlas.... 40 Vice President, Government Relations -- Telecommunications since May 1997. Prior to that, Associate Chief of the Common Carrier Bureau of the FCC since January 1995. Prior to that, Associate Chief of the FCC's Wireless Telecommunications Bureau since November 1994. Prior to that, associate in the law firm of Willkie Farr & Gallagher since 1982. Jeanette H. Clonan... 49 Vice President -- Communications and Investor Relations since November 1996. Prior to that, Director -- Corporate Communications from June 1996. Prior to that, Vice President -- Corporate Relations of Jamaica Water Securities since September 1992. Stephen L. Jackson... 56 Vice President -- Administration since March 1997. Prior to that, Vice President -- Administration of Old Loral since 1978.
27 29
NAME AGE POSITION ---- --- -------- Avi Katz............. 39 Vice President, Deputy General Counsel and Assistant Secretary since February 1998. Prior to that, Deputy General Counsel and Assistant Secretary since August 1997. Prior to that, Associate General Counsel and Assistant Secretary since July 1996. Prior to that, associate in the law firm of Willkie Farr & Gallagher since 1987. Jerald A. Lindfelt... 51 Vice President -- Business Operations since March 1997. Prior to that, Division President of Old Loral since July 1991. Russell R. Mack...... 43 Vice President -- Business Ventures since February 1998. Prior to that, Director of Business Planning and Development since April 1996. Prior to that, Manager of Project Finance of Old Loral since July 1991. Harvey B. Rein....... 44 Vice President and Controller since April 1996. Prior to that, Assistant Controller of Old Loral since 1985. \ Thomas B. Ross....... 68 Vice President -- Government Relations since November 1996. Prior to that, Vice President -- Corporate Communications from April 1996. Prior to that, Vice President -- Communications of Globalstar from May 1995 to April 1996. Prior to that, Special Assistant to the President and Senior Director for Public Affairs of the National Security Council from April 1994 to May 1995 and Senior Vice President of Hill & Knowlton.
ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under Items 11, 12 and 13, is set forth in the Company's 1998 definitive proxy statement which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements
PAGE ---- Index to Financial Statements............................... F-1 Loral Space & Communications Ltd. Independent Auditors' Report.............................. F-2 Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996...................................... F-3 Consolidated Statements of Operations for the year ended December 31, 1997, for the nine months ended December 31, 1996 and for the year ended March 31, 1996......... F-4 Consolidated Statements of Shareholders' Equity/Invested Equity for the year ended December 31, 1997, for the nine months ended December 31, 1996 and for the year ended March 31, 1996................................... F-5 Consolidated Statements of Cash Flows for the year ended December 31, 1997, for the nine months ended December 31, 1996 and for the year ended March 31, 1996......... F-6 Notes to Consolidated Financial Statements................ F-7 Space Systems/Loral, Inc. Independent Auditors' Report.............................. F-29 Consolidated Balance Sheets as of December 31, 1996....... F-30
28 30
PAGE ---- Consolidated Statements of Income for the nine months ended December 31, 1996 and the year ended March 31, 1996................................................... F-31 Consolidated Statements of Shareholders' Equity for the nine months ended December 31, 1996 and the year ended March 31, 1996......................................... F-32 Consolidated Statements of Cash Flows for the nine months ended December 31, 1996 and the year ended March 31, 1996................................................... F-33 Notes to Consolidated Financial Statements................ F-34 Globalstar, L.P. (A development stage limited partnership) Independent Auditors' Report.............................. * Consolidated Balance Sheets as of December 31, 1997 and 1996................................................... * Consolidated Statements of Operations for the years ended December 31, 1997 and 1996 and 1995 and cumulative..... * Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, 1995 and cumulative........... * Consolidated Statements of Partners' Capital and Subscriptions Receivable for the period March 23, 1994 (commencement of operations) to December 31, 1997...... * Notes to Consolidated Financial Statements................ *
- --------------- * Incorporated herein by reference from the Annual Report on Form 10-K of Globalstar Telecommunications Limited for the year ended December 31, 1997, pages F-13 through F-32. (a) 2. Financial Statement Schedules Independent Auditors' Report............................ S-1 Schedule I -- Condensed Financial Information of Registrant.............................................. S-2 Financial statement schedules not listed are either not required or the information required is reflected in the consolidated financial statements. (a) 3. Exhibits
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.+ 3.1 Memorandum of Association(1) 3.2 Memorandum of Increase of Share Capital(1)
29 31
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 3.3 Second Amended and Restated Bye-laws(1) 3.4 Schedule III to Second Amended and Restated Bye-laws relating to Registrant's 6% Series C Convertible Redeemable Preferred Stock(6) 4.1 Rights Agreement dated March 27, 1996 between the Registrant and The Bank of New York, Rights Agent(1) 10.1 Shareholders Agreement dated as of April 23, 1996 between Loral Corporation and the Registrant(1) 10.2 Tax Sharing Agreement dated as of April 22, 1996 between Loral Corporation, the Registrant, Lockheed Martin Corporation and LAC Acquisition Corporation(1) 10.3 Exchange Agreement dated as of April 22, 1996 between the Registrant and Lockheed Martin Corporation(1) 10.4 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as of March 6, 1996 among Loral/Qualcomm Satellite Services, L.P., Globalstar Telecommunications Limited, AirTouch Satellite Services, San Giorgio S.p.A., Hyundai/ Dacom, Loral/DASA Globalstar, L.P., Loral Globalstar, L.P., TE.S.AM. and Vodastar Limited(7) 10.5 Service Provider Agreements by and between Globalstar, L.P. and each of Loral General Partner, Inc. and Loral/DASA Globalstar, L.P.(8) 10.6 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.(8) 10.7 1996 Stock Option Plan(1)++ 10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++ 10.9 Employment Agreement between the Registrant and Bernard L. Schwartz(1)++ 10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement between the Registrant and Bernard L. Schwartz+++ 10.10 Registration Rights Agreement dated as of August 9, 1996 among Loral Space & Communications Ltd., Lehman Brothers Capital Partners II, L.P., Lehman Brothers Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore Investment Partnership L.P. and Lehman Brothers Offshore Investment Partnership-Japan L.P.(9) 10.11 Registration Rights Agreement dated November 6, 1996 relating to the Registrant's 6% Convertible Preferred Equivalent Obligations due 2006(6) 10.12 Registration Rights Agreement (Series C Preferred Stock) dated as of March 31, 1997 between Loral Space & Communications Ltd. and Finmeccanica S.p.A. and dated as June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.13 Registration Rights Agreement (Common Stock) dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.14 Alliance Agreement dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI, Alcatel Espace and Finmeccanica S.p.A.(10) 10.15 Principal Stockholder Agreement dated as of October 7, 1997 among Loral Space & Communications Ltd., Loral Satellite Corporation, Orion Network Systems, Inc. and certain Orion stockholders signatory thereto(4) 10.16 Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc., the Banks parties thereto, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo di Torino S.p.A, individually and as Italian Export Financing and Arranger and as Selling Bank(11) 10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as of June 30, 1997+ 10.18 Purchase and Sale Agreement dated November 17, 1997 between the Federal Government of the United Mexican States and Corporativo Satelites Mexicanos, S.A. de C.V. for the purchase and sale of the capital stock of Satelites Mexicanos, S.A. de C.V. (English translation of Spanish original)+
30 32
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.19 Membership Agreement dated and effective as of November 17, 1997 among Loral SatMex Ltd. and Ediciones Enigma, S.A. de C.V. and Firmamento Mexicano, S. de R.L. de C.V.+ 10.20 Letter Agreement dated December 29, 1997 between Loral Space & Communications Ltd., Telefonica Autrey S.A. de C.V., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. and Lehman Commercial Paper Inc. and related Agreement between the Federal Government of United Mexican States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma, S.A. de C.V., Loral Space & Communications Ltd., Loral SatMex Ltd. and Servicios Corporativos Satelitales, S.A. de C.V.+ 12 Statement Re: Computation of Ratios+ 21 List of Subsidiaries of the Registrant+ 23 Consent of Deloitte & Touche LLP+ 27 Financial Data Schedule (EDGAR only)+ 99.1 Consolidated Financial Statements of Globalstar, L.P. and Independent Auditors' Report(12)
- --------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form 10 (No. 1-14180). (2) Incorporated by reference to the Registrant's Form 8-K filed on September 27, 1996. (3) Incorporated by reference to the Registrant's Form 8-K filed on March 28, 1997. (4) Incorporated by reference to the Registrant's Form 8-K filed on October 10, 1997. (5) Incorporated by reference to the Registrant's Registration Statement on Form S-4 filed on February 17, 1998 (File No. 333-46407). (6) Incorporated by reference to the Registrant's Form 10-K for the nine month period ended December 31, 1996. (7) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed by Globalstar Telecommunications Limited (File No. 0-25456). (8) Incorporated by reference to the Registration Statement on Form S-1 of Globalstar Telecommunications Limited (File No. 33-86808). (9) Incorporated by reference to the Registrant's Form 8-K filed on August 13, 1996. (10) Incorporated by reference to the Registrant's Form 8-K filed on July 8, 1997. (11) Incorporated by reference to the Registrant's Form 8-K filed on December 9, 1997. (12) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed by Globalstar Telecommunications Limited (File No. 0-25456). + Filed herewith. ++ Management compensation plan. (b) Reports on Form 8-K
DATE OF REPORT -------------- October 7, 1997 Item 5 - Loral entered into a Merger Agreement with Orion Network Systems, Inc. November 14, 1997 Item 5 - Loral SpaceCom Corporation entered into an $850 million credit facility. Loral joint venture entered into an agreement to acquire 75% of SatMex.
31 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LORAL SPACE & COMMUNICATIONS LTD. By: BERNARD L. SCHWARTZ ------------------------------------ Bernard L. Schwartz (Chairman of the Board and Chief Executive Officer) Date: March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- BERNARD L. SCHWARTZ Chairman of the Board, Chief Executive March 30, 1998 - --------------------------------------------------- Officer and Director (Principal Bernard L. Schwartz Executive Officer) HOWARD GITTIS Director March 30, 1998 - --------------------------------------------------- Howard Gittis ROBERT B. HODES Director March 30, 1998 - --------------------------------------------------- Robert B. Hodes GERSHON KEKST Director March 30, 1998 - --------------------------------------------------- Gershon Kekst CHARLES LAZARUS Director March 30, 1998 - --------------------------------------------------- Charles Lazarus MALVIN A. RUDERMAN Director March 30, 1998 - --------------------------------------------------- Malvin A. Ruderman E. DONALD SHAPIRO Director March 30, 1998 - --------------------------------------------------- E. Donald Shapiro ARTHUR L. SIMON Director March 30, 1998 - --------------------------------------------------- Arthur L. Simon DANIEL YANKELOVICH Director March 30, 1998 - --------------------------------------------------- Daniel Yankelovich MICHAEL P. DEBLASIO First Senior Vice President and March 30, 1998 - --------------------------------------------------- Chief Financial Officer Michael P. DeBlasio (Principal Financial Officer) HARVEY B. REIN Vice President and Controller March 30, 1998 - --------------------------------------------------- (Principal Accounting Officer) Harvey B. Rein
32 34 INDEX TO FINANCIAL STATEMENTS Loral Space & Communications Ltd. and Subsidiaries Independent Auditors' Report.............................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996................................................... F-3 Consolidated Statements of Operations for the year ended December 31, 1997, nine months ended December 31, 1996 and year ended March 31, 1996.......................... F-4 Consolidated Statements of Shareholders' Equity/Invested Equity for the year ended December 31, 1997, nine months ended December 31, 1996 and year ended March 31, 1996................................................... F-5 Consolidated Statements of Cash Flows for the year ended December 31, 1997, nine months ended December 31, 1996 and year ended March 31, 1996.......................... F-6 Notes to Consolidated Financial Statements................ F-7 Space Systems/Loral, Inc. Independent Auditors' Report.............................. F-29 Consolidated Balance Sheet as of December 31, 1996........ F-30 Consolidated Statements of Income for the nine months ended December 31, 1996 and the year ended March 31, 1996................................................... F-31 Consolidated Statements of Shareholders' Equity for the nine months ended December 31, 1996 and the year ended March 31, 1996......................................... F-32 Consolidated Statements of Cash Flows for the nine months ended December 31, 1996 and the year ended March 31, 1996................................................... F-33 Notes to Consolidated Financial Statements................ F-34
F-1 35 INDEPENDENT AUDITORS' REPORT To the Shareholders of Loral Space & Communications Ltd. We have audited the accompanying consolidated balance sheets of Loral Space & Communications Ltd. (a Bermuda company) and its subsidiaries (collectively, the "Company") as of December 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity/invested equity and cash flows for the year ended December 31, 1997, the nine months ended December 31, 1996 and the year ended March 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the year ended December 31, 1997, the nine months ended December 31, 1996 and the year ended March 31, 1996 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP New York, New York March 6, 1998 (March 20, 1998 as to the fifth paragraph of Note 3) F-2 36 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 226,547 $1,180,752 Contracts in process...................................... 468,134 Inventories............................................... 98,325 Other current assets...................................... 51,612 29,555 ---------- ---------- Total current assets........................................ 844,618 1,210,307 Property, plant and equipment, net.......................... 926,679 17,939 Cost in excess of net assets acquired, less amortization.... 361,411 Long-term receivables....................................... 78,639 Investments in affiliates................................... 472,639 443,057 Deposits.................................................... 154,970 Other assets................................................ 165,980 28,023 ---------- ---------- $3,004,936 $1,699,326 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of debt................................... $ 2,146 Accounts payable.......................................... 231,519 $ 10,708 Accrued employment costs.................................. 38,797 Customer advances......................................... 68,287 Accrued interest and preferred dividends.................. 11,192 6,000 Other current liabilities................................. 25,931 Income taxes payable...................................... 25,934 2,311 Deferred income taxes..................................... 4,187 112 ---------- ---------- Total current liabilities................................... 407,993 19,131 Deferred income taxes....................................... 99,696 4,611 Pension and other postretirement liabilities................ 48,398 19,723 Long-term liabilities....................................... 31,388 2,500 Long-term debt.............................................. 433,252 Minority interest........................................... 10,964 Convertible preferred equivalent obligations ($600,000 principal amount)......................................... 583,292 Commitments and contingencies (Notes 6, 7 and 12) Shareholders' equity: Series A convertible preferred stock, $.01 par value; 150,000,000 shares authorized, 45,896,977 shares issued................................................. 459 459 Series B preferred stock, $.01 par value; 750,000 shares authorized and unissued................................ 6% Series C convertible redeemable preferred stock ($745,472 redemption value), $.01 par value; 20,000,000 shares authorized, 14,909,437 shares issued............ 733,762 Common stock, $.01 par value; 750,000,000 shares authorized, 200,950,864 and 191,092,308 shares issued................................................. 2,010 1,911 Paid-in capital........................................... 1,216,128 1,058,822 Treasury stock, at cost; 101,053 shares................... (1,680) Retained earnings......................................... 22,566 8,877 ---------- ---------- Total shareholders' equity.................................. 1,973,245 1,070,069 ---------- ---------- $3,004,936 $1,699,326 ========== ==========
See notes to consolidated financial statements. F-3 37 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ---------- Revenues............................................... $1,312,591 Management fee from affiliate.......................... $ 5,088 $ 5,608 Costs and expenses..................................... 1,299,039 17,289 3,021 ---------- -------- -------- Operating income (loss)................................ 13,552 (12,201) 2,587 Interest and investment income......................... 49,069 34,699 Interest expense....................................... 15,230 6,000 10,524 Gain on sale of K&F stock.............................. 79,591 ---------- -------- -------- Income (loss) before income taxes, minority interest and equity in net loss of affiliates................. 126,982 16,498 (7,937) Income taxes........................................... 34,871 2,912 (2,780) ---------- -------- -------- Income (loss) before minority interest and equity in net loss of affiliates............................... 92,111 13,586 (5,157) Minority interest...................................... (4,834) Equity in net loss of affiliates....................... (47,273) (4,709) (8,628) ---------- -------- -------- Net income (loss)...................................... 40,004 8,877 (13,785) Preferred dividends and accretion...................... (26,315) ---------- -------- -------- Net income (loss) applicable to common stockholders.... $ 13,689 $ 8,877 $(13,785) ========== ======== ======== Earnings (loss) per share: Basic................................................ $ 0.06 $ 0.04 $ (.08) ========== ======== ======== Diluted.............................................. $ 0.06 $ 0.04 $ (.08) ========== ======== ======== Weighted average shares outstanding: Basic................................................ 242,070 228,997 183,580 ========== ======== ======== Diluted.............................................. 243,591 229,396 183,580 ========== ======== ========
See notes to consolidated financial statements. F-4 38 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/INVESTED EQUITY YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED MARCH 31, 1996 (In thousands, except per share amounts)
6% SERIES C SERIES A CONVERTIBLE CONVERTIBLE REDEEMABLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK --------------- ------------------ ---------------- SHARES SHARES SHARES PAID-IN INVESTED ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL EQUITY ------ ------ ------- -------- ------- ------ ---------- --------- Balance March 31, 1995................... $ 251,819 Advances from Old Loral.................. 116,362 Net loss................................. (13,785) Incorporation of Loral Space & Communications Ltd...................... 12 $ 354,396 (354,396) ------ ---- ------- -------- ------- ------ ---------- --------- Balance March 31, 1996................... 12 354,396 -- Advances from Old Loral.................. 2,425 April 23, 1996 Distribution: Other assets transferred and liabilities assumed, net from Old Loral............................... 4,070 Common stock issued to Old Loral shareholders and option holders..... 183,580 $1,836 254,152 Sale of Series A Convertible Preferred Stock............................... 45,897 $459 343,541 Common stock issued to acquire interest in SS/L................................. 7,500 75 100,238 Net income............................... ------ ---- ------- -------- ------- ------ ---------- --------- Balance December 31, 1996................ 45,897 459 191,092 1,911 1,058,822 Shares issued: Exercise of stock options and related tax benefits, net of shares tendered.............................. 208 2 2,015 Employee savings plan................... 352 4 6,997 Acquisition of equity interest in SS/L.................................. 2,909 $149,600 8,043 80 130,820 Acquisition of Globalstar partnership interests............................. 1,256 13 17,474 Mandatory exchange of Convertible Preferred Equivalent Obligations, net of unamortized issue costs............ 12,000 583,282 Preferred dividends $3.00 per share...... Accretion to Series C Convertible Redeemable Preferred Stock redemption value................................... 880 Net income............................... ------ ---- ------- -------- ------- ------ ---------- --------- Balance at December 31, 1997............. 45,897 $459 14,909 $733,762 200,951 $2,010 $1,216,128 $ -- ====== ==== ======= ======== ======= ====== ========== ========= TOTAL TREASURY RETAINED SHAREHOLDERS' STOCK EARNINGS EQUITY -------- -------- ------------- Balance March 31, 1995................... $ 251,819 Advances from Old Loral.................. 116,362 Net loss................................. (13,785) Incorporation of Loral Space & Communications Ltd...................... ------- -------- ---------- Balance March 31, 1996................... 354,396 Advances from Old Loral.................. 2,425 April 23, 1996 Distribution: Other assets transferred and liabilities assumed, net from Old Loral............................... 4,070 Common stock issued to Old Loral shareholders and option holders..... 255,988 Sale of Series A Convertible Preferred Stock............................... 344,000 Common stock issued to acquire interest in SS/L................................. 100,313 Net income............................... $ 8,877 8,877 ------- -------- ---------- Balance December 31, 1996................ 8,877 1,070,069 Shares issued: Exercise of stock options and related tax benefits, net of shares tendered.............................. $(1,680) 337 Employee savings plan................... 7,001 Acquisition of equity interest in SS/L.................................. 280,500 Acquisition of Globalstar partnership interests............................. 17,487 Mandatory exchange of Convertible Preferred Equivalent Obligations, net of unamortized issue costs............ 583,282 Preferred dividends $3.00 per share...... (25,435) (25,435) Accretion to Series C Convertible Redeemable Preferred Stock redemption value................................... (880) Net income............................... 40,004 40,004 ------- -------- ---------- Balance at December 31, 1997............. $(1,680) $ 22,566 $1,973,245 ======= ======== ==========
See notes to consolidated financial statements. F-5 39 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ----------------- ---------- Operating activities: Net income (loss)......................................... $ 40,004 $ 8,877 $ (13,785) Gain on the sale of K&F stock............................. (79,591) Equity in net loss of affiliates.......................... 47,273 4,709 8,628 Minority interest......................................... 4,834 Deferred taxes............................................ 419 (926) 3,838 Accretion on GTL CPEOs.................................... (1,739) Depreciation and amortization............................. 62,764 1,051 Changes in operating assets and liabilities, net of acquisitions: Contracts in process and inventories...................... (152,794) Deposits.................................................. (107,670) Other assets.............................................. (26,615) (9,252) Accounts payable.......................................... 69,574 (1,832) Customer advances......................................... (57,778) Accrued expenses.......................................... (36,602) (4,506) Taxes payable............................................. 24,873 Long-term liabilities..................................... (17,200) (1,124) ----------- ---------- --------- Cash used in operating activities........................... (230,248) (3,003) (1,319) ----------- ---------- --------- Investing activities: Acquisition of businesses, net of cash acquired........... (545,642) Proceeds from the sale of K&F stock, net of expenses...... 79,591 Investment in affiliates.................................. (237,899) (6,425) (105,231) Other assets.............................................. (63,482) (9,800) Proceeds from the sale of property, plant and equipment... 5,003 Capital expenditures...................................... (255,340) (540) ----------- ---------- --------- Cash used in investing activities........................... (1,022,772) (1,962) (115,031) ----------- ---------- --------- Financing activities: Borrowings under revolving credit facility, net........... 32,812 Proceeds from issuance of term loan....................... 275,000 Proceeds from convertible preferred equivalent obligations............................................. 583,292 Proceeds from exercise of stock options and issuances to employee savings plan................................... 7,338 Contribution from minority partner........................ 9,100 Preferred dividends....................................... (25,435) Proceeds from the Distribution............................ 612,274 Transaction expenses related to the Distribution.......... (12,286) Advances from Loral Corporation prior to the Distribution............................................ 2,425 116,362 ----------- ---------- --------- Cash provided by financing activities....................... 298,815 1,185,705 116,362 ----------- ---------- --------- (Decrease) increase in cash and cash equivalents............ (954,205) 1,180,740 12 Cash and cash equivalents -- beginning of period............ 1,180,752 12 ----------- ---------- --------- Cash and cash equivalents -- end of period.................. $ 226,547 $1,180,752 $ 12 =========== ========== ========= Non-cash transactions: Mandatory exchange of Convertible Preferred Equivalent Obligations............................................. $ 583,282 =========== Issuance of Series C Preferred Stock to acquire equity interest in SS/L........................................ $ 149,600 =========== Issuance of Loral common stock to acquire equity interest in SS/L and Globalstar partnership interests............ $ 148,387 $ 100,313 =========== ========== Deferred purchase price to acquire Globalstar partnership interests............................................... $ 24,787 =========== Assets transferred from Loral Corporation at the Distribution............................................ $ 31,383 ========== Liabilities assumed from Loral Corporation at the Distribution............................................ $ 27,313 ========== Transfer of GTL common stock to acquire equity interest in SS/L.................................................... $ 5,158 ========== Supplemental Information: Interest paid............................................. $ 40,866 =========== Taxes paid................................................ $ 8,901 $ 1,528 =========== ==========
See notes to consolidated financial statements. F-6 40 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPAL BUSINESS Loral Space & Communications Ltd. and subsidiaries (the "Company" or "Loral") is one of the world's leading satellite companies, with substantial activities in satellite manufacturing and satellite-based communications services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and manufacturer of space systems. Loral Skynet ("Skynet"), acquired March 14, 1997, is a leading provider of satellite communications services in the United States. Skynet owns and operates the Telstar satellite network and is expanding its business internationally. On November 17, 1997, a joint venture including Loral and another partner acquired 75% of SatMex, a satellite services provider to Mexico and South America. Loral also manages and is the largest equity owner of Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system scheduled for service initiation in early 1999. Loral is pursuing additional satellite-based communications service opportunities including CyberStar, a proposed worldwide high-speed broadband data services system initially using leased Ku-band transponder capacity on Skynet's Telstar 5 satellite. Loral was formed to effectuate the distribution of Loral Corporation's ("Old Loral") space and communications businesses (the "Distribution") to shareholders of Old Loral and holders of options to purchase Old Loral common stock pursuant to a merger agreement (the "Merger") dated January 7, 1996 between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"). The Distribution of approximately 183.6 million shares of Loral common stock was made on April 23, 1996. In connection with the Distribution, Lockheed Martin contributed $612 million in cash to the Company. Of the amount contributed, $344 million represented the purchase of 45,896,977 shares of Loral Series A Convertible Preferred Stock ("Series A Preferred Stock"). Such stock is subject to certain voting limitations, restrictions on transfer and standstill provisions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Loral operates on a December 31 fiscal year-end. The consolidated financial statements for the year ended December 31, 1997 and the nine months ended December 31, 1996, include the accounts of Loral Space & Communications Ltd. and its subsidiaries. The consolidated financial statements for the year ended December 31, 1997, include the results of SS/L for the full year and Skynet from March 14, 1997 (see Note 3). All intercompany transactions have been eliminated. The space and communications operations of Old Loral (the "Space & Communications Operations") operated under a March 31 year-end. For the year ended March 31, 1996, the consolidated financial statements reflect that portion of the space and communications assets and operations included in Old Loral's historical financial statements that were spun-off to Loral. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of expenses reported for the period. Actual results could differ from estimates. A significant portion of Loral's revenue is associated with long-term contracts which require significant estimates. These estimates include forecasts of costs and schedules, estimating contract revenue related to contract performance (including orbital incentives) and the potential for component obsolescence in connection with long-term procurements. Other significant estimates include the estimated useful lives of the Company's satellites. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. F-7 41 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Concentration of Credit Risk and Major Customers Financial instruments which potentially subject Loral to concentrations of credit risk consist principally of cash and cash equivalents, foreign exchange contracts and contracts in process and long-term receivables. Loral's cash and cash equivalents are maintained with high-credit-quality financial institutions. Loral's customers are U.S. and foreign governments and large multinational corporations. The credit worthiness of such institutions is generally substantial and management believes that its credit evaluation, approval and monitoring processes mitigate potential credit risks. Sales to foreign customers, primarily in Asia, represented 30% of revenues for the year ended December 31, 1997. Sales to the U.S. government represented 7% of revenues for the year ended December 31, 1997. Inventories Inventories consist principally of common subassemblies not specifically identified to contracts in process, and are valued at the lower of cost or market. Cost is determined using the first-in-first-out (FIFO) or average cost method. Investments in Affiliates Investments in affiliates are accounted for using the equity method. Income and losses of the affiliates are recorded based on Loral's beneficial interests. Intercompany profits arising from transactions between affiliates are eliminated to the extent of the Company's beneficial interests. Equity in losses of affiliates is not recognized after the carrying value has been reduced to zero, unless guarantees or other obligations exist. In connection with Loral's investment in Globalstar, a development stage company, Loral capitalizes interest cost on its investment. At December 31, 1997 and 1996 the total amount of capitalized interest included in the investment in Globalstar was $23.5 million and $10.3 million, respectively. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided primarily on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Costs incurred in connection with the construction and successful deployment of the Company's satellites and related equipment are capitalized. Such costs include direct contract costs, allocated indirect costs, launch costs, launch insurance and construction period interest. Capitalized interest related to the construction of satellites for the year ended December 31, 1997 was $9.4 million. All capitalized satellite costs will be amortized over the estimated useful life of the related satellite. The estimated useful life of the satellites, ranging from 12 to 18 years, was determined by engineering analyses performed at the in-service date. Losses from unsuccessful launches and in-orbit failures of the Company's satellites, net of insurance proceeds, will be recorded in the period when the loss occurs. Cost in Excess of Net Assets Acquired The excess of the cost of purchased businesses over the fair value of net assets acquired is being amortized over 40 years using the straight line method. Accumulated amortization was $10.8 million at December 31, 1997. Valuation of Long-Lived Assets The carrying value of Loral's long-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. Current and future profitability, as well as F-8 42 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) current and future undiscounted cash flows, excluding financing costs, are primary indicators of recoverability. For the year ended December 31, 1997, there was no adjustment to the carrying value of Loral's long-lived assets resulting from these evaluations. Other Assets Other assets include a $25 million equity investment in CD Radio Inc. representing approximately 12% of CD Radio's equity. The Company accounts for this investment using the cost method. Revenue Recognition Revenue under long-term fixed-price contracts is recognized using the cost-to-cost percentage-of-completion method. Revenue includes estimated orbital incentives discounted to present value at the launch date. Costs include the development effort required for the production of high-technology satellites, non-recurring engineering and design efforts in early periods of contract performance, as well as the cost of qualification testing requirements. Revenue under cost-reimbursable type contracts is recognized as costs are incurred; incentive fees are estimated and recognized over the contract term. Contracts with the U.S. government are subject to termination by the U.S. government for convenience or for default. Other government contract risks include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under U.S. government contracts are subject to audit. Management believes the results of such audits will not have a material effect on Loral's financial position or results of operations. Losses on contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable. In accordance with industry practice, contracts-in-process include unbilled amounts relating to contracts and programs with long production cycles, a portion of which may not be billable within one year. Skynet provides satellite capacity under lease agreements that generally provide for the use of satellites and, in certain cases, earth stations for periods generally ranging from one year to the life of the satellite. Some of these agreements have certain obligations, including providing spare or substitute capacity, if available, in the event of satellite failure. If no spare or substitute capacity is available, the agreement may be terminated. Revenue under transponder lease agreements is recognized as services are performed. Allocation of Certain Expenses For the year ended March 31, 1996, the results of operations include allocations and estimates of certain expenses of Loral based upon estimates of actual services performed by Old Loral on behalf of Loral. The amount of corporate office expenses reflected in these financial statements has been estimated based primarily on the allocation methodology prescribed by government regulations pertaining to government contractors, which management of Loral believes to be a reasonable allocation method. However, the results of operations as presented herein may not be the same as would have occurred had the Space & Communications Operations been an independent entity. Interest Expense For the year ended March 31, 1996, interest was allocated to Loral based upon Old Loral's historical weighted average debt cost applied to the average investment in affiliates, which management believes to be a reasonable allocation method. Interest expense related to Old Loral's investment in Globalstar was capitalized because Globalstar has not commenced commercial operations. F-9 43 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Foreign Exchange Contracts Loral enters into foreign exchange contracts as hedges against exchange rate fluctuations of future accounts receivable and accounts payable denominated in foreign currencies. Realized and unrealized gains and losses on foreign exchange contracts designated as hedges are deferred and recognized over the lives of the related contracts in process. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," Loral accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Income Taxes Commencing with the Distribution, Loral is subject to U.S. Federal, state and local income taxation at regular corporate rates plus an additional 30% "branch profits" tax on any income that is effectively connected with the conduct of a U.S. trade or business. U.S. subsidiaries are subject to regular corporate tax on their worldwide income. For the year ended March 31, 1996, the Space & Communications Operations were included in the consolidated U.S. Federal income tax return and certain combined and separate state and local income tax returns of Old Loral. However, for purposes of these financial statements, the provision (benefit) for income taxes is computed as if the Space & Communications Operations were a separate taxpayer. Accordingly, the provision (benefit) for income taxes is based upon reported income (loss) before income taxes. Current income tax liabilities (benefits) are considered to have been paid (received) by Old Loral and are recorded through the invested equity account with Old Loral. Deferred income taxes for all periods presented reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying tax rates in effect at the end of each year. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Dilutive earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been presented and, where appropriate, restated to conform to the requirements of SFAS 128 (see Note 14). Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), and in February 1998, issued Statement No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS 131 establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. SFAS 132 expands and standardizes the disclosure requirements for pensions and other postretirement benefits. The Company is F-10 44 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) required to adopt SFAS 130, SFAS 131 and SFAS 132 in 1998, and the Company's consolidated financial statements will reflect the appropriate disclosures. Reclassifications Certain reclassifications have been made to conform prior year amounts to current year presentation. 3. ACQUISITIONS SS/L At April 1, 1996, Loral had an effective 32.7% interest in SS/L. In 1996, Loral made a strategic decision to increase its ownership of SS/L to 100%. The first step in implementing this decision was the acquisition by Loral in August 1996 of the 18.3% interest in SS/L owned by certain partnerships affiliated with Lehman Brothers (the "Lehman Partnerships") in exchange for 7.5 million newly issued shares of Loral common stock, 534,512 shares of common stock of GTL previously held by the Company and $4 million in cash. As a result of this transaction, the Company increased its interest in SS/L from 32.7% to 51%. In February 1997, Loral agreed to acquire the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies (the "Alliance Partners") for $374 million. In March 1997, Loral acquired 24.5% of SS/L's common stock for $93.5 million in cash and $93.5 million of Loral's Convertible Preferred Equivalent Obligations ("CPEOs"). In June 1997, the Company acquired the remaining 24.5% of SS/L's common stock for $187.0 million in the form of 8,042,922 shares of Loral common stock and 1,063,663 shares of Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"). The aggregate purchase price of the 67.3% interest in SS/L acquired by Loral was $493.2 million. The purchase price represented $174.4 million in excess of SS/L's proportionate net book value which was allocated primarily to the incremental value of SS/L's investment in Globalstar of $62.2 million and cost in excess of net assets acquired of $105.9 million. The consolidated financial statements include the results of operations of SS/L since January 1, 1997, with a reduction for the earnings attributed to the minority shareholders. Skynet On March 14, 1997, Loral acquired Skynet from AT&T for $462.1 million in cash. The fair value of assets and liabilities recorded in connection with the purchase price allocation was $569.8 million and $107.7 million, respectively. Loral's consolidated financial statements include the results of operations of Skynet from the date of acquisition. Had the acquisitions of SS/L, Skynet and the investment in SatMex (see Note 6) occurred on April 1, 1996 the unaudited pro forma revenue, net loss applicable to common stockholders and related basic and diluted loss per share for the year ended December 31, 1997 and the nine months ended December 31, 1996 would have been: $1.3 billion and $1.0 billion; $19.2 million and $26.1 million; $0.08 and $0.11, and, $0.08 and $0.11, respectively. These results, which are based on various assumptions, are not necessarily indicative of what would have occurred had the acquisitions been consummated as of April 1, 1996. Orion On March 20, 1998, Loral acquired all of the outstanding stock, as defined, of Orion Network Systems, Inc. ("Orion") in exchange for Loral common stock. Loral issued 17.9 million shares of its common stock and assumed existing Orion options and warrants to purchase 1.9 million shares of Loral common stock representing an aggregate purchase price of $467.0 million. Loral will include Orion's results from the date of acquisition using the purchase method of accounting. Orion is a provider of satellite-based communications services, focused primarily on private communications network services, Internet services and video distribution and other satellite transmission services. Orion provides multinational corporations with private communi- F-11 45 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACQUISITIONS -- (CONTINUED) cations networks designed to carry high speed data, fax, video teleconferencing, voice and other specialized services. Orion currently has one satellite in orbit and two satellites under construction. Had the acquisitions of SS/L, Skynet, the investment in SatMex (see Note 6) and Orion occurred on April 1, 1996 the unaudited pro forma revenue, net loss applicable to common stockholders and related basic and diluted loss per share for the year ended December 31, 1997 and the nine months ended December 31, 1996 would have been: $1.4 billion and $1.0 billion; $95.4 million and $112.2 million; $0.36 and $0.43; and, $0.36 and $0.43, respectively. These results, which are based on various assumptions, are not necessarily indicative of what would have occurred had the acquisitions been consummated as of April 1, 1996. 4. CONTRACTS-IN-PROCESS
DECEMBER 31, 1997 ------------------- (IN THOUSANDS) U.S. government contracts: Amounts billed............................................ $ 5,243 Unbilled contract receivables............................. 10,274 -------- 15,517 -------- Commercial contracts: Amounts billed............................................ 194,997 Unbilled contract receivables............................. 257,620 -------- 452,617 -------- $468,134 ========
Unbilled amounts include recoverable costs and accrued profit on progress completed which has not been billed. Such amounts are billed upon shipment of the product, achievement of contractual milestones, or completion of the contract and are reclassified to billed receivables. Billed receivables relating to long-term contracts are expected to be collected within one year. Loral classifies the orbital component of unbilled receivables expected to be collected beyond one year as long term. Long-term receivable balances related to satellite orbital incentive payments at December 31, 1997 are scheduled to be received as follows (in thousands): 1999........................................................ $11,416 2000........................................................ 10,792 2001........................................................ 10,782 2002........................................................ 10,657 Thereafter.................................................. 34,992 ------- $78,639 =======
Selling, general and administrative expenses for the year ended December 31, 1997 were $125.7 million and include independent research and development costs, which are expensed as incurred, of $56.8 million. F-12 46 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, --------------------- 1997 1996 ---------- ------- (IN THOUSANDS) Land and land improvements.................................. $ 24,999 Buildings................................................... 58,443 Leasehold improvements...................................... 10,234 $ 171 Equipment, furniture and fixtures........................... 154,684 20,083 Satellites and earth stations............................... 506,852 Satellites under construction............................... 233,204 Construction in progress.................................... 29,823 ---------- ------- 1,018,239 20,254 Accumulated depreciation.................................... (91,560) (2,315) ---------- ------- $ 926,679 $17,939 ========== =======
Depreciation expense was $52.0 million and $1.1 million for the year ended December 31, 1997 and the nine months ended December 31, 1996. No depreciation expense was allocated to the Space & Communications Operations of Old Loral for the year ended March 31, 1996. 6. INVESTMENTS IN AFFILIATES
DECEMBER 31, ---------------------- 1997 1996 -------- -------- (IN THOUSANDS) Globalstar.................................................. $383,714 $175,639 SatMex...................................................... 88,925 SS/L........................................................ 267,418 K&F......................................................... 23,568 Deferred K&F gain........................................... (23,568) -------- -------- $472,639 $443,057 ======== ========
Equity in net income (loss) of affiliates consists of (in thousands):
YEAR ENDED NINE MONTHS ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996 ----------------- ------------------ -------------- Globalstar.............................. $(42,503) $(18,105) $(20,980) Tax benefit of Globalstar partnership losses (see Note 8)................... 1,626 8,308 SatMex.................................. (6,396) SS/L.................................... 13,396 4,044 -------- -------- -------- $(47,273) $ (4,709) $ (8,628) ======== ======== ========
Globalstar Loral is the managing partner of Globalstar. Globalstar will operate a worldwide, LEO satellite-based digital telecommunications system (the "Globalstar(TM) System") that is scheduled to commence service in early 1999. The Globalstar System is designed to enable local service providers to offer low-cost, high quality wireless voice telephony and data services in virtually every populated area of the world. Currently, Globalstar's designated service providers have agreed to offer service and seek all necessary regulatory approvals in more than 100 nations, accounting for about 88% of the world's population. On February 14, 1998, Globalstar launched the first four satellites of its 56 (including eight in-orbit spares) satellite constellation. F-13 47 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INVESTMENTS IN AFFILIATES -- (CONTINUED) In May, 1997, Globalstar Telecommunications Limited ("GTL"), a public company that acts as a general partner of Globalstar, issued a two-for-one stock split. Accordingly, all GTL share amounts have been adjusted to reflect the two-for-one stock split. Prior to the two-for-one stock split, GTL's equity securities and convertible securities were represented by equivalent Globalstar partnership interests on a one-for-one basis. Globalstar's partnership interests were not affected by the GTL stock split and, accordingly, GTL's equity securities and convertible securities are now represented by equivalent Globalstar partnership interests on a two-for-one basis. At December 31, 1997, Loral had a direct and indirect ownership of 20,962,211 (40.1%) ordinary partnership interests of the total 52,319,076 Globalstar ordinary partnership interests outstanding. A portion of Loral's investment in Globalstar is held in the form of 5,439,678 shares of GTL common stock. At December 31, 1997, the market value of the GTL shares, based on the last reported sales price, was $267.2 million. On September 14, 1995, Old Loral in its capacity as managing general partner of Globalstar, granted certain officers of Old Loral, who were also officers of GTL and Globalstar, options to purchase 280,000 shares of the GTL common stock owned by Loral at an exercise price of $10.00 per share. On December 12, 1995, Loral granted non-employee directors of Loral options to purchase 400,000 shares of the GTL common stock owned by Loral at an exercise price of $16.69 per share. These options were immediately exercisable and expire 12 years from date of grant; no options were exercised or cancelled during the year. On October 9, 1996, Loral, in its capacity as managing general partner, granted certain officers of Loral, who were also officers of GTL and Globalstar, options to purchase 304,000 shares of the GTL common stock owned by Loral at an exercise price of $12.50 per share. Such options vest over a three-year period and expire 10 years from date of grant; no options were exercised or cancelled during the year. On December 15, 1995, Globalstar entered into a $250 million credit agreement (the "Globalstar Credit Agreement") with a group of banks. Lockheed Martin, SS/L and certain other Globalstar partners have guaranteed $206.3 million, $11.7 million and $32.0 million of the Globalstar Credit Agreement, respectively. In addition, Loral agreed to indemnify Lockheed Martin for any liability in excess of $150 million. In exchange for the guarantee and indemnity, GTL issued warrants to purchase 8,370,636 shares of GTL common stock at $13.25 per share as follows: Loral and SS/L 2,275,044 warrants, Lockheed Martin 5,022,380 warrants and certain other Globalstar partners 1,073,212 warrants. In February 1997, GTL accelerated the vesting and exercisability of these warrants and the holders exercised such warrants. In addition, GTL distributed to the holders of its common stock rights to subscribe for and purchase 2,262,336 GTL shares for a price of $13.25 per share of which Loral received rights to purchase 318,344 shares and agreed to purchase all shares not purchased upon exercise of the rights. In March 1997, Loral exercised warrants to purchase 2,275,044 shares of common stock of GTL for $30.1 million and, in April 1997, Loral exercised its right as a shareholder in GTL to purchase an additional 350,348 shares of GTL common stock for $13.25 per share. GTL used the proceeds from the exercise of the warrants and the rights, to purchase additional Globalstar ordinary partnership interests. In March 1996, Loral purchased $100 million principal amount of GTL 6 1/2% Convertible Preferred Equivalent Obligations, due 2006 par value $50 per share, ("GTL CPEOs") for $97 million. In April 1996, Loral purchased an additional $2.5 million principal amount of the GTL CPEOs for $2.4 million. Such amounts are included in the investment in Globalstar. The GTL CPEOs must be redeemed by GTL on March 1, 2006. Loral, at its option, may convert its holdings of GTL's CPEO's into 3,153,846 shares of GTL common stock subject to adjustment for certain anti-dilution provisions. Loral's interest income for the year and nine months ended December 31, 1997 and 1996 includes $7.2 million and $5.5 million related to its investment in GTL CPEOs. F-14 48 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INVESTMENTS IN AFFILIATES -- (CONTINUED) During 1997, Loral acquired 2,208,372 Globalstar ordinary partnership interests from other Globalstar partners for $97.5 million in cash and 1,255,684 shares of Loral common stock. In addition, on October 21, 1997 Loral acquired 540,000 ordinary partnership interests of Globalstar from another Globalstar partner, for $24.8 million. The purchase price is payable in installments during 1998 and bears interest at 6%. Any unpaid balance at December 31, 1998 is due in cash. Pursuant to the Globalstar partnership agreement, Loral is responsible for managing the operations of Globalstar and is entitled to receive a Managing Partner's Allocation on commencement of commercial operations. SS/L is the prime contractor for the construction and launch of the satellite constellation under a contract valued at $1.4 billion. SS/L has awarded subcontracts to third parties, including other investors in Globalstar, for substantial portions of its obligations under the contract. Revenue recorded under the Globalstar contract for the year ended December 31, 1997 was $408.1 million. Billed and unbilled receivables from Globalstar at December 31, 1997, were $84.2 million. Globalstar's current budgeted expenditures for the cost for the design, construction and development of the Globalstar System, including working capital, cash interest on borrowings and operating expenses, are approximately $2.7 billion. Globalstar has raised or received commitments for approximately $2.6 billion in equity, debt and vendor financing. In addition, Globalstar will purchase from SS/L eight additional spare satellites for $175 million that will increase Globalstar's ability to have at least 40 satellites in service during 1999, even in the event of launch failures. If the launch program is successful, the additional satellites will serve as ground spares, readily available for launch to replenish the constellation as needed in response to satellite attrition during the first generation, or to increase system capacity as required. If Globalstar were to experience a launch failure, the costs associated with the construction and launch of replacement satellites would be substantially covered by insurance, and in that event the cost of the additional satellites used as replacements, would be reimbursed to Globalstar. SS/L provides Globalstar with approximately $310 million of the contract billings to be deferred as vendor financing. Of the $310 million, $90 million is interest bearing at the 30-day LIBOR rate plus 3% per annum. The remaining $220 million of vendor financing is non-interest bearing. Globalstar will repay the non-interest bearing portions as follows: $49 million following the launch and acceptance of 24 or more satellites (the "Preliminary Constellation"), $61 million upon the launch and acceptance of 48 or more satellites (the "Full Constellation"), and the remainder in equal installments over the five-year period following acceptance of the Preliminary and Full Constellations. SS/L's subcontractors have assumed a portion of this vendor financing which totals approximately $121 million and will be paid on similar terms. Payment of the $90 million interest bearing vendor financing will be deferred until December 31, 1998 or the Full Constellation Date, whichever is earlier. Thereafter, interest and principal will be repaid in twenty equal quarterly installments over the next five years. In addition, under the contract for the additional eight spare satellites, SS/L will provide an additional $43 million of vendor financing of which $19 million will be interest bearing. The repayment terms are substantially the same as the prior vendor financing. At December 31, 1997, $90.0 million was due under these arrangements, all of which was interest bearing. SatMex In connection with the privatization by the Federal Government of Mexico (the "Mexican Government") of its fixed satellite services business, Loral and Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture, Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). Holdings acquired 75% of the outstanding capital stock of Satelites Mexicanos, S.A. de C.V. ("SatMex") for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Telefoncia Autrey equity contribution of $50.9 million and debt issued by Holdings. As part of the acquisition, Holdings issued a F-15 49 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INVESTMENTS IN AFFILIATES -- (CONTINUED) $125.1 million seven year obligation bearing interest at 6.03% to the Mexican Government (the "Government Obligation") in consideration for the assumption by SatMex of the debt incurred by Holdings in connection with the acquisition. The debt of SatMex and Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica Autrey have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the Government Obligation until maturity. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in SatMex. Loral, together with Telefonica Autrey, will be responsible for managing SatMex and will receive an aggregate management fee, based on a sliding scale, applied to SatMex's quarterly gross revenues up to a maximum of 3.75% of cumulative gross revenues. In addition, Loral Skynet will license certain intellectual property to SatMex for a fee of 1.5% of SatMex's gross revenues. Such fees were not significant for the year ended December 31, 1997. SS/L In 1997, Loral discontinued the use of the equity method of accounting for SS/L and consolidates SS/L's financial position and results of operations in its financial statements (see Note 3). The SS/L stockholders' agreement provided for management fees to be paid to Loral, ranging from 0.5% to 1% of sales, as defined, depending upon SS/L's operating performance. Such management fees were $5.1 million and $5.6 million for the nine months ended December 31, 1996 and the year ended March 31, 1996, respectively. The stockholders' agreement also required SS/L to pay Loral an annual fee for overhead reimbursement, not to exceed 1% of SS/L's adjusted sales, as defined, for each fiscal year. This fee amounted to $2.7 million and $3.4 million for the nine months ended December 31, 1996 and for the year ended March 31, 1996, respectively. At December 31, 1996, other current assets include $9.3 million due from SS/L primarily related to these management fees and overhead reimbursement. K&F Old Loral's 22.5% voting equity interest in K&F Industries, Inc. ("K&F") was transferred to Loral at the Distribution. Loral used the equity method to account for its investment in K&F; however, no income or loss was recognized due to K&F's financial position. In December 1997, Loral sold its 22.5% equity interest for $80.6 million and recorded a $79.6 million gain on the sale. Summary Financial Data of Affiliates The following table presents summary financial data for Globalstar at December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 and cumulative (in thousands):
YEAR ENDED DECEMBER 31, CUMULATIVE MARCH 23, 1994 ----------------------------- (COMMENCEMENT OF OPERATIONS) 1997 1996 1995 TO DECEMBER 31, 1997 ------- ------- ------- ---------------------------- STATEMENT OF OPERATIONS DATA: Revenues............................. $ -- $ -- $ -- $ -- Operating loss....................... 88,071 61,025 80,226 257,349 Net loss............................. 67,586 54,646 68,237 216,713 Preferred distributions.............. 21,202 17,323 38,525 Net loss applicable to ordinary partnership interests.............. 88,788 71,969 68,237 255,238
F-16 50 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
DECEMBER 31, -------------------------- 1997 1996 ---------- ------------ BALANCE SHEET DATA: Current assets.............................................. $ 493,780 $ 21,786 Total assets................................................ 2,149,053 942,913 Current liabilities......................................... 143,810 75,267 Long-term debt.............................................. 1,099,531 -- Long-term liabilities....................................... 221,795 250,423 Redeemable preferred partnership interests.................. 303,089 302,037 Ordinary partners' capital.................................. 380,828 315,186
The following table presents unaudited summary financial data for SatMex at December 31, 1997, and for the period November 17, 1997 (date of acquisition) through December 31, 1997 (in thousands):
NOVEMBER 17, 1997 TO DECEMBER 31, 1997 ----------------- STATEMENT OF OPERATIONS DATA: Revenues.................................................... $ 12,540 Operating income............................................ 4,757 Net loss.................................................... 13,058
DECEMBER 31, 1997 ----------------- BALANCE SHEET DATA: Current assets.............................................. $ 62,457 Total assets................................................ 936,554 Current liabilities......................................... 5,438 Long-term debt.............................................. 570,000 Shareholders' equity........................................ 361,116
The following table presents summary financial data for SS/L at December 31, 1996 and for the nine months ended December 31, 1996 and the year ended March 31, 1996 (in thousands):
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, 1996 MARCH 31, 1996 ----------------- -------------- STATEMENT OF OPERATIONS DATA: Revenues.................................................... $1,017,653 $1,121,619 Operating income............................................ 54,011 22,054 Net income.................................................. 31,025 12,367
DECEMBER 31, 1996 ----------------- BALANCE SHEET DATA: Current assets.............................................. $ 521,510 Total assets................................................ 1,059,064 Current liabilities......................................... 377,929 Long term debt.............................................. 127,586 Other noncurrent liabilities................................ 72,666 Minority interest........................................... 1,990 Shareholders' equity........................................ 478,893
F-17 51 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT
DECEMBER 31, 1997 ----------------- (IN THOUSANDS) Term loan, 7.2%............................................. $275,000 Revolving credit facility, 7.2%............................. 55,000 Note purchase facility...................................... 88,234 Export-Import credit facility............................... 17,164 -------- Total debt........................................ 435,398 Less, current maturities.................................... 2,146 -------- $433,252 ========
Loral SpaceCom Corporation ("Loral SpaceCom"), a wholly owned subsidiary of Loral, and SS/L have entered into an $850 million amended and restated credit and participation agreement (the "Credit Agreement") with a group of banks dated November 14, 1997. The Credit Agreement provides for a $275 million term loan facility, a $500 million revolving credit facility, of which up to $175 million may be used for letters of credit, and a separate $75 million letter of credit facility. Both the term loan facility and revolving credit facility are for a period of five years. The separate letter of credit facility runs for a two-year period. The term loan facility requires repayment in twelve consecutive quarterly installments beginning December 31, 1999. The first four installments are $18,750,000 each with the final eight installments being $25,000,000 each. Borrowings under the facilities are secured by the stock of Loral SpaceCom and SS/L and bear interest, at Loral SpaceCom's option, at various rates based on margins over the lead bank's base rate or the London Interbank Offer Rate ("LIBOR") for periods of one to six months. Loral SpaceCom pays a commitment fee on the unused portion of the facilities. The Credit Agreement contains customary covenants including an interest coverage ratio and debt to capitalization ratios. In addition, the Credit Agreement contains limitations on indebtedness, liens, guarantee obligations, asset sales, dividends, investments and transactions with affiliates. Under the terms of the Credit Agreement, Loral SpaceCom may pay dividends to its parent if the cumulative dividend payments do not exceed 50% of cumulative net income, as defined, and the ratio of funded debt to EBITDA, as defined, is less than three to one. Currently, Loral SpaceCom, a wholly owned subsidiary of Loral, has equity and intercompany debt of approximately $1.1 billion, of which approximately $200 million can be paid to its parent. In 1994 SS/L entered into a $139.3 million note purchase facility (the "Note Purchase Facility") with an Italian bank. Borrowings are determined by formula and are made in accordance with a specified schedule through the earlier of June 30, 1998, or until the facility is fully disbursed. The outstanding principal is to be repaid on the earlier of twenty-three months from the final acceptance date of certain satellite deliveries or April 30, 2000. Interest is charged at a weighted average annual rate of 4.26% and is payable semiannually. All borrowings under this facility reduce the amount available under the Credit Agreement. SS/L borrowed a total of $42.9 million under an export-import credit facility (the "EX-IM Facility") with a Japanese bank. The EX-IM Facility is fully secured by a letter of credit arrangement with another bank. At December 31, 1997, no amounts remained available for borrowing under this facility. The outstanding principal is to be repaid in semiannual installments through November 1, 2005. Interest is charged at LIBOR less 1/4% and is payable semiannually on May 1 and November 1. The aggregate maturities for the years 1998 through 2002 are as follows: $2,146,000, $20,896,000, $83,396,000, $102,146,000 and $220,380,000. F-18 52 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands):
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ---------- Current: U.S. Federal................................. $27,204 $2,913 $(5,772) State and local.............................. 7,248 925 (660) ------- ------ ------- 34,452 3,838 (6,432) Deferred, principally U.S. Federal............. 419 (926) 3,652 ------- ------ ------- Total provision (benefit) for income taxes..... $34,871 $2,912 $(2,780) ======= ====== =======
The provision for income taxes excludes: current tax benefits related to the exercise of stock options, credited directly to Stockholders' Equity, of $0.5 million for the year ended December 31, 1997; a current tax benefit of $4.3 million and $0.2 million for the years ended December 31, 1997 and March 31, 1996, respectively, and, a deferred tax liability of $2.7 million and a benefit of $8.1 million for the years ended December 31, 1997 and March 31, 1996, respectively, related to the Globalstar partnership loss included in equity in net loss of affiliates. The effective income tax rate differs from the statutory Federal income tax rate for the following reasons:
YEAR ENDED NINE MONTHS ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996 ----------------- ----------------- -------------- Statutory U.S. Federal income tax rate............................. 35.0% 35.0% (35.0)% State and local income taxes, net of Federal income tax............ 3.0 3.0 (4.0) Foreign source income and losses taxed at lower rate.............. (13.3) (21.3) Non-deductible amortization of cost in excess of net assets acquired......................... 2.6 Undistributed income of affiliates....................... 4.0 Other, net......................... .2 1.0 ----- ----- ----- Effective income tax rate.......... 27.5% 17.7% (35.0)% ===== ===== =====
At December 31, 1997, the Company had net operating loss carryforwards of approximately $28.4 million and tax credit carryforwards of approximately $3.6 million which generally expire through 2012. For the twelve months ended December 31, 1997 and the nine months ended December 31, 1996, income before income taxes includes approximately $72.0 and $10.0 million, respectively, of foreign source income. F-19 53 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. INCOME TAXES -- (CONTINUED) The significant components of the net deferred income tax liability are (in thousands):
DECEMBER 31, ------------------- 1997 1996 -------- ------ Postretirement benefits other than pensions............... $(14,927) Inventoried costs......................................... (37,457) Net operating loss and tax credit carryovers.............. (13,562) Compensation and benefits................................. (11,129) $ 32 Other, net................................................ (74) 251 Pension costs............................................. 5,957 52 Property, plant and equipment............................. 54,838 4,388 Income recognition on long-term contracts................. 120,237 -------- ------ Net deferred income tax liability........................... $103,883 $4,723 ======== ======
9. SHAREHOLDERS' EQUITY Series A Preferred Stock Significant terms of the Company's Series A Preferred Stock include a liquidation preference of $.01 per share prior to pro rata participation with the common stock and the ability to convert to common stock upon the receipt of certain antitrust clearance or sales to an unaffiliated third party. The Series A Preferred Stock has the same voting rights as the Company's common stock except, it has no right to vote for the election of directors. Series B Preferred Stock The Series B Preferred Stock will, if issued, be junior to any other series of preferred stock which may be authorized and issued. 6% Series C Preferred Stock On November 1, 1996, the Company sold $600 million of 6% Convertible Preferred Equivalent Obligations which, were mandatorily exchanged on June 5, 1997 into shares of the Company's Series C Preferred Stock resulting in a reclassification of these amounts into shareholders' equity. The Series C Preferred Stock has an aggregate liquidation preference equal to the aggregate redemption value and a mandatory redemption date of November 1, 2006. The Series C Preferred Stock is convertible into shares of common stock of the Company at a conversion price of $20 per share. At December 31, 1997, the outstanding Series C Preferred Stock was convertible into 37,273,593 shares of Loral common stock. The Series C Preferred Stock, with respect to dividend rights and rights upon liquidation, winding up and dissolution, ranks pari passu with Loral's Series A Preferred Stock and senior to or pari passu with all other existing and future series of preferred stock of Loral and senior to Loral common stock. The Series C Preferred Stock is redeemable in cash or Loral common stock at any time, in whole or in part, at the option of the Company (at a premium which declines over time) commencing November 5, 1999. Stock Plans In April 1996, Loral established the 1996 Stock Option Plan. An aggregate of 12 million shares of common stock were reserved for issuance. Under this plan, options are granted at the discretion of the Company's Board of Directors to employees of the Company and its affiliates. Such options become F-20 54 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. SHAREHOLDERS' EQUITY -- (CONTINUED) exercisable as determined by the Board, generally over five years, and generally expire no more than 10 years from the date of the grant. As discussed in Note 2, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense based on the fair value method has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net income and earnings per share as though the Company had adopted the fair value method. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions for 1997 and 1996: expected life, 6 months following vesting; stock volatility, 25%; risk free interest rate, 5.5% to 6.55% based on date of grant; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1997 and 1996 awards, including stock-based compensation awards to employees of the Company's affiliates, had been amortized to expense over the vesting period of the awards, pro forma net income applicable to common stockholders would have decreased by $4.4 million ($.02 per diluted share) and $4.1 million ($.02 per diluted share) to $9.3 million ($.04 per diluted share) and $4.8 million ($.02 per diluted share) for the year and nine months ended December 31, 1997 and 1996, respectively. A summary of the status of the Company's stock option plans as of December 31, 1997 and 1996 and changes during the periods then ended is presented below:
WEIGHTED- AVERAGE EXERCISE SHARES PRICE --------- --------- Outstanding at March 31, 1996............................... -- $ -- Granted (weighted average fair value $2.93 per share)....... 6,412,000 10.60 Forfeited................................................... 500 10.50 --------- ------ Outstanding at December 31, 1996............................ 6,411,500 10.60 Granted (weighted average fair value $3.97 per share)....... 732,500 13.93 Exercised................................................... 207,750 10.50 Forfeited................................................... 175,800 12.98 --------- ------ Outstanding at December 31, 1997............................ 6,760,450 $10.90 ========= ====== Options exercisable at December 31, 1997.................... 2,014,250 $10.53 ========= ====== Options exercisable at December 31, 1996.................... 1,200,000 $10.50 ========= ======
At December 31, 1997, the range of exercise prices and the weighted-average remaining contractual life of outstanding options was $10.50 to $20.47 and 8.4 years, respectively. The range for the options exercisable at December 31, 1997 was $10.50 to $15.94. All options granted during the year were non-qualified stock options. As of December 31, 1997, 5,031,800 shares of common stock were available for future grant under the Plan. F-21 55 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. PENSIONS AND OTHER EMPLOYEE BENEFITS Pensions The Company maintains a pension plan and a supplemental retirement plan. These plans are defined benefit pension plans and members in certain locations may contribute to the pension plan in order to receive enhanced benefits. Eligibility for participation in these plans vary and benefits are based on members' compensation and/or years of service. In connection with the Distribution, Loral assumed the obligations of such members previously employed by Old Loral, in exchange for plan assets as defined. The Company's funding policy is to fund the pension plan in accordance with the Internal Revenue Code and regulations thereon and to fund the supplemental retirement plan on an actuarial basis, including service cost and amortization amounts. Contributions of $1.9 million were made for the year ended December 31, 1997, and no contributions were made for the nine months ended December 31, 1996. Plan assets are generally invested in U.S. government and agency obligations and listed stocks and bonds. Pension cost includes the following components (in thousands):
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- Service cost-benefits earned during the period..... $ 6,538 $ 268 Interest cost on projected benefit obligation...... 14,277 1,410 Actual return on plan assets....................... (28,044) (499) Net amortization and deferral...................... 11,619 (77) -------- ------ Total pension cost................................. $ 4,390 $1,102 ======== ======
The following presents the plans' funded status and amounts recognized in the balance sheet (in thousands):
DECEMBER 31, ----------------------------------------------- 1997 1996 ------------------------------ ------------- ASSETS EXCEED ACCUMULATED ACCUMULATED ACCUMULATED BENEFITS BENEFITS BENEFITS EXCEED ASSETS EXCEED ASSETS ------------- ------------- ------------- Actuarial present value of benefit obligations: Vested benefits............................. $154,328 $ 24,210 $ 27,831 ======== ========= ======== Accumulated benefits........................ $156,443 $ 24,226 $ 27,845 Effect of projected future salary increases................................ 22,929 568 694 -------- --------- -------- Projected benefits.......................... 179,372 24,794 28,539 Plan assets at fair value..................... 189,546 8,467 9,450 -------- --------- -------- Plan assets in excess of (less than) projected benefit obligation.......................... 10,174 (16,327) (19,089) Unrecognized prior service cost............... (72) 88 Unrecognized net loss (gain).................. 3,115 (1,048) (445) -------- --------- -------- Prepaid (accrued) pension cost................ $ 13,217 $ (17,287) $(19,534) ======== ========= ========
The principal actuarial assumptions were:
1997 1996 ---- ---- Discount rate............................................... 7.25% 7.75% Rate of increase in compensation levels..................... 4.50% 4.50% Expected long-term rate of return on plan assets............ 9.50% 9.50%
F-22 56 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED) Postretirement Health Care and Life Insurance Benefits In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees and dependents. Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for the Company's pension plan. These benefits are funded primarily on a pay-as-you-go basis with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions. Postretirement health care and life insurance costs include the following components (in thousands):
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ------------------ Service cost - benefits earned during the period... $ 915 $13 Interest cost on accumulated postretirement benefit obligation....................................... 2,314 9 Actual return on plan assets....................... (136) Net amortization and deferral...................... (1,137) ------- --- Total postretirement health care and life insurance costs............................................ $ 1,956 $22 ======= ===
The following presents the plans funded status and amounts recognized in the balance sheet (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- Actuarial present value of benefit obligations: Retirees......................................... $16,695 $ -- Fully eligible active participants............... 3,864 30 Other active participants........................ 15,451 148 ------- ---- Accumulated postretirement benefit obligations... 36,010 178 Plan assets at fair value.......................... 2,022 ------- ---- Accumulated postretirement benefit obligations in excess of plan assets......................... 33,988 178 Unrecognized prior service cost.................... 2,894 Unrecognized net gain (loss)....................... (5,771) 11 ------- ---- Accrued postretirement health care cost............ $31,111 $189 ======= ==== The principal actuarial assumptions were: Discount rate...................................... 7.25% 7.75% Expected long-term rate of return on plan assets... 9.50%
The health care cost trend rates at December 31, 1997 and 1996, were assumed to be 9.96% and 10.59%, respectively, decreasing gradually to an ultimate rate of 5.50% by the year 2004. Changing the assumed health care cost trend rate by 1% in each year would change the accumulated postretirement benefit obligation at December 31, 1997 by approximately $6.7 million and the aggregate service and interest cost components for 1997 by approximately $0.8 million. Employee Savings Plan In April, 1996 the Company adopted the employee savings plan which provides that the Company match the contributions of participating employees up to a designated level. Under this plan, the matching F-23 57 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED) contributions in Loral common stock or cash were $5.6 million for the year ended December 31, 1997 and $0.1 million for the nine months ended December 31, 1996. 11. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value: The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. The fair value of the Series C Preferred Stock and the CPEO's are based on market quotations and the fair value of the Company's long-term debt is based on carrying value due to the short-term variable interest rate on the outstanding borrowings. The estimated fair values of the Company's financial instruments are as follows (in thousands):
DECEMBER 31, 1997 ------------------------ CARRYING FAIR AMOUNT VALUE ---------- ---------- Cash and cash equivalents................................... $ 226,547 $ 226,547 Long-term debt, including current maturities................ 435,398 435,398 Series C Preferred Stock.................................... 733,762 916,930
DECEMBER 31, 1996 ------------------------ CARRYING FAIR AMOUNT VALUE ---------- ---------- Cash and cash equivalents................................... $1,180,752 $1,180,752 Convertible Preferred Equivalent Obligations................ 583,292 681,000
Foreign Currency Hedges At December 31, 1997, the Company had foreign currency exchange contracts (forwards and swaps) with several banks to purchase and sell foreign currencies, primarily Japanese yen, aggregating $175.1 million. Such contracts were designated as hedges of certain foreign contracts and subcontracts to be performed by SS/L through May 2006. The fair value of these contracts, based on quoted market prices, was $139.0 million at December 31, 1997. At December 31, 1997, deferred gains on forward contracts to sell foreign currencies, primarily yen, were $26.6 million and deferred losses on forward contracts to purchase foreign currencies, primarily yen, were $9.5 million. The Company is exposed to credit-related losses in the event of nonperformance by counter parties to these financial instruments, but does not expect any counter party to fail to meet its obligation. F-24 58 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. FINANCIAL INSTRUMENTS -- (CONTINUED) The maturity of foreign currency exchange contracts held at December 31, 1997 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts and payments to vendors under subcontracts. These foreign exchange contracts mature as follows (in thousands):
TO PURCHASE TO SELL ------------------ ------------------ AT AT AT AT YEARS CONTRACT MARKET CONTRACT MARKET TO MATURITY RATE RATE RATE RATE ----------- -------- ------- -------- ------- 1.............................................. $68,582 $59,937 $ 20,711 $14,766 2 to 5......................................... 5,804 4,939 65,276 48,975 6 to 10........................................ 14,750 10,385 ------- ------- -------- ------- $74,386 $64,876 $100,737 $74,126 ======= ======= ======== =======
12. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities equipment and transponder capacity under agreements expiring at various dates. Certain leases covering facilities contain renewal and or purchase options which may be exercised by the Company. Rent expense was $17.7 million for the year ended December 31, 1997. Future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1997 (in thousands): 1998........................................................ $16,257 1999........................................................ 15,409 2000........................................................ 14,963 2001........................................................ 12,268 2002........................................................ 6,355 Thereafter.................................................. 33,389 ------- $98,641 =======
At December 31, 1997 the Company had outstanding letters of credit of approximately $71.5 million. Due to the long lead times required to produce purchased parts, SS/L has entered into various purchase commitments with suppliers. These commitments aggregated $973.1 million at December 31, 1997. Prior to its acquisition by Loral, Skynet sold several transponders under which title to specific transponders was transferred to the customer upon the customer's acceptance. Under the terms of the contracts, Skynet continues to operate the satellites on which the transponders are located and provides a warranty for a period of 10 to 14 years, generally the economic life of the satellite. Depending on the contract, Skynet is required to replace transponders failing to meet operating specifications. All customers are entitled to a refund equal to the reimbursement value, as defined, in the event there is no repair or replacement. The reimbursement value is determined based on the original purchase price plus an interest factor from the time the payment is received to acceptance of the transponder by the customer, reduced on a straight-line basis over the warranty period. In case of satellite failure, the reimbursement value may be paid from proceeds received from insurance policies. In 1997, two in-orbit satellites built by SS/L experienced solar array circuit failures. One of the customers has asserted that, in light of the failures and uncertainty as to further failures, it has not accepted the satellite. Loral believes that the customer was contractually required to accept the satellite at completion of in-orbit testing and that risk of loss has passed to the customer. In addition, another customer has requested F-25 59 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) that SS/L structure an arrangement whereby the satellite under construction would be sold to another customer. Management believes that these matters will not have a material adverse effect on the financial condition or results of operations of Loral. 13. RELATED PARTY TRANSACTIONS In connection with contract performance, Loral provided services to and acquired services from Lockheed Martin for the year ended December 31, 1997. A summary of such transactions and balances is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1997 ----------------- Revenue from services sold.................................. $ 3,550 Cost of purchased services.................................. 78,160 Balance at year end: Receivable................................................ $ 80 Payable................................................... 29,589 ------- Net payable................................................. $29,509 =======
Loral's sales to, purchases from, and balances with the Alliance Partners are as follows (in thousands):
YEAR ENDED DECEMBER 31, 1997 ----------------- Revenue from services sold.................................. $ 39,303 Cost of purchased services.................................. 147,777 Balance at year end: Receivable................................................ $ 10,492 Payable................................................... 81,716 -------- Net payable................................................. $ 71,224 ========
14. EARNINGS PER SHARE Basic earnings per share is computed based upon the weighted average number of shares of common stock and the Series A Preferred Stock outstanding. Diluted earnings per share excludes the assumed conversion of the Series C Preferred Stock as the effect would have been antidilutive. Earnings per share for the year ended March 31, 1996 is computed based on the number of shares issued to Old Loral's shareholders in the Distribution. F-26 60 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. EARNINGS PER SHARE -- (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED NINE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income (loss)............................... $ 40,004 $ 8,877 $(13,785) Preferred stock dividends and accretion......... (26,315) -------- -------- -------- Numerator for basic and diluted earnings per share -- net income (loss) applicable to common stockholders.......................... $ 13,689 $ 8,877 $(13,785) ======== ======== ======== Denominator: Weighted average shares: Common stock................................. 196,173 186,799 183,580 Series A Preferred Stock..................... 45,897 42,198 -------- -------- -------- Denominator for basic earnings per share........ 242,070 228,997 183,580 Effect of dilutive securities: Employee stock options....................... 1,521 399 -------- -------- -------- Denominator for diluted earnings per share...... 243,591 229,396 183,580 ======== ======== ======== Basic earnings per share.......................... $ 0.06 $ 0.04 $ (.08) ======== ======== ======== Diluted earnings per share........................ $ 0.06 $ 0.04 $ (.08) ======== ======== ========
15. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share amounts)
QUARTER ENDED ------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,* --------- -------- ------------- ------------- YEAR ENDED DECEMBER 31, 1997 Revenues........................... $340,353 $291,148 $371,118 $309,972 Income before income taxes and equity in net loss of affiliates....................... 19,476 3,120 9,663 94,723 Net income (loss).................. (406) (10,296) (3,962) 54,668 Preferred dividends and accretion........................ (2,947) (11,633) (11,735) Net income (loss) applicable to common shareholders.............. (406) (13,243) (15,595) 42,933 Earnings per share -- basic........ 0.00 (0.06) (0.06) 0.17 Earnings per share -- diluted...... 0.00 (0.06) (0.06) 0.17 Market price per share High............................. 19 1/2 17 1/2 21 24 1/4 Low.............................. 14 1/8 13 14 1/16 19
- --------------- * The results of operations for the quarter ended December 31, 1997, include a $79.6 million gain on the sale of K&F stock. F-27 61 LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share amounts) -- (continued)
QUARTER ENDED -------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, -------- ------------- ------------ NINE MONTHS ENDED DECEMBER 31, 1996 Revenues................................ $ 1,538 $ 1,837 $ 1,713 Income before income taxes and equity in net loss of affiliates................ 5,998 4,422 6,078 Net income.............................. 1,301 2,953 4,623 Earnings per share -- basic............. 0.01 0.01 0.02 Earnings per share -- diluted........... 0.01 0.01 0.02 Market price per share High.................................. 18 1/2 16 5/8 19 5/8 Low................................... 10 1/2 11 1/8 15 1/4
F-28 62 INDEPENDENT AUDITORS' REPORT Space Systems/Loral, Inc.: We have audited the accompanying consolidated balance sheet of Space Systems/Loral, Inc. and its subsidiaries as of December 31, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the nine months ended December 31, 1996 and for the year ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Space Systems/Loral, Inc. and its subsidiaries at December 31, 1996, and the results of their operations and their cash flows for the nine months ended December 31, 1996 and for the year ended March 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP San Jose, California February 24, 1997 (March 14, 1997 as to the fourth paragraph of Note 4) F-29 63 SPACE SYSTEMS/LORAL, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share data)
DECEMBER 31, 1996 ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 19,181 Contracts in process, net................................. 376,847 Inventories............................................... 74,572 Deposits and other current assets......................... 50,910 ---------- Total current assets................................... 521,510 Property, plant and equipment, net.......................... 166,786 Cost in excess of net assets acquired, less amortization.... 227,604 Long-term receivables....................................... 90,005 Investments................................................. 15,000 Prepaid pension costs and other assets...................... 38,159 ---------- $1,059,064 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 122,549 Accrued payroll........................................... 25,515 Customer advances......................................... 163,819 Income taxes payable...................................... 3,052 Deferred income taxes..................................... 54,360 Other current liabilities................................. 8,634 ---------- Total current liabilities.............................. 377,929 Long-term debt.............................................. 127,586 Deferred income taxes....................................... 37,787 Postretirement and other liabilities........................ 34,879 Minority interest in ISTI................................... 1,990 Commitments and contingencies (Notes 6, 8 and 9) Shareholders' equity: Preferred stock, $.10 par value; 100,000 authorized and unissued shares........................................ -- Common stock, $.10 par value; 100,000 shares authorized, 4,000 shares issued and outstanding.................... 466,668 Retained earnings (accumulated deficit)................... 12,225 ---------- Total shareholders' equity............................. 478,893 ---------- $1,059,064 ==========
See notes to consolidated financial statements. F-30 64 SPACE SYSTEMS/LORAL, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1996 1996 ------------ ---------- Revenues.................................................... $1,017,653 $1,121,619 Costs and expenses.......................................... 953,496 1,087,213 ---------- ---------- Gross profit................................................ 64,157 34,406 Amortization of cost in excess of net assets acquired....... 5,058 6,744 Management fee.............................................. 5,088 5,608 ---------- ---------- Operating income............................................ 54,011 22,054 Interest income............................................. 9,179 9,652 Interest expense............................................ 3,098 3,301 ---------- ---------- Income before income taxes, minority interest and equity in net loss of affiliate..................................... 60,092 28,405 Provision for income taxes.................................. 27,643 15,180 ---------- ---------- Income before minority interest and equity in net loss of affiliate.............................................. 32,449 13,225 Minority interest in losses of ISTI......................... 125 151 Equity in net loss of Globalstar, net of tax benefit........ (1,549) (1,009) ---------- ---------- Net income.................................................. $ 31,025 $ 12,367 ========== ==========
See notes to consolidated financial statements. F-31 65 SPACE SYSTEMS/LORAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND FOR THE YEAR ENDED MARCH 31, 1996 (In thousands, except share data)
COMMON STOCK RETAINED ------------------ EARNINGS SHARES (ACCUMULATED ISSUED AMOUNT DEFICIT) TOTAL ------ -------- ------------ -------- Balance March 31, 1995........................... 4,000 $466,668 $(31,167) $435,501 Net income....................................... -- -- 12,367 12,367 ----- -------- -------- -------- Balance March 31, 1996........................... 4,000 466,668 (18,800) 447,868 Net income....................................... -- -- 31,025 31,025 ----- -------- -------- -------- Balance December 31, 1996........................ 4,000 $466,668 $ 12,225 $478,893 ===== ======== ======== ========
See notes to consolidated financial statements. F-32 66 SPACE SYSTEMS/LORAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NINE YEAR ENDED MONTHS ENDED MARCH 31, DECEMBER 31, 1996 1996 ----------------- ---------- Cash flows from operating activities: Net income................................................ $ 31,025 $ 12,367 Depreciation and amortization............................. 23,242 29,993 Deferred income taxes..................................... 26,673 10,237 Minority interest in losses of ISTI....................... (125) (151) Equity in net loss of LQSS................................ 1,549 1,009 Changes in operating assets and liabilities: Contracts in process, including long-term receivables.......................................... (152,454) (58,092) Inventories............................................ (37,990) (26,729) Deposits and other current assets...................... (39,212) 8,431 Prepaid pension cost and other assets.................. (16,208) 1,450 Accounts payable and other current liabilities......... (7,803) 79,450 Customer advances...................................... 37,501 10,368 Postretirement and other liabilities................... 317 (537) -------- -------- Net cash (used in) provided by operating activities......... (133,485) 67,796 -------- -------- Investing activities: Capital expenditures...................................... (26,731) (24,167) Investment in ABCN........................................ (10,000) -- -------- -------- Net cash used in investing activities....................... (36,731) (24,167) -------- -------- Financing activities: Proceeds from borrowings.................................. 290,408 100,740 Repayment of debt......................................... (227,874) (69,728) -------- -------- Net cash provided by (used in) financing activities......... 62,534 31,012 -------- -------- Net (decrease) increase in cash and cash equivalents........ (107,682) 74,641 Cash and cash equivalents, beginning of period.............. 126,863 52,222 -------- -------- Cash and cash equivalents, end of period.................... $ 19,181 $126,863 ======== ======== Supplemental information: Interest paid, net of amounts capitalized................. $ 2,562 $ 2,440 ======== ======== Income taxes paid......................................... $ 1,449 $ 1,501 ======== ========
See notes to consolidated financial statements. F-33 67 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation: Space Systems/Loral, Inc. ("SS/L"), a corporate joint venture owned by Loral Space & Communications Ltd. ("Loral") and four international aerospace and communications companies (the "Alliance Partners"), designs and produces geosynchronous and low-earth-orbit satellites and subsystems for communications, remote earth sensing and direct-to-home broadcast television. At December 31, 1996, Loral owned 51% of the common stock of SS/L and has agreed to increase its ownership to 100% by acquiring the remaining 49% held by the Alliance Partners (See Note 9). SS/L has operated under various agreements which specify actions which can be taken by it or its equity investors. The consolidated financial statements include the accounts of SS/L, its wholly owned foreign sales corporation subsidiary, and International Space Technology, Inc. ("ISTI"), a partially owned, corporate joint venture. All significant intercompany balances and transactions have been eliminated. The investment in Globalstar is accounted for on the equity method; intercompany profit is eliminated based on ownership interests. Change in Fiscal Year-end: In 1996, SS/L changed its fiscal year-end to December 31 from March 31. The accompanying financial statements include audited financial statements for the nine month transition period ended December 31, 1996. Use of Estimates in Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of expenses reported for the period. Actual results could differ from estimates. A significant portion of SS/L's revenue is associated with long-term contracts which require significant estimates. These estimates include forecasting costs and schedules, estimating contract revenue related to contract performance (including orbital incentives) and the potential for component obsolescence in connection with long-term procurements. Cash and Cash Equivalents: Cash equivalents consist of money market investments with an original maturity of less than 90 days. Financial Instruments: SS/L's financial instruments consist of cash equivalents, foreign exchange contracts, contracts-in-process, long-term receivables and long-term debt. Except as discussed in Note 4, SS/L believes that the carrying value of its financial instruments approximates fair value. Concentration of Credit Risk and Major Customers: Financial instruments which potentially subject SS/L to concentrations of credit risk consist principally of cash and cash equivalents, foreign exchange contracts (See Note 4) and contracts in process and long-term receivables ("Contract Receivables"). SS/L's cash and cash equivalents are maintained with high-credit-quality financial institutions. SS/L's customers are U.S. and foreign governments and large multinational corporations. The credit worthiness of such institutions is generally substantial and management believes that its credit evaluation, approval and monitoring processes mitigate potential credit risks. SS/L generally obtains insurance to mitigate collection risk associated with the in-orbit delivery of satellites. Sales to the U.S. government represented 8% and 10% of revenues for the nine months ended December 31, 1996 and for the year ended March 31, 1996, respectively. Sales to foreign customers, primarily in Asia, represented 25% and 27% of revenues for the nine months ended December 31, 1996 and for the year F-34 68 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) ended March 31, 1996, respectively. For the nine months ended December 31, 1996 two commercial customers represented 28% and 15% of revenues. For the year ended March 31, 1996, two commercial customers represented 30% and 13% of revenues. Inventories: Inventories consist principally of common subassemblies not specifically identified to contracts in process, and are valued at the lower of cost or market. Cost is determined using the first-in-first-out (FIFO) or average cost method. Revenue Recognition: Revenue under long-term fixed-price contracts is recognized using the cost-to-cost percentage-of-completion method. Revenue includes estimated orbital incentives discounted to present value at the launch date. Costs include the development effort required for the production of high-technology satellites, non-recurring engineering and design efforts in early periods of contract performance, as well as the cost of qualification testing requirements. Revenue under cost-reimbursable type contracts is recognized as costs are incurred; incentive fees are estimated and recognized over the contract term. Contracts with the U.S. government are subject to termination by the U.S. government for convenience or for default. Other government contract risks include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under U.S. government contracts are subject to audit. Management believes the results of such audits will not have a material effect on SS/L's financial position or results of operations. Losses on contracts are recognized when determined. Revisions in profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable. In accordance with industry practice, contracts-in-process include unbilled amounts relating to contracts and programs with long production cycles, a portion of which may not be billable within one year. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," SS/L accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Property, Plant and Equipment: Property, plant and equipment are stated at cost. Generally, when assets are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in the results of operations. Depreciation is provided using predominantly accelerated methods over the estimated useful lives of the related assets (buildings and improvements 20 to 45 years; all other assets 2 to 10 years). Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the improvements. Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), establishes the accounting standards for the impairment of long-lived assets and certain intangible assets. SS/L adopted SFAS 121 in the nine months F-35 69 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) ended December 31, 1996 and such adoption did not have any impact on its financial position or results of operations. Foreign Exchange Contracts: SS/L enters into foreign exchange contracts as hedges against exchange rate fluctuations of future accounts receivable and accounts payable denominated in foreign currencies. Realized and unrealized gains and losses on foreign exchange contracts designated as hedges are deferred and recognized over the lives of the related contracts in process. Cost in Excess of Net Assets Acquired: Cost in excess of the fair value of net assets acquired is being amortized over 40 years using the straight line method. Accumulated amortization was $41,882,000 at December 31, 1996. The carrying amount of Cost in Excess of Net Assets Acquired is evaluated on a recurring basis. Current and future profitability as well as current and future undiscounted cash flows, excluding financing costs, are primary indicators of recoverability. For the nine months ended December 31, 1996 and for the year ended March 31, 1996, there was no adjustment to the carrying amount of the Cost in Excess of Net Assets Acquired resulting from these evaluations. 2. CONTRACTS-IN-PROCESS:
DECEMBER 31, 1996 -------------- (IN THOUSANDS) U.S. government contracts: Amounts billed............................................ $ 11,880 Unbilled contract receivables............................. 11,828 -------- 23,708 -------- Commercial contracts: Amounts billed............................................ 145,447 Unbilled contract receivables............................. 207,692 -------- 353,139 -------- $376,847 ========
Unbilled amounts include recoverable costs and accrued profit on progress completed which has not been billed. Such amounts are billed upon shipment of the product, achievement of contractual milestones, or completion of the contract and are reclassified to billed receivables. Payment terms and conditions vary between contracts, however, SS/L generally requires, for commercial contracts, advance deposits equal to varying percentages of the total contract amount. F-36 70 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. CONTRACTS-IN-PROCESS: (CONTINUED) Billed receivables relating to long-term contracts shown above are expected to be collected within one year. Upon launch of a satellite, SS/L reclassifies the orbital component of unbilled receivables expected to be collected beyond one year to long term. During the nine months ended December 31, 1996 $26,878,000 were reclassified to long-term receivables. Long-term receivable balances related to satellite orbitals at December 31, 1996 are scheduled to be received as follows (in thousands): 1998........................................................ $11,367 1999........................................................ 11,413 2000........................................................ 10,793 2001........................................................ 10,783 Thereafter.................................................. 45,649 ------- $90,005 =======
Selling, general and administrative expenses for the nine months ended December 31, 1996 and the year ended March 31, 1996 were $45,231,000 and $40,273,000 and include independent research and development costs of $16,274,000 and $11,171,000, respectively. 3. PROPERTY, PLANT AND EQUIPMENT:
DECEMBER 31, 1996 -------------- (IN THOUSANDS) Land........................................................ $ 22,300 Buildings and improvements.................................. 65,448 Machinery, equipment, furniture and fixtures................ 178,137 Leasehold improvements...................................... 5,780 Construction-in-process..................................... 22,054 -------- 293,719 Accumulated depreciation.................................... (126,933) -------- $166,786 ========
Depreciation and amortization expense was $18,184,000 and $23,249,000 and capitalized interest costs were $97,000 and $127,000 for the nine months ended December 31, 1996 and the year ended March 31, 1996, respectively. 4. FINANCING ARRANGEMENTS: Foreign currency exchange facilities: At December 31, 1996, SS/L had foreign currency exchange contracts (forwards and swaps) with several banks to purchase and sell foreign currencies, primarily Japanese yen, aggregating $251,379,000. Such contracts were designated as hedges of certain foreign contracts and subcontracts to be performed through May 2006. The fair value of these contracts, based on quoted market prices, was $215,625,000 at December 31, 1996. At December 31, 1996, deferred gains on forward contracts to sell foreign currencies, primarily yen, were $25,296,000 and deferred losses on forward contracts to purchase foreign currencies, primarily yen, were $10,458,000. At March 31, 1996, deferred gains on forward contracts to sell yen were $23,995,000 and deferred losses on forward contracts to purchase foreign currency, primarily yen, were F-37 71 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. FINANCING ARRANGEMENTS: (CONTINUED) $5,106,000. SS/L is exposed to credit-related losses in the event of nonperformance by counter parties to these financial instruments, but does not expect any counter party to fail to meet its obligation. The maturity of foreign currency exchange contracts held at December 31, 1996 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts and payments to vendors under subcontracts. These foreign exchange contracts mature as follows (in thousands):
TO PURCHASE TO SELL -------------------- -------------------- AT AT AT AT YEARS CONTRACT MARKET CONTRACT MARKET TO MATURITY RATE RATE RATE RATE ----------- -------- -------- -------- -------- 1....................................... $ 96,690 $ 87,513 $ 54,605 $ 45,292 2 to 5.................................. 19,873 18,592 62,435 49,933 6 to 10................................. -- -- 17,776 14,295 -------- -------- -------- -------- $116,563 $106,105 $134,816 $109,520 ======== ======== ======== ========
Debt Long-term debt consists of:
DECEMBER 31, 1996 -------------- (IN THOUSANDS) Revolving credit agreement (weighted average annual interest rate of 8.25%).......... $ 59,000 Note purchase facility (weighted average annual interest rate of 4.26%).......... 49,276 Export -- Import credit facility (weighted average annual interest rate of 5.63% and 5.8%, respectively)............................................. 19,310 -------- $127,586 ========
SS/L has a $250,000,000 revolving credit facility, as amended, ("the Revolving Credit Agreement") with a group of banks, which provides for borrowings and letters of credit through January 1, 1999 at which time the Revolving Credit Agreement expires. Borrowings are unsecured and bear interest, at SS/L's option, at various rates based on the lead bank's prime rate, or margins over the Federal Funds rate or the London Interbank Offer Rate ("LIBOR"). SS/L pays a commitment fee on the unused portion of the Revolving Credit Agreement. The Revolving Credit Agreement contains customary covenants requiring SS/L to maintain specified net worth and debt to equity ratios, an interest coverage ratio and a current asset to debt ratio. In addition, the Revolving Credit Agreement limits amounts that may be paid as dividends and advances to and from affiliates. In 1994 SS/L entered into a $140,000,000 note purchase facility (the "Note Purchase Facility") with an Italian bank. Borrowings are determined by formula and are made in accordance with a specified schedule through the earlier of June 30, 1998, or until the facility is fully disbursed. Principal is to be repaid on the earlier of twenty-three months from the final acceptance date of certain satellite deliveries or April 30, 2000. Interest is charged at a weighted average annual rate of 4.26% and is payable semiannually. All borrowings under this facility reduce the amount available under SS/L's Revolving Credit Agreement. SS/L borrowed a total of $42,912,000 under an export-import credit facility ("the EX-IM Facility") with a Japanese bank. The EX-IM Facility is fully secured by a letter of credit arrangement with another F-38 72 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. FINANCING ARRANGEMENTS: (CONTINUED) bank. At December 31, 1996, no amounts remained available for borrowing under this facility. Principal is to be repaid in semiannual installments through November 1, 2005. Interest is charged at LIBOR less 1/4% and is payable semiannually on May 1 and November 1. The aggregate maturities of long-term debt for the calendar years 1998 through 2001 are as follows: $2,146,000, $61,146,000, $51,422,000 and $2,146,000. SS/L has other outstanding letters of credit of approximately $42,562,000 at December 31, 1996. 5. INCOME TAXES: The components of the provision for income taxes are as follows:
YEAR ENDED NINE MONTHS ENDED MARCH 31, DECEMBER 31, 1996 1996 ------------------ ---------- (IN THOUSANDS) Current: Federal............................................... $ 683 $ 1,836 State, local & foreign................................ 287 3,107 ------- ------- 970 4,943 Deferred, principally federal........................... 26,673 10,237 ------- ------- Total................................................. $27,643 $15,180 ======= =======
The provision for income taxes excludes a deferred tax benefit of $834,000 and $544,000 for the nine months ended December 31, 1996 and the year ended March 31, 1996, respectively, related to SS/L's share of Globalstar, L.P. losses (see Note 6). The income tax provision differs from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons:
YEAR ENDED NINE MONTHS ENDED MARCH 31, DECEMBER 31, 1996 1996 ------------------ ----------- (IN THOUSANDS) Provision at statutory federal income tax rate.......... $21,032 $ 9,942 State income taxes, net of federal income tax benefit... 4,042 2,219 Non-deductible goodwill amortization.................... 1,770 2,360 Losses of ISTI.......................................... 229 330 Non-deductible meals, entertainment and lobbying expense...................................... 370 208 Other................................................... 200 121 ------- ------- Total provision for income taxes.............. $27,643 $15,180 ======= =======
Deferred income taxes have been calculated using an asset and liability method. The deferred tax liability on the accompanying balance sheet arises from the tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes, and is principally related to use of the long-term contract method of accounting for tax purposes, the liability for other postretirement benefits and differences in tax and book bases of assets and liabilities acquired. F-39 73 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES: (CONTINUED) At December 31, 1996, the reported deferred tax liability is net of future tax benefits of $7,288,000 arising from net operating loss carryforwards which expire beginning in 2008. Tax carryforward benefits will be used in the periods that net deferred tax liabilities mature. The significant components of the deferred income tax assets and liabilities are:
DECEMBER 31, 1996 -------------- (IN THOUSANDS) Deferred tax assets: Postretirement benefits other than pensions............... $ 13,849 Net operating loss carryforwards.......................... 7,288 Compensation and benefits................................. 3,842 Other, net................................................ 3,464 -------- 28,443 Deferred tax liabilities: Income recognition on long-term contracts................. 86,761 Property, plant and equipment............................. 25,059 Pension costs............................................. 8,770 -------- 120,590 -------- Net deferred income tax liability........................... $ 92,147 ========
6. INVESTMENTS: In March 1994, SS/L purchased an 11% limited partnership interest in Loral Qualcomm Satellite Services, L.P. ("LQSS") for $6,000,000. LQSS's only asset is 18,000,000 ordinary partnership interests in Globalstar, L.P. ("Globalstar"), which represents a 38.3% interest in the ordinary partnership interests of Globalstar at December 31, 1996. At December 31, 1996, SS/L and Loral had an effective 4.2% and 31.7% interest, respectively, in Globalstar's ordinary partnership interests. Globalstar was formed to design, construct and operate a worldwide, low-earth-orbit satellite-based digital telecommunications system. SS/L's investment has been reduced by $2,383,000 and $1,553,000 for the nine months ended December 31, 1996 and the year ended March 31, 1996, respectively, to reflect the pretax effect of its proportionate share of Globalstar's losses. In connection with the construction of the Globalstar system, Globalstar entered into a $1.4 billion contract with SS/L to design, manufacture, test and obtain launch vehicles and launch services for its constellation of 56 satellites. Under the contract, SS/L has agreed to act as Globalstar's agent to obtain launch vehicles, arrange for the launch of Globalstar satellites and obtain insurance to cover the replacement cost of satellites or launch vehicles lost in the event of a launch failure. In addition, Globalstar has agreed to purchase from SS/L eight additional spare satellites at a cost of approximately $175 million. SS/L has entered into subcontracts with certain of Globalstar's direct or indirect limited partners, some of whom are shareholders of SS/L. Revenue recorded under the Globalstar contract for the nine months ended December 31, 1996 and the year ended March 31, 1996 was $280,627,000 and $336,977,000, respectively. Billed and unbilled receivables from Globalstar were $22,572,000 and $130,694,000 at December 31, 1996. Globalstar's space segment contract with SS/L calls for approximately $310 million of the contract billings to be deferred as vendor financing. Of the $310 million, $90 million is interest bearing at the 30-day LIBOR rate plus 3% per annum. The remaining $220 million of vendor financing is non-interest bearing. Globalstar will repay the non-interest bearing portions as follows: $49 million following the launch and acceptance of 24 or more satellites (the "Preliminary Constellation"), $61 million upon the launch and acceptance of 48 or more satellites (the "Full Constellation"), and the remainder in equal installments over F-40 74 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INVESTMENTS: (CONTINUED) the five-year period following acceptance of the Preliminary and Full Constellations. SS/L's subcontractors have assumed a portion of this vendor financing which totals approximately $121 million and will be paid on similar terms. Payment of the $90 million interest bearing vendor financing will be deferred until December 31, 1998 or the Full Constellation Date, whichever is earlier. Thereafter, interest and principal will be repaid in twenty equal quarterly installments over the next five years. At December 31, 1996, $130.7 million was due under this arrangement, of which $72.0 million of the vendor financing receivable was interest bearing. SS/L has guaranteed approximately $11,700,000 of Globalstar's obligation under a $250,000,000 credit agreement. In return for providing such guarantee, SS/L received warrants to purchase 195,094 shares of Globalstar Telecommunications Limited ("GTL") common stock at $26.50 per share. On February 12, 1997, SS/L agreed to exercise these warrants in connection with arrangements reached by GTL with the other warrant holders. In April 1994, SS/L purchased common stock representing a five percent interest in Orion Network Systems, Inc. for $5,000,000. In May 1996, SS/L purchased common stock representing a 4.8% interest in Asia Broadcasting and Communications Network Public Company Limited for $10 million. At December 31, 1996, the carrying value of these investments approximated market value. The investments are accounted for using the cost method. 7. RELATED PARTY TRANSACTIONS: SS/L, its shareholders and Loral have entered into a stockholders' agreement ("the Stockholders' Agreement") which provides for management fees to be paid to Loral, ranging from 0.5% to 1% of sales, as defined, depending upon SS/L's operating performance. Such management fees were $5,088,000 and $5,608,000 for the nine months ended December 31, 1996 and the year ended March 31, 1996 respectively. The Stockholders' Agreement also requires SS/L to pay Loral an annual fee for overhead reimbursement, not to exceed 1% of SS/L's adjusted sales, as defined, for each fiscal year. This fee amounted to $2,695,000 and $3,427,000 for the nine months ended December 31, 1996 and for the year ended March 31, 1996, respectively. For the nine months ended December 31, 1996, SS/L was billed $10,066,000 for certain operational, executive, administrative, financial, legal and other services provided by Loral. SS/L was billed for certain operational, executive, administrative, financial, legal and other services provided by Lockheed Martin and Old Loral, and SS/L charged Lockheed Martin and Old Loral certain overhead costs. Net costs billed by Lockheed Martin for the nine months ended December 31, 1996 were $5,154,000. Net costs billed by Old Loral were $7,066,000 for the year ended March 31, 1996. F-41 75 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. RELATED PARTY TRANSACTIONS: (CONTINUED) In connection with contract performance, SS/L provided services to and acquired services from Lockheed Martin for the nine months ended December 31, 1996 and Old Loral for the year ended March 31, 1996. A summary of such transactions and balances is as follows:
YEAR ENDED NINE MONTHS ENDED MARCH 31, DECEMBER 31, 1996 1996 ------------------ ---------- (IN THOUSANDS) Revenue from services sold.............................. $ 3,174 $ 1,096 Cost of purchased services.............................. 124,275 28,228 Balances at year end: Receivable............................................ $ 1,650 $ 430 Payable............................................... 3,572 15,823 ------- -------- Net payable............................................. $ 1,922 $ 15,393 ======= ========
SS/L's sales to, purchases from, and balances with the Alliance partners are as follows:
YEAR ENDED NINE MONTHS ENDED MARCH 31, DECEMBER 31, 1996 1996 ------------------ ---------- (IN THOUSANDS) Revenue from services sold.............................. $55,019 $ 32,561 Cost of purchased services.............................. 150,608 249,092 Balances at year end: Receivable............................................ $ 8,526 $ 15,066 Payable............................................... 41,335 38,257
Certain employees of SS/L participate in Loral's 1996 Stock Option Plan. Under this plan, options are granted at the discretion of Loral's Board of Directors to employees of Loral and its affiliates. Such options become exercisable as determined by the Board, generally over five years, and generally expire no more than 10 years from the date of grant. For the nine months ended December 31, 1996 Loral granted certain key employees of SS/L options to purchase 1,474,000 shares of Loral common stock at a weighted average price of $10.67 per share (weighted average fair value of $2.95 per share.) No options were exercised, and at December 31, 1996, options to purchase 1,473,500 shares were outstanding, none of which were exercisable. For the year ended March 31, 1996, SS/L employees were eligible to participate in Old Loral's stock option plans. At March 31, 1996, options to purchase 466,304 shares of Old Loral common stock were outstanding, respectively (adjusted for a two for one stock split in the fiscal year ended March 31, 1996.) All options were exercised in connection with the Distribution. For the year ended March 31, 1996, SS/L had agreed to pay Old Loral any difference between the market value of Old Loral stock at the time of exercise and the option price for up to 200,000 shares authorized by SS/L's stockholders, and to reimburse Old Loral for any tax benefit resulting from shares granted in excess of that amount. For the year ended March 31, 1996, $4,510,000 of compensation expense was accrued for the excess of market value of Old Loral stock over exercise prices for options exercisable subject to the authorized limitation. As described in Note 1, SS/L accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation" requires the disclosure of pro forma net income had SS/L adopted the fair value method. SFAS No. 123 requires that equity instruments granted to an employee by a principal stockholder be included as part of the disclosure. The F-42 76 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. RELATED PARTY TRANSACTIONS: (CONTINUED) pro forma incremental effect on net income required to be disclosed under SFAS No. 123 is not material to SS/L's results of operations for the nine months ended December 31, 1996 and the year ended March 31, 1996. 8. COMMITMENTS AND CONTINGENCIES: At December 31, 1996, SS/L was party to various noncancellable real estate leases with minimum aggregate rental commitments payable as follows (in thousands): 1997........................................................ $ 9,875 1998........................................................ 8,574 1999........................................................ 7,776 2000........................................................ 7,284 2001........................................................ 6,848 Thereafter.................................................. 22,954 ------- $63,311 =======
Leases covering major items of real estate contain renewal and/or purchase options which may be exercised by SS/L. Rent expense was $7,838,000 and $6,440,000 for the nine months ended December 31, 1996 and the year ended March 31, 1996, respectively. Due to the long lead times required to produce purchased parts, SS/L has entered into various purchase commitments with suppliers. These commitments aggregated $1,014,429,000 at December 31, 1996. SS/L is party to various litigation arising in the normal course of its operations. In the opinion of management, the ultimate liability for these matters, if any, will not have a material adverse effect on SS/L's financial position or results of operations. 9. SS/L SHAREHOLDERS Loral has made a strategic decision to increase its ownership of SS/L to 100%. The first step in implementing this decision was the acquisition by Loral in August 1996 of the 18.3% interest in SS/L owned by certain partnerships affiliated with Lehman Brothers (the "Lehman Partnerships") in exchange for 7,500,000 newly issued shares of common stock of the Company, 267,256 shares of common stock of GTL previously held by the Company and $4 million in cash. As a result of this transaction, the Company increased its interest in SS/L from 32.7% to 51%. On February 12, 1997, Loral completed negotiations with SS/L's Alliance Partners to acquire their respective ownership interests in SS/L for $374 million of which $93 million will be paid in cash and the balance in Loral common stock and Loral convertible preferred equivalent obligations. Partners exchanging SS/L common stock for Loral common stock or convertible preferred equivalent obligations will retain representation on the SS/L Board of Directors and continue their strategic operating relationships with SS/L. Beginning in 1997, the financial position and results of operations of SS/L will be consolidated in the financial statements of Loral. 10. PENSIONS AND OTHER EMPLOYEE BENEFITS: Pensions: SS/L maintains a contributory defined benefit pension plan covering substantially all employees. Benefits are based on members' salaries and years of service. SS/L's funding policy is generally to contribute in accordance with cost accounting standards that affect government contractors, subject to the Internal Revenue F-43 77 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. PENSIONS AND OTHER EMPLOYEE BENEFITS: (CONTINUED) Code and regulations thereon. No contributions were made for the nine months ended December 31, 1996. Contributions for the year ended March 31, 1996 were $3,990,000. Plan assets are invested primarily in U.S. government and agency obligations and listed stocks and bonds. Net pension costs include the following components:
YEAR ENDED NINE MONTHS ENDED MARCH 31, DECEMBER 31, 1996 1996 ------------------ ---------- (IN THOUSANDS) Service cost -- benefits earned during the period....... $ 3,808 $ 3,676 Interest cost on projected benefit obligation........... 8,205 10,070 Actual loss (return) on plan assets..................... (9,934) (27,838) Net amortization and deferral........................... 574 18,110 ------- -------- Net pension costs....................................... $ 2,653 $ 4,018 ======= ========
The following table sets forth the Plan's funded status:
DECEMBER 31, 1996 ----------------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefits........................................... $130,363 ======== Accumulated benefits...................................... $134,507 Effect of projected future salary increases............... 16,981 -------- Projected benefits........................................ 151,488 Plan assets at fair value................................... 167,635 -------- Plan assets in excess of (less than) projected benefit obligation................................................ 16,147 Unrecognized net prior service cost......................... 60 Unrecognized net loss....................................... 5,183 -------- Prepaid pension cost included in other assets in the accompanying balance sheet................................ $ 21,390 ======== The principal actuarial assumptions are as follows: Discount rate............................................. 7.75% Rate of increase in compensation levels................... 4.50% Expected long-term rate of return on plan assets.......... 9.50%
Postretirement Health Care and Life Insurance Cost: In addition to providing pension benefits, SS/L provides certain health care and life insurance benefits for retired employees and dependents. Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for SS/L's pension plans. These benefits are funded primarily on a pay-as-you-go basis with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions. In March 1993, SS/L adopted various plan amendments resulting in unrecognized prior service gains, which are being amortized commencing in 1994. F-44 78 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. PENSIONS AND OTHER EMPLOYEE BENEFITS: (CONTINUED) Postretirement health care and life insurance costs include the following components:
YEAR ENDED NINE MONTHS ENDED MARCH 31, DECEMBER 31, 1996 1996 ------------------ ---------- (IN THOUSANDS) Service cost -- benefits earned during the period....... $ 622 $ 405 Interest cost on accumulated postretirement benefit obligation............................................ 1,599 1,549 Net amortization and deferrals.......................... (916) (1,316) ------- ------- Total postretirement health care and life insurance costs................................................. $ 1,305 $ 638 ======= =======
The following table reconciles the amounts recognized in the balance sheet:
DECEMBER 31, 1996 ----------------- (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees.................................................. $15,260 Fully eligible plan participants.......................... 3,517 Other active plan participants............................ 10,541 ------- Total accumulated postretirement benefit obligation......... 29,318 Fair value of assets........................................ (2,055) ------- Unfunded accumulated postretirement benefit obligation...... 27,263 Unrecognized prior service gain related to plan amendments................................................ 12,742 Unrecognized net (loss) gain................................ (6,225) ------- Accrued postretirement health care and life insurance costs..................................................... $33,780 =======
The principal assumptions used in determining the pension benefit obligation are as follows: Discount rate............................................... 7.75% Rate of increase in compensation levels..................... 4.50% Present healthcare cost trend rate.......................... 10.59% Ultimate trend rate by the year 2004........................ 5.50%
Changing the assumed health care cost trend rate by 1% in each year would change the accumulated postretirement benefit obligation by approximately $3,224,000 and the aggregate service and interest cost components for the nine months ended December 31, 1996 by approximately $325,000. Employee Savings Plan: SS/L employees participate in the Loral Savings Plan ("the Plan"). Under the Plan, SS/L matches 60% of participating SS/L employees' contributions, up to 6% of base pay. SS/L's matching cash contributions were $2,859,000 and $2,852,000 for the nine months ended December 31, 1996 and the year ended March 31, 1996, respectively. F-45 79 SPACE SYSTEMS/LORAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. INTERNATIONAL SPACE TECHNOLOGY, INC. COMMON STOCK TRANSACTIONS: In September 1993 and March 1994, International Space Technology, Inc. ("ISTI"), a corporate joint venture with unrelated third parties, entered into agreements to sell, in installments, a 22.8% equity interest in ISTI to two unaffiliated entities. Under the first installment, ISTI sold 267.85 common shares for $2.9 million in 1994, representing a 17.6% equity interest in ISTI. In November 1994, in conjunction with the stock sales agreements, ISTI issued an additional 28.95 common shares to one of the minority shareholders, increasing the minority interest in ISTI by 1.6% to 19.2%. Accordingly, 17.6% of the losses of ISTI incurred subsequent to the sale and prior to November 8, 1994, and 19.2% of such incurred losses after November 7, 1994, have been allocated to the minority interest. Additional sales of shares under the agreements are contingent upon completion of certain product qualifications by SS/L. F-46 80 INDEPENDENT AUDITORS' REPORT We have audited the consolidated financial statements of Loral Space & Communications Ltd. (a Bermuda company) as of December 31, 1997 and 1996, and for the year ended December 31, 1997, the nine months ended December 31, 1996, and the year ended March 31, 1996, and have issued our report thereon dated March 6, 1998 (March 20, 1998 as to the fifth paragraph of Note 3), included elsewhere in this Annual Report on Form 10-K. Our audits also included the financial statement schedule listed in Item 14(a)2 of this Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP New York, New York March 6, 1998 S-1 81 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT LORAL SPACE & COMMUNICATIONS LTD. BALANCE SHEETS (In thousands, except share data)
DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 171,850 $1,175,018 Other current assets...................................... 3,864 9,795 ---------- ---------- Total current assets........................................ 175,714 1,184,813 Note receivable from unconsolidated subsidiary.............. 349,000 Investments in affiliates................................... 410,221 443,057 Investment in unconsolidated subsidiaries................... 776,493 19,427 Due from unconsolidated subsidiaries........................ 245,089 191 Other assets................................................ 69,555 13,476 ---------- ---------- $2,026,072 $1,660,964 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and other current liabilities............ $ 29,187 $ 340 Accrued interest and preferred dividends.................. 9,478 6,000 Income taxes payable...................................... 12,004 1,263 Deferred income taxes..................................... 1,796 ---------- ---------- Total current liabilities................................... 52,465 7,603 Deferred income taxes....................................... 362 Convertible preferred equivalent obligations ($600,000 principal amount)......................................... 583,292 Commitments and contingencies Shareholders' equity: Series A convertible preferred stock, $.01 par value; 150,000,000 shares authorized, 45,896,977 shares issued................................................. 459 459 Series B preferred stock, $.01 par value; 750,000 shares authorized and unissued................................ 6% Series C convertible redeemable preferred stock ($745,472 redemption value), $.01 par value; 20,000,000 shares authorized, 14,909,437 shares issued............ 733,762 Common stock, $.01 par value; 750,000,000 shares authorized, 200,950,864 and 191,092,308 shares issued................................................. 2,010 1,911 Paid-in capital........................................... 1,216,128 1,058,822 Treasury stock, at cost; 101,053 shares................... (1,680) Retained earnings......................................... 22,566 8,877 ---------- ---------- Total shareholders' equity.................................. 1,973,245 1,070,069 ---------- ---------- $2,026,072 $1,660,964 ========== ==========
See note to financial statements. S-2 82 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT.) LORAL SPACE & COMMUNICATIONS LTD. STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ---------- Management fee from affiliate.......................... $ 5,608 Costs and expenses..................................... $ 14,123 $ 6,561 3,021 -------- -------- -------- Operating income (loss)................................ (14,123) (6,561) 2,587 Interest and investment income......................... 60,915 34,717 Interest expense....................................... 695 6,000 10,524 Gain on sale of K&F stock.............................. 79,591 -------- -------- -------- Income (loss) before income taxes, minority interest and equity in net income (loss) of affiliates and subsidiaries......................................... 125,688 22,156 (7,937) Income taxes........................................... 19,644 1,263 (2,780) -------- -------- -------- Income (loss) before minority interest and equity in net loss of affiliates............................... 106,044 20,893 (5,157) Equity in net loss of unconsolidated subsidiaries...... (21,007) (7,307) Equity in net loss of affiliates....................... (45,033) (4,709) (8,628) -------- -------- -------- Net income (loss)...................................... 40,004 8,877 (13,785) Preferred dividends and accretion...................... (26,315) -------- -------- -------- Net income (loss) applicable to common stockholders.... $ 13,689 $ 8,877 $(13,785) ======== ======== ======== Earnings (loss) per share: Basic................................................ $ 0.06 $ 0.04 $ (.08) ======== ======== ======== Diluted.............................................. $ 0.06 $ 0.04 $ (.08) ======== ======== ======== Weighted average shares outstanding: Basic................................................ 242,070 228,997 183,580 ======== ======== ======== Diluted.............................................. 243,591 229,396 183,580 ======== ======== ========
See note to financial statements. S-3 83 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT.) LORAL SPACE & COMMUNICATIONS LTD. STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ----------------- ---------- Operating activities: Net income (loss)......................................... $ 40,004 $ 8,877 $ (13,785) Gain on the sale of K&F stock............................. (79,591) Equity in net loss of affiliates.......................... 45,003 4,709 8,628 Equity in net loss of unconsolidated subsidiaries......... 21,007 7,307 Deferred taxes............................................ (2,158) 3,838 Accretion on GTL CPEOs.................................... (1,739) Depreciation and amortization............................. 78 Changes in operating assets and liabilities, net of acquisitions: Due from unconsolidated subsidiaries...................... (244,898) 191 Accounts payable.......................................... 4,218 (217) Accrued expenses.......................................... 3,283 5,340 Taxes payable............................................. 10,741 1,263 Other assets and liabilities.............................. (82,367) (5,010) ----------- ---------- --------- Cash used in operating activities........................... (286,419) 22,460 (1,319) ----------- ---------- --------- Investing activities: Proceeds from the sale of K&F stock, net of expenses...... 79,591 Investment in affiliates.................................. (232,729) (6,425) (105,231) Investments in unconsolidated subsidiaries................ (144,060) (26,734) Other assets.............................................. (52,454) (9,800) ----------- ---------- --------- Cash used in investing activities........................... (349,652) (33,159) (115,031) ----------- ---------- --------- Financing activities: Issuance of note to unconsolidated subsidiary, net of repayments.............................................. (349,000) Proceeds from convertible preferred equivalent obligations............................................. 583,292 Proceeds from exercise of stock options and issuances to employee savings plan................................... 7,338 Preferred dividends....................................... (25,435) Proceeds from the Distribution............................ 612,274 Transaction expenses related to the Distribution.......... (12,286) Advances from Loral Corporation prior to the Distribution............................................ 2,425 116,362 ----------- ---------- --------- Cash provided by financing activities....................... (367,097) 1,185,705 116,362 ----------- ---------- --------- (Decrease) increase in cash and cash equivalents............ (1,003,168) 1,175,006 12 Cash and cash equivalents -- beginning of period............ 1,175,018 12 ----------- ---------- --------- Cash and cash equivalents -- end of period.................. $ 171,850 $1,175,018 $ 12 =========== ========== ========= Non-cash transactions: Mandatory exchange of Convertible Preferred Equivalent Obligations............................................. $ 583,282 =========== Issuance of Series C Preferred Stock to acquire equity interest in SS/L........................................ $ 149,600 =========== Issuance of Loral common stock to acquire equity interest in SS/L and Globalstar partnership interests............ $ 148,387 $ 100,313 =========== ========== Deferred purchase price to acquire Globalstar partnership interests............................................... $ 24,787 =========== Assets transferred from Loral Corporation at the Distribution............................................ $ 31,383 ========== Liabilities assumed from Loral Corporation at the Distribution............................................ $ 27,313 ========== Transfer of GTL common stock to acquire equity interest in SS/L.................................................... $ 5,158 ========== Supplemental information: Interest paid............................................. $ 22,823 =========== Taxes paid................................................ $ 6,205 ===========
See note to financial statements. S-4 84 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTE TO FINANCIAL STATEMENTS 1. Loral Space & Communications Ltd. ("Loral"), a Bermuda company, is a holding company which is the ultimate parent of all Loral subsidiaries and is the registrant of all Loral securities. The accompanying financial statements reflect the financial position, results of operations and cash flows of Loral on a separate company basis. All subsidiaries of Loral are reflected as investments accounted for under the equity method of accounting. Accordingly intercompany payables and receivables have not been eliminated. Loral's significant transactions with its subsidiaries other than the investment account and related equity in net loss of unconsolidated subsidiaries are the management fee charged by Loral SpaceCom Corporation ("SpaceCom") to Loral and intercompany payable and receivables resulting primarily from the funding of the construction of the Telstar Satellites. The note receivable from SpaceCom relates to the Loral Skynet acquisition and bears interest at 8.2% per annum. Principal payments are restricted to a maximum of $149,000,000 by a financing arrangement entered into by SpaceCom. No cash dividends were paid to Loral by its subsidiaries or its affiliates during the year ended December 31, 1997, the nine months ended December 31, 1996 or the year ended March 31, 1996. S-5 85 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - -------------- ----------- ---- 2.1 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996, among Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., Loral General Partner, Inc., Loral Globalstar L.P., Loral Globalstar Limited, the Registrant and Lockheed Martin Corporation(1) 2.2 Amendment to Restructuring, Financing and Distribution Agreement, dated as April 15, 1996(1) 2.3 Agreement for the Purchase and Sale of Assets dated as of September 25, 1996 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(2) 2.4 First Amendment to Agreement for the Purchase and Sale of Assets dated as of March 14, 1997 by and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as Buyer(3) 2.5 Agreement and Plan of Merger dated as of October 7, 1997 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation(4) 2.6 First Amendment to Agreement and Plan of Merger dated as of February 11, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation.(5) 2.7 Second Amendment to Agreement and Plan of Merger dated as of March 20, 1998 by and among Orion Network Systems, Inc., Loral Space & Communications Ltd. and Loral Satellite Corporation.+ 3.1 Memorandum of Association(1) 3.2 Memorandum of Increase of Share Capital(1) 3.3 Second Amended and Restated Bye-laws(1) 3.4 Schedule III to Second Amended and Restated Bye-laws relating to Registrant's 6% Series C Convertible Redeemable Preferred Stock(6) 4.1 Rights Agreement dated March 27, 1996 between the Registrant and The Bank of New York, Rights Agent(1) 10.1 Shareholders Agreement dated as of April 23, 1996 between Loral Corporation and the Registrant(1) 10.2 Tax Sharing Agreement dated as of April 22, 1996 between Loral Corporation, the Registrant, Lockheed Martin Corporation and LAC Acquisition Corporation(1) 10.3 Exchange Agreement dated as of April 22, 1996 between the Registrant and Lockheed Martin Corporation(1) 10.4 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P., dated as of March 6, 1996 among Loral/Qualcomm Satellite Services, L.P., Globalstar Telecommunications Limited, AirTouch Satellite Services, San Giorgio S.p.A., Hyundai/Dacom, Loral/DASA Globalstar, L.P., Loral Globalstar, L.P., TE.S.AM. and Vodastar Limited(7) 10.5 Service Provider Agreements by and between Globalstar, L.P. and each of Loral General Partner, Inc. and Loral/DASA Globalstar, L.P.(8) 10.6 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.(8) 10.7 1996 Stock Option Plan(1)++ 10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++ 10.9 Employment Agreement between the Registrant and Bernard L. Schwartz(1)++
86
EXHIBIT NUMBER DESCRIPTION PAGE - -------------- ----------- ---- 10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement between the Registrant and Bernard L. Schwartz+++ 10.10 Registration Rights Agreement dated as of August 9, 1996 among Loral Space & Communications Ltd., Lehman Brothers Capital Partners II, L.P., Lehman Brothers Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore Investment Partnership L.P. and Lehman Brothers Offshore Investment Partnership-Japan L.P.(9) 10.11 Registration Rights Agreement dated November 6, 1996 relating to the Registrant's 6% Convertible Preferred Equivalent Obligations due 2006(6) 10.12 Registration Rights Agreement (Series C Preferred Stock) dated as of March 31, 1997 between Loral Space & Communications Ltd. and Finmeccanica S.p.A. and dated as June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.13 Registration Rights Agreement (Common Stock) dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI and Alcatel Espace(10) 10.14 Alliance Agreement dated as of June 23, 1997 among Loral Space & Communications Ltd., Aerospatiale SNI, Alcatel Espace and Finmeccanica S.p.A.(10) 10.15 Principal Stockholder Agreement dated as of October 7, 1997 among Loral Space & Communications Ltd., Loral Satellite Corporation, Orion Network Systems, Inc. and certain Orion stockholders signatory thereto(4) 10.16 Amended and Restated Credit and Participation Agreement, dated as of November 14, 1997, among Loral SpaceCom Corporation, Space Systems/Loral, Inc., the Banks parties thereto, Bank of America National Trust and Savings Association, as Administrative Agent, and Istituto Bancario San Paolo di Torino S.p.A, individually and as Italian Export Financing and Arranger and as Selling Bank(11) 10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as of June 30, 1997+ 10.18 Purchase and Sale Agreement dated November 17, 1997 between the Federal Government of the United Mexican States and Corporativo Satelites Mexicanos, S.A. de C.V. for the purchase and sale of the capital stock of Satelites Mexicanos, S.A. de C.V. (English translation of Spanish original)+ 10.19 Membership Agreement dated and effective as of November 17, 1997 among Loral SatMex Ltd. and Ediciones Enigma, S.A. de C.V. and Firmamento Mexicano, S. de R.L. de C.V.+ 10.20 Letter Agreement dated December 29, 1997 between Loral Space & Communications Ltd., Telefonica Autrey S.A. de C.V., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. and Lehman Commercial Paper Inc. and related Agreement between the Federal Government of United Mexican States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma, S.A. de C.V., Loral Space & Communications Ltd., Loral SatMex Ltd. and Servicios Corporativos Satelitales, S.A. de C.V.+ 12 Statement Re: Computation of Ratios+ 21 List of Subsidiaries of the Registrant+ 23 Consent of Deloitte & Touche LLP+ 27 Financial Data Schedule (EDGAR only)+
87
EXHIBIT NUMBER DESCRIPTION PAGE - -------------- ----------- ---- 99.1 Consolidated Financial Statements of Globalstar, L.P. and Independent Auditors' Report(12)
- --------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form 10 (No. 1-14180). (2) Incorporated by reference to the Registrant's Form 8-K filed on September 27, 1996. (3) Incorporated by reference to the Registrant's Form 8-K filed on March 28, 1997. (4) Incorporated by reference to the Registrant's Form 8-K filed on October 10, 1997. (5) Incorporated by reference to the Registrant's Registration Statement on Form S-4 filed on February 17, 1998 (File No. 333-46407). (6) Incorporated by reference to the Registrant's Form 10-K for the nine month period ended December 31, 1996. (7) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed by Globalstar Telecommunications Limited (File No. 0-25456). (8) Incorporated by reference to the Registration Statement on Form S-1 of Globalstar Telecommunications Limited (File No. 33-86808). (9) Incorporated by reference to the Registrant's Form 8-K filed on August 13, 1996. (10) Incorporated by reference to the Registrant's Form 8-K filed on July 8, 1997. (11) Incorporated by reference to the Registrant's Form 8-K filed on December 9, 1997. (12) Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed by Globalstar Telecommunications Limited (File No. 0-25456). + Filed herewith. ++ Management compensation plan. EX-2.7 2 2ND AMENDMENT TO AGREEMENT OF PLAN & MERGER 1 AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF MERGER This AMENDMENT NO. 2, dated as of March 20, 1998 (the "Amendment"), amends the AGREEMENT AND PLAN OF MERGER, dated October 7, 1997 (the "Merger Agreement"), as amended on February 11, 1998, by and among Orion Network Systems, Inc., a Delaware corporation ("Company"), Loral Space & Communications Ltd., a Bermuda company ("Acquiror") and Loral Satellite Corporation, a Delaware corporation ("Merger Sub"). WHEREAS, the parties have entered into the Merger Agreement (capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings set forth in the Merger Agreement); WHEREAS, the parties to the Merger Agreement desire to amend various provisions of the Merger Agreement and set forth certain agreements among the parties; and WHEREAS, pursuant to Section 9.4 of the Merger Agreement, the Merger Agreement may be amended with the written consent of the parties thereto. NOW, THEREFORE, in consideration of the foregoing premises, it is hereby agreed by and among, the Company, Acquiror and Merger Sub as follows: (1) Section 10.1 shall be amended to read as follows: "The representations, warranties and agreements in this Agreement (and in any certificate delivered in connection with the Closing) shall be deemed to be conditions to the Merger (or the Exchange Offer, as applicable) and shall not survive the Effective Time (or consummation of the Exchange Offer, as applicable) or termination of this Agreement, except for the agreements set forth in Articles I (the Merger) and II (Conversion of Securities; Exchange of Certificates) and Sections 7.7 (Indemnification and Insurance), 7.8 (Employee Benefits Matters) 7.9 (Further Action) and 7.15(g) (Subsequent Merger), each of which shall survive the Effective Time (or consummation of the Exchange Offer, as applicable) indefinitely, and Sections 7.2 (Confidentiality), 7.17 (Private Letter Ruling), 9.2 (Effect of Termination) and 9.3 (Expenses), each of which shall survive termination of this Agreement indefinitely." (2) Pursuant to Section 9.5(c) of the Merger Agreement, with respect to the closing conditions set forth in Sections 8.2(c) and 8.3(c) of the Merger Agreement, the parties hereby acknowledge 2 and agree that on February 26, 1998 the FCC granted the FCC Application by initial order, and Acquiror, Merger Sub and the Company waive the portions of such closing conditions that require that the grant of the FCC Application be by Final Order. (3) The Exchange Ratio, which has been calculated in accordance with Section 2.1 of the Merger Agreement as set forth on Exhibit A hereto, is .71553. (4) This Amendment may be executed and delivered in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to the Agreement and Plan of Merger to be executed and delivered as of the date first written above. LORAL SPACE & COMMUNICATIONS LTD. By: /s/ Avi Katz Avi Katz Vice President LORAL SATELLITE CORPORATION By: /s/ Avi Katz Avi Katz Vice President ORION NETWORK SYSTEMS, INC. By: /s/ David J. Frear David J. Frear Senior Vice President 4 EXHIBIT A
CLOSING DATE TRADING DATE INTRA DAY AVG 20 DAY AVG IMPLIED EXCHANGE RATIO ------------ ------------ ------------- ---------- ---------------------- 2/23/98 2/6/98 23.5022 2/24/98 2/9/98 23.8906 22.5144 0.77728 2/25/98 2/10/98 24.495 22.75546 0.76905 2/26/98 2/11/98 24.0362 22.92992 0.76319 2/27/98 2/12/98 23.6283 23.07363 0.75844 3/2/98 2/13/98 23.7657 23.213735 0.75386 3/3/98 2/17/98 23.7887 23.33944 0.7498 3/4/98 2/18/98 23.8853 23.448945 0.7463 3/5/98 2/19/98 24.1456 23.52671 0.74384 3/6/98 2/20/98 25.237 23.63675 0.74037 3/9/98 2/23/98 25.5097 23.76496 0.73638 3/10/98 2/24/98 25.1063 23.883955 0.73271 3/11/98 2/25/98 25.33 23.97767 0.72985 3/12/98 2/26/98 25.0202 24.04818 0.72771 3/13/98 2/27/98 25.4303 24.17237 0.72397 3/16/98 3/2/98 25.4896 24.352195 0.71862 3/17/98 3/3/98 24.9971 24.45594 0.71557 3/18/98 3/4/98 24.9698 24.511735 0.71553 3/19/98 3/5/98 25.496 24.586905 0.71553 3/20/98 3/6/98 26.0068 24.68652 0.71553
Determination Price: 24.68652 Exchange Ratio: 0.71553 EX-10.9.1 3 AMENDED EMPLOYMENT AGREEMENT 1 Exhibit 10.9.1 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment (the "Amendment") to the Agreement dated as of April 5, 1996 (the "Agreement"), between Loral Space & Communications Ltd. and Bernard L. Schwartz, is made and is effective as of March 1, 1998. 1. The first sentence of Section 3(a) of the Agreement is hereby amended to read as follows: "For services rendered by Schwartz during the term of this Agreement, the Company shall pay to Schwartz a base salary at the rate of $956,300 per year (adjusted as provided in Section 3(b)), for the period commencing on the Distribution Date to February 28, 1998, and a base salary at the rate of $1,600,000 per year (adjusted as provided in Section 3(b)), commencing on March 1, 1998." 2. This Amendment shall be construed in accordance with and governed by the laws of the State of New York. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date set forth above. Loral Space & Communications Ltd. By: /s/ Eric J. Zahler ----------------------------- Eric J. Zahler Senior Vice President /s/ Bernard L. Schwartz ----------------------------- Bernard L. Schwartz EX-10.17 4 AGREEMENT OF LIMITED PARTNERSHIP 1 AGREEMENT OF LIMITED PARTNERSHIP OF CYBERSTAR, L.P. a Delaware limited partnership Dated as of June 30, 1997 2 TABLE OF CONTENTS
Page ARTICLE I. CONTINUATION OF PARTNERSHIP.........................................................................2 SECTION 1.1. Continuation ...........................................................................2 SECTION 1.2. Name ...................................................................................2 SECTION 1.3. Registered Office; Principal Office.....................................................2 SECTION 1.4. Purpose ................................................................................2 SECTION 1.5. Power of Attorney...................................................................... 3 SECTION 1.6. Term ...................................................................................4 SECTION 1.7. Title to Partnership Property.......................................................... 4 SECTION 1.8. Effectiveness of Agreement............................................................. 4 ARTICLE II. DEFINITIONS .......................................................................................5 SECTION 2.1. Definitions ............................................................................5 ARTICLE III. REPRESENTATIONS AND WARRANTIES...................................................................13 SECTION 3.1. Representations and Warranties of Each Partner.........................................13 SECTION 3.2. Representations and Warranties of Each Limited Partner.................................14 ARTICLE IV. CAPITAL CONTRIBUTIONS.............................................................................15 SECTION 4.1. Phase I Commitments of the General Partner and GP Affiliates...........................15 SECTION 4.2. Phase I Commitments of the Unaffiliated Phase I Partners...............................15 SECTION 4.3. Participation Bonus; Non Participation Consequences....................................16 SECTION 4.4. Additional Partners....................................................................17 SECTION 4.5. Capital Accounts.......................................................................19 SECTION 4.6. Interest ..............................................................................20 SECTION 4.7. No Withdrawal..........................................................................20 SECTION 4.8. Loans .................................................................................20 SECTION 4.9. Preemptive Rights......................................................................21 SECTION 4.10. Sale of Units and Partnership Securities...............................................23 SECTION 4.11. Business Plan..........................................................................24 ARTICLE V. ALLOCATIONS AND DISTRIBUTIONS......................................................................25 SECTION 5.1. Allocations Generally..................................................................25 SECTION 5.2. Regulatory Allocations.................................................................26 SECTION 5.3. Other Allocations When Book Value Differs from Tax Basis...............................26 SECTION 5.4. Distributions..........................................................................28 -i-
3 ARTICLE VI. MANAGEMENT AND OPERATION OF BUSINESS..............................................................29 SECTION 6.1. Management ............................................................................29 SECTION 6.2. Limitation on Authority of the General Partner.........................................32 SECTION 6.3. Partners' Committee and Partners' Meetings.............................................34 SECTION 6.4. FCC and Related Matters................................................................35 SECTION 6.5. Certificate of Limited Partnership.....................................................35 SECTION 6.6. Reliance by Third Parties..............................................................35 SECTION 6.7. Expenses and Reimbursement of the General Partner......................................36 SECTION 6.8. Cooperation with SkyBridge.............................................................36 SECTION 6.9. Outside Activities.....................................................................36 SECTION 6.10. Resolution of Conflicts of Interest....................................................39 SECTION 6.11. Partnership Funds......................................................................41 SECTION 6.12. Loans from the General Partner.........................................................41 SECTION 6.13. Indemnification of Partners............................................................42 SECTION 6.14. Liability of the General Partner.......................................................44 SECTION 6.15. Other Matters Concerning the General Partner...........................................45 SECTION 6.16. Conversion to Corporate Form...........................................................45 ARTICLE VII. RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS...................................................47 SECTION 7.1. Limitation of Liability................................................................47 SECTION 7.2. Management of Business.................................................................47 ARTICLE VIII. BOOKS, RECORDS, ACCOUNTING AND REPORTS..........................................................48 SECTION 8.1. Records and Accounting.................................................................48 SECTION 8.2. Fiscal Year ...........................................................................48 SECTION 8.3. Reports ...............................................................................48 SECTION 8.4. Disclosure to Limited Partners.........................................................48 SECTION 8.5. Determination of Book Value of Partnership Assets......................................49 ARTICLE IX. TAX MATTERS ......................................................................................50 SECTION 9.1. Preparation of Tax Returns.............................................................50 SECTION 9.2. Tax Elections..........................................................................51 SECTION 9.3. Tax Controversies......................................................................51 SECTION 9.4. Taxation as a Partnership..............................................................51 ARTICLE X. TRANSFER OF INTERESTS..............................................................................52 SECTION 10.1. Transfer .............................................................................52 SECTION 10.2. Transfer of Units.....................................................................53 SECTION 10.3. Change of Control.....................................................................56 ARTICLE XI. ADMISSION OF SUCCESSOR PARTNERS...................................................................58 SECTION 11.1. Admission of Successor Limited Partner................................................58 SECTION 11.2. Admission of Successor General Partner................................................59 -ii-
4 SECTION 11.3. Amendment of Agreement and of Certificate of Limited Partnership......................59 ARTICLE XII. RIGHT TO BECOME LIMITED PARTNER..................................................................59 SECTION 12.1. Right of the General Partner to Become a Limited Partner..............................59 SECTION 12.2. Withdrawal of Limited Partner.........................................................59 ARTICLE XIII. DISSOLUTION AND LIQUIDATION.....................................................................60 SECTION 13.1. Dissolution ..........................................................................60 SECTION 13.2. Winding Up and Liquidation............................................................61 SECTION 13.3. Cancellation of Certificate of Limited Partnership....................................62 SECTION 13.4. Return of Capital.....................................................................62 SECTION 13.5. Waiver of Partition...................................................................63 SECTION 13.6. Deficit Upon Liquidation..............................................................63 ARTICLE XIV. AMENDMENT OF PARTNERSHIP AGREEMENT...............................................................63 SECTION 14.1. Amendments to be Adopted Without Consent of the Partners..............................63 SECTION 14.2. Amendment Procedures..................................................................64 ARTICLE XV. GENERAL PROVISIONS................................................................................64 SECTION 15.1. Addresses and Notices.................................................................64 SECTION 15.2. Titles and Captions...................................................................64 SECTION 15.3. Pronouns and Plurals..................................................................64 SECTION 15.4. Further Action........................................................................64 SECTION 15.5. Binding Effect........................................................................65 SECTION 15.6. Survival of Certain Provisions........................................................65 SECTION 15.7. Integration ..........................................................................65 SECTION 15.8. Creditors ............................................................................65 SECTION 15.9. Waiver ...............................................................................65 SECTION 15.10. Counterparts.........................................................................65 SECTION 15.11. Dispute Resolution...................................................................66 SECTION 15.12. Governing Law........................................................................66 SECTION 15.13. Confidentiality......................................................................67 SECTION 15.14. Invalidity of Provisions.............................................................69 SECTION 15.15. Number; Gender; Without Limitation; Interpretation of Certain Defined Terms..........69 SECTION 15.16. No Right to Partition................................................................70 SIGNATURE PAGES ..............................................................................................66 SCHEDULE A Partners, Capital Contributions and Units SCHEDULE B Notices SCHEDULE C Installments of Loral Cash Capital Contributions SCHEDULE D Similar Businesses SCHEDULE E Exclusive Benefit Letter
5 AGREEMENT OF LIMITED PARTNERSHIP OF CYBERSTAR, L.P. This AGREEMENT OF LIMITED PARTNERSHIP is entered into and shall be effective as of the 30th day of June 1997, by and between Loral CyberStar, L.L.C., a limited liability corporation organized and existing under the laws of the State of Delaware ("Loral CyberStar, L.L.C." or the "General Partner"), Loral Broadband Holdings, L.P., a limited partnership organized and existing under the laws of the State of Delaware ("Loral Broadband"), and those additional Persons who have executed this Agreement as limited partners and whose names and states or countries of formation are set forth on Schedule A attached hereto and made a part hereof as limited partners (each of whom shall become a Limited Partner of the Partnership upon such execution), pursuant to the provisions of the Delaware Act on the following terms and conditions: WHEREAS, Loral Broadband, in accordance with the Delaware Act, has heretofore formed a limited partnership under the name "CyberStar, L.P." pursuant to a Certificate of Limited Partnership, filed with the office of the Secretary of State of Delaware on May 29, 1997; WHEREAS, the General Partner and Loral Broadband desire to pursue the research, development, construction, launch and operation of a worldwide geostationary orbit satellite communications project, presently denoted "CyberStar," and a predecessor service, utilizing leased transponders, presently denoted "CyberLink", to support interactive, broadband, multimedia applications (the "Project"); WHEREAS, Loral Space & Communications Ltd. ("Loral Space") has received a license (the "FCC License") from the United States Federal Communications Commission (the "FCC") to construct, launch and operate CyberStar; WHEREAS, each of the Limited Partners desires to invest in the Project, and the General Partner and Loral Broadband desire for the Limited Partners to invest in the Project and to become limited partners of the Partnership, all in accordance with and subject to the terms and conditions of this Agreement; and NOW, THEREFORE, the Partners, in consideration of the premises and their mutual agreements as hereinafter set forth, do hereby agree as follows: 6 ARTICLE I. CONTINUATION OF PARTNERSHIP SECTION 1.1. Continuation. The parties hereto do hereby agree to continue the Partnership as a limited partnership pursuant to the provisions of the Delaware Act. The rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by this Agreement and the Delaware Act. SECTION 1.2. Name. The name of the Partnership shall continue to be, and the business of the Partnership shall continue to be conducted under, the name of "CyberStar, L.P." The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner; provided, however, that the General Partner may not select the name of any Limited Partner or any similar name without the prior written consent of such Limited Partner. The General Partner may change the name of the Partnership at any time and from time to time. Notice will be given to the Limited Partners within ten days after any change in the name of the Partnership and the General Partner shall file an amendment to the Certificate of Limited Partnership reflecting such change in accordance with the Delaware Act. SECTION 1.3. Registered Office; Principal Office. Unless and until changed by the General Partner, the registered office of the Partnership in the State of Delaware shall continue to be located at c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801, and the registered agent for service of process on the Partnership at such registered office shall continue to be Corporation Trust Company. The principal office of the Partnership shall be located at such place as the General Partner may from time to time designate to the Limited Partners. Notice will be given to the Limited Partners within ten days after any change in the principal office of the Partnership and the General Partner shall file an amendment to the Certificate of Limited Partnership reflecting such change in accordance with the Delaware Act. The Partnership may maintain offices at such other places as the General Partner deems advisable. SECTION 1.4. Purpose. The purpose and business of the Partnership shall be: (a) directly or indirectly to (i) conduct (or cause to be conducted) research concerning the Project, and (ii) develop, design, deploy, exploit, own and operate the Project; (b) to acquire, hold, own, operate, lease, manage, maintain, improve, repair, replace, reconstruct, sell, transfer, assign, exchange, contribute or otherwise dispose of and use the assets of the Partnership; and 7 (c) to enter into any lawful transaction and engage in any lawful activity incidental to or in furtherance of the foregoing purposes. Without in any way limiting the generality of the foregoing provisions of this Section 1.4, the Partners acknowledge that the Partnership may enter into transactions and agreements which provide that the Project is to be developed on behalf of the Partnership by one or more Persons other than the Partnership, which Persons may include GP Affiliates. SECTION 1.5. Power of Attorney. (a) Each Limited Partner hereby irrevocably appoints and empowers the General Partner and, if a Liquidator shall have been selected pursuant to Section 13.2, the Liquidator and each of their authorized officers and attorneys-in-fact with full power of substitution as its true and lawful agent and attorney-in-fact (each an "Attorney"), with full power and authority in its name, place and stead, for so long as such Attorney is the General Partner or Liquidator or an authorized officer or attorney-in-fact of the General Partner or Liquidator, to: (i) make, execute, swear to, acknowledge, publish, deliver, file and record in the appropriate public offices (A) any duly approved amendments to this Agreement or to the Certificate of Limited Partnership pursuant to the Delaware Act and to the laws of any state in which such documents are required to be filed; (B) any certificates, instruments or documents as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business; (C) any other instrument which may be required to be filed by the Partnership under the laws of any state or other jurisdiction or by any governmental agency, or which the General Partner or Liquidator deems advisable to file; (D) any documents which may be required to effect the continuation of the Partnership, the admission, withdrawal or substitution of any Partner pursuant to Article XI or Article XII hereof, the dissolution and termination of the Partnership pursuant to the terms of this Agreement, or the surrender of any rights or the assumption of any additional responsibilities by the General Partner; and (E) any document which may be required to effect any duly approved amendment to this Agreement; and (ii) sign, execute, swear to and acknowledge all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement and/or appropriate or necessary to effectuate the terms or intent of this Agreement; provided, however, 8 that when the Consent of the Partners or the Approval of the Founding Partners is required under the terms of this Agreement or the consent of a Partner is required pursuant to Section 14.2, an Attorney may exercise the power of attorney made in this subsection (ii) only after the necessary consent or approval has been received. (b) To the maximum extent permitted by applicable law, the foregoing grant of authority (i) is a special power of attorney, coupled with an interest, and it shall be irrevocable and shall survive the death, incompetency, disability, liquidation, dissolution, bankruptcy or termination of any Partner and shall extend to such Partner's heirs, successors, assigns and personal representatives; (ii) may be exercised by an Attorney for each and every Limited Partner acting as attorney-in-fact for each and every Limited Partner; and (iii) shall survive the assignment by any Limited Partner of all or any of its Units and shall be fully binding upon such assignee. Each Limited Partner hereby agrees to be bound by any representations made by an Attorney acting in good faith pursuant to such power of attorney in furtherance of the Partnership's business. Each Partner shall execute and deliver to the General Partner or Liquidator, within 15 days after receipt of a request therefor, such further designations, powers of attorney and other instruments as the General Partner or Liquidator deems necessary to effectuate this Agreement and the purposes of the Partnership. SECTION 1.6. Term. The Partnership commenced business as a limited partnership on May 29, 1997, upon the filing of the Certificate of Limited Partnership with the Secretary of State of the State of Delaware; the Partnership shall continue in existence until the termination of the Partnership in accordance with the provisions of Article XIII hereof. SECTION 1.7. Title to Partnership Property. All property owned by the Partnership, whether real or personal, tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually, shall have any ownership of such property. The Partnership shall hold all of its assets in its own name or, in the case of marketable securities, in its own name or in street name. SECTION 1.8. Effectiveness of Agreement. This Agreement shall become effective as of the date first above written (the "Effective Date") as among the parties hereto as of the Effective Date and, with respect to other parties, as of the date of execution of this Agreement by such parties, pursuant to Section 4.4 or Article XI hereof. 9 ARTICLE II. DEFINITIONS SECTION 2.1. Definitions. Any capitalized term used herein and not otherwise defined shall have the meaning ascribed to such term in this Article II. For purposes of this Agreement, the following terms shall have the following meanings: "Additional Capital Contribution" has the meaning specified in Section 4.3(b)(i). "Additional Partner" means any Limited Partner or General Partner admitted to the Partnership pursuant to Section 4.4(b). "Additional Units" means any Units, or any securities convertible or exchangeable into, or exercisable for, Units, issued by the Partnership after the Effective Date, including, without limitation, Units issued to existing Partners pursuant to Sections 4.1(b) and (c), 4.2, 4.3, 4.4(a) and 4.9, and those issued to Additional Partners pursuant to Sections 4.1(b) and (c), 4.2 and 4.4(a). "Adjusted Income" for a period means any positive amount computed as the sum of Net Income or Net Loss (computed before deduction for allocations pursuant to Section 5.1(a)) plus the amount of depreciation and amortization taken into account in computing Net Income or Net Loss. "Affiliate" means any Person who directly or indirectly controls, is controlled by, or is under common control with the Person in question, provided that the Partnership and any Person in which it directly or indirectly owns any interest shall in no event constitute an Affiliate of any Partner for purposes of this Agreement. As used in this definition of "Affiliate," the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. The terms "controlled" and "common control" shall have correlative meanings. "Agreement" means this Amended and Restated Agreement of Limited Partnership of CyberStar, L.P., as the same may be modified, supplemented, or amended in accordance with the terms hereof. "Approval of the Founding Partners" means the written consent of all of the Founding Partners, provided that such consent shall not be required of any Founding Partner that is a Delinquent Partner. "Book Up Gain" and "Book Up Loss" have the meanings specified in Section 8.5(d). 10 "Book Value" has the meaning determined under Section 8.5. "Business Day" means Monday through Friday of each week, except that a legal holiday recognized as such by the governments of the United States or France shall not be regarded as a Business Day. "Business Plan" means the business plan and budget prepared annually by the General Partner pursuant to Section 4.11. "Capital Account" means each capital account maintained pursuant to Section 4.5. "Capital Contribution" means any cash or property that a Partner contributes to the Partnership pursuant to Sections 4.1, 4.2, 4.3, 4.4, 4.9 or 4.10. "Certificate of Limited Partnership" means the Certificate of Limited Partnership of CyberStar, L.P. filed on May 29, 1997 with the Secretary of State of Delaware pursuant to the Delaware Act, as it may be amended from time to time. "Code" means the U.S. Internal Revenue Code of 1986, as amended. "Communications Act" means the U.S. Communications Act of 1934, as amended. "Confidential Information" has the meaning specified in Section 15.13. "Consent of the Partners" means, in the case of actions specified in Sections 4.11(d)(i) and 6.2(a), the approval of Partners holding 65% of the Units outstanding and, as to any other action or proposed action by the Partnership, the approval of Partners holding a majority of the Units outstanding; provided, however, that (i) to the extent that any Partner and its Affiliates (other than a Founding Partner, Affiliates of a Founding Partner or a Partner formed solely for the purpose of consummating the Initial Public Offering) hold, in the aggregate, more than 20% of the outstanding Units, such excess Units shall not be deemed to be outstanding for purposes of determining whether the Consent of the Partners has been obtained and (ii) the Units held by a Delinquent Partner shall not be deemed to be outstanding for purposes of determining whether the Consent of the Partners has been obtained. Such approvals may be given in writing or through votes cast at a meeting of the Partners held in accordance with Section 6.3(d). The determination of the number of Units held by each Partner shall be made as of the record date specified in the notice delivered by the General Partner to seek such approval (or, in the case of actions decided at a Partner's Meeting, in the notice delivered by the Partnership to each of the Partners to call such meeting), provided that such date shall be not less than ten (10) Business 11 Days and not more than sixty (60) Business Days prior to the date of such notice. "Cost" shall mean all direct costs customarily charged directly to projects plus reasonable and allocable indirect costs (e.g., overhead, R&D and G&A) charged consistently with past practices and customary cost accounting principles. "CyberStar Service" means the transmission and/or reception of data and other signals through the Project satellite constellation. "Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. ss. 17-101, et seq., as it may be amended from time to time, and any successor to such Act. "Delinquent Partner" means any Partner that: (i) has failed to make a Capital Contribution required by Section 4.1 or 4.2; (ii) has failed to make a Capital Contribution specified in a Sale Notice after delivering written notice of its election to accept the offer contained in such Sale Notice, pursuant to Section 4.9; (iii) has failed to make a loan pursuant to a Participation Rights Notice after delivering written notice of its election to accept the offer contained in such Participation Rights Notice, pursuant to Section 6.12; or (iv) is otherwise in uncured, material default of its obligations under this Agreement, including, but not limited to, those contained in Section 6.4, Section 6.9, Article X and Section 15.13. "Effective Date" has the meaning specified in Section 1.8. "Eligible Phase I Partner" means an Unaffiliated Phase I Cash Partner that: (i) has participated, on a pro rata basis and as set forth in Section 4.3, in all Funded Contribution Requests and (ii) is not a Delinquent Partner. "FCC" has the meaning specified in the recitals. "FCC License" has the meaning specified in the recitals. "Fiscal Year" has the meaning specified in Section 8.2. "Founding Partners" mean Loral Broadband Holdings, L.P. and Audelec. "Funded Contribution Request" means a Contribution Request in which both the General Partner (or a GP Affiliate) and one or more Unaffiliated Phase I Cash Partners have participated or which is substantially similar to the terms and conditions on which a financially responsible third party (other than the General Partner or a GP Affiliate) has made, or has entered into a binding commitment to make, a Capital Contribution in exchange for a Unit or Units. 12 "GAAP" means U.S. generally accepted accounting principles as in effect from time to time. "General Partner" means Loral CyberStar, L.L.C. or any additional or successor Person admitted as a general partner pursuant to the terms of this Agreement, but any Person who ceases to be a general partner of the Partnership shall not be a General Partner. "GP Affiliate" shall mean any Affiliate of the General Partner. "Initial Public Offering" shall mean the first underwritten sale of equity securities issued directly by the Partnership, a successor entity or a Partner formed for such purpose (the net proceeds of which are contributed to the Partnership), to the public pursuant to a Registration Statement, provided that (i) such sale is not solely effected to implement an employee benefit plan or a transaction to which Rule 145, as promulgated under the Securities Act, is applicable, and (ii) the sum of the gross proceeds raised from such sale exceeds U.S. $150,000,000.00. "Investor Documents" has the meaning specified in Section 3.2. "Investment Notice" has the meaning specified in Section 6.9. "Involuntary Transfer" means any transfer, proceeding or action (other than to an Affiliate) by or in which the Partner shall be deprived or divested of any right, title or interest in or to any Units, including, without limitation, any seizure under levy of attachment or execution, any foreclosure upon a pledge of such Units, any transfer in connection with bankruptcy (whether pursuant to the filing of a voluntary or an involuntary petition under Title II of the United States Code or any modifications or revisions thereto) or other court proceeding to a debtor in possession, trustee in bankruptcy or receipt or other officer or agency, or any transfer to a state or to a public officer or agency pursuant to any statute pertaining to escheat or abandoned property. "Limited Partner" means each of the limited partners identified as such on Schedule A as attached hereto on the date hereof, any Additional Limited Partner admitted as such pursuant to Section 4.4, or any successor limited partner admitted as such pursuant to the terms of this Agreement; provided, however, that any Person who ceases to be a limited partner of the Partnership shall not be a Limited Partner. Except as otherwise explicitly provided in this Agreement: (i) the Limited Partners shall constitute a single class or group of limited partners for all purposes of the Delaware Act, and (ii) whenever a vote of the Limited Partners is required by either the Delaware Act or the 13 terms of this Agreement, the Limited Partners shall vote as a single class or group. "Liquidator" has the meaning specified in Section 13.2. "Loral" has the meaning specified in Section 4.1. "Loral Broadband" has the meaning specified in the recitals. "Loral Space" has the meaning specified in the recitals. "Net Income" or "Net Loss" shall mean, with respect to any Fiscal Year, the taxable income or loss of the Partnership as determined for federal income tax purposes, with the following adjustments: (1) such taxable income shall be increased or such loss shall be reduced by the amount, if any, of tax-exempt income received or accrued by the Partnership; (2) such taxable income shall be reduced or such loss shall be increased by the amount, if any, of all expenditures of the Partnership described in section 705(a)(2)(B) of the Code, including expenditures treated as described therein under Reg. ss. 1.704-1(b)(2)(iv)(i); (3) such taxable income shall be increased or such loss reduced by the excess, if any, of the fair market value of distributed property over its Book Value and such taxable income shall be reduced or such loss shall be increased by the excess, if any, of the Book Value of distributed property over its fair market value; (4) the items of income, gain, loss and deduction allocated under Section 5.2 shall not be taken into account; (5) allocations of Adjusted Income under Section 5.1(a) shall be deducted; and (6) income, gain, loss, depreciation or amortization with respect to Partnership property shall be determined with reference to the Book Value of such property. "Nonperformance" means continuing gross negligence or willful misconduct by the General Partner in performing its obligations under this Agreement which results in a material adverse effect upon the assets or business of the Partnership that is not otherwise cured by the General Partner after written notice thereof. "Parent" means, with respect to any Person, such other Person who owns, directly or indirectly, at least a majority (by number of votes) of the outstanding stock of any class or classes (or equivalent interests) of such Person, if as direct or indirect holder of the stock of such class or classes (or equivalent interests) it (a) is ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or Persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency, or (b) is at the time entitled, as such holder, to vote for the election of the majority of the directors (or Persons performing similar functions) of such Person, whether or not the right so to vote exists by reason of the happening of a contingency. 14 "Parent's Guarantee" shall mean a document, executed in form and substance to the satisfaction of the General Partner (or, in the case of a Parent's Guarantee delivered by the General Partner, to the satisfaction of each of the Founding Partners), evidencing that a Parent of a Partner, or of a Person succeeding to a Partner or of a Person subscribing to Additional Units: (i) will guarantee the obligations of such Partner or Person under this Agreement and under any Investor Documents and (ii) will itself (including its Subsidiaries) be bound by the provisions of Sections 6.9 and 15.13 of this Agreement. "Participation Bonus" has the meaning specified in Section 4.3(a). "Participation Rights Closing" has the meaning set forth in Section 6.12(b). "Participation Rights Notice" has the meaning set forth in Section 6.12(b). "Partner" means any General Partner or Limited Partner. "Partners' Committee" has the meaning specified in Section 6.3. "Partnership" means CyberStar, L.P., a Delaware limited partnership formed on May 29, 1997 and continued pursuant to this Agreement. "Passive Investment" means an investment made with an investment related purpose, and not with the purpose or the effect of changing or influencing the policies, operations, management, or control of the entity into which the investment is made (or of such entity's Affiliates). "Percentage Interest" means, for each Partner, the ratio, expressed as a percentage, that the number of Units held by such Partner bears to the total number of Units outstanding, as such percentages are set forth on Schedule A attached hereto, as it is amended from time to time. "Person" means an individual or a corporation, partnership, limited liability company, trust, unincorporated organization, association or other entity. "Phase I" means the period of time from the Effective Date through and including March 31, 1998. "Phase I Budget" means the budget for the Partnership for Phase I, as previously provided to each of the Unaffiliated Phase I Partners, and as it may be amended from time to time. "Phase I Closing" means the closing of the sale of the Units offered during the Phase I Financing, including, without 15 limitation, the initial closing which shall occur on June 30, 1997 and each subsequent closing which shall occur on subsequent dates chosen by the General Partner. "Phase I Financing" means the Partnership's sale of up to 1,760 Units during Phase I, in order to raise an aggregate of up to US $185,000,000.00 in Capital Contributions, made in both the form of cash and in kind. "Phase I Partner" means any Person who purchases, in cash or in kind, Units at any Phase I Closing, in accordance with Schedule A attached hereto and made a part hereof at any Phase I Closing. "Preemptive Rights Closing" has the meaning specified in Section 4.9(c). "Preferred Return" means, cumulatively, the sum of (x) 2.5% of the Partnership's gross operating revenues for each quarter plus (y) 1% of that portion of the Partnership's gross operating revenues for each calendar quarter that, when aggregated with gross operating revenues earned by the Partnership earlier in the Fiscal Year, exceeds $500,000,000 plus (z) interest compounded monthly at the rate publicly announced by Citibank N.A. from time to time in New York City as its prime rate, on the amount by which, at the end of each quarter, the cumulative Preferred Return exceeds cumulative distributions under Section 5.4(a). "Project" has the meaning specified in the recitals. "Quarterly Meeting" has the meaning specified in Section 6.3(b). "Registration Statement" means any registration statement filed in compliance with the Securities Act and declared effective by the U.S. Securities and Exchange Commission. "Sale Notice" has the meaning specified in Section 4.9(b). "Section 704(c) Property" has the meaning specified in Section 5.3. "Securities Act" means the U.S. Securities Act of 1933, as amended. "SkyBridge" has the meaning specified in Section 6.8. "Strategic Investor" means any Person (other than the General Partner or a GP Affiliate) whom the General Partner believes, because of the nature of such Person's business, the Partnership has a strategic interest in allowing to acquire an interest in the Partnership. 16 "Subject Partner" means, (i) for the purposes of Section 4.9, each Partner that is not a Delinquent Partner at the time that a Sale Notice is issued pursuant to Section 4.9(b) or at any time prior to the Preemptive Rights Closing following such issuance and (ii) for the purposes of Section 6.12, each Partner that is not a Delinquent Partner at the time that a Participation Rights Notice is issued pursuant to Section 6.12(b) or at any time prior to the Participation Rights Closing following such issuance. "Subsidiary" of any Person shall mean any other Person at least a majority (by number of votes) of the stock of any class or classes (or equivalent interests) of which is at the time owned by such Person or by one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person, if the holders of the stock of such class or classes (or equivalent interests) (a) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or Persons performing similar functions) of such business entity, even the right so to vote has been suspended by the happening of such a contingency, or (b) are at the time entitled, as such holders, to vote for the election of the majority of the directors (or persons performing similar functions) of such business entity, whether or not the right so to vote exists by reason of the happening of a contingency. "Treasury Regulations" means the United States income tax regulations promulgated under the Code by the United States Department of Treasury and codified at Title 26 of the Code of Federal Regulations. References herein to temporary or final regulations also refer to corresponding provisions of successor and superseding regulations. "Unaffiliated Phase I Cash Partner" means an Unaffiliated Phase I Partner that makes its contribution in cash at any Phase I Closing, in connection with the Phase I Financing in accordance with the Capital Contribution amounts set forth on Schedule A attached hereto and made a part hereof at any Phase I Closing. "Unaffiliated Phase I Partner" means any Phase I Partner other than the General Partner or a GP Affiliate. "Ultimate Parent" means, with respect to any Partner, the Parent of such Partner that is not a Subsidiary of another Person; provided, however, that the Ultimate Parent of a state-owned entity shall be that Parent that is not a Subsidiary of any Person other than a government or a governmental agency. "Unit" means an equity interest in the Partnership of a General Partner, a Limited Partner, or both, as the context may require. Units may be issued on a fractional basis. 17 ARTICLE III. REPRESENTATIONS AND WARRANTIES SECTION 3.1. Representations and Warranties of Each Partner. Each of the Partners represents and warrants to the other Partners as follows: (a) Such Partner is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and has all requisite power and authority to own, lease and operate its assets, properties and business and to carry on its business as now conducted. (b) Such Partner has full power and authority to execute and deliver this Agreement and to perform fully its obligations hereunder. No other action on the part of such Partner is necessary to authorize the execution and delivery of this Agreement or the performance by such Partner of its obligations hereunder or the consummation of the transactions contemplated hereby. (c) This Agreement has been duly and validly executed and delivered by such Partner and constitutes the valid and legally binding obligation of such Partner in accordance with its terms. (d) The execution and delivery of this Agreement, the performance by such Partner of its obligations pursuant to the terms hereof and the consummation of the transactions contemplated hereby do not and shall not, with or without the giving of notice or lapse of time, or both: (i) violate or conflict with such Partner's charter, by-laws or other organizational documents; (ii) violate or conflict with any law by which such Partner, or any of its respective assets or properties are bound or affected; (iii) violate or conflict with any judgment, order, writ or decree of any court, arbitrator or administrative body applicable to such Partner, or by which the assets or property of such Partner are bound or affected; (iv) violate or conflict with or result in the breach of (or give rise to any right of termination, cancellation or acceleration under) any material contract to which such Partner is a party or by which any of its respective assets or properties is bound; or (v) result in the creation of any encumbrance or charge upon any assets of the Partner. (e) No permit, consent, approval or authorization of, or declaration to or filing with, any governmental authority or any other Person is required in connection with such Partner's execution and delivery of this Agreement or the performance by it of its obligations hereunder or the consummation of the transactions contemplated hereby. (f) The Partner is not a party to, or to its knowledge, is not threatened with, any litigation or judicial, administrative 18 or arbitration proceedings that in the aggregate are likely to have a material adverse effect on the transactions contemplated hereby. SECTION 3.2. Representations and Warranties of Each Limited Partner. In addition to any representations and warranties made in any subscription agreement or similar instrument executed in connection with its acquisition of its Units (the "Investor Documents") each of the Limited Partners represents and warrants to the Partnership, to the other Limited Partners and to the General Partner as follows: (a) Such Limited Partner is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D promulgated under the Securities Act. (b) Such Limited Partner is familiar with the existing or proposed business, financial condition, properties, operations, and prospects of the Partnership; it has asked such questions, and conducted such due diligence, concerning such matters and concerning its acquisition of Units as it has desired to ask and conduct, and all such questions have been answered to its full satisfaction; it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the Partnership, it understands that owning Units involves various risks, including: (1) the restrictions on transfers of Units, (ii) the lack of any public market for Units, (iii) the risk of owning its Units for an indefinite period of time, (iv) the risk of losing its entire investment in the Partnership, (v) risks inherent in the start-up of any business in a highly-regulated, high technology industry, (vi) the uncertainties and difficulties involved in obtaining the approximately $3.9 billion of financing needed for the development and implementation of the Project and to begin its operations, (vii) the potential for delay in development and implementation of the Project, including risks inherent in the construction and deployment of a complex satellite system, (viii) risks associated with the need to negotiate procurement contracts with suppliers on terms acceptable to the Partnership, (ix) complexity of technologies that have not been implemented in the past, (x) competition from other satellite systems that have been or may be announced, (xi) obsolescence, (xii) licensing and other regulatory risks and complexities, and (xiii) numerous other risks and uncertainties that are associated with a project of this scope and nature. Such Limited Partner is able to bear the economic risk of such investment; it is acquiring its Units for investment, solely for its own beneficial account and not with a view to or any present intention of directly or indirectly selling, transferring, offering to sell or transfer, participating in any distribution or otherwise transferring of all or a portion of its Units; and it acknowledges that the Units have not been registered under the Securities Act or any other applicable federal or state securities laws, and that the Partnership has no intention, and shall not have any obligation, 19 to register or to obtain an exemption from registration for the Units, or to take action so as to permit sales pursuant to the Securities Act (including Rules 144 and 144A thereunder). ARTICLE IV. CAPITAL CONTRIBUTIONS SECTION 4.1. Phase I Commitments of the General Partner and GP Affiliates. (a) As of the Effective Date, the General Partner and/or GP Affiliates (collectively, "Loral") will receive: (i) 280 Units in consideration for Loral's efforts to initiate, conceptualize, develop, and promote the Project; and (ii) 160 Units in consideration for Loral Space's agreement to utilize the FCC License for the exclusive benefit of the Partnership. An executed copy of such agreement is attached as Schedule E hereto. (b) Loral will receive 520 Units in return for cash Capital Contributions made pursuant to the installments specified in Schedule C attached hereto. (c) Any Units issued to Loral pursuant to subsections 4.1 (a) or (b) may be issued as general partner or limited partner Units, and in such proportion and to such entities as may be determined by the General Partner, in its sole discretion. (d) Upon the issuance of Units to Loral pursuant to subsections 4.1 (b) or (c), the General Partner shall: (i) pursuant to Section 4.4 (b), if a GP Affiliate receiving any such Units is not yet a Partner, effectuate the admission of such GP Affiliate as an Additional Partner and (ii) pursuant to Section 4.4 (c), amend Schedule A and, if such GP Affiliate is not yet a Partner, Schedule B. SECTION 4.2. Phase I Commitments of the Unaffiliated Phase I Partners. (a) Each Unaffiliated Phase I Partner shall make a Capital Contribution, and shall receive limited partner Units, both in accordance with the Investor Documents executed by such Partner and accepted by the Partnership. Upon each issuance of Units pursuant to this Section 4.2, the General Partner shall: (i) pursuant to Section 4.4(b), if the Person receiving such Units is not yet a Partner, effectuate the admission of such Person as an Additional Partner and (ii) pursuant to Section 4.4(c), amend Schedule A and, if such Person is not yet a Partner, Schedule B. 20 SECTION 4.3. Participation Bonus; Non Participation Consequences. (a) Upon the earlier of (i) that point in time immediately prior to the closing of the Initial Public Offering or (ii) the first Business Day that occurs six (6) months following the date on which the Project begins offering CyberStar Service to customers on a commercial basis, the Partnership shall issue to each of the Eligible Phase I Partners that number of Units (or, if the Partnership has converted to corporate form, that number of shares of capital stock of such corporation having the same relative rights and preferences with respect to distributions as such number of Units) (the "Participation Bonus") equal to the product of 75 Units multiplied by a fraction, the numerator of which shall be the number of Units purchased by such Eligible Phase I Partner during the Phase I Financing, as set forth in Schedule A attached hereto, and the denominator of which shall be the number of Units purchased by all Eligible Phase I Partners during the Phase I Financing, as derived from Schedule A attached hereto. (b) Following the final Phase I Closing, the General Partner, in its sole discretion, may from time to time, request additional Capital Contributions from each of the Unaffiliated Phase I Cash Partners by delivering to such Partners a written notice (the "Contribution Request") specifying: (i) the amount of the additional Capital Contribution being requested of such Unaffiliated Phase I Cash Partner (the "Additional Capital Contribution") and of all Unaffiliated Phase I Cash Partners (the "Aggregate Additional Capital Contribution") and the price per Unit being offered to the Unaffiliated Phase I Cash Partners. The Additional Capital Contribution requested of any Unaffiliated Phase I Cash Partner shall be equal to the product of the Aggregate Additional Capital Contribution multiplied by a fraction, the numerator of which shall be the number of Units purchased by such Unaffiliated Phase I Cash Partner during the Phase I Financing, as set forth in Schedule A attached hereto, and the denominator of which shall be 800 Units; (ii) the manner in which, and the expected date on which, such Aggregate Additional Capital Contribution is to be applied; (iii) the date (the "Contribution Date") on which such Additional Capital Contribution is due; and (iv) The bank account of the Partnership to which such Additional Capital Contribution shall be paid. The Contribution Request must be delivered no less than fifteen (15) Business Days before the Contribution Date, in the case of 21 those Aggregate Additional Capital Contributions that are included in a Business Plan previously delivered to the Partners pursuant to Section 4.11, and no less than sixty (60) Business Days before the Contribution Date, in the case of all other Aggregate Additional Capital Contributions. (c) No Partner shall be obligated to make any Additional Capital Contribution. In order to be an Eligible Phase I Partner and avoid the consequences of Section 4.3(d), however, an Unaffiliated Phase I Cash Partner must make all Additional Capital Contributions requested by Funded Contribution Requests delivered pursuant to Section 4.3(b) above. All such Additional Capital Contributions shall be paid to the Partnership by wire transfer of immediately available funds in U.S. dollars by 3:00 P.M. (New York City time) on the later of: (i) the Contribution Date or (ii) that date that occurs ten (10) Business Days following each Unaffiliated Phase I Cash Partner's receipt of written notice from the General Partner that the Contribution Request is a Funded Contribution Request. (d) If any Partner fails to make any Additional Capital Contribution requested by a Funded Contribution Request delivered in accordance with Section 4.3(b) that sets forth a price per Unit higher than the average price per Unit paid by such Partner, then upon the closing of such Funded Contribution Request, the number of Units owned by such Partner shall be reduced to the number of Units such Partner would have owned had all of its prior purchases of Units been effected at the price per Unit paid in connection with such Funded Contribution Request, provided that no such reduction will be made if the capital contributions of investors who were not theretofore Partners or Affiliates of Partners account for less than 60% of the total amount paid (by both existing and new Partners) in connection with such Funded Contribution Request and such Partner made no less than 50% of the Additional Capital Contribution so requested. Any such reduction will have prospective effect only, and will not affect the Partner's Capital Account until future allocations of income, gain, loss or deduction are made with respect to the adjusted number of Units. (e) Nothing in this Section 4.3 shall prevent the General Partner from seeking Capital Contributions from any of the Partners or any of their Affiliates pursuant to Sections 4.4, 4.9 and 4.10. An Unaffiliated Phase I Cash Partner shall not become a general partner of the Partnership, or otherwise hold a general Unit in the Partnership, solely as a result of such Partner's purchase of limited partner Units (whether pursuant to a Contribution Request or otherwise) or of such Partner's receipt of its Participation Bonus. SECTION 4.4. Additional Partners. (a) Subject to Sections 4.9, and 6.2, the Partnership is hereby authorized (through a private placement, in connection with the Initial Public Offering or subsequent public offerings or otherwise) to offer Additional 22 Units and to admit as Partners those Persons who subscribe to purchase Additional Units and who are acceptable to the General Partner in its sole discretion. (b) At each closing following the Effective Date at which Additional Units are issued, the Capital Contributions of those Persons then being admitted as Additional Partners shall be transferred to the Partnership, which amounts shall be credited to their respective Capital Accounts pursuant to Section 4.5 hereof. A Person shall be admitted as an Additional Partner only upon the Partnership's acceptance of payment of the appropriate Capital Contribution from the Person subscribing to Additional Units and upon furnishing by each Person to the General Partner of evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including the power of attorney granted in Section 1.5, and such other documents or instruments (including, without limitation, Investor Documents and Parent's Guarantees) as may be required in the sole discretion of the General Partner to effect such Person's admission as an Additional Partner. (c) Upon the admission of a Person as an Additional Partner, (i) the schedule of Partners as set forth on Schedule A attached hereto shall be amended to reflect such Person's name, state or country of formation, whether such Person is being admitted as a general partner or a limited partner, such Person's Capital Contribution, the amount to be reflected in such Person's Capital Account following such subscription, the percentage of all capital contributed to the Partnership that has been contributed by such Person, and the Units and the Percentage Interest held by such Person following such subscription and (ii) the schedule of addresses as set forth on Schedule B attached hereto shall be amended to reflect the addresses of such Person for the purposes of Section 15.1 hereof. Upon the issuance of Additional Units to an existing Partner, the schedule of Partners as set forth on Schedule A hereto shall be amended to reflect whether such Additional Units are general partner interests or limited partner interests, the total amount of capital contributed by such Partner to the Partnership as of such date, such Partner's Capital Account, the percentage of capital contributed to the Partnership that has been contributed by such Partner, and the Units and Percentage Interest held by such Partner following such issuance. SECTION 4.5. Capital Accounts. (a) The Partnership shall maintain a separate account for each Partner as part of its books and records. A Partner's "Capital Account" shall be credited with (i) the amount of cash and the Book Value of other property contributed to the Partnership by the Partner, (ii) allocations of Adjusted Income, Net Income and Book Up Gain to the Partner, (iii) allocations of gain and income to the Partner under Section 5.2 and (iv) the amount of any Partnership liabilities assumed by such Partner or 23 secured, in whole or in part, by any Partnership assets that are distributed to such Partner, and shall be debited with (i) allocations of Net Loss and Book Up Loss to the Partner, (ii) allocations of deduction and loss to the Partner under Section 5.2, (iii) the amount of cash distributions and the fair market value of any property distributed to the Partner and (iv) the amount of any Partner liabilities assumed by the Partnership or secured, in whole or in part, by any assets contributed by such Partner to the Partnership. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations under Section 704(b) of the Code and, to the extent not inconsistent with the provisions of this Agreement, shall be interpreted and applied in a manner consistent with such Regulations. Schedule A attached hereto sets forth the respective Capital Accounts of the Partners as of the Effective Date. (b) A transferee of a Unit will succeed to the portion of the Capital Account of the Partner transferring such Unit which relates to the Unit transferred. SECTION 4.6. Interest. No interest shall be paid by the Partnership on Capital Contributions, on balances in Partners' Capital Accounts or on any other funds distributed or distributable under this Agreement. SECTION 4.7. No Withdrawal. No Partner shall have the right to the withdrawal or reduction of any part of its Capital Contribution. It is the intent of the Partners that no distribution to the Limited Partners of cash pursuant to Section 5.4 shall be deemed a return or withdrawal of capital, even if such return or distribution represents, for federal income tax purposes or otherwise (in whole or in part), a distribution of depreciation or any other non-cash item accounted for as a loss or deduction from or offset to the Partnership's income, and that the Limited Partners shall not be obligated to pay any such amount to, or for the account of, the Partnership or any creditor of the Partnership; provided, however, that if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Limited Partner is obligated to make any such payment, such obligation shall be the obligation of such Limited Partner and not of the General Partner. SECTION 4.8. Loans. Loans by a Partner to the Partnership shall not be considered Capital Contributions. 24 SECTION 4.9. Preemptive Rights. (a) The Partnership hereby grants to each of the Partners a preemptive right, in accordance with the procedures set forth in this Section 4.9, with respect to the issuance and sale by the Partnership of Additional Units ("Preemptive Securities") other than those: (i) issued or sold in connection with the Phase I Financing; (ii) issued or sold to a Strategic Investor; (iii) issued or sold pursuant to, in connection with, or following the Initial Public Offering; (iv) issued or sold in connection with any merger, consolidation, acquisition or other business combination involving the Partnership or any subsidiary of the Partnership; or (v) issued or sold under any employee benefit or similar plan or arrangement. (b) At least thirty (30) days prior to the sale of the Preemptive Securities, the Partnership shall deliver a written notice (a "Sale Notice") to each Subject Partner setting forth: (i) the number of Preemptive Securities to be sold; (ii) the price for which and other terms and conditions upon which such Preemptive Securities are to be sold; and (iii) all written information distributed to offerees of such Preemptive Securities, together with an irrevocable offer from the Partnership to issue and sell to each Subject Partner, at the same price per Preemptive Security and on the same other terms and conditions set forth in the Sale Notice, the number of Preemptive Securities equal to the product of the total number of Preemptive Securities set forth in the Sale Notice multiplied by a fraction, the numerator of which is the number of Units held by such Subject Partner at the time the Sale Notice is issued, and the denominator of which is the number of Units held by all Subject Partners at such time. (c) The Subject Partners shall have absolute discretion to accept or decline such offers. If a Subject Partner wishes to accept any of the offers made pursuant to Section 4.9(b), it shall give the Partnership irrevocable written notice (which notice must specify acceptance of all Preemptive Securities offered to such Subject Partner in the Sale Notice) of its election to accept such offer within fifteen (15) days of the 25 date (the "Sale Notice Delivery Date") on which the Partnership delivers the applicable Sale Notice. The closing thereunder (a "Preemptive Rights Closing") shall occur five (5) days thereafter (or, if such day is not a Business Day, on the next Business Day thereafter) at the offices of the Partnership or at such other time and place as the parties shall agree. (d) If any portion (the "Remaining Portion") of the total number of Preemptive Securities set forth in the Sale Notice is not subscribed to by the Subject Partners within fifteen (15) days of the Sale Notice Delivery Date, the Partnership shall have the right, until the one hundred twenty-first (121st) day following the Sale Notice Delivery Date, to sell Preemptive Securities to any Person(s) at a price per Preemptive Security not less than 95% of the price specified in the Sale Notice, and on terms and conditions that are otherwise substantially similar to the terms and conditions set forth in the Sale Notice; provided, however, that if, as a condition of such proposed sale, such Person requires the Partnership to sell a number of Preemptive Securities greater than the number of Preemptive Securities included in the Remaining Portion, then such sale shall be subject to the requirements of Section 4.9(e). (e) If, as a condition of a proposed sale of Preemptive Securities under Section 4.9(d), the Partnership is being required to sell a number of Securities greater than the number of Preemptive Securities included in the Remaining Portion, the Partnership shall provide those Subject Partners that have purchased the Preemptive Securities set forth in the applicable Sale Notice (the "Exercising Partners") with a notice (the "Subsequent Sale Notice") setting forth: (i) the number of Preemptive Securities that the Partnership plans to sell pursuant to Section 4.9(d); and (ii) the price for which and other terms and conditions upon which such Preemptive Securities are to be sold. Each of the Exercising Partners shall have the following option (but not the obligation) to purchase Preemptive Securities at the price and on terms and conditions substantially similar to those specified in the Sale Notice: upon the Partnership's delivery of the Subsequent Notice, the Exercising Partner shall have ten (10) days from the date (the "Subsequent Notice Date") upon which the Partnership delivers the Subsequent Sale Notice to deliver to the Partnership an irrevocable written notice (the "Subsequent Sale Election Notice") committing to purchase a specified number of Preemptive Securities that does not exceed the number of Preemptive Securities included in the Remaining Portion. If the total number of Preemptive Securities subscribed to by Exercising Partners through the delivery to the Partnership of Subsequent Sale Election Notices within ten (10) days of the Subsequent Sale Notice Date is greater than or equal to the number of Preemptive 26 Securities included in the Remaining Portion, then the Partnership shall sell the Preemptive Securities subscribed to in such Subsequent Sale Election Notices and the Partnership shall not complete the sale described in the Subsequent Sale Notice. The closing of such sales pursuant to Subsequent Sale Election Notices (also, a "Preemptive Rights Closing") shall occur on the fifteenth (15th) day after the Subsequent Sale Notice Date (or, if such date is not a Business Day, on the next Business Day thereafter) at the offices of the Partnership or at such other time and place as the parties shall agree and the Partnership shall not complete the sale described in the Subsequent Sale Notice. If the total number of Preemptive Securities subscribed to by Exercising Partners through the delivery to the Partnership of Subsequent Sale Election Notices within ten (10) days of the Subsequent Sale Notice Date is less than the number of Preemptive Securities included in the Remaining Portion, then none of Exercising Partners shall have the option to purchase Preemptive Securities under this Section 4.9(e) and the Partnership shall have the right to complete the sale described in the Subsequent Sale Notice. (f) In connection with any proposed or contemplated sale of Additional Units, upon the request of the Partnership, each Subject Partner shall indicate to the Partnership its good faith intentions (which indications shall not be binding) with respect to whether or not it will exercise the preemptive rights described herein. (g) Notwithstanding anything to the contrary in this Agreement, no Limited Partner shall become a general partner of the Partnership or otherwise hold general partner Units in the Partnership as a result of such Limited Partner's purchase of any Preemptive Securities. SECTION 4.10. Sale of Units and Partnership Securities. (a) Subject to the provisions of Sections 4.9 and 6.2, the Partnership may, upon the determination of the General Partner, issue or sell, on such terms as the General Partner deems (in its sole and complete discretion) appropriate and in the best interests of the Partnership (including by way of a private placement, the Initial Public Offering or otherwise), Additional Units to the Partners and to Additional Partners from time to time and to admit such Additional Partners to the Partnership as Additional Partners pursuant to Section 4.4, without being required to obtain the approval of the Limited Partners or any other Persons who may acquire an interest in the Units; provided that any sale of Units that is effectuated prior to the Initial Public Offering at a per Unit price below that paid by the Founding Partners during Phase I (or on terms and conditions, including side agreements, contemporaneous commitments and the like, that, in the aggregate, are materially more favorable to such new investors than those applicable to the Founding 27 Partners' investments during Phase I) shall require the Approval of the Founding Partners. (b) The Partnership may, upon the determination of the General Partner, issue or sell any other type of security of the Partnership from time to time to Partners or other Persons on terms and conditions established in the sole and complete discretion of the General Partner, including, without limitation, unsecured and secured debt obligations of the Partnership without being required to obtain the approval of the Limited Partners, or any other Persons who may acquire an interest in any Unit or any combination of any of the foregoing. (c) There shall be no limit on the number of Units or other securities that may be issued and the General Partner shall have the sole and complete discretion in determining the consideration and terms and conditions with respect to any future issuance of Units or other securities. SECTION 4.11. Business Plan. (a) The General Partner shall prepare (or cause to be prepared), on an annual basis, a Business Plan (the "Business Plan") in accordance with this Section 4.11. (b) A proposed version of the Business Plan shall be delivered to the Partners along with the prior written notice to be delivered pursuant to Section 6.3 in connection with the final Quarterly Meeting of each Fiscal Year, beginning with the final Quarterly Meeting to be held in 1997. Such proposed Business Plan shall contain the following elements: (i) a budget for the following Fiscal Year (the "Annual Budget") containing: (A) schedules of estimated capital expenditures and other costs for each quarter; (B) a projected income and expense statement for each quarter; and (C) a projected year-end balance sheet for each quarter; and (ii) a forecast for the immediately succeeding five Fiscal Years (the "Five-Year Forecast") setting forth: (A) the information contained in subsections 4.11(b)(i)(A-C) above, for each of the five Fiscal Years included therein, on an annual basis; and (B) a projected schedule of sources and uses of funds for each of the five Fiscal Years included therein. 28 (c) Following consultation with the Partners' Committee, the General Partner shall adopt the Business Plan prior to the beginning of the Fiscal Year covered by the Annual Budget contained in such Business Plan. A copy of such Business Plan shall be delivered to each of the Partners prior to the beginning of such Fiscal Year. (d) The Business Plan may be amended from time to time by the General Partner in its sole discretion following consultation with the Partners' Committee; provided that: (i) if such amendment would materially change the purpose of the Partnership from that set forth in Section 1.4, the Consent of the Partners shall be required; or (ii) if such amendment would increase the aggregate amount of the total capital expenditures and other costs contained in the Phase I Budget by more than 15%, the Approval of the Founding Partners shall be required. ARTICLE V. ALLOCATIONS AND DISTRIBUTIONS SECTION 5.1. Allocations Generally. (a) As of the end of each quarter, Loral Broadband will be allocated Adjusted Income until such Adjusted Income has been allocated to Loral Broadband on a cumulative basis for the current quarter and all prior quarters in an amount equal to its Preferred Return. (b) Except as provided in Section 5.1(c), Net Income and Net Loss shall be allocated to the Capital Accounts of the Partners as follows: (i) Net Income of the Partnership for each Fiscal Year shall be allocated to the Partners (other than Delinquent Partners) in proportion to their respective Percentage Interests. (ii) Net Loss of the Partnership for each Fiscal Year shall be allocated to the Partners in proportion to their respective Percentage Interests. (c) For all periods following adoption of a plan of liquidation, after first making any allocations pursuant to Section 8.5(d), Net Income and Net Loss shall be allocated to the Capital Accounts of the Partners as follows: (i) Net Income of the Partnership for each Fiscal Year shall be allocated: 29 (A) first, to the Partners (other than Delinquent Partners) so as to cause, as nearly as practicable, the Capital Account balances of the Partners to be in proportion to their respective Percentage Interests; and (B) thereafter, to the Partners (other than the Delinquent Partners) in proportion to their respective Percentage Interests. (ii) Net Loss of the Partnership for each Fiscal Year shall be allocated to the Partners as follows: (A) first, to the Partners so as to cause, as nearly as practicable, the Capital Account balances of the Partners to be in proportion to their respective Percentage Interests; and (B) thereafter, to the Partners in proportion to their respective Percentage Interests. SECTION 5.2. Regulatory Allocations. Section 704 of the Code and the Treasury Regulations promulgated thereunder (including but not limited to the provisions of the Treasury Regulations addressing qualified income offset provisions, minimum gain chargeback requirements and allocations of deductions attributable to nonrecourse debt and partner nonrecourse debt) are hereby incorporated by reference. If, as a result of the provisions of section 704 of the Code and the Treasury Regulations, items of income, gain, loss or deduction are allocated to the Partners in a manner that is inconsistent with the manner in which the Partners intend to divide Partnership distributions as reflected in this Agreement, items of future income and loss shall be allocated among the Partners in accordance with the Treasury Regulations so as to prevent such allocations from distorting the manner in which Partner distributions will be divided among the Partners pursuant to this Agreement. SECTION 5.3. Other Allocations When Book Value Differs from Tax Basis. When the Book Value of a Partnership asset is different from its adjusted tax basis for income tax purposes, then, solely for federal, state and local income tax purposes, and not for purposes of computing Capital Accounts, income, gain, loss, deduction and credit with respect to such assets ("Section 704(c) Property") shall be allocated among the Partners to take this difference into account in accordance with the principles of Code Section 704(c), using the traditional method set forth in Treasury Regulation Section 1.704-3(b)(1). In addition, under the principles of Treasury Regulation Section 1.704-3(b)(2) Example 2(ii)(C), in order to prevent the shifting of tax consequences with respect to built-in gain or built-in loss with respect to Partnership property that has an adjusted Book Value different from its adjusted federal income tax basis, 30 taxable gain on the sale of that property shall be allocated among the Partners to offset the ceiling rule limitation of Treasury Regulation Section 1.704-3(b)(1). SECTION 5.4. Distributions. (a) On or before the last day of each calendar quarter the Partnership shall make distributions to Loral Broadband until the cumulative sum of such distributions is equal to the cumulative allocations of Adjusted Income to Loral Broadband under Section 5.1(a). If the cumulative allocations of Adjusted Income have not yet been finally determined by the end of the calendar quarter, distributions under this Section 5.4(a) shall be made on the basis of estimates and, when the cumulative allocations are finally determined, any excess distribution shall be promptly returned and any under distribution shall be promptly distributed. (b) Thereafter, subject to Section 6.2(a)(i), any or all remaining amounts of undistributed Net Income may be distributed at the General Partner's sole discretion to each of the Partners in proportion to their respective Percentage Interests. (c) Each Partner authorizes the Partnership to withhold and pay over any withholding or other tax payable by the Partnership as a result of such Partner holding an interest in the Partnership. Such amounts, if withheld from distributions to a Partner, shall be treated as a distribution to the Partner and a payment of the withheld tax by such Partner to the appropriate taxing authorities. In the event that current distributions to any Partner are not sufficient to cover the withheld tax, the amount withheld in excess of the amount covered by distributions to such Partner shall be a loan to such Partner with respect to whom such withholding has been undertaken and such Partner hereby grants the Partnership a security interest in its entire interest in the Partnership at the time any such loan is made to it to secure the repayment of such loan. Such loans shall bear interest at the rate publicly announced by Citibank N.A. from time to time in New York City as its prime rate, shall be compounded monthly, and shall be payable on demand. The Partnership may apply future distributions to such Partner against amounts due under the loan. In the event that the Internal Revenue Service shall determine that the amount of taxes that should have been withheld with respect to a Partner is in excess of the amount withheld by the Partnership, that Partner shall indemnify the Partnership for the amount of any such shortfall with interest and penalties. 31 ARTICLE VI. MANAGEMENT AND OPERATION OF BUSINESS SECTION 6.1. Management. (a) Except as specifically provided to the contrary in this Agreement, the business and affairs of the Partnership shall be carried on and managed by the General Partner, who shall have full, exclusive and complete discretion and control with respect thereto. The General Partner shall have all powers necessary, convenient and appropriate to carry out the purposes and business of the Partnership and, except as otherwise provided by the Delaware Act or this Agreement, shall possess and enjoy all of the rights and powers and shall be subject to all restrictions of a general partner of a partnership without limited partners under the laws of the State of Delaware. (b) The General Partner shall, in good faith, use its best reasonable efforts to carry out the purposes of the Partnership through implementation of the Business Plan and shall devote to the administration and management of the business and affairs of the Partnership such time as the General Partner shall deem necessary or appropriate for the administration and management of such business and affairs. The General Partner may, subject to the provisions of Section 6.2, contract or otherwise deal with any Person, including GP Affiliates and their employees, to perform any acts or services for the Partnership as the General Partner shall approve. Any such delegee having access to confidential information shall be deemed to be bound by a confidential agreement containing substantially the same terms as Section 15.13. Without limitation on any power that may be conferred upon it hereunder or by law, and except as hereinafter stated and subject to the limitations explicitly set forth in Sections 6.1(a) and 6.2, the General Partner shall have the power, on behalf of the Partnership, to: (i) make and enter into such contracts and incur expenses and other liabilities on behalf of the Partnership, as the General Partner deems necessary or appropriate for the efficient conduct and operation of the Partnership's business; (ii) compromise, submit to arbitration, sue on or defend all claims in favor of or against the Partnership; commence or defend litigation that pertains to the Partnership or any Partnership assets, and arrange for the settlement of any pending or threatened litigation, by or against the Partnership, through compromise, arbitration or otherwise; (iii) make and revoke any election permitted the Partnership by any taxing authority; 32 (iv) do all acts the General Partner deems necessary or appropriate for the protection and preservation of the Partnership's assets; (v) make distributions and allocations to the Partners in accordance with Article V hereof; (vi) designate such officers of the Partnership and other Persons as authorized signatories with the authority to execute on behalf of the Partnership, any documents or instruments of any kind that the General Partner may deem appropriate or advisable to carry out the purposes of the Partnership taking into consideration the terms and conditions of such document or instrument; (vii) prepare, execute and file U.S., federal, state and local and foreign income tax returns and pay any taxes on behalf of the Partnership and the Partners; (viii) make all payments of the Partnership under the terms of this Agreement, including such payments, fees and reimbursements as the General Partner or any of the GP Affiliates may be entitled to receive under the terms of this Agreement; (ix) contest any determination by the Internal Revenue Service or any other taxing authority which the General Partner deems to be adverse to the best interests of the Partnership; (x) invest Partnership funds on a temporary basis pending distribution in such investments (other than investments in a GP Affiliate) as the General Partner deems appropriate, provided that the General Partner shall not invest Partnership funds in such a manner that the Partnership will be considered to be holding itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities or will otherwise be deemed to be an investment company under the Investment Company Act of 1940, as amended; (xi) employ Persons (including any Affiliate or employee of any Affiliate of any Partner) for the research and development of the Project and/or the operation and management of the Partnership and engage such other experts and advisers as the General Partner may deem necessary or advisable, in each case, on such terms and for such compensation as the General Partner may determine; (xii) borrow money on behalf of the Partnership as the General Partner deems necessary or appropriate and in the best interests of the Partnership and make, accept, endorse and execute promissory notes, drafts, bills of exchange and other instruments and evidences of indebtedness in 33 connection therewith and secure the payment of any such Partnership indebtedness by mortgage, pledge or assignment of or security interest in all or any part of the property then owned or thereafter acquired by the Partnership and guarantee like obligations of others; (xiii) call a meeting of the Partners' Committee from time to time as the General Partner deems necessary or advisable; (xiv) acquire (a) all or any portion of the equity or other interests in any Person or (b) any other assets whether or not in the ordinary course of business of the Partnership; (xv) sell, lease, lease back, license, contribute, assign, exchange or otherwise dispose of the assets of the Partnership, including, without limitation, pursuant to a transaction where the assets of the Partnership are transferred to a Person in exchange for equity interests in such Person; provided, however that in the event of a cash sale of all or substantially all of the assets of the Partnership (other than to a Person controlled by the Partnership), the Partnership shall distribute the proceeds of such sale to the Partners as soon as practicable thereafter; (xvi) commence any litigation or arbitration that pertains to the Partnership or any Partnership assets, or arrange for the settlement of any pending or threatened litigation, by or against the Partnership, through compromise, arbitration or otherwise; (xvii) effectuate the Initial Public Offering, or any other underwritten sale of securities to the public pursuant to a Registration Statement, by: (A) creating, admitting as a partner in accordance with Section 6.16(c), and issuing Units to, a corporate Partner and causing securities of such corporate Partner to be registered for sale to the public, provided that the General Partner has received the Approval of the Founding Partners with respect to such issuance, (B) registering Units for sale to the public, provided that the General Partner has received the Approval of the Founding Partners with respect to such sale, or (C) converting the Partnership to a corporate entity, pursuant to Section 6.16, in order to cause the capital stock of such entity to be registered for sale to the public; (xviii) convert the Partnership to another form, pursuant to Section 6.16; and (xix) engage in any kind of activity and enter into and perform obligations of any kind (with the General Partner, a GP Affiliate or otherwise) necessary to, in 34 connection with, or incidental to, the accomplishment of the purposes and business of the Partnership, so long as said activities and obligations may be lawfully engaged in or performed by a limited partnership under the Delaware Act. (c) The General Partner may delegate any of such foregoing powers and any additional powers conferred upon it under this Agreement or by law to officers of the Partnership or other Persons. The Partners hereby agree that each such authorized officer of the Partnership or such other Person is authorized to execute, deliver and perform any agreements, acts, transactions and matters in connection with the exercise of power hereunder on behalf of the Partnership without any further act, approval or vote of the Partners or the Partnership, except in connection with acts otherwise prohibited by this Agreement, the Delaware Act or any applicable law, rule or regulation. SECTION 6.2. Limitation on Authority of the General Partner. (a) Notwithstanding anything herein to the contrary, the General Partner shall not undertake, on behalf of the Partnership, any of the actions specified in this Section 6.2(a) without the Consent of the Partners: (i) make any distributions other than those required by Section 5.4(a) to the Partners in excess of accumulated undistributed Net Income, as of the end of the preceding calendar quarter; (ii) make any material amendments or modifications to this Agreement, except as otherwise provided in Section 14.1; (iii) merge or combine the Partnership with another Person or cause or permit the dissolution (except as provided by Section 6.16), and/or liquidation of the Partnership, or convert the Partnership to another form (except as provided by Section 6.16); (iv) take any action for the (a) commencement of a voluntary case under any applicable bankruptcy, insolvency or similar law now or hereafter in effect, (b) consent to the entry of any order for relief in an involuntary case under any such law to the extent that the giving or withholding of such consent is within the Partnership's discretion, (c) consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of it or of any substantial part of its property or (d) making by it of a general assignment for the benefit of creditors; or (v) sell all or substantially all of the Partnership's assets; provided that this provision shall not apply to the 35 mortgage, hypothecation, pledge or grant of a security interest in all or substantially all of the Partnership's assets or to the forced sale of any assets pursuant to a foreclosure of, or other realization on, any such encumbrance. (b) Notwithstanding anything herein to the contrary, the Partnership shall not enter into any binding transaction (the "Proposed Transaction") with the General Partner or a GP Affiliate (the "Proposed Contractor") except pursuant to the provisions of this Section 6.2(b). (i) The Partnership shall deliver to the Founding Partners written notice (the "Contract Proposal") of the material terms and conditions of the Proposed Transaction at least ten (10) days before the execution of such contract. (ii) If any Founding Partner determines in good faith that the Proposed Transaction, as described in the Contract Proposal, does not contain commercially fair and reasonable terms and conditions, such Founding Partner shall, within seven (7) days of receiving the Contract Proposal, submit to the General Partner a certification (the "Certificate of Objection"), signed by the chief executive officer of such Founding Partner's Ultimate Parent stating with particularity the reasons for such determination, including a statement as to (A) which terms and conditions in the Contract Proposal are not commercially fair and reasonable and (B) what terms and conditions such Founding Partner would deem to be commercially fair and reasonable for the Proposed Transaction. (iii) If the General Partner has not received a Certificate of Objection within ten (10) days of delivery of the Contract Proposal to the Founding Partners, the General Partner may cause the Partnership to execute any documents to bind the Partnership to the Proposed Transaction. (iv) If the General Partner has received a Certificate of Objection within ten (10) days of delivery of the Contract Proposal to the Founding Partners, the Founding Partner that has submitted the Certificate of Objection shall negotiate in good faith with the Partnership and the Proposed Contractor regarding the terms of the Proposed Transaction. (v) In the event that, notwithstanding the negotiations conducted pursuant to subsection 6.2(b)(iv) above, the Founding Partner's determination that the Proposed Transaction does not contain commercially fair and reasonable terms remains unchanged, then: (a) in the case of a Proposed Transaction in the form of a contract to provide goods or services to the Partnership, the General Partner may cause the Partnership to execute a contract with 36 the Proposed Contractor on a "cost plus" basis, with a profit margin above Cost not to exceed 12%, and on terms and conditions that the General Partner certifies are otherwise commercially fair and reasonable, and (b) in all Proposed Transactions other than contracts to provide goods and services to the Partnership, the General Partner may cause the Partnership to execute any documents to bind the Partnership to the Proposed Transaction, so long as such documents contain terms and conditions that the General Partner certifies are commercially fair and reasonable. SECTION 6.3. Partners' Committee and Partners' Meetings. (a) Each Partner (other than a Delinquent Partner) shall have the right to designate two representatives (the "Partners' Committee Representatives") to participate in meetings of the Partners' Committee, which shall be an advisory committee that serves as a forum for the exchange of information and ideas regarding the Project. (b) The Partnership shall hold a quarterly meeting of the Partners' Committee ("Quarterly Meeting") on fifteen (15) days prior written notice to the Partners. Each Quarterly Meeting shall be held no sooner than thirty (30) days and no later than sixty (60) days after delivery to the Partners of the quarterly financial statements for the preceding fiscal quarter pursuant to Section 8.3(b). At the Quarterly Meeting, the General Partner, through its representatives or other Persons designated by the General Partner, will review the activities of the Partnership during the preceding quarter, discuss the plans and budget for the current quarter and any amendments to the Business Plan and answer whatever questions may be raised by the Partners' Committee Representatives. The General Partner shall consider the recommendations of the Partners' Committee in good faith, but under no circumstances shall the General Partner be bound by such recommendations. (c) The General Partner, at its sole discretion, may call a meeting of the Partners' Committee at any other time by providing notice to each of the Partners in the manner set forth in Section 15.1 as soon as practicable but in no event less than five (5) days prior to the date called for such a meeting. (d) In the event that the General Partner, at its sole discretion, calls a meeting of the Partners (other than any Delinquent Partners) (a "Partners' Meeting") in order to obtain the Consent of the Partners for any action or proposed action by the Partnership, it shall cause the Partnership to give such notice to each of the Partners in the manner set forth in Section 15.1 as soon as practicable but in no event less than fifteen (15) days prior to the date called for a meeting of senior management representatives (the "Partners' Meeting Representatives") of the Partners regarding such proposal. Each Partner (other than a Delinquent Partner) shall have the right to 37 designate one Partners' Meeting Representative to vote on its behalf at such meeting. In lieu of voting at such a meeting, any Partner may provide written consent of the proposed action. SECTION 6.4. FCC and Related Matters. The Limited Partners hereby understand, agree and acknowledge that they shall use all reasonable efforts to assist and support the Partnership and its Affiliates (or other Persons who acquire from the Partnership or its direct or indirect transferee the right to develop, own, and/or operate the Project) in obtaining all necessary or useful FCC licenses and all other U.S. and foreign governmental licenses and approvals. SECTION 6.5. Certificate of Limited Partnership. The General Partner, on May 29, 1997, filed the Certificate of Limited Partnership with the Secretary of State of the State of Delaware as required by the Delaware Act and shall file such other certificates or documents as may be deemed by the Partnership to be reasonable and necessary or appropriate for the qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware or any other state in which the Partnership may elect to do business. To the extent that the General Partner in its discretion determines such action to be reasonable and necessary or appropriate and to the extent consistent with this Agreement, the General Partner shall file amendments to the Certificate of Limited Partnership and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware or any other state in which the Partnership may elect to do business. SECTION 6.6. Reliance by Third Parties. Notwithstanding any other provision of this Agreement to the contrary, no lender or purchaser, including any purchaser of property from the Partnership or any other Person dealing with the Partnership, shall be required to look to the application of proceeds hereunder or to verify any representation by the General Partner as to the extent of the interest in the assets of the Partnership that the General Partner is entitled to encumber, sell or otherwise use, and any such lender or purchaser shall be entitled to rely exclusively on the representations of the General Partner as to its authority to enter into such financing or sale arrangements and shall be entitled to deal with the General Partner as if it were the sole party in interest therein, both legally and beneficially. In no event shall any Person dealing with the General Partner or the General Partner's representative with respect to any business or property of the Partnership be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expedience of any act or action of the General Partner or the General Partner's representative; and every contract, agreement, deed, mortgage, security agreement, promissory note or other instrument or document executed by the General Partner or the 38 General Partner's representative with respect to any business or property of the Partnership shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and/or delivery thereof this Agreement was in full force and effect, (b) such instrument or document was duly executed in accordance with the terms and provisions of this Agreement and is binding upon the Partnership, and (c) the General Partner's representative was duly authorized and empowered to execute and deliver any and every such instrument or document for and on behalf of the Partnership. SECTION 6.7. Expenses and Reimbursement of the General Partner. (a) All expenses incurred after the Effective Date in connection with the organization of the Partnership (other than expenses borne by the General Partner or any GP Affiliate for which Units are received pursuant to Section 4.1) will be borne by the Partnership and, to the extent not otherwise allocated by Article V, charged to the Partners' Capital Accounts according to their Percentage Interests. (b) The General Partner shall be reimbursed on a monthly basis for all fair and reasonable expenses it incurs or makes on behalf of the Partnership (including amounts paid to any Person to perform services for the Partnership or the General Partner or who is an employee of the Partnership or the General Partner). Such reimbursement shall be in addition to any reimbursement to a General Partner as a result of indemnification pursuant to Section 6.13 hereof. SECTION 6.8. Cooperation with SkyBridge. Each of the Partners hereby acknowledges and agrees that (i) the Partnership may engage in efforts with SkyBridge Limited Partnership ("SkyBridge") to develop synergies and complementarities between the Project and the project to be developed and operated by SkyBridge, including, but not limited to, efforts with respect to system architecture, financing, regulatory, operational and marketing matters, and (ii) the General Partner and/or a GP Affiliate may invest in SkyBridge without creating any conflict with the fiduciary or other duties of the General Partner hereunder. SECTION 6.9. Outside Activities. (a) Subject to the requirements of applicable law, each Partner agrees that each Partner and its partners, associates, employees, Affiliates and agents may engage in other business activities or possess interests in other business activities of every kind and description, independently or with others, except that no such Partner or any of its Affiliates shall possess (together with its Affiliates) any economic interest, directly or indirectly, in any Similar Business (as defined in Section 6.9(b) below) until the earlier of: 39 (1) the third anniversary of the date on which the Partner and all of its Affiliates cease to be Partners of the Partnership; or (2) the third anniversary of the date on which the Project first provides services, on a commercial basis, through satellites using the Ka-band frequency spectrum; or (3) the date following the termination, winding up and liquidation of the Partnership (other than pursuant to Section 6.16); provided, however, that such prohibition shall not apply to: (i) a Passive Investment representing not more than 5% of the equity securities of any entity engaged in a Similar Business; (ii) an interest (other than an equity interest) arising from the sale or provision of goods or services (except services as a reseller, distributor, or service provider with respect to the Similar Business) in the ordinary course of business of a Partner or its Affiliates; (iii) a non-Passive Investment in, or an investment representing more than 5% of the equity securities of, any entity engaged in a Similar Business, if (and only if) the Partner can demonstrate to the reasonable satisfaction of the General Partner that: (x) the investment is primarily motivated by the receipt by the Partner or one of its Affiliates of, or a reasonable expectation that the Partner or one of its Affiliates will receive, a contract of significance (in relation to the amount of the investment) for the provision of goods and/or services (except services as a reseller, distributor, or service provider with respect to the Similar Business) to such entity; and (y) there is a reasonable expectation that the investment will become, within five (5) or fewer years of its having been made, a Passive Investment of less than 5% of the equity securities of such entity (as the result of, for example, dilution brought about by investments received from third parties); (iv) any investment by a Partner or any of its Affiliates in an entity (or in an Affiliate of such an entity) of which the Partner or one of its Affiliates was a general partner prior to the Effective Date; or (v) any investment by a Partner or any of its Affiliates in a business that is added to Schedule D pursuant to Section 6.9(b) if such investment: (A) is consummated prior to the Schedule D Notice Date (as such term is defined in Section 6.9(b)) and such Partner or Affiliate has delivered to the General Partner, at least fifteen (15) Business Days prior to such consummation, a notice (the "Investment Notice") that (x) specifies the 40 terms and conditions of the proposed investment and (y) provides sufficient information to enable the General Partner to determine whether the proposed investment could constitute an investment in a business described in Sections 6.9(b)(i) or 6.9(b)(ii), (B) is made pursuant to a binding commitment on the part of such Partner or Affiliate to invest, provided that such binding commitment was effective prior to the Schedule D Notice Date and such Partner or Affiliate has delivered to the General Partner, at least fifteen (15) Business Days prior to entering into such a commitment, an Investment Notice regarding such commitment to invest or (C) is made pursuant to options, warrants or similar contingent interests purchased by such Partner or Affiliate prior to the Schedule D Notice Date and such Partner or Affiliate has delivered to the General Partner, at least fifteen (15) Business Days prior to effectuating such purchase, an Investment Notice regarding such purchase. (b) A "Similar Business" means any of the businesses listed on Schedule D, and any business that the General Partner may after the Effective Date, on notice to the Partners, add to Schedule D. The General Partner may add a business to Schedule D only if the business (i) has a primary objective of providing interactive broadband transmission services via geostationary satellites to fixed terminals with space-based return link: (A) using the Ku-band spectrum and offering a similar set of services to that contemplated by CyberStar (i.e., electronic data package delivery, electronic data package transfer, real-time streaming, broadband Internet access, multi-use two-way broadband interconnect) or (B) using the Ka-band spectrum, or (ii) does, or is reasonably expected to, generate material earnings by providing such transmission services. Such addition to Schedule D will become effective upon the date on which the General Partner delivers the notice of such addition that is required by this Section 6.9(b), unless such notice specifies a later effective date (in either case, the "Schedule D Notice Date"). SECTION 6.10. Resolution of Conflicts of Interest. (a) Unless otherwise expressly provided in this Agreement (including in Section 6.2(b)), whenever a potential conflict of interest exists or arises between the General Partner or any of the GP Affiliates, on the one hand, and the Partnership or any Partner, on the other, any resolution or course of action by the General Partner or such GP Affiliate(s) in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement, of any agreement contemplated herein, or of any duty stated or implied by law or equity, if the resolution or course of action is, or by operation of this Agreement is deemed to be, fair and reasonable to the Partnership. The General Partner shall be authorized but not required in connection with the resolution of such conflict of interest to seek the approval from Partners holding a majority of outstanding Units (other than 41 those held by any Delinquent Partners) (a "Special Approval") of a resolution of such conflict or course of action. Any conflict of interest and any resolution of such conflict of interest shall be conclusively deemed fair and reasonable to the Partnership if such conflict of interest or resolution is (i) approved by a Special Approval, (ii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or (iii) fair to the Partnership, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership). The General Partner may also adopt a resolution or course of action that has not received a Special Approval. The General Partner (and the Partners determining to grant a Special Approval) shall be authorized in connection with its determination of what is "fair and reasonable" to the Partnership and in connection with its resolution of any conflict of interest to consider (A) the relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest; (B) any customary or accepted industry practices and any customary or historical dealings with a particular Person; (C) any applicable generally accepted accounting practices or principles; and (D) such additional factors as the General Partner (or, as applicable, each of the Partners) determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances. Nothing contained in this Agreement, however, is intended to, nor shall it be construed to, require the General Partner (or the Partners) to consider the interests of any Person other than the Partnership. In the absence of bad faith by the General Partner, the resolution, action or terms so made, taken or provided by the General Partner with respect to such matters shall not constitute a breach of this Agreement or any other agreement contemplated herein or a breach of any standard of care or duty imposed herein or therein or, to the extent permitted by law, under the Delaware Act or any other law, rule or regulation. (b) Whenever this Agreement or any other agreement contemplated hereby provides that the General Partner or any of the GP Affiliates is permitted or required to make a decision (i) in its "sole discretion" or "discretion," that it deems "necessary or appropriate" or "necessary or advisable" or under a grant of similar authority or latitude, except as otherwise explicitly provided herein, the General Partner or such GP Affiliate shall be entitled to consider only such interests and factors as it desires and shall have no duty or obligation to give any consideration to any interest of, or factors affecting any Limited Partner, (ii) it may make such decision in its sole discretion (regardless of whether there is a reference to "sole discretion" or "discretion") unless another express standard is provided for, or (iii) in "good faith" or under another express standard, the General Partner or such GP Affiliate shall act under such express standard and shall not be subject to any other or different standards imposed by this Agreement, any other 42 agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation. The General Partner shall have no duty, express or implied, to sell or otherwise dispose of any asset of the Partnership. (c) Whenever a particular transaction, arrangement or resolution of a conflict of interest is required under this Agreement to be "fair and reasonable" to any Person, the fair and reasonable nature of such transaction, arrangement or resolution shall be considered in the context of all similar or related transactions. SECTION 6.11. Partnership Funds. The funds of the Partnership shall be deposited in such Partnership account or accounts as are designated by the General Partner and shall not be commingled with any other funds. All withdrawals from or charges against such accounts shall be made by duly authorized officers or agents of the Partnership. Funds of the Partnership may be invested as determined by the General Partner, except in connection with acts otherwise prohibited by this Agreement. SECTION 6.12. Loans from the General Partner. (a) The General Partner or any GP Affiliate may lend to the Partnership funds needed by the Partnership subject to the provisions of Section 6.12(b), or provide a guarantee of any indebtedness incurred by the Partnership, for such periods of time as the General Partner may determine. The Partnership shall reimburse the General Partner or GP Affiliate, as the case may be, for any additional costs incurred by the General Partner or GP Affiliate in connection with: (i) the borrowing of funds obtained by the General Partner or GP Affiliate and loaned to the Partnership or (ii) in connection with the provision by the General Partner or GP Affiliate of a guarantee of any indebtedness incurred by the Partnership. (a)(b) At least fifteen (15) days prior to the issuance of debt by the Partnership to the General Partner or a GP Affiliate, the Partnership shall deliver a written notice (a "Participation Rights Notice") to each Subject Partner, setting forth: (i) the amount of debt to be issued, (ii) the interest rate at which and other terms and conditions upon which such debt is to be issued and (iii) an irrevocable offer from the Partnership to issue and sell to each Subject Partner, on the same terms and conditions set forth in the Participation Rights Notice, the amount of debt equal to the product of the total amount of debt to be issued, as set forth in the Participation Rights Notice, multiplied by a fraction, the numerator of which is the number of Units held by the Subject Partner at the time the Participation Rights Notice is issued, and the 43 denominator of which is the number of Units held all Subject Partners at such time. The Subject Partners shall have absolute discretion to accept or decline such offers. If a Subject Partner wishes to accept any offer made pursuant to this Section 6.12, it shall give the Partnership irrevocable written notice of its election to accept such offer within ten (10) days of its receipt of the applicable Participation Rights Notice (which notice must specify acceptance of all debt offered to such Subject Partner in the Participation Rights Notice), and the closing thereunder (the "Participation Rights Closing") shall occur five (5) days thereafter (or, if not a Business Day, on the next Business Day thereafter) at the offices of the Partnership or at such other time and place as the parties shall agree. SECTION 6.13. Indemnification of Partners. (a) The Partnership shall indemnify and hold harmless the Partners, Affiliates of Partners (other than Delinquent Partners) and all of their respective officers, directors, partners, shareholders, employees, and agents (individually, an "Indemnitee"), from and against any and all losses, claims, demands, costs, damages, liabilities, joint and several, expenses of any nature (including attorneys' fees and disbursements), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, in which an Indemnitee may be involved, or threatened to be involved, as a party or otherwise ("Indemnifiable Loss" or "Indemnifiable Losses"), arising out of or incidental to the business of the Partnership, regardless of whether an Indemnitee continues to be a Partner, an Affiliate, or an officer, director, partner, shareholder, employee, or agent of a Partner or of an Affiliate at the time any such Indemnifiable Loss is paid or incurred, if the Indemnitee's conduct did not constitute actual fraud, gross negligence, knowing breach of specific provisions of this Agreement or willful or wanton misconduct. The termination of any action, suit, or proceeding by settlement or upon a plea of nolo contendere, or its equivalent, shall not, in and of itself, create a presumption or otherwise constitute evidence that the Indemnitee's actions constituted actual fraud, gross negligence or willful or wanton misconduct. (b) Expenses (including legal fees and expenses) incurred in defending any proceeding subject to Section 6.13(a) shall be paid by the Partnership in advance of the final disposition of such proceeding upon receipt of an undertaking (which need not be secured) by or on behalf of the Indemnitee to repay such amount if it shall ultimately be determined, by a court of competent jurisdiction or otherwise, that the Indemnitee is not entitled to be indemnified by the Partnership as authorized hereunder. 44 (c) The indemnification provided by this Section 6.13 shall be in addition to any other rights to which each Indemnitee may be entitled under any agreement or vote of the Partners, as a matter of law or otherwise, both as to action in the Indemnitee's capacity as a Partner or as a partner, shareholder, officer, director, employee or agent of a Partner, or as to action in the Indemnitee's capacity as a Person serving at the request of the Partnership as set forth above, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns, administrators and personal representatives of the Indemnitee. Such indemnification, however, shall only apply to Indemnifiable Losses incurred by virtue of the Indemnitee's status as a Partner, Affiliate or officer, director, partner, shareholder, employee or agent thereof, and not as to Indemnifiable Losses incurred in other capacities (for example, by virtue of contracting with the Partnership to provide CyberStar Service or to provide services or products to the Partnership). (d) The Partnership may purchase and maintain insurance on behalf of any one or more Indemnitees and other such Persons as the General Partner may determine against any liability which may be asserted against or expense which may be incurred by such Person in connection with the Partnership's activities, whether or not the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. (e) Any indemnification hereunder shall be satisfied only out of the assets of the Partnership and no Partner shall be subject to personal liability by reason of these indemnification provisions. (f) An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.13 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. (g) The provisions of this Section 6.13 are for the benefit of the Indemnitees and the heirs, successors, assigns, administrators and personal representatives of the Indemnitees and shall not be deemed to create any rights for the benefit of any other Persons. (h) Any Person that proposes to assert the right to be indemnified under this Article VI shall, promptly after receipt of notice of any action which is subject to indemnification hereunder, notify the Partnership of the commencement of such action, enclosing a copy of all papers served. The failure so to notify the Partnership of any such action shall not relieve the Partnership from any liability that it may have to any indemnified party hereunder, except to the extent the Partnership is prejudiced thereby. In case any such action shall be brought 45 and notice given to the Partnership of the commencement thereof, the Partnership shall be entitled to participate in, and to assume the defense thereof, with counsel reasonably satisfactory to the indemnified party, and after notice from the Partnership to such indemnified party of its election so to assume the defense thereof, the Partnership shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party at the request of the Partnership in connection with the defense thereof. The indemnified party shall have the right to employ separate counsel and to participate in (but not control) any such action, but the fees and expenses of such counsel shall be the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized by the Partnership, (ii) the employment of separate counsel is necessitated by a conflicting interest among indemnified parties, or (iii) the Partnership shall not in fact have employed counsel to assume the defense of such action. In each such case, the fees and expenses of counsel shall be at the expense of the Partnership. The Partnership shall not be liable for any settlement of any action or claims effected without its written consent unless the Partnership has failed to assume the defense of any such action or claims. SECTION 6.14. Liability of the General Partner. (a) Notwithstanding anything to the contrary in this Agreement, the General Partner, the GP Affiliates and all officers, directors, partners, shareholders, employees and agents of the General Partner and the GP Affiliates shall not be liable to the Partnership or to the Limited Partners for any losses sustained or liabilities incurred as a result of any act or omission of the General Partner, a GP Affiliate or any such officers, directors, partners, shareholders, employees or agents if the conduct of the General Partner, such GP Affiliate or such officer, director, partner, shareholder, employee or agent did not constitute gross negligence, or Nonperformance. For purposes of this Agreement, any act or omission, if done or omitted to be done in reliance upon the advice of legal counsel or public accountants (the "Professionals") selected with reasonable care, will be conclusively presumed not to constitute gross negligence or Nonperformance. (b) The General Partner shall fully indemnify and hold harmless the Limited Partners and their Affiliates and their respective partners, officers, directors, employees and agents to the fullest extent permitted by law from and against any and all losses, claims, demands, costs, damages, liabilities (joint or several), expenses of any nature (including attorney's fees and disbursements), judgments, fines, settlements and other amounts including, but not limited to, those arising directly or indirectly from or relating to any civil, criminal, administrative or investigative proceeding, arising out of or 46 incidental to conduct by the General Partner with respect to the business or activities of or relating to the Partnership which constituted Nonperformance. The obligations of the General Partner under this Section 6.14 shall extend only to its own acts or omissions and in no event shall the General Partner be liable for the acts or omissions of its Affiliates or any other Person or indirect, consequential, punitive or exemplary damages. SECTION 6.15. Other Matters Concerning the General Partner. (a) The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, approval, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. (b) The General Partner may consult with legal counsel, entities providing CyberStar Service, and other consultants and advisers selected by it, and any advice of such Person as to matters which the General Partner believes to be within such Person's professional experience shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by the General Partner hereunder in good faith and in accordance with such advice. Any such Person receiving confidential information shall be deemed to be bound by a confidentiality agreement containing substantially the same terms as Section 15.13. (c) Any standard of care and duty (including fiduciary duties) implied by the Delaware Act or any applicable law, rule or regulation shall be modified, waived or limited, to the extent permitted by law, as required to permit the General Partner or any of their respective officers, directors, shareholder, partners, employees, representatives or agents (each a "Covered Person") to act under this Agreement or any other agreement contemplated by this Agreement and to make any decision pursuant to the authority prescribed in this Agreement, so long as such action is reasonably believed by the Covered Person to be in, or not inconsistent with, the best interests of the Partnership and to be not inconsistent with the terms of this Agreement. To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating to the Partnership or to the Partners, such Covered Person shall not be liable to the Partnership or to any Partner for its good faith reliance on this Agreement. SECTION 6.16. Conversion to Corporate Form. (a) In the event that the General Partner shall determine that it is desirable or helpful for the business of the Partnership to be conducted in a corporate or other form rather than in a partnership form, the General Partner may convert the Partnership into corporate form or take such other action as it 47 may deem advisable in light of such changed conditions, including, without limitation, dissolving the Partnership; provided, however, that the General Partner may not convert the Partnership into corporate form without obtaining the Consent of the Partners and the Approval of the Founding Partners. In connection with any such conversion of the Partnership into corporate form, the Partners (other than Delinquent Partners) shall receive, in exchange for their Units, shares of capital stock of the corporate entity or entities into which the Partnership has been converted (the "Successor Corporation") that have substantially the same relative rights and preferences as to dividends and distributions and substantially the same voting and transfer rights, subject in each case to any modifications required solely as a result of the conversion to corporate form (all such rights and preferences being referred to, collectively, as "Equity Rights"), as are set forth in this Agreement as among the holders of interests in the Partnership. (b) Prior to taking any such action to convert the Partnership into corporate form, the General Partner shall submit to the other Partners the proposed forms of a certificate or articles or incorporation, by-laws, shareholders' agreement and any other governing documents proposed to be used to organize the Successor Corporation (the "Governing Documents"). If Partners (the "Objecting Partners") holding Units representing at least 50% of the total number of outstanding Units held by all Partners (other than Delinquent Partners) provide written notice to the General Partner within 15 days of the date the proposed forms of Governing Documents are submitted to the Partners that they have concluded in good faith that, based upon such Governing Documents, the shares of capital stock of the Successor Corporation proposed to be issued to them in exchange for such Units do not have the same Equity Rights as are set forth in this Agreement, the General Partner and the Objecting Partners shall negotiate in good faith to resolve any differences with respect thereto. If the General Partner and the Objecting Partners do not resolve such differences, the General Partner may appoint an investment banking firm of internationally recognized standing reasonably acceptable to the Objecting Partners to advise the Partnership as to such dispute, and the conclusion of such firm shall be binding on the parties, and any modification recommended by such investment banking firm in the Equity Rights shall be incorporated into the Governing Documents. Upon such incorporation, the General Partner shall be deemed to have obtained the Consent of the Partners to convert the Partnership into corporate form. Nothing contained herein shall be construed to give the Limited Partners any right to cause the business of the Partnership to be conducted in corporate form or to limit the right of the General Partner to elect, at any time, to continue such business as a partnership. (c) Notwithstanding anything to the contrary in this Agreement, the General Partner shall have the right, without the approval of any other Partner, to admit, as a nonmanaging general 48 partner or a limited partner, a corporation formed for the purpose of acting as such, provided that such corporation: (i) agrees to invest the net proceeds of all financings it undertakes in additional interests in, or loans to, the Partnership; (ii) conducts no business not related to its investment in the Partnership; (iii) has such governance rights as shall be necessary to comply with the requirements of the Investment Company Act of 1940; and (iv) agrees to issue to existing holders of Units a limited right (to the extent that such issuance will not affect the Partnership tax status under applicable law or otherwise violate applicable law and provided that the General Partner shall have received a written legal opinion of counsel in form and substance satisfactory to it that such issuance will not affect the Partnership's tax status under applicable law and is otherwise permitted under applicable law) to exchange such Units for interests in such corporation that have, in the good faith judgment of the General Partner, substantially the same relative rights and preferences as to dividends and distributions and substantially the same voting and transfer rights as the Units being exchanged therefor. In making any determination pursuant to this Section 6.16, the good faith determination of the General Partner shall be conclusive. ARTICLE VII. RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS SECTION 7.1. Limitation of Liability. No Limited Partner shall be personally liable for any debts, liabilities or obligations of the Partnership, whether to the Partnership, to the General Partner, or to creditors of the Partnership, beyond the amount contributed (and to be contributed to the Partnership pursuant to Article IV or other written agreement with the Partnership or any other Partner) by such Limited Partner to the capital of the Partnership and such Limited Partner's share of the accumulated but undistributed profits of the Partnership and the amount of any distribution (including the return of any Capital Contribution) made to such Limited Partner that must be returned to the Partnership pursuant to applicable law. All material agreements to which the Partnership is a party shall include a statement to the effect that the Partnership is a limited partnership organized under the laws of Delaware. SECTION 7.2. Management of Business. The Limited Partners shall not take part in the operation, management or control (within the meaning of the Delaware Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. No Limited Partner has the right to require the partition of Partnership property or compel any sale or appraisal of Partnership assets or sale of a deceased Partner's interest herein. 49 ARTICLE VIII. BOOKS, RECORDS, ACCOUNTING AND REPORTS SECTION 8.1. Records and Accounting. The Partnership shall keep or cause to be kept appropriate books and records with respect to the Partnership's business, which books shall at all times be kept at the principal office of the Partnership. Any records maintained by the Partnership in the regular course of its business, books of account and records of Partnership proceedings, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so kept are convertible into clearly legible written form within a reasonable period of time. The records and books of account of the Partnership will be audited as of the end of each Fiscal Year by independent certified public accountants of recognized international standing selected by the General Partner (other than the principal auditors of the General Partner). SECTION 8.2. Fiscal Year. The fiscal year (the "Fiscal Year") of the Partnership shall be the calendar year, unless otherwise determined by the General Partner in its sole discretion. SECTION 8.3. Reports. (a) As soon as practicable, but in no event later than seventy-five (75) days after the close of each fiscal year, the Partnership shall deliver to the Partners: (i) reports containing financial statements of the Partnership for the fiscal year, presented in accordance with GAAP; including a balance sheet, a statement of income, a statement of Partners' equity and a statement of changes in cash flow, such statements to be audited by the firm of independent certified public accountants selected in accordance with Section 8.1, and (ii) similar reports prepared in accordance with the terms of this Agreement. (b) As soon as practicable, but in no event later than thirty (30) days after the close of each calendar quarter, including the last calendar quarter of each fiscal year, the Partnership shall deliver to the Partners a quarterly report containing a balance sheet and statements of income and changes in financial position for such calendar quarter. SECTION 8.4. Disclosure to Limited Partners. (a) The Limited Partners shall have full access to all financial and other information directly related to the business and affairs of the Partnership. In particular, the following will be open for examination, by any Limited Partner or his duly authorized representatives: 50 (i) books and records pertaining to the Partnership's business showing all of its assets and liabilities, receipts and disbursements, realized profits and losses, and all transactions (including all contracts and commitments) entered into by the Partnership; (ii) a current list of the full name and last known mailing address of each Partner set out in alphabetical order, together with a list showing the Capital Contributions and Capital Account of each Partner; (iii) a copy of the Certificate of Limited Partnership and all amendments to it, together with executed copies of any powers of attorney pursuant to which the Certificate and any amendments to it have been executed; (iv) copies of all the Partnership's U.S. Federal, state, local and foreign income tax returns and reports, if any; and (v) copies of this Agreement as it may be amended from time to time. (b) The Partnership shall make available, on a reasonable basis, its financial officers (if any) and auditors to the Limited Partners for consultation and to respond to questions of the Limited Partners relating to the financial condition of the Partnership. The Partnership will prepare and mail to each Limited Partner promptly upon the request of any Limited Partner such further information concerning the business, affairs and financial conditions of the Partnership as any Limited Partner may reasonably request. (c) Notwithstanding the provisions set forth in this Section 8.4 or the other provisions of this Agreement, the Partnership may keep confidential from the Limited Partners for a period of time deemed reasonable by the General Partner information otherwise required to be provided pursuant to this Agreement (excluding any matters required to be disclosed pursuant to Section 8.3 or clause (ii) - (v) of Section 8.4(a)) to the extent the General Partner, in good faith, determines (i) that disclosure is not in the best interests of the Partnership, (ii) that disclosure could damage the Partnership or its business or (iii) that the Partnership is required by law or by an agreement with a third party to keep the information confidential. SECTION 8.5. Determination of Book Value of Partnership Assets. (a) Except as set forth below, the Book Value of any Partnership asset is its adjusted basis for federal income tax purposes. 51 (b) The initial Book Value of any assets (other than cash) contributed by a Partner to the Partnership shall be the gross fair market value of such assets as determined by the General Partner. (c) The Book Values of all of the Partnership's assets shall be adjusted by the Partnership to equal their respective gross fair market values as of the following times: (i) upon the contribution of money or other property to the Partnership by a new Partner or an existing Partner as consideration for an interest in the Partnership; (ii) immediately prior to the sale of a substantial portion of, or all of, the Partnership's assets, the adoption of a plan of liquidation of the Partnership or a distribution of money or other property by the Partnership to a withdrawing, retiring or continuing Partner in consideration for the retirement of all or a portion of such Partner's interest in the Partnership; and (iii) immediately prior to (A) a conversion of the Partnership to corporate form pursuant to Section 6.16, (B) the consummation of the Initial Public Offering or (C) the consummation of any other underwritten sale of equity securities issued by a Partner formed for such purpose to the public pursuant to a Registration Statement. The Partnership will promptly report any such adjustment to the Partners. (d) If the Book Value of any asset of the Partnership is adjusted pursuant to the provisions of Section 8.5(c), the amount of such adjustment shall be taken into account, immediately prior to the event giving rise to such adjustment, as gain ("Book Up Gain") or loss ("Book Up Loss") from the disposition of such asset and shall be credited or charged to the Capital Accounts of the Partners as follows: (i) first, to the Partners so as to cause, as nearly as practicable, the Capital Account balances of the Partners to be in proportion to their respective Percentage Interests; provided that no allocations of Book Up Gain shall be made to Delinquent Partners; and (ii) thereafter, to the Partners in proportion to their respective Percentage Interests; provided that no allocations of Book Up Gain shall be made to Delinquent Partners. ARTICLE IX. TAX MATTERS SECTION 9.1. Preparation of Tax Returns. (a) The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items necessary for U.S. federal and state and foreign tax purposes. The General Partner shall use all reasonable efforts to furnish to the Partners within 90 days 52 of the close of the taxable year the tax information reasonably required for U.S. federal, state and foreign income tax reporting purposes. Subject to the provisions of Section 9.2, the classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for federal income tax purposes, to the extent permitted by applicable law. The taxable year of the Partnership shall be the calendar year, unless otherwise required by U.S. federal income tax laws and the Treasury Regulations thereunder or unless otherwise determined by the General Partner. (b) The General Partner will prepare the state and local tax returns for those Limited Partners who are not otherwise engaged in business in the United States, or in any state in the United States in which such Limited Partner is required to file a tax return solely because of its status as a limited partner of the Partnership. SECTION 9.2. Tax Elections. Except as otherwise provided herein, the General Partner shall, in its sole discretion, determine whether to make any available election, including but not limited to an election under Code Section 709 to amortize organization and start-up expenditures over a 60 month period, and an election under Code Section 754 to adjust the bases of Partnership property with respect to the Partnership or with respect to a transferee Partner. In the event a Section 754 election is made, the General Partner may in its sole discretion charge transferees for the additional costs incurred in preparing their tax information under such election. SECTION 9.3. Tax Controversies. Subject to the provisions hereof, the General Partner is designated the Tax Matters Partner (as defined in Section 6231 of the Code), and is authorized and required to represent the Partnership (at the Partnership's expense) in connection with all examinations of the Partnership's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. The Partners agree to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings, provided that the foregoing shall not be construed to prevent a Partner from taking steps reasonably necessary to protect and defend its own interests. SECTION 9.4. Taxation as a Partnership. No election shall be made by the Partnership or any Partner for the Partnership to be excluded from the application of any of the provisions of Subchapter K, Chapter 1 of Subtitle A of the Code or from any similar provisions of any state tax laws, without the Consent of the Partners. 53 ARTICLE X. TRANSFER OF INTERESTS SECTION 10.1. Transfer. (a) The term "transfer," when used in this Article X with respect to a Unit, includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition. (b) No Unit may be transferred, in whole or in part, unless such Unit is transferred in accordance with the other terms and conditions set forth in this Article X. Any transfer or purported transfer of any Unit not made in accordance with this Article X shall be null and void. (c) Notwithstanding anything contained herein to the contrary, no transfer of a Unit may be made if such transfer (i) would violate the then applicable foreign, federal or state securities laws or rules and regulations of the U.S. Securities and Exchange Commission, state securities commissions, the Communications Act, or rules and regulations of the FCC and any other U.S. or foreign government agencies with jurisdiction over such transfer; (ii) would affect the Partnership's existence or qualification under the Delaware Act; (iii) would subject the Partnership, any Partner or any of their Affiliates to any additional regulatory requirements; or (iv) except as contemplated by Section 6.16, would cause the dissolution of the Partnership for U.S. federal income tax purposes or cause the Partnership to be classified other than as a partnership for U.S. federal income tax purposes or cause it to be classified as a publicly traded partnership for U.S. federal income tax purposes. In the event a transfer of a Unit is otherwise permitted hereunder, notwithstanding any provision hereof, no Partner shall transfer all or any portion of such Partner's Unit unless and until such Partner provides, at least ten (10) Business Days prior to such proposed transfer, written notice of such proposed transfer and upon the request of the Partnership, delivers to the Partnership an opinion of counsel, addressed to the Partnership, reasonably satisfactory to the Partnership, to the effect: (1) that such Unit has been registered under the Securities Act and any applicable state securities laws, or that the proposed transfer of such Unit is exempt from any registration requirements imposed by such laws and that the proposed transfer does not violate any other applicable requirements of federal or state securities laws; and (2) that such transfer will not cause: (A) the dissolution of the Partnership for U.S. federal income tax purposes, (B) the Partnership to be classified other than as a partnership for U.S. federal income tax purposes, or (C) the Partnership to be taxable as a "publicly traded partnership" within the meaning of section 7704 of the Code; and (3) as to the matters contained in clauses (i)-(iii) of this Section 10.1(c). Such opinion shall not be deemed delivered until the Partnership 54 confirms to such Partner that such opinion is acceptable, which confirmation will not be unreasonably withheld. (d) Notwithstanding anything to the contrary contained herein, a Partner will not take any action which would constitute or result in the transfer of control of the Partnership if such transfer would require, under existing law (including, without limitation, the written rules and regulations promulgated by the FCC), the prior approval of the FCC, without first obtaining such approval of the FCC. SECTION 10.2. Transfer of Units. (a) If a Partner desires to transfer any Units to any Person other than a Affiliate (the "Outside Party"), such Partner (the "Offering Partner") shall give a notice in writing (the "Transfer Notice") to the Partnership and to all of the Partners, setting forth such desire, the price and the Units to be transferred. Upon the giving of such Transfer Notice, the Founding Partners (other than Delinquent Partners) shall have the first option (but not the obligation) to purchase all or any portion of the Units specified in such Transfer Notice at the price specified in the Transfer Notice by giving a written notice (a "First Election Notice") to the Offering Partner and to the Partnership within thirty (30) days after the date of the Transfer Notice. A First Election Notice shall state the number of Units, if any, which the Founding Partner elects to purchase. If the total number of the Units that the Founding Partners elect to purchase exceeds the number of Units specified in the Transfer Notice, then the number of Units purchasable pursuant to such Transfer Notice shall be apportioned among the Founding Partners as follows: (i) first, to each Founding Partner on a proportional basis based on the fraction whose numerator shall be the number of Units held by such Founding Partner and whose denominator shall be the number of Units held by all Founding Partners that have delivered a First Election Notice, up to the amount specified in such Founding Partner's First Election Notice; and (ii) second, to each Founding Partner that does not, under Section 10.2(a)(i) above, receive the full amount of Units specified in such Founding Partner's First Election Notice, on a proportional basis based on the fraction whose numerator shall be the number of Units held by such Founding Partner and whose denominator shall be the number of Units held by all of the Founding Partners that did not, under Section 10.2(a)(i) above, receive the full amount of Units specified in their First Election Notices. The failure by a Founding Partner to deliver a First Election Notice within (30) days after the date of the Transfer Notice 55 shall operate as a waiver of such Founding Partner's rights under this Section 10.2(a). (b) If the Founding Partners do not elect to purchase all of the Units described in the Transfer Notice pursuant to Section 10.2(a), the other Partners (other than Delinquent Partners) shall thereupon have the second option (but not the obligation) to purchase all or any portion of the remaining offered Units, but such second option shall only be exercisable during the forty-five (45) day period after the date of the Transfer Notice. At any time during such forty-five (45) day period, such other Partners may elect, by written notice to the Offering Partner (a "Second Election Notice"), to purchase all or any portion of the remaining Units. Each Second Election Notice shall state the number of Units, if any, which such other Partner elects to purchase. If the aggregate number of Units which such other Partners elect to purchase exceeds the remaining Percentage Interests, then the remaining Percentage Interests purchasable pursuant to such Transfer Notice shall be apportioned among the other Partners as follows: (i) first, to each such Partner on a proportional basis based on the fraction whose numerator shall be the number of Units held by such Partner and whose denominator shall be the number of Units held by all Partners that have delivered a Second Election Notice, up to the amount specified in such other Partner's Second Election Notice; and (ii) second, to each such Partner that does not, under Section 10.2(b)(i) above, receive the full amount of Units specified in such Partner's Second Election Notice, on a proportional basis based on the fraction whose numerator shall be the number of Units held by such Partner and whose denominator shall be the number of Units held by all of the Partners that did not, under Section 10.2(b)(i) above, receive the full amount of Units specified in their Second Election Notices. The failure of the other Partners to exercise such second option within such forty-five (45) day period shall operate as a waiver of such Partner's rights under this Section 10.2(b). (c) If the Founding Partners and the other Partners do not collectively elect to purchase all of the Units offered in the Transfer Notice, then the Partnership shall thereupon have the third option (but not the obligation) to purchase the full remaining amount of the offered Units, but such third option shall only be exercisable during the sixty (60) day period after the date of the Transfer Notice. At any time during such sixty (60) day period, the Partnership may elect, by written notice to the Offering Partner (the "Third Election Notice"), to purchase the full remaining amount of the offered Units. The failure of the Partnership to deliver a Third Election Notice within such 56 sixty (60) day period shall operate as a waiver of the Partnership's rights under this Section 10.2(c). (d) If the Transfer Notice required to be given by the Offering Partner under this Section shall have been duly given, and if all of the offered Units shall not have been purchased by the Partners and the Partnership pursuant to the foregoing options, then the Offering Partner, at any time within a period of one hundred twenty (120) days from the date of the Transfer Notice, may transfer all, but not less than all, of the Units specified in the Transfer Notice to an Outside Party at a price not less than 95% of the price specified in such notice; provided, however, that in the event the Offering Partner has not transferred all of such Units to an Outside Party within such one hundred twenty (120) day period, then such Units thereafter shall continue to be subject to all of the restrictions contained in this Agreement as though no option notices had ever been given; and provided, further, that a Partner may not deliver more than one (1) Transfer Notice in any calendar year. If a Partner or the Partnership elects to purchase Units pursuant to subsections 10.2(a-c), it shall be obligated to purchase, and the Offering Partner shall be obligated to sell, such Units. The closing of such purchase and sale shall be held at the principal executive offices of the Partnership at such time as may be mutually acceptable to the Offering Partner, the Partnership and each participating Partner. (e) No Waiver. No failure to exercise any rights under this Section 10.2 shall constitute a waiver of any Person's rights to receive an option notice with respect to any subsequent proposed transfer to a third party. (f) Involuntary Transfers of Interest. Following any Involuntary Transfer of a Partner's Units, such Partner shall promptly notify the Partnership in writing of the occurrence of such Involuntary Transfer and the other Partners and the Partnership shall have the same rights under this Section 10.2 with respect to such Units (collectively, the "Transferred Interest") as if the Involuntary Transfer had been a proposed transfer described in subsections 10.2(a-d) above, except that: (i) the periods within which such rights must be exercised shall run from the date notice of the Involuntary Transfer is received from the Offering Partners; (ii) such rights shall be exercised by notice to the involuntary transferee rather than to the Offering Partner; and (iii) the price per Unit shall be the fair market value of such Unit, as determined by the Consent of the Partners. 57 At the closing of any purchase under this Section 10.2(f), the involuntary transferee shall deliver certificates representing the Transferred Interest being purchased by the Partners and/or the Partnership duly endorsed for transfer and accompanied by any requisite transfer taxes, and such Transferred Interest shall be free and clear of any liens, claims, options, charges, encumbrances of rights of others arising through the action or inaction of the involuntary transferee (other than those arising hereunder) and the involuntary transferee shall so represent and warrant, and further represent and warrant that he is the beneficial owner of such Transferred Interest. The Partners or the Partnership, as the case may be, shall deliver at closing, by a certified or cashier's bank check, payment in full for such Transferred Interest. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise reasonably necessary or appropriate. (g) In the event that the provision of Section 10.2(f) above shall be held to be unenforceable with respect to any particular Involuntary Transfer or if the Partners and the Partnership do not exercise their rights to purchase such Transferred Interest, then (a) the Partners and the Partnership shall have a right of first offer as set forth in subsections 10.2(a-d) above if the involuntary transferee subsequently desires to transfer such Interest, and (b) the terms and conditions of this Agreement shall apply to the involuntary transferee who shall agree in writing to be bound hereby as a condition to transfer. (h) Permitted Transfers of Units. This Section 10.2 shall not apply to any transfer by a Partner of all or any portion of its Units to any Affiliate of such Partner but such assignment shall not release the transferor from its obligations hereunder. Prior to such transfer, such Affiliate shall affirm in writing that it shall be subject to the terms and conditions of this Agreement. SECTION 10.3. Change of Control. (a) If an Ultimate Parent and its Affiliates shall cease for any reason to own beneficially, directly or indirectly, at least a majority of the voting power of all outstanding equity securities of a Partner or any Parent of a Partner other than the Ultimate Parent, such Partner shall immediately offer the Units held by such Partner to the other Partners and the Partnership in the same manner as that set forth in subsections 10.2(a-d) above, except that the price per Unit shall be the fair market value of such Unit, (i) as determined by agreement between such transferring Partner and the General Partner, if such transferring Partner is a Limited Partner, or between such transferring Partner and all of the Founding Partners, if such transferring Partner is the General Partner, or (ii) absent such agreement, as determined by a nationally recognized investment banking firm selected by the General Partner, subject to the reasonable objection of the transferring partner, in which case the expenses of such 58 investment banking firm shall be borne by such transferring Partner. (b) If any Person shall acquire (whether by merger, consolidation, sale, assignment, lease, transfer or otherwise, in one transaction or any related series of transactions) beneficial ownership of equity securities of the Ultimate Parent of a Partner in excess of 50 percent of the voting power of all outstanding equity securities of such Parent generally entitled to vote for the election of directors, such Partner shall immediately deliver to the Partnership a Parent's Guarantee executed by such Person. If such Parent's Guarantee is not delivered within ten (10) Business Days of the consummation of such acquisition, the Units held by such Partner shall be offered to the other Partners and the Partnership pursuant to Section 10.3(a) above. (c) If, in any three-year period, a majority of the members of the Board of Directors of a Parent of a Partner, which members were elected during such three-year period against the recommendation of management of such Parent or its Board of Directors in office immediately prior to such election (for purposes of this Section 10.3(c), a member of the Board of Directors whose initial election occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the U.S. Securities Exchange Act of 1934, as amended) shall be deemed to have been elected against the recommendation of such Board of Directors), and if any of the members constituting such majority owns, whether directly or indirectly, 5% or more of an entity engaged in a Similar Business, or is a member, partner, shareholder, director, associate, employee, agent or nominee of any entity that owns, whether directly or indirectly, 5% or more of an entity engaged in a Similar Business, then the Units held by such Partner shall be offered to the other Partners and the Partnership pursuant to Section 10.3(a) above. ARTICLE XI. ADMISSION OF SUCCESSOR PARTNERS SECTION 11.1. Admission of Successor Limited Partner. (a) A transferee of a Limited Partner's Unit pursuant to Section 10.2 shall not be admitted to the Partnership as a successor Limited Partner, (i) until the transferee shall have furnished the Partnership with an agreement, in form reasonably satisfactory to the General Partner, to be bound by all the terms and conditions of this Agreement and such other documents or instruments (including, without limitation, Investor Documents and Parent's Guarantees) as may be required by the General Partner in order to effect such transferee's admission as a Partner and (ii) unless such Limited Partner is not a Delinquent Partner. Prior to the time that any transferee of Units is admitted to the Partnership as a Partner, it will have only the rights of a transferee under 59 Delaware law, and shall have no right to require any information or account of the Partnership transactions constituting Confidential Information or to inspect the Partnership's books. (b) Any transferee of a Limited Partner's Unit who meets the requirements of Section 11.1(a) shall be admitted as a successor Limited Partner. SECTION 11.2. Admission of Successor General Partner. The transferee of or successor to any Unit of the General Partner pursuant to Section 10.2 shall be admitted to the Partnership as a General Partner without the need to obtain the consent of the other Partners, effective immediately and upon the receipt of required (if any) FCC approval pursuant to Section 10.1(d), and shall continue the business of the Partnership without dissolution. The successor General Partner shall furnish to the Partnership (a) acceptance in form satisfactory to counsel to the Partnership of all the terms and conditions of this Agreement and (b) such other documents or instruments as may be required by such counsel in order to effect its admission as a General Partner. SECTION 11.3. Amendment of Agreement and of Certificate of Limited Partnership. For the admission to the Partnership of any successor Partner, the Partnership shall take all steps necessary and appropriate to prepare and as soon as practicable an amendment of this Agreement and to prepare and record or file as soon as practicable an amendment to the Certificate of Limited Partnership and may for this purpose exercise the power of attorney granted pursuant to Section 1.5. ARTICLE XII. RIGHT TO BECOME LIMITED PARTNER SECTION 12.1. Right of the General Partner to Become a Limited Partner. The General Partner may also become a Limited Partner by either (i) converting some but not all of its Units to limited Units or (ii) acquiring limited Units and thereby become entitled to all of the rights of a Limited Partner to the extent of the limited Unit so converted or acquired, and the Consent of the Partners need not be obtained. Such event shall not be deemed to reduce any of the General Partner's liability hereunder and will not prevent the General Partner from continuing to act as the General Partner. The General Partner's Capital Contribution referred to in Schedule A as of the Effective Date will be made in its capacity as a General Partner and such Capital Contribution will not entitle the General Partner to any rights of a Limited Partner, including those set forth in Article VII hereof. SECTION 12.2. Withdrawal of Limited Partner. A Limited Partner who shall have withdrawn from the Partnership shall have no further rights hereunder. 60 ARTICLE XIII. DISSOLUTION AND LIQUIDATION SECTION 13.1. Dissolution. The Partnership shall dissolve and its affairs shall be wound up upon: (a) December 31, 2050; (b) the withdrawal of the General Partner, or any other event that results in its ceasing to be a General Partner such as the removal, bankruptcy or dissolution of the General Partner unless within 90 days of the General Partner's ceasing to be a General Partner of the Partnership, Partners holding 50% of those Units held by Limited Partners as of the date of such cessation agree in writing to continue the business of the Partnership and to the appointment, effective as of the date on which the General Partner ceases to be a General Partner of the Partnership, of one or more additional General Partners if necessary or desired; (c) any other event that under the Delaware Act would cause its dissolution; or (d) at the election of the General Partner, provided that the General Partner has obtained any Consent of the Partners and/or Approval of the Founding Partners that is otherwise required herein. For purposes of this Section 13.1, bankruptcy of the General Partner shall be deemed to have occurred when (i) it commences in good faith and under appropriate circumstances a voluntary proceeding or files in good faith and under appropriate circumstances an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any involuntary proceeding, which voluntary or involuntary proceeding seeks a liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (ii) it is adjudged bankrupt or insolvent, or has entered against it a final and non-appealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect, (iii) it executes and delivers a general assignment for the benefit of its creditors, (iv) it seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for it or for all or any substantial part of its properties, or (v) (1) any proceeding of the nature described in clause (i) above has not been dismissed 120 days after the commencement thereof, (2) the appointment without its consent or acquiescence of a trustee, receiver or liquidator appointed pursuant to clause (ii) above has not been vacated or stayed within 90 days of such appointment, or (3) such appointment is not vacated within 90 days after the expiration of any such stay. 61 SECTION 13.2. Winding Up and Liquidation. (a) Upon dissolution of the Partnership other than pursuant to Section 6.16, the General Partner or, in the event the General Partner has withdrawn from the Partnership, a liquidator or liquidating committee selected by Consent of the Partners, shall be responsible for the winding up of the affairs of the Partnership and the distribution of its assets. The Person or Persons who assume such responsibility (whether they be the General Partner or not) are referred to herein as the "Liquidator." In connection with a winding up of the affairs of the Partnership, the Liquidator shall cause an accounting to be made of the assets and liabilities of the Partnership. If any liability is contingent or uncertain in amount, a reserve will be established in such amount as the Liquidator deems reasonably necessary. Upon satisfaction or other discharge of such contingency, the amount of the reserve not required, if any, will be distributed as provided in this Section 13.2. (b) The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by Consent of the Partners. The Liquidator shall agree not to resign at any time without 15 days' prior written notice and (if other than the General Partner) may be removed at any time, with or without cause, by notice of removal signed by Consent of the Partners. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within 30 days thereafter be selected by Consent of the Partners. The right to appoint a successor or substitute Liquidator in the manner provided herein shall be recurring and continuing for so long as the functions and services of the Liquidator are authorized to continue under the provisions hereof, and every reference herein to the Liquidator will be deemed to refer also to any such successor or substitute Liquidator appointed in the manner herein provided. Except as expressly provided in this Article XIII, the Liquidator appointed in the manner provided herein shall have and may exercise, without further authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers) to the extent necessary or desirable in the good faith judgment of the Liquidator to carry out the duties and functions of the Liquidator hereunder for and during such period of time as shall be reasonably required in the good faith judgment of the Liquidator to complete the winding up and liquidation of the Partnership as provided for herein. (c) The Liquidator shall sell or otherwise liquidate the assets of the Partnership; allocate all income, gain, loss and deduction (including any income, gain, loss or deduction inherent in Partnership assets that are not sold) among the Capital Accounts of the Partners in accordance with Section 5.1; and 62 apply and distribute the proceeds of such liquidation in the following order of priority, unless otherwise required by mandatory provisions of applicable law: (i) to the payment of Partnership creditors, including Partners in respect of loans or guaranteed payments, in order of priority provided by law; (ii) to the establishment of reasonable reserves for contingencies; and (iii) thereafter to make distributions to the Partners in accordance with the positive balances in their respective Capital Accounts (determined after applying the provisions of Articles V and VIII). (d) The Liquidator shall be authorized to sell any, all or substantially all of the assets of the Partnership for deferred payment obligations, and to hold, collect and otherwise administer any such obligations or any other deferred payment obligations held or acquired as assets of the Partnership, regardless of the terms of such obligations. (e) A reasonable time, including, without limitation, any time required to collect deferred payment obligations, shall be allowed for the orderly liquidation of the assets of the Partnership and the discharge of liabilities to creditors so as to enable the Liquidator to minimize the normal losses attendant upon the liquidation. The General Partner shall not be personally liable for the return of the original investment or contributions of the Limited Partners, or any portion thereof. Any such return shall be made solely from Partnership assets and in accordance with the express provisions hereof. (f) If, in the process of collecting any deferred payment obligation generated by a sale of assets of the Partnership, the Partnership reacquires any such assets, and if, at such time, there is a General Partner and the same so determines, the Partnership shall be reconstituted with the Consent of the Partners upon the terms and conditions hereof. SECTION 13.3. Cancellation of Certificate of Limited Partnership. Upon the completion of the distribution provided for in Section 13.2, the Partnership shall be terminated, and the Liquidator (or the General Partner and the Limited Partners if necessary) shall cause the cancellation of the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware and shall take such other actions as may be necessary to terminate the Partnership. SECTION 13.4. Return of Capital. The General Partner shall not be personally liable for the return of the Capital Contribution of the Limited Partners, or any portion thereof, it 63 being expressly understood that any such return shall be made solely from Partnership assets. SECTION 13.5. Waiver of Partition. Each Partner hereby waives any rights to partition of Partnership property. SECTION 13.6. Deficit Upon Liquidation. Upon liquidation, the Partners shall not be obligated to the Partnership for any deficit in their Capital Accounts. ARTICLE XIV. AMENDMENT OF PARTNERSHIP AGREEMENT SECTION 14.1. Amendments to be Adopted Without Consent of the Partners. The General Partner (pursuant to powers of attorney granted under Section 1.5), without obtaining the Consent of the Partners, may amend any provision of this Agreement, and execute, swear to, acknowledge, deliver, publish, file and record whatever documents may be required in connection therewith, to reflect: (a) a change in the name of the Partnership or a change in the location of the principal place of business of the Partnership, in each case approved by the General Partner; (b) a change that the General Partner, based upon the opinion of outside counsel, furnished to all the Partners, has determined to be reasonable and necessary or advisable (i) to qualify or continue the qualification of the Partnership as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or (ii) to ensure that the Partnership will not be treated other than as a partnership for U.S. federal income tax purposes; (c) a change (i) that the General Partner, based upon the opinion of outside counsel, furnished to all the Partners, has determined is necessary or desirable to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute, compliance with any of which the General Partner deems to be in the best interests of the Partners or the Partnership, or (ii) that is expressly required or expressly contemplated by this Agreement or is otherwise herein expressly permitted to be made by the General Partner; (d) immaterial amendments to correct any mistake or clear omission or to reflect the surrender of any rights or the assumption of any additional responsibilities by the General Partner; or (e) any amendment necessary to give effect to the issuance and sale of Additional Units permitted by this Agreement or to 64 give effect to the admission of any Additional Partners pursuant thereto, including such amendments to Article V hereof as are necessary to give effect to any allocations of income or loss to the holder of such Additional Units and any distributions to be made to such holders. SECTION 14.2. Amendment Procedures. Except as provided in Section 14.1, all amendments to this Agreement shall be made in accordance with the following requirements. Subject to Sections 6.2(a)(ii) and 14.1, any proposed amendment shall be effective only upon the consent of the General Partner and the Consent of the Partners, provided, that (except as provided in Section 14.1) no amendment adversely affecting the capital account or other economic rights of any Partner shall be made without such Partner's consent. Promptly after the adoption of an amendment to this Agreement as provided hereunder, the Partnership shall forward a copy of such amendment to each Partner. ARTICLE XV. GENERAL PROVISIONS SECTION 15.1. Addresses and Notices. The address of each Partner for all purposes shall be the address as set forth on Schedule B attached hereto and made a part hereof on the date hereof or such other address of which each other Partner has received written notice. All notices, requests, demands and other communications required or permitted to be given under this Agreement shall be sent to the party to whom the notice is to be given, by telex, fax (confirmed by first class mail, postage prepaid), telegram, Federal Express (or other reliable delivery service) or first class mail, postage prepaid and properly addressed as provided in this Agreement (in each case such notice shall be deemed to have been duly given on the day the notice is first received by that party) or to such other address or Person as may be designated by a party hereto, by notice given in accordance with this Section. SECTION 15.2. Titles and Captions. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. SECTION 15.3. Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. SECTION 15.4. Further Action. 65 (a) The parties hereto shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. (b) At any time or times, upon the request of the General Partner, the Partners hereby agree to sign and swear to any certificate required by Delaware or other applicable law, to sign and swear to any amendment to or cancellation of any such certificate whenever such amendment or cancellation is required by or appropriate under law, to sign and swear to or acknowledge similar certificates or affidavits or certificates of fictitious firm name, trade name or the like (and any amendments or cancellations thereof) required by or appropriate under the laws of Delaware or any other jurisdiction in which the Partnership does or proposes to do business, and cause the filing of any of the same for record wherever such filing shall be required by law. SECTION 15.5. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. SECTION 15.6. Survival of Certain Provisions. Each of the Partners agrees that the covenants and agreements set forth in Sections 6.7, 6.9, 6.13, 6.14, 6.16(a), 13.2, 15.11 and 15.13 shall survive the dissolution and termination of the Partnership. SECTION 15.7. Integration. This Agreement entered into by each Partner or the assignor of its Units, together with the Investor Documents, constitute the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto. SECTION 15.8. Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Partnership (other than any Indemnities seeking indemnification under Section 6.13). SECTION 15.9. Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. SECTION 15.10. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto independently of the signature of any other party. 66 SECTION 15.11. Dispute Resolution. (a) The parties hereto shall attempt to resolve by good faith and diligent negotiation any dispute, controversy or claim between them arising out of or relating to this Agreement, or the breach, termination or invalidity thereof. If such negotiations are not concluded within 30 days of delivery by a party hereto of a request for negotiations, such Party may initiate arbitration as provided for below. (b) Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, that has not been amicably resolved pursuant to the procedures of Section 15.11(a), shall be exclusively and finally settled by arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (the "Rules"), as at present in force, by three arbitrators appointed according to the Rules. The language of the arbitration proceedings shall be English. The place of arbitration shall be New York, New York, U.S.A. (c) Resolution of Common Issues. If at any time there is pending an arbitration under this Section 15.11 and such arbitration involves one or more issues of law or fact, the resolution of which a Partner (the "First Partner") desires binding on some or all the other Partners, the First Partner may give written notice to such other Partners identifying the issue of law or fact, the resolution of which the First Partner desires to be so binding and inviting each other Partner to join in such arbitration as provided in this Section 15.11(c). Each Partner which shall have received such a notice shall have the right (but shall not be obligated) to become a party to such arbitration for the limited purpose of the resolution of such issue of law or fact. The arbitrator in such arbitration may supplement and alter the Rules as may be necessary or appropriate to accommodate the multi-party nature of the arbitration and to ensure the just, expeditious, economical and final determination of the dispute. The award in any such arbitration shall be final and binding as to resolution of the issues of law or fact decided therein and identified in the notice from the First Partner given pursuant to this Section 15.11(c), on all of the Partners who were given notice of such arbitration and an opportunity to participate as parties therein, whether or not they participated in such arbitration. (d) Enforcement. Arbitral awards under Section 15.11 shall be final and binding, and shall be enforceable in any court having jurisdiction. SECTION 15.12. Governing Law. This agreement shall be construed in accordance with and governed by the laws of the state of Delaware, without regard to its principles of conflicts of law. 67 SECTION 15.13. Confidentiality. (a) For purposes of this Agreement, "Confidential Information" shall mean all oral, written and/or tangible technical, financial, business and/or any other information of whatever kind created by or on behalf of the Partnership or disclosed by the General Partner, the Partnership or one of their Affiliates (in any case "Owner") to a receiving party ("Recipient") which is confidential, proprietary and/or not generally available to the public, including, but not limited to, information relating, in whole or in part, to present and future services related to the Partnership's business, business plans and strategies, marketing ideas and concepts, pricing, volume estimates, financial data, market testing information, research and development plans and results, specifications, configurations, designs, plans, drawings, apparatus, sketches, software, hardware, data, connecting requirements or other technical and business information. Confidential Information provided by an Owner shall remain the sole and exclusive property of Owner. (b) During the term of this Agreement, and until the fifth anniversary of the termination thereof, Confidential Information: (i) shall be treated in confidence by Recipient and shall be used only for purposes of Recipient's performance of its obligations under this Agreement, or any other written agreement between Owner and Recipient entered into in connection with the Partnership's business; (ii) shall not be reproduced or copied in whole or in part, except as necessary for use as authorized herein; and (iii) shall be disseminated only to those of its and its Affiliates' employees, agents and subcontractors who have a need to know it (and such employees, agents and subcontractors shall be advised of the obligations assumed herein). Recipient shall ensure by appropriate procedures that such employees, agents and subcontractors to whom Confidential Information is disseminated or disclosed treat such Confidential Information in confidence pursuant to this paragraph. Such procedures shall include: (A) advising such employees, agents and subcontractors of the obligations assumed herein, and (B) requiring such employees, agents and subcontractors to execute a document agreeing to be bound by all the conditions set forth in this Section 15.13. (c) Notwithstanding the foregoing, information shall not be deemed Confidential Information and Recipient shall have no obligation with respect to any such information which: (i) is or was in the possession of the Recipient at the time of disclosure by Owner, and was not previously acquired by the Recipient directly or indirectly from Owner 68 or any of its Affiliates under an obligation to keep such information confidential; or (ii) is or becomes publicly known, through no negligence or other wrongful act of Recipient; or (iii) is received by Recipient from a third party having, to the best knowledge of the Recipient, a lawful right to disclose, subject to, as to disclosed information, any restriction as to use, imposed by such third party; or (iv) is independently developed by Recipient, as evidenced by its records. (d) Upon the termination of this Agreement, written Confidential Information will be returned to Owner or destroyed immediately upon the request of Owner, and no copies, extracts or other reproductions shall be retained by Recipient. All documents, memoranda, notes and other writings whatsoever prepared by Recipient which contain the Confidential Information shall be returned to Owner or destroyed at Owner's request. The redelivery or destruction of such materials shall not relieve Recipient of its obligation of confidentiality or other obligations hereunder. (e) If Recipient (or its Affiliate) is required by order of any competent authority (by oral questions, interrogatories, directions, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any Confidential Information, Recipient will promptly notify Owner of such order or requirements and shall cooperate with Owner in seeking appropriate protective arrangements requested by Owner. If, in the absence of a protective order or the receipt of a waiver hereunder, Recipient (or any of its Affiliates) is in the written opinion of Recipient's counsel compelled to disclose the Confidential Information or else stand liable for contempt or suffer other censure or significant penalty, Recipient (or its Affiliate) may disclose only so much of the Confidential Information to the authority compelling disclosure as is required by law. Recipient will exercise (and will cause its Affiliates to exercise) reasonable efforts to obtain appropriate protective arrangements or other reliable assurance that confidential treatment will be accorded to Confidential Information. (f) The terms and conditions of this Agreement, the Investor Documents and all exhibits, attachments and amendments hereto and thereto shall be considered Confidential Information protected under this Section 15.13. (g) Notwithstanding anything in this Section 15.13 to the contrary, in the event that any Confidential Information is also subject to a limitation on disclosure or use contained in another written agreement between Owner and Recipient which is more restrictive than the limitations contained in this Section 15.13, 69 then the limitation in such agreement shall supersede this Section 15.13. SECTION 15.14. Invalidity of Provisions. (a) If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby, unless the effect would be to materially and adversely affect the economic rights of any Partner. (b) Without vitiating the effectiveness of Section 15.14(a) above, and without limiting the enforceability of any other provision of this Agreement, each of the parties to this Agreement agrees that: (i) if any provision contained in either Section 6.9 or 15.13 shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of the respective Section. It is the intention of the parties that if any of the restrictions or covenants contained therein is held to be for a length of time which is not permitted by applicable law, or in any way construed to be too broad or to any extent invalid, such provision shall not be construed to be null, void and of no effect, but to the extent such provision would be valid or enforceable under applicable law, a court of competent jurisdiction shall construe and interpret or reform the Section to provide for a covenant having the maximum enforceable time period or other provisions (not greater than those contained herein) as shall be valid and enforceable under such applicable law. (ii) The provisions of Section 6.9 and 15.13 were negotiated in good faith by the parties hereto, and such provisions are reasonable and are not more restrictive than necessary to protect the legitimate interests and objectives of the Partners and the Partnership. (iii) Each other party hereto would be irreparably harmed by any breach of either Section 6.9 or 15.13 and that there would be no adequate remedy at law or in damages to compensate such party for any such breach; each other party hereto shall be entitled to injunctive relief requiring specific performance of either Section 6.9 or 15.13, and each of the parties hereto consents to the entry thereof, and waives any right to require any other party hereto to post a bond in order to obtain specific performance. SECTION 15.15. Number; Gender; Without Limitation; Interpretation of Certain Defined Terms. Pronouns, wherever used in this Agreement, and of whatever gender, shall include Persons of every kind and character, and the singular shall include the plural whenever and as often as may be appropriate. Any 70 reference herein to "including" and words of similar import refer to "including without limitation." SECTION 15.16. No Right to Partition. The Partners, on behalf of themselves and their shareholders, partners, members, successors and assigns, if any, hereby specifically renounce, waive and forfeit all rights, whether arising under contract or statute or by operation of law, except as otherwise expressly provided in this Agreement, to seek, bring or maintain any action in any court of law or equity for partition of the Partnership or any asset of the Partnership, or any interest which is considered to be Partnership property, regardless of the manner in which title to such property may be held. 71 IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Agreement as of the date first above written. "General Partner" Loral CyberStar, L.L.C. By: Loral Broadband Holdings, L.P. as Sole Member By: Loral CyberStar Ltd. as General Partner By: /s/ Eric J. Zahler ----------------------- Eric J. Zahler Vice President "Limited Partners" Loral Broadband Holdings, L.P. By: Loral CyberStar Ltd. as General Partner By: /s/ Eric J. Zahler ----------------------- Eric J. Zahler Vice President Audelec By: CyberStar, L.P. as Attorney-In-Fact for Audelec By: Loral CyberStar, L.L.C. as General Partner By: Loral Broadband Holdings, L.P. as Sole Member By: Loral CyberStar Ltd. as General Partner By: /s/ Eric J. Zahler ----------------------- Eric J. Zahler Vice President EX-10.18 5 PURCHASE AND SALE AGREEMENT 1 PURCHASE AND SALE AGREEMENT OF STOCK REPRESENTING THE CAPITAL STOCK OF THE COMPANY CALLED SATELITES MEXICANOS, S.A. DE C.V. (HEREINAFTER "SATMEX"), ENTERED INTO BY ONE PARTY, THE FEDERAL GOVERNMENT OF THE UNITED MEXICAN STATES (HEREINAFTER THE "VENDOR"), THROUGH THE SECRETARIAT OF COMMUNICATIONS AND TRANSPORT, THROUGH THE UNDER SECRETARY OF COMMUNICATIONS, JAVIER LOZANO ALARCON, AND BY THE OTHER PARTY CORPORATIVO SATELITES MEXICANOS, S.A. DE C.V. REPRESENTED HEREIN BY MESSRS LAURO ANDRES GONZALEZ MORENO AND CARLOS RAUL VALENCIA BARRERA, ( HEREINAFTER "BUYER"), WITH THE APPEARANCE OF THE FEDERAL TREASURY (HEREINAFTER "TESOFE"), THROUGH THE FEDERAL TREASURER, LIC. JONATHAN DAVIS ARZAC; THE SECRETARIAT OF THE COMPTROLLER'S OFFICE AND ADMINISTRATIVE DEVELOPMENT, THROUGH EMILIO CARRERA CORTES, DELEGATE COMMISSIONER FOR THE COMMUNICATIONS AND TRANSPORT SECTOR, AND MR. SERGIO MIGUEL AUTREY MAZA, IN ACCORDANCE WITH THE FOLLOWING BACKGROUND RECORD, RECITALS AND CLAUSES: BACKGROUND RECORD 1. On March 2, 1995, the amendment was published in the Official Gazette of the Federation, to paragraph four of article 28 of the Political Constitution of the United Mexican States, in order to substitute the system of exclusive participation by the State in the rendering of satellite communication service, in order for it to be a priority activity that allows participation by private parties, and consequently, on June 7 of the same year, the Federal Telecommunications Law was promulgated with the purpose of establishing among other things, the fundamental regulatory framework for this activity. 2. By the Accord of the Secretariat of Communications and Transport published in the Official Gazette of the Federation on February 28, 1996, the Committee for Restructuring of the Mexican Satellite System was created, whose object is to define the strategy to be followed concerning general and specific aspects in the different phases of the restructuring process carried out by the Secretariat of Communications and Transport (hereinafter the "SECRETARIAT"), under the terms of the Federal Telecommunications Law and the other applicable laws, as well as to make recommendations and proposals. 3. By official letter No. 101,-784, of June 11, 1997, and with the prior, favorable opinion of the Intersecretarial Commission of Financing Expense, the Secretariat of the Treasury and Public Credit authorized the temporary establishment of the majority state controlled company Satelites Mexicanos, S.A. de C.V. (hereinafter SATMEX), in order to carry out the restructuring process of the Mexican Satellite System. 2 4. SATMEX was established via public document No. 51,371 of June 26, 1997, executed before Lic. Miguel Alessio Robles, notary public 19 of the Federal District, which was recorded on July 1, 1997 in mercantile folio 226109 of the Public Commerce Registry of the Federal District, SATMEX was incorporated with a fixed minimum capital stock of $50,000.00 (FIFTY THOUSAND MEXICAN PESOS 00/100), represented by 5,000 issued shares, of which 2,550 shares belong to Class I Series "A" and 2,450 shares belong to Class I Series "B". 5. SATMEX's corporate purpose includes the installation, operation, control and exploitation of the Mexican satellites system through occupancy and exploitation of geostationary orbital positions and satellite orbits assigned to the country, with their respective frequency bands and signal sending and receiving rights, under the terms of the Federal Telecommunications Law. 6. The Intersecretarial Commission on Divestiture (hereinafter the "CID"), in its ordinary session of July 4, 1997, ratified accord 97-XX-1, adopted in the session of May 28, 1997, whereby it was resolved to call bids on a control package consisting of 60% of the capital stock shares of SATMEX, with the option for the winner to acquire an additional 15% of such stock. 7. Based on the Organic Act of the Federation the Federal Law on Partial-state Controlled Entities and its Regulation, and via official letter No. 100.-1007 6184 of July 28, 1997, the Secretariat of the Treasury and Public Credit authorized the alienation of stock representative of SATMEX, which was published in the Official Gazette of the Federation on August 6, 1997. 8. On August 1, 1997, publication was made in the Official gazette of the Federation, of the notice and rules (hereinafter "NOTICE" and "RULES") for carrying out the public bid whose purpose would be the sale of stock representing 60% of SATMEX's capital stock (hereinafter "FIRST STOCK PACKAGE"). The foregoing is in the understanding that the winner could opt to purchase together with the FIRST STOCK PACKAGE, and under the same terms and conditions, up to an additional 15% of the capital stock shares of SATMEX (hereinafter "SECOND STOCK PACKAGE"), at the same per-share price offered for the FIRST STOCK PACKAGE. The remaining 40% of the stock or, if such, the percentage of certificates the Federal Government effectively keeps (hereinafter the THIRD STOCK PACKAGE), once the purchase option right on the SECOND 3 STOCK PACKAGE has been exercised, will be kept by the Federal Government to be sold in a public auction through the stock market, prior authorization from the National Banking and Securities Commission, and registration of such stock in the National Securities and Brokers' Registry. 9. In a session held September 10, 1997, the Board of Trustees of Telecomunicaciones de Mexico (hereinafter "TELECOMM") granted an authorization to the VENDOR to sell the Class "I" Series "B" share that such body holds in the capital stock of SATMEX, to the person(s) who win(s) the bidding process mentioned in point 8 above, jointly with the stock that VENDOR sells to BUYER for that reason. 10. On October 17, 1997 the participants in the bidding process mentioned filed their technical and economic bids and, as a result of the bidding, on October 27, 1997 the CID, based on the proposals presented and on the decision criteria established in the NOTICE and the BASES, resolved to adjudicate the subject matter of such bid to the BUYER, who was notified of the result on October 30, 1997, for which purpose the recommendation of the SECRETARIAT was taken into consideration. In its bid, the BUYER declared its intention to purchase the shares representing the FIRST STOCK PACKAGE and 1,500,000 (ONE MILLION FIVE HUNDRED THOUSAND) shares representing the SECOND STOCK PACKAGE (hereinafter jointly, the "STOCK" or the "SHARES"). 11. Development of the restructuring process of the Mexican Satellite System has been duly communicated to the Chamber of Deputies, of the Congress of the Union, by the President of the Committee for Restructuring of the Mexican Satellite System, in accordance with article 76, section II, of the Federal Expenditures Budget for fiscal year 1997. The foregoing, as established in official letter No. 2.-153, of July 8, 1997, issued by Lic. Javier Lozano Alarcon, for that effect. RECITALS I. VENDOR declares that: a) It is the legitimate owner of 9,999,999 (NINE MILLION NINE HUNDRED AND NINETY-NINE THOUSAND NINE HUNDRED AND NINETY-NINE) capital stock shares of SATMEX, distributed as follows (hereinafter "FEDERAL GOVERNMENT'S STOCK"): . 2,550 Class I Series "A" shares . 2,449 Class I Series "B" shares . 2,598,450 Class II Series "A" shares . 2,496,550 Class II Series "B" shares 4 . 4,900,000 Class II Series "N" shares All of the FEDERAL GOVERNMENT'S STOCK is subscribed and paid in full and free from all liens or restriction of any domain, and are deposited in the TESOFE as established in article 76 of the Federal Treasury Service Law. These shares are represented in final certificates numbers 1m 2m 4, 5, 6, and 7 issued by SATMEX. b) Lic. Javier Lozano Alarcon has sufficient authority to sell the FEDERAL GOVERNMENT STOCK subject to the terms and conditions of this Contract, as established in article 6 of the Internal Regulation of the Secretariat of Communications and Transport, and the sufficient authority to alienate the share of Class "I", Series "B", owned by TELECOMM (hereinafter the "TELECOMM SHARE"), subject to the terms and conditions of this contract, as established in the mandate granted by the Director General of such decentralized body on October 14, 1997, and that is attached hereto as Exhibit "I". TELECOMM'S SHARE is represented in final stock certificate number 3, issued by SATMEX. c) There is no legal restriction or cause that might generate it, and that restricts or prevents it from assuming and performing all and each of its obligations hereunder, and that the procedures established by law for the sale of the FEDERAL GOVERNMENT'S STOCK as well as TELECOMM'S SHARE have been fulfilled. d) On October 15, 1997, SATMEX entered into a purchase and sale contract with VENDOR with respect to the goods and equipment specified therein, a copy whereof is added as Exhibit "II" hereto (hereinafter the "GOODS AND EQUIPMENT PURCHASE AND SALE CONTRACT"). The goods and equipment under the GOODS AND EQUIPMENT PURCHASE AND SALE CONTRACT were in turn acquired by the VENDOR from TELECOMM through a donation agreement dated October 15, 1997, a copy whereof is added hereto as Exhibit "III" (hereinafter the "DONATION AGREEMENT"). e) On October 17 and 27, 1997 the stockholders of SATMEX held an ordinary general stockholders meeting in which the Federal Government subscribed a capital increase for $,155,086,278.00 (seven thousand one hundred and fifty-five million and eighty-six thousand two hundred and seventy-eight Mexican pesos 00/100) and paid it via capitalization of the liability in its favor and against SATMEX, derived substantially from the GOODS 5 AND EQUIPMENT PURCHASE AND SALE CONTRACT, from the purchase of rights and obligations arising from the contracts for purchase and launching of the Morelos III satellite system and the payment for the grant of the three concessions that allow it to occupy and exploit the geostationary orbital positions therein described, together with their C and Ku frequency bands, and their signal broadcasting and receiving rights, which titles are attached hereto as Exhibit "IV" (hereinafter called jointly, the "CONCESSION TITLES"). f) It wishes to transfer to BUYER through this Contract, 2,550 Class I Series "A" shares, 2,449 Class I Series "B" shares, 2,598,450 Class II Series "A" shares , and 2,496,550 Class II Series "B" shares, and 2,400,000 Class II Series "N" shares it owns, as well as TELECOMM'S SHARE (defined in recital 10 above, as the "STOCK" or "SHARES"). h) SATMEX's pro forma financial statements to October 3, 1997, 1997 that are added hereto as Exhibit "V", ( hereinafter the "FINANCIAL STATEMENTS"), reasonably present SATMEX's financial situation to that date in keeping with accounting principles generally accepted in Mexico, applied consistently, and that between the date of such FINANCIAL STATEMENTS and the signing of this Contract, there has been no subsequent event, nor is any cause or reason known that might generate an event that substantially affects or could adversely affect SATMEX's financial or operation situation. Except as established in the FINANCIAL STATEMENTS, that is, SATMEX has no responsibilities obligations of any nature, except for responsibilities and obligations reflected or reserved against SATMEX in the FINANCIAL STATEMENTS. h) SATMEX's accounting books and corporate books, that is, the Book of Minutes of the Stockholders Meetings, the book of Board of Directors sessions, the Stockholders Register, and the Capital Variations book, are correct and complete and have been kept in keeping with healthy commercial practices. "SATMEX's minute books contain exact, complete records of all the meetings held, and of the resolutions adopted by the stockholders and the members of SATMEX's Board of Directors. i) On October 24, 1997 the SECRETARIAT granted to SATMEX, based on the last paragraph of article 7 of the Satellite Communication Regulation and the Federal Telecommunications Law, the CONCESSION TITLES which continue with full legal force and value. 6 j) On October 24,, 1997, based on the Accord published by the Secretariat of the Comptroller's Office and Administrative Development in the Official Gazette of the Federation on June 17, 1997, the SECRETARIAT granted to SATMEX a concession title to use, develop and operate the real property within the federal public domain that are described in said Accord, for a term of 40 years counted from the date of the grant, in order for SATMEX to be able to use such real property in the rendering of the fixed satellite service that TELECOMM had previously been providing. k) The personal property that forms SATMEX's patrimony, as well as the real property it has licensed in its favor, constitute all the properties, goods and rights with which SATMEX provides the fixed satellite service. l) There are no purchase options in circulation, stock appreciation rights, optional certificates, convertible securities or other rights that are convertible to stock, or that have their value based on SATMEX's common stock, and there are no contracts related to the issue, sale or transfer of any capitals market instrument or any other type of SATMEX securities. m) Neither the signing of this Contract nor the performance hereof contravene what is established: (i) in the legislation in force in Mexico; (ii) in SATMEX's bylaws; (iii) in the resolutions adopted by the Stockholders Meeting and/or SATMEX's administrative body, or (iv) in the contracts or agreements signed by SATMEX to this date. n) All the procedures have been completed and the necessary permits and authorizations obtained for sale of the shares that represent SATMEX's capital stock. n) Because they were personal property within the private domain of the Federation, the Morelos II, Solidaridad 1 and Solidaridad 2 satellites, as well as the other personal property of SATMEX is not subject to the divestiture process, under the terms of the official letter UNAOPSPF/309/BN/1205/96 of October 21, 1996, issued by the Secretariat of the Comptroller's Office and Administrative Development. (o) The orbiting satellite life insurance policies in the above subsection are in force and certified by Seguros comercial America, Division Asemex, and its reinsurance agent, International Space brokers. 7 p) Said satellites have not undergone any adverse change since their most recent test, which was carried out on October 6, 1997. q) The contracts it has entered into with its users are producing their effects normally and there is no cause that might invalidate them; a list of such contracts is added to this contract as Exhibit VI. r) It informed the buyer of all the information within its reach so that it could file its tender in the public bidding process mentioned in paragraph 8 of the background chapter of this instrument, based on the analysis and appraisal that the BUYER did of such information. s) It has not entered into any legal act that might have adverse effects for the normal course of SATMEX's operations, from the date it was established and to the signing date of this instrument; nor does it have litigation in progress pending decision. t) On the signing date of this contract, it has contracted the services of the employees whose names and respective remuneration are detailed in Exhibit VII of this Contract. u) On October 15, 1997 it entered into a contract with SATMEX, among others, whereby it ceded under onerous title, all the rights and obligations that arise from the contract for purchase of the Morelos III satellite system. Likewise, on that same date, it entered into another contract whereby it ceded to SATMEX, under onerous title, all of the rights and obligations arising from the contract to launch the replacement of the Morelos II satellite (hereinafter the "ASSIGNMENT CONTRACTS"). v) It is its intention to sell the STOCK to the BUYER, subject to the terms and conditions established in this Contract. II. The BUYER declares that: a) It is a corporation duly organized under the laws of the Mexican Republic, as established in public document number 19,166 dated November 12, 1997, executed before lic. Jose Maria Morera Gonzalez, notary public no. 102 of Mexico City, in the process of registration in the Public Commerce Registry of the Federal District because of its recent execution. b) Its representative herein, Messrs Lauro A. Gonzalez Moreno and Carlos R. Valencia barrera, have sufficient authority to enter into this Contract representing it, 8 as evidenced with the public document number mentioned in the above recital; such powers have not been modified or revoked in any form. c) It is fully aware of the scope and terms of the documents concerning SATMEX, in conformity with the statement contained in the technical proposal, the CONCESSION TITLES, SATMEX's corporate bylaws, the FINANCIAL STATEMENTS, and the GOODS AND EQUIPMENT PURCHASE AND SALE CONTRACT. d) It learned all the information that was made available to it in relation to the bid which is the subject matter of the NOTICE and the RULES, in the information room that was established for such purpose, and that they were provided through prospectuses, with answers to the questions raised by the participants in said bid, interviews with the financial agent, and with different officers from SATMEX, the SECRETARIAT and TELECOMM. e) It acts in its own name and for its own account, as was declared in the proposal that filed by Telefonica Autrey, S.A. de C.V. and Loral Space and Communications Ltd. in the bid, which they won, and that it does not act in representation, substitution or otherwise, for third parties, without having so declared in its proposal, if such. f) In accordance with point 5.5.6 of the RULES, it declared its intention to acquire together with the FIRST STOCK PACKAGE, all of the shares included in the SECOND STOCK PACKAGE (as defined in Recital I.f) above), under the terms and conditions established in this Contract. g) It is its intention to acquire the STOCK from the VENDOR subject to the terms and conditions established in this Contract. After stating the foregoing, the parties agree to execute the following: CLAUSES ONE. OBJECT. For its own account and for the account of TELECOMM, the VENDOR herein transfers to the BUYER and the BUYER acquires, the STOCK, which represents 60% of the capital stock shares of SATMEX and that constitute the FIRST STOCK PACKAGE, plus an additional 15 % of the capital stock shares of SATMEX and that represent the SECOND STOCK PACKAGE. The STOCK is comprised of the following: Shares the VENDOR sells to the BUYER for its own account: . 2,550 Class I Series "A" shares 9 . 2,449 Class I Series "B" shares . 2,598,450 Class II Series "A" shares . 2,496,550 Class II Series "B" shares, and . 2,400,000 Class II Series "N" shares One Class I Series B share that VENDOR sells for TELECOMM'S account. The FEDERAL GOVERNMENT'S STOCK is delivered herein to the BUYER, who endorses it and allocates it in irrevocable management and security trust (hereinafter the "TRUST"), a cop of which is added hereto as exhibit VIII. TWO.- PRICE.- The price of the purchase and sale of the STOCK is the total amount of $5,366,352,206.25 (five thousand three hundred and sixty-six million three hundred and fifty-two thousand two hundred and six Mexican pesos 25/100), that is, the amount of $715.5136275 (seven hundred and fifteen pesos 5136275/10000000) Mexican Pesos per share. This price obligates the BUYER to pay it to the VENDOR, in accordance with Clause Three below, and subject to the other terms and conditions of this Contract. THREE.- PRICE PAYMENT DATE. As established in point 8.2 of the RULES, the BUYER shall pay the price stipulated in Clause Two as follows: Via payment by the BUYER, of thirty percent (30%) of the contracted price, that is, the amount of $1,609,905,661.87 (one thousand six hundred and nne million nine hundred and five thousand six hundred and sixty-one pesos 87/100), which is paid herein by the BUYER to the VENDOR, this contract serving as full and sufficient receipt. The outstanding balance of the contracted price shall be paid at the latest on December 17, 1997. The payment mentioned in this paragraph must be made together with the amount corresponding to the ordinary interests that have been generated under the terms of clause Four, during the corresponding period. If for any reason the price and ordinary interests are not paid under the terms of the preceding paragraph, the BUYER shall pay delinquent interests at 1.5 times the ordinary interest rate established in Clause Four below, notwithstanding the authority established for the VENDOR in Clause Five hereof. All payments that the BUYER makes shall be used in first place, to cover past-due interests, if they exist; in second place, to cover ordinary interests, and lastly, for payment of the principal amount of the contracted price. FOUR. INTERESTS. The outstanding balance of the price not covered on the date this Contract is signed, if such, shall cause ordinary interests at a rate equal to the average of the 28-day interbank break-even interest rate (TIIE), or the one that 10 substitutes it that, during this term, has been published weekly by the Bank of Mexico in the Official Gazette of the Federation since the signing of this Contract until it is paid in full. The interests shall be caused on a daily basis and by days effectively lapsed, calculated on years of 360 days. FIVE. DELINQUENCY. The parties agree that if BUYER fails to comply with payment of the price on the dates specified in Clause Three, the VENDOR may rescind this Contract, in which case, it may claim payment of the liquidated damages referred to in clause Thirteen of this Contract and point 8.3 of the RULES. SIX. ADVANCE PAYMENT. The BUYER may pay early, all or part of the outstanding balance of the price not paid on the signing date of this Contract following notification to the SECRETARIAT at least five working days in advance of the payment date and provided all the interests accrued to that date are paid with it. If the BUYER makes early payment of the balance of the price as established in this Clause, this fact shall not give BUYER the right to any discount for early payment. No penalty shall be imposed on BUYER for early payment. SEVEN. PAYMENT FORM AND PLACE. The price and corresponding interests, if such, shall be paid by certified or cashier's check, issued to the Federal Treasury at its offices located at Av. Constituyentes 1001, col. belen de las Flores, Mexico, D.F., during business days, from 9:00 to 12:00 hours, or through electronic transfer of funds, to the account of the Federal Treasury the VENDOR indicates in writing for that purpose. For the first payment, the BUYER may request that VENDOR apply the amount of the tender maintenance guaranty indicated in point 2.2 of the NOTICE. EIGHT. DELIVERY OF STOCK CERTIFICATES AND ENDORSEMENT. Directly or through the TESOFE, VENDOR shall give the BUYER the certificates that represent the stock hereunder, with property thereof duly endorsed. NINE. ALLOCATION TO TRUST. In order to guarantee payment of the outstanding balance of eh price of this purchase and sale and of the interests generated, if such, as well as to guarantee payment of the liquidated damages mentioned in Clause Twelve, the Buyer shall contribute to the trust (the "TRUST"), established in Banco Invex, S.A., Institucion de Banca Multiple, Invex Grupo Financiero (the TRUSTEE"), the stock certificates mentioned in the above clause (or the "TRUST STOCK"), who shall deliver them only to the BUYER, on the same date when the total amount of the purchase and sale transaction hereunder is paid. If a Stockholders Meeting of SATMEX is held, the BUYER shall notify the TRUSTEE in writing at least 5 days in advance, of how to vote the TRUST STOCK. However, if there is any nonperformance by the BUYER of the obligations the same assumes under this Contract or in the RULES; that is notified by the SECRETARIAT to the TRUSTEE, and regardless of whether the TRUSTEE complies with the aims 11 established in the trust agreement, the corporate rights on the TRUST STOCK shall be exercised as indicated by the VENDOR. The parties agree herein that the expenses and costs arising from the establishment and maintenance of the trust, including the trustee's fees, up to the date when all of the TRUST STOCK is issued, shall be covered fully by the BUYER. The BUYER shall register the above-mentioned trust in SATMEX's Stockholders Register. The parties herein agree that until the price of the purchase and sale hereunder is paid, the stock whereof the certificates are delivered to the BUYER under the terms of this clause may only be encumbered by the BUYER with prior authorization from the SECRETARIAT, in the understanding that such authorization shall only be granted when the credit they guarantee has the main purpose of paying the outstanding balance of the price mentioned in this Contract and the respective creditor agrees that the VENDOR shall have preference as first beneficiary under the terms of the TRUST. TEN. GRACE PERIOD The parties agree that if the BUYER fails to perform, it shall have a grace period of 5 working days, counted from the date VENDOR notifies said BUYER of such situation, to perform in the form and terms herein pacted except in the case of breach of Clauses Three, Four, Five, and Eight of this document, in which cases the VENDOR may immediately rescind this Contract. ELEVEN.- REGISTRATION. BUYER promises that the Stockholders Register shall indicate expressly which shares have not been paid to VENDOR by BUYER; therefore, breach of the respective payment obligation may have as an effect rescission of the purchase and sale contract. TWELVE. BREACH. LIQUIDATED DAMAGES. If the BUYER breaches the obligations specified in clauses Three, Four, Five, or Eighteen, or any of its obligations hereunder in the term required for this, in the terms required for this, if such, and the VENDOR decides to rescind this Contract, the VENDOR shall notify the trustee in the TRUST about such breach, and the latter shall notify the BUYER of the alleged breach within 24 hours after receipt of the notification from the VENDOR, and in a term of forty-eight (48) hours the BUYER may challenge the rescission provided it establishes opportune compliance with its obligations. Otherwise, the VENDOR may terminate and rescind this Contract immediately without requiring a prior court order. If the BUYER breaches this Contract or the RULES, BUYER shall pay to VENDOR liquidated damages for the amount equal to thirty percent (30%) of the total price of the purchase and sale hereunder. The parties herein agree that in the case of breach of this Contract or of the RULES, the VENDOR shall directly apply the value of the partial payment specified in Clause Three to payment 12 of the liquidated damages herein covenanted. Therefore, pursuant to article 2311 of the Civil Code for the Federal District in Common Matters and for the entire Republic in Federal Matters, and in the case of rescission of this Contract, the payment of the price mentioned above shall be understood returned virtually, with the BUYER in this case being required to return to VENDOR the stock that was delivered to them on the business day after the day when they are notified in writing of rescission of this contract. BUYER herein commits to return the corresponding stock, free from all lien and limitation of ownership. THIRTEEN. DESIGNATION OF BOARD MEMBERS, STATUTORY AUDITORS AND TOP MANAGEMENT. The BUYER shall perform all the acts that are necessary for an Ordinary Stockholders Meeting of SATMEX to be held on the date this Contract is entered into, which shall designate a new Board of Directors, surveillance and administration body, the powers granted shall be revoked and the current board members, statutory auditors, executives and representatives of SATMEX shall be released from all liability from the date of such meeting. THE BUYER may at any time modify SATMEX's bylaws, in the understanding that while the VENDOR is a stockholder of SATMEX, the articles related to minority rights indicated therein and that VENDOR is aware of, shall be respected. Likewise, while all or part of the shares that form the THIRD STOCK PACKAGE are owned by the VENDOR, the BUYER shall carry out the legal actions within its reach so that the VENDOR's patrimony is not diminished with respect to the THIRD STOCK PACKAGE as a result of any financial operation of restructuring, lease, or other similar operations not approved by the VENDOR whose purpose is to obtain financing for SATMEX or any other purpose, and whose benefit is transferred to a third party, whether such actions are performed by the BUYER, by SATMEX or by any third party. Regardless of the obligation the BUYER assumes under this paragraph, THE BUYER promises that SATMEX shall validly and personally assume the obligation contained in this paragraph in a term not to exceed fifteen (15) days, counted from the date this contract is executed, and to keep this obligation in SATMEX's bylaws exactly as established on the signing date of this Contract while the VENDOR keeps total or full ownership of the THIRD STOCK PACKAGE. FOURTEEN. PRICE ADJUSTMENT. VENDOR shall adjust the price of the purchase and sale hereunder only when there is a net difference according to this Clause, in favor of BUYER that is greater than 3% of the price contracted and that derives solely from the particulars specified in points 1 and 2 below. 1. Liabilities against SATMEX that are not registered in whole or in part in the FINANCIAL STATEMENTS, originating from operations prior to the signing of this contract or derived from acts or events beyond 13 the normal course of such operations. Said unregistered liabilities shall be compensated liabilities that have been covered or defrayed in full or in part and whose payment has not been registered in such FINANCIAL STATEMENTS. In the case of the liabilities indicated in the above paragraph, the BUYER shall only be reimbursed the amount that, if BUYER is required to pay SATMEX, it has actually paid, and provided later it does not directly or indirectly have any right of any type or any legal or administrative recourse to avoid or reduce the corresponding payment. For the effects of this paragraph, only those liabilities will be considered for which a claim has been filed under the terms of Clause Fifteen of this Contract. 2. Fixed assets nonexistent in terms of the list and appraisal accompanying the GOODS AND EQUIPMENT PURCHASE AND SALE CONTRACT, without considering for these effects, the value variations that the indicated assets may have. These assets shall be compensated, if necessary, by the similar existing fixed assets in favor of SATMEX, not registered in whole or in part in relation to the above-indicated assets. Adjustments derived from fixed assets shall only proceed when the latter do not exist, and may not affect the quality, state of conservation, accounting appraisal, accounting policies or any other item that is not strictly what is indicated in this paragraph, provided such nonexistence is not challenged or has not been challenged under the GOODS AND EQUIPMENT PURCHASE AND SALE CONTRACT specified in Recital I, subsection d) of this Contract. In the supposition of the nonexistence of fixed assets, the VENDOR shall have authority at its full discretion to adjust the price under the terms of this Clause, or replace the nonexistent assets by others of similar characteristics, conditions and value. For effects of the adjustment that must be made, if such, in the cause of nonexistent fixed assets the value established for them in the appraisal specified in the first paragraph of point 2 of this Clause shall be considered. The results obtained in keeping with points 1 and 2 above shall in turn be compensated against each other in order to obtain the net difference in favor of the BUYER, if such. The VENDOR shall cover the amount that is in favor of the BUYER whenever this exceeds the figure specified in the first paragraph 14 of this clause, in a term not greater than 10 working days, counted from the date when the final price adjustment is determined. The parties agree that if there is any outstanding balance in favor of VENDOR, the corresponding compensation may be made for the amount of the lesser amount owed. For effects of the price adjustment, the financial cost that may be generated shall be calculated at a rate equal to that of 28-day CETES (Federal Treasury Certificates) applicable during the corresponding period. Despite the foregoing, the parties agree that loss of the operating satellites that are part of SATMEX's assets shall not be the object of adjustment for purposes of this clause, since the risk of their loss is duly insured, to BUYER's satisfaction, as mentioned in Recital I, o) of this instrument. FIFTEEN. CLAIM OF LIABILITIES. The parties agree that in the case of price adjustment derived from liabilities against SATMEX specified in point 1 of the above clause, they may only be paid when: a) The BUYER notifies the VENDOR in writing and in certifiable form, through the SECRETARIAT and within 5 calendar days following notification of the respective existence of the liability or any claim derived therefrom, either judicially or extrajudicially, in order for VENDOR to take the steps they consider opportune, if such. b) SATMEX shall defend against the respective claims judicially or extrajudicially, adhering to what VENDOR indicates. c) The BUYER gives VENDOR or its representative, provided the request is made opportunely, the necessary information and elements it has available so that if VENDOR decides to defend itself against the corresponding claims, it has the necessary means to do so. In this case, SATMEX shall be required to grant the powers of attorney that are required, to the persons VENDOR determines, in the understanding that failure to grant such powers of attorney shall result in the inappropriateness of the corresponding price adjustments. d) The liability or the claim derived therefrom does not arise as a direct consequence of an omission or action attributable to SATMEX from the time the delivery and reception concludes, or attributable to any BUYER at any time. When the claims referred to in the above subsections arise from actions that, under this contract, VENDOR is responsible for, all 15 the legal expenses SATMEX makes for defense shall be refunded by VENDOR, provided they are reasonable, are duly proven and are directly related to the claims mentioned in the above subsections. The amounts corresponding to the items mentioned in this paragraph shall be refunded to BUYER by VENDOR in a term of 20 calendar days, counted from the date when they were determined. SIXTEEN.- TERM FOR CLAIMS. The BUYER shall have a term of 180 calendar days, counted from the signing date of this Contract, to adjust the price under the terms of Clause Fourteen. Notwithstanding the obligation contained in subsection a) of the above clause, the price adjustment request shall be filed in a single document. The appropriateness of any price adjustment shall be determined under the terms of Clauses Nineteen and Twenty below. EIGHTEEN. OTHER LIABILITIES. In relation to liabilities derived from fiscal, financial or labor obligations or from violations of the general Law of Ecological Balance and Environmental Protection not recorded in the FINANCIAL STATEMENTS, whose origin is prior to the date of this Contract, the BUYER may request payment or restitution thereof during a term equal to the term the legislation currently in force establishes for the prescription or expiration of the right or action that is the basis of the claim, applying Clause Fifteen where pertinent for this case. EIGHTEEN. WARRANTY . The VENDOR gives warranty against hidden defects and quiet enjoyment. NINETEEN. PURCHASE AUDIT. The BUYER may do a purchase audit with the aim of determining the existence of liabilities not registered or the nonexistence of fixed assets mentioned in points 1 and 2 of clause fourteen above. Said audit, if such, may begin on the working day after the date this contract is signed and may in no case exceed the term of 120 calendar days counted from the date of the total payment of the price established in clause Two. The audit cost shall be covered by the BUYER. Upon conclusion of the audit, the auditor shall write up a record, of which a copy shall be given to each of the parties, in the understanding that the official opinion shall not obligate the VENDOR in any way. When unregistered fixed assets appear as a result of the audit, the VENDOR shall retire them as established in this Contact, or use them for the restitutions or compensations specified in Clause Fifteen hereof. 16 TWENTY.- LAWFULNESS OF THE CLAIM. For the effects of point 9.7 of the NOTICE and the RULES, the parties agree to designate Mancera, S.C. (hereinafter the "OFFICE") to decide on the lawfulness of the claims derived from unregistered liabilities or nonexisting assets that BUYER presents, if such, for the purpose of adjusting the price of this purchase and sale. If the OFFICE cannot perform its functions or abstains from issuing the corresponding official opinion, the parties may agree that a new office will be selected based on the list of offices that is added hereto as Exhibit "IX". The invitation to such offices shall be made in the same order in which they appear on said list. Both parties shall pay the fees, costs and expenses incurred by the OFFICE by equal parts. In performing its functions, the OFFICE shall act with full liberty, and may gather the elements for making judgments that it deems opportune, the parties being required to provide it with what is required of them for that purpose. The OFFICE's official opinion shall be final, shall obligate the parties under its terms and may not be appealed. What is established in the preceding paragraphs constitutes an arbitral commitment under the terms of article 1423 of the Commerce Code, the parties observing what is established for that effect in said Code where not expressly contained in this Clause. TWENTY-ONE. RESTRICTION ON CIRCULATION OF STOCK. In the event of any alleged subscription of stock, in one or a succession of acts, that represents ten percent or more of the value of SATMEX's capital stock, the parties agree that SATMEX shall observe the following system: a) SATMEX shall notify the SECRETARIAT of the interested parties' intention to subscribe the stock, enclosing with the notice, the information on the persons interested in purchasing the stock; b) The SECRETARIAT shall have a term of 30 calendar days counted from presentation of the notice, to object in writing to the transaction involved, with justified cause, and c) After such term without the SECRETARIAT having objected to the transaction, it shall be understood as approved. Only operations that the SECRETARIAT has not objected to may be registered in SATMEX's Stockholders or Partners' Register, notwithstanding the authorizations required from other authorities under the applicable rules. It shall not be required 17 for the notice referred to in the second paragraph of this clause to be presented when the subscription refers to stock or corporate interests that represent neutral investment or investment with limited vote on the business mentioned in article 113 of the General Business Corporation Law, or when capital increases are involved that are subscribed by the same stockholders, provided the proportion of the share of each one in the capital stock is not modified. If the party interested in subscribing the shares or corporate interests is a corporation, the notice referred to in this clause shall present the necessary information for the SECRETARIAT to identify the individuals who have ownership interests greater than ten percent in the capital of such corporation, unless acquisitions are involved that are made by administrators of retirement funds or of investment corporations, through the stock market. This condition shall be included in the corporate bylaws as well as in the final or provisional certificates that SATMEX issues. Notwithstanding what is established in this clause, and for a term of three years counted from november 17, 1997, in conformity with article 8.7.2 of the RULES, the stockholders who represent 51% of SATMEX's paid-in capital stock, in all cases in which they expect to transfer stock, shall obtain the prior authorization of the SECRETARIAT unless the transfers are between the stockholders themselves and these do not exceed 5% of SATMEX's paid-in capital stock. TWENTY-TWO. PUBLIC OFFER OF THE THIRD PACKAGE. THE BUYER certifies that it is aware that the VENDOR expects to offer and place in the stock market, the stock of the THIRD STOCK PACKAGE, and that for this effect, the BUYER commits to make the necessary resolutions so that together with VENDOR, SATMEX carries out the procedures and processing necessary to obtain the authorizations from the National Banking and Securities commission, and if such, from the corresponding authorities of other countries, as well as recordal of the corresponding stock in the National Securities and Brokers Registry. TWENTY-THREE. ASSISTANCE FOR PUBLIC PLACEMENT. So that VENDOR can place the stock of the THIRD STOCK PACKAGE, the BUYER as from now commits that SATMEX shall perform all the actions, and make all the accords and resolutions that are reasonably necessary, and shall provide VENDOR with all the information and documentation required for such objective, and to have SATMEX not directly or indirectly take any action or make any decision that might prevent or obstruct such objective in any form, nor shall they take any step that might directly or indirectly produce breach of the obligations that derive therefrom for SATMEX. TWENTY-FOUR.- STOCK PLACEMENT. In the event that SATMEX and its stockholders wish to place stock of such company in stock 18 markets, both in Mexico and abroad, each one of the parties agrees to notify the other of its decision, prior to the placement, so that by mutual agreement, they establish the bases, terms and conditions thereof that avoid negative or opposing effects in the stock markets of the stock that is placed. The stipulations of the above paragraph shall apply for placement in stock markets of any instrument issued by SATMEX, when they can directly or indirectly affect the market of the stock issued by SATMEX. The parties agree that, in the case of placements that are made by mutual agreement, the expenses involved therein shall be covered in proportion to their stock holding in the public offer; otherwise, each party shall absorb the placement costs, with the exception of what is established in the following paragraph. The costs involved in registrations and authorizations of the company and of the corresponding stock, with the competent authorities and stock market institutions necessary for their placement in such stock market shall be covered wholly by SATMEX; these costs do not include the fees of the Placing Agent and his related expenses. TWENTY-FIVE. SATMEX'S ACCOUNTING AND CORPORATE BOOKS SATMEX'S accounting and corporate books are herein delivered to the BUYER, who receives them to its entire agreement, with this document producing the effects of a receipt with respect to such books. TWENTY-SIX. BUYER'S DECLARATIONS. BUYER recognizes expressly herein, that both on the date when its proposal was filed under the terms of the Rules and during the entire process, and on the date this contract is entered into, the following warranties are completely true and correct : a) that during the bidding process referred to in the NOTICE and the RULES, it always acted in its own name and for its own account. b) that the source and structure of the resources and financing with which the STOCK is herein acquired, is the same as that provided to the SECRETARIAT, under the NOTICE and the RULES. The parties agree herein that, if any of BUYER's statements established in this Contract or in its proposal under the terms of the NOTICE and the RULES turns out to be false or incorrect, this simple fact shall give VENDOR the right to rescind this Contract without requiring a prior court order; therefore, in such case it shall be understood that a resolutory condition to which this Contract is subject, is met. For these effects, the simple written notification from the VENDOR to the BUYER stating the facts that prove the falseness or imprecision of BUYERs statements shall suffice. In that case, the BUYER shall also be required to pay liquidated damages to VENDOR equal to 100% of the 19 purchase price of the STOCK mentioned in clause Twelve of this Contract. The resolutory condition mentioned in this clause shall be in effect for 10 years counted from the date this Contract is entered into. TWENTY-SEVEN. CLAUSE RELATED TO FOREIGNERS. THE BUYER promises that its partners or stockholders shall not invoke the protection of any foreign government under penalty of forfeiting all the goods and rights it has acquired or comes to acquire hereunder, if it breaches the foregoing. TWENTY-EIGHT. CONSTRUANCE. In the case of doubt or dispute between the provisions of this contract and any other provision or contract related to the bidding process which is the subject matter of the NOTICE and the RULES, the parties shall in first place, observe the stipulations of this Contract, in second place what is established in the FINANCIAL STATEMENTS and, in third place, the CONCESSION TITLES and lastly, the NOTICE and the RULES the pro forma financial statements that VENDOR delivers for this effect to BUYER, and in third place, the CONCESSION TITLES and lastly, the NOTICE and the RULES. TWENTY-NINE. DOMICILES AND NOTIFICATIONS. For all the notices that the parties wish to or must give each other in relation to this Contract, and for the effects derived herefrom, the VENDOR an the BUYER specify the following as their domiciles: THE VENDOR: Av. Xola esquina Universidad Cuerpo "C" 1er Piso Col. Narvarte 03020 Mexico, D.F. Attention: Lic. Jorge Silberstein Coordinador General de la Unidad de Apoyo al Cambio Estructural THE BUYER: Calle Santa Rosa No. 61 Col. Reforma Social 11650 Mexico, D.F. Attention: Ing. Lauro Gonzalez Moreno and Lic. Carlos Raul Valencia Barrera Notifications shall be made by certified mail with request for return receipt, by fax, or by any other means that can certifiably prove that they have been received, and shall be confirmed within two days following receipt in order to produce effects. THIRTY-. APPLICABLE LEGISLATION. JURISDICTION. For the construance and performance of this Contract, the parties expressly submit to the laws and federal courts of Mexico City, Federal District, and waive any other venue that might correspond to them by reason of their present or future domicile. 20 This contract is signed in Mexico City, Federal District, on three copies, on November seventeenth, 1997. THE VENDOR (BY ITS OWN RIGHT AND REPRESENTING TELECOMUNICACIONES DE MEXICO) (Signed ____________________________________________________ Lic. Javier Lozano Alarcon Under Secretary of Communications THE BUYER (Signed) Lauro A. Gonzalez Moreno (Signed) Carlos R. Valencia Barrera WITH THE APPEARANCE OF: (Signed) (Signed) Lic. Jonathan Davis Arzac Arq. Emilio Carrera Cortes Federal Treasurer Delegate Commissioner for the Communications and Transport Sector (Signed) Sergio Autrey Maza EX-10.19 6 MEMEBERSHIP AGREEMENT 1 Execution Copy Firmamento Mexicano, S. de R.L. de C.V. MEMBERSHIP AGREEMENT Membership Agreement, dated and effective as of the 17th day of November, 1997, among Loral SatMex Ltd., a company organized under the laws of the Islands of Bermuda ("Loral") and Ediciones Enigma, S.A. de C.V., a sociedad anonima de capital variable organized under the laws of Mexico ("EE" and, together with Loral, the "Members"), and Firmamento Mexicano, S. de R.L. de C.V., a sociedad de responsibilidad limitada de capital variable organized under the laws of Mexico (the "Company"). Certain terms used in this Agreement are defined in Section 8 hereof. R E C I T A L S WHEREAS, the Company has been created with an authorized capital of P$1,170,050,000, which capital is divided into voting capital represented by Class A Social Parts and Class B Social Parts (collectively, the "Voting Capital") and non-voting capital represented by Class N Social Parts (the "Non-Voting Capital"). The authorized Voting Capital and Non-Voting Capital was subscribed on November 17, 1997 by Loral and EE in the following amounts and in exchange for issuance of the following Social Parts: EE: 1. a Class A Social Part representing invested capital of P$25,500 and constituting 51% of the total Voting Capital. 2. a Class N Social Part representing invested capital of P$409,492,000 and constituting 35% of the total Non-Voting Capital. Loral: 1. a Class B Social Part representing invested capital of P$24,500 and constituting 49% of the total Voting Capital. 2. a Class N Social Part representing invested capital of P$760,508,000 and constituting 65% of the total Non-Voting Capital. 2 WHEREAS, the Company owns all but one share of the issued and outstanding capital stock of Servicios Corporativos Satelitales, S.A. de C.V. ("Satmex Holdings"), which in turn owns all but two shares of the issued and outstanding capital stock of Corporativo Satelites Mexicanos, S.A. de C.V. (the "Acquisition Sub"). The Acquisition Sub was formed for the purpose of making the acquisition of 75% of the equity interest of Satelites Mexicanos, S.A. de C.V. (the "Acquisition"); WHEREAS, the amounts invested by EE and Loral in the Company have been used to fund, through the Acquisition Sub, a portion of the purchase price payable at the first closing of the Acquisition; WHEREAS, the second closing of the Acquisition will occur on December 29, 1997 and in connection therewith, Loral and EE may be required pursuant to the terms of the Financing Documents to make certain Additional Capital Contributions to the Company; and WHEREAS, the Members and the Company desire to promote their mutual interests by agreeing to certain matters relating to the Additional Capital Contribution, the operations and governance of the Company and the Companies Entities and the disposition and voting of Social Parts. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. ADDITIONAL CAPITAL CONTRIBUTION; SOCIAL PART CERTIFICATES (a) Each of Loral and EE hereby agrees that if an Additional Capital Contribution is required, then it shall, in accordance with the terms set forth below, fund 65% and 35%, respectively, of the amount of such Additional Capital Contribution by increasing the authorized equity capital of the Company in such amount, which increase will be allocated among Voting Capital and Non-Voting Capital in the same proportion as the initial funding and which increased capital will be subscribed by Loral and EE in the same proportions as the initial funding such that the percentage of Voting Capital and Non-Voting Capital of each of Loral and EE remains unchanged. (b) Closing. The closing of any such sales and purchases shall take place at 9:00 A.M., New York City time, on the date of the second closing of the Acquisition, at the offices of Sanchez Mejorada Velasco y Valencia, Paseo de la Reforma 450, Lomas de Chapultepec, 11000 Mexico, D.F., or such other location as the Members shall mutually select. (c) Application of Proceeds. The initial capital contribution, as well as any Additional Capital Contribution was and shall be used to fund the Acquisition. Such funding was and -2- 3 shall be effected by a contribution of the invested capital by the Company to its Subsidiaries. (d) Legends. The certificates evidencing the Social Parts subscribed by the Members, will bear the legend set forth in Section 5(d) and the following legend reflecting the restrictions on the transfer of such interests contained in this Agreement: "The Social Parts evidenced hereby are subject to the terms of that certain Membership Agreement dated and effective as of November 17, 1997, by and among the Company and certain Members identified therein, including certain restrictions on transfer. A copy of this Agreement is available upon request to the Company." 2. GOVERNANCE (a) Election of Directors. The Members and the Company shall take all action within their respective power, including, but not limited to, the voting of all Voting Capital owned by them to cause the Board of Directors of the Company to consist of five (5) members or such other odd number as the Members may from time to time establish (the "Authorized Number"), which shall at all times throughout the term of this Agreement (except as set forth in Section 4(e) hereof) be comprised of (i) directors equal to a simple majority of the Authorized Number and holding a simple majority of the votes entitled to be cast by directors at any meeting of the Board, each such director to be designated by EE (each, an "EE Director"), and (ii) the remaining director(s) to be designated by Loral (each, a "Loral Director"). For so long as EE designates the majority of directors of the Board of the Company pursuant to the foregoing sentence, EE shall nominate the Chairman of the Board of the Company and the Members agree that they shall take all action within their respective power to elect such nominee. For so long as EE designates the Chairman of the Board of the Company, Loral shall have the right to nominate the Secretary of the Board (and his alternate) and the Members agree that they shall take all action within their respective power to elect such nominee, which Secretary shall not be a member of the Board for any purpose and shall not count as a Loral Director. The Company shall cause the Board of Directors of SatMex and any other direct or indirect subsidiary of the Company to be constituted in an identical manner unless determined otherwise by the Board of Directors of the Company by a Consensus Vote provided that the Board of Directors of SatMex shall have such additional directors (not appointed by either Loral or EE) as may be required pursuant to Mexican law or the by-laws of SatMex. Each of Loral and EE shall have the authority to designate alternate directors (each a "Designated Alternate") to substitute for the Loral Directors or EE Directors, as the case may be, in accordance with the bylaws of the Company Entities. As of the date hereof, the Board of each Company -3- 4 Entity (as defined below) shall consist of those persons set forth on Schedule I hereto. (b) Replacement Directors. Each Loral Director or EE Director is subject to removal at any time for any reason or for no reason by the Member who designated him or her. If, at any time, a vacancy is created on the Board of any Company Entity by reason of the death, removal or resignation of any Loral Director or EE Director, the Member who designated such director shall, within five days after the date such vacancy first occurs, take such action as is reasonably necessary, including the voting of all Voting Capital held by it, to elect a director or directors designated in accordance with Section 2(a) hereof to fill such vacancy or vacancies; provided, that during such five day period following the creation of the vacancy, the Board of such Company Entity shall not transact any other business except by Consensus Vote. Each Member agrees that it will vote or execute a written consent with respect to all of its Voting Capital to effectuate the intent of this Section 2(b). (c) Quorum; Required Vote. A quorum of any meeting of the Board of any Company Entity shall require the presence of a majority of the Board, which shall include at least one Loral Director and one EE Director. No action at any meeting may be taken by the Board unless a quorum is present and notice therefor (setting forth all actions to be taken at such meeting) is duly given at least five business days before the date of the meeting (or unless duly waived by the directors in accordance with the by-laws). No resolution, action or decision required or permitted to be taken, adopted or made by the Board of any Company Entity shall be so taken, adopted or made without a vote of the majority of all directors present, provided that if the matter being considered is an Extraordinary Matter, the approval of at least one Loral Director and one EE Director shall be required (a "Consensus Vote"). Any such resolution, action or decision may also be taken, adopted or made by unanimous written consent. (d) Mutual Approvals Required for Certain Action. A Consensus Vote, or if the matter requires approval by shareholders or members under Mexican law or the by-laws of the Company Entities, the approval of each Member, shall be required to approve and authorize any of the following matters with respect to any Company Entity (each, an "Extraordinary Matter"): (i) New Line of Business. Engagement by the Company Entities in any business other than that conducted on the date hereof or as set forth in the Business Plan and any business directly related to such business, in each case, as such business or businesses may, from time to time develop, provided, that such related business or developed business does not constitute a material change in the nature of the business of the Company Entities as it is conducted on the date hereof or as set forth in the Business Plan. -4- 5 (ii) Transfer of Material Assets. Sell, lease (as lessor), transfer, mortgage, assign, pledge, exchange or otherwise dispose of all or substantially all of the assets of any of the Company Entities. (iii) Merger or Liquidation. Approve any transaction or merger, consolidation, amalgamation, recapitalization or other form of business combination, or any liquidation, winding up or dissolution of any of the Company Entities or any other transaction in which a Company Entity is not the surviving entity. (iv) Voluntary Bankruptcy. Commence a voluntary case under the applicable Mexican bankruptcy code, as now or hereafter in effect, or any successor thereto, or any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency, liquidation or similar law under any other jurisdiction or make a general assignment for the benefit of creditors. (v) Organizational Documents. Amend in any material manner the articles of incorporation or by-laws or organizational documents of any of the Company Entities, except as contemplated in the SatMex Stock Purchase Agreement. (vi) Adoption of or Amendments to the Business Plan. Adopt or amend in any material manner the Business Plan. (vii) Dividends and Distributions; Redemption and Repurchase; Dividend Policy. Declare or pay any dividends or distributions (other than (i) to the Company or (ii) in the case of SatMex, in accordance with the SatMex Dividend Policy) or repurchase or redeem any equity securities of any of the Company Entities except as set forth in Section 4(f). Amend in any manner the SatMex Dividend Policy. (viii) Affiliated Parties. Enter into or engage in transactions with entities directly or indirectly, controlling, controlled by or under common control of either of the Members other than the Permitted Transactions. For such purposes, "control" shall mean the direct or indirect possession of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Control, by contract or otherwise. (ix) Significant Decisions. Any Significant Decision. (x) Budget. The adoption by the Company Entities of a Budget, as more fully described in Section 2(f). (xi) Capital Expenditures and Certain Actions. Except as provided in any Budget approved by a Consensus -5- 6 Vote, (i) any individual or series of related expenditures, commitments, obligations or agreements by any Company Entity in excess of US$1,000,000 or (ii) any commitment, arrangement or agreement outside of the ordinary course of business of the Company Entities, including without limitation entering into any joint venture or strategic alliances or partnerships. (xii) Incurrence or Payment of Indebtedness. Create, incur, guarantee, assume, refinance or pre-pay indebtedness of any Company Entities outside of the ordinary course of business except for the indebtedness contemplated by the Business Plan, the Bridge Note Commitment Letter, the Facility Commitment Letter, the Interim Facility, the Fixed Rate Financing and the Government Obligations and any refinancing of any of the foregoing. (xiii) Acquisitions. The direct or indirect loan or advance to, any acquisition of any business, assets, capital stock, equity interest or other security of, or other investment in, any Person or Persons, in each case, by any Company Entity, in any transaction or in any series of related transactions, that involve or could reasonably be valued in excess of US$1,000,000, except for the transactions contemplated under the SatMex Stock Purchase Agreement. (xiv) Issuance of Securities. Approve any issuance of equity securities or any other security convertible, exercisable or exchangeable into equity securities of any Company Entity (other than to the Company or as contemplated in the Business Plan), including any option, warrant, put, call or other arrangement of any kind to purchase or otherwise receive from any Company Entity (other than to the Company or as contemplated in the Business Plan) any such securities outside of the ordinary course of business, except for (i) the issuance of warrants in connection with the High Yield Financing or as contemplated in the Bridge Commitment Letter and (ii) the issuance of securities pursuant to an employee stock option plan or similar plan adopted pursuant to a Consensus Vote in accordance with Section 2(d)(xix). (xv) Appointment, Suspension or Removal of Senior Officers; Compensation. Except as set forth in Section 2(h), any appointment, suspension or removal of any person who is, or upon appointment would be, a senior executive officer of any of the Company Entities and the determination of the compensation in respect of any such senior executive officer. (xvi) Engagement of Accountants. The engagement or dismissal of independent public accountants, whether in -6- 7 connection with an audit of the financial statements of the Company Entities or otherwise. (xvii) Accounting and Tax. Establish or modify the accounting or tax methods, practices, procedures or policies of the Company Entities except as required by law or generally accepted accounting principles. (xviii) Litigation and Arbitration. Commence any litigation or arbitration that pertains to any of the Company Entities or assets of any of the Company Entities or the settlement or any other material decision relating to a litigation, arbitration, governmental investigation or other proceeding, with a potential claim for damages in excess of US$1,000,000. (xix) Employee Benefit Plans. Adopt, amend or make any grants pursuant to any employee benefit or stock option plans. (xx) Transfer of Telecommunications Licenses. Sell, lease (as lessor), transfer, mortgage, assign, pledge, exchange or otherwise dispose of the telecommunications licenses of the Company Entities, except as contemplated under the Facility Commitment Letter. (xxi) Certain Agreements. The entry into any agreement or arrangement to do any of the foregoing. (e) Management and Operating Decisions. The day and day management and operation of SatMex, including the taking of such actions as may be necessary to implement the Business Plan, shall be vested in the Chief Executive Officer and the Chief Operating Officer of SatMex who shall have authority to approve all decisions related thereto; provided, however, that any decision that would impact the Operating Cash Flow, as set forth in the Business Plan, by more than 10% or US$10 million (a "Significant Decision") shall be approved by a Consensus Vote of the Board of Directors as set forth in Section 2(d)(ix) above. The Chief Operating Officer shall report to the Chief Executive Officer of SatMex and the Executive Committee of SatMex and shall serve as Chief Executive Officer of SatMex during any period in which there is a vacancy in the position of Chief Executive Officer. (f) Budget Approval. (i) The Members shall consider and, if agreement is reached, shall adopt and approve at least once each fiscal year, a budget for the successive fiscal year. If any proposed budget, or any material amendment thereto, is not approved by a Consensus Vote, then the last budget so approved by the Members shall be extended as described below (the "Carry-Over Budget"), until approval is received from by Consensus Vote. -7- 8 (ii) The Carry-Over Budget shall provide for (x) adjustments for the greater of five percent (5%) per annum or the increase in the Consumer Price Index in effect for the period in question, (y) any additional increases necessary to meet (A) any payment escalation provisions of any authorized contractual commitments of the Company Entities, or (B) any authorized contractual commitments of the Company Entities, in either case to the extent such contractual commitments shall have been previously approved by the Members or by a Consensus Vote to the extent required by the provisions hereof or the provisions of the By-laws or the Membership Agreement and (z) if any material items set forth in the Budget shall be denominated in Pesos, a method for adjusting any peso denominated amounts in the event of a material fluctuation in the Peso-Dollar exchange rate. (g) Appointment of Officers. (i) Each Member and the Company hereby agrees to take such action as may be necessary to appoint as officers to SatMex, effective as of the date hereof, as follows: (A) as Chief Executive Officer, such individual as Loral and EE shall mutually agree and who shall be a Mexican national, (B) as Chief Operating Officer, such individual as may be designated by Loral, with the approval of EE, which approval shall not be unreasonably withheld and (C) as all other executive officers, such individuals as Loral and EE shall mutually agree. Schedule II hereto sets forth the officers of SatMex as of the date hereof. (ii) Each Member and the Company hereby agrees to take such action as may be necessary to appoint as officers to the Company, effective as of the date hereof, as follows: (i) as President, such individual as may be designated by EE, with the approval of Loral, which approval shall not be unreasonably withheld, (ii) as Chief Executive Officer, such individual as may be designated by Loral, with the approval of EE, which approval shall not be unreasonably withheld, (iii) as Chief Operating Officer, such individual as may be designated by Loral, with the approval of EE, which approval shall not be unreasonably withheld and (iv) as Chief Financial Officer, such individual as may be designated by EE, with the approval of Loral, which approval shall not be unreasonably withheld. Schedule II hereto sets forth the officers of the Company as of the date hereof. (iii) The officers of all other Company Entities shall be appointed by their respective Board of Directors, if the members agree that they are needed. (h) Removal of Officers. The officers of SatMex shall be removed as follows: (i) the Chief Executive Officer, by either EE or Loral, (ii) the Chief Operating Officer, by Loral or by the Executive Committee if removal of such officer was recommended to -8- 9 the Executive Committee by the Chief Executive Officer and such recommendation was approved by the Executive Committee and (iii) all other executive officers, by either EE or Loral or by the Executive Committee if removal of such officer was recommended to the Executive Committee by either the Chief Executive Officer or Chief Operating Officer and such recommendation was approved by the Executive Committee. The officers of the Company shall be removed as follows: (i) the President and Chief Financial Officer, by EE and (ii) the Chief Executive Officer and Chief Operating Officer, by Loral. Each Member and the Company hereby agrees to take such action as may be necessary to effect all such removal and to appoint any successor to fill any vacancy resulting from such removal or from the death or resignation of any officer in accordance with Section 2(g) above. (i) Executive Committee. Each of the Members and the Company agrees to take such action as shall be necessary to create an Executive Committee of the Board of Directors of the Company and SatMex, which Executive Committee shall be composed of one Loral Director and one EE Director. Schedule I hereto sets forth the members of the Executive Committees as of the date hereof. The Executive Committees shall be authorized to take action on all matters, including Extraordinary Matters that may be authorized by the Board of Directors under this Agreement or otherwise. Each of Loral and EE shall be authorized to designate an alternate director to substitute for the Loral Director and EE Director, as the case may be, on each Executive Committee (each an "Executive Committee Alternate"). Schedule I hereto sets forth the Executive Committee Alternates as of the date hereof. (j) Certain Actions of SatMex Board. Each of Loral and EE shall use its reasonable best efforts to cause the directors of the Board of SatMex designated by Loral or EE, as the case may be, to vote in favor of any action relating to SatMex previously approved by the Board of the Company. (k) By-laws. The Members and the Company shall cause the provisions of this Section 2 to be included in the by-laws of each of the Company Entities, as applicable. 3. DEADLOCK (a) Proposal. If either Loral or EE proposes a capital expenditure (the "Proposing Member") in excess of US$1 million not provided for in the Business Plan, but such expenditure is within the existing line of business of the Company as described in Section 2(d)(i) (the "Proposal"), the Proposing Member shall send to the other Member written notice of its intent to effect such a capital expenditure and if within ten Business Days following receipt of such notice such expenditure is opposed in writing by the other Member (the "Objection"), the Proposing Member may, notwithstanding the provisions of Section 2(d)(xi), implement the Proposal, and the other member (the "Opposing Member") shall vote its Social Parts and otherwise cooperate to -9- 10 implement the Proposal, provided that the Opposing Member shall have the option, exercisable by delivering to the Proposing Member written notice of its intent to exercise its option under this Section 3(a), within 60 days after the date of the Objection, to sell to the Proposing Member, and the Proposing Member shall be required to purchase, all of the Social Parts of the Company held by the Opposing Member and its Affiliates for Fair Market Value (as defined in Section 3(d)) as of the end of the fiscal quarter immediately preceding the date the Proposal was made. If the Opposing Member is EE and it elects to exercise its rights under this Section 3(a), Loral may, in its sole discretion, elect to assign the right to purchase the Social Parts of the Company owned by EE to a Qualified Mexican Person at a price negotiated with such buyer, provided that in no event shall EE receive for its Social Parts less than the Fair Market Value as of the end of the fiscal quarter immediately preceding the date the Proposal was made. (b) EE Action. If EE causes any of the Company Entities to take any material action not explicitly provided for in the Business Plan and Loral opposes such action in writing within ten (10) Business Days from the day it first becomes aware of such material action, then Loral, in its sole discretion, shall have the option to provide EE with a written notice (the "Opposition Notice") stating its opposition to the action and the reason it is material and that the failure to cure such action within twenty days after receipt of the Opposition Notice shall give rise to its option under this Section 3(b). No such action shall be deemed material if it would not require a Consensus Vote or if it does not involve the expenditure or incurrence of obligations in excess of US $1 million. If EE does not cure such action within twenty days after receipt of the Opposition Notice, Loral shall have the option, exercisable by delivering to EE written notice of its intent to exercise its option under this Section 3(b) within 60 days of the date of the Opposition Notice, to either: (i) sell to EE, and EE shall be required to purchase, all of the Social Parts of the Company held by Loral and its Affiliates at a price equal to 120% of the Fair Market Value of such Social Parts as of the end of the fiscal quarter immediately preceding the date such action was taken, or (ii) purchase from EE and EE shall be required to sell, all of the Social Parts of the Company held by EE and its Affiliates for cash in an amount equal to the Fair Market Value of such Social Parts as of the end of the fiscal quarter immediately preceding the date such action was taken, provided that such exercise shall be conditioned upon Loral identifying a Qualified Mexican Person willing to purchase the Social Parts of the Company owned by EE and its Affiliates at such Fair Market Value. (c) Loral Inaction. If Loral fails to approve any material matter which requires a Loral vote and which is provided for in the Business Plan and EE approves such a matter and has given Loral written notice (the "Warning Notice") that such failure to approve the matter gives rise to its option under this Section -10- 11 3(c), then unless Loral grants such approval within twenty (20) days after receipt of such notice, then EE shall have the option, exercisable by delivering to Loral written notice of its intent to exercise its option under this Section 3(c) within sixty (60) days of the date of such notice, to either: (i) sell to Loral, and Loral shall be required to purchase, all of the Social Parts of the Company held by EE and its Affiliates at a price equal to 120% of the Fair Market Value of such Social Parts as of the end of the fiscal quarter immediately preceding the date of the Warning Notice, as (ii) purchase from Loral and Loral shall be required to sell, all of the Social Parts of the Company held by Loral and its Affiliates for cash in an amount equal to the Fair Market Value of such Social Parts as of the end of the fiscal quarter immediately preceding the date of the Warning Notice. No such action will be deemed material if it would not require a Consensus Vote or if it does not involve the expenditure or incurrence of obligations in excess of US $1 million. (d) Determination of Fair Market Value. The determination of the fair market value (the "Fair Market Value") of the Social Parts described in Section 3(a) - 3(c) above shall be made in accordance with this Section 3(d). Promptly upon receipt by a Member of a call or put notice, as the case may be, under Sections 3(a), 3(b) or 3(c) above, each Member shall promptly appoint as an appraiser an internationally-recognized investment banking firm (a "recognized investment banking firm"). Each appraiser shall, within thirty (30) days of appointment, separately investigate the value of the Social Parts to be purchased or sold, as the case may be, as of the proposed transfer date and shall submit a notice of an appraisal of that value to each Member. If the appraised values of such consideration (the "Earlier Appraisals") vary by less than ten percent (10%), the average of the two appraisals on a per unit basis shall be controlling as the fair market value. If the appraised values vary by more than ten percent (10%), the appraisers, within ten (10) days of the submission of the last appraisal, shall appoint a third appraiser which shall be a recognized investment banking firm. The third appraiser shall, within thirty (30) days of its appointment, appraise the fair market value of the Social Parts in question as of the proposed transfer date and submit notice of its appraisal to each Member. The value determined by the third appraiser shall be controlling as the fair market value of the Social Parts unless the value is greater than the two Earlier Appraisals, in which case the higher of the two Earlier Appraisals will control, and unless the value is lower than the two Earlier Appraisals, in which case the lower of the two Earlier Appraisals will control. If any Member fails to appoint an appraiser or if one of the two initial appraisers fails after appointment to submit its appraisal within the required period, the appraisal submitted by the remaining appraiser shall be controlling. Each Member shall bear the cost of its respective appointed appraiser. The cost of the third appraisal shall be shared equally between the Members. -11- 12 (e) Closing. Within the later of 30 days after the date on which the fair market value of the Social Parts is finally determined pursuant to Section 3(d), the Member selling the Social Parts, whether pursuant to a call or a put option, as the case may be, shall convey to the purchasing Member all of the Social Parts then held by it or its Affiliates, free and clear of all liens, claims and encumbrances, and the purchasing Member shall deliver cash to the selling Member equal to the appropriate amount in consideration therefor, at a closing to be held at the offices of the Company or at such other place as shall be agreed to by the Members. 4. TRANSFER OF STOCK (a) Resale of Social Parts. No Member shall Transfer any Social Parts other than in accordance with the provisions of this Section 4. Any Transfer or purported Transfer made in violation of this Section 4 shall be null and void and of no effect. (b) Rights of First Offer. (i) If a Member proposes to Transfer any of the Social Parts owned by it other than in a Permitted Transfer, then the Member desiring to make the Transfer (hereinafter referred to as the "Transferor") must first make the offer to sell the Social Parts to the other Member (the "Other Member"). (ii) Offer by Transferor. Copies of the Transferor's offer shall be given to the Other Member and shall consist of an offer to sell to the Other Member, for cash, all of the Social Parts then proposed to be transferred by the Transferor (the "Subject Social Parts") upon customary terms and conditions, representations, warranties and covenants, at a cash price designated by the Transferor (the "Stated Price"). (iii) Acceptance of Offer. Within twenty (20) days after the receipt of the offer described in Section 4(b)(ii), the Other Member may, at its option, elect to purchase all, but not less than all, of the Subject Social Parts for the Stated Price on the terms and conditions set forth in such offer. The Other Member shall exercise such option by giving notice to the Transferor, in which event the notice required to be given by the purchasing party (the "Purchaser") shall specify a date for the closing of the purchase which shall not be more than thirty (30) days after the date of the giving of such notice. If the Other Member does not accept the offer by the twentieth day following the date the offer was received, it shall be deemed to have waived all its rights under this Section 4(b)(iii) with respect to such offer. -12- 13 (iv) Closing of Purchase. The closing of the purchase shall take place at the office of the Company or such other location as shall be mutually agreeable and the Stated Price shall be paid at the closing. At the closing, the Transferor shall cause the Company to deliver to the Purchaser new certificates evidencing the Subject Social Parts to be conveyed. (v) Release from Restriction; Termination of Rights. If the offer to sell is not accepted by the Other Member, the Transferor shall be free for six months following the period described in Section 4(b)(iii) above to solicit offers for the Social Parts, provided that (A) the Transferor shall not offer or sell the Social Parts at a price that is less than 98% of the Stated Price, and if the sale to the third party is other than entirely for cash, the Transferor shall certify to the other Member as to the cash value of any noncash consideration, (B) such Transfer shall be made only in strict accordance with the other terms of the offer described in Section 4(b)(ii) and (C) the transferee agrees, in writing, to be bound by the provisions of this Agreement. In the event that the Transferor shall have failed to effect a sale of the Social Parts in compliance with the requirements of (A), (B) and (C) above in the six month period provided herein or shall have offered the Social Parts to third parties at a price that is less than 98% of the Stated Price, the restrictions provided for herein shall again become effective, and no transfer of Social Parts may be made thereafter without again offering the same in accordance with this Section 4(b). Any purported transfer of the Social Parts which contravenes any of this Section 4(b)(v) shall be deemed null and void. (vi) Assignment by Loral. The parties hereto agree that if EE is the Transferor, Loral shall be free to assign its rights under this Section 4(b) to a Qualified Mexican Person upon written notice to EE of its intent to do so, which notice shall state the name and address of the Qualified Mexican Person, and following the date of such notice, the Qualified Mexican Person shall be treated as the Other Member for all purposes of this Section 4(b). (vii) Limitations. The provisions of this Section 4(b) shall not apply to sales by Tag-Along Holders (as defined below) pursuant to Section 4(c) hereof. (c) Tag-Along Rights. (i) In the event any Member intends to Transfer any or all of its Social Parts (excluding a Permitted Transfer but including Transfers made to third parties pursuant to Section 4(b)(v)), such Member (the "Selling Member") shall notify the other Member (the "Tag-Along Holder"), in writing, of such proposed Transfer, the name of the third -13- 14 party and its terms and conditions. Within twenty (20) days of the date of such notice, the Tag-Along Member shall notify the Selling Member if it elects to participate in such Transfer. If the Tag-Along Holder fails to notify the Selling Member within such twenty (20) day period, it shall be deemed to have waived its rights hereunder. Upon notification by the Tag-Along Holder of its intent to exercise its rights under this Section 4(c), the Tag-Along Holder shall have the right to sell, at the same price and on the same terms and conditions as the Selling Member, an amount of Social Parts equal to the Social Parts the third party actually proposes to purchase multiplied by a fraction, the numerator of which shall be the number of Social Parts issued and owned by the Tag-Along Holder and the denominator of which shall be the aggregate number of Social Parts issued and owned by the Selling Member and the Tag-Along Holder. The Selling Member agrees that, in such event, it will reduce the amount of Social Parts to be sold by it to such third party by a corresponding amount. If, however, the Selling Member proposes to sell all of its Social Parts and the third party shall have agreed to purchase all the Social Parts held by the Selling Member and the Tag-Along Holder, the Tag-Along Holder shall have the right to sell at the same price and on the same terms and conditions as the Selling Member all of its Social Parts. (ii) Notwithstanding anything contained in this Section 4(c), in the event that all or a portion of the purchase price consists of securities and the sale of such securities to the Tag-Along Holder would require either a registration under the Securities Act or the preparation of a disclosure document pursuant to Regulation D under the Securities Act (or any successor regulation) or a similar provision of any jurisdiction's securities law (and such sale would not otherwise have been registered under the Securities Act), then, at the option of the Selling Member, the Tag-Along Holder may receive, in lieu of such securities, the fair market value of such securities in cash, as may be determined (A) in the case of publicly traded securities, by calculating the average of the reported closing market prices per share of such securities for the 10 consecutive trading days ending on the fifth trading day prior to the closing date for such Transfer, (B) in the case of non-publicly traded securities, as determined by a nationally recognized investment banking firm appointed by a Consensus Vote, or (C) in such other manner as may be determined by a Consensus Vote of the Board of Directors of the Company. (d) Minimum Holdings. EE hereby agrees that without the prior written consent of Loral, it shall not Transfer any of its Social Parts, if immediately following such Transfer, the direct and indirect ownership in the Company then held by Qualified Mexican Persons is reduced to less than the number of Social -14- 15 Parts required to be held by a Qualified Mexican Person under Mexican law. (e) Amendments to Applicable Mexican Law. Should the applicable Mexican law be amended to allow Persons not organized under the laws of Mexico to hold a majority of the voting securities of SatMex and the Company, the parties hereto shall promptly take action to (i) amend the designation of the Class N Social Parts to convert them into voting securities and (ii) amend the provisions of Section 2(a)(i) to provide that the majority of the Board of Directors of the Company Entities shall be designated by the Person holding a majority of the Social Parts then outstanding. In addition, if so requested by EE at its option, Loral shall thereafter negotiate in good faith with EE to exchange all Social Parts in the Company held by EE and its Affiliates (the "EE Social Parts") for common stock, par value US$.01 per share, of Loral Space & Communications Ltd. (the "Loral Common Stock"), based upon an appraisal of the fair market value of the EE Social Parts in accordance with the provisions of Section 3(d). (f) Redemption of Social Parts. At the request of either Loral or EE (the "Requesting Member"), the Company shall sell such number of shares of common stock (the "SatMex Equivalent Shares") of SatMex held by the Company as shall correspond to the indirect interest in SatMex represented by the Social Parts proposed to the Transferred by the Requesting Member. The Company shall promptly thereafter use the proceeds of such sale to redeem from the Requesting Member the applicable number of Social Parts requested to be Transferred by the Requesting Member. Notwithstanding the provisions of this Section 4(f), the sale of the SatMex Equivalent Shares shall (A) be made in compliance with any applicable restrictions under the Ley General de Sociedades Mercantiles, or any other applicable law, and (B) remain subject to the provisions of Section 4(a) through 4(c) as if they were Social Parts proposed to be Transferred by a Member. (g) Sale of Member. A Member, substantially all of the assets of which shall consist of Social Parts, shall not offer to sell its securities, or permit its securities to be sold, to another party if such sale would result in a Change of Control of such Member until and unless such Member shall have first made a right of first offer with respect to such securities to the other Member in the same manner as that set forth in Section 4(b) above. 5. CERTAIN COVENANTS OF THE PARTIES (a) Expenses and Indemnification. Each of Loral and EE agrees to cause the Company Entities to pay the fees and expenses incurred by the lenders under the Commitment Letters, and to provide indemnification to the lenders as set forth therein. In the event that the Company Entities shall be unable for whatever reason, to provide such expense reimbursement or indemnification, -15- 16 then Loral and EE, severally, agree to assume the obligations to pay such expenses or provide such indemnity, as the case may be, in the following proportion: Loral 65% and EE 35%. (b) The Members shall cause SatMex to: (i) enter into a management services agreement with each of Loral and EE or their respective Affiliates substantially in the form set forth as Exhibit A hereto (the "Management Services Agreement"); (ii) enter into a license agreement with Loral or its Affiliates substantially in the form set forth as Exhibit B hereto (the "IP Agreement") and (iii) adopt a marketing policy substantially in the form set forth as Exhibit C hereto (the "Marketing Policy"). The Members hereby agree that they shall not amend, or cause SatMex to amend, any of the Management Services Agreement, the IP Agreement or the Marketing Policy without the consent of Loral and EE. (c) Tax Considerations. Each of Loral and EE agrees that, at the request of either Member, it shall execute and deliver any documents necessary for the Company or any Company Entity to be treated as a partnership to the extent permitted for United States federal income tax purposes, provided that such designation shall not adversely effect the other Member or any Company Entity. (d) Application of (Mexican) General Business Entities Act. Each of Loral, EE and the Company covenants and agrees, and each party hereto acknowledges that each other party hereto is entering into this Agreement in reliance on, the following: (i) that any and all rights that the parties hereto may have under Articles 38 and 42 of the General Business Entities Act (or any successor provisions) are hereby expressly waived; (ii) that the events of rescission provided for in Article 50 of the General Business Entities Act (or any successor provisions) shall not be actionable by the parties hereto and shall not apply to the Company except as may be expressly provided for in this Agreement or in the by-laws of the Company; and (iii) any attempt by any party hereto to exercise or invoke any of the provisions of Articles 15, 38, 42 or 50 of the General Business Entities Act (or any successor provisions) other than as expressly provided for herein or in the by-laws of the Company shall be void and shall constitute a material breach of this Agreement by such party which will be actionable by any other party. The Company covenants and agrees that each certificate evidencing Social Parts or other instrument issued by the Company which represents or evidences an interest in Social Parts shall bear a legend to the foregoing effect. -16- 17 (e) Loral hereby agrees that, without the prior written consent of EE after full disclosure of all material facts and circumstances, it will not knowingly permit any Company Entity to take any action or adopt any policy that would discriminate unfairly against any Company Entity in favor of Loral or any of its other Affiliates in any material respect, including, without limitation, marketing policies applicable to areas in which any Company Entity competes with Loral or such Affiliate. 6. WARRANTIES AND REPRESENTATIONS OF THE MEMBERS Each Member severally, represents to the other Member that: (a) Corporate Existence and Power. Such Member (a) is duly organized and validly existing under the laws of the jurisdiction of its organization and (b) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement. Such Member is duly qualified to do business as a corporation in each jurisdiction in which the conduct of its business or the nature of the property owned by it requires such qualification except where the failure to so qualify would not have a material adverse effect on such Member. (b) Authorization. This Agreement constitutes the valid and binding obligation of such Member, enforceable against such Member in accordance with its terms, except to the extent that enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws affecting creditors' rights and remedies generally from time to time in effect. The execution, delivery, and performance of this Agreement have been duly authorized by all necessary action on the part of such Member. (c) No Contravention. The execution, delivery and performance by such Member of this Agreement and the transactions contemplated hereby (a) do not contravene the terms of the charter, by-laws or other organizational documents of such Member, (b) do not violate, conflict with or result in any breach or contravention of, or the creation of any lien under, any indenture, mortgage, deed of trust, credit agreement or other agreement to which such Member is party or to which its properties may be bound and (c) do not violate any provisions of applicable law. (d) Governmental Authorization; Third Party Consents. No approval, consent, exemption, authorization or other action by, or notice to, or filing with, any governmental authority or any other Person in respect of any requirement of law or any requirement of contract or otherwise, and no lapse of a waiting period under any requirement of law, is necessary or required in connection with the execution, delivery or performance by such Member, or the enforcement against such Member, of this Agreement, or the transactions contemplated hereby. -17- 18 (e) Investment for Own Account. Such Member is acquiring the Social Parts purchased hereunder for its own account for investment and not with a view towards the resale, transfer or distribution thereof, nor with any present intention of distributing such Social Parts. Except as set forth in this Agreement, no other Person has any right with respect to or interest in the Social Parts to be purchased by such Member, nor has the Member agreed to give any Person any such interest or right in the future. (f) Offering Exemption. Such Member understands that the Social Parts being purchased by it hereunder have not been registered under the Securities Act, nor qualified under any state securities laws, and that they are being offered and sold pursuant to an exemption from such registration and qualification based in part upon the representations of the Members contained herein. 7. INTERPRETATION OF THIS AGREEMENT (a) Terms Defined. As used in this Agreement, the following terms have the respective meaning set forth below: Acquisition: has the meaning set forth in the recitals hereto. Acquisition Sub: has the meaning set forth in the recitals hereto. Additional Capital Contribution: shall mean any additional equity contribution that may be required to be funded by Acquisition Sub as a condition precedent to the closing of the Credit Agreement or the Bridge Securities Purchase Agreement. Affiliate: means any Person or entity, directly or indirectly controlling, controlled by or under common control with such Person or entity. Bridge Note Commitment Letter: shall mean that certain commitment letter, dated as of November 17, 1997, by and between Loral Space & Communications Ltd. and Telefonica Autrey, S.A. de C.V., on the one hand, and DLJ Bridge Finance, Inc. and LB I Group Inc., on the other hand, with respect to the financing of certain bridge securities, in the amount of up to US$270 million. Bridge Securities Purchase Agreement: shall mean the definitive securities purchase agreement entered into in connection with the Bridge Note Commitment Letter. Business Plan: the business plan of SatMex attached hereto as Exhibit A. -18- 19 Change of Control: shall mean the acquisition of a majority of the voting stock or analogous equity interest of a Member by a party other than an Affiliate of such Member. Closing Date: shall have the meaning set forth in Section 1(c). Concession Agreements: The Agreements dated October 23, 1997 entered into between SetMex and the Mexican Government relating to geostationary orbital positions located at 116.8(Degree)W, 109.2(Degree)W and 113.0(Degree)W. Concession Subsidiary: shall mean a subsidiary of the Company formed for the purpose of applying for, and holding, a license from the Mexican Government to provide satellite transmission services directly to end-users. Consumer Price Index: shall mean the Bureau of Labor Statistics Consumer Price Index, Subgroup "Urban Consumers (Revised)" for the United States as published by the United States Department of Labor. Commitment Letters: shall mean collectively, the Bridge Note Commitment Letter and the Facility Commitment Letter. Company Entities: shall mean the Company, SatMex and their respective subsidiaries provided that if the Board of Directors of the Company shall determine by a Consensus Vote under Section 2(a)(i) that the board of directors of any subsidiary (other than SatMex) need not be identical to that of the Board of Directors of the Company, then such subsidiary shall not be deemed to be a Company Entity for purposes of Section 2 (a)-(d). Consensus Vote: shall have the meaning set forth in Section 2(c). Credit Agreement: shall mean the definitive credit agreement entered into in connection with the Facility Commitment Letter. Earlier Appraisals: shall have the meaning set forth in Section 3(d). Extraordinary Matter: shall have the meaning set forth in Section 2(d). Facility Commitment Letter: shall mean that certain commitment letter, dated as of November 17, 1997, by and between Loral Space & Communications Ltd. and Telefonica Autrey, S.A. de C.V., on the one hand, and DLJ Capital Funding, Inc., Lehman Commercial Paper Inc. and Donaldson Lufkin & Jenrette Securities -19- 20 Corporation on the other hand, with respect to the financing up to US$500 million of secured credit facilities. Financing Documents: shall mean collectively, the Bridge Securities Purchase Agreement and the Credit Agreement and all related documents. Fixed Rate Financing: shall mean the issuance of notes of a Company Entity to finance a portion of the purchase price of the SatMex acquisition or to refinance indebtedness, if any, outstanding in respect of the Bridge Note Commitment Letter. Government Obligation: The obligation incurred by SatMex Holdings to the federal government of the United Mexican States under that certain Agreement, dated as of December 1997. Interim Facility: shall mean that Demand Loan Agreement dated as of November 17, 1997, by and between Corporativo Satellites Mexicanos, S.A. de C.V., on the one hand, and DLJ Capital Funding, Inc., Lehman Commercial Paper Inc. and Donaldson Lufkin & Jenrette Securities Corporation, on the other hand, with respect to the financing up to US$57.5 million of interim credit facilities. Member, Members: shall have the meaning set forth in the introduction. Permitted Transactions: shall mean collectively, the following: (i) transactions contemplated under the Management Services Agreement, as amended from time to time in accordance with the terms hereof, (ii) transactions contemplated under the IP Agreement, as amended from time to time in accordance with the terms hereof, (iii) transactions contemplated under the Marketing Policy, as amended from time to time in accordance with the terms hereof, (iv) the guarantee by Loral Space & Communications Ltd. of the Interim Credit Facility, (v) transactions between and among the Company Entities and any of the Service Subsidiary or the Concession Subsidiary and (vi) transactions between and among the Company Entities. Permitted Transfer: a transfer (i) by either Loral or EE of Social Parts owned by it to any of its Affiliates, (ii) to the Company provided that in the case of clause (i), the transferee shall agree in writing to comply with all the provisions of this Agreement and provided further that no such transfer shall relieve the transferring Member from any liability of such transferring Member hereunder. Person: an individual, partnership, joint-stock company, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof. Proposal: shall have the meaning set forth in Section 3(a). -20- 21 Proposing Member: shall have the meaning set forth in Section 3(a). Purchaser: shall have the meaning set forth in Section 4(b). Qualified Mexican Person: shall mean a Person that is either a Mexican national or is organized under the laws of Mexico and satisfies the requirements of the Federal Telecommunications Law and Foreign Investment Laws as then in effect. SatMex: Satelites Mexicanos, S.A. de C.V., a company organized under the laws of Mexico. SatMex Holdings: shall have the meaning set forth in the recitals hereto. SatMex Dividend Policy: The policy by SatMex to pay annual dividends in an amount equal to at least 20% of the total amount available for distribution (after payment of liabilities and establishment of appropriate reserves as determined by management) but only to the extent such dividends are permitted under the debt instruments to which the Company Entities are bound and only to the extent of the balance in SatMex's Cuenta de Fiscal Neta (CUFIN) account. SatMex Stock Purchase Agreement: The Stock Purchase Agreement between the Company and the Mexican government dated as of November 17, 1997, with respect to the purchase of a 75% interest in SatMex. Securities Act: the United States Securities Act of 1933, as amended. Selling Member: shall have the meaning set forth in Section 4(c). Service Subsidiary: shall mean a subsidiary of the Company formed for the purpose of hiring and providing administrative, management, accounting, legal, operations, maintenance and other ancillary services to SatMex. Significant Decision: shall have the meaning set forth in Section 2(e). Social Parts: shall have the meaning set forth in the Recitals. Stated Price: shall have the meaning set forth in Section 4(b). -21- 22 Subject Social Parts: shall have the meaning set forth in Section 4(b). subsidiary: shall mean in respect of any Person any other Person which, at the time as of which any determination is being made, such Person or one or more of its subsidiaries has, directly or indirectly, Voting Control. Tag-Along Holder: shall have the meaning set forth in Section 4(c). Transfer: any sale, assignment, pledge, hypothecation, or other disposition or encumbrance. Transferor: shall have the meaning set forth in Section 4(b). Voting Control: shall mean, at any time, (A) the ownership or control, whether direct or indirect, of outstanding Social Parts of capital stock of (or equity interests in) a Person, which Social Parts or interest at such time have by the terms thereof ordinary voting power to elect a majority of the members of the Board of Directors (or Persons performing similar functions) of such Person (excluding voting power of the holders of preferred stock arising upon the occurrence of a contingency) or (B) with respect to any partnership when (i) the sole general partner or the managing general partner of which is such Person or a subsidiary of such Person or (ii) the only general partners of which are such Person or of one or more subsidiaries of such Person (or any combination thereof). (b) Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Mexico applicable to contracts made and to be performed entirely within such jurisdiction. (d) Section Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof. (e) Arbitration. In the event of any dispute, controversy or claim arising out of or relating to this Agreement, or to the breach or termination hereof (a "Dispute"), the parties agree to resolve the same as follows: (a) The parties to the Dispute shall initially attempt to resolve it through consultations and negotiations. -22- 23 (b) If the Dispute has not been resolved amicably within thirty (30) days after any party provides notice thereof, unless the parties agree otherwise, the Dispute shall be resolved by final and binding arbitration in New York, New York, if EE shall have initiated the proceeding or in Dallas, Texas, if Loral shall have initiated the proceeding, in each case in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL"), as in effect on the date of this Agreement. The language to be used in the arbitral proceeding shall be English. The International Chamber of Commerce shall serve as the appointing authority. The arbitrators shall render a written award stating the reasons for the decision. Judgment on an arbitral award or decision may be entered by any court of competent jurisdiction, or application may be made to such a court for judicial acceptance of the award or decision and any appropriate order, including enforcement (homologacion). (c) Each of the parties hereto consents to the submission of any Dispute for settlement by final and binding arbitration in accordance with paragraph (b) above. Such consent shall satisfy the requirements for: (i) A written arbitration agreement between the parties pursuant to Article I of the Inter-American Convention on International Commercial Arbitration (Convercion Interamericana Sobre Arbitaje Comercial Internacional), promulgated in Panama on January 30, 1975; (ii) An "agreement in writing" pursuant to Article II of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitration Awards, done at New York on June 10, 1958; and (iii) A written arbitration agreement between the parties pursuant to Article 1423 of the Mexican Commercial Code (Codigo de Comercio). (d) The parties hereby agree to continue to perform their obligations hereunder while any Dispute is pending. (e) Each of the parties hereby undertakes to carry out without delay the provisions of any arbitral award or decision. 8. CONFIDENTIALITY As to so much of the information and other material furnished under or in connection with this Agreement (whether furnished before, on or after the date hereof) as constitutes or contains confidential business, financial or other information of any of the Company Entities, each Member covenants for itself and -23- 24 its directors, officers and partners that it will use due care to prevent its officers, directors, partners, employees, counsel, accountants and other representatives from disclosing such information to Persons other than their respective authorized employees, counsel, accountants, Members, partners, limited partners and other authorized representatives; provided, however, that a Member may disclose or deliver any information or other material disclosed to or received by it should the Member be advised by its counsel that such disclosure or delivery is required by law, regulation or judicial or administrative order. For purposes of this Section 9, "due care" means at least the same level of care that a Member would use to protect the confidentiality of its own sensitive or proprietary information, and this obligation shall survive termination of this Agreement. 9. MISCELLANEOUS (a) Notices. (i) All communications under this Agreement shall be in writing and shall be delivered by hand or mailed by overnight courier or by facsimile: (A) if to Loral, at Loral SpaceCom Corporation, 600 Third Avenue, New York, New York 10016, marked for the attention of Eric J. Zahler, Vice President, General Counsel and Secretary, or at such other address as Loral may have furnished the Company in writing (with a copy to Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022 for the attention of Bruce R. Kraus, Esq. and Sanchez Mejorada Velasco y Valencia, Paseo de la Reforma 450, Lomas de Chapultepec, 11000 Mexico, D.F. to the attention of Carlos R. Valencia Barrera, Esq.); (B) if to EE, at Sierra Santa Rosa No. 61, Lomas de Chapultepec, Mexico, D.F. 11650, marked for the attention of Lauro Gonzalez, or at such other address as EE may have furnished the Company in writing (with a copy to Vinson & Elkins L.L.P., 3700 Trammel Crow Center, Dallas, Texas 75201 for the attention of Tim Foarde); and (C) if to the Company, at Eje Central Lagard Cardenas 567 Piso 12, Ala Norte Col. Narvarte, C.P. 03020, Mexico D.F. marked for attention of General Counsel, or at such other address as it may have furnished in writing to each of the Members. (ii) Any notice so addressed shall be deemed to be given: if delivered by hand, on the date of such delivery; if mailed by courier, on the third business day following the date of such mailing; and if sent by facsimile, on the next business day after receipt of confirmation. -24- 25 (b) Reproduction of Documents. This Agreement and all documents relating thereto, including, without limitation, (i) consents, waivers and modifications which may hereafter be executed, (ii) documents received by each Member pursuant hereto and (iii) financial statements, certificates and other information previously or hereafter furnished to each Member, may be reproduced by each Member by a photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and each Member may destroy any original document so reproduced. All parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by each Member in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. (c) Injunctive Relief. The Company and the Members hereby declare that it is impossible to measure in money the damages which will accrue to the parties hereto by reason of the failure of any party to perform any of its obligations set forth in this Agreement. Therefore, the Company and the Members agree that in the event of a breach or threatened breach by any other party of the provisions of this Agreement, in addition to any remedies at law, they shall, respectively, without posting any bond, be entitled to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy which may then be available, and if any party hereto shall institute any action or proceeding to enforce the provisions hereof, each of the Company and the Members hereby waives the claim or defense that the party instituting such action or proceeding has an adequate remedy at law. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. (e) Entire Agreement; Amendment and Waiver. This Agreement constitutes the entire understanding of the parties hereto relating to the subject matter hereof and supersedes all prior understandings among such parties, between any of them and the Company or among any of them. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company, Loral and EE. (f) Severability. In the event that any part or parts of this Agreement shall be held illegal or unenforceable by any court or administrative body of competent jurisdiction, such determination shall not effect the remaining provisions of this Agreement which shall remain in full force and effect. -25- 26 (g) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. (h) Non-Contravention. Each of the parties hereto agrees that it shall not take any action that would result in a violation of the Federal Telecommunications law (by Federal Telecommunicaciones) or the Concession Agreements. (i) Further Actions. Each of the parties hereto agrees that it shall amend, or cause to amend, the by-laws of the Company Entities in such manner as may be reasonably requested by either Loral or EE so as to effectuate the provisions of this Agreement. -26- 27 IN WITNESS WHEREOF, the parties hereto have executed this Membership Agreement as of the date first above written. EDICIONES ENIGMA, S.A. DE C.V. By:_____/s/_________________________ Name: Title: LORAL SATMEX LTD. By:_____/s/_________________________ Name: Title: FIRMAMENTO MEXICANO, S. de R.L. de C.V. By:_____/s/_________________________ Name: Title: By:_____/s/_________________________ Name: Title: -27- EX-10.20 7 LETTER AGREEMENT 1 Loral Space & Communications Ltd. Telefonica Autrey S.A. de C.V. 600 Third Avenue Sierra Santa Rosa No. 61 New York, New York 10016 Lomas de Chapultepec Mexico, D.F. 11650 December 29, 1997 Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Lehman Inc. 3 World Financial Center 200 Vesey Street New York, New York 10285 Lehman Commercial Paper, Inc. as Administrative Agent (and any successor thereto under the Credit Agreement) 3 World Financial Center New York, New York 10285 Ladies and Gentlemen: Loral Space & Communications Ltd. and Telefonica Autrey, S.A. de C.V. (being collectively referred to below as the "undersigned") refer to that certain Credit Agreement, dated the date hereof (the "Credit Agreement"), among Firmamento Mexicano S. de R.L. de C.V. ("Firmamento"), Servicios Corporativos Satelitales S.A. de C.V. ("Servicios"), Corporativo Satelites Mexicanos, S.A. de C.V. ("Corporativo"), Satelites Mexicanos, S.A. de C.V. ("SatMex"), the several financial institutions or entities from time to time party thereto, as Lenders, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") and Lehman Brothers Inc., as Arrangers, DLJ Capital Funding, Inc. and Lehman Commercial Paper Inc.("LCPI"), as Syndication Agents, DLJSC as Documentation Agent and LCPI as Administrative Agent named therein. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The undersigned agree and acknowledge that DLJSC and Lehman Brothers Inc. and their respective affiliates are relying on the agreements of the undersigned set forth below and would not enter into the Credit Agreement or the Securities Purchase Agreement without the agreements of the undersigned set forth below. Each of the undersigned hereby jointly and severally agrees with each of you that, so long as (A) there remain any undrawn commitments or amounts outstanding under (i) the Credit Agreement, (ii) the Term Loans, or (iii) that certain Securities 2 Purchase Agreement, dated the date hereof (the "Securities Purchase Agreement"), among Firmamento, Servicios, Corporativo, SatMex, SatMex Funding, Inc. and LB I Group Inc., or (B) there remain outstanding any of (i) the Fixed Rate Notes, (ii) the Senior Secured Floating Rate Notes, or (iii) the Unsecured Floating Notes: (a) Neither of the undersigned will take, or permit Firmamento, Servicios, or SatMex to take, any action that would accelerate the maturity of the Government Obligation pursuant to paragraph (b) of Clause Third therein without the prior written consent of both Donaldson, Lufkin & Jenrette Securities Corporation and Lehman Brothers Inc. (b) Each of the undersigned will take such action as may be necessary to ensure compliance with Clause Fourth of the Government Obligation at all relevant times thereunder. Without derogation of the joint and several nature of their obligations to you under paragraphs (b) and (c) above, Loral Space & Communications Ltd. and Telefonica Autrey S.A. de C.V., agree to share this obligation in proportion to their respective economic equity interests in Firmamento. -2- 3 Very truly yours, LORAL SPACE & COMMUNICATIONS LTD. By: ________/s/__________________ Name: Title: TELEFONICA AUTREY S.A. DE C.V. By: ________/s/__________________ Name: Title: -3- 4 Agreement entered into by and among the Federal Government of the Mexican United States, through the Ministry of Communications and Transports (the "Federal Government"), represented by Lic. Javier Lozano Alarcon, Subsecretary of such Ministry, Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey"), and Ediciones Enigma, S.A. de C.V. ("Ediciones"), represented by Mr. Lauro Andres Gonzalez Moreno, Loral Space & Communications Ltd. ("Loral"), and Loral Satmex, Ltd. ("LoralSat") represented by Mr. Carlos Raul Valencia Barrera and Servicios Corporativos Satelitales S.A. de C.V. ("Servicios"), represented by Mr. Carlos Raul Valencia Barrera and Mr. Lauro Andres Gonzalez Moreno, in accordance with the following Background, Recitals and Clauses: Background I. On August 1, 1997, call and bases for the public bid carried out to sell certain shares of the capital stock of Satelites Mexicanos, S.A. de C.V. ("SatMex") was published in the Official Gazette of the Federation. II. On October 27, 1997, the Intersecretarial Commission of Desincorporation, taking into consideration the proposals submitted, as well as the decision criteria established in the call and bases referred to background I above, awarded said public bid to Corporativo Satelites Mexicanos, S.A. de C.V. (hereinafter referred to as "Corporativo"), a company controlled by Telefonica Autrey and Loral, through Servicios, which was notified of the result on October 30, 1997. III. Corporativo decided to acquire shares representing 75% of the capital stock of SatMex (hereinafter referred to as the "Shares") as was provided by the mentioned call and bases. IV. On November 17, 1997, the Federal Government entered into a purchase and sale agreement related to the Shares with Corporativo (the "Purchase and Sale Agreement"). V. The last paragraph of Clause Thirteen of the Purchase and Sale Agreement establishes that, while the Federal Government is owner of shares representing 25% of the capital stock of SatMex (hereinafter referred to as "Third Package"), Corporativo covenants to do all necessary legal acts within its power so that the Federal Government does not suffer any loss or reduction of the equity value of its shares as a result, among others, of any operation of restructure financing. VI. As a result of the merger which Corporativo intends to effect into SatMex, there could occur the condition contemplated in Clause Thirteen of the Purchase and Sale Agreement, as consequence of debts incurred by Corporativo for the purpose of financing the acquisition of the Shares and considering the assignment of rights referred to in 5 representation I(b), below, the parties have decided to enter into this Agreement. VII. This Agreement has as its purpose to establish terms and conditions according to which Servicios shall pay to the Federal Government, the amounts which are derived from performance of the last paragraph of Clause Thirteen of the Purchase and Sale Agreement. Recitals Servicios represents, through its representative, that: It is an variable capital stock corporation, incorporated under the laws of the Mexican United States ("Mexico"), as established in public deed No. 19,391, dated December 15, 1997, granted before Mr. Jose Maria Gonzalez, Notary Public No. 102, of Mexico City, Federal District, the registration of the first original of which is pending the Public Registry of Commerce and Property of the Federal District. It entered into an agreement with Corporativo by which it assumed Corporativo's obligations contained in the third paragraph of the clause Thirteen of the Purchase and Sale Agreement. As the merger of SatMex and Corporativo could have as an effect the condition contained in the last paragraph of the clause referred to in subclause (b) above, Servicios recognizes its obligation to pay to the Federal Government the applicable amount, which will be paid in the terms of this Agreement. It does not require consent or authorization from any individual, corporation or authority for the due execution and performance of this Agreement and that entering into this Agreement does not contravene any applicable legal or contractual provision or obligation to which Servicios is bound. In its capacity as controlling shareholder of Corporativo, on the date upon which the merger referred to in background VI above becomes effective, and before such merger is consummated, the financial statements of Corporativo will reflect only the liabilities assumed by Corporativo with financial institutions for the acquisition of the share certificates representing equity capital of SatMex and its normal operation, and including its working capital, of $1,170,050,000.00 (one billion one hundred and seventy million fifty thousand pesos 00/100) M.N., the approximate amount of $120,000,000.00 pesos (one hundred twenty million pesos 00/100) M.N. of retained earnings pending capitalization and assets constituting share certificates representing the 75% of the equity capital of SatMex. -2- 6 Mr. Carlos Raul Valencia Barrera and Mr. Lauro Andres Gonzalez Moreno have sufficient authority to represent and bind Servicios to the terms of this Agreement, as it is established in public deed No. 19,391, dated December 15, 1997 granted before Mr. Jose Maria Morera Gonzalez, Notary Public No. 102 of Mexico City, Federal District, and said facilities have not been revoked nor amended in any way. Telefonica Autrey represents, through its representative, that: It is a variable capital stock corporation, incorporated under the laws of Mexico, as it is established in public deed No. 236,100, dated December 19, 1988, granted before Mr. Tomas Lozano Molina, Notary Public No. 87, of Mexico City, Federal District, associated to Mr. Francisco Lozano Noriega, Notary Public No. 10 of Mexico City, Federal District which first original was registered in the Public Registry of Property and Commerce of the Federal District, under mercantile folio No. 115084 dated May 23, 1989. It does not require consent or authorization from any individual, corporation or authority, for the due execution and performance of this Agreement and that entering into this Agreement does not contravene any applicable legal or contractual provision or obligation to which Telefonica Autrey is bound. That Mr. Lauro Andres Gonzalez Moreno has sufficient authority to represent and bind Telefonica Autrey to the terms of this Agreement, as it is established in public deed No. 26,714 dated August 14, 1997, granted before Mr. Jorge Antonio Francoz Garate, Notary Public No. 17 of the Judicial District of Tlalnepantla, Estado de Mexico, said faculties have not been revoked nor amended in any way. In its capacity as controlling shareholder of Ediciones, that the financial statements of Ediciones will reflect only an equity capital of $20,000,000.00 (twenty million pesos 00/100) M.N., and assets constituting an equity interest representing the equity capital of Firmamento, which together with the equity interest held by Loral, represents 100% of the subscribed and paid equity capital of Firmamento. Loral, represents, through its representative, that: It is a company duly incorporated under the laws of the Bermuda Islands which legal existence has been proven to the parties. It does not require consent or authorization from any individual corporation or authority, for the due execution and performance of this Agreement and that entering into this Agreement does not contravene any applicable legal or contractual provision or obligation to which Loral is bound. -3- 7 Mr. Carlos Raul Valencia Barrera has sufficient authority to represent and bind Loral to the terms of this Agreement, as it is established in public deed No. 18,637, dated August 18, 1997, granted before Mr. Jose Maria Morera Gonzalez, Notary Public No. 102, of Mexico City, Federal District, said faculties have not been revoked nor amended in any way. In its capacity as controlling shareholder of LoralSat, that the financial statements of Ediciones will reflect only an equity capital of U.S. $12,000.00 (twelve thousand dollars), legal currency of the United States of America, and assets constituting an equity interest representing the equity capital of Firmamento, which together with the equity interest held by Ediciones, represents 100% of the subscribed and paid equity capital of Firmamento. Ediciones represents, through its representative, that: It is an variable capital stock corporation, incorporated under the laws of Mexico, as it is established in public deed No. 248,296, dated October 15, 1991, granted before Lic. Tomas Lozano Molina, Notary Public No. 87, of Mexico City, Federal District, which first original was registered in the Public Registry of Property and Commerce of the Federal District, under mercantile folio No. 157207 dated March 23, 1992. It does not require consent or authorization from any individual, corporation or authority, for the due execution and performance of this Agreement and that entering into this Agreement does not contravene any applicable legal or contractual provision or obligation to which Ediciones is bound. That Mr. Lauro Andres Gonzalez Moreno has sufficient authority to represent and bind Ediciones to the terms of this Agreement, as it is established in public deed No. __________, dated _________, granted before Lic. Benito Guerra Silva, Notary Public No. 7 of the Federal District, which is in process of registration in the Public Registry of Commerce due to its recent issuance. That it is holder of an equity interest representing the equity capital of Firmamento, which together with the equity interest held by LoralSat, represents 100% of the subscribed and paid equity capital of Firmamento, and all of which is free and clear of any liens or limits on ownership. LoralSat, represents, through its representative, that: It is a company duly incorporated under the laws of the Bermuda Islands which legal existence has been proven to the parties. -4- 8 It does not require consent or authorization from any individual, corporation or authority, for the due execution and performance of this Agreement and that entering into this Agreement does not contravene any applicable legal or contractual provision or obligation to which LoralSat is bound. Mr. Carlos Raul Valencia Barrera has sufficient authority to represent and bind LoralSat to the terms of this Agreement, as it is established in public deed No. 19,160, dated November 12, 1997, granted before Mr. Jose Maria Morera, Notary Public No. 102, of Mexico City, Federal District, said faculties have not been revoked nor amended in any way. That it is holder of an equity interest representing the equity capital of Firmamento, which together with the equity interest held by Ediciones, represents 100% of the subscribed and paid-in equity capital Firmamento. The Federal Government states through its representative that: Mr. Javier Lozano Alarcon has sufficient authority to represent and bind the Federal Government to the terms of this Agreement, said faculties have not been revoked nor amended. It does not require consent or authorization from any individual corporation or authority, for the due execution and performance of this Agreement and that entering into this Agreement does not contravene any applicable legal or contractual provision or obligation to which the Federal Government is bound. It recognizes and accepts the assignment of obligations that Corporativo has entered into with Servicios, regarding Corporativo's obligations for the benefit of the Federal Government, contained in the third paragraph of Clause Thirteen of the Purchase and Sale Agreement and that Servicios is compelled to pay to the Federal Government as a consequence of the merger and pursuant to the terms of Clause Thirteen of the Purchase and Sale Agreement, the amount of the loss resulting as a consequence of the merger referred to in representation I(b), which will be paid pursuant to the terms of this Agreement. At a meeting held last November 7 of this year, the Committee for the Restructuring of the Mexican Satelite System resolved to approve the terms and conditions pursuant to which Autrey, Loral and Corporativo will make the payment of the agreed price for the acquisition of the share certificates representing equity capital of Satelites Mexicanos, S.A. de C.V., which contemplate the execution of this Agreement. Taking into consideration the above, the parties agree on the following: -5- 9 FIRST. Payment of principal. Pursuant to the terms of this Agreement and the third paragraph of Clause Thirteen of the Purchase and Sale Agreement, Servicios binds itself to pay the Federal Government the amount of $125,145,821.69 (one hundred twenty-five million, one hundred forty five thousand eight hundred twenty one and 69/100 dollars), in the legal currency of the United States of America, plus the escalation amount accrued according to the following clause, no later than December 30, 2004 or on the following business day if such day is a holiday (the "Maturity Date"), at the exchange rate for the performance of obligations denominated in foreign currency. Except as provided under Clause Three below, the Federal Government will only have the right to demand the payment of any amount from Servicios under this Agreement on the Maturity Date. The parties agree to apply the calculation procedure contained in Exhibit 1 of this document to determine the amount referred to in the previous paragraph. On the date on which the amount referred to in the above paragraph is determined, Servicios will execute a non-negotiable promissory note in favor of the Federal Government, in the amount determined according to this Clause and with the term and escalation factors which are established in this agreement, in the form attached as Exhibit 3 to this document. SECOND. Escalation. a) Servicios binds itself to pay the Federal Government exactly on the Maturity Date, a payment for escalation based on the unpaid principal amount referred to in Clause One of this agreement, as of the date of this agreement. The escalation referred to in the previous paragraph will be calculated using the following formula: Outstanding Balance times (1.0603)N/365 Where the Outstanding Balance means the amount established in Clause One above, calculated in dollars, legal currency of the United States of America and "N" means the actual number of days elapsed. b) In case of delay, default interest will accrue on the amount of principal and escalation payment from the day on which the corresponding payment should have been made and until the day on which total payment of the corresponding amount is made, at an annual rate of 18.09% over the unpaid balance (eighteen point zero nine percent), which will be calculated over the actual number of days effectively elapsed divided by 360. THIRD. Advanced payments of principal. a) Servicios may make advanced payments related to all or part of the principal owed to the Federal Government under this Agreement, without having to pay any discount, premium or penalty, so long as prior -6- 10 irrevocable written notice has been given to the Federal Government with five (5) working days in advance, and provided that it will have to pay all escalation amounts accrued up to the date of such advanced payment together with the advanced payment of the principal. b) In the event that the Federal Government as owner offers in the public market the Third Package before the Maturity Date, with the express prior consent of Autrey and Loral, Servicios shall be bound to prepay the total amount of the unpaid principal due to the Federal Government under this agreement, without having to pay any premium or penalty, exactly on the fifth working day following the date of receipt of the funds resulting from the public offering of the Third Package, together with the amount of escalation payment accrued up to the date of payment of said advanced payment. Servicios shall not be obliged to make said prepayment if Telefonica Autrey and Loral do not give their express consent to the public offering. (c) In the event Servicios sells all or part of the SatMex shares which it currently owns; Firmamento sells all or part of the shares of Servicios which it currently owns; Ediciones sells all or part of the equity interest in Firmamento which it currently owns; LoralSat sells all or part of the equity interest in Firmamento which it currently owns; Telefonica Autrey or Loral sell all or part of the shares of Ediciones or LoralSat, respectively, which they currently own, then Servicios will be obligated to prepay to the Federal Government, of the amount referred to in Clause One above, an amount equal to the price received by Servicios, Firmamento, Ediciones, LoralSat, Telefonica Autrey or Loral, as the case may be, for the sale of the applicable shares or equity interests. The provisions of this clause will not be applicable in the event that (i) the shares are transferred as a result of the execution of collateral agreements granted by the companies referred to in this paragraph as part of the acquisition of the share certificates representing equity capital in Satmex; or (ii) the subject sale is made to affiliated companies or subsidiaries of Loral or Telefonica Autrey or Ediciones or Loral Sat or Firmamento or Servicios, provided that such affiliates or subsidiaries assume the obligation established in the prior paragraph. For purposes of this clause, a company will be deemed an affiliate or subsidiary if, because of its investment ties or equity relationships, Loral, Telefonica Autrey, Ediciones, LoralSat, Firmamento or Servicios, together or separately, have the right to designate the majority of the members of its management bodies or the capacity to determine the terms in which its shareholder or partnership resolutions are made. (d) In the event SatMex, Servicios, Firmamento, Ediciones and LoralSat declare a dividend in favor of their -7- 11 shareholders which is covered with proceeds which come directly from SatMex, Servicios must prepay to the Federal Government, an amount equal to the amount of the declared dividend, simultaneously with its payment. (e) In the event clause 4, paragraph 2, below, is not met in two consecutive semesters and Servicios does not increase the amount of the collateral as requested by the Federal Government. FOURTH. Guarantee. To secure the punctual and complete compliance and payment of Servicios' obligations under this Agreement, together with all costs, expenses and other payment obligations incurred by the Federal Government in enforcing its rights against Servicios, Ediciones and LoralSat shall deposit in a collateral trust no later than January 15, 1998, all of the shares which they own and which represent the total equity capital issued by Firmamento, [TRANSLATOR NOTE: Firmamento is an SRL de CV which doesn't have shares but has equity interests] who is the holder of all the Servicios' shares less one, who in turn is, once consummated the conditions established in the merger agreements of Corporativo into SatMex, holder of seventy-five percent (75%) of the equity capital of Satmex. The parties agree that, at all times, the amount of the collateral must represent, during the first three years following execution of this Agreement, at least 1 time the balance of the amount established in Clause One, plus the amount of escalation applicable thereon; and from and after the commencement of the fourth year, 1.2 times the amount referred to above. For purposes of this paragraph, to determine such ratio, generally accepted accounting principles in Mexico, consistently applied, will be used to calculate the book value of the shares. Within ten days following the end of each trimester, Servicios will present to the Federal Government a report issued by an independent public accountant which acts as external auditor of Firmamento, in which it shall state that the ratio referred to in the prior paragraph is maintained at least as provided therein, and for which purpose, the exchange rate to be used will be that published by the Bank of Mexico in the Official Gazzette of the Federation for performance obligations denominated in foreign currency on the date of the issuance of such report. Until the trust referred to above has been finalized and executed, Ediciones and LoralSat, no later than 12:00 (noon) on December 30, 1997, will grant a pledge of the shares of Firmamento which they own and which represent 100% of the subscribed and paid capital of Firmamento. The parties agree that the collateral granted under this clause may be substituted for another, satisfactory to the Federal Government, without prejudice to the right of Servicios -8- 12 [sic] to increase the value of the collateral as the same may be necessary in order to maintain the ratio referred to in the second paragraph of this Clause, by means of the granting of other collateral, satisfactory to the Federal Government. When the collateral agreed to herein exceeds the ratio referred to in the second paragraph of this clause, Servicios will have the right to reduce such collateral, and the Federal Government shall be obligated to return or accept the cancellation, as the case may be, of the excess collateral. FIFTH. Unless the parties expressly agree otherwise, hereafter any payment which Servicios must make to the Federal Government pursuant to the provisions in the last paragraph of Clause Thirteen of the Purchase and Sale Agreement, must be made in cash. SIXTH. Assignments. Servicios, Telefonica Autrey and Loral may not assign their rights or delegate their obligations under this Agreement, unless express written consent of the Federal Government has been granted to them. SEVENTH. Notifications. a) For the purposes of this Agreement the parties indicate as their domiciles to receive notifications, the following: Federal Government:Av Xola Esq. Av. Universidad Cuerpo C. ler Piso Col. Narvarte, 03020, Mexico D.F. Servicios Corporativos Satelitaltes, S.A. de C.V. Telefonica Autrey S.A. de C.V. and Ediciones Enigma, S.A. de C.V. Sierra Santa Rosa No. 61 Col. Lomas de Chapultepec 11650 Mexico, D.F. Loral Space & Communications Ltd. and Loral SatMex, Ltd. 600 Third Avenue New York, New York 10016 U.S.A. b) If the parties do not notify the change of their domicile in writing, notices, notifications and all other judicial or extrajudicial proceedings made at the above domiciles will be enforceable. EIGHT. Applicable laws. This agreement shall be governed and construed by the Mexican laws. -9- 13 NINTH. Jurisdiction. For the construction and compliance with this Agreement, the parties submit themselves to the jurisdiction and competence of the courts in Mexico City, Federal District, waiving any other jurisdiction and competence which their present or future domiciles may entitle them to assert. -10- 14 TENTH. Amendments and waivers. Any amendment to this agreement will only be considered valid if it is made in writing and signed by the parties. Any waivers to rights under this agreement will only be considered valid if said waivers and in writing and signed by the parties with such rights. This agreement is signed by the parties on 29 of December, 1997, in Mexico City, Federal District. /s/ Javier Lozano Alarcon -------------------------------------------------------------------- Gobierno Federal de los Estados Unidos Mexicanos through Ministry of Communications and Transports represented by __________________ /s/ Lauro Andres Gonzalez Moreno -------------------------------------------------------------------- Telefonica Autrey, S.A. de C.V. represented by Mr. Lauro Andres Gonzalez Moreno /s/ Carlos Raul Valencia Barrera -------------------------------------------------------------------- Loral Space & Communications Ltd. represented by Mr. Carlos Raul Valencia Barrera /s/ Carlos Raul Valencia Barrera /s/ Lauro A. Gonzalez Moreno -------------------------------------------------------------------- Servicios Corporativos Satelitales, S.A. de C.V. represented by Mr. Carlos R. Valencia Barrera e Mr. Lauro A. Gonzalez Moreno -11- EX-12 8 STATEMENT RE: COMPUTATION OF RATIOS 1 EXHIBIT 12 LORAL SPACE & COMMUNICATIONS LTD COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In thousands, except ratios) (Unaudited)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- Earnings: Income before income taxes, minority interest and equity in net loss of affiliates............................. $126,982 $16,498 Plus: Interest expense...................................... 37,871 6,000 Interest component of rent expense(1)................. 4,400 Less capitalized interest................................ 22,641 -------- ------- Earnings available to cover fixed charges.................. $146,612 $22,498 ======== ======= Fixed charges(2)........................................... $ 78,568 $ 6,000 ======== ======= Ratio of earnings to fixed charges......................... 1.9x 3.7x ======== =======
- --------------- (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. EX-21 9 LIST OF SUBSIDIARIES 1 PAGE 1 Exhibit 21 Loral Space & Communications Ltd. As of February 27, 1998, active subsidiaries, all 100% owned directly or indirectly (except as noted below) consist of the following:
State or Country of Incorporation -------------------- Loral Space & Communications Corporation Delaware Loral General Partner, Inc. Delaware Loral Holdings, Inc. Delaware Loral Communications Services, Inc. Delaware Loral SpaceCom Corporation Delaware Space Systems/Loral, Inc. Delaware International Space Technology, Inc.(1) Delaware Cosmotech(1) Russian Federation SS/L Export Corporation U.S. Virgin Islands Mabuhay Space Holdings Limited(2) Bermuda Loral Travel Services, Inc. Delaware Globalstar, L.P.(3) Delaware Globalstar Capital Corporation(3) Delaware GlobalTel(4) Russian Federation GlobalTrak Pty(3) Australia Globalstar Services Company, Inc.(3) Delaware Globalstar Corporation(3) Delaware Globalstar Telecommunications Limited(5) Bermuda LGP (Bermuda) Ltd. Bermuda Loral Canada Holdings Ltd. Bermuda Loral CyberStar Ltd. Bermuda Loral Broadband Holdings, L.P. Delaware Loral CyberStar L.L.C. Delaware CyberStar, L.P.(6) Delaware CyberStar Licensee, L.L.C.(6) Delaware Loral/DASA Globalstar, L.P.(7) Delaware Loral/Qualcomm Partnership, L.P.(8) Delaware LQ Licensee, Inc.(8) Delaware Loral/Qualcomm Satellite Services, L.P.(9) Delaware Loral Satellite Corporation Delaware Loral SatMex Ltd. Bermuda Firmamento Mexicano S. de R.L. de C.V.(10) Mexico Servicios Corporativos Satelitales S.A. de C.V.(10) Mexico Satelites Mexicanos, S.A. de C.V.(11) Mexico Loral Skynet Ltd. Bermuda Loral SpaceCom DBS Holdings, Inc. Delaware R/L DBS Company L.L.C.(12) Delaware Loral SpaceCom DBS, Inc. Delaware Continental Satellite Corporation (13) California
- ---------------------------- (1) Only 44.9% owned directly or indirectly (2) Only 35% owned directly or indirectly (3) Only 40.1% owned directly or indirectly (4) Only 19.6% owned directly or indirectly (5) Only 17.7% owned directly or indirectly (6) Only 91.3% owned directly or indirectly (7) Only 66.7% owned directly or indirectly (8) Only 51% owned directly or indirectly (9) Only 73.6% owned directly or indirectly (10) Only 65% of the economic interest and 49% of the voting interest owned directly or indirectly (11) Only 48.8% of the economic interest and 49% of the voting interest owned directly or indirectly (12) Only 50% owned directly or indirectly (13) Only 86% owned directly or indirectly EX-23 10 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 on Form S-3; 333-46401 on Form S-4; and 333-14863 on Form S-8 of Loral Space & Communications Ltd. (a Bermuda company) of our reports with respect to the consolidated financial statements of Loral Space & Communications Ltd., Space Systems/Loral, Inc., and Globalstar, L.P., and the financial statement schedule of Loral Space & Communications Ltd., appearing in or incorporated by reference in this Annual Report on Form 10-K of Loral Space & Communications Ltd. for the year ended December 31, 1997. Deloitte & Touche LLP New York, New York March 27, 1998 EX-27 11 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, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1997 JAN-1-1997 DEC-31-1997 226,547 0 468,134 0 98,325 844,618 1,018,239 91,560 3,004,936 407,993 0 0 734,221 2,010 1,237,014 3,004,936 1,312,591 1,441,251 1,299,039 1,299,039 0 0 15,230 126,982 34,871 13,689 0 0 0 13,689 0.06 0.06 Note: The adoption of SFAS 128 had no effect on reported earnings per share for the year ended December 31, 1997 or the nine months ended December 31, 1996.
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