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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 Commission file
ended December 31, 1998 number 1-4929
COMSAT Corporation
(Exact name of registrant as specified in its charter)
District of Columbia 52-0781863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6560 Rock Spring Drive, Bethesda, MD 20817
(Address of principal executive offices)
Registrant's telephone number, including area code:(301) 214-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
8 1/8% Cumulative Monthly Income New York Stock Exchange
Preferred Securities of
COMSAT Capital I, L.P.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) 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 for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----------- -----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, any amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant was $1,497,888,670 based on a closing market price of $29.75 per
share on March 1, 1999, as reported on the composite tape for New York Stock
Exchange listed issues.
52,617,999 shares of common stock, without par value, were outstanding on
March 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference: NONE.
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PART I
Item 1: Business
GENERAL INFORMATION
Business Segments
COMSAT Corporation (COMSAT, the Corporation or Registrant) reports
operating results and financial data in four business segments: COMSAT World
Systems (CWS), COMSAT Mobile Communications (CMC), COMSAT International (CI) and
COMSAT Laboratories (Labs).
. CWS provides satellite capacity for telephone, data, Internet, video
and audio communications services between the U.S. and the rest of the
world using the global satellite networks of the International
Telecommunications Satellite Organization (INTELSAT) and New Skies
Satellites, N.V. (New Skies). The CWS segment also includes COMSAT
General Corporation (COMSAT General), COMSAT Digital Teleport, Inc.
(CDTI) and COMSAT Government Systems, Inc. (CGSI), which provide
various satellite and ground segment services to commercial and
government customers.
. CMC provides satellite telecommunications services for maritime,
aeronautical and land mobile applications primarily using the
satellite system of the International Mobile Satellite Organization
(Inmarsat).
. CI operates an integrated group of telecommunications companies that
principally provide individualized digital network solutions and value
added services to business clients and carriers in selected emerging
markets.
. Labs provides technical consulting services and develops advanced
communications technologies and products for satellite access and
networking applications.
Financial information by business segment for each of the last three years
is set forth in Note 16 to the financial statements.
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
in 1998 which changes the way the Corporation reports information about its
operating segments. Prior to the fourth quarter of 1998, the Corporation
reported operating results and financial data in two business segments:
Satellite Services (consisting of CWS and CMC) and Network Services (consisting
of CI, Labs and Government Programs). The Corporation began accounting for
substantially all of its former entertainment and manufacturing businesses as
discontinued operations in the second quarter of 1997. For information
concerning the Corporation's discontinued operations, see "Business -
Discontinued Operations" and Note 3 to the financial statements.
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The Corporation had approximately 1,600 employees as of December 31, 1998.
The only employees represented by a labor union are the approximately 126
employees working on the construction of the radio astronomy telescope project
in Green Bank, West Virginia.
Communications Satellite Act of 1962
COMSAT was incorporated in 1963 under District of Columbia law, as
authorized by the Communications Satellite Act of 1962 (the Satellite Act). In
1993, COMSAT changed its corporate name from "Communications Satellite
Corporation" to "COMSAT Corporation." COMSAT is not an agency or establishment
of the United States Government. The U.S. Government has not invested funds in
COMSAT, guaranteed funds invested in COMSAT or guaranteed the payment of
dividends by COMSAT. The U.S. Government has no ownership interest in COMSAT.
Although COMSAT is a private corporation, the Satellite Act regulates
certain aspects of COMSAT's structure, ownership and operations, including:
. three of COMSAT's 15 director positions are appointed by the
President of the United States with the advice and consent of the
United States Senate (one of those positions is currently vacant);
. COMSAT's issuance of capital stock and borrowing of money must be
authorized by the Federal Communications Commission (FCC);
. there are limitations on the classes of persons that may hold shares
of COMSAT's common stock and on the percentage of outstanding shares a
person or class of persons may hold; and
. on matters that may affect the national interest and foreign policy
of the United States, COMSAT's representatives to INTELSAT and
Inmarsat receive instructions from the U.S. Government.
Congress has reserved the right to amend the Satellite Act, and amendments,
if any, could materially affect the Corporation. Legislation is currently
pending in Congress to overhaul the Satellite Act. See "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Outlook - Regulatory and Legislative Developments."
Government Regulation
Under the Satellite Act, the International Maritime Satellite
Telecommunications Act of 1978 (the Inmarsat Act) and the Communications Act of
1934, as amended (the Communications Act), COMSAT is subject to regulation by
the FCC with respect to its capital and organizational structure, as well as
CWS's and CMC's plant, operations, services and rates. In addition, COMSAT
General and CGSI are common carriers regulated by the FCC. FCC decisions and
policies have had and will continue to have a significant impact on the
Corporation. Specific aspects of the regulation of CWS and CMC are discussed in
the narratives concerning those segments. See "Business - COMSAT World Systems
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- - Regulation of CWS" and "Business - COMSAT Mobile Communications - Regulation
of CMC." Certain parts of COMSAT's business are also regulated by foreign
governments.
COMSAT World Systems
Services
CWS provides satellite capacity for telephone, data, Internet, video and
audio communications services between the United States and the rest of the
world using the global satellite networks of INTELSAT and New Skies. CWS's
customers include U.S. international communications common carriers, teleports,
private network providers, multinational corporations, U.S. and international
broadcasters, news-gathering organizations, digital audio companies and the U.S.
government.
The largest portion of CWS's revenues comes from providing full-time voice-
grade half-circuits (two-way communications links between an earth station and
an INTELSAT satellite) to U.S. international communications common carriers.
The three largest carrier customers are AT&T Corporation (AT&T), MCI WorldCom,
Inc. (MCI WorldCom) and Sprint Corporation (Sprint). CWS offers significant
discounts to customers entering into long-term commitments for full-time voice-
grade half-circuits. Approximately 95% of all eligible voice-grade half-
circuits are now under such commitments.
At year end 1998, approximately 81% of CWS's International Digital Route
(IDR) and International Business Service (IBS) traffic was under long-term
commitments with INTELSAT. CWS has short-term commitments with INTELSAT for the
remaining portion of its IDR and IBS traffic. CWS also enters into commitments
with INTELSAT for video traffic, which vary in length depending on the length of
commitments from CWS's customers.
CWS's voice and data services are virtually all digital. CWS's IDR
service, for example, makes it possible for communications carriers to provide
digital public-switched telephone network circuits. The carriers apply
techniques to such circuits that permit a single digital circuit to handle
multiple telephone calls simultaneously.
For private-line customers, CWS offers an all-digital IBS, as well as an
international VSAT (very small aperture terminal) service. IBS offers customers
high-speed, digital communications for voice, data, facsimile and video
conferencing using on-premise earth stations that eliminate the need for costly
land-line connections. At year end 1998, approximately 97% of CWS's IBS traffic
was covered by long-term commitments. CWS's customers have established
international VSAT networks in both Latin America and Europe. Using on-premise
antennas as small as 1.8 meters in combination with the high-power satellites in
the INTELSAT network, corporations doing business internationally can deliver
communications to multiple sites. Used primarily for data transmissions, VSATs
can also accommodate voice and video communications. CWS's carrier and Internet
Service Provider customers frequently employ either IBS or international VSAT
services to implement their Internet applications. These services are well-
suited for either high speed point-to-point or point-to-multipoint Internet
applications. In addition to providing reliable worldwide access to the
Internet, IBS and VSAT services offer features to customers, such as simplified
network architectures, asymmetric data rates, and quick turnup of satellite
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connectivity. The global demand for Internet access has been growing at a high
rate. The applicability of IBS and VSAT for the support of Internet
applications is the main growth driver for these services.
To the growing international broadcasting community, CWS provides both
digital and analog transmission services on a long-term, short-term or
occasional as-needed basis. With the introduction of the INTELSAT VII, VIIA and
VIII satellites, CWS has expanded the availability of high-power, flexible
capacity for broadcasters and satellite news gatherers. See "Item 2: Properties
- - INTELSAT Satellites."
To maintain the quality of the INTELSAT network, CWS provides tracking,
telemetry, control (TT&C) and monitoring services to INTELSAT and engages in a
program of research and development to ensure that the satellite system
accommodates the latest communications technologies, including broadband,
integrated services digital networks (ISDN), and asynchronous transfer mode
(ATM).
The CWS business also includes the operations of COMSAT General, CDTI and
CGSI, all of which are wholly-owned subsidiaries of the Corporation.
COMSAT General provides a line of satellite-based communications services
to provide business data solutions. This includes satellite circuits, ground
station transit services, connecting terrestrial links, baseband network
terminal equipment and engineering services for international host nation
licensing and approvals. COMSAT General provides services to commercial,
government and international organizations, and is an FCC-licensed common
carrier. COMSAT General also operates via the INTELSAT system from certain
foreign countries.
COMSAT General operates satellite earth station facilities located in
Clarksburg, Maryland, Santa Paula, California, and Southbury, Connecticut.
COMSAT General also operates a satellite control facility and high speed fiber
interconnects to telecommunications carriers and Internet service providers.
COMSAT General provides its customers with satellite services over a variety of
international and domestic satellite systems, including INTELSAT and Inmarsat,
for voice, data, Internet and one-way video broadcast.
COMSAT General provides satellite operation service for the MARISAT and
COMSTAR satellites, which includes tracking, telemetry, command and orbital
maintenance for these spacecraft. In addition to operating the satellites,
COMSAT General also provides transponder capacity on such satellites.
CDTI provides turnkey satellite services through facilities located in
Clarksburg, Maryland and Santa Paula, California. CDTI network services include
satellite and terrestrial segments, network management, and installation and
maintenance of required hardware. CDTI also offers bundled satellite service
including space and ground segment for Internet, video, and digital data
applications.
CGSI is a wholly-owned subsidiary established primarily to support the
Commercial Satellite Communications Initiative (CSCI) program. CGSI has a
contract with the Defense Information Systems Agency (DISA) to provide bulk
commercial satellite transponder leases. CGSI also operates two bandwidth
management centers.
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Revenues
Approximately 49% of the Corporation's consolidated revenues in 1998 were
derived from CWS services (compared to 51% in 1997 and 55% in 1996).
Approximately 9% of the Corporation's consolidated revenues in 1998 were derived
from CWS services to AT&T. Also in 1998, CWS's three largest customers, AT&T,
MCI WorldCom and Sprint, were the source of approximately 19%, 18% and 7%,
respectively, of CWS's revenues. See Note 16 to the financial statements.
INTELSAT
INTELSAT is a 143-member international organization headquartered in
Washington, D.C. It operates under three agreements: an intergovernmental
agreement; a headquarters agreement with the U.S. Government; and an operating
agreement signed by each member nation's government or designated
telecommunications entity (a Signatory).
COMSAT is the U.S. Signatory. It represents the U.S. in INTELSAT, subject
to instructions from the Department of State (in concert with the Department of
Commerce and the FCC) on matters that may affect U.S. national interest and
foreign policy.
Each shareholder has rights and obligations in INTELSAT analogous to those
of a partner. Each owns an investment share, makes proportionate contributions
to INTELSAT's capital costs, and receives proportionate distributions of
INTELSAT's net revenues after deductions for operating expenses. Shareholders
also pay INTELSAT for their use of the satellite system. The investment shares
are readjusted in March each year to approximate the shareholders' respective
portions of the total use of the INTELSAT space segment for the previous six
months. CWS's investment share, the largest in INTELSAT, was approximately
18.0% as of December 31, 1998, which was unchanged from December 31, 1997.
Effective March 1, 1999, CWS's investment share in INTELSAT increased to
approximately 19.8%. At December 31, 1998, total INTELSAT owners' equity was
approximately $1.63 billion. The rate of return on shareholders' capital is
subject to change based on business conditions. INTELSAT does not guarantee a
return to Signatories.
Since 1995 INTELSAT has allowed non-Signatory telecommunications entities
to participate as shareholders in the organization. As of December 31, 1998,
there were 48 non-Signatory shareholders accounting for total shares of 6.6%.
As of December 31, 1998, COMSAT Argentina and COMSAT General together owned
approximately 0.4% of INTELSAT.
INTELSAT generally procures spacecraft and launch services under long-term,
multi-satellite contracts which provide for payments by INTELSAT over the
contract periods. Under the satellite construction contracts, approximately 70%
of spacecraft cost is typically paid to the manufacturer during construction
prior to spacecraft delivery and satellite launch. In addition, approximately
15% typically is paid after the satellite has been placed in orbit and has
satisfactorily completed in-orbit testing. The remaining portion of the
spacecraft cost is payable periodically as performance incentives over the
designated design life of the satellite contingent upon continued successful
operation of the satellite during the respective periods.
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Under the launch service contracts, launch services costs are typically
paid in quarterly installments with the final payment due at the end of the
planned launch period. Launch payments are payable in full whether or not the
launch has resulted in launch success.
INTELSAT has purchased launch and post-separation insurance coverage for
possible losses that may occur during the launch and subsequent one-year periods
for satellites scheduled for launch from 2000 through 2002. The coverage
includes the cost of the satellite, launch services and associated capitalized
interest, as well as the cost of the insurance itself. This insurance protects
the Corporation in proportion to the Corporation's interest in INTELSAT. Launch
and post-separation insurance for the INTELSAT satellites does not protect the
Corporation against business interruption, loss or delay of revenues and similar
losses and may not fully reimburse the Corporation or INTELSAT for their
respective expenditures. Beyond this one year post-separation period, the
Corporation and INTELSAT intend to rely on the spare capacity on the satellite
fleets, to the extent available, to avoid an interruption of customer service
and revenues. Neither INTELSAT nor the Corporation procures insurance for the
in-orbit failure of satellites beyond the one-year, post-separation period. In
the event of a complete in-orbit failure beyond the one-year, post-separation
period, the Corporation would be required to write off the value of its
proportionate investment in that satellite. Partial in-orbit failures will be
evaluated for impairment according to the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of."
Effective January 1, 1998, the Corporation changed its accounting policy
with respect to the cost of series satellites lost at launch or in orbit and its
accounting policy with respect to satellite performance incentives paid to
manufacturers. See Note 5 to the financial statements.
INTELSAT generally offers long-term commitments for transponder capacity of
one, two, three, five, ten or fifteen years for a range of services at tariff
rates which are progressively lower for the longer term commitment periods. As
of December 31, 1998, COMSAT had commitments with INTELSAT of five years or more
in effect representing approximately 66.34% of COMSAT's total analog services
traffic with INTELSAT, 63.5% of its total digital services traffic with
INTELSAT, 81% of its total voice service with INTELSAT and 91% of its total
video service traffic with INTELSAT. Approximately 54% of COMSAT's commitments
with INTELSAT are for a fifteen year term.
New Skies and INTELSAT Privatization
The Corporation continues to promote efforts to restructure the INTELSAT
satellite system. See "Business - Investments - New Skies Satellites, N.V.,"
"Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations - Outlook - Satellite Services - Restructuring of INTELSAT and
Inmarsat" and Note 6 to the financial statements.
Regulation of CWS
Under the Satellite Act and the Communications Act, COMSAT is subject to
regulation by the FCC with respect to CWS's communications services and the
rates charged for those services. CWS provides its services on a non-
discriminatory basis to all customers, either under tariffs filed with the FCC
or on the basis of inter-carrier contracts.
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On April 24, 1998, the FCC granted the Corporation's petition for
reclassification as a non-dominant common carrier in markets that represent
approximately 90% of CWS's revenues. For those markets, rate-of-return
regulation was lifted immediately. On February 10, 1999, the FCC eliminated
COMSAT's remaining rate-of-return regulation along thin routes in favor of
COMSAT's incentive-based pricing plan. See "Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook - Regulatory
and Legislative Developments."
On October 28, 1998, the FCC issued a separate notice of proposed
rulemaking to explore the implications of enabling users to have direct access
to the INTELSAT system, which would end COMSAT's status as the exclusive
provider of INTELSAT services in the U.S. In the direct access notice, the FCC
tentatively concluded, among other things, that it lacks the statutory authority
to impose Level 4 direct access (by which users could invest and acquire an
ownership interest in INTELSAT), but does have the authority to require Level 3
direct access (by which users could directly contract with INTELSAT for capacity
and bypass COMSAT). The FCC sought comments on its tentative conclusion that it
would serve the public interest to mandate Level 3 direct access. The
Corporation filed comments contesting the basis for the FCC's proposed action.
See "Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations - Outlook - Regulatory and Legislative Developments."
In November 1997, the FCC issued an order in its "DISCO-II" rulemaking
proceeding addressing, among other matters, COMSAT's provision of INTELSAT
services within the United States. The FCC ruled that, before COMSAT may
provide such domestic satellite services, it must first waive the limited
immunity from suit which it has with respect to its actions as U.S. Signatory to
INTELSAT. COMSAT has appealed that ruling on the ground that its limited
immunity arises from international agreements entered into by the U.S. which may
not be abrogated by the FCC.
COMSAT General is licensed by the FCC to operate the MARISAT F-2 and
COMSTAR D-4 satellites and is the licensee of a number of earth stations, which
are chiefly located at Clarksburg, Maryland. There are also several earth
stations located at Clarksburg, Maryland and Paumulu, Hawaii that are licensed
to the Corporation for use by CWS. In addition, CGSI is the licensee of two
earth stations located at Clarksburg, Maryland. See "Item 2: Properties."
Competition
CWS is subject to substantial and increasing competition from satellite
service providers, undersea cable operators and fiber optic cable systems.
Currently there are more than fifty satellite operators with over 180
geostationary satellites providing services around the globe. Of those, over 50
satellites are capable of providing international service to or from the U.S. in
competition with COMSAT. Competing satellite service providers offer a full
range of services. Voice and data services are provided by numerous satellite
systems, including Hughes/PanAmSat, Loral/Orion, GE Americom, Columbia
Communications, JSAT and others. A number of satellite systems provide video
service in direct competition with COMSAT and INTELSAT, including
Hughes/PanAmSat, Loral/Orion, Columbia Communications and regional satellite
systems (e.g., Hispasat, JSAT, and France Telecom). Many of the Corporation's
competitors have plans to substantially expand capacity over the next few years.
COMSAT is currently the only U.S. entity that may provide international
space segment to customers using INTELSAT satellites. In the above-mentioned
FCC direct access proceeding, CWS's
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largest customers have asked the FCC to allow direct access to the INTELSAT
system, and have also asked the FCC to nullify their long term contracts with
CWS pursuant to the so-called "fresh look" doctrine. The Corporation has opposed
these requests. For additional information concerning direct access and "fresh
look," see "Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations -Outlook - Regulatory and Legislative Developments."
In addition to the competitors described above, COMSAT also faces
competition from other countries' INTELSAT Signatories in the provision of
voice, video and data services. Earth stations located in other countries that
are within the footprint of satellites sending signals to U.S. earth stations
may be providing service to customers in the U.S. by routing traffic through a
non-U.S. earth station connected to U.S. customers by domestic satellite or
fiber optic cable. Such competitive service is believed to be primarily offered
by Canada's Signatory, Teleglobe, but may also be available from other
countries' Signatories, including Mexico.
COMSAT also faces significant competition from service providers utilizing
undersea fiber optic cable systems to provide voice, data, and video services.
Fiber optic undersea cable is increasingly being used to carry transoceanic
video programming. CWS's major carrier customers (including its three largest
customers, AT&T, MCI WorldCom and Sprint) are co-owners of fiber cable systems.
COMSAT Mobile Communications
Services
CMC provides satellite telecommunications services for maritime,
aeronautical and land mobile applications, primarily using Inmarsat satellites.
CMC operates land earth stations in Southbury, Connecticut and Santa Paula,
California, which serve the Atlantic and Pacific Ocean Regions, respectively,
and in Malaysia and (until CMC's lease expires on June 30, 1999) Turkey, which
serve the Indian Ocean Region. These stations enable CMC to offer global
coverage for its services. There are currently approximately 143,000 mobile
terminals operating in the Inmarsat system. As described below, CMC provides a
full range of voice, facsimile, data and telex services, as well as certain
value-added services.
Maritime Services
CMC provides satellite services for communications to and from ships and
other vessels. Customers for these services include transport ship operators,
cruise ships and their passengers, fishing vessel operators, oil and mining
interests, pleasure boat operators, U.S. Navy ships and foreign
telecommunications administrations.
In addition to telephony services, CMC's services include group call
messaging to a fleet of ships, electronic mail services, a direct-dial telephone
service for passengers and crew on board ships, a news summary distribution
service, access to data bases through personal computers, and other office
communications services for facsimile transmissions, worldwide teleconferencing
and current financial news reports.
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In May 1998, CMC implemented service with the U.S. Coast Guard (USCG) and
the National Oceanic and Atmospheric Administration (NOAA) to provide Inmarsat
standard-C services in support of USCG position reporting and NOAA survey
programs.
CMC offers three digital services, Inmarsat-B, Inmarsat-C and Inmarsat-M,
in the Atlantic, Pacific and Indian Ocean Regions. These services provide more
efficient use of the Inmarsat satellite capacity, help to significantly lower
the cost of using satellite communications, and expand the potential customer
base for maritime and land mobile services. CMC also offers a multi-channel
version of Inmarsat-M service that allows cruise ships and other high-volume
users to increase their channel capacity and offer lower rates to their
customers.
In October 1998, CMC entered into a nine year agreement with AT&T to
provide global satellite communications for "Afloat Personnel Telecommunications
Services" on board U.S. Navy vessels. CMC will provide bulk capacity satellite
services to AT&T to support telephone service for sailors at sea.
Aeronautical Services
CMC provides satellite telecommunications services for aeronautical
applications, including airline operational and administrative communications,
passenger telephone service and, prospectively, air traffic control. Customers
of CMC for international aeronautical services include airline service
providers, commercial airlines, government aircraft and corporate aircraft.
CMC provides aeronautical services with a data service for cockpit
communications on commercial flights under an agreement with Aeronautical Radio,
Inc., an airline-owned service organization. CMC also provides aeronautical
voice services in the Atlantic and Pacific Ocean Regions through its earth
stations at Southbury, Connecticut and Santa Paula, California. There are
currently more than 1,600 aircraft equipped to use the Inmarsat aeronautical
system, equally split between voice and data services.
A service agreement with Kokusai Denshin Denwa Co., Ltd. (KDD), the
Japanese Signatory to Inmarsat, provides that CMC may use KDD's ground earth
station serving the Indian Ocean Region to serve CMC's aeronautical customers,
and CMC may serve KDD's customers flying in the Atlantic Ocean Region. Under
the agreement, CMC and KDD provide mutual back-up in the Pacific Ocean Region
for aeronautical customers of both companies.
A service agreement with GTE Airfone, Inc., a provider of air-to-ground
passenger telephone service using terrestrial facilities, enables it to extend
its current service to transoceanic flights by acquiring satellite and ground
earth station services from CMC.
CMC has been selected by United Airlines to provide satellite
communications services for passengers (including telephone, fax and data
transmission) on approximately 104 United Airlines aircraft. CMC has provided
financing for 74 of these aircraft of up to $7 million to promote the use of
satellite phones on United Airlines aircraft. The $7 million facility is being
drawn upon as United Airlines installs seat-back phones on those aircraft.
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CMC also has been selected to provide satellite communication services to
the international fleet of Delta Airlines. CMC entered into agreements with
AT&T Wireless, Inc. to provide satellite communications to the passenger cabins
and with DeltaTel, Inc. to provide cockpit communications. CMC has implemented
service with AT&T to accept the use of the AT&T calling card to support this
service offering. In addition, COMSAT provides voice service to Air Canada
passengers pursuant to an existing arrangement which commenced in 1994.
In late 1996, the Federal Aviation Administration (FAA) selected CMC to
provide satellite and uplink services for the Wide Area Augmentation System
(WAAS). In July 1998, CMC signed a five year $57 million agreement with the FAA
to complete the agreement and began earth station services.
Land Mobile Services
CMC provides telecommunications services for international land mobile
applications, using mobile and portable terminals located outside of the United
States. Customers for these services include broadcasters, foreign
telecommunications authorities and U.S. and foreign corporations and government
agencies.
CMC's land mobile services are currently available using transportable
versions of Inmarsat's Inmarsat-A and Inmarsat-B mobile earth stations
(telephone, facsimile, data, and telex), a briefcase-size Inmarsat-M terminal
and a smaller data-only Inmarsat-C terminal through CMC's C-Link service. C-
Link service is a low-cost text messaging service that permits smaller vessels
and land mobile units to use the global satellite network. The briefcase-size
Inmarsat-M terminals provide a more portable and less expensive telephone
service for the news media, government officials and others who travel to remote
parts of the world where reliable communications services are often not
available.
The Corporation commenced commercial Planet 1 service in January 1997. The
Planet 1 terminal is a six pound, laptop computer-sized satellite terminal which
utilizes the Inmarsat-3 satellites. CMC has entered into a number of agreements
to resell Planet 1 service.
Revenues
Approximately 27% of the Corporation's consolidated revenues in 1998 were
derived from CMC (compared to 30% in 1997 and 30% in 1996). No single customer
of CMC provided more than 10% of the Corporation's consolidated revenues in
1998. See Note 16 to the financial statements.
Inmarsat
Pending its expected privatization in April 1999, Inmarsat is an 87-nation
organization headquartered in London, England. It operates under three
agreements: an intergovernmental convention; a headquarters agreement with the
United Kingdom (U.K.) Government; and an operating agreement signed by each
member nation's government or designated telecommunications entity (a
Signatory).
COMSAT is the U.S. Signatory. It represents the U.S. in Inmarsat, subject
to instructions from the Department of State (in concert with the Department of
Commerce and the FCC) on matters that may affect U.S. national interest and
foreign policy.
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Each Signatory has rights and obligations in Inmarsat analogous to those of
a partner. Each owns an investment share, makes proportionate contributions to
Inmarsat's capital costs, and receives proportionate distributions of Inmarsat's
space segment charges after deductions for operating expenses. The investment
shares are typically readjusted as of February 1 of each year to approximate the
signatories' respective portions of the total utilization of the Inmarsat space
segment for the previous year. Due to the expected privatization of Inmarsat in
April 1999, this readjustment did not occur as of February 1, 1999. COMSAT's
investment share, the largest in Inmarsat, was 22.2% as of December 31, 1998 as
compared to 23.0% at December 31, 1997. At December 31, 1998, total Inmarsat
owners' equity was approximately $850 million.
The Corporation continues to promote efforts for the privatization of
Inmarsat. Inmarsat is expected to become an independent commercial company in
April 1999. The privatization will affect the manner in which the Corporation
accounts for its ownership interest in Inmarsat. See "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Outlook - Satellite Services - Restructuring of INTELSAT and Inmarsat."
The Inmarsat-3 satellites are the primary operational Inmarsat spacecraft
and are used for on-demand services such as Inmarsat A, B, M, Mini-M, C, and
Aeronautical. Some services such as Mini-M and Aero-I are spot beam only
services and can only be supported on the Inmarsat-3 satellites. Four of the
Inmarsat-3 satellites are the primary operational Inmarsat spacecraft and are
used for on-demand services such as Inmarsat A, B, M, Mini-M, C, and
Aeronautical. The fifth Inmarsat-3 satellite is planned to be used primarily
for bulk services and backup capacity.
The Inmarsat-2 satellites are expected to provide full time pre-emptible
services and backup for global beam services on the Inmarsat-3 satellites. Four
Inmarsat-2 satellites are in orbit.
Inmarsat procured the Inmarsat-2 and Inmarsat-3 satellites and launch
services under long-term, multi-satellite contracts which provided for payments
by Inmarsat over the contract periods. The contracts for the construction of
the Inmarsat-3 satellites required performance-based incentive payments for each
satellite after 60 days of successful in-orbit testing and after successful
emergence of the spacecraft from the first eclipse season. Additional incentive
payments are made quarterly based on continuous satisfactory operation of the
satellite through the end of its orbital life. Incentive payments were not paid
by Inmarsat in connection with the procurement of the Inmarsat-2 satellites.
As of December 31, 1998, Inmarsat did not have any contracts to procure
additional satellites.
All of the existing Inmarsat satellites have been in orbit for more than
one year and, as a result, are no longer insured for in-orbit loss under the
terms of the insurance policies procured at the time of launch. Neither
Inmarsat nor the Corporation procures insurance for the in-orbit failure of
satellites beyond the one-year, post-separation period. In the event of a
complete in-orbit failure of an existing Inmarsat satellite, the Corporation
would be required to write off the value of its proportionate investment in that
satellite. The Corporation evaluates partial in-orbit failures and determines
whether a write-off is appropriate based on the degree of impairment. The
Corporation also does not procure insurance to protect against business
interruption, loss or delay of revenues and similar losses for potential in-
orbit failure of the Inmarsat satellites. The Corporation and Inmarsat rely on
spare and preemptible capacity
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<PAGE>
on the satellite fleets, to the extent available, to minimize potential
interruption of customer service and revenues in the event of an in-orbit
failure.
Effective January 1, 1998, the Corporation changed its accounting policy
with respect to the cost of series satellites lost at launch or in orbit and its
accounting policy with respect to satellite performance incentives paid to
manufacturers. See Note 5 to the financial statements.
Inmarsat generally offers its service providers satellite capacity on
demand generally under terms that require payments on a per minute basis.
Inmarsat has established a full period bulk capacity program which will increase
the inventory of satellite products that CMC can offer for future sale.
Regulation of CMC
Under the Inmarsat Act, COMSAT is subject to regulation by the FCC with
respect to CMC's communications services and the rates charged for these
services. CMC is currently regulated as a dominant carrier and its operations
are generally restricted to international service. Regulatory constraints on
CMC are expected to be eased after Inmarsat is privatized. However, upon
privatization of Inmarsat, CMC will no longer hold the legal status as the sole
authorized U.S. provider of Inmarsat service originating in the U.S.
By an FCC Report and Order issued in 1989, COMSAT was authorized: (i) to be
the sole U.S. provider of Inmarsat space segment capacity for aeronautical
services; (ii) to provide ground segment aeronautical services in connection
with the Inmarsat space segment on a non-exclusive basis; and (iii) to provide
such aeronautical services only to aircraft engaged in international flights,
including international flights over U.S. airspace. Another entity, the
American Mobile Satellite Corporation (AMSC), was designated to be the sole
provider of certain domestic aeronautical and land mobile satellite services.
In 1995, CMC applied to the FCC for authority to offer domestic aeronautical
services. CMC's request is pending before the FCC. In 1996, CMC began offering
domestic aeronautical services on an interim basis pursuant to temporary
authority granted by the FCC. The FCC has regularly renewed COMSAT's temporary
authorization, and COMSAT continues to offer domestic aeronautical services
thereunder.
COMSAT is not generally authorized to provide U.S. domestic land mobile
services. In limited circumstances, the Corporation provides U.S. domestic
service to certain individual end users under special temporary authorities from
the FCC.
In November 1997, the FCC issued an order in its "DISCO II" rulemaking
proceeding addressing, along with other issues, COMSAT's provision of Inmarsat
services within the United States. The FCC ruled that, before COMSAT may
provide domestic service within the United States via Inmarsat, it must first
waive its immunity from suit, including suit under the U.S. antitrust laws,
stemming from its role as U.S. Signatory to Inmarsat. The new commercial entity
which will be created upon the privatization of Inmarsat will not have the
privileges and immunities that the current Inmarsat inter-governmental, treaty-
based organization has currently. COMSAT's limited privileges and immunities in
respect of the successor to Inmarsat also will be eliminated. Absent that
impediment, the Corporation expects that the FCC will grant it authorization to
offer Inmarsat services within the United States following privatization.
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Competition
CMC competes internationally in the provision of voice, fax and data
communications services over the Inmarsat satellite system. CMC's maritime,
land and aeronautical customers have access to a broad array of alternative
service providers and communications technologies, including:
. Inmarsat services provided by other Inmarsat distributors and
resellers;
. High Frequency (HF), Very High Frequency (VHF) and other forms of
maritime radio;
. C-Band and Ku-Band Satellites (maritime C-Band for cruise ships and
VSAT systems on land using Ku-Band);
. Regional Satellite Systems (AMSC, TMI, and others used for land and
maritime);
. Cellular (used widely on land, and in maritime coastal markets);
. New Global Satellite Systems (such as the low earth orbit satellite
system of Iridium); and
. Terrestrial-based aeronautical.
Under the Inmarsat Act, COMSAT is the designated U.S. Signatory to the
Inmarsat Operating Agreement, and is the sole U.S. operating entity and investor
in the Inmarsat system. CMC competes for maritime, land mobile and aeronautical
communications business with other Inmarsat Signatories operating land earth
stations and with IDB Mobile Communications, Inc. (IDB), another U.S. land earth
station operator and a subsidiary of Stratos Global Corporation, which became
Canada's Signatory in 1998. IDB provides maritime, land mobile and aeronautical
services through its own U.S. land earth stations using Inmarsat satellite
capacity obtained from a foreign Signatory. COMSAT is currently involved in
legal proceedings against IDB. See "Item 3: Legal Proceedings."
With regard to U.S.-originating shore-to-ship Inmarsat traffic, COMSAT
currently has the exclusive right under the Inmarsat Act to be the provider of
Inmarsat space segment. Nonetheless, COMSAT currently competes with another
land earth station operator, IDB, for shore-to-ship traffic. MarineSat
Communications Network and Marine Telecommunications Network also have FCC
licenses to provide these services in competition with COMSAT as resellers.
COMSAT competes directly with a number of other Inmarsat Signatories that
operate land earth stations around the world and offer many of the same services
as COMSAT. These include British Telecom, France Telecom, Station 12 (the
Netherlands), Telstra (Australia), Stratos (Canada), Deutsche Telecom, KDD
(Japan) and Telenor (Norway). A total of 16 Signatories offer global service,
and a number of others offer service in one or more ocean regions. In addition,
there are U.S. carriers licensed to resell Inmarsat services, including IDB,
Stratos Mobile Networks, and MarineSat Communications Network (subsidiaries of
Stratos Global Corporation) and Marine Telecommunications Network (a subsidiary
of ICG Satellite).
Inmarsat's competitive environment is very different from that of INTELSAT,
in which a given call between two countries is "shared," with each country
accounting for one "half-circuit." Inmarsat instead relies on a demand-assigned
mode of operation which results in a high degree of intra-system competition
among the more than 30 Inmarsat land earth station operators (LESOs) that
compete for traffic generated from Inmarsat's approximately 143,000 system-wide
terminals. Each time a call from an Inmarsat mobile terminal is made, the end-
user placing the call can select any land earth station that
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<PAGE>
serves the respective Inmarsat satellite to complete his transaction. COMSAT and
all LESOs effectively compete for each and every mobile-originated Inmarsat call
as it is made.
Additionally, Inmarsat recently adopted a plan to privatize in April 1999.
As a result, COMSAT will lose its present status as sole provider of Inmarsat
satellite capacity for U.S. shore-to-ship traffic and for U.S. land earth
stations. With privatization, competition among Inmarsat service providers is
expected to increase for shore-to-ship services. See "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Outlook - Satellite Services -Restructuring of INTELSAT and Inmarsat."
Inmarsat's most significant competitor in the provision of maritime
communications is VHF radio for short distance or coastal communications, along
with Medium Frequency (MF) and HF radio for communications over long distances.
In addition to serving the communications needs of small vessels which operate
in coastal waters, maritime radio provides a lower-cost alternative to Inmarsat
services for ships which must comply with GMDSS carriage requirements. It is
difficult to estimate the number of maritime radio coast stations or ship
terminals in service around the world. However, in the United States alone, an
estimated 600,000 maritime radio licensees, utilizing more than 300 public coast
stations, rely on maritime radio for ship-to-ship and ship-to-shore
communications, including calls that are interconnected to the terrestrial
public switched network. There are approximately 10 licensed operators of
public coast stations in the United States. Major operators of global maritime
radio networks serving the United States include MariTEL, Globe Wireless, and
Maritex.
Maritime C-Band is used for a large volume of maritime communications
traffic from cruise ships sailing in the Caribbean and Alaskan regions for ship-
to-shore and shore-to-ship communications. Whereas Inmarsat-based operators such
as COMSAT were previously the largest communications providers to cruise ships,
in recent years these customers have increasingly been serviced by Maritime C-
Band operators such as MTN that use the satellite capacity of Hughes/PanAmSat,
INTELSAT and others.
CMC also faces competition from cellular service. A significant amount of
maritime traffic in U.S. and nearby waters operates within range of shore-based
cellular, and many of these ships rely heavily on cellular service. Cellular
competes with CMC for coastal communications traffic from passenger ships,
fishing vessels and pleasure craft operating in the Caribbean, Alaskan fishing
regions and along the U.S. coastline. The rapid build-out of cellular networks
around the world also provides competition to CMC's land mobile services.
CMC competes in the maritime and land mobile markets with a number of
regional mobile satellite systems that operate using their own GEO satellites.
These include AMSC (serving North and Central America), TMI (Canada), MobilSat
(Australia/New Zealand) and N-Star (Japan). Though COMSAT has been foreclosed
by FCC regulations from competing with AMSC for land mobile traffic in the
United States, both companies actively compete for customers operating in U.S.
coastal waters. AMSC's services are sold through their exclusive distributor,
Stratos Mobile. Because the United States, pursuant to the 1997 WTO Basic
Telecommunications Agreement, committed to open up its markets to foreign
competition, foreign-licensed satellite operators using regional satellites can
now routinely offer services in the United States. For example, TMI, a Canadian
company, has applied to provide land
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mobile satellite services in the United States using the Canadian MSAT-1
satellite and the FCC recently authorized a U.S. company, SatCom, to provide
such services via MSAT-1.
CMC now competes with Iridium, the first of several proposed low-earth-
orbit (LEO) satellite providers, to complete its satellite network. Iridium
began commercial service in November 1998. Iridium uses a network of 66
satellites to offer voice and paging services on a global basis, and is now
competing directly with Inmarsat for provision of global mobile satellite
services. Due to its low-earth orbit system, Iridium is able to utilize smaller
handheld terminals which are easier to carry than the smallest laptop size
terminals currently needed for Inmarsat access.
CMC also competes with VSAT services. Inmarsat communications on land are
best suited for short-term, rapid deployment applications and are often used by
government, media and relief organizations for this purpose. However, VSATs
offer a more cost effective alternative for customers whose communications
requirements are likely to involve more than two hours of traffic usage a day on
a long-term basis. Today there are thousands of VSAT sites all over the globe,
many of which have been deployed to replace higher cost Inmarsat communications
or to provide for higher data transmission rates than Inmarsat.
CMC faces competition from terrestrial radio networks to provide
aeronautical communications services. Most aeronautical communications in the
United States rely on terrestrial radio networks operated by GTE Airfone, AT&T
Wireless and ARINC. Satellite-based systems are less frequently used for such
communications and represent a smaller segment of the overall aeronautical
communications services market.
FCC decisions also may significantly affect the competition for products
and services offered by CMC. See "- Regulation of CMC."
COMSAT INTERNATIONAL
Services
CI operates an integrated group of telecommunications companies that are
engaged principally in providing individualized digital network solutions to
business clients and carriers in selected markets. CI also is exploring the
development of prospective international telecommunications opportunities that
are consistent with its digital networking strategy. CI's existing and
prospective companies typically are and will be located in those rapidly growing
markets where a significant number of CI's existing or targeted clients are
located (or where they intend to locate).
As of December 31, 1998, CI operated in 11 countries located in Latin
America, Asia and Europe. CI's companies generally are wholly- or majority-
owned, with one exception. At December 31, 1998, CI beneficially owned 50% of
COMSAT Max Limited, CI's operating company in India. CI's clients are typically
local, indigenous large and medium-sized corporations, national branches of
multinational corporations and major telecommunications carriers and consortia.
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The following chart sets forth the CI businesses as of December 31, 1998:
<TABLE>
<CAPTION>
CI Company Country CI Ownership Percentage
<S> <C> <C>
BelCom, Inc. Russian Federation & CIS 100%
COMSAT Argentina, S.A. Argentina 100%
COMSAT Asia (L) Incorporated China 55%
COMSAT de Colombia, S.A. Colombia 100%
Communicaciones Satelitales de Colombia Colombia 100%
COMSAT Brasil Ltda. Brazil 100%
COMSAT de Guatemala, S.A. Guatemala 100%
COMSAT Max Limited India 50%
COMSAT Mexico S.A. de C.V. Mexico 100%
COMSAT Peru, S.A. Peru 100%
COMSAT Digital Services Turkey 85%
COMSAT Telecommunications Services Turkey 64%
COMSAT Venezuela Venezuela 100%
</TABLE>
CI continued to develop its businesses in 1998. In particular, CI
purchased all outstanding minority shareholdings in its Latin American
companies, including 35% of COMSAT Peru, S.A. held by Avantec, S.A. and 6% of
Communicaciones Satelitales de Colombia held by several individual minority
shareholders. As a result, all of CI's Latin American operations are now
wholly-owned companies. Due to a restrictive regulatory environment, CI decided
to convert its Bolivian operations to inactive status, pending possible
liberalization and business opportunities in the future.
CI employs various technologies including satellite, microwave, fiber
optic, frame relay and ATM in the design and implementation of network solutions
for its clients. Each of CI's operations centers is open seven days per week,
24 hours per day to monitor, test, and provide help desk services to clients.
CI provides a wide range of service options to its corporate clients from
basic provision and maintenance of the customer's network to full management of
the network including router and facility management, from each of CI's network
management centers.
The services provided by CI operating companies depend on local regulations
and are built from the following "family" of offerings:
. COMSATLink - services that assure a constant dedicated circuit
----------
between locations for the transmission of voice, data and video
communications. Customers use the service for applications requiring
LAN interconnection, Internet access, and voice trunking both
domestically and internationally.
. COMSATNet - a service connecting multiple locations to a central
---------
host location or with each other. Typical applications are point-of-
sale networks, credit card verification, banking, lottery, Internet
access, inventory management and others. A wide range of speeds are
available both domestically and internationally.
. COMSATCast - an effective solution for customers having one-way
----------
(broadcast) data, audio and video requirements. Transmission from a
central location can be sent to many locations simultaneously for
applications such as the distribution of financial market data, news,
weather data, radio programming, corporate training and television
programming.
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<PAGE>
. COMSATDVnet - a Dynamic Virtual Network service that takes
-----------
advantage of broadband technologies and flexible, cost-effective
bandwidth allocation to bring high-performance data services tailored
to the customers network and management needs. Uses include WAN and
LAN interconnections, Internet access, remote database access, file
transfer and sharing, E-mail, E-commerce, virtual private networks,
packetized voice and video, order entry systems and more. Speeds
range from 64kbps to 45mbps.
. COMSATWeb - provides a variety of Internet service configurations
---------
with integrated offerings under development now.
Sales and Marketing
CI has direct sales personnel in each of its operations. In some of the
larger countries, marketing agreements have also been established with various
companies to provide additional geographic coverage of the market.
CI's target market consists of corporate clients, both national and
international, Internet service providers (ISPs) and telecommunications carriers
who need local presence for provision of corporate networks.
Regulation of CI
CI's companies operate in various developing countries and are subject to
regulation by the local regulatory authorities in those countries. Because the
regulatory environment in those countries is rapidly evolving as the local
economies are developing, CI's companies face increasing business uncertainties
which could have an adverse effect on their operations in those countries.
Competition
CI's companies operate in numerous and diverse markets. Competition in
these markets tends to be fragmented. Competitors are different in each region
and in some cases, in each country in which CI operates. The degree of
regulation and the level of competition in these countries varies considerably.
In some countries there is full competition, and in others competition is
limited by law. The competitive conditions faced by each company are the result
of differing and changing regulatory policies and economic conditions. In those
countries that have not yet undergone a substantial liberalization of their
telecommunications laws, CI's principal competitor is typically a version of the
local Postal, Telegraph and Telephone administration (PTT), together with a
limited number of companies that provide telecommunications services similar to
those offered by CI. In countries that have liberalized their
telecommunications laws, CI typically faces greater competition than in less
liberalized markets.
CI faces certain operational risks inherent to the countries in which it
operates. These risks are typical of emerging markets and include changes in
government regulations and licensing requirements, tariffs, taxes, sanctions and
other trade barriers, exchange controls, bureaucratic impediments, political,
social and economic instability, inflation, devaluation, interest rate and
exchange rate fluctuations. There can be no assurance that the current economic
difficulties faced in Asia, Russia, Brazil and elsewhere, or any future economic
difficulties, or any other risks enumerated above or otherwise, will not
adversely
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<PAGE>
impact CI's existing or prospective customers, thereby affecting CI's ability to
generate revenues or otherwise having a material adverse affect on CI's
financial results and condition.
Revenues
Approximately 18% of the Corporation's consolidated revenues in 1998 were
derived from CI (compared to 16% in 1997 and 11% in 1996). No single customer
of CI provided more than 10% of the Corporation's consolidated revenues in 1998.
See Note 16 to the financial statements.
COMSAT LABORATORIES
Services
COMSAT Laboratories provides technical consulting services and develops
communications products. Technical consulting activities include the design and
development of advanced digital communications technologies, systems and
networking solutions. COMSAT Laboratories also designs and develops
communications products and software for satellite access, networking
applications and satellite system planning and management.
Customers include U.S. and foreign government agencies, commercial
entities, INTELSAT, Inmarsat and ICO Global Communications (Holdings) Ltd.
(ICO). In addition, COMSAT Laboratories conducts research and development (R&D)
on a broad range of telecommunications devices, subsystems, transmission
systems, technologies and techniques in support of other COMSAT businesses.
On-going contracts being performed in 1998 include: a contract with
Ericsson to design and develop the HPN ICONET ground facilities subsystems; a
consulting agreement with Iridium related to the design of its next generation
system; a contract with AT&T to deliver second generation Time Division Multiple
Access (TDMA) terminals; contracts with INTELSAT to design STRIP7 and develop a
software system for generation INTELSAT TDMA burst time plans; a contract with
NASA to provide operation and maintenance support for the ACTS (Advanced
Communications Technology Satellite) program; and a variety of technical
consulting contracts for INTELSAT, Inmarsat, ICO and other governmental and
private industry customers.
COMSAT Laboratories won external contracts with a total value of $53
million in 1998. Major new contracts awarded or begun in 1998 include: a
contract with INTELSAT for new TDMA infrastructure; a contract with Lockheed
Martin for the ACES In-Orbit-Test; a contract with WorldSpace; and a contract
with NASA for ACTS. At December 31, 1998, COMSAT Laboratories' backlog of
orders totaled $50.5 million, as compared to $28.3 million at December 31, 1997.
The Labs developed the Linkway 2000 product which is used commercially in
the Link One/SM/ service, a new global satellite networking solution. The
Linkway 2000 product supports two advanced networking protocols, ATM and Frame
Relay. Telecommunications carriers can use the Link One service and the Linkway
2000 product to extend international voice and data networks into remote
locations that do not currently have service. ISPs can use this service to more
easily connect countries throughout the world to the U.S. Internet backbone.
The service can also be used by multinational corporations to network their
offices worldwide.
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COMSAT Laboratories incurred research and development expenditures of $3.2
million in 1998, a decrease of $0.5 million from 1997. These expenditures were
largely attributed to the development of its broadband VSAT, ATM and software
products.
Revenues
Approximately 7% of the Corporation's consolidated revenues in 1998 were
derived from the Labs (compared to 6% in 1997 and 8% in 1996). See Note 16 to
the financial statements.
DISCONTINUED OPERATIONS
During the second quarter of 1997, the Corporation began accounting for the
operations of both Ascent Entertainment Group, Inc. (Ascent) and substantially
all of COMSAT RSI, Inc. (CRSI) as discontinued operations. See Note 3 to the
financial statements. The Corporation distributed its 80.67% ownership interest
in Ascent to COMSAT's shareholders on June 27, 1997. On June 25, 1998, COMSAT
completed the sale of substantially all of CRSI to a subsidiary of TBG
Industries, Inc. (TBG) for net cash proceeds of approximately $111.9 million,
after adjusting for changes in intercompany loans and advances. The sale of
substantially all of the assets and liabilities of JEFA Wireless Systems, a
subsidiary of CRSI, was completed in a separate transaction in February 1998.
The Corporation has agreed to indemnify the purchasers of CRSI and JEFA against
certain losses. See Note 3 to the financial statements.
The Corporation has retained the long-term contract for the completion of
the 100 meter radio astronomy telescope at Green Bank, West Virginia. CRSI's
$29 million claim for work performed under and relating to the Green Bank
contract, which is currently in arbitration, has been assumed by COMSAT. See
"Item 3: Legal Proceedings" and Note 3 to the financial statements.
The Corporation has also retained Electromechanical Systems, Inc. (EMS), a
former subsidiary of CRSI. EMS designs, manufactures and installs multi-axis
positioning control units (pedestals) for precision tracking and pointing for
air traffic control, weather, radar, communication and surveillance equipment.
EMS also provides repair and restoration service for various antenna pedestals
for its customers. More than 90% of EMS's current business is with military and
government customers, nearly all in the U.S. EMS and the Corporation have been
named as defendants in a pending qui tam lawsuit under the Civil False Claims
Act. There is also a separate criminal investigation into the same allegations.
See "Item 3: Legal Proceedings" and Note 11 to the financial statements.
CRSI previously owned a 53% equity interest in Plexsys International
Corporation (Plexsys). Plexsys ceased doing business on July 1, 1998. This
investment was not sold to TBG in connection with the sale of CRSI and has been
written off by the Corporation.
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<PAGE>
INVESTMENTS
New Skies Satellites, N.V.
On November 30, 1998, INTELSAT transferred six satellites (five currently
in orbit and one scheduled to be launched during 1999) to New Skies. New Skies,
which is headquartered in the Netherlands, is a separate company that is
independent of INTELSAT. As of December 31, 1998, the Corporation owned 16.6%
of New Skies. See "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations - Outlook - Satellite Services -
Restructuring of INTELSAT and Inmarsat" and Note 6 to the financial statements.
ICO Global Communications (Holdings) Limited
As of December 31, 1998, the Corporation directly owned 1.6% of ICO.
Together with the Corporation's indirect ownership of ICO through its ownership
interest in Inmarsat, which is also an ICO shareholder, the Corporation owned an
aggregate of 3.7% of ICO. See Note 6 to the financial statements.
ICO was formed to provide hand-held satellite communications services
outside of the Inmarsat organization to allow a more commercial focus than the
current Inmarsat system.
In 1997, COMSAT concluded agreements with ICO to construct, operate and
interconnect a "satellite access node" (SAN) in Brewster, Washington. In
December 1998, COMSAT reached an agreement with ICO to transfer the SAN facility
back to ICO. The agreement also waives any rights to distribute ICO services
that COMSAT may have obtained by virtue of its 1995 subscription agreement. In
consideration of its settlement agreement, COMSAT received a cash payment of
$4.5 million. See "Item 7: Management's Discussion of Financial Condition and
Results of Operations - Consolidated Operations" and Note 6 to the financial
statements.
21
<PAGE>
Item 2: Properties
COMSAT PROPERTIES
Bethesda, Maryland Headquarters
At year end 1998, the headquarters of the Corporation and the headquarters
of CWS, CMC and CI were located in a building in Bethesda, Maryland, which the
Corporation leases from a limited partnership in which it holds a 50% interest,
primarily as a limited partner. The managing general partner also owns a 50%
interest in the partnership. An affiliate of the managing general partner owns
the building site and has leased this site to the partnership. In 1993, the
Corporation entered into a 15-year lease with the partnership for the building.
See Note 10 to the financial statements.
Clarksburg, Maryland Facility
In 1997, the Corporation sold the office buildings and land at Clarksburg,
Maryland that serve as the headquarters of the Labs and CGSI. The Corporation
leased back the office buildings and the land underlying its earth stations for
a ten-year lease term. See Note 5 to the financial statements. The Corporation
owns an earth station at Clarksburg, Maryland that is used by COMSAT General to
house its Satellite Control and Teleport Facilities as well as the Bandwidth
Management Center operated by CGSI for the U.S. Government CSCI Program. The
Corporation also owns an earth station at Clarksburg, Maryland that is used by
CWS to provide TT&C services to INTELSAT. CDTI provides turnkey satellite
services at Clarksburg, Maryland.
Other Properties
The Corporation owns or leases 10 properties in the United States and
leases a sales office in Beijing, China.
The Corporation owns earth stations at Santa Paula, California and
Southbury, Connecticut, and leases earth stations in Turkey (which lease expires
June 30, 1999) and Malaysia, that are used by CMC to provide mobile
communications services. The Corporation owns an earth station at Paumalu,
Hawaii that is used by CWS to provide TT&C services to INTELSAT.
COMSAT General owns 86.3% of the MARISAT Joint Venture, which operates the
MARISAT F-2, one of the three satellites launched in 1976, with capacity leased
to Fugro N.V., a Netherlands company. The MARISAT F-1 and F-3 ceased commercial
operations in 1996. COMSAT General owns the COMSTAR D-4 satellite (launched in
1981) with capacity leased to CMC and the U.S. Navy.
CI leases or owns facilities in each of the countries in which it operates.
See "Item 1: Business -COMSAT International" above for a listing of the
countries in which CI operates.
The Corporation's properties are believed to be suitable and adequate for
the Corporation's business operations.
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<PAGE>
INTELSAT Satellites
The Corporation's property accounts include CWS's pro rata share of
INTELSAT satellites. The INTELSAT satellites currently in use and under
construction are described below. As a result of the INTELSAT restructuring,
six INTELSAT satellites were transferred to New Skies on November 30, 1998.
Five of the transferred satellites were in use and one is under construction.
The transferred satellites are not included in the description below. See "Item
7: Management's Discussion and Analysis of Financial Condition and the Results
of Operations -Outlook - Satellite Services - Restructuring of INTELSAT and
Inmarsat."
There are three INTELSAT V and VA satellites continuing to operate in the
INTELSAT system. All of these satellites have reached the end of their design
lives and are operating in an inclined orbit. Their capacities range from 15,000
to 17,000 voice circuits or 51 to 57 television channels (or some combination of
each depending on the configuration of the satellite). The satellites were
built by a predecessor to Space Systems/Loral.
The INTELSAT VI series consists of five satellites, constructed by Hughes
Aircraft Company, now a subsidiary of General Motors Corporation. These
satellites have an average capacity of at least 24,000 bearer circuits or 87
television channels. The INTELSAT VI satellites, the last of which was launched
on October 1991, currently provide primarily backbone public switched network
(PSN) services in the Atlantic and Indian Ocean regions.
The INTELSAT VII series consists of five satellites constructed by Space
Systems/Loral. These satellites have an average capacity of at least 17,050
bearer circuits or 62 television channels (or a capacity of 62 36MHz units with
a typical minimum power range of 29 to 34.5 decibels relative to one watt (DBW)
at C-band and 44 DBW at Ku-band depending on the beam). The last INTELSAT VII
satellite was launched in June 1996. These satellites were designed to replace
the V/VA satellites. They provide improved utilization and flexibility, with
improved radio frequency power, enhanced Ku-band coverage and increased C-band
connectivity compared to the V/VA satellites.
The INTELSAT VIIA series, also constructed by Space Systems/Loral, consists
of two satellites having an average capacity of at least 19,250 bearer circuits
or 70 television channels (or a capacity of 70 36MHz units with a typical
minimum power range of 29 to 36 DBW at C-band and 42.7 to 45 DBW at Ku-band
depending on the beam). Of the three INTELSAT VIIA satellites constructed, the
first INTELSAT VIIA satellite was successfully launched in May 1995; the launch
of the second VIIA, in February 1996, was a launch failure (see Note 5 to the
financial statements); and the third VIIA was successfully launched in March
1996. These satellites provide an enhancement over the VII satellites to meet
increased demand for high power Ku-band capacity. New cross-strapped
connectivity from Ku-band to C-band allows the provision of satellite news
gathering (SNG) service using a roving Ku-band Spot Beam in the uplink.
The INTELSAT VIII series consists of three satellites constructed by
Lockheed Martin Corporation. These satellites have an average capacity of
21,000 bearer circuits or 76 television channels (or a capacity of 76 36MHz
units with a typical power range of 29 to 34.5 DBW at C-band and 44 DBW at Ku-
band depending on the beam). All three INTELSAT VIII satellites were
successfully launched in 1997. They were designed primarily to complement the
INTELSAT VI satellites and meet growing
23
<PAGE>
demand for C-band services. The INTELSAT VIII series satellites provide new
television broadcast mode capability with simultaneous up link from the
Northeast zone beam and down link from three West zone beams. The INTELSAT VIII
series satellites also provide expanded SNG service with the capability to cross
connect any of the Ku-band spot beams to any of the global beams in certain
transponders.
The INTELSAT VIIIA series consists of one satellite constructed by Lockheed
Martin Corporation. The satellite has an average capacity of at least 11,600
bearer circuits or 38 television channels (or a capacity of 42 36MHz units with
a power range of 39.7 to 42 DBW at C-band and 50.4 to 51.7 DBW at Ku-band
depending on the beam). The INTELSAT VIIIA (F-5) was launched in June 1998.
The INTELSAT VIIIA satellite is designed for users requiring high power together
with a wide coverage areas in C-band for the provision of services such as
video, VSAT applications and PSN. It uses complex state-of-the-art antenna
technology to provide improved coverage of land areas of North and South
America.
The INTELSAT IX series currently consists of five satellites. As of
December 31, 1998, procurement of five satellites had been approved by the
INTELSAT Board of Governors. These spacecraft are to be built by Space
Systems/Loral and are intended to replace the INTELSAT VI satellites between
2000 and 2002. The INTELSAT IX satellites are expected to have an average
capacity of 98 36MHz transponders with a typical minimum power range of 31 to 47
DBW depending on the beam. The satellites will provide primarily high
connectivity backbone public network services in the Atlantic and Indian Ocean
regions. The INTELSAT IX satellites will be INTELSAT's largest capacity
satellites with advanced communications and RF performance.
Inmarsat Satellites
The Corporation's property accounts include CMC's pro rata share of
Inmarsat satellites. The Inmarsat satellites currently used are described
below. See "Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations - Outlook - Satellite Services - Restructuring of
INTELSAT and Inmarsat."
The second-generation Inmarsat satellite system, known as the Inmarsat-2
series, consists of four satellites constructed by an international consortium
led by British Aerospace Dynamics Corporation. These satellites are now used
primarily for bulk services and backup capacity. The Inmarsat-2 satellites are
expected to be moved, depending on traffic demand, to new orbital locations
where they will provide full time pre-emptible lease services. The Inmarsat-2
series satellites also provide backup for global beam services on the Inmarsat-3
satellites. Some services such as Mini-M and Aero-I are spot beam only services
and can only be supported on the Inmarsat-3 satellites.
The third-generation Inmarsat satellite system, known as the Inmarsat-3
series, consists of five satellites constructed by Lockheed Martin Astro Space.
These satellites use spot-beam technology, which allows reuse of the scarce
frequency resources allocated for mobile satellite communications. The
Inmarsat-3 satellites are about eight times more powerful than the Inmarsat-2
series. All five of these satellites were launched successfully. Four of the
Inmarsat-3 satellites are the primary operational Inmarsat spacecraft and are
used for on-demand services such as Inmarsat A, B, M, Mini-M, C, and
Aeronautical. The fifth Inmarsat-3 satellite is planned to be used primarily for
bulk services and backup capacity.
24
<PAGE>
Item 3: Legal Proceedings
In addition to the matters described below, certain legal proceedings,
which are either pending or known to be contemplated by governmental
authorities, to which COMSAT or any of its subsidiaries is a party are described
in Notes 10 and 11 to the financial statements.
In 1995, the Corporation entered into a five-year agreement with News
Corporation to provide satellite services beginning in 1996. In March 1996,
News Corporation unilaterally terminated this agreement. The Corporation has
commenced a lawsuit against News Corporation to recover damages arising out of
the alleged breach of obligation to COMSAT, and against PanAmSat Corporation and
Televisa for allegedly inducing the breach. News Corporation has asserted a
counter claim for return of the $5 million deposit it originally paid.
Since November 1997, the Corporation has been in a dispute with IDB Mobile
Communications, Inc. and its parent, Stratos Global Corporation of Canada, about
IDB/Stratos' refusal to pay COMSAT as U.S. Signatory to Inmarsat for the
satellite capacity used by their U.S. land earth stations. Stratos became
Canada's Signatory to Inmarsat in 1998. COMSAT contends that IDB is required,
under contract and by U.S. law (including the Maritime Satellite Act of 1978),
to pay solely COMSAT for that U.S. satellite capacity. IDB/Stratos contend they
are permitted to secure capacity from foreign Signatories. In February 1998 they
asked the FCC for a declaratory ruling to that effect, which COMSAT opposed; the
petition remains pending. In January 1998, the Corporation sued IDB for breach
of contract. The court dismissed the contract case but ruled that COMSAT could
seek to enforce its statutory rights at the FCC. COMSAT has appealed this
ruling. In January 1999, the Corporation filed a complaint at the FCC seeking
damages against IDB, which remains pending. In addition, IDB/Stratos have three
applications pending at the FCC for authority to provide various Inmarsat
services, which COMSAT has opposed unless conditioned on use of satellite
capacity provided by COMSAT as U.S. Signatory. Also pending at the FCC is a
complaint filed against COMSAT by IDB/Stratos in September 1997 challenging the
Corporation's rates for certain Inmarsat services.
The Corporation has retained the long-term contract for the completion of
the 100 meter radio astronomy telescope at Green Bank, West Virginia. CRSI's
$29 million claim for work performed under and relating to the Green Bank
contract, which is currently in arbitration, has been assumed by COMSAT. The
prime contractor has filed a counterclaim seeking $12.9 million in damages for
delay. The claim and counterclaim are currently in arbitration. There can be
no assurance that the Corporation will be successful in collecting all or any
portion of this claim.
COMSAT and its subsidiaries are a party to various lawsuits and arbitration
proceedings and are subject to various claims and inquiries, which generally are
incidental to the ordinary course of its business. The outcome of legal
proceedings cannot be predicted with certainty. Based on currently available
information, however, management does not believe that the outcome of any matter
which is pending or threatened, either individually or in the aggregate, will
have a material adverse effect on the consolidated financial condition of the
Corporation. Nevertheless, the outcome of such matters could materially affect
consolidated results of operations in a given year or quarter.
25
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
None.
26
<PAGE>
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
On December 31, 1998, there were 52,633,577 shares of common stock
outstanding. Of this number, 18,958 were Series II shares and 52,614,619 were
Series I shares. Series II shares are shares held by communications common
carriers authorized to hold shares by the FCC. Series I shares are held by
other persons. As of December 31, 1998, the Corporation had 32,711 Series I
holders and 36 Series II holders of record.
The principal market for COMSAT's common stock is the New York Stock
Exchange, where it is traded under the symbol "CQ." COMSAT's common stock is
also listed on the Chicago Stock Exchange and the Pacific Stock Exchange in the
United States and on the Swiss Exchange.
The Corporation's transfer agent, registrar and dividend disbursing agent
is The Bank of New York, 101 Barclay Street, New York, New York.
The high and low sales prices of, and the dividends declared on, each share
of COMSAT common stock for the last two years are as follows:
<TABLE>
<CAPTION>
Calendar Year 1998 High Low Dividend
- -------------------- -------- -------- --------
<S> <C> <C> <C>
First Quarter 36 21 5/8 .05
Second Quarter 42 3/4 27 3/4 .05
Third Quarter 36 7/8 21 13/16 .05
Fourth Quarter 39 5/8 32 7/16 .05
<CAPTION>
Calendar Year 1997 High Low Dividend
- -------------------- -------- -------- --------
<S> <C> <C> <C>
First Quarter 28 1/2 23 .195
Second Quarter 26 11/16 19 5/8 .05
Third Quarter 24 5/16 20 13/16 .05
Fourth Quarter 25 3/4 20 5/16 .05
</TABLE>
27
<PAGE>
Item 6: Selected Financial Data
<TABLE>
<CAPTION>
In thousands, except per share amounts 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Summary of Operations
<S> <C> <C> <C> <C> <C>
Revenues $ 616,469 $ 562,651 $ 545,100 $ 507,687 $ 500,687
Operating expenses 556,967 480,683 437,875 387,873 367,324
Operating income 59,502 81,968 107,225 119,814 133,363
Income from continuing operations 26,417 28,568 36,197 43,507 69,245
Net income (loss) 26,417 (64,446) 8,622 37,817 77,642
Earnings (loss) per share-assuming dilution:
Income from continuing operations 0.50 0.57 0.74 0.91 1.47
Net income (loss) 0.50 (1.29) 0.18 0.79 1.65
Balance Sheet Data
Total assets 1,790,798 1,894,775 2,097,286 2,022,247 1,851,351
Long-term debt 446,832 461,960 578,379 590,378 511,474
Stockholders' equity 659,040 586,271 841,817 839,433 826,916
Dividends
Dividends paid 10,393 16,975 37,698 36,874 33,547
Dividends paid per share 0.20 0.35 0.78 0.78 0.76
Distribution of Ascent Entertainment Group, - 194,633 - - -
Inc. shares
</TABLE>
28
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
ANALYSIS OF OPERATIONS
Consolidated Operations
Continuing Operations
Consolidated revenues from continuing operations in 1998 were $616 million,
an increase of 10% as compared to the previous year. This improvement was the
result of increases in all business segments. Consolidated revenues in 1997 were
$563 million, or 3% higher than 1996. This increase was predominantly the
result of COMSAT International (CI) revenue growth as compared to 1996.
Operating income from continuing operations in 1998 was $60 million, which
was $22 million below 1997. The decrease in operating income was primarily the
result of a $14 million impairment loss related to BelCom (a CI company
operating in Russia and the Commonwealth of Independent States) and increased
losses in CI of $12 million, which were primarily related to operations in
Brazil. In addition, 1998 results included $6 million of costs related to the
proposed merger with Lockheed Martin Corporation. Improvements in operating
income in both the COMSAT Mobile Communications (CMC) and COMSAT World Systems
(CWS) segments totaling $14 million partially offset those items.
Operating income from continuing operations for 1997 was $82 million, as
compared to $107 million for 1996. The 1997 decline in operating income was
primarily the result of lower operating income in the CWS, CMC and COMSAT
Laboratories (Labs) segments, partially offset by improvements in CI. The
decrease in CWS was primarily the result of a lower investment base in CWS,
which reduced operating income under rate of return regulation. The decrease in
CMC was due to increased depreciation from new satellites. The decrease in the
Labs was due to the non-recurrence in 1997 of the positive impact in 1996 of a
licensing agreement that resolved a patent-infringement dispute. Expenses of $4
million for a proxy contest and related litigation, which were settled in the
second quarter of 1997, also affected 1997 operating income.
Other income (expense), net for 1998 was income of $13 million, which was
$9 million better than 1997. This was primarily the result of a $15 million
gain from the sale of a portion of CI's investment in Viatel, Inc. and income of
$4 million from an agreement with ICO Global Communications (Holdings) Limited
(ICO) that settled a dispute between the corporation and ICO. See Note 6 to the
financial statements. In addition, 1998 included a $2 million non-cash write-
off of the Labs' investment in Superconducting Core Technologies that partially
offset those items. For 1997, other income (expense), net was income of $4
million, which was $11 million better than 1996. This was primarily
attributable to a $7 million gain on the sale of the corporation's Clarksburg,
Maryland property and improvements in the results of CI's equity investments.
Interest costs, net of amounts capitalized for 1998, were $40 million, or
$2 million lower than 1997. The lower interest costs were due to the reversal
of $4 million of previously accrued interest costs related to income taxes
(discussed below in income tax expense) and lower borrowings as a result of the
use of the proceeds from the sale of COMSAT RSI, Inc. (CRSI) to reduce debt.
Lower amounts of
29
<PAGE>
interest capitalized due to the completion of satellites under construction
partially offset these decreases. Interest costs, net of amounts capitalized for
1997, were $42 million, which was $7 million higher than 1996. The increase
primarily reflected reduced interest capitalized as compared to 1996.
Income from continuing operations before taxes and extraordinary item for
1998 was $32 million, or $12 million below the previous year. This decrease was
principally due to the impairment loss related to BelCom, increased losses in
Brazil, merger costs and the non-recurrence of the gain on the sale of the
Clarksburg property. The gain from the sale of Viatel stock and improvements in
both CMC and CWS partially offset those items. Income from continuing
operations before taxes and extraordinary item for 1997 was $44 million, or $21
million below 1996. This was primarily the result of the factors noted above in
the discussion of operating income, partially offset by the 1997 gain on the
sale of the Clarksburg property.
Income tax expense for 1998 was $6 million, compared to $16 million for the
previous year. In the third quarter of 1998, the corporation favorably resolved
a state tax audit and, accordingly, reversed previously accrued interest costs
of $2 million and state income taxes of $2 million. In addition, events during
the third quarter led the corporation to determine that previously accrued
interest costs of $2 million and federal income taxes of $15 million related to
certain federal tax matters were no longer required. See Note 14 to the
financial statements. Excluding these tax benefits, the corporation's
effective tax rate was higher than the previous year as a result of not being
able to tax benefit the BelCom impairment loss and certain merger costs. Income
tax expense in 1997 of $16 million was $13 million below 1996. This was
primarily due to a decrease in income before taxes and an improved effective tax
rate due principally to a reduction in state income tax expense.
Income for 1998 from continuing operations before extraordinary item was
$26 million, or $3 million below the previous year. Income from continuing
operations before extraordinary item for 1997 was $29 million, as compared to
$36 million in 1996.
Basic earnings per share for continuing operations before extraordinary
item for 1998 were $0.51, or $0.07 below 1997. For 1997, basic earnings per
share were $0.58, as compared to $0.76 for 1996. Diluted earnings per share for
continuing operations for 1998 were $0.50, a $0.07 decrease from 1997. Diluted
earnings per share for continuing operations for 1997 and 1996 were $0.57 and
$0.74, respectively. See Note 12 to the financial statements.
Extraordinary loss from early extinguishment of debt, net of tax, for 1997
was $4 million ($0.08 per share). This represents the costs incurred in 1997
from the corporation's repurchase of $90 million of its 8.125% notes and $10
million of its 7.7% medium-term notes. See Note 8 to the financial statements.
Discontinued Operations
During the second quarter of 1997, the corporation began accounting for the
operations of both Ascent Entertainment Group, Inc. (Ascent) and substantially
all of CRSI as discontinued operations. In 1997, the corporation recorded a
loss from discontinued operations, net of tax, of $89 million ($1.78 per share,
fully diluted). This compares to losses of $28 million ($0.56 per share, fully
diluted) for 1996. See Note 3 to the financial statements.
30
<PAGE>
Consolidated Results
On a consolidated basis, including discontinued operations and the
extraordinary item, net income for 1998 was $26 million as compared to a net
loss for 1997 of $64 million. For 1996, the consolidated net income was $8
million.
Basic earnings per share for 1998 were $0.51 as compared to basic losses
per share for 1997 of $1.32. Basic earnings per share for 1996 were $0.18.
Diluted earnings per share for 1998 were $0.50 as compared to diluted losses per
share for 1997 of $1.29. Diluted earnings per share for 1996 were $0.18. See
Note 12 to the financial statements.
Segment Operating Results
In accordance with Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures About Segments of an Enterprise and Related Information," the
corporation is reporting its operating results in four segments. The Satellite
Services business unit consists of two segments -- CWS and CMC. The
corporation's other business units, CI and Labs, are being reported as separate
segments. The corporation evaluates the performance of its operating segments
based on income (loss) before taxes and interest costs. See Note 16 to the
financial statements.
In the corporation's 1998 Form 10-Q reports and the 1997 Form 10-K,
operating results were presented in two segments -- Satellite Services and
Network Services. The Satellite Services segment included CWS and CMC. The
Network Services segment included CI, Labs and Government Programs. Effective
December 31, 1998, CI and Labs are reported as separate segments. The results
of Government Programs are now included as part of the CWS segment.
31
<PAGE>
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- -----------------------------------------------------------------------
REVENUES
- --------
<S> <C> <C> <C>
Satellite Services
World Systems $303.1 $286.1 $297.8
Mobile Communications 169.1 167.9 160.9
------- ------ ------
Total Satellite Services 472.2 454.0 458.7
------- ------ ------
COMSAT International 113.3 89.7 58.1
COMSAT Laboratories 42.3 36.4 43.7
Eliminations and other (11.3) (17.5) (15.4)
------- ------ -----
Total $616.5 $562.6 $545.1
======= ====== ======
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES AND EXTRAORDINARY ITEMS
- ------------------------------------------
Satellite Services
World Systems $113.1 $102.7 $111.0
Mobile Communications 31.9 23.8 34.9
------- ----- -----
Total Satellite Services 145.0 126.5 145.9
------- ----- -----
COMSAT International (21.0) (8.9) (14.7)
COMSAT Laboratories (3.5) (1.8) 7.3
------- ----- -----
Total segment income before taxes 120.5 115.8 138.5
General and administrative expense (25.6) (23.2) (23.9)
Merger costs (5.5) - -
Other (57.2) (48.4) (49.5)
------- ----- -----
Total $ 32.2 $ 44.2 $ 65.1
======= ====== ======
</TABLE>
Satellite Services
Satellite Services includes both the CWS and CMC operating segments. CWS
provides satellite capacity for telephone, data, Internet, video and audio
communications services between the United States and the rest of the world
using the global satellite networks of the International Telecommunications
Satellite Organization (INTELSAT) and New Skies Satellites N.V. (New Skies). CWS
also includes the operating results of COMSAT Government Systems, Inc., COMSAT
Digital Teleport, Inc. and COMSAT General Corporation, which provide various
satellite and ground segment services to commercial and government customers.
CMC provides satellite telecommunications services for maritime, aeronautical
and land mobile applications, primarily using International Mobile Satellite
Organization (Inmarsat) satellites. COMSAT is the statutorily designated U.S.
participant in both the INTELSAT and Inmarsat satellite systems.
Revenues in the Satellites Services business in 1998 were $472 million, an
increase of 4% over 1997. For 1997, Satellite Services revenues were $454
million, or 1% below the previous year. Income before taxes for the Satellite
Services business in 1998 was $145 million, which was 15% better than
32
<PAGE>
1997. Income before taxes for Satellite Services in 1997 was $127 million, a
decline of 13% as compared to 1996.
World Systems
Revenues in CWS for 1998 were $303 million, which was 6% higher than 1997.
The improvement in revenues was primarily the result of increased demand for
private data communication networks and Internet transmissions, partially offset
by declines in voice and video revenues. CWS revenues for 1997 were $286
million, or 4% below 1996. The decline resulted from lower full-time voice and
fiber optic restoration revenues, which were partially offset by increased
revenues from private data communication network leases and Internet traffic.
The lower voice revenues stemmed primarily from rate reductions provided to
AT&T, MCI and Sprint, CWS's three largest international carrier customers.
Income before taxes for CWS in 1998 was $113 million, or 10% higher than
the previous year. The 1998 results include income of $4 million from a
settlement with ICO pursuant to which the corporation will transfer operation of
ICO's Satellite Access Node facility in the United States to ICO. See Note 6 to
the financial statements. The balance of the improvement in income before taxes
was primarily due to higher revenues offset, in part, by increased depreciation
from placing new satellites in service. For 1997, CWS's income before taxes was
$103 million, or 7% below 1996. The 1997 results reflect increased depreciation
from placing new INTELSAT satellites in service.
On November 30, 1998, INTELSAT transferred six satellites (five currently
in orbit and one scheduled to be launched during 1999) to New Skies. New Skies
is an independent company that was spun off from INTELSAT and is headquartered
in the Netherlands. See Note 6 to the financial statements and Management's
Discussion and Analysis (MD&A) -- Outlook.
Mobile Communications
Revenues in CMC for 1998 were $169 million, an increase of 1% compared to
last year. In 1998, CMC recorded increased revenues from the contract with the
Federal Aviation Administration (FAA) on the Wide Area Augmentation System
(WAAS) and from traffic improvements in both digital telephone services and
aeronautical services. Offsetting these improvements were lower sales of Planet
1 terminals and a decrease in telex revenues. For 1997, CMC's revenues were
$168 million, an increase of 4% compared to the prior year. The higher revenues
were primarily the result of sales of Planet 1 terminals and service, the start
of the FAA WAAS contract and increased revenues from the Inmarsat system.
CMC's income before taxes for 1998 was $32 million, which was 34% better
than 1997. The improvement in income was primarily the result of lower operating
costs offset, in part, by increased depreciation from the full-year impact of
new Inmarsat satellites placed in service. Income before taxes for CMC in 1997
was $24 million, which was 32% below 1996. The decrease was primarily the result
of increased depreciation associated with new Inmarsat-3 satellites placed in
service during 1997 and increased costs related to Planet 1 service, which began
commercial operation in 1997.
33
<PAGE>
COMSAT International
CI operates an integrated group of telecommunications companies that are
engaged principally in providing individualized digital network solutions and
value-added services to business clients and carriers in selected emerging
markets. As of December 31, 1998, CI operated in 11 countries worldwide.
CI's revenues in 1998 were $113 million, or 26% higher than in 1997. The
higher revenues were principally due to growth in Argentina, Brazil and
Colombia. In 1997, CI's revenues were $90 million, which was 54% better than
the previous year. The 1997 increase in revenues in CI was driven primarily by
improvements in CI's operations in Brazil, Argentina and Venezuela.
CI's loss before taxes in 1998 was $21 million, as compared to losses of $9
million in 1997. In the third quarter of 1998, CI recorded a non-cash impairment
loss of $14 million, which was related to the write-down of long-lived BelCom
assets, namely goodwill and plant and equipment. See Note 7 to the financial
statements. In addition, CI had a $15 million gain from the sale of Viatel
stock. Exclusive of the BelCom impairment and the gain on the sale of stock,
CI's losses increased $13 million as compared to 1997. The increased operating
losses were primarily due to higher depreciation, fixed asset adjustments and
contract losses in Brazil; increased losses in BelCom; and start-up costs in
Mexico. In 1997, the loss before taxes was $9 million, a $6 million improvement
over 1996. The 1997 improvement was primarily the result of a decrease in
losses at BelCom.
COMSAT Laboratories
COMSAT Laboratories provides technical consulting services and develops
advanced communications technologies and products for satellite access and
networking applications.
The Labs' revenues for 1998 were $42 million, which was 16% higher than
1997. This increase was due to improvements in technical consulting revenues.
Revenues in 1997 were $36 million, as compared to $44 million for 1996.
Included in 1996 revenues and income before taxes was $8 million related to a
licensing agreement that resolved patent infringement disputes with certain
manufacturers of television encryption and decryption equipment, which did not
reoccur in 1997. Exclusive of the revenues related to this agreement, the Labs'
1997 revenues were at approximately the same level as 1996.
The loss before taxes in 1998 for the Labs was $4 million, compared to $2
million in 1997. The 1998 loss included the first quarter 1998 non-cash $2
million write-off of the Labs' investment in Superconducting Core Technologies,
Inc. The 1997 loss before taxes of $2 million compared to a $7 million profit
before tax for 1996. The 1996 results included the $8 million of income related
to the agreement on patent disputes.
34
<PAGE>
Outlook
Many of the statements that follow are forward looking and relate to
anticipated future events and operating results. Statements that look forward
in time are based on management's current expectations and assumptions, which
may be affected by subsequent developments and business conditions, and
necessarily involve risks and uncertainties. These statements and the
corporation's future operating results may be affected by the timing and outcome
of regulatory and other governmental proceedings, legislative actions,
developments concerning the privatizations of INTELSAT and Inmarsat, the
proposed acquisition of COMSAT by Lockheed Martin Corporation, international and
domestic business conditions, increased competition from other satellite
services providers, the disposition of assets and completion of contracts placed
in discontinued operations, the effect of the year 2000 issue on COMSAT,
litigation and other factors. Therefore, there can be no assurance that actual
future results will not differ materially from anticipated results. Although
the corporation has attempted to identify some of the important factors that may
cause actual results to differ materially from those anticipated, those factors
should not be viewed as the only factors that may affect future operating
results.
Business Combination with Lockheed Martin
On September 18, 1998, COMSAT entered into an Agreement and Plan of Merger
(the Merger Agreement) with Lockheed Martin Corporation (Lockheed Martin) and
Deneb Corporation (Acquisition Sub), a wholly-owned subsidiary of Lockheed
Martin. Under the terms of the Merger Agreement, Lockheed Martin will acquire
all of the issued and outstanding common stock, no par value, of COMSAT (the
COMSAT Common Stock) in a two-step transaction.
On September 25, 1998, a wholly-owned subsidiary of Lockheed Martin,
Regulus, LLC (Purchaser), initiated a tender offer to purchase up to 49%
(subject to certain adjustments) of the COMSAT Common Stock at a price of $45.50
per share in cash. The tender offer is being made pursuant to the Merger
Agreement upon the terms and subject to the conditions set forth in the
Purchaser's Offer to Purchase, dated September 25, 1998 (the Offer to Purchase),
and the related Letter of Transmittal (which, together with the Offer to
Purchase, constitute the Offer).
Certain significant conditions to the consummation of the Offer include:
(i) there being validly tendered and not withdrawn prior to the expiration date
of the Offer at least one-third of the COMSAT Common Stock; (ii) the approval by
COMSAT shareholders of the Merger (described below) and the Merger Agreement;
and (iii) the receipt of all required regulatory consents and approvals,
including the Purchaser having been authorized by the FCC to acquire up to 49%
of the then outstanding Shares, subject to certain adjustments (such
authorization, and certain related FCC authorizations, the Authorized Carrier
Conditions, and expiration of all waiting periods under applicable antitrust
laws. The Purchaser's obligation to consummate the Offer also is subject to
there not being any fact or circumstance that would reasonably be expected to
have a Material Adverse Effect (as defined in the Merger Agreement) on COMSAT or
a decline in the Standard & Poor's 500 Index of at least 27% from the date of
the Merger Agreement through certain specified measurement dates.
The Offer is currently scheduled to expire on May 3, 1999. Under the
Merger Agreement, however, Lockheed Martin has agreed to extend the Offer, for
periods of no more than 60 days, until the
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earlier of (i) September 18, 1999, or (ii) 10 business days after the date on
which the last of the Authorized Carrier Conditions shall have been obtained. At
Lockheed Martin's request, the Merger and Merger Agreement will be considered
for approval by COMSAT's shareholders at the corporation's annual meeting of
shareholders scheduled for June 18, 1999.
The Merger Agreement provides that as soon as practical after consummation
of the Offer and the satisfaction or waiver of the conditions set forth therein,
COMSAT will be merged with Acquisition Sub (the Merger). In the Merger, each
share of COMSAT Common Stock that is issued and outstanding immediately prior to
the effective time of the Merger (other than shares of COMSAT Common Stock held
by COMSAT, Purchaser or Lockheed Martin and dissenting shares, if any) will be
converted into the right to receive one share of common stock, par value $1.00
per share, of Lockheed Martin (the Lockheed Martin Common Stock), after
adjustment to give effect to a 2 for 1 stock split by Lockheed Martin effective
December 31, 1998 and subject to possible further adjustment as provided in the
Merger Agreement.
Certain significant conditions to the consummation of the Merger include:
(i) the consummation of the Offer; (ii) the amendment of the Communications
Satellite Act of 1962 (the Satellite Act); and (iii) the receipt of the
approvals of the FCC and other governmental authorities required for the
consummation of the Merger. In addition, the obligations of Lockheed Martin and
Acquisition Sub to consummate the Merger are subject to there not being any fact
or circumstance that would reasonably be expected to have a Significant Adverse
Effect (as defined in the Merger Agreement) on COMSAT.
On January 21, 1999, Representative Tom Bliley, Chairman of the House
Committee on Commerce, and Senator Conrad Burns, Chairman of the Senate Commerce
Subcommittee on Communications, sent a letter to William E. Kennard, Chairman of
the FCC, urging the FCC not to take any action to permit any company (including
Lockheed Martin and the Purchaser) to purchase more than 10 percent of COMSAT
prior to Congress adopting satellite reform legislation. If the FCC, in
deference to the position expressed in the letter, does not proceed with its
review of Lockheed Martin's filings related to the Offer, or if the FCC's review
does not otherwise proceed on the schedule Lockheed Martin anticipated, the
Offer may not be completed in the first half of 1999, the time frame previously
disclosed by Lockheed Martin and COMSAT as the time frame during which they
expected the Offer to close. Further, if the FCC were to delay or slow its
review, and if Congress does not make rapid progress on satellite reform
legislation, the Offer may not be completed by September 18, 1999. If this
occurs, under the terms of the Merger Agreement, either party may terminate the
Merger Agreement. The parties may also elect not to avail themselves of that
right or may elect to amend the Merger Agreement to extend this date. If
Congress enacts legislation promptly, the Merger may be accelerated from the
year-end date previously estimated by Lockheed Martin and COMSAT as the date by
which they expected the Merger to close. Conversely, if the legislative process
moves slowly, the Merger is unlikely to occur by year end. For information about
recently introduced satellite reform legislation, see Legislative and Regulatory
Developments below. No assurance can be given that the requisite legislation
will be enacted. If legislation enabling the Merger is enacted, FCC approval of
the Merger (in addition to the Authorized Carrier Conditions) will still be
required. While it is expected that the FCC would act promptly on the matter
following enactment of enabling legislation, the FCC's response time could
affect the estimated time frame for closing the Merger.
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<PAGE>
In connection with the execution of the Merger Agreement, the parties
entered into certain ancillary agreements, including a Shareholders Agreement, a
Registration Rights Agreement and a Carrier Acquisition Agreement. See Note 2
to the financial statements for a description of those agreements.
Restructuring of INTELSAT and Inmarsat
Significant progress was made during 1998 and early 1999 with respect to
the corporation's ongoing efforts to restructure INTELSAT and Inmarsat.
On November 30, 1998, INTELSAT transferred six satellites (five currently
in orbit and one scheduled to be launched during 1999) to New Skies Satellites
N.V. (New Skies). New Skies, which is headquartered in the Netherlands, is an
entirely separate, independent company spun off from INTELSAT.
Prior to the transfer from INTELSAT to New Skies of the six satellites, the
financial results related to those satellites were included in INTELSAT's
financial statements. Since the corporation uses the proportionate method of
accounting to account for its investment in INTELSAT, a portion of the financial
results related to those satellites also was included in the corporation's
financial results. COMSAT is using the cost method of accounting for its
investment in New Skies. COMSAT's direct ownership of New Skies is
approximately 16%. Under the cost method, COMSAT will recognize income only at
the time dividends from New Skies are received. COMSAT does not anticipate that
New Skies will declare dividends during 1999 and for some period of time
thereafter. During 1998, the corporation's share of pre-tax earnings related to
the satellites transferred to New Skies was approximately $3 million. As a
result, CWS's 1999 pre-tax earnings will be lower by approximately this amount
in the absence of other factors that may affect operating results in CWS. COMSAT
continues to consolidate the remaining INTELSAT investment and recognizes its
portion of INTELSAT's results of operations each reporting period. See Note 6
to the financial statements.
In June 1998, the FCC issued a public notice requiring U.S. earth stations
licensees using INTELSAT satellites that were scheduled to be transferred to New
Skies to file license modification applications by July 17, 1998 in order to
access the New Skies system. Several companies, including COMSAT, filed
applications in response to this notice. In September 1998, a competitor of New
Skies filed a petition asking the FCC to deny the applications or alternatively
to grant the applicants special temporary authority to access New Skies for a
limited period and to defer the question of permanent authority to a later date.
COMSAT, New Skies, and several of the applicants opposed this petition. The FCC
did grant special temporary authority to access New Skies following the November
30, 1998 asset transfer and indicated that it would act on the question of
permanent authority once it had obtained a complete record. The corporation
expects that such authority ultimately will be granted.
At its meeting in December 1998, the INTELSAT Board of Governors continued
its discussions on transforming the remaining portion of INTELSAT from a treaty-
based, intergovernmental organization to a fully private company. The INTELSAT
Board of Governors will continue this work at its meeting in March 1999. It is
the corporation's objective to privatize the remaining portion of INTELSAT by
the end of 2001. The corporation, as a minority shareholder and the U.S.
Signatory to INTELSAT, lacks the ability to independently effect a restructuring
of INTELSAT. The success of the corporation's efforts will depend on its
ability to achieve a consensus among other signatories and participating member
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governments. A two-thirds vote of the governments that are members of INTELSAT
would be necessary for approval of any final privatization proposal.
In September 1998, the Inmarsat Assembly of Parties approved a plan to
transfer the operating assets of the current Inmarsat intergovernmental
organization to a new company. Inmarsat is expected to become an independent
commercial company, based in the United Kingdom, in April 1999. While the new
company initially would not be publicly traded, it is expected that it would
proceed with an initial public offering within approximately 24 months after its
creation. Individual ownership in the new company would be capped at 15%,
although COMSAT's ownership in Inmarsat at the time of privatization would be
grandfathered. COMSAT's ownership of Inmarsat was 22.2% as of December 31, 1998.
COMSAT's voting rights, however, would be capped at 15% with respect to votes
against certain shareholder resolutions. Prior to the public offering, owners
are expected to be able to trade shares, and strategic investors may invest up
to $500 million in equity in the new company.
COMSAT signed the relevant Inmarsat restructuring agreements in February
1999. As a result, upon the transfer of Inmarsat's assets to the new company,
COMSAT will be able to exercise its shareholder rights, as described in the
preceding paragraph, and will continue to provide its current mobile satellite
communications services using the satellites of the Inmarsat successor company.
As with INTELSAT, COMSAT currently consolidates its shares of the accounts
of Inmarsat. At the time of Inmarsat's privatization, the corporation will begin
using the equity method of accounting for its 22.2% investment in the new
company. Under the equity method, the corporation would include its
proportionate share of the new company's operating results as part of the
corporation's operating results. Currently, Inmarsat does not recognize income
taxes in its financial results. The successor company to Inmarsat will be
subject to income taxation in the jurisdiction in which it operates, the United
Kingdom. In 1998 and prior years, the corporation reported its proportionate
share of Inmarsat's operating results in revenues, operating expenses and other
income (expense). As a result of the privatization of Inmarsat, the corporation
expects to report in 1999 its share of Inmarsat's operating results, net of U.K.
taxes, in other income (expense). The corporation does not anticipate that its
use of the equity method of accounting for Inmarsat's results will affect its
net operating results.
The following table illustrates the effect of adoption of the equity method
of accounting for the corporation's investment in Inmarsat on the corporation's
consolidated balance sheet. The "As Reported" column reflects summary
historical financial information for the corporation as of December 31, 1998.
The "Proforma" column reflects similar summary unaudited proforma financial
information assuming the equity method had been adopted as of December 31, 1998.
The proforma information reflected is based upon the historical portion of
Inmarsat's financial information included in the corporation's consolidated
balance sheet as of December 31, 1998. In preparing the proforma consolidated
balance sheet, the corporation's share of Inmarsat's assets and liabilities were
removed from the respective financial captions (e.g., property and equipment or
long-term debt) and reclassified as an investment in Inmarsat in the
consolidated balance sheet. The proforma financial data is intended for
informational and illustrative purposes only and should not be viewed as
indicative of the future financial condition of the corporation on a
consolidated basis.
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<PAGE>
<TABLE>
<CAPTION>
In millions (Unaudited)
As of December 31, 1998 As Reported Proforma
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets $ 199 $ 199
Property and equipment 1,210 954
Investments 249 434
Other 133 133
--------- ---------
Total $ 1,791 $ 1,720
========= =========
Liabilities and Stockholders' Equity
Current liabilities $ 141 $ 137
Long-term debt 447 380
Non-current liabilities 344 344
Preferred securities issued by subsidiary 200 200
Stockholders' equity 659 659
--------- ---------
Total $ 1,791 $ 1,720
========= =========
</TABLE>
Regulatory and Legislative Developments
On April 24, 1998, the FCC granted the corporation's petition for
reclassification as a non-dominant common carrier in markets that currently
represent over 90% of CWS's revenues for INTELSAT services. For those markets,
rate-of-return regulation was lifted immediately. On February 9, 1999, the FCC
eliminated COMSAT's remaining rate-of-return regulation along thin routes in
favor of COMSAT's incentive-based pricing plan. That plan will lower prices for
customers on thin routes and, at the same time, ease the regulatory burden on
the corporation in connection with its INTELSAT business. The FCC also adopted a
procedure for reclassifying thin routes as competition increases to make them
eligible for non-dominant treatment. The FCC's April 24, 1998 non-dominant order
also granted the corporation's request to file tariffs for thick-route services
on one day's notice with a presumption of lawfulness; tariffs for thin-route
services must be filed on 14 days' notice but require only minimal cost support.
The non-dominant order also granted the corporation's request for the
elimination of the CWS structural separation requirements and gave CWS authority
to enter the earth station market on an unseparated and non-dominant basis.
On October 28, 1998, the FCC issued a separate notice of proposed
rulemaking that looks toward enabling users to have direct access to the
INTELSAT system, which would end COMSAT's status as the exclusive provider of
INTELSAT services in the United States. In the direct access notice, the FCC
tentatively concluded, among other things, that it lacks the statutory authority
to impose Level 4 direct access (by which users could invest and acquire an
ownership interest in INTELSAT) but does have the authority to require Level 3
direct access (by which users could contract directly with INTELSAT for capacity
and bypass COMSAT). The FCC sought comments on its tentative conclusion that it
would serve the public interest to mandate Level 3 direct access. The
corporation filed comments contesting the basis for the FCC's proposed action.
The imposition of direct access could have a substantial adverse impact on the
corporation's financial condition and results of operations. The corporation,
however, does not believe that the FCC has the current authority to grant direct
access under the Satellite Act and would vigorously contest the exercise of such
authority by the FCC.
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<PAGE>
In October 1998, Congress passed, and the President subsequently signed,
the International Anti-Bribery Act of 1998. The act provides that as of May 1,
1999, an international organization providing commercial satellite services will
not be accorded immunity from suit or legal process in connection with its
provision of such service, except as required by international agreements to
which the United States is a party that are so designated by the President. The
Act requires the President to designate those agreements which are subject to
the exception and directs the President to take all appropriate actions to
reduce or eliminate all privileges and immunities that are not preserved by
designation. The corporation opposed prior versions of this legislation but
supported it in the form ultimately passed by Congress. The corporation does
not believe that enactment of this legislation will have a material effect on
its business, because (i) Inmarsat is expected to be privatized before May 1,
1999, and (ii) the President is expected to designate the INTELSAT Headquarters
Agreement an international agreement to which the United States is a party,
thereby requiring the United States to continue to afford INTELSAT immunity from
suit and legal process under the Act. The President has since delegated this
designation authority to the Secretary of State.
On February 4, 1999, Senator Conrad Burns, Chairman of the Senate Commerce
Subcommittee on Communications, introduced the Open-market Reorganization for
the Betterment of International Telecommunications (Orbit) Act (S. 376). COMSAT
believes that S. 376, on the whole, represents a constructive approach to the
privatization of INTELSAT and regulation of the corporation. Significantly, S.
376 would repeal the ownership restrictions on COMSAT stock upon enactment and
eliminate other outdated provisions in the Satellite Act. The bill would not
interfere with the ongoing privatization of Inmarsat, which is expected to be
completed in April 1999. The corporation does have concerns with some
provisions of the bill, including the 2002 target for full INTELSAT
privatization and a requirement that the President withdraw the U.S. from this
international organization if this privatization goal is not achieved. Although
the corporation believes privatization of INTELSAT will be completed rapidly,
United States withdrawal from INTELSAT in 2002, if privatization is not
completed, would have a substantial adverse effect on the corporation's
financial condition and results of operations.
The House of Representatives is also expected to consider satellite
privatization issues this year, most likely in the form of legislation being
prepared by Representative Tom Bliley, Chairman of the House Committee on
Commerce. At this time, Representative Bliley's timetable for revising and re-
introducing his satellite bill passed by the House in the last Congress, which
was entitled Communications Satellite Competition and Privatization Act of 1998
(H.R. 1872), is unclear. The corporation opposed H.R. 1872 because it contained
provisions that, in the view of the corporation's management, would adversely
affect the corporation's results of operations and the value of its
shareholders' investments in the INTELSAT and Inmarsat satellite systems. The
Clinton Administration opposed H.R. 1872 in testimony before the Senate Commerce
Committee late last year.
World Systems
CWS continues to be well positioned through its long-term agreements with
major international carriers to provide cost-competitive services for bulk usage
beyond the year 2000. In addition, CWS expects revenue growth from the
provision of services in emerging markets, including the Internet, international
VSAT, Asynchronous Transfer Mode (ATM) and Link One technology. CWS also
expects to face increasing competition over the longer term from existing
competitors and new market entrants (including New Skies).
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INTELSAT currently has five INTELSAT IX satellites on order. It is
expected that they will be launched during 2000 to 2002. During 1998, INTELSAT
successfully completed the placement in orbit of the remaining two INTELSAT VIII
satellites. Two of the six INTELSAT VIII satellites were a part of the transfer
of satellites to New Skies. The new INTELSAT VIII series satellites offer
higher-power C-band capabilities to address various markets.
Mobile Communications
CMC plans to continue to expand its service offerings and value-added
products to meet anticipated growth in customers' needs. The increasing numbers
of digital terminals with improved operating efficiency and reduced service
charges are expected to make possible traffic growth in land mobile, small
commercial and pleasure boat, and business traveler markets. CMC expects to
continue to face increasing competition from existing Inmarsat service
providers, other wireless communications services (including C-band), low earth
orbit satellite systems (such as Iridium) and other potential market entrants.
COMSAT International
CI operates an integrated group of telecommunications companies that are
engaged principally in providing individualized digital network solutions to
business clients and carriers in selected emerging markets. CI also plans to
develop prospective international telecommunications opportunities that are
consistent with its digital networking strategy. In this regard, CI will
continue to target those rapidly growing markets where a significant number of
CI's existing or targeted clients are located (or in which they intend to
locate).
On January 12, 1999, in response to increasing capital flight, the
Brazilian government widened the controlled trading band on its currency, the
Real. This created an initial devaluation of over 8% compared to the U.S.
Dollar. As support for the currency continued to diminish, it was apparent that
the Brazilian government needed to allow a "free-float," which occurred shortly
thereafter. As a result, the Brazilian Real was devalued over 40% compared to
the U.S. Dollar, and is no longer tied to a fixed trading range. It is expected
that the continued instability of the Real, as well as the current economic
climate within Brazil, will negatively impact growth and financial performance
during 1999 in CI's operation in Brazil. In 1998, COMSAT Brazil was CI's largest
operating company, accounting for approximately 40% of CI's revenues. In
addition, Brazil's problems could have the potential for a "spill-over" effect
into other Latin American markets in which CI has operations.
CI faces certain operational risks inherent to the countries in which it
operates. These risks are typical of emerging markets and include changes in
government regulations and licensing requirements; tariffs, taxes, sanctions and
other trade barriers; exchange controls; bureaucratic impediments; political,
social and economic instability; inflation, devaluation, interest rate and
exchange rate fluctuations. There can be no assurance that the current economic
difficulties faced in Asia, Russia, Brazil and elsewhere, or any future economic
difficulties, or any other risks enumerated above or otherwise, will not
adversely impact CI's existing or prospective customers, thereby affecting CI's
ability to generate revenues or otherwise having a material adverse affect on
CI's financial results and condition.
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<PAGE>
Year 2000 Issue (Year 2000 Readiness Disclosure)
The year 2000 issue is the result of existing computer programs that were
written using two digits rather than four digits to define the applicable year
(i.e., "98" for 1998). Certain of the corporation's computer programs that have
- -----
date-sensitive software may not operate properly when the last two digits become
"00," as will occur on January 1, 2000. To the extent that this situation
exists, there is the potential for system failure or miscalculations, which
could cause a disruption of operations. The problem is not limited to computer
programs, as some of the corporation's computer and other operational equipment
that have date-sensitive processors may not be able to process dates after
December 31, 1999.
In the second half of 1996, the corporation initiated a program to identify
and properly address issues associated with the year 2000 problem in order to
avoid interruption to the corporation's operations at the turn of the century.
Each of the operating segments of the corporation, as well as the administrative
functions, has completed the inventory and assessment phase of the year 2000
implementation plan and is currently implementing plans to remediate the non-
compliant systems identified during these first two phases. The corporation
presently believes that such changes to the corporation's key computer and other
operational systems and equipment will be completed and tested by the end of the
third quarter of 1999.
The corporation's current estimate is that it will cost approximately $8
million prior to January 1, 2000 to modify its in-house management information
systems, customer products and other systems and equipment affected by the year
2000 issue. Of this amount, the corporation has spent $2.3 million, or
approximately 30% of the projected amount, through December 31, 1998. Year 2000
modifications and replacements are based on management's current expectations
and assumptions, which were derived using assumptions of future events,
including the continued availability of resources and the reliability of third-
party modification plans. Future events that might cause material differences
in management's current expectations and assumptions include, but are not
limited to, the availability and cost of personnel with appropriate skills, the
ability to locate and correct all relevant computer code, reliance on third
parties and similar uncertainties.
While the corporation is devoting substantial resources to its own year
2000 compliance effort, COMSAT, as well as other international
telecommunications carriers, will be dependent, in part, on foreign and other
third-party telecommunications carriers being year 2000 compliant. The financial
impact on CWS and CMC of foreign or third-party telecommunications carriers
failing to meet the year 2000 challenge would be realized in either of two ways:
loss of revenue due to the inability to complete the up-link or down-link
transmissions to or from a satellite and/or loss of the corporation's share of
INTELSAT and Inmarsat revenues. In recognition of the financial exposure
resulting from this dependency on foreign and third-party telecommunications
carriers, the corporation has undertaken, as part of its year 2000 efforts, an
analysis of the year 2000 compliance efforts of these telecommunications
carriers. In addition to this analysis, the corporation is also utilizing the
results of efforts undertaken by the International Telecommunication Union
(ITU). The corporation plans to develop contingency plans to deal with this
issue depending on the results of its analysis and the year 2000 readiness
status of individual telecommunications carriers.
CWS derives in excess of 90% of its revenues under long-term contracts.
Almost all of these revenues are dependent upon termination with a foreign
telecommunication carrier. Even though these long-term contracts are not
subject to termination as a result of the year 2000 issue, a significant portion
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<PAGE>
of the expected future CWS revenues and COMSAT's share of INTELSAT revenues is
generated from services between the United States and areas of the world that
may be subject to service interruptions resulting from year 2000 readiness
issues. In addition, CMC derives a significant portion of its revenues from
services either originating or terminating outside of the United States. If the
originating or terminating carrier is unable to initiate or terminate a call,
CMC, directly and through its share of Inmarsat revenues, would be adversely
affected by reduced revenues. It is not possible for the corporation to
accurately quantify the amount, if any, of these exposures at this time.
CI and the Labs rely on third-party vendor-provided and vendor-supported
systems to provide products and services to their customers. CI and the Labs
have sought, but have not yet received, final certification regarding year 2000
compliance from all of their third-party vendors. If it became necessary, a
compliant product provided by a different supplier would be utilized to replace
a non-compliant product.
ANALYSIS OF CONSOLIDATED BALANCE SHEETS
Assets
The corporation's total assets at December 31, 1998 were $1.8 billion, as
compared to $1.9 billion at December 31, 1997. Current assets at the end of
1998 were $199 million, $119 million lower than December 31, 1997. The declines
in both current and total assets were primarily related to the decrease of $130
million associated with the net assets of discontinued operations, offset in
part by the increase in cash and cash equivalents of $25 million.
Property and equipment, net of depreciation, decreased $150 million during
1998, predominantly as the result of the transfer of satellites from INTELSAT to
New Skies. See Note 6 to the financial statements. New Skies property has been
reclassified to investments. Property and equipment additions amounted to $225
million for 1998. The increase in property and equipment was primarily related
to additions related to CWS's share of INTELSAT's satellite program and
investment in new communications property and equipment at CI.
Investments increased $158 million during 1998, of which $143 million is
related to the transfer of satellites from INTELSAT to New Skies.
Liabilities
The corporation's total liabilities decreased during 1998 by $177 million.
This was primarily the result of a decrease in commercial paper of $150 million.
The corporation used the proceeds from the sale of CRSI to reduce short-term
debt. See Note 3 to the financial statements.
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<PAGE>
ANALYSIS OF CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash from operating activities for 1998 was $323 million, compared to $169
million in 1997. In terms of continuing operations, cash from operating
activities was $220 million, or $14 million better than 1997. CWS and CMC
generated the majority of the corporation's cash from continuing operations.
Cash provided from discontinued operations in 1998 was $103 million, which
primarily reflects proceeds related to the sale of CRSI. During 1998, the
corporation made interest payments, net of amounts capitalized, of $37 million
and received income tax refunds of $2 million.
During 1998, the corporation used $166 million in investing activities, a
25% decrease as compared to 1997. The 1998 purchases of property and equipment
occurred primarily in CWS and CI, as the corporation continued to make capital
investments equal to its share of INTELSAT's satellite programs and purchased
communications property and equipment predominantly in CI's Latin American
companies. The corporation expects to make additional investments in property
and equipment in 1999 at approximately the same level as 1998.
Net cash used in financing activities during 1998 was $132 million, as
compared to net cash provided in 1997 of $50 million. During 1998, proceeds from
the sale of CRSI contributed significantly to the $150 million reduction in
short-term debt. The corporation paid dividends of $0.05 per share for each
quarter of 1998.
Liquidity and Capital Resources
The corporation's working capital at December 31, 1998 was $58 million, an
increase of $37 million from December 31, 1997. The increase in working capital
during 1998 was primarily the result of a decrease in commercial paper of $150
million and an increase in cash of $25 million, partially offset by the
reduction in net assets of discontinued operations of $130 million from the sale
of CRSI. The corporation reduced short-term debt primarily with the proceeds
from the sale of CRSI. See Note 3 to the financial statements. Cash from
operating activities in 1999 will be used to fund growth and to finance working
capital needs.
The corporation has access to short-term and long-term financing at
favorable rates. The corporation's current long-term debt ratings are A- from
Standard and Poor's and A3 from Moody's. The corporation's current commercial
paper ratings are A2 from Standard and Poor's and P2 from Moody's. Following the
announcement of the Merger Agreement with Lockheed Martin, both Standard and
Poor's and Moody's placed their ratings on the corporation's long-term debt
under review for possible downgrades. The downgrades would take effect as a
result of merging the corporation with a lower-rated parent company. The
ratings for commercial paper are not under review at this time. The current
ratings on the Monthly Income Preferred Securities issued by COMSAT Capital I,
L.P. are BBB from Standard and Poor's and A3 from Moody's.
The corporation's $200 million commercial paper program had no borrowings
outstanding at December 31, 1998. A $200 million credit agreement, expiring at
the end of 1999, backs up the corporation's commercial paper program. This
credit agreement has a one-year option to extend its term
44
<PAGE>
to December 31, 2000. The corporation had $36 million remaining under a $100
million medium-term note program at December 31, 1998. The medium-term note
program is part of a $200 million debt securities shelf registration program
initiated in 1994.
The corporation's capital structure and debt-financing activities are
regulated by the FCC. The corporation is required to submit a capitalization
plan to the FCC for review annually. Under the currently approved FCC
guidelines, the corporation is subject to a limit of $200 million in short-term
debt, a maximum long-term debt to total capital ratio of 45% and an interest
coverage ratio of 2.3 to 1. The corporation was in compliance with the
guidelines at December 31, 1998, with a long-term debt to total capital ratio of
40.4%, no short-term debt outstanding other than $15 million of current
maturities of long-term debt, and an interest coverage ratio of 2.7 to 1. If
the corporation were to fail to satisfy one or more of the FCC guidelines, the
corporation would be required to seek advance FCC approval of future financing
activities on a case-by-case basis.
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Item 7a: Quantitative and Qualitative Disclosures About Market Risk
The corporation does not hold or issue derivative financial instruments.
The corporation finances its operations and manages its interest rates through a
combination of its short-term commercial paper, fixed-rate long-term debt and
Monthly Income Preferred Securities (MIPS) issued by a subsidiary. The MIPS pay
a fixed dividend. Borrowings under the corporation's short-term commercial
paper program will expose the corporation's operating results to changes in
short-term rates. At December 31, 1998, no commercial paper was outstanding.
As of December 31, 1998, the fair value of the corporation's fixed-rate,
long-term debt was $414,632,000. Assuming a 10% increase in interest rates, the
fair value of the corporation's fixed-rate, long-term debt would be
$407,016,000. Likewise, assuming a 10% decrease in interest rates, the fair
value of the corporation's fixed-rate, long-term debt would be $422,452,000.
Inmarsat has entered into interest rate and foreign currency swap
arrangements to minimize the interest rate and foreign currency exchange
fluctuations related to its satellite financing obligations. Inmarsat borrowed
and is obligated to repay Pounds Sterling. The Pounds Sterling borrowed were
swapped for U.S. Dollars with an agreement to exchange the Dollars for Pounds
Sterling in order to meet the future lease payments. Inmarsat pays interest on
the Dollars at an average rate of 8.8%, and Inmarsat receives variable interest
on the Sterling amounts based on short-term LIBOR rates. At December 31, 1998,
Inmarsat had $321,433,000 of swaps to be exchanged for L211,474,000 at various
dates through 2007. The corporation's share of the estimated fair value of
these swaps is an unrealized gain of $8,214,000 at December 31, 1998. The fair
value was estimated by computing the present value of the Dollar obligation
using current rates available for debt with similar terms and the current value
of the Sterling at year-end exchange rates. Assuming a 10% increase in the
interest rates, the estimated unrealized gain would increase by $1,797,000.
Assuming a 10% decrease in the interest rates, the estimated unrealized gain
would decrease by $1,869,000.
CI conducts its operations primarily through majority-owned and wholly-
owned subsidiaries. The corporation has financed CI's subsidiaries through
capital contributions. CI's largest subsidiaries utilize the local currency as
their functional currency. Therefore, fluctuations in exchange rates relative
to the U.S. Dollar, primarily those related to the Brazilian Real, are recorded
as cumulative translation adjustments as a component of stockholders' equity.
Fluctuations in exchange rates relative to the U.S. Dollar have not had a
material impact on the corporation's cash flows or results of operations.
46
<PAGE>
Item 8: Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
COMSAT Corporation:
We have audited the accompanying consolidated balance sheets of COMSAT
Corporation and its subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flow
for each of the three years in the period ended December 31, 1998. Our audit
also included the financial statement schedule listed in the index at Item
14(a)2. These financial statements and the financial statement schedule are the
responsibility of the corporation's management. Our responsibility is to express
an opinion on these financial statements and the financial statement schedule
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 the corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.
Deloitte & Touche LLP
Washington, D.C.
February 18, 1999
47
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
In thousands, except per share amounts 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $616,469 $562,651 $545,100
---------- -------- --------
Operating expenses:
Cost of services 284,053 263,934 247,120
Depreciation and amortization 219,883 184,206 155,296
Research and development 7,914 9,296 11,518
General and administrative 25,592 23,247 23,941
Impairment of long-lived assets 14,000 - -
Merger costs 5,525 - -
---------- -------- --------
Total operating expenses 556,967 480,683 437,875
---------- -------- --------
Operating income 59,502 81,968 107,225
Other income (expense), net 12,518 4,245 (7,409)
Interest costs (44,502) (51,426) (50,455)
Interest capitalized 4,690 9,394 15,760
---------- -------- --------
Income from continuing operations before taxes and
extraordinary item 32,208 44,181 65,121
Income tax expense 5,791 15,613 28,924
---------- -------- --------
Income from continuing operations before extraordinary item 26,417 28,568 36,197
Discontinued operations, net of tax - (89,068) (27,575)
---------- -------- --------
Income (loss) before extraordinary item 26,417 (60,500) 8,622
Extraordinary loss from early extinguishment of debt, net of tax - (3,946) -
---------- -------- --------
Net income (loss) $ 26,417 $(64,446) $ 8,622
========== ======== ========
Earnings (loss) per common share - basic:
Income from continuing operations before extraordinary item $ 0.51 $ 0.58 $ 0.76
Discontinued operations - (1.82) (0.58)
Extraordinary loss - (0.08) -
---------- -------- --------
Net income (loss) $ 0.51 $ (1.32) $ 0.18
========== ======== ========
Earnings (loss) per common share - assuming dilution:
Income from continuing operations before extraordinary item $ 0.50 $ 0.57 $ 0.74
Discontinued operations - (1.78) (0.56)
Extraordinary loss - (0.08) -
---------- -------- --------
Net income (loss) $ 0.50 $ (1.29) $ 0.18
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
In thousands 1998 1997
- ------------------------------------------------------------------------------------------------------
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,795 $ 5,757
Receivables 131,052 147,621
Deferred income taxes 7,911 7,469
Other 16,243 14,918
Net assets of discontinued operations 12,964 142,484
---------- ------------
Total current assets 198,965 318,249
---------- ------------
Property and equipment 1,209,462 1,359,293
Investments 249,064 91,543
Other assets 133,307 125,690
---------- ------------
Total assets $1,790,798 $1,894,775
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 14,962 $ 13,785
Commercial paper - 149,506
Accounts payable and accrued liabilities 88,297 89,772
Due to related parties 30,424 34,664
Other 7,119 8,919
---------- ------------
Total current liabilities 140,802 296,646
---------- ------------
Long-term debt 446,832 461,960
Deferred income taxes 127,351 112,226
Deferred investment tax credits 6,158 9,523
Accrued post-retirement benefit costs 48,923 49,246
Other long-term liabilities 161,692 178,903
Commitments and contingencies (notes 10, 11 & 15) - -
Preferred securities issued by subsidiary 200,000 200,000
Stockholders' equity:
Common stock, without par value, 100,000 shares authorized,
52,713 shares issued in 1998 and 50,197 in 1997 430,537 366,901
Preferred stock, 5,000 shares authorized, no shares issued or outstanding
Retained earnings 242,809 226,785
Treasury stock, at cost, 80 shares in 1998 and 141 in 1997 (3,109) (1,758)
Unearned compensation (4,652) (4,739)
Accumulated other comprehensive loss (6,545) (918)
---------- ------------
Total stockholders' equity 659,040 586,271
---------- ------------
Total liabilities and stockholders' equity $1,790,798 $1,894,775
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 26,417 $ (64,446) $ 8,622
Adjustments to reconcile net income (loss) to net cash provided by
continuing operations:
Depreciation and amortization 219,883 184,206 155,296
Impairment of long-lived assets 14,000 - -
Loss from discontinued operations - 89,068 27,575
Gain on sale of investments (14,635) (1,987) (2,722)
Gain on sale of land - (7,261) -
Extraordinary loss from early extinguishment of debt - 3,946 -
Changes in assets and liabilities:
Receivables and other current assets (6,890) 3,953 (12,539)
Current liabilities 21,441 (4,709) 34,935
Non-current liabilities (38,516) 1,665 15,770
Other (1,749) 1,165 4,814
----------- --------- ---------
Net cash provided by continuing operations 219,951 205,600 231,751
Net cash provided (used) by discontinued operations 102,769 (36,865) (35,009)
----------- --------- ---------
Net cash provided by operating activities 322,720 168,735 196,742
----------- --------- ---------
Investing activities:
Purchase of property and equipment (187,838) (254,291) (267,279)
Investments in unconsolidated businesses (6,202) (19,950) (59,923)
Proceeds from sale of land - 9,293 -
Proceeds from note on sale of investments - 19,097 -
Proceeds from sale of investments 19,871 9,060 26,076
Satellite insurance proceeds 8,024 - 54,443
Decrease (increase) in INTELSAT ownership (689) 23,232 (1,238)
Decrease in Inmarsat ownership 5,999 213 5,746
Other (5,113) (7,704) 8,328
----------- --------- ---------
Net cash used in investing activities (165,948) (221,050) (233,847)
----------- --------- ---------
Financing activities:
Net short-term borrowings (repayments) (149,506) 131,513 17,993
Repayments against company-owned life insurance policies (64) (3,962) (51,443)
Common stock issued 46,453 20,398 13,837
Repayment of long-term debt (13,760) (114,903) (9,848)
Payment of satellite performance incentives (4,464) - -
Cash dividends paid (10,393) (16,975) (37,698)
Proceeds from Clarksburg financing - 34,342 -
----------- --------- ---------
Net cash provided (used) by financing activities (131,734) 50,413 (67,159)
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents 25,038 (1,902) (104,264)
Cash and cash equivalents, January 1 5,757 7,659 111,923
----------- --------- ---------
Cash and cash equivalents, December 31 $ 30,795 $ 5,757 $ 7,659
=========== ========= =========
Supplemental cash flow information:
Interest paid, net of amount capitalized $ 36,807 $ 39,732 $ 29,519
Income taxes paid (refunded) (1,676) 11,404 1,945
Non-cash property additions:
Inmarsat satellites 2,493 5,403 5,602
Satellite performance incentives 34,397 - -
Distribution of Ascent Entertainment Group, Inc. shares - 194,633 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Shares Shares Common Treasury Retained Unearned Comprehensive
In thousands Issued Outstanding Stock Stock Earnings Compensation Income (loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 48,612 47,755 $324,074 $(9,020) $ 533,238 $(5,484) $ (3,375) $839,433
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 8,622 8,622
Unrealized gain on
securities (net of tax of
$3,916) 7,118 7,118
Foreign currency translation
(net of tax of $0) 924 924
Minimum pension liability
(net of tax of $223) 383 383
---------
Total comprehensive income 17,047
Cash dividends (37,698) (37,698)
Stock awards and options, 401(k)
and employee
stock purchase plan 398 986 12,862 6,014 468 19,344
Other 80 80 3,755 (1,323) 1,259 3,691
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 49,090 48,821 340,691 (3,006) 502,839 (3,757) 5,050 841,817
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (64,446) (64,446)
Unrealized loss on
securities (net of tax
benefit
of $2,997) (5,411) (5,411)
Foreign currency translation
(net of tax of $0) (1,515) (1,515)
Minimum pension liability
(net of tax of $553) 958 958
---------
Total comprehensive loss (70,414)
Cash dividends (16,975) (16,975)
Distribution of Ascent
Entertainment
Group Inc. shares (194,633)
Stock awards and options, 401(k)
and employee
stock purchase plan 1,027 1,155 24,296 1,248 (982) 24,562
Other 80 80 1,914 1,914
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 50,197 50,056 366,901 (1,758) 226,785 (4,739) (918) 586,271
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 26,417 26,417
Unrealized gain on
securities (net of tax of
$5,985) 11,072 11,072
Foreign currency translation
(net of tax of $3,158) (14,380) (14,380)
Minimum pension liability
(net of tax benefit
of $1,414) (2,319) (2,319)
---------
Total comprehensive income 20,790
Cash dividends (10,393) (10,393)
Stock awards and options, 401(k)
and employee
stock purchase plan 2,474 2,535 62,232 (1,351) 87 60,968
Other 42 42 1,404 1,404
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 52,713 52,633 $430,537 $(3,109) $ 242,809 $(4,652) $ (6,545) $659,040
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. Accounts of COMSAT Corporation and its
majority-owned subsidiaries (COMSAT or the corporation) have been
consolidated. Significant intercompany transactions have been eliminated.
The corporation has consolidated its shares of the accounts of the
International Telecommunications Satellite Organization (INTELSAT) and the
International Mobile Satellite Organization (Inmarsat). The corporation's
ownership interests in INTELSAT and Inmarsat are based primarily on the
corporation's usage of these systems. As of December 31, 1998, the
corporation owned 18.0% of INTELSAT and 22.2% of Inmarsat.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires estimates and
assumptions that directly affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those
estimates. Estimates are used in determining the loss on disposal of
discontinued operations and in accounting for long-term contracts,
allowance for doubtful accounts, depreciation and amortization, employee
benefit plans, taxes, litigation, and contingencies.
Revenue Recognition. Revenue from satellite services is recognized over
the period during which the satellite services are provided. Revenue from
long-term product, system integration and related services contracts is
accounted for using the percentage-of-completion (cost-to-cost) method.
Revenue from other services is recorded as services are provided.
Income Taxes and Investment Tax Credits. The provision for income taxes
includes taxes currently payable and those deferred because of differences
between the financial statement and tax bases of assets and liabilities.
The corporation has earned investment tax credits on certain INTELSAT and
Inmarsat satellite costs. These tax credits have been deferred and are
being recognized as reductions to the tax provision over the estimated
service lives of the related assets.
Evaluation of Long-Lived Assets. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the
corporation evaluates the potential impairment of long-lived assets,
including goodwill, based upon projections of undiscounted cash flows
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. Management believes no
material impairment of these assets exists at December 31, 1998.
52
<PAGE>
Marketable Securities. The corporation's marketable securities are
categorized as available-for-sale securities, as defined in SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected, net of tax, as a
separate component of accumulated other comprehensive income (loss) until
realized. For the purpose of computing realized gains and losses, cost is
identified on a specific identification basis.
Other Assets. The cash surrender values of life insurance policies (net of
loans) totaling $97,529,000 and $86,597,000 at December 31, 1998 and 1997,
respectively, are included in "Other assets." "Other income (expense),
net" on the income statement includes $3,185,000, $3,379,000 and $3,351,000
from the increases in the cash surrender values of these policies in 1998,
1997 and 1996, respectively.
Foreign Currency Translation. Financial statements of international
subsidiaries are translated into U.S. dollars using the exchange rate at
each balance sheet date for assets and liabilities and a weighted average
exchange rate for each period for revenues, expenses, gains and losses.
Where the local currency is the functional currency, translation
adjustments are recorded as a separate component of stockholders' equity.
Where the U.S. dollar is the functional currency, translation adjustments
are recorded in the income statement.
Stock-Based Compensation. The corporation accounts for employee stock-
based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation costs
for stock options are measured as the excess, if any, of the quoted market
price of the corporation's stock at the date of the grant over the amount
an employee must pay to acquire the stock.
Cash Flow Information. The corporation considers highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents.
Statement Presentation. Certain prior period amounts have been
reclassified to conform with the current year's presentation.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured
at fair value. The accounting for changes in fair value and gains or
losses depends on the intended use of the derivative and its resulting
designation. The statement is effective for fiscal years beginning after
June 15, 1999. The corporation will adopt SFAS No. 133 in the first
quarter of 2000. The corporation is evaluating the effect that
implementation of SFAS No. 133 will have on its consolidated financial
statements.
53
<PAGE>
2. AGREEMENT AND PLAN OF MERGER WITH LOCKHEED MARTIN CORPORATION
On September 18, 1998, COMSAT entered into an Agreement and Plan of Merger
(the Merger Agreement) with Lockheed Martin Corporation (Lockheed Martin)
and Deneb Corporation (Acquisition Sub), a wholly-owned subsidiary of
Lockheed Martin. Under the terms of the Merger Agreement, Lockheed Martin
has agreed to acquire all of the outstanding common stock, no par value, of
COMSAT (the COMSAT Common Stock) in a two-step transaction.
On September 25, 1998, a wholly-owned subsidiary of Lockheed Martin,
Regulus, LLC (Purchaser), initiated a tender offer to purchase up to 49%
(subject to certain adjustments) of the COMSAT Common Stock at a price of
$45.50 per share in cash. The tender offer is being made pursuant to the
Merger Agreement upon the terms and subject to the conditions set forth in
the Purchaser's Offer to Purchase, dated September 25, 1998 (the Offer to
Purchase), and the related Letter of Transmittal (which, together with the
Offer to Purchase, constitute the Offer).
Certain significant conditions to the consummation of the Offer include:
(i) there being validly tendered and not withdrawn prior to the expiration
date of the Offer at least one-third of the outstanding shares of COMSAT
Common Stock; (ii) the approval by COMSAT shareholders of the Merger and
the Merger Agreement; and (iii) the receipt of all required regulatory
consents and approvals, including the Purchaser having been authorized by
the Federal Communications Commission (FCC) to acquire up to 49% of the
COMSAT Common Stock and expiration of all waiting periods under applicable
antitrust laws. The Purchaser's obligation to consummate the Offer also is
subject to there not being any fact or circumstance that would reasonably
be expected to have a Material Adverse Effect (as defined in the Merger
Agreement) on COMSAT or a decline in the Standard & Poor's 500 Index of at
least 27% from date of the Merger Agreement through specified measurement
dates.
The Merger Agreement also provides that, as soon as practical after
consummation of the Offer and the satisfaction or waiver of the conditions
set forth therein, COMSAT will be merged with Acquisition Sub (the Merger).
In the Merger, each share of COMSAT Common Stock that is issued and
outstanding immediately prior to the effective time of the Merger (other
than shares of COMSAT Common Stock held by COMSAT, Purchaser or Lockheed
Martin and dissenting shares, if any) will be converted into the right to
receive, as adjusted, one share of common stock, par value $1.00 per share,
of Lockheed Martin. The exchange ratio in the merger remains subject to
further adjustment in the event of certain changes in the capitalization of
Lockheed Martin.
Certain significant conditions to the consummation of the Merger include:
(i) the consummation of the Offer, (ii) the amendment of the Communications
Satellite Act of 1962 (the Satellite Act), and (iii) the receipt of the
approvals of the FCC and other governmental authorities required for the
consummation of the Merger. In addition, the obligations of Lockheed
Martin and Acquisition Sub to consummate the Merger are subject to there
not being any fact or circumstance that would reasonably be expected to
have a Significant Adverse Effect (as defined in the Merger Agreement).
54
<PAGE>
In connection with the execution of the Merger Agreement, the parties
entered into certain ancillary agreements dated as of September 18, 1998.
COMSAT entered into a Shareholders Agreement with Lockheed Martin (the
Shareholders Agreement), pursuant to which, upon the consummation of the
Offer, COMSAT will take all actions necessary to cause the three
individuals selected by Lockheed Martin to be elected to the Board of
Directors of COMSAT and appointed to certain committees of the Board of
Directors of COMSAT. Pursuant to the Shareholders Agreement, COMSAT agreed
not to amend or repeal the provisions of its bylaws that permit any three
directors to call a special meeting of the Board of Directors or otherwise
amend its Articles of Incorporation or bylaws in a manner that would
adversely affect the rights of Lockheed Martin under the Shareholders
Agreement or the Registration Rights Agreement (described below). The
Shareholders Agreement also provides that, in the event that the Merger is
not consummated, COMSAT will cause its Board of Directors to amend COMSAT's
Articles of Incorporation to eliminate the transfer restrictions contained
in Section 5.03(c) thereof and to recommend such amendment to the
shareholders of COMSAT for their approval. The Shareholders Agreement
contains other restrictions on Lockheed Martin with respect to its
ownership of COMSAT Common Stock.
In addition, COMSAT and Lockheed Martin entered into the Registration
Rights Agreement dated as of September 18, 1998 (the Registration Rights
Agreement), pursuant to which, assuming that the Purchaser acquired shares
of COMSAT Common Stock in the Offer and that the Merger is not consummated,
Lockheed Martin has certain demand and piggy-back registration rights to
cause COMSAT to prepare and file registration statements under the
Securities Act of 1933, as amended, to register shares of COMSAT Common
Stock held by Lockheed Martin.
In order to facilitate consummation of the Offer and the Merger, COMSAT
also entered into a Carrier Acquisition Agreement with Lockheed Martin, the
Purchaser and COMSAT Government Systems, Inc. (CGSI), a wholly-owned
subsidiary of COMSAT, pursuant to which CGSI will be merged with and into
Purchaser as soon as practical following the satisfaction or waiver of the
conditions set forth in the Carrier Acquisition Agreement, or on such other
date as the parties may agree, but in all events prior to the consummation
of the Offer. In the Carrier Acquisition, the Purchaser will acquire the
common carrier telecommunications business of CGSI.
In connection with the execution of the Merger Agreement, COMSAT adopted
the Retention Bonus Plan. The Retention Bonus Plan generally provides
retention bonuses to certain key employees who remain employed by COMSAT
(or incur a termination of employment, as defined) through specified dates
subsequent to September 18, 1998. Merger costs include compensation
expense associated with the Retention Bonus Plan, investment banking fees
and fees for other professional services incurred in 1998.
3. DISCONTINUED OPERATIONS
The corporation began accounting for Ascent Entertainment Group, Inc.
(Ascent), its former entertainment subsidiary, and substantially all of the
assets and operations of COMSAT RSI, Inc. (CRSI), its former manufacturing
subsidiary, as discontinued operations in the second quarter of 1997.
55
<PAGE>
The income (loss) from discontinued operations, net of tax, for Ascent and
CRSI for the two years ended December 31, 1997, is summarized below:
<TABLE>
<CAPTION>
In thousands 1997 1996
------------ --------- ---------
<S> <C> <C>
Ascent $(29,068) $(28,148)
CRSI (60,000) 573
--------- --------
Total $(89,068) $(27,575)
========= ========
</TABLE>
Ascent Entertainment Group, Inc.
--------------------------------
The corporation distributed its 80.67% interest in Ascent through a tax-
free dividend to shareholders on June 27, 1997. COMSAT shareholders of
record on June 19, 1997 received 0.4888 of a share of Ascent common stock
for each share of COMSAT common stock owned. The tax-free dividend of
$194,633,000 was recorded as a reduction of COMSAT's consolidated retained
earnings.
Prior to being accounted for as a discontinued operation, Ascent reported
revenues of $177,481,000 and $258,120,000 in 1997 and 1996, respectively.
Ascent's loss from operations was $17,779,000 (net of a $5,047,000 tax
benefit) in 1997 and $28,148,000 (net of a $10,637,000 tax benefit) in
1996. The loss on disposal of Ascent in 1997 was $11,289,000 (including a
tax expense of $2,194,000).
COMSAT RSI, Inc.
----------------
On February 25, 1998, the corporation sold substantially all of the assets
of CRSI Acquisition, Inc., d/b/a COMSAT RSI Jefa Wireless Systems (JEFA), a
wholly-owned subsidiary of CRSI engaged in the wireless communications
integration and intelligent transportation systems business, in a separate
transaction. Pursuant to the sale agreement, the corporation assigned to
the buyer its rights in certain contracts and made a payment of $4,663,000
to the purchaser, net of a working capital adjustment at closing.
On June 25, 1998, the corporation completed the sale of substantially all
of CRSI to a subsidiary of TBG Industries, Inc. for cash proceeds of
$111,864,000, after adjusting for changes in inter-company loans and
advances.
In connection with the sale of CRSI and JEFA, the corporation and
respective purchasers agreed to indemnify the other against certain losses.
In the case of the CRSI sale, the corporation's indemnification obligations
are generally limited to losses incurred in excess of an agreed threshold
amount ($6,700,000) and are capped at a maximum agreed threshold amount
($28,000,000) in respect of claims made within an agreed survival period
(generally, approximately two years). In certain instances, however, the
corporation's indemnification obligations are not subject to those
limitations.
Certain of CRSI's assets were excluded from the sale, including
Electromechanical Systems, Inc. (EMS) and CRSI's 53% ownership interest in
Plexsys International Corporation (Plexsys). EMS's revenues and income were
not material to the corporation's consolidated operating results.
56
<PAGE>
Plexsys ceased doing business on July 1, 1998. The corporation has written-
off its investment in Plexsys and certain amounts owed to it by Plexsys.
Such amounts were included in the corporation's 1997 loss from discontinued
operations. COMSAT also retained and is completing a long-term construction
contract for a radio astronomy telescope in Green Bank, West Virginia (the
Green Bank contract). The corporation also has retained a claim against the
prime contractor to recover $29,000,000 in costs incurred in performing the
Green Bank contract, which are in excess of the original contract value.
The prime contractor has filed a counterclaim seeking $12,900,000 million
in damages for delay. The claim and counterclaim are currently in
arbitration. There can be no assurance that the corporation will be
successful in collecting all or any portion of this claim.
The loss upon disposition of discontinued operations is based upon
management's best estimates of the estimated costs to complete the Green
Bank contract, the amount to be realized from the $29,000,000 Green Bank
contract arbitration claim, potential indemnification claims and other
costs related to the discontinued operations. These estimates could change
as additional costs are incurred to complete the Green Bank contract, upon
resolution of the arbitration and upon resolution of other matters related
to the CRSI discontinued operations.
Prior to being accounted for as a discontinued operation, CRSI reported
revenues of $121,291,000 in 1997 and $217,183,000 in 1996. CRSI's income
was $207,000 (net of a $46,000 tax expense) and $573,000 (net of a $232,000
tax expense) in 1997 and 1996, respectively. The estimated loss on
disposal of CRSI in 1997 was $60,207,000 (net of a $19,926,000 tax
benefit).
The net assets of the CRSI discontinued operations totaled $142,484,000 at
December 31, 1997 and included the following components: current assets of
$181,456,000, non-current assets of $46,860,000, current liabilities of
$33,212,000, non-current liabilities of $3,116,000 and a reserve for
estimated loss on disposal of $49,504,000.
The net assets of CRSI remaining at December 31, 1998 amount to $15,016,000
and primarily consist of receivables on long-term contracts, fixed assets,
current liabilities and the remaining reserve for estimated loss on
disposal. In addition to the net assets reported as current of
$12,964,000, $2,052,000 is included in "Other assets."
57
<PAGE>
4. RECEIVABLES
Receivables consisted of:
<TABLE>
<CAPTION>
In thousands 1998 1997
------------ ---------- ---------
<S> <C> <C>
Commercial receivables $108,738 $120,320
Receivables under long-term contracts:
U.S. Government:
Amounts billed 7,375 5,991
Unbilled costs and accrued profits 9,505 9,577
Commercial customers:
Amounts billed 5,177 4,197
Unbilled costs and accrued profits 2,675 239
Related party receivables 4,836 6,422
Other 9,869 15,610
-------- --------
Total 148,175 162,356
Less allowance for doubtful accounts (17,123) (14,735)
-------- --------
Net $131,052 $147,621
======== ========
</TABLE>
Unbilled amounts represent accumulated costs and accrued profits that will
be billed at future dates in accordance with contract terms and delivery
schedules. The 1998 Unbilled receivables are expected to be billed within
one year.
In January 1997, the corporation sold its 19.66% interest in Philippine
Global Communications, Inc. (PhilCom) for cash and a collaterized note
receivable totaling $34,292,000. At December 31, 1997, the remaining note
receivable balance of $12,731,000 was to have been paid in two payments
during 1998 and is recorded above in other receivables. In the third
quarter of 1998, the note was amended so that the balance would be paid in
installments with interest through June 2000. The corporation received a
$1,000,000 principal payment in August 1998 and a $1,000,000 payment of
principal and interest in January 1999. At December 31, 1998, the note's
current balance of $6,930,000 is included in "other receivables" in the
table above, and the non-current portion of $4,524,000 is recorded in
"Other assets."
58
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment includes the corporation's shares of INTELSAT and
Inmarsat property and equipment.
<TABLE>
<CAPTION>
In thousands 1998 1997
------------ ----------- -----------
<S> <C> <C>
Property and equipment at cost:
Satellites $ 1,601,832 $ 1,695,352
Furniture, fixtures and equipment 737,915 595,812
Buildings and improvements 107,772 108,635
Land 3,246 3,244
----------- -----------
Total 2,450,765 2,403,043
Less accumulated depreciation (1,298,336) (1,161,242)
----------- -----------
Net property and equipment in service 1,152,429 1,241,801
Property and equipment under construction:
INTELSAT satellites 37,393 88,540
Inmarsat third-generation satellites - 5,353
Other 19,640 23,599
----------- -----------
Total $ 1,209,462 $ 1,359,293
=========== ===========
</TABLE>
Satellites include construction costs, launch costs, direct development
costs, insurance costs, satellite performance incentive payments and
capitalized interest. Depreciation is calculated using the straight-line
method over the estimated service life of each asset. The service lives
for property and equipment generally are: satellites, 10 to 13 years;
furniture, fixtures and equipment, 3 to 15 years; buildings and
improvements, 3 to 40 years.
Change in Satellite Accounting Policies. Effective January 1, 1998, the
corporation changed its accounting policy with respect to the cost of
satellites lost at launch or in orbit. Such costs will be expensed in the
period in which the satellite is lost at launch or experiences a total
failure in orbit. Previously, the cost of failed satellites was amortized
over their original useful lives. Partial in-orbit failures will be
evaluated for impairment according to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-lived Assets to be Disposed of." Also effective January
1, 1998, the corporation changed its accounting policy with respect to
satellite performance incentive payments paid to manufacturers to
capitalize the net present value of such costs as a component of the cost
of the satellite. Previously, certain of these payments were expensed as
paid. These changes did not have a material effect on the corporation's
financial statements.
Satellite Insurance Proceeds. The INTELSAT 801 satellite suffered damage
during in-orbit testing following its launch in the first quarter of 1997.
Although the satellite's operational capability has not been diminished,
its depreciable life has been shortened from 10 years to 8 years. Under
the terms of its satellite insurance policy, the corporation received
insurance proceeds of $8,024,000 in the third quarter of 1998 and,
correspondingly, reduced the book value of the satellite.
59
<PAGE>
On February 14, 1996, the launch of the INTELSAT 708 satellite failed. The
corporation's share of the satellite's cost was fully insured. Insurance
proceeds totaling $54,443,000 were received in the second quarter of 1996.
Sale of Land. In September 1997, COMSAT sold its Clarksburg, Maryland
office building and the surrounding land for $45,750,000 in an all-cash
transaction. A gain of $7,261,000 was recognized on the sale of land and
is reported in "Other income (expense), net" on the income statement. The
corporation also entered into a 10-year lease agreement with the new owner
to continue occupying the office building, which principally houses COMSAT
Laboratories. In addition to lease payments, the corporation is
responsible for taxes, insurance and maintenance of the building. The
sale-leaseback of the office building has been accounted for as a financing
due to COMSAT's continuing involvement as the lessor of floor space in the
building to non-COMSAT tenants. As a result, the historical cost of the
building remains in property and will be depreciated over the 10-year lease
term.
A financing obligation of $36,219,000, representing the proceeds received
for the building, was recorded at the time of sale. This obligation is
being amortized as the lease payments are made. The net present value at
December 31, 1998 totals $33,612,000, of which $2,078,000 is reflected in
other current liabilities and the remainder in other long-term liabilities.
At December 31, 1998, the future lease payments pursuant to the sale-
leaseback are $4,707,000 in 1999, $5,273,000 in 2000, $5,418,000 in 2001,
$5,567,000 in 2002, $5,720,000 in 2003 and $22,869,000 thereafter.
6. INVESTMENTS
Investments as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Unrealized
Holding
In thousands Cost Gain Total
-----------------------------------------------------------------------
<S> <C> <C> <C>
Available-for-sale equity securities:
ICO $ 41,189 $ 1,239 $ 42,428
Other 6,376 18,444 24,820
-------- ------- --------
Total 47,565 19,683 67,248
-------- ------- --------
Cost investments:
New Skies 142,587 - 142,587
ICO 29,484 - 29,484
Other 9,298 - 9,298
-------- ------- --------
Total 181,369 - 181,369
Equity investees 447 - 447
-------- ------- --------
Total $229,381 $19,683 $249,064
======== ======= ========
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
In thousands Cost Gain Total
-----------------------------------------------------------------------
<S> <C> <C> <C>
1997
----
Available-for-sale equity securities: $ 10,583 $ 2,626 $ 13,209
-------- ------- --------
Cost investments:
ICO 71,784 - 71,784
Other 6,481 - 6,481
-------- ------- --------
Total 78,265 - 78,265
Equity investees 69 - 69
-------- ------- --------
Total $ 88,917 $ 2,626 $ 91,543
======== ======= ========
</TABLE>
New Skies. Effective November 30, 1998, INTELSAT transferred five
operational satellites, plus a sixth which is currently under construction,
to New Skies Satellites N.V. (New Skies). New Skies is a commercial company
which was created by INTELSAT in March 1998.
As a result of INTELSAT's transfer of the satellites, plus working capital,
the corporation has reclassified $146,826,000 from property and equipment
and $4,239,000 from liabilities to establish its $142,587,000 investment in
New Skies. The corporation owns 16.6% of New Skies and will account for
this investment using the cost method.
Had New Skies been formed as of January 1, 1998, and the satellites been
transferred to New Skies at that time, the corporation's unaudited proforma
consolidated revenues, operating income and net income for 1998 would have
been $597,330,000, $56,713,000 and $24,868,000, respectively.
ICO. During 1998, ICO Global Communications (Holdings) Limited (ICO)
conducted an initial public offering. As a result, the corporation's
direct investment in ICO is now treated as an available-for-sale equity
security. In addition, the corporation has an indirect investment in ICO
through its ownership of Inmarsat. Due to certain lock-up provisions
associated with the initial public offering, 85% of the ICO shares held by
Inmarsat did not qualify as a marketable security at December 31, 1998;
therefore, 85% of the corporation's share of Inmarsat's investment in ICO
is presented as a cost investment and the balance is classified as
available-for-sale.
In December 1998, ICO paid the corporation $4,500,000 to settle a dispute
between the two companies. In exchange for this payment, the corporation
transferred operation of ICO's Satellite Access Node facility in the United
States back to ICO and waived the non-exclusive distribution rights it
received under its 1995 stock subscription agreement with ICO. Net of
costs associated with transferring the facility, the corporation recognized
income of $4,303,000 from the settlement. This income is recorded in
"Other income (expense), net" on the income statement.
In December 1996, the corporation reduced its direct investment in ICO by
selling 777,701 of its shares to other ICO shareholders for $29,941,000.
The corporation recognized a gain of $2,722,000 that is included in "Other
income (expense), net" on the income statement.
Realized Gains (Losses). The corporation realized gains of $14,635,000 and
$1,987,000 from the sale of marketable equity securities during 1998 and
1997, respectively. The corporation recognized losses of $1,008,000 and
$1,105,000 during 1997 and 1996, respectively, for a decline in value of a
marketable equity security that was deemed other than temporary. In 1998,
61
<PAGE>
the corporation wrote-off a $1,950,000 investment that was included in the
"cost investments-other" category in the table above. These amounts are
reported in "Other income (expense), net" on the income statement.
7. IMPAIRMENT OF LONG-LIVED ASSETS
In the third quarter of 1998, the corporation recorded a non-cash
impairment loss of $14,000,000 related to the write-down of the goodwill
($9,434,000) and plant and equipment ($4,566,000) of BelCom, COMSAT
International's company operating in Russia and the Commonwealth of
Independent States (CIS). The impairment loss is reported in the
International segment.
In accordance with the corporation's accounting policy for evaluation of
long-lived assets, the corporation evaluates its long-lived assets whenever
events or circumstances indicate the carrying amount of an asset may not be
fully recoverable. Due to the worsening economic conditions in Russia and
the CIS and BelCom's deteriorating performance, management determined that
the corporation's investment in BelCom should be reduced. The impairment
loss was determined based on a discounted analysis of expected cash flows.
8. DEBT
The corporation's capital and debt-financing activities are regulated by
the FCC. The corporation is required to submit a capitalization plan to
the FCC for review annually. Under existing FCC guidelines, the corporation
is subject to a limit of $200,000,000 in short-term borrowings, a maximum
long-term, debt-to-total-capital ratio of 45% and an interest coverage
ratio, as defined, of 2.3 to 1. At December 31, 1998, the corporation was
in compliance with those guidelines.
Long-Term Debt. Long-term debt, including the corporation's share of
INTELSAT and Inmarsat debt, at each year end consists of:
<TABLE>
<CAPTION>
In thousands 1998 1997
-------------------------------------------------- -------------------
<S> <C> <C>
8.125% notes due 2004 $ 70,475 $ 70,475
8.95% notes due 2001 75,000 75,000
6.75% INTELSAT Eurobonds due 2000 26,980 26,932
7.375% INTELSAT Eurobonds due 2002 35,973 35,910
8.375% INTELSAT Eurobonds due 2004 35,973 35,910
6.625% INTELSAT Asian bonds due 2004 35,973 35,910
8.125% INTELSAT Eurobonds due 2005 35,973 35,910
Inmarsat lease financing obligations 82,135 96,504
Medium-term notes, 7.7% - 8.66%, due 2006 - 2007 64,000 64,000
Discounts on notes payable (688) (806)
-------------------
Total 461,794 475,745
Less current maturities (14,962) (13,785)
-------------------
Total long-term debt $446,832 $461,960
===================
</TABLE>
62
<PAGE>
The principal amount of debt (excluding the Inmarsat lease financing
obligations) maturing over the next five years is $0 in 1999, $26,980,000
in 2000, $74,988,000 in 2001, $35,973,000 in 2002 and $0 in 2003.
Commercial Paper. The corporation issues short-term commercial paper as
needed with repayment terms of 90 days or less under a $200,000,000
program. The corporation had no borrowings at December 31, 1998. At
December 31, 1997, outstanding borrowings were $149,506,000 with a weighted
average interest rate of 6.51%.
Credit Facilities. The corporation has a $200,000,000 revolving credit
agreement, which expires in December 1999 and provides a backup source of
credit to the commercial paper program. The corporation has an option to
extend this credit agreement to December 31, 2000. There have been no
borrowings under this agreement.
Early Extinguishment of Debt. The corporation repurchased $89,525,000 of
its 8.125% notes and also $10,000,000 of its 7.7% medium-term notes with
short-term debt in 1997. The early extinguishment of debt resulted in an
extraordinary loss of $6,231,000 ($3,946,000 net of tax).
Inmarsat Lease Financing Obligations. Inmarsat entered into capital lease
agreements to finance the construction of its second- and third-generation
satellites. The corporation's share of these lease obligations is included
in long-term debt. Inmarsat has hedged its obligations through various
foreign exchange transactions to minimize the effect of fluctuating
interest and exchange rates (see Note 15).
The corporation's share of the payments under these lease obligations for
each of the next five years is $18,998,000 in 1999, $19,689,000 in 2000,
$19,985,000 in 2001, $11,043,000 in 2002, $6,267,000 in 2003 and
$20,529,000 thereafter. These payments include interest totaling
$14,376,000 and a current maturity of $14,962,000.
9. MONTHLY INCOME PREFERRED SECURITIES
In July 1995, COMSAT Capital I, L.P. (COMSAT Capital) issued $200,000,000
of Monthly Income Preferred Securities (MIPS). COMSAT Capital is a limited
partnership formed for the sole purpose of issuing the MIPS and loaning the
proceeds to COMSAT, the managing general partner. The MIPS were issued at
a par value of $25 per share, and dividends are payable monthly at an
annual rate of 8.125%. The MIPS are callable by the issuer after July 2000
at par value.
The proceeds of the MIPS were loaned to COMSAT under the terms of a 8.125%,
30-year subordinated debenture agreement. This agreement allows COMSAT to
extend the maturity of the debentures until 2044, provided that COMSAT
satisfies certain financial covenants. The loan between the partnership
and COMSAT has been eliminated in consolidation. The $200,000,000 of MIPS
is shown on the corporation's consolidated balance sheet as "preferred
securities issued by subsidiary." The dividends on these securities are
recorded as minority interest expense of $16,250,000, in "Other income
(expense), net" on the income statement for each of the three years ended
December 31, 1998.
63
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
Property and Equipment. As of December 31, 1998, the corporation had
commitments to acquire property and equipment totaling $187,431,000. Of
this total, $169,527,000 is payable over the next three years. These
commitments are related principally to the corporation's share of INTELSAT
satellite acquisition programs.
Leases. The corporation leases its headquarters building from a
partnership in which the corporation owns a 50% interest. The initial term
of the lease expires in 2008. In addition to lease payments, the
corporation is responsible for taxes, insurance and maintenance of the
building. The corporation also has leases of other property and equipment.
Rental expense under operating leases was $7,579,000 in 1998, $5,367,000 in
1997 and $5,179,000 in 1996. The future rental payments under operating
leases are $9,402,000 in 1999, $7,087,000 in 2000, $5,867,000 in 2001,
$5,408,000 in 2002, $5,251,000 in 2003 and $21,679,000 thereafter.
Space Segment. At December 31, 1998, the corporation's commitments for
space segment capacity from New Skies and certain third parties are
$26,608,000 in 1999, $19,468,000 in 2000, $18,516,000 in 2001, $15,942,000
in 2002, $10,654,000 in 2003, and $32,903,000 thereafter.
Government Contracts and Investigations. The corporation and its
subsidiaries are subject to, and are currently a party to, audits and
investigations by various government agencies which oversee contract
performance in connection with the corporation's contracts with the U.S.
Government or which regulate the corporation's compliance with federal and
state laws. If the corporation is found liable for wrongdoing as a result
of such an audit or investigation, the corporation could be fined or
subjected to other punitive actions. See Note 11 for a description of an
investigation affecting Electromechanical Systems, Inc., a discontinued
operations subsidiary of the corporation.
In response to a communication from an agency of the federal government
regarding the corporation's compliance with export control laws, the
corporation made a disclosure with respect to certain of its export
licensing activities. In addition, the corporation has received a subpoena
from a separate agency of the federal government requesting certain
information in connection with a possible criminal investigation of the
same matter. The corporation cannot predict at this time whether or to
what extent the government may seek sanctions for any possible violations
of the export control laws and, therefore, cannot predict the ultimate
outcome of this matter or estimate the amount of liability, if any, that
could result from any civil or criminal sanctions the government may seek.
There can be no assurances, however, that any such liability would not be
material.
64
<PAGE>
Environmental Issues. The corporation reviews, on a quarterly basis, its
estimates of costs of compliance with environmental laws and the cleanup of
various sites, including sites for which governmental agencies have
designated the corporation as a potentially responsible party. When it is
probable that obligations have been incurred and where a minimum cost or a
reasonable estimate of the cost of compliance or remediation can be
determined, the applicable amount is accrued. Because of the uncertainties
associated with environmental assessment and remediation activities, future
expense to remediate currently identified sites could be higher than the
liability currently accrued.
11. REGULATORY ENVIRONMENT AND LITIGATION
Regulatory Environment. Under the Satellite Act, the International
Maritime Satellite Act of 1978 (the Inmarsat Act) and the Communications
Act of 1934, as amended (the Communications Act), COMSAT is subject to
regulation by the FCC with respect to its capital and organizational
structure, and with respect to its COMSAT World Systems (CWS) and COMSAT
Mobile Communications (CMC) businesses. FCC decisions and policies have
had and will continue to have a significant impact on the corporation. In
addition, the telecommunications companies which the corporation operates
in various developing countries are subject to regulation by the local
regulatory bodies in those countries. Because the regulatory environment
in those countries is rapidly evolving as the local economies are
developing, these companies face increasing business uncertainties that
could have an adverse effect on their operations.
In April 1998, the FCC granted the corporation's petition to be deregulated
and reclassified CWS as a "non-dominant" telecommunications carrier in its
major markets. The FCC's decision eliminates rate-of-return restrictions,
structural separation regulation and 14-day advance tariff notification in
regard to approximately 90% of COMSAT's INTELSAT business. It also allows
CWS to integrate earth station and space segment services, requiring only
that COMSAT list those offerings separately in tariff filings at the FCC.
On February 9, 1999, the FCC further deregulated COMSAT by eliminating rate
of return regulation on so-called "non-competitive thin routes" and
occasional use "single carrier" markets. In its place, the FCC adopted an
incentive-based price policy for COMSAT's provision of INTELSAT services in
these markets. The FCC also adopted a procedure for reclassifying these
markets as non-dominant as competition is introduced.
On October 28, 1998, the FCC issued a separate notice of proposed
rulemaking that looks toward enabling users to have direct access to the
INTELSAT system, which would end COMSAT's status as the exclusive provider
of INTELSAT services in the U.S. In the direct access notice, the FCC
tentatively concluded, among other things, that it lacks the statutory
authority to impose Level 4 direct access (by which users could invest and
acquire an ownership interest in INTELSAT), but does have the authority to
require Level 3 direct access (by which users could contract directly with
INTELSAT for capacity and bypass COMSAT). The FCC sought comments on its
tentative conclusion that it would serve the public interest to mandate
Level 3 direct access. The corporation filed comments in this proceeding
contesting the basis for the FCC's proposed action.
65
<PAGE>
Litigation. The corporation and its subsidiaries are a party to various
lawsuits and arbitration proceedings and are subject to various claims and
inquiries, which generally are incidental to the ordinary course of its
business. See Note 3 for a description of an arbitration proceeding related
to the Green Bank contract to which the corporation is a party. The outcome
of legal proceedings cannot be predicted with certainty. Based on currently
available information, however, management does not believe that the
outcome of any matter which is pending or threatened, either individually
or in the aggregate, will have a material adverse effect on the long-term
consolidated financial condition of the corporation. Nevertheless, the
outcome of such matters could materially affect consolidated results of
operations in a given year or quarter.
In January 1999, the U.S. Department of Justice announced that it had
joined a lawsuit filed by former employees of Electromechanical Systems,
Inc. (EMS), a wholly-owned subsidiary of the corporation, under the qui tam
provisions of the Civil False Claims Act. The corporation acquired EMS in
1994 as part of the corporation's acquisition of Radiation Systems, Inc.
The corporation began accounting for COMSAT RSI as a discontinued operation
in 1997 and retained EMS when the corporation sold COMSAT RSI in 1998 (see
Note 3). The lawsuit names EMS, the corporation and several current and
former EMS employees and seeks potential damages estimated at up to
$40,000,000. The Department of Justice is expected to file its own
complaint in this matter and may then seek to stay the lawsuit pending the
outcome of a separate criminal investigation into the same allegations that
is currently being conducted by the U.S. Attorney's office in Tampa,
Florida. The corporation intends to vigorously defend this matter but
cannot predict the ultimate outcome or estimate the amount of liability, if
any, that could result from any civil or criminal sanctions the government
may seek. There can be no assurances, however, that any such liability
would not be material.
12. STOCKHOLDERS' EQUITY
Comprehensive Income (Loss). In 1998, the corporation adopted SFAS No.
130, "Reporting Comprehensive Income." The statement established rules for
the reporting of comprehensive income and its components. Comprehensive
income consists of net income (loss), unrealized gain (loss) on securities,
foreign currency translation and minimum pension liability adjustments and
is presented in the Statements of Changes in Consolidated Stockholders'
Equity. The adoption of SFAS No. 130 had no impact on total stockholders'
equity. Prior years' financial statements have been reclassified to
conform to the SFAS No. 130 requirements.
The balance of the components of accumulated other comprehensive income
(loss), net of tax, at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
------------ ---------- --------
<S> <C> <C>
Unrealized gain on securities $ 12,779 $ 1,707
Foreign currency translation (14,783) (403)
Minimum pension liability (4,541) (2,222)
--------- -------
Total $ (6,545) $ (918)
========= =======
</TABLE>
66
<PAGE>
Effective January 1, 1998, the corporation no longer accounts for its
Brazil subsidiary as highly inflationary. Foreign currency translation
adjustments are now recorded in "Accumulated other comprehensive loss."
The unrealized gain on securities reported in the Statements of Changes in
Consolidated Stockholders' Equity includes a reclassification adjustment
of $9,513,000, net of tax, in 1998 related to a gain realized from the sale
of marketable equity securities.
Earnings Per Share. The following reconciliation presents the calculation
of the corporation's basic and diluted earnings per share amounts:
<TABLE>
<CAPTION>
In thousands, except per share amounts 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations before
extraordinary item $26,417 $28,568 $36,197
======= ======= =======
Basic:
Weighted average shares outstanding 51,673 48,924 47,870
======= ======= =======
Per share $ 0.51 $ 0.58 $ 0.76
======= ======= =======
Assuming dilution:
Weighted average shares outstanding 51,673 48,924 47,870
Stock options 1,415 766 647
Restricted stock awards and unit 195 313 402
------- ------- -------
Total 53,283 50,003 48,919
======= ======= =======
Per share $ 0.50 $ 0.57 $ 0.74
======= ======= =======
</TABLE>
Stock Incentive Plans. The corporation has stock incentive plans that
provide for the issuance of stock options, restricted stock awards, stock
appreciation rights and restricted stock units. A total of 7,169,000
shares of common stock may be granted under the current plans. As of
December 31, 1998, 71,000 shares of the corporation's treasury stock and
7,098,000 unissued common shares were reserved for these plans. As of
December 31, 1998, no stock appreciation rights were outstanding.
Adjustments were made in 1997 to equitably increase the number of shares
and decrease the exercise price for all outstanding stock options as a
result of the tax-free spinoff of Ascent. Vested stock options held by
Ascent employees generally expired 90 days after the date of the spinoff.
Unvested stock options held by Ascent employees continue to vest as long as
the employee is employed by Ascent and then expire 90 days after vesting.
Adjustments were also made to increase the number of restricted stock
awards and restricted stock units outstanding for the effect of the Ascent
spinoff.
Stock Options. Under the current plans, the exercise price for stock
options may not be less than the fair market value of the stock when
granted. Options generally vest over three years and expire after 10 to 15
years.
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<PAGE>
Stock option activity was as follows:
<TABLE>
<CAPTION>
Options in thousands 1998 1997 1996
-------------------- -------- -------- -------
<S> <C> <C> <C>
Outstanding at January 1 5,152 4,478 4,415
Granted 997 655 899
Exercised (2,465) (848) (481)
Canceled (253) (283) (355)
Adjustment due to Ascent spinoff - 1,150 -
-------- ------ ------
Outstanding at December 31 3,431 5,152 4,478
Exercisable at December 31 1,709 3,300 2,270
Average price
Outstanding at January 1 $ 18.33 $22.20 $22.08
Granted 31.14 25.01 19.44
Exercised 18.91 18.26 17.24
Canceled 20.75 18.68 20.37
Adjustment due to Ascent spinoff - 17.84 -
Outstanding at December 31 21.46 18.33 22.20
Exercisable at December 31 17.79 18.92 23.00
</TABLE>
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 was $12.72, $6.89 and $5.59, respectively. The fair
value of options at date of grant was estimated using the Black-Scholes
model assuming an expected option life of seven years and the following
weighted average assumptions:
<TABLE>
<CAPTION>
Per share 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Dividend yield 0.84% 3.29% 3.37%
Interest rate 5.35% 6.47% 5.70%
Volatility 36.82% 37.21% 29.47%
</TABLE>
Stock options outstanding at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
In thousands, except per share amounts and years
--------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------------
Weighted Average
-------------------------
Exercise Price Number Remaining Exercise Number Weighted Average
Range Outstanding Term in Years Price Exercisable Exercise Price
---------------- ----------- ------------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$4.81 - $ 8.59 143 2.25 $ 6.82 143 $ 6.82
10.94 - 18.85 1,101 6.63 15.58 720 15.67
20.06 - 29.09 1,262 6.35 21.10 846 21.46
30.13 - 38.78 925 9.18 31.23 - -
----------- -----------
4.81 - 38.78 3,431 7.03 21.46 1,709 17.79
=========== ===========
</TABLE>
Restricted Stock Awards. Restricted stock awards are shares of stock that
are subject to restrictions on their sale or transfer. In 1998, 1997 and
1996, 30,800, 152,470 and 66,000 "performance-based" restricted stock
awards were granted, respectively. The 1997 amount includes an adjustment
of outstanding awards due to the Ascent spinoff. Grantees have record
ownership of the underlying securities; however, all such securities are
subject to forfeiture at the end of a two-year performance period. In
addition to the two-year performance period, the awards are further subject
to a three-year vesting schedule. The weighted average fair value at
68
<PAGE>
date of grant for restricted stock awards granted during 1998, 1997 and
1996 was $30.81, $23.71 and $18.00 per share, respectively, which in each
case was equal to the market value of the common stock at the date of
grant.
The expected cost of all grants is amortized over the performance and
vesting period. The expense for all outstanding grants was $1,071,000 in
1998, $870,000 in 1997 and $1,296,000 in 1996.
Restricted Stock Units. Restricted stock units entitle the holder to
receive a combination of stock and cash equal to the market price of common
stock for each unit, when vested. These units vest over three years.
During 1998, 1997 and 1996, respectively, 36,850, 54,360 and 34,000
restricted stock units were granted . The 1997 amount includes an
adjustment of outstanding units due to the Ascent spinoff. The weighted
average fair value for the units granted during 1998, 1997 and 1996 was
$32.32, $25.50 and $18.99 per unit, respectively, which in each case was
equal to the market value of the common stock at the date of grant.
Partially vested restricted stock units outstanding totaled 80,036 at
December 31, 1998 and 110,200 at December 31, 1997. The cost of these
awards is amortized to expense over the three-year vesting period. The
expense in 1998, 1997 and 1996 was $1,012,000, $575,000 and $924,000,
respectively.
Employee Stock Purchase Plan. Employees may purchase stock at a discount
through the corporation's Employee Stock Purchase Plan. The purchase price
of the shares is the lower of 85% of the fair market value of the stock on
the offering date, or 85% of the fair market value of the stock on the last
business day of each month throughout the one-year offering period. The
purchase price on the respective offering dates for calendar years 1998,
1997 and 1996, was $19.76, $21.36 (adjusted to $17.22 subsequent to the
Ascent spinoff) and $16.04, respectively.
There were 196,000 shares, 181,000 shares and 254,000 shares issued under
this plan at weighted average prices of $19.76, $18.26 and $16.03 for the
years ended December 31, 1998, 1997 and 1996, respectively. As of December
31, 1998, a total of 1,381,000 shares of the corporation's unissued common
stock has been reserved for this plan.
The weighted average fair value of the purchase rights granted pursuant to
this plan in 1998, 1997 and 1996 was $5.66, $5.95 and $4.07, respectively.
The fair value of each purchase right was estimated using the Black-Scholes
model as of January 1 of each year assuming each plan year consisted of 12
one-month options and the following weighted average assumptions:
<TABLE>
<CAPTION>
Per share 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Dividend yield 0.84% 3.30% 3.89%
Interest rate 5.56% 5.39% 5.11%
Volatility 36.52% 35.79% 27.33%
</TABLE>
69
<PAGE>
Proforma Disclosures. Had stock-based compensation cost for the
corporation's stock incentive plans been determined based on the fair value
at the grant dates consistent with SFAS No.123, the corporation's income
from continuing operations before extraordinary item and per share amounts
would have been as follows for each year:
<TABLE>
<CAPTION>
In thousands, except per share amounts 1998 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations:
before extraordinary item
As reported $26,417 $28,568 $36,197
Proforma 23,380 26,024 34,269
Earnings per common share - basic:
As reported $ 0.51 $ 0.58 $ 0.76
Proforma 0.45 0.53 0.72
Earnings per common share-assuming dilution:
As reported $ 0.50 $ 0.57 $ 0.74
Proforma 0.44 0.52 0.70
</TABLE>
The proforma effect on income from continuing operations before
extraordinary item for such years is not representative of its effect for
future years because it does not take into consideration proforma
compensation expense related to grants made prior to 1995.
13. PENSION AND OTHER BENEFIT PLANS
Effective December 31, 1998, the corporation adopted SFAS No. 132,
"Employer's Disclosures about Pensions and Other Post-retirement Benefits."
The provisions of SFAS No. 132 revise employer's disclosures about pension
and other post-retirement benefit plans but do not change the measurement
or recognition of these plans.
The corporation has a non-contributory, defined benefit pension plan for
qualifying employees. Pension benefits are based on years of service and
compensation prior to retirement. The components of net pension expense
(benefit) for each year are:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,401 $ 2,005 $ 2,590
Interest cost 8,400 7,690 7,213
Expected return on plan assets (10,158) (9,039) (8,520)
Amortization of transition asset (1,195) (1,208) (1,208)
Amortization of prior service costs 382 386 386
---------- ------- -------
Net periodic pension expense (benefit) $ (170) $ (166) $ 461
========== ======= =======
</TABLE>
The following tables show a reconciliation of the changes in the pension
plan's benefit obligation and fair value of the plan assets as well as the
funded status of the plan as of December 31, 1998 and 1997:
70
<PAGE>
<TABLE>
<CAPTION>
In thousands 1998 1997
---------------------------------------------------------------------
<S> <C> <C>
Reconciliation of benefit obligation
Benefit obligation at January 1 $119,826 $103,608
Service cost 2,401 2,005
Interest cost 8,400 7,690
Actuarial loss 8,654 10,618
Benefits paid from plan assets (4,498) (4,095)
-------- --------
Benefit obligation at December 31 $134,783 $119,826
======== ========
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $150,874 $126,936
Actual return on plan assets 21,229 28,033
Benefits paid from plan assets (4,498) (4,095)
-------- --------
Fair value of plan assets at December 31 $167,605 $150,874
======== ========
Funded status
Funded status at December 31 $ 32,822 $ 31,048
Unrecognized gain (38,218) (35,802)
Unrecognized prior service cost 1,146 1,529
Unrecognized transition asset - (1,195)
-------- -------
Accrued pension liability $ (4,250) $ (4,420)
======== ========
Assumed discount rate 6.75% 7.00%
Assumed rate of compensation increase 5.50% 5.00%
Expected rate of return on pension plan assets 9.50% 9.00%
</TABLE>
Supplemental Executive Retirement Plan. The corporation's supplemental
executive retirement plan is an unfunded defined benefit plan. The
components of net pension expense under this plan for each year are:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
---------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 324 $ 278 $ 491
Interest cost 1,703 1,409 1,454
Amortization of transition obligation 266 266 266
Amortization of losses 842 210 606
-------- ------ ------
Net periodic pension expense $3,135 $2,163 $2,817
======== ====== ======
</TABLE>
The following tables show a reconciliation of the changes in the
supplemental plan's benefit obligation and fair value of the plan assets as
well as the funded status of the plan as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
In thousands 1998 1997
----------------------------------------------------------------------
<S> <C> <C>
Reconciliation of benefit obligation
Benefit obligation at January 1 $ 21,193 $ 22,136
Service cost 324 278
Interest cost 1,703 1,409
Actuarial (gain) loss 4,895 (1,272)
Benefits paid (1,727) (1,358)
-------- --------
Benefit obligation at December 31 $ 26,388 $ 21,193
======== ========
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
In thousands 1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ 0 $ 0
Employer contributions 1,727 1,358
Benefits paid (1,727) (1,358)
-------- --------
Fair value of plan assets at December 31 $ 0 $ 0
======== ========
Funded status
Funded (unfunded) status at December 31 $(26,388) $(21,193)
Unrecognized loss 8,816 4,763
Unrecognized transition obligation 798 1,064
Additional minimum liability (8,042) (4,575)
-------- --------
Total accrued liability $(24,816) $(19,941)
======== ========
Intangible asset $ 798 $ 1,064
Amount recognized in other comprehensive income $ 7,244 $ 3,510
Assumed discount rate 6.75% 7.00%
Assumed rate of compensation increase 5.50% 5.00%
</TABLE>
401(k) Plan. The corporation has a 401(k) plan for qualifying employees. A
portion of employee contributions is matched by the corporation with shares
of its common stock. The number of shares contributed to the plan and the
respective market values each year were as follows: 1998 - 68,000 shares
($2,186,000), 1997 - 108,000 shares ($2,433,000) and 1996 -140,000 shares
($3,035,000).
Post-retirement Benefits. The corporation provides health and life
insurance benefits to qualifying retirees. The expected cost of these
benefits is recognized during the years in which employees render service.
The components of net post-retirement benefit expense for each year are:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 895 $ 666 $ 1,019
Interest cost 2,252 1,877 2,496
Amortization of net gains (1,841) (2,360) (1,219)
------- ------- -------
Net post-retirement benefit expense $ 1,306 $ 183 $ 2,296
======= ======= =======
</TABLE>
The following tables show a reconciliation of the changes in the post-
retirement plan's obligation and fair value of the plan assets as well as
the funded status of the plan as of December 31 for both years:
<TABLE>
<CAPTION>
In thousands 1998 1997
------------------------------------------------------------------
<S> <C> <C>
Reconciliation of benefit obligation
Benefit obligation at January 1 $ 28,890 $ 29,460
Service cost 895 666
Interest cost 2,252 1,877
Plan amendments (573) -
Actuarial (gain) loss 5,373 (1,753)
Benefits paid (1,628) (1,360)
-------- --------
Benefit obligation at December 31 $ 35,209 $ 28,890
======== ========
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
In thousands 1998 1997
-------------------------------------------------------------------
<S> <C> <C>
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ 0 $ 0
Employer contributions 1,628 1,360
Benefits paid (1,628) (1,360)
-------- --------
Fair value of plan assets at December 31 $ 0 $ 0
======== ========
Funded status
Funded (unfunded) status at December 31 $(35,209) $(28,890)
Unrecognized (gain) loss (1,455) (6,829)
Unrecognized gain from plan changes (12,259) (13,527)
-------- --------
Accrued post-retirement benefit costs $(48,923) $(49,246)
======== ========
Assumed discount rate 6.75% 7.00%
Assumed rate of compensation increase 5.50% 5.00%
</TABLE>
An 8.0% increase in health care costs was assumed for 1998 with the rate
decreasing 0.5% each year to an ultimate rate of 5.5%. A 1% change in the
assumed health care cost trend rate would have the following impact on
post-retirement benefit cost and obligation:
<TABLE>
<CAPTION>
1% Change
------------------
In thousands Increase Decrease
----------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and interest cost component of
post-retirement benefit cost $ 431 $ (347)
====== =======
Effect on the post-retirement benefit obligation $4,376 $(3,484)
====== =======
</TABLE>
14. INCOME TAXES
Income (loss) from continuing operations before taxes and extraordinary
item consisted of:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
United States $ 63,144 $47,927 $73,707
Foreign (30,936) (3,746) (8,586)
-------- ------- -------
Total $ 32,208 $44,181 $65,121
======== ======= =======
</TABLE>
The components of income tax expense on continuing operations are:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 6,914 $15,783 $22,910
Deferred 1,962 (2,162) (1,076)
Investment tax credits (net) (1,687) (1,837) (1,844)
State and local (2,369) 1,487 6,779
Foreign 971 2,342 2,155
------- ------- -------
Total $ 5,791 $15,613 $28,924
======= ======= =======
</TABLE>
73
<PAGE>
The difference between income tax expense computed at the statutory Federal
tax rate and the corporation's effective tax rate is:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $ 11,273 $15,463 $22,792
Foreign losses 5,389 3,654 4,335
Investment tax credits (net) (1,688) (1,837) (1,844)
Adjustment to estimated income tax accruals (14,208) (839) (506)
State income taxes, net of federal income taxes (1,569) 972 4,408
Life insurance (net) (1,115) (1,183) (1,173)
Other non-deductible costs 1,403 433 156
Merger costs 1,467 - -
Impairment loss 4,900 - -
Other (61) (1,050) 756
-------- ------- -------
Income tax expense $ 5,791 $15,613 $28,924
========== ======= =======
</TABLE>
The current and net non-current components of deferred tax accounts as
shown on the balance sheet at December 31, 1998 and 1997 are:
<TABLE>
<CAPTION>
In thousands 1998 1997
-----------------------------------------------------------
<S> <C> <C>
Current deferred tax asset $ 7,911 $ 7,469
Non-current deferred tax liability (127,351) (112,226)
--------- ---------
Net liability $(119,440) $(104,757)
========= =========
</TABLE>
The deferred tax assets and liabilities at December 31, 1998 and 1997 are:
<TABLE>
<CAPTION>
In thousands 1998 1997
----------------------------------------------------------
<S> <C> <C>
Assets:
Post-retirement benefits $ 23,425 $ 22,042
Accrued expenses 42,787 45,803
NOL carryforward 9,818 -
Long-term contract revenues 6,876 7,946
Foreign tax credit carryforward 3,159 -
Alternative minimum tax credit 31,454 30,476
Other 4,954 3,181
--------- ---------
Total deferred tax assets 122,473 109,448
--------- ---------
Liabilities:
Property and equipment (209,952) (214,025)
Unrealized gain on securities (6,098) (180)
Foreign currency translation (3,158) -
Basis in cost investment (22,705) -
--------- --------
Total deferred tax liabilities (241,913) (214,205)
--------- --------
Net liability $(119,440) $(104,757)
========= =========
</TABLE>
The corporation favorably resolved a state tax audit for the years 1992-
1996 that allowed the corporation to reverse previously accrued interest
costs of $1,720,000 and state taxes of $2,238,000. After federal taxes, the
interest and state tax benefit increased net income in 1998 by $2,573,000.
74
<PAGE>
In addition, the corporation reversed previously accrued interest costs of
$2,456,000 and taxes of $15,100,000 for the years 1990-1994 related to
certain federal tax matters. Events during the third quarter of 1998
prompted the corporation to conclude that the amounts accrued were no
longer required. The interest and tax benefit increased net income in 1998
by $16,633,000.
The Internal Revenue Service (IRS) has completed examinations of the
federal income tax returns of the corporation through 1994. The corporation
is contesting adjustments proposed by the IRS on the 1990 through 1994
income tax returns. The corporation has also amended its returns and filed
claims for refunds for 1979 through 1987, which the IRS has denied. In
1996, the corporation filed suit in a U.S. District Court seeking the
refunds which the IRS denied. The suit remains pending. In the opinion of
the corporation, adequate provision has been made for income taxes for all
periods through 1998.
15. FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS
Inmarsat has entered into foreign currency contracts designed to minimize
exposure to exchange rate fluctuations on fixed operating expenses
denominated in British pounds sterling. At December 31, 1998, Inmarsat had
several contracts maturing primarily in 1999 to purchase foreign currency
for a total of $116,616,000. The corporation's share of the estimated fair
value of these contracts, as determined by a bank, is an unrealized gain of
approximately $886,000 at December 31, 1998.
Inmarsat has entered into interest rate and foreign currency swap
arrangements to minimize the exposure to interest rate and foreign currency
exchange fluctuations related to its satellite financing obligations.
Inmarsat borrowed and is obligated to repay Pounds Sterling. The Pounds
Sterling borrowed were swapped for U.S. Dollars with an agreement to
exchange the Dollars for Pounds Sterling in order to meet the future lease
payments. Inmarsat pays interest on the Dollars at an average fixed rate of
8.8%, and it receives variable interest on the Sterling amounts based on
short-term LIBOR rates. The differential to be paid or received is accrued
as interest rates change and is recognized over the life of the agreements.
The currency swap arrangements have been designated as hedges, and any
gains or losses are included in the measurement of the debt. The effect of
these swaps is to change the sterling lease obligation into fixed-interest-
rate Dollar debt. As of December 31, 1998, Inmarsat had $321,433,000 of
swaps to be exchanged for (Pounds)211,474,000 at various dates through
2007. Inmarsat is exposed to loss if one or more of the counter parties
defaults. However, Inmarsat does not anticipate non-performance by the
counter parties as all are major financial institutions. The corporation's
share of the estimated fair value of these swaps is an unrealized gain of
$8,214,000 at December 31, 1998. The fair value was estimated by computing
the present value of the Dollar obligations using current rates available
for issuance of debt with similar terms and the current value of the
Sterling at year-end exchange rates.
The fair value of long-term debt (excluding capitalized leases) shown below
was estimated by obtaining a yield-adjusted price for each obligation from
an investment banker. The fair value of the Monthly Income Preferred
Securities was determined by using the quoted market price. The fair values
of the corporation's other financial instruments are approximately equal to
their carrying amounts. The carrying amount and fair value at each year end
are as follows:
75
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------------------------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8.125% notes due 2004 $ 70,475 $ 77,971 $ 70,475 $ 74,971
8.95% notes due 2001 75,000 80,525 75,000 80,123
INTELSAT bonds 170,872 183,974 170,572 180,425
Medium-term notes 64,000 72,162 64,000 69,035
Monthly income preferred securities 200,000 203,000 200,000 204,000
</TABLE>
16. BUSINESS SEGMENT INFORMATION
The corporation adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998, which changes the way the
corporation reports information about its operating segments. The
information for 1997 and 1996 has been restated in order to conform to the
1998 presentation.
The corporation reports operating results and financial data in four
segments: COMSAT World Systems (CWS), COMSAT Mobile Communications (CMC),
International and Laboratories. CWS provides voice, data, Internet, video
and audio communications services between the U.S. and other countries
using the global satellite networks of INTELSAT and New Skies. CWS also
includes the operating results of COMSAT Government Systems, Inc., COMSAT
Digital Teleport, Inc. and COMSAT General Corporation, which provide
various satellite and ground segment services to commercial and government
customers. CMC provides voice, data, fax, telex and information services
for ships, aircraft and land mobile applications throughout the world using
the Inmarsat satellite system. Together, the CWS and CMC operating segments
represent the corporation's Satellite Services business unit.
International consists of activities undertaken by the corporation in its
COMSAT International (CI) business. CI operates an integrated group of
telecommunications companies that are engaged principally in providing
individualized digital network solutions to business clients and carriers
in high-growth emerging markets overseas.
Laboratories (Labs) consists of activities undertaken by the corporation in
its COMSAT Laboratories business, which provides technical consulting
services and develops advanced communications technologies and products for
satellite access and networking applications.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. The
corporation evaluates the performance of its operating segments based on
income (loss) before income taxes and interest costs. Summarized financial
information concerning the corporation's reportable segments is shown in
the following tables. The "Other" column includes the elimination of
intersegment revenues, corporate related items, and interest costs, net of
amounts capitalized. Corporate assets, primarily consisting of short-term
investments, net assets of discontinued operations, property and cash
surrender value of life insurance policies, are reported in the "Other"
column. The operating segments' income (loss) and corporate related amounts
total the amount presented as income before taxes and extraordinary item in
the consolidated income statements.
76
<PAGE>
<TABLE>
<CAPTION>
SATELLITE SERVICES
--------------------------------
In thousands CWS CMC TOTAL CI LABS OTHER TOTAL
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Revenues:
External customers $301,781 $167,559 $ 469,340 $113,106 $34,023 $ - $ 616,469
Intersegment 1,326 1,508 2,834 162 8,299 (11,295) -
----------------------------------------------------------------------------
Total 303,107 169,067 472,174 113,268 42,322 (11,295) 616,469
Operating income (loss) 107,268 29,740 137,008 (39,789) (1,760) (35,957) 59,502
Segment income (loss) 113,110 31,864 144,974 (20,983) (3,508) (88,275) 32,208
Total assets 784,192 454,696 1,238,888 342,704 13,454 195,752 1,790,798
Capital expenditures 129,497 28,646 158,143 61,727 1,266 3,593 224,729
Depreciation and amortization 112,283 64,148 176,431 38,675 1,214 3,563 219,883
-----------------------------------------------------------------------------------------------------------
1997
Revenues:
External customers $285,179 $164,371 $ 449,550 $ 88,550 $24,551 $ - $ 562,651
Intersegment 1,002 3,479 4,481 1,111 11,820 (17,412) -
----------------------------------------------------------------------------
Total 286,181 167,850 454,031 89,661 36,371 (17,412) 562,651
Operating income (loss) 99,974 23,114 123,088 (13,975) (2,043) (25,102) 81,968
Segment income (loss) 102,646 23,854 126,500 (8,888) (1,780) (71,651) 44,181
Total assets 761,338 509,504 1,270,842 322,704 14,133 287,096 1,894,775
Capital expenditures 88,120 54,457 142,577 114,110 1,173 1,639 259,499
Depreciation and amortization 97,821 57,204 155,025 25,623 991 2,567 184,206
-----------------------------------------------------------------------------------------------------------
1996
Revenues:
External customers $296,624 $158,749 $ 455,373 $ 58,084 $31,643 $ - $ 545,100
Intersegment 1,130 2,173 3,303 - 12,043 (15,346) -
----------------------------------------------------------------------------
Total 297,754 160,922 458,676 58,084 43,686 (15,346) 545,100
Operating income (loss) 109,719 31,872 141,591 (17,281) 7,098 (24,183) 107,225
Segment income (loss) 111,023 34,861 145,884 (14,694) 7,335 (73,404) 65,121
Total assets 808,646 503,342 1,311,988 253,649 16,593 515,056 2,097,286
Capital expenditures 110,231 70,616 180,847 89,857 1,009 1,193 272,906
Depreciation and amortization 92,185 45,207 137,392 14,814 956 2,134 155,296
-----------------------------------------------------------------------------------------------------------
</TABLE>
International's operating loss in 1998 includes a $14,000,000 non-cash
impairment loss on long-lived assets (see Note 7) and its 1998 segment loss
includes a realized gain of $14,635,000 from the sale of a marketable
equity security (see Note 6).
CWS's segment income in 1998 includes a $4,303,000 gain from a settlement
with ICO (see Note 6).
Labs' 1996 revenues includes $7,800,000 related to a licensing agreement
that resolved patent infringement disputes.
77
<PAGE>
Related Party Transactions. The corporation provides support services to
INTELSAT and support services and satellite capacity to Inmarsat. The
revenues from these services were $15,385,000 in 1998, $16,364,000 in 1997
and $17,996,000 in 1996. These revenues were recorded primarily in CWS, CMC
and Labs.
Major Customers. Revenues from three major customers contributed
$235,637,000, $224,683,000 and $212,073,000 to the corporation's
consolidated revenues in 1998, 1997 and 1996, respectively.
Geographic Information. Revenues are attributed to geographic areas based
on the location of the assets producing the revenues. Satellite services
revenues generated through the INTELSAT, New Skies and Inmarsat satellites
are ascribed to the United States. The foreign amounts primarily consist
of CI's companies in Latin America. Financial information relating to the
corporation's operations by geographic area is as follows:
<TABLE>
<CAPTION>
Revenues
----------------------------------
In thousands 1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
United States $ 503,363 $ 474,101 $ 487,016
Foreign 113,106 88,550 58,084
---------- ---------- ----------
Total $ 616,469 $ 562,651 $ 545,100
========== ========== ==========
Property and Equipment
----------------------------------
In thousands 1998 1997 1996
---------------------------------------------------
United States $ 954,953 $1,123,750 $1,177,135
Foreign 254,509 235,543 145,850
---------- ---------- ----------
Total $1,209,462 $1,359,293 $1,322,985
========== ========== ==========
</TABLE>
78
<PAGE>
17. QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
In thousands, except per
share amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Revenues $144,717 $151,045 $158,415 $162,292 $616,469
Operating income 19,676 20,962 2,377 (2) 16,487 (4) 59,502
Net income 3,850 (1) 4,074 6,569 (3) 11,924 (5) 26,417
Earnings per share:
Basic 0.08 0.08 0.13 0.23 0.51
Assuming dilution 0.07 0.08 0.12 0.22 0.50
Dividends per share 0.05 0.05 0.05 0.05 0.20
Stock price:
High 36 42 3/4 36 7/8 39 5/8 42 3/4
Low 21 5/8 27 3/4 21 13/16 32 7/16 21 5/8
Close 34 7/16 28 5/16 35 1/4 36 36
Revenues $133,531 $142,437 $145,332 $141,351 $562,651
Operating income 23,151 23,412 17,653 17,752 81,968
Income from continuing
operations
before extraordinary item 8,099 9,098 (6) 9,395 (7) 1,976 (6) 28,568
Loss from discontinued (12,380) (16,481) (30,207) (30,000) (89,068)
operations
Extraordinary loss (1,010) (2,936) - - (3,946)
Net loss (5,291) (10,319) (20,812) (28,024) (64,446)
Earnings (loss) per share:
Basic:
Income from continuing
operations
before extraordinary item 0.17 0.19 0.19 0.04 0.58
Loss from discontinued
operations (0.26) (0.34) (0.62) (0.61) (1.82)
Extraordinary loss (0.02) (0.06) - - (0.08)
Net loss (0.11) (0.21) (0.42) (0.57) (1.32)
Assuming dilution:
Income from continuing
operations
before extraordinary item 0.16 0.18 0.19 0.04 0.57
Loss from discontinued
operations (0.25) (0.33) (0.60) (0.59) (1.78)
Extraordinary loss (0.02) (0.06) - - (0.08)
Net loss (0.11) (0.21) (0.41) (0.55) (1.29
Dividends per share 0.195 0.05 0.05 0.05 0.345
Stock price:
High 28 1/2 26 11/16 24 5/16 25 3/4 28 1/2
Low 23 19 5/8 20 13/16 20 5/16 19 5/8
Close 24 3/8 23 13/16 23 13/16 24 1/4 24 1/4
</TABLE>
(1) The first quarter of 1998 includes the $1,950,000 non-cash write-off of
an investment.
(2) The third quarter of 1998 includes $3,500,000 of merger costs and a
$14,000,000 non-cash impairment loss related to the write-down of long-
lived assets.
(3) The third quarter of 1998 includes a reversal of previously accrued
interest costs and taxes totaling $19,206,000 net of tax, relating to
the resolution of certain state and federal income tax matters.
(4) The fourth quarter of 1998 includes merger costs of $2,025,000.
(5) The fourth quarter of 1998 includes a pre-tax gain of $13,960,000 from
the sale of a marketable equity security and income of $4,303, 000 from
a settlement with ICO.
(6) The second and fourth quarters of 1997 includes a pre-tax gain of
$1,987,000 from the sale of a marketable equity security and a pre-tax
loss of $1,008,000 for a decline in value of a marketable equity
security, respectively.
(7) The third quarter of 1997 includes a pre-tax gain of $7,261,000 from
the sale of land.
79
<PAGE>
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
80
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
DIRECTORS OF THE REGISTRANT
The Satellite Act provides that the Corporation's Board of Directors shall
consist of 15 directors, of whom 12 are to be elected annually by the
shareholders for terms of one year and three are to be appointed by the
President of the United States, with the advice and consent of the U.S. Senate,
for terms of three years or until their successors have been appointed and
qualified. The Corporation's Board of Directors currently consists of 14
directors, pending Presidential appointment and Senate confirmation to fill an
existing vacancy in one of the Presidentially-appointed director positions.
The following sets forth certain information concerning the directors of
the Corporation.
Elected Directors
Betty C. Alewine, 50, has been President and Chief Executive Officer of COMSAT
since July 1996. She was President, COMSAT International Communications from
January 1995 to July 1996, and was President, COMSAT World Systems from May 1991
to January 1995. She joined COMSAT from MCI Communications Corporation in 1986
and has been a director of the Corporation since July 1996. She also is a
director of New York Life Insurance Co. and the Cancer Research Foundation of
America, a not-for-profit corporation. She is a member of the Inter-American
Development Bank Advisory Council, the Business-Higher Education Forum and the
American Institute of Aeronautics and Astronautics.
Marcus C. Bennett, 63, is a director of various organizations. He was Executive
Vice President and Chief Financial Officer of Lockheed Martin Corporation from
1995 to January 1999 and is a director of Lockheed Martin Corporation. He has
been a COMSAT director since August 1997. He also is a director of Carpenter
Technology Corporation and Martin Marietta Materials, Inc. and a member of the
board of directors of the Private Sector Council and the Georgia Tech Advisory
Board.
Lucy Wilson Benson, 71, has been a director of various business, educational and
nonprofit organizations since 1980. She was Under Secretary of State for
Security Assistance, Science and Technology from 1977 to 1980. She has been a
COMSAT director since September 1987. She also is a director of Logistics
Management Institute, a trustee of the Alfred P. Sloan Foundation and Vice
Chairman of the Atlantic Council of the U.S., the Board of Trustees of Lafayette
College and the Citizens Network for Foreign Affairs. She also is a director or
trustee of funds of The Dreyfus Corporation.
Edwin I. Colodny, 72, has been Chairman of the Board of COMSAT since April 1997
and a director since May 1992. He was Chairman of US Airways Group, Inc. and of
its subsidiary, US Airways, Inc., a commercial airline company, from 1978 until
July 1992 and was a director of both corporations until May 1997. He was Chief
Executive Officer of US Airways Group from 1983 to June 1991 and of its
subsidiary, US Airways, Inc., from 1975 to June 1991. He has served as counsel
to the Washington, D.C. law firm of Paul, Hastings, Janofsky and Walker since
September 1991.
81
<PAGE>
Lawrence S. Eagleburger, 68, has been Senior Foreign Policy Advisor for Baker,
Donelson, Bearman & Caldwell, a Washington, D.C. law firm, since January 1993.
He previously served as United States Secretary of State from December 1992
through January 1993, Acting Secretary of State from August 1992 to December
1992, and Deputy Secretary of State from February 1989 to August 1992. He has
been a COMSAT director since May 1995. He also is a director of Phillips
Petroleum Company, Stimsonite Corporation, Universal Corporation and Halliburton
Industries, and Chairman of the International Commission on Holocaust Era
Insurance Claims.
Neal B. Freeman, 58, has been Chairman and Chief Executive Officer of The
Blackwell Corporation, a television production and distribution company, since
1981. He was a Presidentially-appointed COMSAT director from November 1983 to
September 1988 and has been an elected director since May 1991. He also is Vice
Chairman of The Ethics and Public Policy Center and a director of Forum Network,
Inc. and National Review, Inc.
Caleb B. Hurtt, 67, is a director or trustee of various organizations. He was
President of Martin Marietta Aerospace from 1982 to 1987 and then President and
Chief Operating Officer of Martin Marietta Corporation from 1987 through 1989.
He has been a COMSAT director since May 1996. He also is a director of Lockheed
Martin Corporation and has served as Chairman of the Board of Governors of the
Aerospace Industries Association, as Chairman of the NASA Advisory Council, as
Chairman of the Federal Reserve Bank, Denver Branch, and as Vice Chairman of the
Board of Trustees of Stevens Institute of Technology.
Peter W. Likins, 62, has been President of The University of Arizona since
October 1997. He was President of Lehigh University from 1982 to September
1997, Provost of Columbia University from 1980 to 1982 and Professor and Dean of
the Columbia University School of Engineering and Applied Science from 1976 to
1980. He has been a COMSAT director since September 1987. He also is a
director of Parker Hannifin, Inc. and Safeguard Scientifics, Inc. and a trustee
of Consolidated Edison Company of New York, Inc. and of the University Medical
Center in Tucson, Arizona.
Larry G. Schafran, 60, has been the Managing General Partner of L.G. Schafran &
Associates, a real estate investment and development firm, since 1984. He was
Chairman of the Executive Committee of Dart Group Corporation from 1994 to
October 1997 and a director of Dart from 1993 to October 1997. He has been a
COMSAT director since August 1997. He also is a director of PubliCARD, Inc.,
Tarragon Realty Investors, Inc., Discovery Zone, Inc. and Kasper A.S.L., Ltd.
and Chairman of the Board of Directors of Delta-Omega Technologies, Inc.
Robert G. Schwartz, 70, is a director or trustee of various business
organizations. He was Chairman of the Board, President and Chief Executive
Officer of Metropolitan Life Insurance Co. (MetLife) from September 1989 to
March 1993 and remains a director of MetLife. He was Chairman of the Board of
MetLife from February 1983 to September 1989. He has been a COMSAT director
since May 1986. He also is a trustee of Consolidated Edison Company of New
York, Inc. and a director of Lone Star Industries, Inc., Lowe's Companies, Inc.,
Mobil Oil Corporation, Potlatch Corporation and the Horatio Alger Association
for Distinguished Americans.
82
<PAGE>
Kathryn C. Turner, 51, is the Chairperson and Chief Executive Officer of
Standard Technology, Inc., a high-technology, engineering and systems
integration firm. She previously has been appointed by the President to serve
on the President's Export Council, the Eximbank Advisory Committee, and the
Commission on the Future of Worker-Management Relations and by the Secretary of
Defense to the Defense Policy Advisory Committee on Trade. She has been a
COMSAT director since August 1997. She also is a director of Phillips Petroleum
Company and Carpenter Technology Corporation.
Guy P. Wyser-Pratte, 58, is President of Wyser-Pratte & Co., Inc. and Wyser-
Pratte Management Co., Inc. He has been a COMSAT director since August 1997.
He also is a director of The Eureka (US$) Fund, The Eureka (DM) Fund and the
International Rescue Committee, a non-governmental international refugee
organization, a member of the Council on Foreign Relations and a trustee of the
U.S. Marine Corps University Foundation.
Presidentially-Appointed Directors
Peter S. Knight, 49, has been a partner in the Washington, D.C. law firm of
Wunder, Knight, Levine, Thelen & Forscey since 1991. In 1996, he took a leave
of absence from his firm to serve as Campaign Manager for Clinton/Gore '96.
From 1989 to 1991, he was General Counsel and Secretary of the Medicis
Pharmaceutical Corporation. From 1977 to 1989, he served as the Chief of Staff
to Congressman and later Senator Al Gore. He has been a Presidentially-
appointed COMSAT director since September 1994. He also is a director of the
Medicis Pharmaceutical Corporation, Whitman Education Group Inc., Healthworld
and the Schroder Series Trust. His current term expires at the 1999 Annual
Meeting.
Charles T. Manatt, 62, is the Chairman of Manatt, Phelps & Phillips, a
Washington, D.C. and Los Angeles law firm which he founded in 1965. He was
Chairman of the Democratic National Committee from 1981 through 1985. He has
been a Presidentially-appointed COMSAT director since May 1995. He also is a
director of the Federal Express Corporation and ICN Pharmaceuticals, Inc. His
current term expired at the 1997 Annual Meeting, and he continues to serve in
accordance with the Satellite Act.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Title Age*
- --------------------------------------------------------------------------------
<S> <C> <C>
Betty C. Alewine President and Chief Executive Officer 50
Edward E. Berger Treasurer 41
Allen E. Flower Vice President and Chief Financial Officer 55
Alan G. Korobov Controller 50
John H. Mattingly President, COMSAT Satellite Services 48
Benjamin A. Pontano President, COMSAT Laboratories 55
James J. Welch President and General Manager, COMSAT International 54
Warren Y. Zeger Vice President, General Counsel and Secretary 51
</TABLE>
* As of February 1, 1999.
Normally, the officers are elected annually by the Board of Directors at
its first meeting following the Annual Meeting of Shareholders to serve until
their successors are elected and qualified.
83
<PAGE>
There is no family relationship between any director or executive officer
and any other executive officer or director. There is no arrangement or
understanding between any director or executive officer and any other person
pursuant to which he or she was selected as a director or executive officer.
The following is a brief account of each executive officer's experience for
the past five years:
Mrs. Alewine has been President and Chief Executive Officer since July
1996. She was President, COMSAT International Communications from January 1995
to July 1996, and was President, CWS, from May 1991 to January 1995. She is
also a member of the Board of Directors of the Corporation.
Mr. Berger has been Treasurer since September 1998. He previously worked
for Sprint Corporation in various financial capacities, where in his last
position he was responsible for all of Sprint's international treasury
activities.
Mr. Flower has been Vice President and Chief Financial Officer since
November 1995. From November 1995 to September 1996, he was also Acting
Treasurer. He was Controller and Acting Chief Financial Officer from April 1995
through November 1995 and Controller from June 1992 to May 1995. He is a
director of Calian Technology Ltd., in which the Corporation holds a minority
equity investment.
Mr. Korobov has been Controller since November 1995. He was Vice
President, Finance for CMC from January 1993 to September 1995.
Mr. Mattingly has been President, COMSAT Satellite Services since September
1997. He was President, COMSAT World Systems from May 1997 to September 1997 and
Vice President and General Manager, COMSAT World Systems from March 1995 to May
1997. He previously served as Vice President, Europe, COMSAT International
Ventures. Before joining COMSAT in November 1994, he was Senior Vice President
and General Manager of OrionNet, Inc.
Dr. Pontano has been President, COMSAT Laboratories since March 1997,
having served as Acting President, COMSAT Laboratories from August 1996. He was
Vice President, Network Technology Division of COMSAT Laboratories from February
1995 to August 1996. He joined COMSAT Laboratories in 1984 and has held various
management positions during that period.
Mr. Welch has been President and General Manager, COMSAT International since
November 1998. He previously worked for Global One, a joint venture of Sprint,
France Telecom and Deutsche Telekom, where in his last position he was Vice
President and Area Manager for Russia, India, Middle East and Africa.
Mr. Zeger has been Vice President, General Counsel and Secretary since
August 1994. He was Vice President and General Counsel from March 1992 to August
1994.
84
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Two reports, each concerning one transaction, were filed late in 1998 by
Mr. Wyser-Pratte, a director of the Corporation.
Two transactions by Mr. Flower, an executive officer of the Corporation,
that had been previously reported on a Form 144, were inadvertently omitted from
a subsequent report concerning the same series of transactions. An amended
report was subsequently filed to correct the omission.
85
<PAGE>
Item 11: Executive Compensation
DIRECTORS COMPENSATION
Generally
Directors, other than the Chairman of the Board and the President and Chief
Executive Officer, currently receive an annual retainer of 1,000 shares of
COMSAT's common stock payable at the first meeting of the Board after the Annual
Meeting of Shareholders. Those directors also receive a fee of $1,000 per
meeting for attending Board meetings, Board committee meetings or meetings held
pursuant to a special assignment. For service as chair of a Board committee, a
director receives an annual retainer of $3,000 paid in quarterly installments.
The President and Chief Executive Officer does not receive separate compensation
for service as a director. Executive compensation is described in the section
entitled "Executive Compensation."
Under the Non-Employee Directors Stock Plan, a non-employee director may
elect to defer receipt of the annual stock retainer and instead receive phantom
stock units (PSUs). PSUs are held in an account for each director pending
retirement or termination of service on the Board. Upon payment of a dividend
on COMSAT's common stock, an equivalent dollar amount is converted to PSUs,
based on the fair market value of the stock on the dividend payment date, and
credited to the director's account. The PSUs increase or decrease in value
based on an equivalent number of shares of COMSAT's common stock. Upon
retirement or termination of service, or in the event of a "Change in Control",
a director receives payment in shares of COMSAT's common stock equal to the
number of PSUs credited to the director's PSU account. See "Non-Employee
Directors Stock Plan."
Chairman of the Board
The Chairman of the Board receives annual cash compensation for service as
Chairman. Prior to August 1998, Mr. Colodny received $190,000 per year.
Effective August 1, 1998, this amount was increased to $215,000. The Chairman
may elect to receive all or a portion of this annual cash compensation in the
form of COMSAT common stock or stock options, on the following terms:
. the shares or stock options are granted on the date of the Annual
Meeting of Shareholders;
. the number of shares of stock granted is determined by dividing the
amount which the Chairman elects to receive in shares by the fair
market value of the stock on the date of the grant;
. the number of stock options granted is determined by multiplying the
amount which the Chairman elects to receive in options by three and
then dividing by the fair market value of the stock on the date of
grant;
. the exercise price per share of options granted pursuant to the
Chairman's election to receive options is the fair market value of a
share of stock on the date of grant; and
86
<PAGE>
. each option expires 10 years from the date of grant and is
exercisable for half of the shares covered by the option six months
after the date of grant and for the remaining half of the shares one
year after such date.
For 1998, Mr. Colodny elected to receive $90,000 of the annual cash
compensation payable to him as Chairman in stock. Pursuant to his election, he
was granted 2,341 shares of common stock determined in the manner described
above.
Directors and Executives Deferred Compensation Plan
Under the Directors and Executives Deferred Compensation Plan, a non-
employee director may elect to defer payment of all or part of the cash retainer
and fees which the director is entitled to receive. Amounts deferred are
credited with interest and are paid out after the director retires from the
Board. The payment may take the form of a lump sum or up to 15 annual
installments beginning not later than age 73. If the director dies, the
accumulated deferrals are paid to the director's beneficiary.
For 1998:
. the interest crediting rate was prime plus 1% for amounts deferred
after 1996, 12.25% for amounts deferred from February 1994 to December
1996 and 12.94% for amounts deferred prior to that period under the
plan; and
. the aggregate amount of interest accrued in respect of amounts
deferred by participating directors (11 persons) was $380,272.
In 1991, each director at that time serving on the Board and participating
in the plan was given an election to receive his or her account balance as of
March 31, 1991, together with interest accumulated on such balance to a date in
2000, in a lump sum in 2000 to the extent that such amounts were not previously
distributed. This payment is made only if, in 2000, such director is an active
director or a retiree receiving installment payments. If a director who has
made such an election dies, the payment will be made to the beneficiary of such
director if such beneficiary is then receiving such installment payments. The
lump sum payment will be offset against the amounts otherwise payable to the
director or beneficiary under the plan.
In 1992, the plan was amended to provide for an additional lump sum payment
election for any additional amounts deferred under the plan from April 1, 1991
through March 31, 1992, together with interest accumulated on such amounts to a
date in 2001, with payment of the lump sum to be made in 2001.
In September 1998, the plan was amended to provide that if the plan is
terminated, each participant will be paid the full amount of his or her account
in accordance with the terms of the plan and the participant's elections.
87
<PAGE>
Split Dollar Life Insurance Plan for Directors
Under the Split Dollar Life Insurance Plan for Directors, COMSAT provides
death benefits through split dollar life insurance policies to non-employee
directors as follows:
. $50,000 for each year or partial year of his or her Board service
until the benefit reaches $200,000;
. payments increased by 5.5% for each additional year of Board service
to age 72 (this increased coverage does not apply to Presidentially-
appointed directors); and
. coverage continues after retirement from the Board.
For 1998, the aggregate value of split dollar life insurance premiums paid
for the benefit of all covered directors was $112,891.
Non-Employee Directors Stock Plan
Under the Non-Employee Directors Stock Plan, in March of each year COMSAT
grants to each non-employee director an option to purchase shares of common
stock. These grants are only given to those non-employee directors who were
also serving on the date of the Annual Meeting of Shareholders for the prior
year. Certain options have specific terms, as follows:
. for options granted before 1990, each option is for 2,480 shares, the
exercise price per share is the fair market value of a share of common
stock on the date of grant, and the option expires 10 years from the
date of grant;
. for options granted from 1990 to 1992, each option is for 2,480
shares, the exercise price per share is 50% of the fair market value
on the date of grant, and the option expires 15 years from the date of
grant;
. for options granted after 1992, each option is for 4,961 shares, the
exercise price per share is the fair market value of a share of common
stock on the date of grant, and the option expires 15 years from the
date of grant;
. all options granted before 1996 under the plan are currently
exercisable; and
. for options granted after 1995, each option becomes exercisable for
2,481 shares one year after the date of grant and for the remaining
2,480 shares two years after the date of grant.
All data related to shares of common stock, options to purchase shares of
common stock and share prices prior to June 27, 1997 have been adjusted to
reflect (1) the two-for-one split in COMSAT's common stock effective June 1,
1993, and (2) the spin-off of Ascent Entertainment Group, Inc. to COMSAT's
shareholders on June 27, 1997. Pursuant to the Ascent spin-off, all outstanding
options under the plan on June 27, 1997 were adjusted by multiplying the number
of options held by an adjustment ratio of 1.2402, and the exercise price for
such options was adjusted by dividing the exercise price by the same ratio.
88
<PAGE>
Options become fully exercisable and continue in force for the duration of
their terms in the following situations:
. termination of service on the Board by reason of retirement at age 72;
. expiration of a term as a Presidentially-appointed director;
. failure to stand for election with the Board's consent; or
. resignation with the Board's consent.
Options that have not terminated become fully exercisable and continue in
force for one year after the date of death of a director. Options terminate
immediately if the director's service terminates under any other circumstance.
Options also become fully exercisable and continue in force for the
duration of their terms in the event of certain changes in control. A "Change
in Control" includes:
. the acquisition by any person (other than COMSAT or an employee
benefit plan sponsored by COMSAT) of beneficial ownership of 50% or
more of the outstanding voting securities of COMSAT;
. any change in the composition of the Board of Directors such that the
elected directors as of May 17, 1996 (referred to as the Incumbent
Directors) cease to constitute a majority of the Board (provided that
any individual whose nomination or election is approved by a vote of
three-fourths of the then Incumbent Directors will be treated as an
Incumbent Director);
. approval by the shareholders of a merger, share exchange, swap,
consolidation, recapitalization or other business combination which,
if consummated, would result in COMSAT's shareholders holding less
than 60% of the combined voting power of COMSAT, the surviving entity
or its parent (as applicable);
. approval by the shareholders of the liquidation or dissolution of
COMSAT, or sale by COMSAT of all or substantially all of COMSAT's
assets, other than to an entity 80% of the combined voting power of
which would be beneficially owned by COMSAT's then existing
shareholders; or
. any event which would have to be reported as a "change of control"
under the regulations governing the solicitation of proxies by the
SEC.
89
<PAGE>
In September 1998, the plan was amended to provide that only the closing of
the Merger with Lockheed Martin Corporation, and not any of the other
transactions contemplated by the Merger Agreement, would constitute a "Change in
Control" for purposes of this plan.
In 1998, options for a total of 64,493 shares of common stock were granted
to non-employee directors at a purchase price per share of $38.1563, which was
the fair market value of the common stock on the date of grant. In 1998, Mrs.
Benson, Mr. Freeman, Dr. Likins and Mr. Schwartz each exercised 2,480 options
granted previously under the plan, and realized net values (market value on
exercise date less exercise price) of $52,130; $29,810; $47,325; and $27,950,
respectively.
Consulting Arrangements
On August 26, 1997, COMSAT entered into agreements with Arthur
Hauspurg and Howard M. Love, directors who retired at the 1997 Annual Meeting of
Shareholders, to retain their advisory services to the Chairman of the Board and
the President and Chief Executive Officer for a period of two years at a rate of
$25,000 per year.
90
<PAGE>
EXECUTIVE COMPENSATION
The following table shows the compensation for the three fiscal years ended
December 31, 1998 received by (i) the Chief Executive Officer; (ii) the other
four most highly compensated executive officers of COMSAT who were serving as
such at year end 1998; and (iii) Dwight E. Jasmann, who resigned as an executive
officer on February 2, 1998, and whose compensation would have been reportable
but for the fact that he was not an executive officer of COMSAT at year end
1998. These six individuals are referred to as the Named Executive Officers.
The table shows the amounts received or earned by each Named Executive Officer
for all three fiscal years, whether or not such Named Executive Officer was an
executive officer of COMSAT for each of those three years.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Name and Restricted Securities
Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus (1) Compensation (2) Award(s)(3) Options(#)(4) Compensation(5)
- -----------------------------------------------------------------------------------------------------------------
Betty C. 1998 $533,173 $406,258 $ 665 $182,625 30,000 $22,736
Alewine, 1997 472,116 306,756 8,370 498,749 0 22,135
President and 1996 355,846 189,111 3,238 238,188 260,442 20,799
Chief
Executive
Officer
- -----------------------------------------------------------------------------------------------------------------
Allen E. 1998 251,516 211,248 580 121,750 25,000 33,318
Flower, Vice 1997 209,770 83,627 5,622 174,554 49,608 36,855
President and 1996 180,000 73,301 60,122 90,000 43,407 31,578
Chief
Financial
Officer
- -----------------------------------------------------------------------------------------------------------------
Dwight E. 1998 252,000 142,396 44 0 0 9,887
Jasmann, 1997 244,985 204,187 39,961 0 18,603 4,750
President and 1996 98,770 203,600 13,795 97,813 12,402 923
General
Manager,
COMSAT
International(6)
- -----------------------------------------------------------------------------------------------------------------
John H. 1998 270,539 173,146 0 91,313 20,000 4,800
Mattingly, 1997 190,308 75,029 0 74,820 24,804 4,750
President, 1996 162,039 57,274 0 35,994 12,402 4,498
COMSAT
Satellite
Services
- -----------------------------------------------------------------------------------------------------------------
Benjamin A. 1998 197,667 60,000 0 60,875 15,000 5,545
Pontano, 1997 152,663 50,000 0 49,867 18,603 4,610
President, 1996 130,000 42,600 0 0 3,721 3,900
COMSAT
Laboratories
- -----------------------------------------------------------------------------------------------------------------
Warren Y. 1998 286,836 220,997 521 121,750 25,000 27,419
Zeger, 1997 229,808 94,348 5,466 174,554 49,608 26,938
Vice President, 1996 196,551 181,487 2,422 63,000 37,206 25,871
General
Counsel and
Secretary
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
(1) Bonus for 1998 for each Named Executive Officer, as indicated below,
includes unused credits under the Corporation's cafeteria plan that were
paid in cash to the Named Executive Officers. The bonus reflected for Mrs.
Alewine for 1997 includes an additional $85,000 over the amount reported
last year, which was awarded in 1998 to Mrs. Alewine as a supplemental 1997
bonus. The bonuses reflected for Mr. Flower, Mr. Mattingly and Mr. Zeger
for 1998 include special performance-based spot bonuses in the amounts of
$100,000; $50,000; and $100,000, respectively. The bonus reflected for Mr.
Zeger for 1996 includes a special performance-based spot bonus in the
amount of $100,000.
<TABLE>
<CAPTION>
Unused
Name Credits
------------------------
<S> <C> <C>
Mrs. Alewine $ 6,258
------------------------
Mr. Flower 10,448
------------------------
Mr. Jasmann 12,396
------------------------
Mr. Mattingly 8,146
------------------------
Dr. Pontano 0
------------------------
Mr. Zeger 5,997
------------------------
</TABLE>
(2) With the exception of Mr. Flower, Other Annual Compensation shown for 1996,
1997 and 1998 does not include perquisites and other personal benefits
because the aggregate amount of such compensation does not exceed the
lesser of (i) $50,000 or (ii) 10% of individual combined salary and bonus
for the Named Executive Officer in each year. For Mr. Flower, Other Annual
Compensation for 1996 includes $30,000 for club membership fees.
(3) Includes restricted stock awards (RSAs), restricted stock units (RSUs) and
phantom stock units (PSUs). Dividends are paid on RSAs. Dividend
equivalents are paid on RSUs and PSUs. The number and value of the
aggregate restricted stock holdings of each of the Named Executive Officers
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Value as
Number of of
Name RSAs/RSUs/PSUs 12/31/98
--------------------------------------------
<S> <C> <C> <C>
Mrs. Alewine 67,639 $2,358,910
--------------------------------------------
Mr. Flower 20,618 719,053
--------------------------------------------
Mr. Jasmann 0 0
--------------------------------------------
Mr. Mattingly 9,201 320,885
--------------------------------------------
Dr. Pontano 9,441 329,255
--------------------------------------------
Mr. Zeger 29,300 1,021,838
--------------------------------------------
</TABLE>
Awards granted prior to June 27, 1997 were adjusted to give effect to the
Ascent spin-off to COMSAT shareholders. In lieu of receiving a
distribution of Ascent stock, all outstanding RSAs, RSUs and PSUs held on
that date were adjusted by multiplying the number of shares or units held
by an adjustment ratio of 1.2402. Mr. Jasmann forfeited his restricted
stock holdings when he resigned in February 1998.
(4) Options granted prior to June 27, 1997 were adjusted to give effect to the
Ascent spin-off to COMSAT shareholders. All outstanding options held on
that date were adjusted by multiplying the number of options held by an
adjustment ratio of 1.2402.
(5) All Other Compensation for 1998 includes the following elements: (i)
contributions by the Corporation to the Corporation's 401(k) Plan on behalf
of the Named Executive Officers; (ii) above-market interest accrued for
the Named Executive Officers under the Corporation's Deferred Compensation
Plan; and (iii) life insurance premiums for the Named Executive Officers.
The life insurance premiums shown for the Named Executive Officers
represent split dollar premiums which include (i) the value of the
premiums paid by the Corporation with respect to the term life insurance
portion of the policy for each Named Executive Officer, determined under
the P.S. 58 table published by the Internal Revenue Service, and (ii) the
value of the benefit to each Named Executive Officer of the remainder of
the premiums paid by the Corporation, determined by calculating the present
value of the cumulative interest payments that would be made based on the
assumption that the premiums were loaned to each Named Executive Officer at
an interest rate of 7.5% until the Named Executive Officer reaches the
normal retirement age of 65, at which time the policy splits and the
premiums are refunded to the Corporation.
<TABLE>
<CAPTION>
Above- Life
401(k) Plan Market Insurance
Name Contributions Interest Premiums
------------------------------------------------------
<S> <C> <C> <C> <C>
Mrs. Alewine $4,800 $ 8,680 $ 9,256
------------------------------------------------------
Mr. Flower 4,800 11,048 17,470
------------------------------------------------------
Mr. Jasmann 4,800 5,087 0
------------------------------------------------------
Mr. Mattingly 4,800 0 0
------------------------------------------------------
Dr. Pontano 4,837 708 0
------------------------------------------------------
Mr. Zeger 4,800 7,537 15,082
-----------------------------------------------------
</TABLE>
(6) Mr. Jasmann became an executive officer when he joined the Corporation as
President and General Manager, COMSAT International in August 1996. He
resigned in February 1998.
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<PAGE>
Option Grants
The following table sets forth information on options granted to the Named
Executive Officers in 1998.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Individual Grants
---------------------------------------------------------------------------------------------------------------------------
Number of % of Total Options
Securities Granted to
Underlying Options Employees in Exercise Price Grant Date Present
Name Granted (#)(1) Fiscal Year(2) ($/Sh) Expiration Date Value(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mrs. Alewine 30,000 3.23% $30.4375 02/20/08 $375,300
- ---------------------------------------------------------------------------------------------------------------------------
Mr. Flower 25,000 2.69 30.4375 02/20/08 312,750
- ---------------------------------------------------------------------------------------------------------------------------
Mr. Jasmann 0 0.00 0.0000 --- 0
- ---------------------------------------------------------------------------------------------------------------------------
Mr. Mattingly 20,000 2.15 30.4375 02/20/08 250,200
- ---------------------------------------------------------------------------------------------------------------------------
Dr. Pontano 15,000 1.61 30.4375 02/20/08 187,650
- ---------------------------------------------------------------------------------------------------------------------------
Mr. Zeger 25,000 2.69 30.4375 02/20/08 312,750
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The options shown were granted on February 20, 1998 to acquire the
Corporation's Common Stock. All options granted in 1998 vest as
follows: 25% on the first anniversary of the date of grant; another
25% on the second anniversary of the date of grant; and the remaining
50% on the third anniversary of the date of grant.
(2) The total number of COMSAT options granted to key employees in 1998
was 930,200.
(3) The Corporation used the Black-Scholes option pricing model to
determine grant date present values using the following assumptions: a
dividend yield of 0.84%; stock price volatility of 0.34642; a 6-year
option term; a risk-free rate of return of 5.36%; and the vesting
schedule described in footnote 1 above. The use of this model is in
accordance with SEC rules; however, the actual value of an option
realized will be measured by the difference between the stock price
and the exercise price on the date the option is exercised.
Option Exercises and Fiscal Year-End Values
The following table sets forth information on (1) options exercised by the
Named Executive Officers in 1998, and (2) the number and value of their
unexercised options as of December 31, 1998.
Aggregated Option Exercises In 1998 And 12/31/98 Option Values
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In-The-Money
Unexercised Options at 12/31/98(1) Options at 12/31/98
- ------------------------------------------------------------------------------------------------------------------------------
Shares
Underlying
Options Unexercisable
Name Exercised (#) Value Realized Exercisable (#) (#) Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mrs. Alewine 203,393 $2,615,608 229,726 160,221 $4,507,469 $2,451,773
- -----------------------------------------------------------------------------------------------------------------------------
Mr. Flower 16,371 306,763 58,910 83,910 1,178,565 1,102,292
- -----------------------------------------------------------------------------------------------------------------------------
Mr. Jasmann 7,750 103,664 3,101 20,154 59,233 324,497
- -----------------------------------------------------------------------------------------------------------------------------
Mr. Mattingly 0 0 16,122 44,804 289,640 489,728
- -----------------------------------------------------------------------------------------------------------------------------
Dr. Pontano 0 0 23,254 30,813 359,938 310,484
- -----------------------------------------------------------------------------------------------------------------------------
Mr. Zeger 111,618 1,909,430 111,797 80,809 1,805,076 1,039,153
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options granted prior to June 27, 1997 were adjusted to give effect to
the Ascent spin-off to COMSAT shareholders. All outstanding options
held on that date were adjusted by multiplying the number of options
held by an adjustment ratio of 1.2402.
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<PAGE>
Pension Plans
The following table shows the estimated annual benefits payable upon
retirement under the Corporation's Retirement Plan to persons in the salary and
years-of-service classifications specified. The Internal Revenue Code limits
the annual benefits payable under the Retirement Plan. Under this limitation,
the maximum annual benefit for 1998 is $130,000.
Estimated Annual Benefits - COMSAT Corporation Retirement Plan
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Years of Service
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Annual Salary ($) 15 20 25 30 35
- ----------------------------------------------------------------------------
100,000 $24,768 $ 33,633 $ 42,738 $ 51,362 $ 60,227
- ----------------------------------------------------------------------------
150,000 38,543 52,408 66,272 80,137 94,002
- ----------------------------------------------------------------------------
200,000 48,552 67,417 86,282 105,147 124,011
- ----------------------------------------------------------------------------
250,000 55,340 79,205 103,070 126,934 130,000
- ----------------------------------------------------------------------------
300,000 60,340 89,205 118,070 130,000 130,000
- ----------------------------------------------------------------------------
350,000 65,340 99,205 130,000 130,000 130,000
- ----------------------------------------------------------------------------
400,000 70,340 109,205 130,000 130,000 130,000
- ----------------------------------------------------------------------------
450,000 75,340 119,205 130,000 130,000 130,000
- ----------------------------------------------------------------------------
500,000 80,340 129,205 130,000 130,000 130,000
- ----------------------------------------------------------------------------
550,000 85,340 130,000 130,000 130,000 130,000
- ----------------------------------------------------------------------------
600,000 90,340 130,000 130,000 130,000 130,000
- ----------------------------------------------------------------------------
</TABLE>
The compensation covered by the Retirement Plan includes only base salary.
Benefits are determined on a straight life annuity basis under a formula based
on length of service and average annual base salary for the highest five
consecutive years during the final 10 years of employment. Prior to 1989,
benefits were offset by a portion of each participant's estimated Social
Security benefits. Beginning in 1989, each participant accrues a benefit at a
specified percentage of salary up to the Social Security wage base, and at a
higher percentage of salary above the Social Security wage base. The years of
credited service for the Named Executive Officers as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
- -------------------
Mrs. Alewine 12
- -------------------
Mr. Flower 29
- -------------------
Mr. Jasmann 2
- -------------------
Mr. Mattingly 4
- -------------------
Dr. Pontano 14
- -------------------
Mr. Zeger 23
- -------------------
</TABLE>
Insurance and Retirement Plan for Executives
COMSAT also maintains the Insurance and Retirement Plan for Executives,
which covers those executive officers and other key employees who are designated
by the Board of Directors to participate. The plan provides an annuity for life
equal to 60% (70% for the Chief Executive Officer) of the participant's average
annual compensation (salary and incentive compensation) during the 48
consecutive months of highest compensation (or during all consecutive months of
employment if the participant has been employed less than 48 months), offset by
pension benefits payable under the Retirement Plan, the qualified retirement
plans of former employers, Social Security, and government and military
pensions.
Payment begins upon the participant's normal retirement at age 65.
However, a participant in the plan may retire as early as age 55. If a
participant retires before age 62, the Board must consent to such
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<PAGE>
early retirement. A participant who retires early will receive an annuity
reduced by 3% for each year that payment begins before age 62. For employees who
became participants in the plan before January 1, 1993, benefits vest ratably
over the first five years of the participant's service. For employees who become
participants in the plan on or after January 1, 1993, benefits are 50% vested
after five years of service and then vest an additional 10% per year over the
following five years of service, provided that the sum of the participant's age
and years of service equals 60. See "Agreements with Current Executive
Officers."
The annual benefits payable upon retirement at age 65 based upon the 48
consecutive months of highest compensation as of December 31, 1998 for each of
the Named Executive Officers under the plan are:
<TABLE>
<S> <C>
- -------------------------
Mrs. Alewine $400,520
- -------------------------
Mr. Flower 107,739
- -------------------------
Mr. Jasmann N/A
- -------------------------
Mr. Mattingly N/A
- -------------------------
Dr. Pontano N/A
- -------------------------
Mr. Zeger 114,452
- -------------------------
</TABLE>
Mrs. Alewine, Mr. Flower and Mr. Zeger are each 100% vested in the plan.
Mr. Jasmann, Mr. Mattingly and Dr. Pontano do not participate in the plan.
Change in Control Severance Plan
On September 18, 1998, COMSAT adopted the Amended and Restated Change in
Control Severance Plan. The plan amends and restates the Change in Control
Severance Plan adopted by COMSAT on June 20, 1997. The plan generally provides
severance payments and benefits to specified key employees, including certain
executive officers, of COMSAT who incur a termination of employment under
certain circumstances following a change in control of COMSAT. The plan covers
Mr. Mattingly and Dr. Pontano but does not cover Mrs. Alewine, Mr. Flower or Mr.
Zeger, who each have severance arrangements under their employment agreements,
or Mr. Jasmann, who is no longer an executive officer. Participants under the
plan are classified as either Group I Participants, Group II Participants or
Group III Participants. For purposes of the plan, the definition of change in
control is substantively identical to the definition of such term described
under the caption "Agreements with Current Executive Officers."
Under the plan, if a change in control of COMSAT occurs and a participant's
employment is terminated during the period beginning on the date of the change
in control and ending on the date which is eighteen months after the date of
such change in control (a) by COMSAT other than for cause or disability, or (b)
by the participant for good reason, then, in lieu of any other severance
payments or severance benefits payable to the participant by the Company, the
participant will be entitled to receive the following during the benefits
continuation period:
. base salary;
. targeted annual bonus under COMSAT's Annual Incentive Plan; and
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<PAGE>
. the same group health and welfare benefits to which the participant
would have been entitled had he or she remained continuously
employed by COMSAT during the benefits continuation period.
For purposes of the plan, benefits continuation period means with respect
to each Group I, Group II and Group III Participant, respectively, the 24 month,
18 month and 15 month periods immediately following the participant's date of
termination of employment. Mr. Mattingly and Dr. Pontano are Group I
Participants.
Retention Bonus Plan
On September 18, 1998, COMSAT adopted the Retention Bonus Plan. The
Retention Bonus Plan generally provides retention bonuses to specified key
employees who remain employed by COMSAT, or whose employment is terminated under
specific circumstances, through specified dates following the signing of the
either Group I Participants or Group II Participants. The plan covers Mr.
Mattingly and Dr. Pontano, who are Group I Participants, but does not cover Mrs.
Alewine, Mr. Flower or Mr. Zeger, who each have similar bonus arrangements under
their employment agreements, or Mr. Jasmann, who is no longer an executive
officer.
Under the Retention Bonus Plan, each Group I Participant will be entitled
to receive the following retention bonuses, subject to such person's continued
employment through a specified date:
. a bonus on the earliest of:
(a) the completion of the Merger;
(b) the termination date of the Merger pursuant to the Merger
Agreement; or
(c) September 18, 2000, equal to 50% of the sum of the
participant's highest base salary plus his or her highest
targeted annual bonus under COMSAT's Annual Incentive Plan; and
. a bonus on the 18-month anniversary of the closing of the Merger
equal to 100% of the sum of the particpant's highest base salary
plus his or her highest targeted annual bonus under COMSAT's Annual
Incentive Plan.
If, on or before the date on which a bonus would be paid, a Group I
Participant's employment is terminated without cause or by reason of his or her
death or disability, or, if a Group I Particpant elects to terminate his or her
employment for good reason, such Group I Particpant will be entitled to receive
a payment upon termination, instead of any bonuses which have not yet become
payable to the participant under the Retention Bonus Plan, in an amount equal to
the bonus to which he or she would have been entitled had he or she remained
employed by COMSAT through the date on which the next bonus will be paid. If,
however, the aggregate amount of any severance payments to which the participant
is entitled under any severance plan of COMSAT is greater than or equal to the
amount of the bonus payable upon such a termination under the Retention Bonus
Plan, then the participant will forfeit all rights to receive such payment and
any other bonus payments that have not yet become payable to the participant
under the Retention Bonus Plan. In the event that the participant receives a
payment upon
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<PAGE>
termination of employment under the Retention Bonus Plan, such plan of COMSAT to
the extent that such severance payment is based on the participant's salary
and/or bonus.
Group II Participants are entitled to receive bonuses under the Retention
Bonus Plan at the same times and, in general, on the same terms as the Group I
Participants, except that the bonuses are based on a lower percentage of their
base salary and targeted annual bonus.
Agreements With Current Executive Officers
COMSAT has entered into an employment agreement with Mrs. Alewine dated
July 19, 1996, and has entered into employment agreements with Mr. Flower and
Mr. Zeger dated April 18, 1997 (each an Executive and collectively the
Executives). On September 18, 1998, COMSAT amended the employment agreements in
connection with the Lockheed Martin Merger.
The agreements include the following terms:
. for Mrs. Alewine, successive three-year terms from each successive
day after July 19, 1996 until July 19, 2003; for Mr. Flower, a three-
year term; and for Mr. Zeger, a five-year term. The amendments
extended the term of Mr. Flower's employment agreement for two years
until April 17, 2002;
. for Mrs. Alewine, base salary of $450,000 for the first year, with an
increase to $500,000 in the second year; for Mr. Flower, base salary
of $210,000 per year; for Mr. Zeger, base salary of $230,000 per year;
for each Executive, further increases in base salary are subject to
the discretion of COMSAT's Board;
. eligibility for an annual bonus based on performance measures
determined by the Board's Compensation Committee with a target bonus
equal to 70% of Mrs. Alewine's base salary, 50% of Mr. Flower's base
salary, and 50% of Mr. Zeger's base salary;
. for termination without cause, or if the Executive elects to
terminate his or her employment for good reason, the Executive will be
entitled to receive:
(a) his or her then current base salary;
(b) an annual bonus equal to 70% of Mrs. Alewine's then current base
salary, 50% of Mr. Flower's then current base salary, and 50% of
Mr. Zeger's then current base salary; and
(c) all other benefits provided for pursuant to the agreement, which
will be deemed fully and immediately vested if subject to
vesting.
Mrs. Alewine will be entitled to receive these amounts for three years from
her termination date or until July 19, 2003, whichever is earlier, but in
no case for less than one year following termination. Mr. Flower will be
entitled to receive these amounts until the later of one year from his
termination date or April 17, 2002. Mr. Zeger will be entitled to receive
these amounts until April 17, 2002.
97
<PAGE>
. if Mrs. Alewine's employment is not renewed after July 19, 2003, or
is terminated before then either by Mrs. Alewine for good reason or by
COMSAT without cause, Mrs. Alewine will be entitled to begin receiving
retirement benefits at age 55 under the Insurance and Retirement Plan
for Executives at the actuarially reduced rate for early retirement,
subject to the Board's discretion to waive such reduction;
. if Mr. Flower's employment is not renewed after April 17, 2002, Mr.
Flower will be entitled to receive (i) the benefits described above
for one year thereafter and (ii) retirement benefits under the
Insurance and Retirement Plan for Executives beginning on May 1, 2002
at the actuarially reduced rate for early retirement, subject to the
Board's discretion to waive such reduction;
. if Mr. Zeger's employment is not renewed after April 17, 2002, or is
terminated before then either by Mr. Zeger for good reason or by
COMSAT without cause, Mr. Zeger will be entitled to begin receiving
retirement benefits at age 55 under the Insurance and Retirement Plan
for Executives at the actuarially reduced rate for early retirement,
subject to the Board's discretion to waive such reduction; and
. in the event that either Mr. Flower or Mr. Zeger dies after his
employment terminates but before his retirement benefits begin, under
the Insurance and Retirement Plan for Executives, his spouse will
receive the death benefits provided in the plan for participants who
die while employed by COMSAT.
On October 17, 1996, Mrs. Alewine was granted (i) an option to purchase
186,030 shares of COMSAT's common stock at a price equal to the market value of
the stock on the grant date, which vests 25% after one year, another 25% after
the second year and the remaining 50% after the third year; and (ii) 6,201
restricted stock units which vest after three years. On February 20, 1997, Mrs.
Alewine was also granted 24,804 restricted stock awards which are subject to the
same terms as restricted stock awards made to other executives of COMSAT on that
date.
Pursuant to the amendments, the employment agreements were amended to
provide that, upon the occurrence of a change in control, the term of each
employment agreement will automatically end on the third anniversary of the date
of such change in control.
As defined in the amendments, a change in control is deemed to have
occurred upon the happening of any one of the following events:
. the acquisition by any person of beneficial ownership of 50% or more
of the combined voting power of the outstanding voting securities of
COMSAT;
. any change in the composition of the Board of COMSAT such that the
incumbent directors elected as of May 17, 1996 cease to constitute a
majority of the Board; however, any individual whose nomination or
election is approved by a vote of three-fourths of the then incumbent
directors will be treated as an incumbent director;
98
<PAGE>
. approval by the shareholders of a merger, share exchange, swap,
consolidation, recapitalization or other business combination which,
if consummated, would result in COMSAT's shareholders holding less
than 60% of the combined voting power of COMSAT, the surviving entity
or its parent;
. approval by the shareholders of the liquidation or dissolution of
COMSAT, or sale by COMSAT of all or substantially all of COMSAT's
assets, other than to an entity 80% of the combined voting power of
which would be beneficially owned by COMSAT's then existing
shareholders; or
. any event which would have to be reported as a "change of control"
under the regulations governing the solicitation of proxies by the
SEC.
However, if, prior to the occurrence of any of the above events, the Board
adopts a resolution specifically providing that the event will not be deemed to
constitute a change in control for purposes of the employment agreements, then
such event will not constitute a change in control.
The amendments provide that, with respect to the Lockheed Martin Merger, a
change in control of COMSAT for purposes of the employment agreements will be
triggered by the closing of the Merger, but not by the signing of the Merger
Agreement, the approval by the Board or COMSAT's shareholders of the Merger or
the Merger Agreement, the commencement or the closing of the Offer, or the
acquisition by Lockheed Martin or Regulus, LLC of COMSAT Government Systems,
Inc.
The amendments also amended the employment agreements to provide that each
of the Executives will be entitled to receive the following retention bonuses,
subject to his or her continued employment through the applicable dates for such
bonuses:
. a bonus on the earliest of:
(a) the closing date of the Merger;
(b) the termination date of the Merger pursuant to the Merger
Agreement; or
(c) September 18, 2000, if the Merger has not closed by then.
in an amount equal to 150% of the sum of the Executive's base salary
plus the Executive's targeted annual bonus, assuming all performance
targets are met to the maximum extent, under COMSAT's Annual Incentive
Plan; and
. a bonus on the eighteen month anniversary of the closing date of the
Merger in an amount equal to 100% of the sum of the Executive's base
salary plus the Executive's targeted annual bonus, assuming all
performance targets are met to the maximum extent, under COMSAT's
Annual Incentive Plan.
In the following situations, the Executive will be entitled to receive, in
lieu of the retention bonuses described above, a payment in an amount equal to
the retention bonus to which the Executive would have been entitled had the
Executive remained employed by COMSAT through the applicable date:
99
<PAGE>
. for termination without cause on or before the applicable date for
such bonuses;
. by reason of the Executive's death or disability; or
. if the Executive elects to terminate his or her employment for good
reason.
If the Executive and Lockheed Martin are unable to reach an agreement
regarding the terms and conditions of the Executive's employment within 30 days
following the closing of the Merger and the Executive's employment is terminated
within such 30-day period, the Executive will:
. forfeit all rights to receive the bonus which otherwise would have
been payable to the Executive on the eighteen month anniversary of the
closing date of the Merger; or
. forfeit all rights to the payment in lieu of a bonus which would have
been payable to the Executive in the event of a termination of the
Executive's employment between the closing date of the Merger and the
eighteen month anniversary of the closing date of the Merger.
The amendments amended the employment agreements to provide that each of
the Executives will be entitled to receive the severance benefits and payments
to which he or she was entitled under his or her employment agreement prior to
the amendments only in the event that the termination of his or her employment
which gives rise to such payments occurs prior to a change in control of COMSAT.
Pursuant to the amendments, each of the employment agreements was also
amended to provide that, if a change in control of COMSAT occurs and the
Executive's employment is terminated during the period beginning on the date of
the change in control and ending on the last day of the Executive's employment
term (a) by COMSAT other than for cause or disability, or (b) by the Executive
for good reason, then, in lieu of any other severance payments or severance
benefits payable to the Executive under the employment agreements, the Executive
will be entitled to receive the following until the expiration of the
Executive's employment term:
. base salary;
. targeted annual bonus under COMSAT's Annual Incentive Plan; and
. continued group health and welfare plan benefits for the Executive
and the Executive's dependents (subject to reduction under certain
circumstances described in the amendments).
The Executive also will be entitled to receive benefits under COMSAT's Insurance
and Retirement Plan for Executives commencing as early as age 55 without any
actuarial reduction for early commencement of benefits.
In addition, the amendments modified the employment agreements to provide
that if a change in control of COMSAT occurs and (i) if the Executive and
Lockheed Martin have negotiated in good faith but have been unable to reach an
agreement regarding the terms and conditions of the Executive's
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<PAGE>
employment within 30 days following the closing of the Merger and the
Executive's employment is terminated within the 30 day period, or (ii) if the
Executive continues to be employed until the expiration of the Executive's
employment term, then the Executive will be entitled to receive the benefits
under the Insurance and Retirement Plan for Executives noted above.
Each of the Executives also would be entitled to receive a gross-up payment
if any payment or benefit to the Executive would constitute an "excess parachute
payment" under Section 280G of the Internal Revenue Code.
The share amounts discussed in this section have been adjusted to give
effect to the Ascent spin-off to COMSAT shareholders on June 27, 1997 by
multiplying the number of shares or units held on that date by an adjustment
ratio of 1.2402.
Agreement With Former Executive Officer
COMSAT and Mr. Jasmann entered into a three-year employment agreement dated
August 1, 1996 which includes the following terms:
. base salary of $240,000 per year, subject to increases at the
discretion of COMSAT's Board; and
. guaranteed bonus of $130,000 for 1996 and annual bonuses thereafter
based on performance measures determined by the Board's Compensation
Committee with a target bonus equal to 40% of Mr. Jasmann's base
salary.
On August 1, 1996, Mr. Jasmann was granted (i) an option to purchase 12,402
shares of COMSAT's common stock at a price equal to the market value of the
stock on the grant date, which vests 25% after one year, another 25% after the
second year and the remaining 50% after the third year; and (ii) 6,201
restricted stock units which vest after three years.
On February 2, 1998, Mr. Jasmann resigned pursuant to a provision of the
agreement which permitted him to terminate his employment if COMSAT failed to do
an initial public offering of COMSAT International by February 1, 1998.
Pursuant to this provision, Mr. Jasmann will continue to receive salary and an
annual bonus at the same rate as in effect on the date of his termination until
August 1, 1999. His existing stock options, but not his restricted stock units,
will continue to vest during that period.
The share amounts discussed in this section have been adjusted to give
effect to the Ascent spin-off to COMSAT shareholders on June 27, 1997 by
multiplying the number of shares or units held on that date by an adjustment
ratio of 1.2402.
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<PAGE>
CHANGE IN CONTROL ARRANGEMENTS
Certain of COMSAT's benefit and compensation programs have provisions that
are intended to assure the continuity and stability of management and the Board
necessary to protect shareholders' interests, and to protect the rights of the
participants under those programs, in the event of a change in control of
COMSAT. A change in control for this purpose is defined in the same manner as
described above under the caption "Directors Compensation - Non-Employee
Directors Stock Plan." The following actions will take place upon the
occurrence of a change in control:
. the vesting of all stock options, RSAs, RSUs and PSUs will be
accelerated under COMSAT's 1990 and 1995 Key Employee Stock Plans,
Non-Employee Directors Stock Plan and Annual Incentive Plan;
. the deferred compensation accounts under COMSAT's Directors and
Executives Deferred Compensation Plan, Annual Incentive Plan and Non-
Employee Directors Stock Plan will become immediately payable;
. participants in the Split Dollar Life Insurance Plans for Directors
and for Key Employees will receive fully-paid individual policies;
. directors will receive an immediate lump sum payment of their accrued
benefits under the Directors Retirement Plan using present value
assumptions; and
. participants in COMSAT's Insurance and Retirement Plan for Executives
will become vested in their accrued benefits under the plan and will
receive an immediate lump sum payment using present value assumptions.
The Board of Directors retains the authority under the change in control
provisions to determine that the provisions should not apply to a particular
transaction. In the event of such a determination, the vesting of stock awards
and the payment of various plan benefits would not be accelerated. This feature
is intended to afford the Board of Directors flexibility in structuring
transactions and to encourage negotiated transactions.
Pursuant to such authority, the Board has adopted resolutions determining
that, for purposes of the Insurance and Retirement Plan for Executives, the
Deferred Compensation Plan, the Split Dollar Life Insurance Plan for Directors,
the Split Dollar Life Insurance Plan for Key Employees and the Annual Incentive
Plan, the Merger with Lockheed Martin Corporation and the transactions
contemplated by the Merger Agreement will not constitute a change in control of
COMSAT. For purposes of the 1990 Key Employee Stock Plan, the 1995 Key Employee
Stock Plan, the Non-Employee Directors Stock Plan and the Amended and Restated
Change in Control Severance Plan, only the closing of the Merger with Lockheed
Martin Corporation, and not any of the other transactions contemplated by the
Merger Agreement, will constitute a change in control of COMSAT.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION
AND RELATED PARTY TRANSACTIONS
The following directors of the Corporation, who are also members of the
Compensation Committee of the Board of Directors, may be deemed to have a
relationship with Lockheed Martin Corporation that may constitute an indirect
material interest in the proposed merger between the Corporation and Lockheed
Martin. See "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations - Business Combination with Lockheed Martin
Corporation."
Standard Technology, Inc., a technology, engineering and systems
integration firm, has provided services to Lockheed Martin under various
contracts, which resulted from arms's-length negotiations, in connection with a
Department of Defense mentor-protege program to encourage large defense
contractors to subcontract with minority-owned businesses. Kathryn C. Turner, a
director of COMSAT since August 1997, is the Chairperson, Chief Executive
Officer and sole shareholder of Standard Technology. Lockheed Martin paid
Standard Technology $1,807,711, $2,008,766, $1,846,662 and $2,242,126 in 1998,
1997, 1996 and 1995, respectively, under those contracts. Pursuant to the
mentor-protege program, Lockheed Martin agreed to award Standard Technology
with a targeted amount of $1 million of contracts per year through 2001.
Pursuant to the mentor-protege program, Lockheed Martin also participates on an
ad hoc advisory board which provides guidance on business matters and has
provided financial assistance to Standard Technology. Lockheed Martin has made
an unsecured loan to Standard Technology, which is repayable over a fifteen
year period commencing upon the earlier of 2007 or the year after Standard
Technology achieves annual revenues in excess of $25 million. As of March 1,
1999, the outstanding balance of the loan was $2,632,166, which includes
previously capitalized interest. Interest does not currently accrue on the loan
but will accrue at 8% per annum on the unpaid principal amount once repayment is
required. In addition, Lockheed Martin has guaranteed up to $2 million of
Standard Technology's borrowings under a line of credit with a commercial bank,
which also is secured by Standard Technology's accounts receivable and a
personal guarantee by Ms. Turner.
Pursuant to a continuing engagement, the law firm of Wunder, Knight,
Levine, Thelen & Forscey has provided Lockheed Martin general legislative
support. Peter S. Knight, a Presidentially-appointed director of the
Corporation since September 1994 and partner in the law firm of Wunder, Knight,
Levine, Thelen & Forscey, has rendered services to Lockheed Martin pursuant to
such engagement. Lockheed Martin paid Wunder, Knight, Levine, Thelen & Forscey
$161,669, $112,129, $135,325 and $151,370 for services rendered and expenses
incurred during 1998, 1997, 1996 and 1995, respectively.
Caleb B. Hurtt, a director of the Corporation since May 1996 and a director
of Lockheed Martin, may be deemed to have beneficial ownership of 5,672 shares
of Lockheed Martin common stock as of March 1, 1999. He also had 1,013 phantom
stock units credited to an account in a Lockheed Martin deferred compensation
plan as of March 1, 1999.
103
<PAGE>
COMMITTEE ON COMPENSATION AND MANAGEMENT DEVELOPMENT REPORT ON EXECUTIVE
COMPENSATION
The Committee on Compensation and Management Development, which is composed
of independent outside directors, is responsible for establishing and
administering the Corporation's executive compensation philosophy. Set forth
below is the Committee's report on the 1998 compensation of the executive
officers of the Corporation, including Mrs. Alewine, the Chief Executive
Officer, and the other executive officers named in the Summary Compensation
Table (the Named Executive Officers).
The Corporation's executive compensation philosophy is designed to attract,
motivate and retain talented executives critical to the long-term success of the
Corporation. One of the objectives of this philosophy is to align executive
compensation more closely with the interests of shareholders through performance
incentives. The main components of this philosophy are annual compensation,
consisting of salary plus bonuses awarded under the Corporation's Annual
Incentive Plan, and long-term compensation, consisting of stock-based
incentives. The Committee reviews and recommends to the Board the annual
compensation of all executive officers, and reviews and approves executive
officers' long-term compensation.
There are two groups of competitive companies that are used in the
executive compensation analysis. The first group, consisting of the companies
that make up the Peer Group Index discussed under the caption "Performance
Graph," is used to compare executive compensation strategy and practices. The
second group, consisting of companies in the telecommunications industry with
revenues comparable to the Corporation's, is used to benchmark competitive
compensation levels.
Annual Compensation
Mrs. Alewine has an employment agreement as Chief Executive Officer dated
July 19, 1996 which is summarized under the caption "Agreements with Current
Executive Officers." Pursuant to the agreement, Mrs. Alewine received a base
salary of $450,000 for the first year and an increase to $500,000 beginning in
the second year. In July 1998, the Committee recommended to the Board that Mrs.
Alewine's base salary be increased to $575,000 based on market data for a
comparable Chief Executive Officer position and her performance in the last
year. The Board approved the Committee's recommendation. Mrs. Alewine's
employment agreement specifies an annual bonus target of 70% of her base salary.
In addition, the agreement provides for the Committee to determine the
performance measures and other factors used to determine her bonus in
consultation with Mrs. Alewine. These factors included the Corporation's
financial results, Mrs. Alewine's success in meeting personal objectives for
1998 which she presented to the Committee and the Corporation's achievement of
strategic objectives. These strategic objectives included the merger agreement
with Lockheed Martin Corporation, deregulation of the Corporation's largest
business unit, completion of the restructuring commenced in 1997 with the sale
of the Corporation's manufacturing unit, avoidance of adverse proposed
legislation in the 105/th/ Congress, and rapid progress in the privatizations of
INTELSAT and Inmarsat, the two global satellite consortia in which the
Corporation is the U.S. owner, including the spin-off of twenty five percent of
INTELSAT's satellite fleet into a new commercial company named New Skies
Satellites. The Committee considered all of these factors in arriving at a
bonus recommendation for Mrs. Alewine. The Committee recommended, and the Board
approved, payment of a 1998 cash bonus award of $400,000 for Mrs. Alewine.
104
<PAGE>
Base salary ranges have been established for the other executive officers
based on the average of the market for comparable positions in the revenue group
of competitive companies. Individual salaries within each range are based on
recommendations to the Committee by the Chief Executive Officer taking into
account such factors as total professional experience, performance, and
experience in the current assignment. The bonus opportunities for other
executive officers for 1998 were based on a range of award percentages of base
salary for each position determined by the Committee. A portion of each bonus
award was tied to corporate performance criteria based on the achievement of
financial measures as compared to planned performance, and individual
performance criteria based on the Committee's evaluation of each individual
executive officer's achievement of established performance goals for the year.
The Committee recommended a bonus award for each executive officer based on a
bonus range and the performance measures noted above. The Board had final
approval authority for these awards. Mr. Jasmann, who resigned as an executive
officer in February 1998, received the same bonus as he did the prior year in
accordance with the terms of his employment agreement with the Corporation,
which expires on August 1, 1999.
Long-Term Compensation
Long-term compensation is an integral element of the Corporation's
executive compensation philosophy because the Committee believes that stock
ownership by senior management and stock-based performance-compensation
arrangements enhance shareholder value. The Corporation's long-term
compensation strategy includes a blend of stock compensation. For 1998, awards
by the Committee consisted of non-qualified stock options and restricted stock
awards (RSAs). These awards were consistent with ranges in the revenue group of
competitive companies approved by the Committee. The stock option ranges
position the Corporation at the median of the market for these companies while
the performance-based restricted stock awards allow for total long-term
compensation to reach the 75th percentile for this market if the business
achieves prescribed performance standards over the long term. At the Committee's
request, an independent executive compensation consultant conducted a review of
total compensation for Mrs. Alewine and the other Named Executive Officers which
included stock award recommendations. The Committee endorsed the consultant's
methodology for developing recommendations for 1998 stock grants whereby base
salary, bonus and long-term compensation (stock option and restricted stock
awards) would be measured against market data on total compensation for
comparable positions.
A portion of executive compensation is represented by stock options granted
at fair market value, which the Committee believes provide a tie to shareholder
interests. In 1998, Mrs. Alewine received a grant of 30,000 stock options in
accordance with the methodology approved by the Committee.
Stock options were granted to the other Named Executive Officers in
February 1998 as reflected in the table above setting forth 1998 option grants.
These stock option awards were determined on the basis of two factors. First,
the Committee established target award guidelines for each executive officer
based on a competitive analysis of total compensation for each executive
officer. Second, the Committee approved the actual awards for each executive
officer based on these guidelines and performance recommendations made by Mrs.
Alewine based on her evaluation of each officer's performance for 1997.
105
<PAGE>
RSAs are restricted shares of COMSAT stock which are granted to executive
officers and selected key employees as a performance incentive and a retention
device based on the vesting schedule established by the Committee for each
grant. The vesting of RSAs is subject to both a length of service requirement
and the achievement of objective performance-based criteria which have been
approved by the Committee. The percent of the award earned is based on the
level of achievement of the performance objectives over the performance period
established by the Committee. The RSAs earned then become subject to vesting
over an additional 1, 2 and 3 years at the rate of 20%, 40% and 40%,
respectively. Mrs. Alewine received 6,000 RSAs in February 1998. The other
Named Executive Officers also received RSAs in February 1998 as shown in the
Summary Compensation Table, the number of which in each case was consistent with
the guidelines approved by the Committee.
The performance-based criteria applicable to RSAs are intended to ensure
the Federal tax deductibility under Section 162(m) of the Internal Revenue Code
of compensation paid to the Corporation's executive officers pursuant to RSAs.
The Corporation intends to preserve the tax deductibility under Section 162(m)
of all compensation paid to its executive officers.
Committee on Compensation and Management Development
Caleb B. Hurtt, Chairman
Neal B. Freeman
Peter S. Knight
Robert G. Schwartz
Kathryn C. Turner
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return for
the Corporation's Common Stock with the cumulative total return of the S&P 500
Stock Index and a Peer Group Index constructed by the Corporation for the five
fiscal years beginning on January 1, 1994 and ending on December 31, 1998. The
Peer Group consists of three long-distance telecommunications companies (AT&T,
MCI WorldCom and Sprint), and the following satellite industry companies (the
years for which the returns of such companies have been included in the five-
year period are noted in parentheses): American Mobil Satellite Corporation (all
years), Asia Satellite Telecom (American Depository Receipts (ADRS) (1996-98),
British Sky Broadcasting Group (ADRS) (1995-98), Echostar Communications
Corporation (1996-98), Globalstar Telecommunications Ltd. (1996-98), Iridium
World Communications (1996-98), Loral Space and Communications Ltd. (1997-98),
PanAmSat Corporation (1996-98), PT Pasifik Satelit Nusantara (ADRS) (1996-98)
and U.S. Satellite Broadcasting Co. (1996-98). Returns for MCI WorldCom use
WorldCom, Inc. data for all years and include MCI Corporation data for 1998.
106
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Comparison of Five-Year Cumulative Total Return Among
COMSAT, S & P 500 Index, & Peer Group Index
(Assumes $100 Invested on December 31, 1993 & Dividends Reinvested)
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
COMSAT S&P 500 Peer Group
<S> <C> <C> <C>
1993 100 100 100
1994 65 101 95
1995 67 139 131
1996 92 171 140
1997 107 229 191
1998 160 294 277
</TABLE>
107
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Item 12: Security Ownership of Certain Beneficial Owners and Management
Beneficial Owners
COMSAT has reviewed the Schedules 13G or 13D filed with the Securities and
Exchange Commission (SEC) as of March 1, 1999, the most recent practicable date
for such information. COMSAT believes that the following table includes a
complete list of the persons that beneficially owned more than 5% of COMSAT's
common stock on that date.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Amount and
Nature
of Beneficial
Name and Address of Beneficial Owner Ownership(1) Percent of Class
- ---------------------------------------------------------------------------
<S> <C> <C>
FMR Corp.(2) 3,975,812 7.56
- ---------------------------------------------------------------------------
Morgan Stanley Dean Witter & Co.(3) 3,355,632 6.38
- ---------------------------------------------------------------------------
</TABLE>
(1) Each number in this column has been rounded to the nearest whole share.
(2) FMR Corporation, a Massachusetts corporation, is located at 82 Devonshire
Street, Boston, Massachusetts 02109. FMR Corporation filed an amendment to
its Schedule 13-D on February 25, 1999 reporting on a voluntary basis that
FMR and Fidelity International Limited, a Bermuda company, may be deemed to
have jointly owned as of that date a total of 3,975,812 shares of COMSAT
common stock.
(3) Morgan Stanley Dean Witter & Co., a Delaware corporation, is located at
1585 Broadway, New York, New York 10036. Morgan Stanley Dean Witter
Investment Management Limited, organized under the laws of England, is a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. that is located
at 25 Cabot Square, Canary Wharf, London E14 4QA, England. The two
companies filed a joint amendment to Schedule 13-G on February 10, 1999 in
which it was reported that the two companies together beneficially owned an
aggregate of 3,355,632 shares of COMSAT common stock. Of this amount,
Morgan Stanley Dean Witter Investment Management Limited beneficially owned
an aggregate of 3,204,637 shares of COMSAT common stock.
Management
The following table sets forth information as of March 1, 1999, the most
recent practicable date for such information, regarding the beneficial ownership
of COMSAT's common stock by all directors, by each of the Named Executive
Officers, and by all directors and executive officers as a group. Under the
rules of the SEC, beneficial ownership includes any shares over which an
individual has sole or shared voting or investment power, and also any shares
that the individual has the right to acquire within 60 days through the exercise
of any stock option or other right.
108
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount and Nature of
Name(1) Beneficial Ownership(2)
- --------------------------------------------------------------------------------
<S> <C>
Betty C. Alewine 393,138 (3)
- --------------------------------------------------------------------------------
Marcus C. Bennett 2,480
- --------------------------------------------------------------------------------
Lucy Wilson Benson 40,485
- --------------------------------------------------------------------------------
Edwin I. Colodny 47,749
- --------------------------------------------------------------------------------
Lawrence S. Eagleburger 13,102
- --------------------------------------------------------------------------------
Allen E. Flower 123,818 (4)
- --------------------------------------------------------------------------------
Neal B. Freeman 32,165
- --------------------------------------------------------------------------------
Caleb B. Hurtt 8,441
- --------------------------------------------------------------------------------
Dwight E. Jasmann 9,474 (5)
- --------------------------------------------------------------------------------
Peter S. Knight 13,402
- --------------------------------------------------------------------------------
Peter W. Likins 38,335 (6)
- --------------------------------------------------------------------------------
Charles T. Manatt 13,902
- --------------------------------------------------------------------------------
John H. Mattingly 47,689 (7)
- --------------------------------------------------------------------------------
Benjamin A. Pontano 48,703 (8)
- --------------------------------------------------------------------------------
Larry G. Schafran 7,480 (9)
- --------------------------------------------------------------------------------
Robert G. Schwartz 44,285
- --------------------------------------------------------------------------------
Kathryn C. Turner 4,480
- --------------------------------------------------------------------------------
Guy P. Wyser-Pratte 2,020,780 (10)
- --------------------------------------------------------------------------------
Warren Y. Zeger 171,781 (11)
- --------------------------------------------------------------------------------
All directors and executive officers as a group 3,106,957 (12)
(22 persons)
- --------------------------------------------------------------------------------
</TABLE>
(1) Unless otherwise indicated, each person has sole voting and investment
power over the shares listed, and no director or executive officer
beneficially owns more than 1.0% of the Corporation's Common Stock.
(2) Each number in this column has been rounded to the nearest whole share.
The following non-employee directors elected to defer receipt of their
1,000 share annual retainer for 1998 and instead received phantom stock
units which are not included in their beneficial ownership of COMSAT Common
Stock: Mr. Bennett; Mrs. Benson; Mr. Eagleburger; Mr. Hurtt; Mr. Knight;
Mr. Manatt; and Mr. Schafran. Beneficial ownership of COMSAT Common Stock
includes shares that may be acquired within 60 days after March 1, 1999
through the exercise of options as follows: Mrs. Alewine, 274,432 shares;
Mr. Bennett, 2,480 shares; Mrs. Benson, 37,205 shares; Mr. Colodny, 43,408
shares; Mr. Eagleburger, 12,402 shares; Mr. Flower, 99,266 shares; Mr.
Freeman, 29,765 shares; Mr. Hurtt, 7,441 shares; Mr. Jasmann, 7,752 shares;
Mr. Knight, 12,402 shares; Dr. Likins, 31,005 shares; Mr. Manatt, 12,402
shares; Mr. Mattingly, 33,524 shares; Dr. Pontano, 33,515 shares; Mr.
Schafran, 2,480 shares; Mr. Schwartz, 34,725 shares; Ms. Turner, 2,480
shares; Mr. Wyser-Pratte, 2,480 shares; Mr. Zeger, 149,052 shares; and all
directors and executive officers as a group, 838,157 shares. The number of
option shares and shares awarded under COMSAT benefit plans which are
restricted against transfer that are included as beneficially owned have
been adjusted to give effect to the Ascent spin-off to COMSAT shareholders
on June 27, 1997. All outstanding options and restricted shares held on
that date were adjusted by multiplying the number of options or shares held
by an adjustment ratio of 1.2402.
(3) Includes 23,666 shares which are restricted against transfer and 1,534
shares which are held in the Corporation's Savings and Profit-Sharing Plan
as of March 1, 1999.
(4) Includes 12,957 shares which are restricted against transfer and 1,275
shares which are held in the Corporation's Savings and Profit-Sharing Plan
as of March 1, 1999.
(5) Includes 23 shares which are held in the Corporation's Savings and Profit-
Sharing Plan as of March 1, 1999. Mr. Jasmann resigned in February 1998.
(6) Includes 2,850 shares over which Dr. Likins shares voting power and
investment power with Mrs. Likins.
(7) Includes 7,984 shares which are restricted against transfer and 1,080
shares which are held in the Corporation's Savings and Profit-Sharing Plan
as of March 1, 1999. Includes 500 shares held by Mr. Mattingly's mother of
which Mr. Mattingly disclaims beneficial ownership.
(8) Includes 4,000 shares which are restricted against transfer and 597 shares
which are held in the Corporation's Savings and Profit-Sharing Plan as of
March 1, 1999.
(9) Includes 5,000 shares held by Mrs. Schafran of which Mr. Schafran disclaims
beneficial ownership.
(10) Includes 1,961,300 shares owned by investment partnerships and other
managed accounts for which Wyser-Pratte Management Co., Inc. and its
affiliates are the general partner or investment manager. Mr. Wyser-Pratte
beneficially owned 3.84% of the Corporation's outstanding Common Stock as
of March 1, 1999.
(11) Includes 13,453 shares which are restricted against transfer and 1,439
shares which are held in the Corporation's Savings and Profit-Sharing Plan
as of March 1, 1999.
(12) Includes 5,500 shares with respect to which beneficial ownership is
disclaimed. Also includes an aggregate of 70,056 shares which are
restricted against transfer and 6,379 shares which are held in the
Corporation's Savings and Profit-Sharing Plan as of March 1, 1999. All
directors and executive officers as a group beneficially owned 5.90% of the
Corporation's outstanding Common Stock as of March 1, 1999.
109
<PAGE>
Changes in Control
The Corporation has entered into an Agreement and Plan of Merger, dated as
of September 18, 1998, by and among the Corporation, Lockheed Martin
Corporation, a Maryland corporation, and Deneb Corporation, a Delaware
corporation which is a wholly-owned subsidiary of Lockheed Martin. For a
description of the transaction see "Item 7: Management's Discussion and Analysis
of Financial Condition and Results of Operations - Business Combination with
Lockheed Martin" and Note 2 to the financial statements.
Item 13: Certain Relationships and Related Transactions
The following directors of the Corporation may be deemed to have a
relationship with Lockheed Martin Corporation that may constitute an indirect
material interest in the proposed merger between the Corporation and Lockheed
Martin Corporation. See "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations - Business Combination with
Lockheed Martin."
For a discussion of certain relationships between Lockheed Martin
Corporation and each of Ms. Turner, Mr. Hurtt and Mr. Knight, see "Item 11:
Executive Compensation - Compensation Committee Interlocks, Insider
Participation and Related Party Transactions."
Marcus C. Bennett, a director of the Corporation since August 1997, and the
former Executive Vice President and Chief Financial Officer and a director of
Lockheed Martin, may be deemed to have beneficial ownership of 197,092 shares of
Lockheed Martin common stock as of March 1, 1999. He also had 861 phantom stock
units credited to an account in a Lockheed Martin deferred compensation plan as
of March 1, 1999.
Edwin I. Colodny, the Chairman of the Board of COMSAT since April 1997 and
a director of the Corporation since May 1992, may be deemed to have beneficial
ownership of 4,204 shares of Lockheed Martin common stock as of March 1, 1999.
Pursuant to a continuing engagement, the law firm of Manatt, Phelps &
Phillips, LLP has provided Lockheed Martin general legal and legislative
advocacy services in connection with government contracts and contracting
opportunities in the state of California. Charles T. Manatt, a Presidentially-
appointed director of the Corporation since May 1995 and chairman of the law
firm of Manatt, Phelps & Phillips, LLP, has not had any personal involvement
with the services rendered pursuant to the engagement. Lockheed Martin paid
Manatt, Phelps & Phillips, LLP $65,414, $166,113, $153,126 and $66,686 for
services rendered and expenses incurred during 1998, 1997, 1996 and 1995,
respectively.
110
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this Report
1. Consolidated Financial Statements and Supplementary Data of Registrant
a. Independent Auditors' Report
b. Consolidated Financial Statements of COMSAT Corporation and
Subsidiaries
(i) Consolidated Income Statements for the Years Ended December 31,
1998, 1997 and 1996
(ii) Consolidated Balance Sheets as of December 31, 1998 and 1997
(iii) Consolidated Cash Flow Statements for the Years Ended December
31, 1998, 1997 and 1996
(iv) Statements of Changes in Consolidated Stockholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996
(v) Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997 and 1996
2. Financial Statement Schedule Relating to the Consolidated Financial
Statements of COMSAT Corporation for Each of the Three Years in the Period
Ended December 31, 1998
(a) Schedule II - Valuation and Qualifying Accounts
All other Schedules have been omitted because they are not applicable or
not required or because the required information is included elsewhere in the
financial statements in this filing.
3. Exhibits (listed according to the number assigned in the table in Item 601
of Regulation S-K)
Exhibit No. 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession
2.1 Agreement and Plan of Merger, dated as of September 18, 1998, among COMSAT
Corporation, Lockheed Martin Corporation and Deneb Corporation
(Incorporated by reference to Exhibit 2 to Registrant's
Solicitation/Recommendation Statement on Schedule 14D-9 filed on September
25, 1998)
2.2 Carrier Acquisition Agreement, dated as of September 18, 1998, by and among
COMSAT Corporation, Lockheed Martin Corporation, Regulus, LLC, and COMSAT
Government Systems, Inc. (Incorporated by reference to Exhibit 5 to
Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed
on September 25, 1998)
Exhibit No. 3 - Articles of Incorporation and By-laws
3.1 Articles of Incorporation of Registrant, composite copy, as amended through
June 1, 1993 (Incorporated by reference from Exhibit No. 4(a) to
Registrant's Registration Statement on Form S-3 (No. 33-51661) filed on
December 22, 1993)
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<PAGE>
3.2 By-laws of Registrant, as amended through April 21, 1997 (Incorporated by
reference from Exhibit No. 3.2 to Registrant's Current Report on Form 8-K
filed on April 21, 1997.
3.3 Regulations adopted by Registrant's Board of Directors pursuant to Section
5.02(c)f Registrant's Articles of Incorporation (Incorporated by reference
from Exhibit No. 3(c) to Registrant's Report on Form 10-K for the fiscal
year ended 1992)
Exhibit No. 4 - Instruments defining the rights of security holders, including
indentures
4.1 Specimen of a certificate representing Series I shares of COMSAT Common
Stock, without par value, which are held by citizens of the United States
(Incorporated by reference from Exhibit No. 4(a) to Registrant's Report on
Form 10-K for the fiscal year ended December 31, 1993)
4.2 Specimen of a certificate representing Series I shares of COMSAT Common
Stock, without par value, which are held by aliens (Incorporated by
reference from Exhibit No. 4(b) to Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1982)
4.3 Specimen of a certificate representing Series II shares of COMSAT Common
Stock, without par value (Incorporated by reference from Exhibit No. 4(c)
to Registrant's Report on Form 10-K for the fiscal year ended December 31,
1982)
4.4 Standard Multiple-Series Indenture Provisions dated March 15, 1991
(Incorporated by reference from Exhibit No. 4(a) to Registrant's
Registration Statement on Form S-3 (No. 33-39472) filed on March 15, 1991)
4.5 Indenture dated as of March 15, 1991 between Registrant and The Chase
Manhattan Bank, N.A. (Incorporated by reference from Exhibit No. 4(b) to
Registrant's Registration Statement on Form S-3 (No. 33-39472) filed on
March 15, 1991)
4.6 Supplemental Indenture, dated as of June 29, 1994, from the Registrant to
The Chase Manhattan Bank, N. A. (Incorporated by reference from Exhibit No.
4(c) to Registrant's Registration Statement on Form S-3 (No. 33-54369)
filed on June 30, 1994)
4.7 Officers' Certificate pursuant to Section 3.01 of the Indenture, dated as
of March 15, 1991, from the Registrant to The Chase Manhattan Bank, N.A.,
as Trustee, relating to the authorization of $75,000,000 aggregate
principal amount of Registrant's 8.95% Notes Due 2001 (with form of Note
attached) (Incorporated by reference from Exhibit No. 4 to Registrant's
Current Report on Form 8-K filed on May 15, 1991)
4.8 Officers' Certificate pursuant to Section 3.01 of the Indenture, dated as
of March 15, 1991, from the Registrant to The Chase Manhattan Bank, N.A.,
as Trustee, relating to the authorization of $160,000,000 aggregate
principal amount of Registrant's 8.125% Debentures Due 2004 (with form of
Debenture attached) (Incorporated by reference from Exhibit No. 4 to
Registrant's Current Report on Form 8-K filed on April 9, 1992)
112
<PAGE>
4.9 Officers' Certificate pursuant to Section 3.01 of the Indenture, dated as
of March 15, 1991, as supplemented by the Supplemental Indenture, dated as
of June 29, 1994, from the Registrant to The Chase Manhattan Bank, N.A., as
Trustee, relating to the authorization of $100,000,000 aggregate principal
amount of Registrant's Medium Term Notes, Series A (with forms of Notes
attached) (Incorporated by reference from Exhibit No. 4(I) to Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1994)
4.10 Limited Partnership Agreement of COMSAT Capital I, L.P., dated as of July
18, 1995, relating to issuance of monthly income preferred securities
(Incorporated by reference from Exhibit No. 4(a) to Registrant's Report on
Form 10-Q for the quarter ended June 30, 1995)
4.11 Guarantee Agreement for Preferred Securities of COMSAT Capital I, L.P.,
dated as of July 18, 1995 (Incorporated by reference from Exhibit No. 4(b)
to Registrant's Report on Form 10-Q for the quarter ended June 30, 1995)
4.12 Indenture between Registrant and the First National Bank of Chicago, as
Trustee, dated as of July 18, 1995 (Incorporated by reference from Exhibit
No. 4(c) to Registrant's Report on Form 10-Q for the quarter ended June
30, 1995)
Exhibit No. 10 - Material Contracts
10.1 Agreement relating to the International Telecommunications Satellite
Organization (INTELSAT) by Governments, which entered into force on
February 12, 1973 (Incorporated by reference from Exhibit No. 10(a) to
Registrant's Report on Form 10-K for the fiscal year ended December 31,
1980)
10.2 Operating Agreement relating to INTELSAT by Governments which entered into
force on February 12, 1973 (Incorporated by reference from Exhibit No.
10(b) to Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1980)
10.3 Agreement dated August 15, 1975, among COMSAT General Corporation, RCA
Global Communications, Inc., Western Union International, Inc. and ITT
World Communications, Inc. relating to the establishment of a joint venture
for the purpose of participating in the ownership and operation of a
maritime communications satellite system and Amendment Nos. 1-4 and
Amendment No. 5 dated March 24, 1980 (Incorporated by reference from
Exhibit No. 10(p) to Registrant's Report on Form 10-K for the fiscal year
ended December 31, 1980)
10.4 Amendment No. 6 to Exhibit 10.3 dated September 1, 1981 (Incorporated by
reference from Exhibit No. 10(p)(ii) to Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1981)
10.5 Convention on the International Maritime Satellite Organization (Inmarsat)
dated September 3, 1976 (Incorporated by reference from Exhibit No. 11 to
Registrant's Report on Form 10-K for the fiscal year ended December 31,
1978)
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10.6 Operating Agreement on Inmarsat dated September 3, 1976 (Incorporated by
reference from Exhibit No. 12 to Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1978)
10.7* Registrant's 1982 Stock Option Plan (Incorporated by reference from
Exhibit No. 10(x) to Registrant's Report on Form 10-K for the fiscal year
ended December 31, 1981)
10.8* Registrant's Insurance and Retirement Plan for Executives, as amended and
restated effective January 1, 1997 (Incorporated by reference from
Exhibit No. 10.10 to Registrant's Report on Form 10-K for the fiscal year
ended December 31, 1997)
10.9* Registrant's Non-Employee Directors Stock Plan (Incorporated by reference
from Exhibit No. 10.11 to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1996)
10.10 Agreement to Acquire and Lease (and Supplemental Agreements thereto)
dated September 28 and October 10, 1988, respectively, among the
International Maritime Satellite Organization (Inmarsat), the North Sea
Marine Leasing Company, British Aerospace Public Limited Company, the
European Investment Bank, Kreditanstalt Fuer Wiederaufbau, European
Investment Bank (as Agent and as Trustee), Instituto Mobiliare Italiano,
Credit National, Hellenic Industrial Development Bank, and Society
Nationale de Credit a L'Industrie relating to the financing of three
Inmarsat spacecraft (Incorporated by Reference from Exhibit No. 3(a) to
Registrant's Report on Form 10-K for the fiscal year ended December 31,
1988)
10.11* Registrant's 1990 Key Employee Stock Plan (Incorporated by reference from
Exhibit No. 10 (p) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1989)
10.12 Amended and Restated Agreement, dated November 14, 1990, of Limited
Partnership of Rock Spring II Limited Partnership (Incorporated by
reference from Exhibit No. 10(a) to Registrant's Current Report on
Form 8-K filed on February 24, 1992)
10.13 Amended and Restated Lease Agreement, dated November 14, 1990, of Limited
Partnership of Rock Spring II Limited Partnership (Incorporated by
reference from Exhibit No. 10(b) to Registrant's Current Report on Form
8-K filed on February 24, 1992)
10.14 Amended and Restated Ground Lease Indenture, dated November 14, 1990,
between Anne D. Camalier (Landlord) and Rock Spring II Limited
Partnership (Tenant) (Incorporated by reference from Exhibit No. 10(c) to
Registrant's Current Report on Form 8-K filed on February 24, 1992)
10.15 Finance Facility Contract (and Supplemental Agreements thereto), dated
December 20, 1991, among the International Maritime Satellite
Organization (Inmarsat), Abbey National plc, General Electric Technical
Services Company, Inc., European Investment Bank, Kreditanstalt Fuer
Wiederaufbau, Instituto Mobiliare Italiano S.p.A., Credit National,
Societe Nationale de Credit a L'Industrie, Finansieringsinstituttet for
Industri OG Haandvaerk A/S, De Nationale Investeringsbank NV, and
Osterreichische Investitionkredit Aktiengesellschaft relating to the
financing of three Inmarsat spacecraft (Incorporated by reference from
Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1991)
114
<PAGE>
10.16* Registrant's Directors and Executives Deferred Compensation Plan, as
amended by the Board of Directors on July 15, 1993 (Incorporated by
reference from Exhibit No. 10.24 to the Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1996)
10.17 Fiscal Agency Agreement, dated as of August 6, 1992, between
International Telecommunications Satellite Organization and Morgan
Guaranty Trust Company of New York (Incorporated by reference from
Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1992)
10.18 Fiscal Agency Agreement, dated as of January 19, 1993, between
International Telecommunications Satellite Organization and Morgan
Guaranty Trust Company of New York (Incorporated by reference from
Exhibit No. 10 (ee) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1992)
10.19 Agreement dated July 1, 1993, between Registrant and AT&T Easylink
Services relating to exchange of telex traffic (Incorporated by reference
from Exhibit No. 10(bb) to Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.20 Agreement dated July 27, 1993, between the Registrant and American
Telephone & Telegraph Company relating to utilization of space segment
(Incorporated by reference from Exhibit No. 10(cc) to Registrant's Report
on Form 10-K for the fiscal year ended December 31, 1993)
10.21 Amendment to Exhibit 10.20 dated as of December 1, 1995 (Incorporated by
reference from Exhibit No. 10.34 to Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1995)
10.22 Amendment to Exhibit 10.20 dated as of January 8, 1997 (Incorporated by
reference from Exhibit No. 10.32 to Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1996)
10.23 Agreement dated November 6, 1998, between Registrant and MCI
International, Inc. relating to exchange of traffic.
10.24 Agreement dated November 30, 1993, between the Registrant and Sprint
Communications Company L.P. relating to utilization of space segment
(Incorporated by reference from Exhibit No. 10(ee) to Registrant's Report
on Form 10-K for the fiscal year ended December 31, 1993)
10.25 Amendment to Exhibit 10.24 dated April 7, 1995 (Incorporated by reference
from Exhibit No. 10(a)(i) to Registrant's Report on Form 10-Q/A Amendment
No. 2 dated June 29, 1995 for the quarter ended March 31, 1995)
10.26 Agreement dated December 10, 1993, between Registrant and Sprint
International relating to the exchange of traffic (Incorporated by
reference from Exhibit No. 10(ff) to Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1993)
10.27 Credit Agreement dated as of December 17, 1993 among Registrant,
NationsBank of North Carolina, N.A., Bank of America National Trust and
Savings Association, The First National
115
<PAGE>
Bank of Chicago, The Chase Manhattan Bank, N.A., The Sumitomo Bank,
Limited, New York Branch, Swiss Bank Corporation, New York Branch, as
lenders, and NationsBank of North Carolina, N.A., as agent (Incorporated
by reference from Exhibit No. 10(gg) to Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1993)
10.28 Amendment No. 1 to Exhibit 10.27 dated as of December 17, 1994
(Incorporated by reference from Exhibit No. 10(cc)(i) to Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1994)
10.29 Agreement dated January 24, 1994, between MCI International, Inc. and
Registrant relating to utilization of space segment (Incorporated by
reference from Exhibit No. 10(ii) to Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1993)
10.30 Amendment to Exhibit 10.29 dated as of July 1, 1995 (Incorporated by
reference from Exhibit No. 10.42 to Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1995)
10.31 Amendment to Exhibit 10.29 dated as of September 17, 1996 (Incorporated
by reference from Exhibit No. 10.41 to Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1996)
10.32 Agreement dated June 1, 1996, between Registrant and AT&T relating to
exchange of traffic.
10.33 Fiscal Agency Agreement between International Telecommunications
Satellite Organization, Issuer, and Bankers Trust Company, Fiscal Agent
and Principal Paying Agent, dated as of March 22, 1994 (Incorporated by
reference from Exhibit No. 10(kk) to Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1993)
10.34 Distribution Agreement dated July 11, 1994 between Registrant and CS
First Boston Corporation, Salomon Brothers Inc and Nationsbanc Capital
Markets, Inc., as Distributors, of Registrant's Medium-Term Notes, Series
A (Incorporated by reference from Exhibit No. 10(ff) to Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1994)
10.35 Fiscal Agency Agreement between International Telecommunications
Satellite Organization, Issuer, and Morgan Guaranty Trust Company, Fiscal
Agent and Principal Paying Agent, dated as of October 14, 1994
(Incorporated by reference from Exhibit No. 10(gg) to Registrant's Report
on Form 10-K for the fiscal year ended December 31, 1994)
10.36* Registrant's Annual Incentive Plan (Incorporated by reference from
Exhibit No. 10(hh) to Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1994)
10.37 Fiscal Agency Agreement between International Telecommunications
Satellite Organization, Issuer, and Morgan Guaranty Trust Company, Fiscal
Agent and Principal Paying Agent, dated as of February 28, 1995
(Incorporated by reference from Exhibit No. 10(ii) to Registrant's Report
on Form 10-K for the fiscal year ended December 31, 1994)
116
<PAGE>
10.38* Registrant's 1995 Key Employee Stock Plan (Incorporated by reference from
Exhibit No. 10.51 to the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1996)
10.39 Distribution Agreement, dated as of June 3, 1997, between the Registrant
and Ascent (Incorporated by reference from Exhibit 10.2 to the
Registrant's Report on Form 8-K dated June 18, 1997)
10.40 Tax Disaffiliation Agreement, dated as of June 3, 1997, between the
Registrant and Ascent (Incorporated by reference from Exhibit 10.3 to the
Registrant's Report on Form 8-K dated June 18, 1997)
10.41 Amended and Restated Employment Agreement, dated as of July 18, 1997,
between the Registrant and Betty C. Alewine (Incorporated by reference
from Exhibit 9 to the Registrant's Solicitation/Recommendation Statement
on Schedule 14D-9 filed on September 25, 1998)
10.42 Amended and Restated Employment Agreement, dated as of July 18, 1997,
between the Registrant and Allen E. Flower (Incorporated by reference
from Exhibit 11 to the Registrant's Solicitation/Recommendation Statement
on Schedule 14D-9 filed on September 25, 1998)
10.43 Amended and Restated Employment Agreement, dated as of July 18, 1997,
between the Registrant and Warren Y. Zeger (Incorporated by reference
from Exhibit 13 to the Registrant's Solicitation/Recommendation Statement
on Schedule 14D-9 filed on September 25, 1998)
10.44 Shareholders' Agreement, dated as of September 18, 1998, between COMSAT
Corporation and Lockheed Martin Corporation (Incorporated by reference to
Exhibit 3 to the Registrant's Solicitation/Recommendation Statement on
Schedule 14D-9 filed on September 25, 1998)
10.45 Registration Rights Agreement, dated as of September 18, 1998, between
COMSAT Corporation and Lockheed Martin Corporation (Incorporated by
reference to Exhibit 4 to the Registrant's Solicitation/Recommendation
Statement on Schedule 14D-9 filed on September 25, 1998)
10.46 Amendment to Amended and Restated Employment Agreement, between COMSAT
Corporation and Betty C. Alewine, dated as of September 18, 1998
(Incorporated by reference to Exhibit 10 to the Registrant's
Solicitation/Recommendation Statement on Schedule 14D-9 filed on
September 25, 1998)
10.47 Amendment to Amended and Restated Employment Agreement, between COMSAT
Corporation and Allen E. Flower, dated as of September 18, 1998
(Incorporated by reference to Exhibit 12 to the Registrant's
Solicitation/Recommendation Statement on Schedule 14D-9 filed on
September 25, 1998)
10.48 Amendment to Amended and Restated Employment Agreement, between COMSAT
Corporation and Warren Y. Zeger, dated as of September 18, 1998
(Incorporated by reference to Exhibit 14 to the Registrant's
Solicitation/Recommendation Statement on Schedule 14D-9 filed on
September 25, 1998)
117
<PAGE>
10.49 Stock Purchase and Sale Agreement, dated as of March 16, 1998 among
COMSAT Corporation, TBG Industries, Inc. and Prodelin Holding Corporation
(Incorporated by reference to Exhibit 10.1 to the Registrant's Report on
Form 10-Q for the quarter ended March 31, 1998)
10.50 Master Lease Agreement by and between LCOR Clarksburg L.L.C., as
Landlord, and COMSAT Corporation, as Tenant, dated as of September 12,
1997.
10.51 Facilities Lease Agreement by and between LCOR Clarksburg L.L.C., as
Landlord, and COMSAT Corporation, as Tenant, dated as of September 12,
1997.
10.52 Agreement among COMSAT Corporation, COMSAT Argentina, S.A. and ICO Global
Communications (Holdings) Limited, ICO Global Communications Holdings
B.V. and ICO Global Communications Services Inc., dated as of September
30, 1998.
10.53* COMSAT Corporation Retention Bonus Plan, effective as of September 18,
1998 (Incorporated by reference to Exhibit 15 to the Registrant's
Solicitation/Recommendation Statement on Schedule 14D-9 filed on
September 18, 1998)
10.54* COMSAT Corporation Amended and Restated Change of Control Severance
Plan, effective as of September 18, 1998 (Incorporated by reference to
Exhibit 16 to the Registrant's Solicitation/Recommendation Statement on
Schedule 14D-9 filed on September 18, 1998)
10.55* Amendment to COMSAT Corporation 1995 Key Employee Stock Plan, dated as of
September 18, 1998 (Incorporated by reference to Exhibit 17 to the
Registrant's Solicitation/Recommendation Statement on Schedule 14D-9
filed on September 18, 1998
10.56* Amendment to COMSAT Corporation 1990 Key Employee Stock Plan, dated as of
September 18, 1998 (Incorporated by reference to Exhibit 18 to the
Registrant's Solicitation/Recommendation Statement on Schedule 14D-9
filed on September 18, 1998
10.57* Amendment to COMSAT Corporation Non-Employee Directors Stock Plan, dated
as of September 18, 1998 (Incorporated by reference to Exhibit 19 to the
Registrant's Solicitation/Recommendation Statement on Schedule 14D-9
filed on September 18, 1998
10.58* Amendment to COMSAT Corporation Directors and Executives Deferred
Compensation Plan, dated as of September 18, 1998 (Incorporated by
reference to Exhibit 20 to the Registrant's Solicitation/Recommendation
Statement on Schedule 14D-9 filed on September 18, 1998
Exhibit No. 21 - Subsidiaries of the Registrant as of December 31, 1998
Exhibit No. 23 - Consents of experts and counsel
Consent of Independent Auditors dated March 24, 1999.
118
<PAGE>
Exhibit No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Corporation filed a Report on Form 8-K dated December 23, 1998, related
to the amicable resolution of a dispute between the Corporation and ICO Global
Communications (Holdings) Ltd.
*Compensatory plan or arrangement.
119
<PAGE>
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.
COMSAT CORPORATION
(Registrant)
Date: March 25, 1999 By /s/ Alan G. Korobov
-----------------------------
(Alan G. Korobov, Controller)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by each of the following persons on behalf of the
Registrant and in the capacity and as of March 25, 1999. Each person whose
signature appears below constitutes and appoints the Registrant's Vice President
and Chief Financial Officer, Vice President and General Counsel or Controller
his or her true and lawful attorney-in-fact, with full power of substitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Form 10-K, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact, or his substitute, may lawfully do or cause to be
done by virtue hereof.
(1) Principal executive officer
By /s/ Betty C. Alewine
--------------------------------------
(Betty C. Alewine, President and Chief
Executive Officer and Director)
(2) Principal financial officer
By /s/ Allen E. Flower
--------------------------------------
(Allen E. Flower, Vice President and
Chief Financial Officer)
(3) Principal accounting officer
By /s/ Alan G. Korobov
--------------------------------------
(Alan G. Korobov, Controller)
120
<PAGE>
(4) Board of Directors
By /s/ Edwin I. Colodny
--------------------------------------
(Edwin I. Colodny, Chairman and
Director)
By /s/ Marcus C. Bennett
--------------------------------------
(Marcus C. Bennett, Director)
By /s/ Lucy Wilson Benson
--------------------------------------
(Lucy Wilson Benson, Director)
By /s/ Lawrence S. Eagleburger
--------------------------------------
(Lawrence S. Eagleburger, Director)
By /s/ Neal B. Freeman
--------------------------------------
(Neal B. Freeman, Director)
By /s/ Caleb B. Hurtt
--------------------------------------
(Caleb B. Hurtt, Director)
By /s/ Peter S. Knight
--------------------------------------
(Peter S. Knight, Director)
By /s/ Peter W. Likins
--------------------------------------
(Peter W. Likins, Director)
By /s/ Charles T. Manatt
--------------------------------------
(Charles T. Manatt, Director)
121
<PAGE>
By /s/ Larry G. Schafran
--------------------------------------
(Larry G. Schafran, Director)
By /s/ Robert G. Schwartz
--------------------------------------
(Robert G. Schwartz, Director)
By /s/ Kathryn C. Turner
--------------------------------------
(Kathryn C. Turner, Director)
By /s/ Guy P. Wyser-Pratte
--------------------------------------
(Guy P. Wyser-Pratte, Director)
122
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Balance at
Beginning of Charged to Balance at
In thousands Year Expenses Deductions(a) End of Year
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Allowance for loss on accounts receivable $ 8,251 $3,847 $ 939 $11,159
Allowance for loss on investments - $1,105 - $ 1,105
1997:
Allowance for loss on accounts receivable $11,159 $6,306 $2,730 $14,735
Allowance for loss on investments $ 1,105 $1,008 - $ 2,113
1998:
Allowance for loss on accounts receivable $14,735 $4,749 $2,361 $17,123
Allowance for loss on investments $ 2,113 $1,950 - $ 4,063
</TABLE>
(a) Uncollectible amounts written off, recoveries of amounts previously
reserved, and other adjustments.
123
<PAGE>
EXHIBIT 10.23
SERVICE AGREEMENT
This Service Agreement (the "Agreement") is made and entered into
this 6th day of November 1998, by and between COMSAT Mobile Communications,
a business unit of COMSAT Corporation, a corporation organized and existing
under the laws of the District of Columbia, with offices located at 6560
Rock Spring Drive, Bethesda, Maryland 20871 ("COMSAT"), and MCI
International, Inc., a corporation organized and existing under the laws of
Delaware, with offices at 2 International Drive, Rye Brook, New York 10573
("MCI"). COMSAT and MCI are hereinafter collectively referred to as the
"Parties" and individually referred to as a "Party".
WHEREAS, COMSAT provides mobile satellite communications services to and
from mobile earth stations via the International Mobile Satellite
Organization ("Inmarsat") satellite system through COMSAT's land earth
stations and switching facilities; and
WHEREAS, MCI maintains a terrestrial telecommunications network and
provides telecommunication services, including telex services, within the
United States and abroad; and
WHEREAS, both Parties desire to obtain the services of the other Party and
are willing to interconnect facilities for the purpose of facilitating the
mutual provision of services in accordance with the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein expressed, COMSAT and MCI agree as follows:
1. DEFINITIONS
1.1 "COMSAT Facilities" shall mean land earth stations ("LES") and
switching facilities provided by COMSAT.
1.2 "COMSAT Services" shall mean Standard-A, -M, -B, Mini-M and Aero
mobile satellite communication services to and from mobile earth
stations via the Inmarsat satellite system through COMSAT
Facilities.
1.3 "Effective Date" shall mean November 1, 1998.
1.4 "Fixed-to-Mobile Traffic" shall mean U.S. traffic originating on
MCI Facilities in a fixed location and destined to terminate at a
mobile earth station via the Inmarsat satellite system.
1.5 "Inmarsat Ocean Regions" shall mean the Pacific Ocean Region
("POR"), the Atlantic Ocean Region-West ("AOR-W"), the Atlantic
Ocean Region-East ("AOR-E") and the Indian Ocean Region ("IOR").
1.6 "MCI Facilities" shall mean MCI's international switching centers
and other terrestrial facilities owned or controlled by MCI or, as
the case may be, the facilities of any local exchange carriers
selected by MCI for the termination of Mobile-to-Fixed Traffic.
MCI's Facilities shall not include facilites owned and operated by
Worldcom, Inc. or its affiliates prior to the merger of Worldcom,
Inc. and MCI Communications Corporation.
1.7 "MCI Services" shall mean terrestrial communications services to
and from fixed international or domestic land points via MCI
Facilities.
1.8 "MES" shall mean mobile earth station.
1.9 "Mobile-to-Fixed Traffic" shall mean traffic originating from a
mobile earth station via the Inmarsat satellite system and
COMSAT's Facilities and destined to terminate at a fixed
international or domestic land point.
1.10 "Transit Traffic" shall mean traffic to an Inmarsat MES
originating from a fixed location in a country in which no
Inmarsat land earth station exists to provide service to such MES
and which traffic is routed over MCI Facilities to COMSAT
Facilities for delivery to its final destination.
<PAGE>
2. TERM OF AGREEMENT.
Unless otherwise terminated pursuant to Article 7 hereof, this
Agreement shall be effective for a period of one year, commencing
on the Effective Date ("Initial Term").
3 SERVICE PROVISION AND RATES
3.1 COMSAT shall provide COMSAT Services to MCI at the rates set forth
in Attachment A hereto in order to allow MCI to terminate U.S.
originated Fixed-to-Mobile Traffic. Notwithstanding the foregoing,
COMSAT shall provide a discount to its rates for Standard -A
services in consideration of MCI's commitment to program its
switches and undertake any other measures necessary to direct to
COMSAT a minimum of seventy-five (75%) of MCI's U.S.-originated
Inmarsat -A, -M, -B, Mini-M and Aero Fixed-to-Mobile Traffic
destined to the AOR-E, AOR-W and POR. The discount rate shall be
as set forth in Attachment A. In order to receive the discount,
internal monthly reviews shall be conducted by COMSAT to measure
actual Fixed-to-Mobile traffic delivered by MCI to COMSAT. The
rates set forth in Attachment A shall be inclusive of all space
and ground segment charges. COMSAT shall be solely responsible for
such charges and MCI shall have no responsibility therefor.
3.2 MCI shall provide MCI Services to COMSAT to allow COMSAT to
terminate Mobile-to-Fixed Traffic at the rates set forth in
Attachment B hereto. COMSAT shall be eligible for discounts as
described in Attachment B. The rates set forth in Attachment B
shall be inclusive of all pay-outs and other amounts payable to
any local, long distance or other carrier or administration and/or
other operating entities with respect to MCI Service terminating
in or transiting through their jurisdictions. MCI shall be solely
responsible for settlements with and payments to such carriers and
COMSAT shall have no responsibility therefor.
3.3 The rates set forth in Attachments A and B shall be effective as of
November 1, 1998.
3.4 Transit Traffic
3.4.1 For Transit Traffic, COMSAT will establish transit rates with the
foreign administrations for the LES component of the charge and
MCI will establish the international land line charges.
3.4.2 For Transit Traffic where the foreign administration accounts and
settles with COMSAT for the LES component ("Direct Settlement"),
the foreign telephone administration shall account and settle with
MCI for the international land line charges. In the event that
cascade accounting is utilized, MCI shall credit COMSAT the amount
due COMSAT and settlement shall be in accordance with Section
6.1.2. MCI shall provide sufficient detail on a monthly basis to
enable COMSAT to determine the foreign administration from which
the call originated, volume and ocean region destinations of the
Transit Traffic.
4. INTERCONNECTION OF FACILITIES.
4.1 COMSAT and MCI agree to interconnect COMSAT Facilities and MCI
Facilities to permit the exchange of Fixed-to-Mobile and
Mobile-to-Fixed Traffic. The points of interconnections shall be
at COMSAT's Main Distribution Frame ("MDF") at COMSAT's Facilities
at Santa Paula, California and Southbury, Connecticut.
4.2 Each Party shall be responsible for providing and maintaining, at
its own expense and liability, the equipment and circuits located
on its side of the MDF. The Parties shall cooperate in the
detection and correction of problems which can not be immediately
isolated to a specific side of the MDF or segment of a circuit.
4.3 Except as otherwise agreed by the Parties, the technical standards
and methods of operation applied by the Parties in the exchange of
traffic hereunder shall conform to the applicable recommendations
of the International Telecommunications Union - Telecommunications
Standardization Sector ("ITU-T") and to any revisions of same. The
Parties agree that the signaling standard shall continue to be
Signaling System
<PAGE>
No. 5. Such signaling standard may be upgraded to Signaling System
No. 7 upon availability and mutual agreement of the Parties.
5. APPLICABLE SERVICE STANDARDS
5.1 COMSAT Services. COMSAT shall provide COMSAT Services through
COMSAT Facilities which satisfy the applicable Inmarsat
specifications for such services. COMSAT's failure to comply with
non-mandatory specifications shall not be deemed to be in conflict
with this Agreement.
5.2 MCI Services. MCI shall provide services through its facilities
which satisfy ITU Recommendations Q. 140 through Q. 157 for Signaling
System No. 5.
6. PAYMENT FOR SERVICE
6.1 Accounting and Settlement Procedures.
6.1.1 Each Party shall be responsible for establishing end-user rates
for services rendered to its respective customers. In addition,
each Party shall be responsible to bill and collect service
charges from its respective customers.
6.1.2 No later than sixty (60) days after the end of a service
month, the Parties shall exchange accounting statements for services
provided to each other during the preceding calendar month. Each Party
shall provide to the other Party such detail as each Party may
reasonably require to determine the appropriate settlement between the
Parties. At a minimum, the monthly statement shall contain the type of
service, the Inmarsat Ocean Region, the number of calls, the minutes
carried and the rates applicable to each minute. Such monthly
statement shall be provided via a printed statement until
implementation of settlement disk processing. The Parties shall reduce
to a net balance the sum due in U.S. Dollars each month from each
Party to the other Party. Net balances due from one Party ("Debtor
Party") to the other Party ("Creditor Party") shall be paid by the
Debtor Party to the Creditor Party. Settlement of net balances shall
be made within forty-five (45) days of receipt of invoice from the
Creditor Party. The inability of a Party to collect from its end users
shall not relieve such Party's obligation to make payment to the other
Party for services rendered hereunder.
6.2 Billing Disputes. Each Party is responsible for the accuracy of
any accounting statement or invoice that it submits to the other
Party. An accounting statement shall be deemed to have been
accepted by the Party to whom it is rendered if such Party does
not object in writing thereto before the end of the second
calendar month following the month in which the account is
transmitted by the Party rendering it. Agreed adjustments shall be
included in the following monthly accounting statement. Objections
to an invoice that are not raised within twelve (12) months of the
date on which an invoice is received by a Party shall be deemed
waived by such Party and such invoice shall be deemed final.
6.3.1 Taxes. Each Party shall be responsible for its own tax or tax
related surcharges determined by reference to income, net worth,
franchise or property and any other tax imposed directly on the
Party.
6.3.2 With regard to services originated and billed to a purchaser by
MCI, MCI agrees to be responsible for the determination,
collection and remittance of all appropriate taxes imposed thereon
including but not limited to United States federal excise, state
and local sales, gross receipts and similar taxes. With regard to
services originated and billed to a purchaser by COMSAT, COMSAT
agrees to be responsible for the determination, collection and
remittance of all appropriate taxes imposed thereon including but
not limited to United States federal excise, state and local
sales, gross receipts and similar taxes.
In the event that an exemption certificate is required by either
Party, all efforts will be made to provide such certificate to the
requesting Party.
<PAGE>
7. TERMINATION.
7.1 Termination . This Agreement may be terminated by either Party
("Terminating Party") to the other Party (the "Defaulting Party")
in the event that one (1) or more of the following events shall
occur and which event(s) shall not have been cured within the
thirty (30) day period from the date of written notice thereof
from the Terminating Party to the Defaulting Party: (a) failure of
the Defaulting Party to pay any sum due and owing to the
Terminating Party within the payment period specified in Section 6
hereof; or (b) failure of the Defaulting Party to perform any
material obligation contained in this Agreement.
7.1.1 Consequence of Termination. Termination or expiration of this
Agreement in accordance with its terms shall not release the
Parties hereto from any liability which at the time of termination
or expiration has already accrued or which thereafter may accrue
in respect of any act or omission of a Party prior to such
termination or expiration, or from any obligation which is
expressly stated in this Agreement to survive termination or
expiration.
7.1.2 Upon expiration or termination of this Agreement:
a. Neither Party shall be obligated to provide its services to
the other Party;
b. Each Party shall return or destroy all Confidential
Information of the other Party in its possession no later
than five (5) business days following the termination or
expiration date; and
c. All mutual indebtedness of the Parties that shall have
accrued as of the date of termination or expiration shall
become due and payable within thirty (30) days thereof.
8. LIABILITY; GENERAL INDEMNITY
8.1 In no event shall either Party be liable to the other Party for
any special, indirect, incidental, punitive, consequential or
exemplary damages, including without limitation loss of revenue,
loss of profits, loss of clients or goodwill arising in any manner
from this Agreement and the performance or nonperformance of
business hereunder.
8.2 With respect to the service that each Party provides to the other
Party hereunder, neither Party shall be liable for, and expressly
disclaims any liability to the other Party, its customers, assigns
or any other person or entity for any damages, claims, liability,
expenses, or loss, regardless of the degree of fault or failure,
including but not limited to damage to property and claims for
personal injury or death, sustained by the other Party, its
customers, assigns or any other person or entity for any reason
relating to the unavailability, delay, outage, interruption,
disruption, break-down, degradation, error in transmission, or
failure arising out of, relating to, or in any way associated with
the Services, satellites, land earth stations, equipment,
operations, or facilities that are involved in the performance of
this Agreement, regardless of the cause or causes thereof, and
regardless of whether or not attributable to any negligent act or
omission or whether or not such act or omission constitutes, with
respect to any person or entity, failure to meet any of its
obligations.
8.3 With respect to the COMSAT Services provided hereunder, MCI agrees
that Inmarsat shall not be liable to the same extent as the
disclaimers of liability in this Article.
8.4 Each Party agrees to include, in any contract, agreement, tariff
or other undertaking between it and any customer or assign
relating to the services, operations, equipment or facilities
involved in the performance of this Agreement, a provision stating
that the disclaimers of liability as set forth above shall apply
in full to said contract, agreement, tariff or other undertaking.
<PAGE>
9. FORCE MAJEURE
9.1 Except for payment obligations, neither Party shall be liable for
failure to perform under this Agreement due to any act, event or
cause beyond its reasonable control ("Force Majeure Event")
including, but not limited to:
Acts of God, peril of the sea, accident of navigation, war,
sabotage, riot, insurrection, civil commotion, national emergency
(whether in fact or by law), martial law, fire, lightning, flood,
cyclone, earthquake, landslide, storm or other adverse weather
conditions, explosion, power shortage, strike or other labor
difficulty (whether or not involving COMSAT employees), epidemic,
quarantine, radiation or radioactive contamination;
Action or inaction of any government or other competent authority,
(including any court of competent jurisdiction), including
expropriation, restraint, prohibition, intervention, requisition,
requirement, direction or embargo by legislation regulation,
decree or other legally enforceable order; and Breakdown of plant,
machinery or equipment, externally caused transmission
interference or satellite failure, or satellite launch failure or
delay, or satellite malfunction, or shortages of labor,
transportation, fuel, power or plant, machinery, equipment or
material.
9.2 In the event that a Force Majeure Event exceeds thirty (30)
consecutive days, then following such thirty-day period, the
Parties shall meet and negotiate the continuation, suspension,
termination, restructuring or other disposition of this Agreement.
Upon removal or cessation of the Force Majeure Event, all
obligations under this Agreement shall resume, unless the Parties
determine to terminate or restructure the Agreement.
10. ASSIGNMENT
This Agreement shall not be assigned or transferred by either
Party without the prior written consent of the other Party, which
consent shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, either Party may, without the
other's consent, make an assignment to a successor, affiliate,
subsidiary, or to any entity controlling or under the same control
as such a Party.
11. GOVERNMENT APPROVALS
11.1 All agreements covenants, undertakings and obligations herein made
or assumed by the Parties hereto are subject to the obtaining of
all necessary governmental licenses, consents, permits,
authorizations, and approvals. Each Party shall obtain and
continue to maintain such licenses, consents, permits,
authorizations, and approvals.
11.2 Both Parties represent and warrant that they have been authorized
as common carriers by the FCC pursuant to Section 214 of the
Communication Act of 1934, as amended. A copy of this Agreement
shall be filed with the FCC pursuant to Section 211 of such Act
and shall seek confidential treatment of such filing.
12. CONFIDENTIALITY
12.1 The Parties hereby agree that it may be necessary to the
performance of this Agreement for a Party (the "Disclosing Party")
to disclose to the other Party (the "Receiving Party") certain
information that each Party deems to be confidential and
proprietary. The Receiving Party shall maintain the security and
confidentiality of all Confidential Information received from the
Disclosing Party hereunder.
12.2 For purposes hereof, "Confidential Information" shall include
business and technical information or data relating to the
Disclosing Party and its representatives that is reduced to
writing and marked "Confidential" by the Disclosing party.
Notwithstanding anything contained herein to the contrary,
Confidential Information shall not include (i) information
developed independently by the Receiving Party or lawfully
received from a third party not under an obligation of
confidentiality; or (ii) information in the public domain; or
(iii) information known by Receiving Party prior to the execution
of this Agreement; or information disclosed pursuant to law; (iv)
judicial order or governmental regulation.
<PAGE>
12.3 The Receiving Party shall not use nor communicate, directly or
indirectly, any of the Confidential Information to any third party
without the prior written consent of the Disclosing Party. The
Receiving Party shall use its best efforts to prevent inadvertent
disclosure of all or any part of the Confidential Information to
any third party.
12.4 The Receiving Party's obligations under this Article shall
continue for a period of two (2) years after the termination or
expiration of this Agreement with respect to each item of
Confidential Information disclosed hereunder. Upon such expiration
or termination, the Receiving Party shall return or destroy all
Confidential Information of the other Party in its possession.
13. INTELLECTUAL PROPERTY RIGHTS
The Parties agree that trademarks, inventions, patents,
copyrights, registered designs, service marks, trade names and all
other intellectual property shall remain in the ownership of the
person or party originating the same and nothing herein shall
confer or be deemed to confer on either Party expressly, implied
or otherwise, any rights or licenses in the intellectual property
of the other.
14. AMENDMENT
This Agreement together with all Attachments and Exhibits, may be
amended, modified or amplified only by written agreement signed by
authorized representatives of both Parties.
15. WAIVER OF TERMS
No waiver by either Party of any provision of this Agreement shall
be binding unless expressly confirmed in writing. Further, any
such waiver shall relate only to such particular matter,
non-compliance or breach as it expressly relates to and shall not
apply to any subsequent or other matter, non-compliance or breach.
16. GOVERNING LAW AND FORUM
16.1 The existence, validity, construction, operation and effect of
this Agreement shall be determined in accordance with and be
governed by the laws of the State of New York.
16.2 Any dispute arising out of or related to this Agreement, which
cannot be resolved by negotiation within thirty (30) days
following the date on which written notice of a dispute has been
given to the other Party, shall be settled by binding arbitration
in accordance with the J.A.M.S./ENDISPUTE Arbitration Rules and
Procedures, as amended by this Agreement. The number of neutral
arbitrators shall be three (3), one appointed by each Party, and
the third appointed by the other two arbitrators. The place of
arbitration shall be Washington, D.C. The costs or arbitration,
including the fees and expenses of the arbitrators, shall be
shared equally by the parties unless the arbitration award
provides otherwise. Each party shall bear the cost of preparing
and presenting its case. The parties agree that this provision and
the arbitrator's authority to grant relief shall be subject to the
United States Arbitration Act, 9 U.S.C. 1-16 et seq. ("USAA") and
the provisions of this Agreement. The arbitrators shall comply
with the ABA-AAA Code of Ethics for Arbitrators in Commercial
Disputes. The parties agree that the arbitrators shall have no
power or authority to make awards or issue orders of any kind
except as expressly permitted by this Agreement, and in no event
shall the arbitrators have the authority to make any award that
provides for punitive or exemplary damages. The arbitrators'
decision shall be final and binding. The award may be confirmed
and enforced in any court of competent jurisdiction. All
post-award proceedings shall be government by the USAA.
<PAGE>
17. NOTICES
17.1 All notices, invoices and other communications made hereunder
shall be given in writing and shall be deemed to have been duly
given and effective (i) upon receipt, if delivered in person or by
telecopy, with confirmation; or (ii) one (1) day after deposit
prepaid with a U.S. domestic overnight express service for
domestic delivery; or (iii) three (3) days after deposit in the
United States mail, certified, postage prepaid, return receipt
requested; or (iv) five (5) days after deposit with an overnight
express service for international delivery service.
Notices to COMSAT of a contractual nature shall be directed to the
following address:
COMSAT Mobile Communications
6560 Rock Spring Drive
Bethesda, Maryland 20817
Attention: Contracts Department
Telephone Number: (301) 214-3450
Facsimile Number: (301) 214-7113
Notices to COMSAT related to invoices and collections shall be
directed to the following addresses:
COMSAT Mobile Communications
6560 Rock Spring Drive
Bethesda, Maryland 20817
Attention: Revenue Accounting Department
Telephone Number: (301) 214-3000
Facsimile Number: (301) 214-7113
Notices to MCI of a contractual nature shall be directed to the
following address:
MCI International, Inc. MCI Worldcom, Inc.
2 International Drive 1717 Pennsylvania Avenue, N.W.
Rye Brook, New York 10573 Washington, D.C. 20006
Attention: Attention: International Commercial
Affairs Law and Public Policy
Telephone Number:
Facsimile Number: Facsimile Number: (202) 721-2549
Notices to MCI related to invoices and collections shall be
directed to the following address:
MCI International, Inc.
2 International Drive
Rye Brook, New York 10573
Attention:
Telephone Number:
Facsimile Number:
18. MISCELLANEOUS
18.1 No Third Party Beneficiary. The provisions of this Agreement are
for the benefit only of the Parties hereto, and no third party may
seek to enforce or benefit from those provisions.
18.2 No Partnership Or Agency Relationship. The relationship between
COMSAT and MCI shall not be that of partners or agents of one
another, and nothing contained in this Agreement shall be deemed
to constitute a partnership or agency agreement between them.
<PAGE>
18.3 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of each Party's successors and permitted
assignees.
18.4 Headings. The titles in the headings of paragraphs are intended
for organization and convenience only and do not apply in the
interpretation of any of the Agreement terms.
18.5 Survival of Terms. The terms and provisions contained in this
Agreement that by their sense and context are intended to survive
the performance thereof by the Parties hereto shall so survive the
completion of
18.6 Rule of Construction. No rule of construction requiring
interpretation against the drafting party hereof shall apply in
the interpretation of this Agreement.
19. ENTIRE AGREEMENT
This Agreement, together with all attachments incorporated herein
specifically by reference, represents the entire understanding of
the Parties with respect to the subject matter hereof and all
other agreements (written or oral) between the Parties relating to
the Service shall be superseded by this Agreement.
20. SEVERABILITY
If any one or more of the provisions contained in this Agreement
or any document executed in connection herewith shall be invalid,
illegal or unenforceable in any respect under any applicable law,
the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or
impaired; provided, however, that in such case the Parties agree
to use their best efforts to achieve the purpose of the invalid
provision by a new legally valid stipulation.
21. SUPERSEDES OTHER AGREEMENTS
This Agreement specifically supersedes and cancels the Agreement
dated 1 September 1993, entered into by COMSAT and MCI
International, Inc., which Agreement shall be null and void,
except for any liabilities of the Parties that arise thereunder
prior to the date of such cancellation and which remain
outstanding.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in
counterparts on the day and year first above written.
COMSAT Mobile Communications, MCI International, Inc.
a business unit of COMSAT Corporation
/s/ Carol M. Schoonhoven /s/ Anthony Cirieco
CAROL M. SCHOONHOVEN ANTHONY CIRIECO
20 NOVEMBER 1998 11/6/98
<PAGE>
EXHIBIT 10.32
INTERCONNECTION AND
SERVICES AGREEMENT
between
AT&T Maritime Services
and
COMSAT Mobile Communications
June 1, 1996
<PAGE>
TABLE OF CONTENTS
1. Interconnection of Facilities........................................2
2. Circuit Restoration and Rerouting....................................2
3. Service Offerings................................................... 3
4. Service Modification.................................................4
5. Traffic Volumes and Rates............................................4
6. Accounting and Settlement Procedures.................................5
7. Failure to Pay.......................................................7
8. Technical Standards and Methods of Operation.........................7
9. Exchange of Proprietary Information..................................7
10. Governmental Approvals...............................................8
11. Prior Agreements.....................................................9
12. Notices..............................................................9
13. Duration and Termination of Agreement................................9
14. Change in Circumstances..............................................9
15. Limitation of Liability.............................................10
16. Assignment..........................................................10
17. Governing Law.......................................................10
18. Severability........................................................10
19. Waiver..............................................................11
20. Execution and Amendment.............................................11
<PAGE>
INTERCONNECTION AND SERVICES AGREEMENT
THIS AGREEMENT, entered into this 1st day of June 1996, by and
between COMSAT Corporation, acting through its business unit COMSAT Mobile
Communications, a corporation organized and existing under the laws of the
District of Columbia, with offices located at 6560 Rock Spring Drive,
Bethesda, Maryland 20817 (hereinafter referred to as "COMSAT," which
expression shall include its successors and permitted assignees) and AT&T
Corp., acting through its business unit AT&T Mobile Satellite Services, a
corporation organized and existing under the laws of the State of New York,
with offices located at 101 JFK Parkway, Short Hills, New Jersey 07078
(hereinafter called "AT&T," which expression shall include its successors
and permitted assignees).
W I T N E S S E T H:
WHEREAS, COMSAT and AT&T are both communications common carriers
subject to the jurisdiction of the Federal Communications Commission
("FCC"); and
WHEREAS, COMSAT offers mobile satellite communications services to
and from mobile stations and COMSAT's Land Earth Station ("LES")
facilities, with associated Mobile Satellite Switching Center ("MSSC")
facilities, using satellite capacity obtained from the International Mobile
Satellite Organization ("Inmarsat"); and
WHEREAS, AT&T provides telecommunications services to and from
customers in the United States and operates international
telecommunications channels jointly with various foreign administrations
and carriers (hereinafter "international correspondents") for the
furnishing of its authorized services between points in or served via the
United States and other points outside the United States (hereinafter
referred to as "international" or "overseas" points); and
WHEREAS, COMSAT and AT&T have previously interconnected their
facilities and exchanged traffic so as to permit the provision of
telecommunications services between mobile earth stations located outside
the United States and points in the United States served by AT&T, and
international points served by AT&T with its correspondents; and
WHEREAS, it is the desire of AT&T and COMSAT to enter into a new
inter-carrier agreement, and to establish terms and conditions for the
exchange of traffic as each may choose to deliver to the facilities of the
other;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, COMSAT and AT&T agree as follows:
<PAGE>
1. Interconnection of Facilities
a. COMSAT and AT&T agree to continue to interconnect COMSAT's
LES/MSSC facilities and AT&T's switched network facilities to provide voice
and data telecommunications services between the geographic and ocean
regions covered by the Inmarsat system served by COMSAT and points in the
United States and international points served by AT&T.
b. The interconnecting circuits to be used in providing the
services set forth in this Agreement shall be such circuits between
COMSAT's MSSC facilities and AT&T's International Switching Centers ("ISC
facilities") as may presently exist and such additional or replacement
circuits as the parties may from time to time agree upon.
c. Each party shall be responsible for providing and maintaining,
at its own expense and liability, the circuits located on its side of the
interconnecting circuits. COMSAT shall reimburse AT&T for half of AT&T's
direct cost of terrestrial circuits connecting AT&T's ISC facilities and
COMSAT's MSSC facilities. The number of circuits necessary for the
provision of services hereunder shall be mutually agreed between the
parties, based on the amount of traffic to be exchanged between the
parties.
d. COMSAT and AT&T agree that this Agreement is not exclusive.
Accordingly, each party shall have the right to interconnect with other
telecommunications and satellite service providers to exchange traffic
including, but not limited to, the services set forth in this Agreement,
consistent with applicable laws.
2. Circuit Restoration and Rerouting
a. Each party shall advise the other party in writing as soon as
practicable, and in any event no later than twenty-four (24) hours after it
becomes aware of the occurrence, of any facility failure in its network
that is causing any significant impairment or interruption of service
provided under this Agreement, and the party experiencing the failure shall
make all reasonable efforts to implement prompt restoration of service.
b. COMSAT shall make arrangements, as commercially practicable,
with foreign telephone administrations for rerouting and restoration of
service in the event of disruption of mobile satellite communications
service through COMSAT's LES facilities, and in such cases shall make such
alternative facilities available to route AT&T mobile satellite traffic.
c. For maintenance and operational purposes, both AT&T and COMSAT
agree that the mobile satellite telephony services provided hereunder shall
be treated with no less diligence than either party treats its other
telephony services.
<PAGE>
3. Service Offerings
a. Voice Message Telecommunications Services
AT&T and COMSAT hereby agree to make the following voice
message telecommunications services available to end users to the extent
practicable:
(i) Directory Assistance. COMSAT will make available
mobile directory assistance, including but not limited to mobile station
listings. AT&T will make available directory assistance for U.S. shore points.
(ii) Conference Calling Capabilities.
(iii) Mobile Terminal to Mobile Terminal Calling.
(iv) Person/Station Calling. Both person-to-person and
station-to-station calls will be permitted by COMSAT and AT&T for
maritime and international land mobile satellite service. Only station-to-
station calls will be provided by COMSAT and AT&T for aeronautical satellite
telephone service.
(v) Calling Card Calls. To the extent AT&T is able to
bill COMSAT's mobile-to-fixed tariffed rates, COMSAT shall have the right
to accept AT&T's Calling Cards on calls from mobile stations outside the U.S.
to the U.S. and international points as long as the Calling Card is
validated (i.e., a positive or indeterminate response is received from the
validator system). To the extent changes to COMSAT's tariff require
modifications to AT&T billing systems or billing rates in connection with
Calling Card calls, AT&T shall use its reasonable efforts to make such
modifications. AT&T shall notify COMSAT promptly and in writing as to
whether such modifications can be made by AT&T. Notwithstanding the
foregoing, COMSAT shall not route any mobile-to-fixed 800 calls to AT&T
until AT&T notifies COMSAT otherwise, and until such time COMSAT shall not
bill AT&T in connection with any such calls.
(vi) Collect Calls. Except for collect calls to coin
telephones, collect calls shall be permitted by COMSAT and AT&T in both
directions between mobile stations and fixed locations within the United
States, excluding Alaska.
(vii) Distress and Safety. Messages and replies
in connection with situations involving maritime and aeronautical safety
will be handled in compliance with national and international regulations.
b. Data, Facsimile and Other Digital Network Services
Transmission of data, facsimile and other digital
services will be permitted over the network facilities of AT&T and COMSAT
to the extent practicable.
<PAGE>
4. Service Modification
The services listed in Article 3 above may be modified and other
services added by written agreement of the parties. Each party reserves the
right (subject to any FCC requirements) to discontinue any individual
customer service set forth in Article 3 upon ninety (90) days prior written
notice to the other party. The decision by either party to discontinue any
individual service shall not constitute a termination of any other service,
nor can the procedure established by this Article for individual service
modification be utilized to terminate this Agreement substantially or in
its entirety.
5. Traffic Volumes and Rates
a. AT&T will pay COMSAT $6.50 per minute for the space and earth
station segments of fixed-to-mobile traffic to Inmarsat Standard A
terminals for traffic up to one million minutes per year. For Inmarsat A
traffic volumes exceeding that amount, COMSAT agrees to reduce the
foregoing rate in accordance with Attachment I hereto. For all
fixed-to-mobile traffic to Standard M and Standard B terminals, AT&T will
pay COMSAT $3.30 per minute for calls destined to the Atlantic and Pacific
Ocean regions, and $2.95 per minute for calls destined to the Indian Ocean
Region.
b. COMSAT will pay AT&T $.20 per minute for all mobile-to-fixed
calls terminating in the United States and for all Inmarsat
mobile-to-mobile calls routed via AT&T for the terrestrial segment of that
traffic and associated services. For mobile-to-fixed calls terminating
outside the United States, COMSAT will pay AT&T's tariffed international
long distance rates minus ten percent (10%).
c. Inmarsat aeronautical calls shall be settled as follows:
(i) For air-to-ground calls, COMSAT shall pay AT&T $.20 per
minute.
(ii) For ground-to-air calls, AT&T shall pay COMSAT $6.50
per minute.
d. Notwithstanding anything to the contrary in this Agreement,
except in regards to the proportion of traffic described in Article
6.a.(6), neither AT&T nor COMSAT commits to send the other party any
traffic, nor does either party commit to any particular volume or type of
traffic, by reason of this Agreement. Each party reserves the absolute
right to adjust or change the volume of traffic it sends to the other
party. In this connection, and without limitation, COMSAT and AT&T agree
that there will be no shortfall obligation, charge or penalty for a party's
failure to deliver any traffic volumes, even if the reason for such action
is within the control of such party.
<PAGE>
e. Any tariff changes affecting services provided in conjunction
with this Agreement shall be provided by written notice in the manner set
forth in Article 12 by the party making the changes to the other party on
or before the date the tariff changes are submitted to the FCC, provided,
in any event, that COMSAT shall notify AT&T of Calling Card tariff changes
no less than fifteen (15) days before the tariff is to become effective.
6. Accounting and Settlement Procedures
a. Monthly Statements
(1) Each party shall be responsible for the billing
and collection of charges to its respective
customers.
(2) Each party shall render to the other a monthly
statement of the messages provided during the
month to which the statement relates, expressed
in seconds, but with totals rounded to the next
full minute and showing the portion of revenues
due to the other party calculated on the basis
of the rates set forth in Article 5. Each line
item total shall be rounded up to the next full
minute. Such statements shall be forwarded to
the other party as soon as practicable after the
calendar month to which the statement relates,
but in no event later than the end of the second
calendar month following the month to which the
statement relates. The monthly statements shall
include any accounting information received
through international settlements. This traffic
will be reported and included in the monthly
statements no later than one (1) month following
the date it is reported to the party. Both
parties acknowledge that international traffic
may be reported over time (in some instances in
excess of one (1) year after service was
provided).
(3) Each party shall have the right to make credit
adjustments to its customers with respect to
periods in which transmission is interrupted or
defective, and to reflect, in its monthly
statements to the other party, deductions for
such interrupted or defective transmissions,
provided that such deductions or adjustments are
reasonable and are made before the monthly
statement is forwarded to the other party.
COMSAT shall validate all AT&T Calling Card
calls. Without prejudice to the foregoing and in
addition to any other remedies AT&T may have at
law or in equity, AT&T specifically reserves the
right to block calls billed to any unvalidated
AT&T Calling Card or deduct the value of such
calls from its settlement payments to COMSAT in
the event of nonpayment for the unvalidated call.
(4) A statement shall be deemed to have been
irrevocably accepted as free of discrepancies
and errors by the party to whom it is rendered
if that party
<PAGE>
does not object in writing within one year from
the date the monthly statement is received. If
an objection is made, the parties shall use
their best efforts to settle promptly the
disputed item or items. Adjustments that have
been agreed upon by both parties shall be
included in the next monthly statement.
(5) The parties agree to exchange billing data only
to the extent it is strictly necessary to
respond to a specific customer inquiry. This
exchange shall be made in a timely manner (per
recommendations of the International Telegraph
and Telephone Consultation Committee ("CCITT")),
in a format to which both parties agree, and in
accordance with all applicable legal
requirements.
(6) Where COMSAT and a foreign telephone
administration have entered into an agreement
providing for that telephone administration's
routing of traffic originating in its territory
and terminating via COMSAT's Inmarsat
facilities, and AT&T provides connecting service
to that administration with respect to such
traffic, AT&T hereby agrees to route to COMSAT
such traffic equal to the share of all traffic
such telephone administration has agreed to so
route to COMSAT. Where AT&T provides connecting
service with respect to such traffic, AT&T
agrees to accept payment from such foreign
telephone administrations through the settlement
process on behalf of COMSAT, but shall not be
required to bill, collect from, or determine the
method of payment of end users and shall not be
responsible for late or non-payment from such
telephone administrations. Any payments received
by AT&T from such administrations on COMSAT's
behalf shall be paid in accordance with Article
6.b. below.
b. Payment of Net Balance
The sums due each month from each party to the other as
covered by each monthly statement shall be reduced to a net balance by each
party. Net balances due from one party to the other shall be paid monthly
by the debtor party to the creditor party. Payment will be made as soon as
practicable, but in no event later than forty-five (45) days after the
monthly statement has been received from the creditor party. The payment of
the net balance due with respect to undisputed amounts on a statement,
except to the extent that such amounts are uncollected settlement payments
from a foreign telephone administration, shall not be delayed pending
agreement to the adjustment of disputed items of that statement.
<PAGE>
c. Other Matters
Payments made and statements rendered under this
Agreement from one party to the other shall be in U.S. currency. AT&T
hereby commits to work with COMSAT on a regular basis to review and
streamline the accounting and settlement process in an effort to improve
the timeliness of payments.
7. Failure to Pay
Subject to the terms of Article 6.a. and Article 6.b. of this
Agreement, upon failure of a party to pay a net balance in accordance
with Article 6.b., the party to whom such balance is owed may, ninety
(90) days after delivering notice in writing to the other party, and
subject to FCC requirements, suspend its participation in the services
covered hereby, and said party shall be deemed released from its
obligations under this Agreement for so long as any balance due shall
remain unpaid. This provision does not limit any other legal or equitable
remedies available under this Agreement.
8. Technical Standards and Methods of Operation
Except as otherwise agreed by the parties, the technical
standards and methods of operation applied by the parties to the exchange
of traffic hereunder shall conform to the applicable recommendations of
the CCITT and to any revisions of same.
9. Exchange of Proprietary Information
a. In connection with the provision of services pursuant to this
Agreement, COMSAT and AT&T may each disclose to the other certain
marketing, financial, billing, technical, and other information which is
proprietary or confidential to the disclosing party or its affiliated
companies (hereinafter referred to as "Information"). For purposes of
this Agreement, such Information shall include, but not be limited to,
engineering information, hardware, software, drawings, models, samples,
tools, technical specifications, and documentation, in whatever form
recorded or orally provided.
b. The receiving party shall hold Information in confidence,
shall use such Information only for the purpose of performing this
Agreement, shall reproduce such Information only to the extent necessary
for such purpose, shall restrict disclosure of such Information to its
employees and employees of its affiliated companies with a need to know
(and inform such employees of the obligations assumed herein), and shall
not disclose such Information to any third party without prior written
approval of the other party. These restrictions on the use or disclosure
of information shall not apply to any Information:
<PAGE>
(i) that is independently developed by the receiving
party or its affiliated companies or lawfully received
free of restriction from another source having the right
to so furnish such Information;
(ii) that has become generally available to the public
without breach of this Agreement by the receiving party
or its affiliated companies;
(iii) that at the time of disclosure to the receiving
party was known to such party or its affiliated
companies free of restriction and evidenced by
documentation in such party's possession;
(iv) that the disclosing party agrees in writing is free
of such restrictions; or
(v) that is required to be made public by the FCC or
other due legal process, provided the disclosing party
is notified promptly by the receiving party of any such
requirement to make the Information public.
c. Information shall be subject to the restrictions above, if it
is in writing or other tangible form, only if clearly marked as
proprietary or confidential when disclosed to the receiving party or, if
it is not in tangible form, only if identified as proprietary or
confidential at the time of disclosure and confirmed in writing within
thirty (30) days of such disclosure.
d. No license to a party, under any trademark, patent, copyright,
mask work protection right or any other intellectual property right, is
either granted or implied by the conveying of Information to such party.
None of the Information which may be disclosed or exchanged by the
parties shall constitute any representation, warranty, assurance,
guarantee or inducement by either party to the other of any kind, and, in
particular, with respect to the non- infringement of trademarks, patents,
copyrights, mask work protection rights or any other intellectual
property rights, or other rights of third persons.
e. All Information shall remain the property of the transmitting
party and shall be returned upon written request or upon the receiving
party's determination that it no longer has a need for such Information.
f. Each party agrees that all of its obligations undertaken in
Article 9 herein as a party receiving Information shall survive and
continue after termination of this Agreement.
<PAGE>
10. Governmental Approvals
All undertakings, obligations and rights of the parties hereto
are subject to all necessary governmental licenses and approvals, and to
all other applicable legal requirements. This Agreement shall not be
construed or interpreted to prejudice the rights either party may have to
provide any services it is or becomes lawfully authorized to provide, or
in any way limit the ability of each party to present any regulatory or
other legal position, or to request or oppose any grant of authority, in
any appropriate legal forum.
11. Prior Agreements
This Agreement supersedes all previous agreements (including all
amendments thereto) between COMSAT and AT&T regarding the provision of
mobile satellite telephone services using the Inmarsat system.
12. Notices
Any notice under this Agreement shall be in writing and shall be
deemed sufficient if sent by first class mail, facsimile or telex to the
following address, or any superseding address so notified hereunder, and
shall be effective upon receipt.
To COMSAT:
COMSAT Mobile Communications
6560 Rock Spring Drive
Bethesda, Maryland 20817
Attention: Director-Contracts
To AT&T:
AT&T Corp.
101 JFK Parkway
Short Hills, New Jersey 07078
Attention: District Manager Maritime Services
13. Duration and Termination of Agreement
This Agreement will be effective as of June 1, 1996, and subject
to the provisions contained herein, shall continue in full force and
effect until December 31, 1997. Subsequent to the initial term, the
Agreement shall continue in full force and effect unless terminated by
either party upon ninety (90) days prior notice in writing.
14. Change in Circumstances
If, during the term of this Agreement, any U.S. governmental
action or other significant change in circumstances renders either party
unable to perform or results in significant economic detriment or
competitive disadvantage to a party, such party may request in writing
that the terms of this Agreement be renegotiated. Upon such request, the
parties agree to negotiate, promptly and in good faith, methods to
resolve the competitive disadvantage, economic detriment or inability to
perform. However, if no such mutual agreement can be reached within a
period of ninety (90) days with respect to a party's inability to perform
under this Agreement, either party may terminate this Agreement without
further cost or liability, except for any unpaid amounts owed by a party
hereunder at the time of such termination.
<PAGE>
15. Limitation of Liability
Neither party nor its parent, subsidiaries, or affiliates shall
be liable to the other for any failure in or breakdown of the
communications facilities or interruption to same associated with the
functioning of the services set forth in this Agreement no matter what
the cause. Each party's liability to the other for any loss, cost, claim,
injury, liability, or expense, including reasonable attorneys' fees,
relating to or arising out of any negligent act or omission in its
performance of this Agreement (not involving knowing or willful
misconduct or a failure, breakdown or interruption of communication
facilities or services provided hereunder) shall be limited to the amount
of direct damage actually incurred. NEITHER PARTY SHALL BE LIABLE FOR ANY
INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY KIND
WHATSOEVER, INCLUDING LOSS OF PROFITS OR REVENUES. EXCEPT AS EXPRESSLY
SET FORTH HEREIN, NEITHER PARTY MAKES ANY WARRANTIES OR REPRESENTATIONS,
EXPRESS OR IMPLIED.
16. Assignment
Neither party may assign this Agreement except to a parent or
wholly-owned subsidiary in connection with the transfer of responsibility
for the services provided under this Agreement without the prior written
consent of the other, which consent shall not be unreasonably withheld or
delayed.
17. Governing Law
This Agreement shall be governed by the laws of the State of
Maryland, United States of America, without regard to the conflict of law
principles thereof. This Agreement shall also be subject to all
applicable laws of the United States, including without limitation the
Communications Act of 1934, as amended and U.S. Export Control laws.
18. Severability
If any term or provision of this Agreement shall be found to be
illegal or unenforceable, then such term or provision shall be deemed
stricken, and the remainder of this Agreement shall continue in full
force and effect.
<PAGE>
19. Waiver
No term or provision of this Agreement shall be deemed waived by
either party unless such waiver is in writing and signed by that party.
20. Execution and Amendment
This Agreement is executed in two copies, both of which shall be
considered originals with identical legal effect. This Agreement may be
modified or amended only by written agreement of the Parties.
IN WITNESS WHEREOF, the parties hereto have severally subscribed
these presents or caused them to be subscribed, in their name and behalf
by their respective officers thereunto duly authorized.
AT&T Maritime Services AT&T CORP.
By: /s/ Mario Persico
Name: Mario Persico
Title: District Manager
Date: June 25, 1996
COMSAT Mobile Communications
COMSAT Corporation
By: /s/ Thomas Collins
Name: Thomas Collins
Title: VP & GM, CMC
Date: 6/20/96
<PAGE>
EXHIBIT 10.50
MASTER LEASE AGREEMENT
BY AND BETWEEN
LCOR CLARKSBURG L.L.C., AS LANDLORD
AND
COMSAT CORPORATION, AS TENANT
CLARKSBURG, MONTGOMERY COUNTY, MARYLAND
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TABLE OF CONTENTS
INTRODUCTION
Section 1. DEFINITIONS......................................................1
Section 2. LEASE OF MASTER LEASE PROPERTY...................................2
Section 3. TERM.............................................................2
Section 4. RENT.............................................................4
Section 5. USE OF THE MASTER LEASE PROPERTY.................................7
Section 6. DEVELOPMENT; DESIGNATION OF THE EXCLUDED AREAS...................9
Section 7. TAXES AND IMPOSITIONS...........................................11
Section 8. UTILITIES.......................................................15
Section 9. SIGNS...........................................................15
Section 10. AS-IS CONDITION OF MASTER LEASE PROPERTY........................16
Section 11. REPAIRS, MAINTENANCE AND MANAGEMENT.............................16
Section 12. ACCESS TO MASTER LEASE PROPERTY.................................18
Section 13. ALTERATIONS AND PERSONAL PROPERTY...............................19
Section 14. INSURANCE.......................................................22
Section 15. DAMAGE OR DESTRUCTION...........................................25
Section 16. INDEMNIFICATION.................................................31
Section 17. CONDEMNATION....................................................35
Section 18. LIENS...........................................................36
Section 19. EXISTING SPACE LEASES; ASSIGNMENT AND SUBLETTING................37
Section 20. SUBORDINATION OR SUPERIORITY OF LEASE...........................40
Section 21. DEFAULTS AND REMEDIES...........................................40
Section 22. BANKRUPTCY OR INSOLVENCY........................................45
Section 23. SURRENDER OF MASTER LEASE PROPERTY..............................47
Section 24. NON-CONSENSUAL HOLDING OVER.....................................48
Section 25. QUIET ENJOYMENT.................................................48
Section 26. NOTICES.........................................................48
Section 27. HAZARDOUS MATERIALS.............................................49
Section 28. RIGHT TO RENEW TERM.............................................52
Section 29. SECURITY DEPOSIT................................................54
Section 30. MISCELLANEOUS GENERAL PROVISIONS................................54
SCHEDULE I Defined Terms
SCHEDULE II Deductibles
SCHEDULE OF EXHIBITS
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MASTER LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease") is entered into and
made effective as of the 12th day of September, 1997 (the "Effective
Date"), by and between LCOR CLARKSBURG L.L.C., a Delaware limited liability
company ("Landlord") and COMSAT Corporation, a District of Columbia
corporation ("Tenant").
WITNESSETH:
(a) Prior to but contemporaneously with the execution and
delivery of this Lease, Tenant sold and transferred the Master Lease
Property to Landlord pursuant to that certain Agreement of Sale dated the
Effective Date, by and between Tenant, as seller, and Landlord, as
purchaser (the "Purchase and Sale Agreement").
(b) Landlord desires to lease to Tenant, and Tenant
desires to lease back from Landlord, the Master Lease Property, all as set
forth and on the terms and conditions contained in this Lease.
NOW THEREFORE, in consideration of the mutual promises
set forth in this Lease and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged by each party, Landlord
and Tenant agree as follows:
SECTION 1. DEFINITIONS
(a) The following terms shall have the meanings ascribed
thereto below:
Agents: The agents, employees, contractors,
subcontractors, affiliates, licensees and invitees of each party
(and in the case of Tenant, subtenants).
Excluded Areas: Any areas of the Master Lease Property
excluded by Landlord pursuant to Section 6.
Expiration Date: The ending date of the Term.
Installations Premises: Certain portions of the Land as
described or shown on Exhibit C attached hereto and made a part hereof,
together with all improvements located thereon.
Land: Approximately 227 acres of land located in
Clarksburg, Montgomery County, Maryland, as described or shown on Exhibit A
attached hereto and made a part hereof.
Main Building: A building complex consisting of three
buildings (the "Component Buildings") which, for the purposes of this
Lease, Landlord and Tenant agree contain, in the aggregate, 496,000 gross
square feet of space (the "Main Building Space"), located on the Land and
commonly known as 22250, 22300, and 22240
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COMSAT Drive, Clarksburg, Maryland. Further, for the purposes of this
Lease, Landlord and Tenant agree that the Component Buildings are
designated as, and contain amounts of Main Building Space, as follows:
Building A: The largest of the Component Buildings,
commonly known as the primary building; 446,000 gross
square feet;
Building B: The second largest of the Component
Buildings, commonly known as the Spectra building;
40,000 gross square feet;
Building C: The smallest of the Component Buildings,
commonly known as the etching and plating building;
10,000 gross square feet.
Main Building Area: The Main Building and the Parking
Areas, access drives, and other appurtenant areas serving the Main
Building, as described or shown on Exhibit B attached hereto and made a
part hereof.
Master Lease Property: The Land, together with all
improvements located thereon, less the Installations Premises and
the Excluded Areas. The Master Lease Property includes, without
limitation, the Main Building Area.
Parking Areas: Those certain areas located in the Main
Building Area and designated for use for parking of motor
vehicles as of the Effective Date.
Unimproved Area: The Master Lease Property, less the
Main Building Area.
(b) Other terms shall have meanings ascribed to such
terms in this Lease and as shown on Schedule I attached hereto and made a
part hereof.
SECTION 2. LEASE OF MASTER LEASE PROPERTY
Landlord, for and in consideration of the rents,
covenants and agreements hereinafter reserved, mentioned and contained on
the part of Tenant and its successors and assigns, to be paid, kept and
performed, has leased, rented, let and demised, and by these presents does
lease, rent, let and demise unto Tenant, and Tenant does hereby take and
hire, upon and subject to the covenants, agreements, provisions,
limitations and conditions herein expressed, the Master Lease Property.
SECTION 3. TERM
(a) The initial term of this Lease (the "Initial Term")
shall be for a period of ten (10) years commencing on the Effective Date
and ending at 11:59 p.m. local time on the day preceding the tenth
anniversary of the Effective Date, unless
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this Lease shall be sooner terminated as hereinafter provided or as
provided by law. Notwithstanding the foregoing, if the Term ends on any day
other than the last day of any calendar month, the Term shall be extended
so that the last day of the Term is the last day of such calendar month.
The Initial Term, as may be extended by exercise of the provisions of
Subsection 3(b) or Section 28, may sometimes be collectively referred to in
this Lease as the "Term".
(b) Provided that no Event of Default exists on the date
of the Holdover Notice or the date of commencement of the Holdover Period,
Tenant may holdover under the terms of this Lease with respect to the Main
Building Area for up to six (6) months immediately after the Initial Term,
provided that:
(i) Tenant provides Landlord with written notice
(the "Holdover Notice") at least six (6) months prior to the Expiration
Date of the Initial Term stating the number of months up to six (6) that
Tenant will holdover under the terms of this Lease (the "Holdover Period");
and
(ii) Tenant pays as Base Rent for each month
during the Holdover Period, in addition to all other amounts payable under
this Lease, one hundred twelve and 75/100ths percent (112.75%) of the full
monthly installment of Base Rent due in the last year of the Initial Term.
If Tenant exercises this holdover right, then, upon commencement of the
Holdover Period, any portions of the Unimproved Area remaining subject to
this Lease at the expiration of the Initial Term shall automatically be
released from this Lease as Excluded Area as if released under Section 6;
provided, however, that after the commencement of the Holdover Period,
Tenant shall not record any instrument confirming the grant of easements
described in Section 6(d). At its sole election, Tenant may exercise its
right to the Holdover Period with respect to less than all of the Main
Building Area. If Tenant desires to so holdover with respect to less than
all of the Main Building Area, Tenant shall designate in the Holdover
Notice the space in which it desires to holdover in the Main Building, but
in no event less than two hundred fifty thousand (250,000) gross square
feet (including the aggregate gross square footage of the area of the Main
Building then leased under Existing Space Leases and Subleases, the terms
of which have been extended beyond the Expiration Date of the Initial Term
with Landlord's approval) (the "Holdover Space"). Tenant's payments of Base
Rent and payments of Additional Rent during the Holdover Period shall be
reduced to the proportion that the Holdover Space bears to the Main
Building Space and Tenant shall have the nonexclusive right during the
Holdover Period to use the Parking Areas, access drives, and all other
common areas within the Main Building Area. If Tenant designates a part of
the Holdover Space in Building B in the Holdover Notice, Tenant shall be
required to holdover in the entirety of Building B. If Tenant designates a
part of the Holdover Space in Building C in the Holdover Notice, Tenant
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shall be required to holdover in the entirety of Building C. The amount of
square footage comprising the Holdover Space designated in Building A
shall be determined in accordance with the applicable standard of the
Greater Washington Association of Commercial Realtors and such Holdover
Space shall be so configured as to leave remaining space in Building A
reasonably marketable to third party tenants; provided, however, this
obligation shall not require Tenant to construct Alterations in order to leave
such a marketable space.
(c). As used in this Lease, the term "Lease Year" means
each consecutive period of twelve (12) calendar months during the Term,
commencing on the Effective Date. If, however, the Effective Date is other
than the first day of a calendar month, the first Lease Year shall begin on
the Effective Date and end on the first anniversary of the last day of the
calendar month in which the Effective Date falls, and each succeeding Lease
Year shall be each succeeding consecutive period of twelve (12) calendar
months thereafter during the Term.
SECTION 4. RENT
(a) Tenant covenants and agrees to pay Landlord in lawful
money of the United States, annual base rent for the Master Lease Property
("Base Rent") in twelve (12) equal monthly installments, in advance, on or
before the first day of each and every month throughout the Term, as
follows:
(i) FOUR MILLION NINE HUNDRED SIXTY THOUSAND AND NO/100
DOLLARS ($4,960,000.00) during the first Lease Year.
(ii) FIVE MILLION NINETY-SIX THOUSAND AND FOUR HUNDRED
AND NO/100 DOLLARS ($5,096,400.00), during the second Lease Year.
(iii) FIVE MILLION TWO HUNDRED THIRTY-SIX THOUSAND FIVE
HUNDRED FIFTY-ONE AND NO/100 DOLLARS ($5,236,551.00), during the third
Lease Year.
(iv) FIVE MILLION THREE HUNDRED EIGHTY THOUSAND FIVE
HUNDRED FIFTY-SIX AND 15/100 DOLLARS ($5,380,556.15), during the fourth
Lease Year.
(v) FIVE MILLION FIVE HUNDRED TWENTY-EIGHT THOUSAND FIVE
HUNDRED TWENTY-ONE AND 45/100 DOLLARS ($5,528,521.45), during the fifth
Lease Year.
(vi) FIVE MILLION SIX HUNDRED EIGHTY THOUSAND FIVE
HUNDRED FIFTY-FIVE AND 79/100 DOLLARS ($5,680,555.79), during the sixth
Lease Year.
(vii) FIVE MILLION EIGHT HUNDRED THIRTY-SIX THOUSAND
SEVEN HUNDRED SEVENTY-ONE AND 07/100 DOLLARS ($5,836,771.07), during the
seventh Lease Year.
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(viii) FIVE MILLION NINE HUNDRED NINETY-SEVEN THOUSAND
TWO HUNDRED EIGHTY-TWO AND 27/00 DOLLARS ($5,997,282.27), during the eighth
Lease Year.
(ix) SIX MILLION ONE HUNDRED SIXTY-TWO THOUSAND TWO
HUNDRED SEVEN AND 54/100 DOLLARS ($6,162,207.54), during the ninth Lease
Year.
(x) SIX MILLION THREE HUNDRED THIRTY-ONE THOUSAND SIX
HUNDRED SIXTY-EIGHT AND 24/100 DOLLARS ($6,331,668.24), during the tenth
Lease Year.
Notwithstanding the foregoing, if the Effective Date shall be a day other
than the first day of a calendar month, there shall be due and payable on
the Effective Date, as the installment of Base Rent for such fractional
month, an amount determined by dividing the Base Rent for the first Lease
Year by 365 and multiplying the result by the number of days from the
Effective Date through the end of such month.
(b) Tenant also covenants and agrees to pay, as
additional rent (the "Additional Rent"), all sums, Impositions, costs,
expenses and other payments which Tenant in any of the provisions of this
Lease assumes, agrees or is obligated to pay, or which shall become
otherwise due and payable from Tenant to Landlord under this Lease (other
than Base Rent). Base Rent and Additional Rent may sometimes be
collectively referred to herein as "Rent".
(c) It is the purpose and intent of Landlord and Tenant
that, except as explicitly set forth herein, the Base Rent shall be
absolutely net to Landlord, so that this Lease shall yield, net to
Landlord, the net annual rent specified in Subsection (a) of this Section 4
in each Lease Year during the Term and that all costs, expenses and
obligations of every kind and nature whatsoever, in connection with or
relating to the Master Lease Property shall be the obligation of Tenant and
shall be paid by Tenant.
(d) The Base Rent shall be paid to Landlord promptly when
due without notice or demand therefor, and without any abatement (except as
explicitly stated to the contrary in Section 8, Section 15 and Section 17),
deduction or set-off for any reason whatsoever.
(e) No payment by Tenant or receipt or acceptance by
Landlord of a lesser amount than the correct Rent shall be deemed to be
other than a payment on account, nor shall any endorsement or statement on
any check or any letter accompanying any check or payment be deemed an
accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance or pursue any
other remedy in this Lease or as provided by law or in equity.
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(f) If any of the Rent payable under the terms and
provisions of this Lease shall be or become uncollectible, reduced or
required to be refunded because of any rent control or similar act or law
enacted by a valid governmental authority, Tenant shall enter into such
agreements and take such other steps that Landlord may request and as may
be legally permissible to permit Landlord to collect the maximum rents
which, from time to time during the continuance of such legal rent
restriction, may be legally permissible (and not in excess of the amounts
reserved therefor under this Lease). Upon the termination of such legal rent
restriction, (i) the Rent shall become and thereafter be payable in accordance
with the amounts reserved herein for the periods following such termination,
and (ii) Tenant shall promptly pay to Landlord, to the maximum extent legally
permissible, an amount equal to (a) the Rent which would have been paid
pursuant to this Lease but for such legal rent restriction, less (b) the Rent
paid by Tenant during the period such rent restriction was in effect.
(g) All Rent and other payments required to be made by
Tenant to Landlord shall be delivered to Landlord by wire transfer pursuant
to the wire transfer instructions as shown on Exhibit D attached hereto and
made a part hereof or to any other single party that Landlord may specify
from time to time by written notice given to Tenant.
(h) In recognition of the extra costs to Landlord
resulting from Tenant's failure to make timely payment of any installment
of Base Rent, if any such installment is not paid within nine (9) days
after its due date, the delinquent amount shall be subject to a service
charge of five percent (5%) of such delinquent amount, or such lesser
charge as may be the maximum charge permitted by law. In addition, if any
installment of Base Rent or any other sum due Landlord under this Lease
remains unpaid seventy-five (75) days after its due date, the outstanding
amount shall bear interest at an annual rate of two percent (2%) over the
"Prime Rate" then prevailing or such lesser rate as may be the maximum rate
permitted by law (the "Stipulated Rate"), and calculated from the due date
of such sum and continuing through the date such sum is paid in full. As
used in this Lease, the term "Prime Rate" means the prime rate of interest
for large money center banks as published in the Money Rates section of the
Wall Street Journal or if the Wall Street Journal ceases to publish such
rate, as established by reference to such other authority as is generally
accepted in the business community as a source for determining the "Prime
Rate".
SECTION 5. USE OF THE MASTER LEASE PROPERTY
(a) The Main Building may be occupied and used for any
lawful purpose and shall not be used for any other purpose. The remainder
of the Main Building Area may be occupied and used for parking for, access to,
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and other reasonable purposes incidental to use of the Main Building and
shall not be used for any other purpose. The Unimproved Area shall not
be occupied by Tenant but may be used by Tenant for (i) access to the Main
Building Area via roads existing in the Unimproved Area as of the
Effective Date, or as may be relocated as expressly provided for in this
Lease, (ii) purposes which are incidental to use of the Main Building Area,
such as use, maintenance, repair, and replacement of utilities, storm
drainage facilities, and signage serving or used in connection with the Main
Building Area, (iii) use, maintenance, repair, and replacement of antennae,
satellite dishes, and other communications equipment located in the Unimproved
Area as of the Effective Date (but such facilities, excluding footings,
foundations, and concrete bases, shall be removed by Tenant at its own expense
promptly after such Unimproved Area is excluded from this Lease under
Section 6), (iv)reasonable recreation uses, such as use of the existing
recreational facilities, (v) temporary activities and uses that Tenant
reasonably deems desirable, and (vi) such limited purposes as are reasonably
necessary in order for Tenant to fulfill its obligations under this Lease to
Care for the Unimproved Area. Notwithstanding anything to the contrary
contained in this Lease, with respect to the uses described in clauses
(iv) and (v) above, (y) the Tenant shall ensure that such uses do not interfere
with the Development, and (z) no action or omission of Landlord, or its
Agents, successors and assigns that interferes with such uses shall be a
default of Landlord under this Lease.
(b) Tenant further agrees as follows:
(i) Tenant and its Agents shall use the Master
Lease Property and conduct its business thereon in a safe, careful,
reputable and lawful manner.
(ii) Tenant shall obtain, or cause to be obtained,
all certificates, licenses and permits necessary for its, or its
subtenants', occupancy, use, operation and maintenance of the Master Lease
Property. Upon reasonable advance request by Tenant, Landlord shall
reasonably cooperate with Tenant in Tenant's obtaining such necessary
certificates, licenses or permits, including, without limitation, signing
applications for the same within ten (10) business days after Tenant's
request if Landlord's signing is required by Applicable Law or requested by
a governmental authority; provided, that Landlord shall not be required to
incur any out-of-pocket costs to third parties in connection therewith.
Tenant shall promptly reimburse Landlord for any of its reasonable
out-of-pocket costs to third parties for review or advice about such
certificates, licenses or permits.
(iii) Tenant shall not commit, nor allow to be
committed, in, on or about the Master Lease Property, any act of waste,
including any act which might deface, damage or destroy any improvement
thereon, or any part thereof. Further, Tenant shall not permit any noise or
odor to be emitted from the Master Lease Property which is unlawful or
which constitutes a legal nuisance. Notwithstanding the foregoing, Tenant
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shall not have any responsibility for any waste, noise, or odor caused by
Landlord or its Agents.
(iv) Tenant shall promptly comply in all material
respects with all present and future laws, statutes, ordinances, rules,
regulations and orders of any federal, state, municipal or other government
or agency thereof having jurisdiction over and relating to the use,
condition and occupancy of the Master Lease Property, and any covenants,
conditions and restrictions of record existing as of the Effective Date and
governing the Master Lease Property (collectively, the "Applicable Laws").
Tenant acknowledges that the Applicable Laws are of public record and that
Tenant knows the character of its operation on the Master Lease Property.
Tenant shall have sole responsibility for its compliance with the
Applicable Laws in all material respects, and Tenant's inability to so
comply shall not be cause for Tenant to terminate this Lease.
Notwithstanding the foregoing:
(A) Tenant shall not be required to comply
with any Applicable Laws to the extent that Tenant or the Master Lease
Property are legally grandfathered or exempt from the application of such
Applicable Laws or Tenant may obtain from the appropriate authorities a
waiver or variance with respect to compliance.
(B) Tenant shall not be required to comply
with any legal requirements in connection with the Master Lease Property
arising out of or relating to the Development or arising out of other acts
or omissions of Landlord or its Agents on or with respect to the Master
Lease Property. All of such requirements on the Master Lease Property shall
be promptly complied with by Landlord in all material respects, at its own
expense.
(C) Tenant shall not be obligated to
correct any violations of Applicable Laws which may exist on the Master Lease
Property as of the Effective Date, except to the extent specifically
required to do so by written notice from the governmental authority having
jurisdiction.
(D) Tenant shall have the right to contest
by appropriate legal proceedings, conducted diligently and in good faith,
without expense to Landlord, the validity or application of any Applicable
Laws. If compliance with the Applicable Law being contested may legally be
delayed pending the prosecution of the proceeding, Tenant may delay
compliance until the final determination of the proceeding. Landlord shall
execute and deliver, within ten (10) business days after request by Tenant,
any appropriate papers and/or other instruments that may be necessary to
permit Tenant to contest the validity or application of the Applicable Law.
Landlord shall otherwise reasonably cooperate with Tenant in the contest,
provided that Landlord shall not be required to incur any out-of-pocket
costs to third parties in connection therewith. Notwithstanding the
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foregoing, Tenant shall ensure that any such contest does not cause any lien
to be filed against the Master Lease Property or any portion thereof.
SECTION 6. DEVELOPMENT; DESIGNATION OF THE EXCLUDED
AREAS
(a) Tenant acknowledges that, among other purposes,
Landlord purchased the Master Lease Property for possible development
and/or sale of all or portions of the Unimproved Area. Although Landlord is
not required to develop or sell any of the Unimproved Area, Landlord is
contemplating a mixed-use development thereon, consisting of, among other
things, uses of varying densities, sizes and natures, and infrastructure in
order to serve same (all or any portion thereof, the "Development"). The
Development shall be at Landlord's sole cost. Tenant acknowledges that the
Development may require Landlord to change the zoning classification as
well as take other actions to change the land use and character of the
Master Lease Property. Tenant covenants and agrees that during the Term it
shall not object to, and shall reasonably cooperate with Landlord with
respect to, Development by Landlord or its successors of any of the
Unimproved Area and shall reasonably cooperate so as to avoid interference
with the Development. Notwithstanding the foregoing:
(i) The Development by Landlord shall not
interfere with Tenant's or its subtenants' use of the Master
Lease Property.
(ii) No rezoning or other development approvals
sought by Landlord for all or any part of the Master Lease Property shall
prohibit, restrict, or make non-conforming any of the uses which may be
conducted on the Main Building Area or Installations Premises under the I-3
zoning applicable to such property as of the Effective Date.
(iii) Landlord acknowledges that the
uninterrupted operation of antennae, satellite dishes, and other
communications equipment now or in the future installed on the Main
Building Area (the "Communications Facilities") is of critical importance
to Tenant. Landlord shall not oppose the installation or continued
operation of the Communications
Facilities.
(iv) Tenant shall not be required to incur any
liability or out of pocket expense to third parties in providing
cooperation to Landlord or its successors with respect to the Development.
(b) At any time during the Term, without any consent of
Tenant whatsoever, a portion of the Unimproved Area shall be excluded from
the Master Lease Property immediately upon the occurrence of any of the
following (each a "Triggering Event"):
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(i) A written notice from Landlord to Tenant
designating such portion of the Unimproved Area as an Excluded Area. The
notice shall be accompanied by a legal description and drawing of the
Excluded Area.
(ii) The transfer of record title to or the
ground lease of such portion of the Unimproved Area by Landlord to another
party, including entities related to Landlord.
(iii) The commencement of clearing or grading
work for such portion of the Unimproved Area (in which event the Excluded
Area shall include the land to be disturbed by the work, any borrow, fill,
or stockpile areas, any areas for staging of equipment or materials, any
areas upon which sediment control measures are to be implemented).
Landlord may cause Triggering Events with respect to as many portions of
the Unimproved Area, and as often, as Landlord may determine in its sole
and absolute discretion. Landlord shall give Tenant written notice of the
occurrence of the Triggering Events described in (ii) and (iii) above at
least thirty (30) days before their anticipated dates of occurrence. The
notice shall be accompanied by a legal description and plat of the Excluded
Area. It is the intention of (iii) that no development work whatsoever
shall be performed to any portion of the Unimproved Area while it remains
subject to this Lease and that each such portion of the Unimproved Area
must be excluded from the Master Lease Property before work begins.
(c) Upon exclusion of an Excluded Area from the Master
Lease Property, Tenant shall have no further rights or obligations under
this Lease with respect to such Excluded Area. There shall be no reduction
in Base Rent with respect to an Excluded Area, but Landlord and Tenant
shall equitably apportion any Additional Rent with respect to such Excluded
Area as of the date of exclusion and Landlord shall reimburse Tenant at the
time of such exclusion in an amount equal to (i) any Impositions paid by
Tenant, and (ii) any other expenses paid by Tenant (provided that such
expenses are required to be paid by Tenant under this Lease) with respect
to such Excluded Area and attributable to the period of time beginning with
and following the date of exclusion. Such reimbursement shall be a
condition precedent to exclusions of any property. In addition, Landlord,
at its sole expense and as a condition precedent to exclusions of any
property, shall cause such Excluded Area to be established as a separate
tax parcel for the purposes of Impositions at the time such parcel is
excluded.
(d) In the event that an Excluded Area contains any road,
utility line, drainage line, storm water management facility, sign, or
other improvement or amenity then being used by Tenant in connection with
the Main Building Area (collectively, "Appurtenances"), then, automatically
upon exclusion of the Excluded Area, Tenant shall be deemed to have
easements for the continued uninterrupted use of the
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Appurtenances for so long as this Lease remains in effect. The easements
provided for in this subsection shall include the right of Tenant to enter
upon the Excluded Area to inspect, maintain, repair, and replace the
Appurtenances. Notwithstanding the foregoing, Landlord may temporarily
discontinue any of the Appurtenances for a period of not more than
forty-eight (48) hours if Landlord provides Tenant with temporary
Appurtenances, provided such temporary Appurtenances allow Tenant and its
Agents to use the Master Lease Property without any material diminishment
of Tenant's or its Agents' use of the Master Lease Property or any material
interference with the business operations of Tenant or its subtenants on
the Main Building Area.
(e) Notwithstanding anything to the contrary contained in
this Lease, Tenant shall not be required to pay for any incremental,
additional or increased Insurance or any increased costs of Care of the
Master Lease Property which are attributable to Development or any other
acts or omissions of Landlord or its Agents with respect to the Master
Lease Property.
(f) In addition to the easements for existing
Appurtenances provided for in Subsection 6(d), Landlord shall grant to
Tenant, or to any utility company or governmental authority designated by
Tenant, such other easements for utilities, drainage, stormwater
management, and other similar matters on, under, and across the Unimproved
Area as may be reasonably required in connection with the use or occupancy
of the Main Building Area and in accordance with this Lease ("Additional
Easements"). No Additional Easements shall materially and adversely affect
the Development or materially increase the cost of Development. Landlord
shall have a reasonable right of approval of the location of all Additional
Easements. All Additional Easements shall be granted without charge within
ten (10) business days after written request by Tenant, accompanied by the
instrument to be executed and a plat showing the location of the Additional
Easement. Landlord shall make good faith and commercially reasonable
efforts to cause its mortgagees to subordinate their liens against the
Master Lease Property to any Additional Easements.
SECTION 7. TAXES AND IMPOSITIONS
(a) Tenant covenants and agrees to pay, not later than
the first day on which any interest or penalty will accrue or be assessed
for the non-payment thereof, all of the following items applicable to or
affecting the Master Lease Property or any part thereof accruing or payable
from and after the Effective Date and during the Term or applicable
thereto: (i) all real estate taxes and assessments (including, without
limitation, assessments for special business improvement or assessment
districts), (ii) personal property taxes, (iii) occupancy and rent taxes
specifically imposed on tenants in Montgomery County or attributable to the
subtenants of Tenant, (iv) water and sewer rents, rates and charges, (v)
vault taxes and charges, (vi) certificate, license and permit fees, (vii)
any taxes, assessments or governmental levies, general and special,
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ordinary and extraordinary, foreseen and unforeseen, of any kind and nature
whatsoever which at any time prior to or during or applicable to the Term or
any part thereof may be assessed, levied, confirmed, imposed upon, or grow or
accrue or become due and payable out of, or charged with respect to, or
become a lien on, the Master Lease Property or any part thereof, or the
sidewalks or streets in front of or adjoining the Master Lease Property, or
any vault, passageway or space in, over or under such sidewalk or street, or
any other appurtenances to the Master Lease Property, or any personal
property, equipment or other facility used in the operation thereof, or any
use or occupation of the Master Lease Property, or any document by which
Tenant creates or transfers an interest or estate in the Master Lease Property
(except any document releasing an Excluded Area from the Master Lease
Property), and (vii) any fines or penalties or similar governmental charges
applicable with respect to any of the foregoing, together with interest and
costs thereon (all such items aforesaid may sometimes be collectively
referred to herein as "Impositions").
(b) If, by law, any Imposition imposed during the Term,
which is an assessment not related to general real estate taxes, may at the
option of the taxpayer be paid in installments (whether or not interest
shall accrue on the unpaid balance of such Imposition), Tenant may exercise
the option to pay the same (and any accrued interest on the unpaid balance
of such Imposition) in installments and, in such event, shall pay such
installments plus interest as may become due during the Term of this Lease;
provided, that all such payments shall be made before any fine, penalty or
other charge for non-payment of any installment may be added thereto.
(c) Any Imposition (including, without limitation, those
Impositions which have been converted into installment payments by Tenant
as referred to in Subsection (b) above) relating to a period of time which
is partially within the Term and partially beyond the Expiration Date shall
be adjusted between Landlord and Tenant as of the Expiration Date so that
Landlord shall pay that portion of such Imposition which is attributable to
any period of time after the Expiration Date and Tenant shall pay the
remainder thereof. This subsection shall survive termination of the Lease.
(d) Notwithstanding the foregoing, Tenant shall not be
required to pay municipal, state or federal income, excess profits, capital
levy, rental (except as set forth in clause (iii) of Subsection (a)),
estate, succession, inheritance, transfer, recordation (except to the
extent described in Section 30(v)) or gift taxes of Landlord, any corporate
franchise tax imposed upon Landlord or any tax imposed because of the
nature of the business entity of Landlord; provided, however, that if at
any time during the Term, the method of taxation prevailing at the
Effective Date shall be altered so that, in substitution for ad valorem
real estate taxes, any new Imposition or charge, or any part thereof, shall be
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measured by or be based in whole or in part upon the Master Lease Property and
shall be imposed upon Landlord, then all such new Impositions or charges,
or any part thereof, shall be deemed to be included within the term
"Impositions", and Tenant shall pay and discharge the same as herein provided
in respect of the payment of Impositions.
(e) (i) If permitted by Applicable Law, and provided no
Event of Default is then in existence, Tenant shall have the right, at its
own expense, to contest the amount or validity, in whole or in part, of any
Imposition by appropriate proceedings diligently conducted in good faith.
If, under Applicable Law, the contested Imposition must be paid before
undertaking the contest, Tenant shall pay such Imposition (which payment
may be made under protest, at Tenant's option) or, if permitted by Landlord
and any mortgagee of Landlord (including trustees or beneficiaries of deeds
of trust) ("Mortgagee"), either deposit with Landlord, Mortgagee or the
assessing body, as Landlord, Mortgagee or the assessing body may require,
an amount sufficient to pay all amounts referred to in Subsection (ii)
below, or undertake such other method of securing payment of such amounts
as is satisfactory to Landlord, Mortgagee and the assessing body.
(ii) Upon the termination of any such proceeding,
Tenant shall pay the amount of such Imposition or part thereof as finally
determined as due in such proceedings, the payment of which may have been
deferred during the prosecution of such proceedings, together with any
costs, fees, interest, penalties or other liabilities in connection
therewith, and, upon such payment, Landlord shall, provided an Event of
Default is not then in existence, return or request Mortgagee to return any
amount still on deposit with it or with Mortgagee with respect to such paid
Imposition. If at any time during the continuance of such proceedings
Landlord, Mortgagee or the assessing body shall deem the amount deposited
or the undertaking insufficient, Tenant shall, upon thirty (30) days prior
written notice, make an additional undertaking or deposit with Landlord,
Mortgagee or the assessing body, as Landlord or Mortgagee reasonably may
request, or as the assessing body may require, and upon failure of Tenant
to do so, the amount theretofore deposited shall be applied by Landlord,
Mortgagee or the assessing body to the payment, removal and discharge of
such Imposition and the interest and penalties in connection therewith and
any costs, fees (including, without limitation, reasonable attorneys' fees
and disbursements) or other liabilities accruing in any such proceedings,
and the balance, if any, shall be returned to Tenant, or the deficiency, if
any, shall be paid by Tenant immediately on demand of Landlord or Mortgagee
to the taxing authority to which such Imposition is payable. This
subsection shall survive termination of this Lease.
(f) Landlord or Tenant may, if it shall so desire,
endeavor at any time or times to obtain a lowering of the assessed
valuation upon the Master Lease Property, or any part thereof, for the
purpose of reducing Impositions thereon, and in such event, the other party
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will reasonably cooperate in effecting such reduction, but shall not be
required to incur any out-of-pocket costs in so cooperating.
(g) Landlord shall not be required to join in any
proceedings referred to in Subsection (e) above unless the provisions of
any law, rule or regulation at the time in effect shall require that such
proceedings be brought by or in the name of Landlord or any owner of the
Master Lease Property, in which event, Landlord shall join in such
proceedings or permit the same to be brought in its name and shall sign all
documents reasonably necessary to prosecute the proceedings. Landlord shall
not be subject to any liability for the payment of any costs or expenses in
connection with any such proceedings, and Tenant will indemnify and save
harmless Landlord from and against any such costs and expenses, including,
but not limited to, reasonable attorneys' fees and disbursements, and from
any liability resulting from such proceeding. After reimbursing and
indemnifying Landlord for the items referred to in the preceding sentence,
Tenant shall be entitled to any refund with respect to any Imposition and
penalties or interest thereon which have been paid by Tenant (whether
directly or through escrowed funds), or which have been paid by Landlord
but previously reimbursed in full to Landlord by Tenant. Tenant's right to
the refund shall survive termination of this Lease.
(h) The certificate, advice, statements, or bill of the
appropriate official designated by law to make or issue the same or to
receive payment of any Imposition shall be prima facie evidence that the
Imposition is due and unpaid at the time of the making or issuance of such
certificate, advice statement or bill.
(i) Tenant shall make all payments of Impositions
directly to the appropriate governmental authorities, and Landlord appoints
Tenant the attorney-in-fact of Landlord for the purpose of making all
payments to be made by Tenant pursuant to any of the provisions of this
Lease to persons or entities other than Landlord. In case any person or
entity to whom any sum is directly payable by Tenant under any of the
provisions of this Section 7 shall refuse to accept payment of such sum
from Tenant, Tenant shall thereupon give written notice of such fact to
Landlord and shall pay such sum directly to Landlord and Landlord shall
promptly pay such sum to such person or entity.
(j) Tenant shall deliver to Landlord duplicate receipts
or photostatic copies thereof, or other evidence reasonably satisfactory to
Landlord (followed by such duplicate receipts or copies, when available)
showing the payment of all Impositions, within ten (10) business days after
the respective payments are required to be made by Tenant and Landlord
requests such evidence in writing.
(k) Landlord shall furnish to Tenant copies of all
notices of assessment and bills relating to Impositions within ten (10)
business days after Landlord receives any of the same from the governmental
authorities.
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SECTION 8. UTILITIES
(a) Tenant agrees to pay all charges made against the
Master Lease Property for gas, heat, water, electricity, sewage
disposition, telephone and all other utilities and services related to the
Master Lease Property during the Term (collectively, the "Utilities").
(b) Tenant understands, acknowledges and agrees that any
one or more of the Utilities may be interrupted or diminished by reason of
causes beyond Landlord's reasonable control; that Landlord does not
represent or warrant the uninterrupted avail ability of the Utilities; that
Tenant shall be solely responsible for obtaining and maintaining the use of
the Utilities; and that, unless caused by Landlord or its Agents, any such
interruption or diminishment shall not (i) be deemed an eviction or
disturbance of Tenant's right to possession, occupancy and use of the
Master Lease Property or any part thereof, or (ii) render Landlord liable
to Tenant in damages by abatement of Rent or otherwise, or relieve Tenant
from the obligation to perform its covenants under this Lease. In pursuing
the Development, Landlord shall take and cause its Agents to take best
efforts to avoid the interruption or diminishment of the Utilities.
SECTION 9. SIGNS
(a) Tenant shall not inscribe, paint, affix or display
any sign, advertisement or notice (collectively "Signs") on any portion of
the Main Building Area (or on any interior portion of the Main Building
that is visible from the exterior) not presently located thereon without
the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed.
(b) Tenant shall not inscribe, paint, affix or display
any Sign on any portion of the Unimproved Area not presently located
thereon without the prior written consent of Landlord, which consent shall
be in Landlord's sole and absolute discretion. After a Triggering Event
with respect to an Excluded Area on which any Sign then exists, Landlord
shall have the right, at its sole expense, to remove such Sign. If any Sign
is to be removed pursuant to the preceding sentence, Landlord, if requested
by Tenant, shall relocate the Sign, and any lighting and electrical service
related to the Sign, to another location reasonably agreed upon by the
parties and providing substantially similar visibility to that afforded by
the prior location.
(c) Despite the foregoing, Tenant shall not require
Landlord's consent to replace any Sign existing as of the Effective Date
provided that the dimensions and location of the new Sign are substantially
the same as those of the existing Sign.
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SECTION 10. AS-IS CONDITION OF MASTER LEASE PROPERTY
PRIOR TO THE EFFECTIVE DATE, TENANT OWNED THE LAND FOR APPROXIMATELY THIRTY
(30) YEARS, DEVELOPED THE IMPROVEMENTS THEREON, INCLUDING BUT NOT LIMITED
TO THE MAIN BUILDING, AND OCCUPIED THE MAIN BUILDING. CONSEQUENTLY, UPON
THE EFFECTIVE DATE, TENANT SHALL ACCEPT THE MASTER LEASE PROPERTY IN "AS
IS" CONDITION. TENANT AGREES AND ACKNOWLEDGES THAT LANDLORD HAS NOT MADE
ANY REPRESENTATION RESPECTING OR ANY WARRANTY WHATSOEVER, EXPRESS OR
IMPLIED, REGARDING THE MASTER LEASE PROPERTY, INCLUDING, WITHOUT
LIMITATION, REPRESENTATIONS OR WARRANTIES REGARDING THE PHYSICAL NATURE OR
CONDITION OF THE MASTER LEASE PROPERTY. TENANT ACKNOWLEDGES THAT IT IS
COGNIZANT OF AND SATISFIED WITH ALL ASPECTS OF THE MASTER LEASE PROPERTY,
AND THAT AS PROVIDED HEREIN THIS TRANSACTION IS AN "AS IS" TRANSACTION.
SECTION 11. REPAIRS, MAINTENANCE AND MANAGEMENT
(a) Tenant shall, at its sole expense, keep, maintain,
manage and operate (collectively, "Care" or "Care for" or "Care of" as the
context may require) the Main Building Area in good condition and repair in
a manner consistent with Care for Class B suburban buildings of similar age
and character and used for similar purposes in Montgomery County, Maryland
("Comparable Buildings"), and in compliance with all Applicable Laws in all
material respects. Except as otherwise provided in Subsection 5(b)(iii),
Subsection 5(b)(iv)(A), Subsection 5(b)(iv)(B), Subsection 5(b)(iv)(C),
Subsection 5(b)(iv)(D), Subsection 8(b), Section 10, Subsection 11(a),
Subsection 11(c), Subsection 11(d), Subsection 12(a), Subsection 15,
Subsection 16(b), Subsection 17(a)(i), Subsection 17(a)(iii), Subsection
17(b), Section 23, Subsection 27(b), Subsection 27(f) of this Lease to the
contrary, Tenant shall make and perform all necessary maintenance and
repairs to the Main Building Area, whether structural and non-structural,
ordinary and extraordinary, foreseen and unforeseen, of every nature, kind
and description. All repairs made by Ten ant shall be reasonably suited to
accomplish their intended purposes and shall be in compliance with
Applicable Laws in all material respects. The necessity for or adequacy of
Care shall be measured by the standards which are appropriate for
Comparable Buildings; provided, that Tenant shall in any event make all
repairs necessary to avoid structural damage to the Main Building or other
damage or injury to persons, property and other portions of the Master
Lease Property. However, Landlord shall be responsible for any repairs
necessitated by Landlord or its Agents.
(b) Tenant shall further Care for the remainder of the
Master Lease Property and keep the same in good condition and repair in a
manner consistent with other similar properties in Montgomery County,
Maryland (the "Comparable Properties") and in material compliance with all
Applicable Laws. All repairs made by Tenant shall be reasonably suitable to
accomplish their purposes and shall be in material compliance with
Applicable Laws. Tenant shall in any event make all repairs necessary to
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avoid structural damage to the improvements or other damage or injury to
persons, property and other portions of the Master Lease Property. However,
Landlord shall be responsible for any repairs necessitated by Landlord or its
Agents. Further, Tenant, while it was owner of the Property, recorded a
Declaration of Easements, Covenants, and Restrictions (the "Declaration")
which, among other things, sets forth a standard of Care for the Master Lease
Property. Landlord hereby delegates to Tenant, and Tenant hereby accepts
from Landlord, the maintenance and repair obligations applicable to the
Master Lease Property and described in Section 6 of the Declaration.
(c) If any dispute shall arise between Landlord and
Tenant as to the standard of Care required under Subsection (a) or (b)
above, the matter shall be resolved by binding arbitration in accordance
with the then prevailing Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"). Upon demand for arbitration by either
party in accordance with such rules, the matter shall be decided by a
single arbitrator in Montgomery County, Maryland, selected in accordance
with the prevailing Commercial Arbitration Rules of the AAA. In deciding
any matter relating to the Main Building Area, the arbitrator shall take
into account the age and character of the Main Building, the standards of
Care set forth in this Section 11, and the remaining Term of this Lease.
The arbitrator shall hold a hearing on the matter within forty-five (45)
days after he or she is appointed. At least twenty (20) days before the
hearing, each party shall submit to the other party a written statement of
its case, copies of all documents upon which it intends to rely at the
hearing, and a list of the witnesses it intends to call to testify at the
hearing. The hearing shall be concluded within fifteen (15) days after the
initial hearing date and the arbitrator shall decide the matter within
fifteen (15) days after the hearing is concluded. The arbitrator shall
render his or her decision in writing, setting forth the reasons for the
decision. Each party shall bear its own costs related to the arbitration,
except that the parties shall share equally all filing fees and other costs
imposed by the AAA in connection with the arbitration and the fees of the
arbitrator. The decision of the arbitrator shall be final and
non-appealable and judgment on the decision may be entered in any court of
competent jurisdiction.
(d) Notwithstanding Subsections (a) and (b), unless
required by Applicable Laws, Tenant shall not be required to (i) improve,
upgrade, re-model, retrofit, or renovate all or any part of the Main
Building Area or (ii) make any replacement or major repair of any
component, element or system of the Main Building Area where a more minor
repair may be sufficient to allow the ordinary use and occupancy of the
Main Building Area.
(e) In addition to the Care required by this Section 11,
Tenant, at its sole expense, within five (5) years after the Effective Date
(subject to extension for Unavoidable Delays), shall complete the work (the
"Roof Work") described in Exhibit F attached hereto and made a part hereof.
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(f) Landlord agrees that during the Term, Tenant shall
have the right, after providing prior written notice to Landlord, to
enforce any rights of Landlord under applicable warranties, guarantees,
licenses and permits applicable to the Main Building Area. Landlord shall
sign such documents and otherwise reasonably cooperate with Tenant to
facilitate such enforcement, provided that Landlord shall not be required
to incur any out of pocket expense to third parties in so doing.
SECTION 12. ACCESS TO MASTER LEASE PROPERTY
(a) Tenant acknowledges that Landlord has a significant
economic interest in the Care of the Main Building Area and that Landlord,
pursuant thereto, has a need, from time to time, to inspect the Main
Building Area to insure Tenant's conformity with the covenants of this
Lease. Tenant, therefore, hereby authorizes Landlord and any parties
authorized by Landlord to perform such inspections of the Main Building
Area as Landlord from time to time may reasonably deem appropriate.
Landlord shall have the right to enter any part of the Main Building Area
at all reasonable times, upon reasonable advance notice to Tenant and
accompanied by a representative of Tenant, for the purposes of making such
inspections, showing the Main Building Area to prospective purchasers,
investors, mortgagees and tenants, and making such repairs, alterations or
improvements to the Main Building Area as Landlord may deem necessary or
desirable if Tenant fails to properly Care for same after notice and
opportunity to cure as provided for in Section 21(a). No such entry shall
materially interfere with the use and occupancy of the Main Building Area
by Tenant, its subtenants and licensees. Landlord shall incur no liability
to Tenant for such entry except in the case of death, bodily injury, or
property damage caused by Landlord or its Agents. Notwithstanding the
foregoing, Landlord shall have no right to enter upon those portions of the
Main Building which are secured or confidential areas pursuant to
Applicable Laws or agreements to which Tenant is subject ("Restricted
Areas"). Further, no person who is a foreign national may enter into the
Main Building on behalf of Landlord, unless approval of such person is
obtained from Tenant in advance. Such approval may be withheld only to the
extent entry by such person would violate Applicable Laws or agreements to
which Tenant is subject.
(b) Tenant also acknowledges that Landlord has a
significant economic interest in the Care of the Unimproved Area, and an
on-going need to access the Unimproved Area in connection with Development.
Tenant, therefore, hereby authorizes Landlord and any parties authorized by
Landlord to enter upon the Unimproved Area at any time without notice and
without being accompanied by a representative of Tenant, to perform such
inspections of the Unimproved Area as Landlord from time to time may
reasonably deem appropriate, and further to perform whatever activities
Landlord deems necessary or desirable, in its sole discretion, to aid
Development, provided that such activities do not amount to a Triggering
Event. Additionally, Tenant
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authorizes Landlord and any parties authorized by Landlord to use and
maintain such then existing roads and other infrastructure in the
Unimproved Area, and to grant such easements and rights of way with respect
to the Unimproved Area as Landlord deems necessary or desirable, in its
sole discretion. However, Landlord's exercise of its rights under this
Subsection 12(b) shall not materially interfere with the use of, or access
to, the Unimproved Area or the Main Building Area by Tenant or its Agents.
No development or construction work shall take place in the Unimproved Area
unless such Unimproved Area is first excluded from this Lease in accordance
with Section 6.
SECTION 13. ALTERATIONS AND PERSONAL PROPERTY
(a) Except as required by Tenant's repair and maintenance
obligations under this Lease, Tenant shall not make any alterations,
additions, installations or other improvements ("Alterations") to the
Master Lease Property or any part thereof without the prior written consent
of Landlord, which consent shall not be unreasonably withheld or delayed
with respect to the Main Building Areas but which may be withheld in
Landlord's sole discretion with respect to the Unimproved Area. However,
nothing in this Section shall be deemed to diminish Landlord's obligation
to grant easements under Section 6(e) or Tenant's right to replace Signs
under Section 9(d). Moreover, Tenant need not seek the consent of Landlord
to (i) install any Alteration in the Main Building Area costing One Hundred
Seventy Thousand Dollars ($170,000.00) or less, (ii) install any tenant
improvement work for subleased space in the Main Building, (iii) install
communications equipment on the roof of the Main Building (the "Roof Based
Facilities") (provided any such piece of the Roof Based Facilities does not
exceed twenty (20) feet in diameter), or (iv) dismantle and remove any
clean room contained in the Main Building (collectively, "Preapproved
Alterations"). Notwithstanding anything to the contrary herein, in no event
shall Tenant make any Alterations which would affect the structure or
structural integrity of the Main Building or the facade of the Main
Building or construct or place any communications equipment on the exterior
of the Main Building or other exterior portions of the Main Building Area
(except the Roof Based Facilities described in clause (iii) above) without
obtaining the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed. Any Alteration in or to the Master Lease
Property, whether or not requiring the approval of Landlord, shall be
subject, however, in all cases to the following:
(i) Except to the extent that any Alteration is a
Preapproved Alteration, no Alteration shall be made without at least 30
days prior notice to Landlord (unless Applicable Laws require otherwise or
except in the case of an emergency, in which case, Tenant shall give
Landlord as much notice as is practicable), accompanied by a copy of the
proposed plans and specifications in detail reasonably sufficient for
Landlord to review same, the identity of the contractor and any
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subcontractors, and a copy of all contracts with respect to the Alteration.
All Alterations shall be made promptly at the sole cost and expense of
Tenant and in a good and workmanlike manner and in material compliance with
all Applicable Laws. Tenant shall promptly reimburse Landlord upon demand,
up to One Thousand Dollars ($1,000) in each instance, for any reasonable
costs and expenses incurred by Landlord to third parties in connection with
Landlord's review of Tenant's proposed plans and specifications, or
revisions thereof (collectively, the "Plans"); provided, however, that
Tenant shall not be obligated to reimburse Landlord for Landlord's review
of any Plans in connection with Restoration (except as provided in Section
15). Upon the request of Landlord, but not more than once each Lease Year,
Tenant shall provide Landlord with a written description of Alterations
made to the Master Lease Property since the later of (i) the Commencement
Date, and (ii) the date of the last such report. In addition, Tenant shall
provide "CAD" drawings to Landlord showing the current configuration of the
Main Building, including, without limitation, any Alterations made to the
Master Lease Property. Such drawings shall be delivered to Landlord
approximately twenty-four (24) months before the Expiration Date and within
thirty (30) days after the expiration or earlier termination of this Lease.
(ii) The Master Lease Property at all times shall
be kept by Tenant free of liens for labor and materials supplied or claimed
to have been supplied to the Master Lease Property in connection with the
Alterations.
(iii) Notice is hereby given that Landlord shall
not be liable for any labor or materials furnished to or for Tenant.
Furthermore, notice is hereby given to Tenant and Tenant's mechanics,
laborers and materialmen with respect to the Master Lease Property that no
mechanic's, materialman's or laborer's lien shall attach to or affect the
reversion or other interest of Landlord in or to the Master Lease Property.
(iv) No Alteration shall, when completed, be of
such a character as to render any part of the Master Lease Property
anything other than a complete, self-contained structural unit.
(v) Worker's compensation, builder's risk and
general liability insurance with respect to the Alteration as required by
Section 14 shall be maintained by Tenant.
(vi) All Alterations, other than roof-top
communications equipment, shall be the property of Landlord. Tenant shall
have no obligation to remove, or to pay for the removal of, any
Alterations, other than roof-top communications equipment, upon termination
of this Lease.
(b) All personal property, including, but not limited to,
trade fixtures, furniture, furnishings, telephone switching equipment,
roof-top communications equipment, generators and
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uninterrupted power supply equipment, and moveable equipment ("Personal
Property") owned by Tenant, and all Restricted Property, upon or in the
Master Lease Property shall remain the property of Tenant, or remain under
Tenant's control, and shall be removed by Tenant, at its sole cost and
expense, upon termination of this Lease or surrender by Tenant of the
Master Lease Property to Landlord. (The term "Personal Property" does not
include Fixtures and Limited Personal Property as defined in the Purchase
and Sale Agreement.) If such removal shall injure or damage the Master
Lease Property, Tenant shall repair the damage at its sole cost and
expense, reasonable wear and tear excepted. If Tenant fails to so remove
and repair, Landlord shall have the right to remove the Personal Property
and Restricted Property and to dispose of the same and to repair the Master
Lease Property without accountability to Tenant, and at the sole cost and
expense of Tenant. The "Restricted Property" shall mean all personal
property, including, but not limited to documents and equipment, which are
required to be secured or kept confidential pursuant to Applicable Laws or
agreements to which Tenant is subject. The Restricted Property shall at all
times, both during and after the Term, be the sole responsibility of
Tenant. Tenant covenants and agrees that no Restricted Property shall be
left in or upon the Master Lease Property after termination of this Lease
or surrender by Tenant of the Master Lease Property to Landlord. Upon the
expiration or earlier termination of this Lease (or, in the case of
Excluded Areas, at the time such areas are excluded from the Master Lease
Property) all right, title and interest to any underground storage tanks
located in the Master Lease Property (or, in the case of Excluded Areas,
located in such Excluded Areas) shall automatically convey to Landlord
without the requirement that either party execute any other documents to
effectuate the conveyance and shall become part of Landlord's property.
SECTION 14. INSURANCE
(a) At all times during the Term, Tenant, at its own cost
and expense, shall carry and maintain the insurance coverage set forth
below (the "Insurance"):
(i) Hazard insurance covering the Master Lease
Property (including, without limitation, all Alterations now or hereafter
made to the Master Lease Property) under an "All Risks of Physical Loss"
policy (an "All Risks Policy") written with full replacement coverage
("Replacement Value"), i.e., in an amount equal to 100% of the full costs
of replacement of the insurable portions of the Master Lease Property,
excluding foundation and excavation costs and subject to such reasonable
deductibles as Tenant may see fit to carry and as Landlord reasonably
approves. For the purposes of this Section 14, deductibles up to the
amounts stated on Schedule II attached hereto shall automatically be deemed
reasonable deductibles without any need for Landlord's approval. The
insurer's determination of Replacement Value shall be binding and
conclusive on Landlord and Tenant. A stipulated value or agreed
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amount endorsement deleting the co-insurance provision of the policy shall
be provided with such insurance. If not otherwise included within the All
Risks Policy specified above, Tenant shall carry or cause to be carried, by
endorsement to such All Risks Policy, coverage against (i) damage due to
water and sprinkler leakage, with limits of coverage reasonably required by
Landlord, and (ii) building ordinance covering increased costs of
construction with a limit of not less than twenty-five percent (25%) of the
value of the Main Building Area and demolition with a limit of not less
than ten percent (10%) of the value of the Main Building Area. The
Replacement Value shall include the cost of debris removal and the value of
grading, paving and landscaping, and architects', engineers' and
development fees. During the course of any Alteration, Tenant shall carry
insurance in the form of a "Builder's Risk" policy with respect thereto in
such amount as reasonably required by Landlord.
(ii) Commercial liability insurance with respect to the
Master Lease Property and the operations related thereto, whether conducted
on or off the Master Lease Property, against liability for death, bodily
injury, and property damage (the "Liability Policy"). The Liability Policy
shall be on an occurrence basis and specifically shall include:
(A) Contractual liability to cover Tenant's
obligations to indemnify Landlord as required under this Lease; and
(B) Water damage and sprinkler leakage legal
liability.
The Liability Policy shall be written for a combined single limit of not
less than Ten Million Dollars ($10,000,000). Such limit shall be subject to
reasonable increase from time to time (but not more than once every
twenty-four (24) months) in accordance with the limits then being
customarily carried with respect to Comparable Buildings and Comparable
Properties, or operations similar to those being conducted on the Master
Lease Property. Tenant may satisfy the required coverage limits for the
Liability Policy by carrying a combination of primary and excess liability
policies providing aggregate coverage in at least the limits stated herein
for such policy.
(iii) Boiler and machinery insurance with limits as from time
to time customary for Comparable Buildings and appropriate in the light of the
cost of repairing potential damage.
(iv) Rent loss insurance ("Rent Insurance") on the "All Risks
of Physical Loss" basis in an amount equal to twenty-four (24) months of
the then current Base Rent.
(b) Tenant further covenants and agrees, at its sole cost
and expense, to procure and maintain or cause to be procured and maintained
at all times all necessary worker's compensation
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insurance covering all persons employed by Tenant, Existing Tenants and
Subtenants in and about the Master Lease Property.
(c) Tenant further covenants and agrees, at its sole cost
and expense, to procure and maintain or cause to be procured and maintained
at all times Comprehensive Automobile Insurance covering all owned,
non-owned, and hired automobiles of tenant in limits of not less than One
Million Dollars ($1,000,000).
(d) In addition to the insurance carried by Tenant,
during the course of any Alteration or Care work undertaken by a contractor
hired by or for Tenant, Tenant shall require such contractor to carry
public liability insurance in limits of not less than Two Million Dollars
($2,000,000).
(e) Tenant may at its option provide any Insurance
coverage under a blanket insurance policy instead of a separate policy or
policies, provided that the certificate or certificates issued under such
blanket insurance policy, and the coverage afforded thereby, conforms in
all respects to the requirements hereof (a "Blanket Policy").
(f) Tenant acknowledges that it currently carries flood
and earthquake coverage ("Flood and Earthquake Insurance"). Tenant not
shall not be required to maintain the Flood and Earthquake Insurance during
the Term; provided, however, Tenant shall give Landlord at least thirty
(30) days written notice prior to any discontinuance of the Flood and
Earthquake Insurance. Notwithstanding the foregoing, (i) in the event that
any portion of the Property is classified as being located in (A) a Class A
flood zone or any other flood zone indicating a higher frequency of
predicted flooding than a Class A flood zone as indicated by the Federal
Emergency Management Agency (a "Flood Zone"), or (B) a B3 seismic activity
zone or any other seismic activity zone indicating a higher frequency of
predicted seismic activity than B3 seismic activity zone as indicated by a
consensus of insurance underwriters that underwrite such policies for
earthquake coverage (a "Seismic Activity Zone"), Tenant shall procure Flood
and Earthquake Insurance if such coverage is customary for Comparable
Buildings and Comparable Properties, or (ii) to the extent the Master Lease
Property is insured under a Blanket Policy and such Blanket Policy contains
Flood and Earthquake Insurance for any other property under such Blanket
Policy, Tenant shall maintain Flood and Earthquake Coverage on the Master
Lease Property.
(g) All Insurance, except for Flood and Earthquake
Insurance if the Property is not in Flood Zone or Seismic Activity Zone,
shall be in such form and shall be issued by such responsible insurance
companies licensed to do business in the State of Maryland as are
reasonably approved by Landlord. Any insurance company rated by Bests
Insurance Reports (or any successor publication of comparable standing) as
"A-, VIII" or better and by Standard & Poor's (or any successor of
comparable standing) as "A" or better (or the equivalent of such rating)
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(collectively, the "Standard Rating") shall be deemed a responsible company
and acceptable to Landlord. Notwithstanding the foregoing, in the event
that the rating of such insurance falls below the Standard Rating during
the term of the policy of such insurance, Tenant shall not be required to
procure replacement coverage until the scheduled expiration or earlier
termination of such policy; provided, however, in no event shall such
period exceed twelve (12) months. Upon the Effective Date, and thereafter,
not less than five (5) days prior to the expiration dates of the expiring
policies of Insurance, originals of replacement policies or renewal
certificates, as the case may be, bearing notations evidencing the payment
of premiums or accompanied by other evidence reasonably satisfactory to
Landlord of each payment, shall be delivered by Tenant to Landlord
("Insurance Notice"). If Tenant does not provide Landlord with the
Insurance Notice or if Tenant lets any Insurance lapse, Landlord shall have
the right, without providing any notice to Tenant, to procure replacement
coverage that is effective upon such lapse and Tenant shall promptly
reimburse Landlord for the reasonable cost thereof.
(h) All policies of Insurance shall name Landlord,
Tenant, and, if requested by Landlord in writing, any Mortgagee as
insureds, as their respective interests may appear. All policies of
Insurance other than the Liability Policy shall, if requested in writing by
Landlord, name the Mortgagee as a loss payee, as the interest of such
Mortgagee may appear, but subject to the provisions of Section 15. Any
request of coverage as to a Mortgagee shall set forth the name and address
of the Mortgagee.
(i) Tenant shall not violate or permit to be violated any
of the conditions, provisions or requirements of any Insurance policy, and
Tenant shall perform, satisfy and comply with, or cause to be performed,
satisfied and complied with, the conditions, provisions and requirements of
all Insurance policies and the companies writing such policies so that, at
all times, the Insurance shall be provided by companies reasonably
acceptable to Landlord, except as otherwise provided in Subsection 14(g).
(j) Each policy or certificate of Insurance shall contain
(i) an agreement by the insurer that such policy shall not be canceled,
modified or denied renewal without at least thirty (30) days prior written
notice to Landlord and any Mortgagee named as an insured or loss payee,
except that if the reason for cancellation or denial of renewal is
nonpayment of premiums, the notice will be at least ten (10) days, and (ii)
a waiver of subrogation by the insurer.
(k) If by reason of changed economic conditions the
Insurance amounts referred to in this Lease become inadequate, upon
Landlord's request, the limits shall be reasonably increased by Tenant from
time to time (but not more often than once every twenty-four (24) months)
to meet the changed conditions, but any changes in limits shall be
consistent with what is customary for
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Comparable Buildings and Comparable Properties or for operations similar to
those conducted on the Master Lease Property. Upon the reasonable request
of Landlord, Tenant shall procure and obtain such types of insurance in
lieu of the current insurance then required under this Lease; provided that
such replacement coverage is of a substantially similar scope and nature as
the Insurance then required under this Lease and is the type of insurance
that is customary for Comparable Buildings and Comparable Properties or for
operations similar to those conducted on the Master Lease Property.
Notwithstanding the foregoing, in the event that Landlord makes such
request during the term of the policy of the insurance that is being
replaced, Tenant shall not be required to procure replacement coverage
until the scheduled expiration or earlier termination of such policy;
provided, however, in no event shall such period exceed twelve (12) months.
(l) Notwithstanding any provisions in this Section 14 or
elsewhere in this Lease to the contrary, any deductible to the All Risk
Policy shall be deemed an amount covered by Insurance and shall be promptly
paid by Tenant in the event of an Insurable Casualty.
SECTION 15. DAMAGE OR DESTRUCTION
(a) In case of damage to or destruction of the Master
Lease Property or any part thereof by fire or other casualty ("Damage"),
Tenant will promptly give written notice thereof to Landlord. If the Damage
is caused by an Insurable Casualty, Tenant shall, in accordance with the
provisions of this Section and all other provisions of this Lease, restore
the same as nearly as possible to its condition and character immediately
prior to such Damage, subject to Tenant's right to make Alterations in
substantial conformity with and subject to the conditions of Section 13
hereof, and in conformity with the plans and specifications required to be
prepared pursuant to Section 13 and subject to any restrictions imposed by
Applicable Laws ("Restoration"), whether or not insurance proceeds are
sufficient to pay in full the cost of the work. The Restoration shall be
commenced within sixty (60) days after the loss is finally adjusted with
the insurer, the plans, specifications and contract for the Restoration
have been approved by Landlord under Section 15(b)(i) and (ii), and all
necessary permits for the Restoration have been issued. Tenant shall pursue
such adjustment of the loss, approvals of Landlord, and issuance of permits
with reasonable diligence after the Damage. The Restoration shall be
prosecuted and completed with reasonable diligence after its commencement,
Unavoidable Delays excepted. Landlord shall cooperate fully with Tenant in
order to obtain the largest possible insurance recovery and shall execute
any and all consents and other instruments and take all other actions
reasonably necessary to accomplish the same and to cause the insurance
proceeds to be paid as provided in Subsection (c) below.
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(b) In the event that the cost of Restoration exceeds One
Hundred Seventy Thousand Dollars ($170,000), Tenant agrees to furnish to
Landlord at least twenty (20) days before the
commencement of Restoration, the following:
(i) Complete plans and specifications for
Restoration prepared by a licensed and reputable architect reasonably
satisfactory to Landlord (the "Architect"), which plans and specifications
shall meet with the reasonable approval of Landlord, together with the
approval thereof by all governmental authorities then exercising
jurisdiction with regard to such work, and which plans and specifications
shall be and become the sole and absolute property of Landlord in the event
that, for any reason, this Lease shall be terminated.
(ii) A contract then customary in the trade with
(A) the Architect, and (B) a reputable and responsible general contractor
reasonably approved by Landlord, providing for the completion of
Restoration in accordance with said plans and specifications, which
contract shall meet with the reasonable approval of Landlord.
(iii) Assignment of the contract with the
Architect and the general contractor so furnished, duly executed and
acknowledged by Tenant, the Architect and the general contractor, by their
terms to be effective upon any termination of this Lease or upon Landlord's
re-entry upon the Master Lease Property prior to the complete performance
of such contracts.
(c) All insurance proceeds payable on account of Damage
shall be paid to Mortgagee (provided such Mortgagee is an Institutional
Mortgagee) or to a trustee designated by Mortgagee ("Insurance Trustee")
and applied to the payment of the cost of Restoration, including the cost
of temporary repairs or for the protection of the Master Lease Property
pending the completion of permanent work pursuant to the plans,
specifications and contracts (all of which temporary repairs, protection of
Master Lease Property and permanent work shall be deemed to be part of the
Restoration). In the event of Damage in which the proceeds of insurance are
Five Hundred Thousand Dollars ($500,000.00) or less, such proceeds shall be
payable directly to Tenant, in trust, to be applied to the Restoration.
Such funds shall be used only for such purposes until the Restoration is
completed and any excess proceeds shall be retained by Tenant for its own
account. In the event of Damage in which the proceeds of insurance exceed
Five Hundred Thousand Dollars ($500,000.00), such proceeds shall be
deposited with Mortgagee or with the Insurance Trustee in a bank in the
Washington D.C. metropolitan area as designated by Landlord and, upon
written request of Tenant, shall be paid out to Tenant from time to time
(but no more often than once per month) as Restoration progresses, in
trust, for the purposes of paying the cost of Restoration. The receipt by
Landlord and its Mortgagee of the following are conditions precedent to
each payment of insurance proceeds by the Mortgagee or Insurance Trustee to
Tenant:
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(i) A requisition ("Requisition") signed by
Tenant, dated not more than 30 days prior to such request, certifying the
following:
(A) that the sum then requested either has
been paid by Tenant or is justly due to contractors, subcontractors,
materialmen, engineers, architects or other persons who have rendered
services or furnished materials for the portion of the Restoration therein
specified, and giving a brief description of such services and material and
the several amounts so paid or due to each of said persons in respect
thereof, and stating that such amounts have not been the subject of any
previous Requisition and do not exceed the value of the services and
materials described in the Requisition, and stating, in reasonable detail,
the progress of the work in connection with Restoration up to the date of
the Requisition;
(B) that, to the best of Tenant's knowledge,
except for the amount set forth in the Requisition and except for any
amount related to services or materials furnished after the date of the
Requisition, there is no other amount then due for services or materials in
connection with Restoration which, if unpaid, might become the basis of a
mechanic's, materialmen's, or similar lien upon the Master Lease Property
or any part thereof; and
(C) that, to the best of Tenant's knowledge,
the materials, fixtures and equipment for which payment is being requested
pursuant to this Section are substantially in accordance with the plans and
specifications approved by Landlord.
For the purposes of this Subsection 15(c)(i), (i) "Institutional Mortgagee"
shall mean Nomura Asset Capital Corporation and its successors and assigns
or any federally insured savings bank, federally insured commercial bank,
trust company, life insurance company, casualty insurance company, pension
fund, real estate investment trust, mortgage company, credit union, college
or university, charitable institution, or government agency or fund with
tangible net worth in excess of Two Hundred Fifty Million Dollars
($250,000,000), and (ii) "Tenant's knowledge" shall mean the then current
knowledge of the General Manager of Corporate Services of Tenant or such
other authorized representative of Tenant overseeing the Restoration.
(ii) A certificate or report of a title insurance
company reasonably satisfactory to Landlord and such Mortgagee, or other
evidence reasonably satisfactory to Landlord and such Mortgagee, to the
effect that there has not been filed with respect to the Master Lease
Property or any part thereof or upon Tenant's leasehold interest therein
any mechanic's, materialman's or other lien in respect of such services
rendered or materials furnished which has not been discharged of record.
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(iii) A certificate from Tenant stating that, to
the best of Tenant's knowledge, no Event of Default then exists.
Simultaneously with receipt of the insurance proceeds, Tenant shall deliver
to Landlord and such Mortgagee acknowledgments of payment and waivers of
lien from all vendors, mechanics and laborers receiving payment, to the
extent of the work performed through the date of the previous Requisition.
(d) If the insurance proceeds shall be insufficient to
pay the entire cost of Restoration, Tenant will pay the deficiency.
(e) Upon receipt by Landlord or any such Mortgagee of
satisfactory evidence of the character required by Subsection (c) above
that Restoration has been completed and paid for in full (including,
without limitation, a copy of the permanent or temporary certificate of
occupancy for the Main Building, if a new certificate is issued or if the
then existing certificate is modified, and a then current, complete set of
"as built" plans for the Restoration, if the cost of such plans is covered
by Insurance) and that there are no Events of Default then in existence,
any balance of the insurance proceeds at the time held by Mortgagee or the
Insurance Trustee shall be paid to and may be retained by Tenant for its
own account.
(f) Notwithstanding the foregoing, if at the time of any
Damage, Tenant fails to maintain a credit rating for Tenant's corporate
debt of at least BB as rated by an "Approved Credit Rating Agency", the
following provisions shall apply:
(i) All references in Subsection 15(c) to "Five
Hundred Thousand Dollars ($500,000)" shall be deemed references to "One
Hundred Thousand Dollars ($100,000)";
(ii) The following shall be additional
conditions precedent to those set forth in Subsection 15(c) in order for
Tenant to receive insurance proceeds held by the Mortgagee or Insurance Trustee:
(A) A Certificate from the Architect
stating that the materials, fixtures and equipment for which payment is
being requested pursuant to this Section are substantially in accordance with
the plans and specifications approved by the Landlord.
(B) Upon occurrence of Damage, Tenant
shall deposit with Mortgagee or the Insurance Trustee any deductible under
the Insurance. In addition, Tenant shall deposit with the Mortgagee and
Insurance Trustee any excess cost of the Restoration over the Insurance
Proceeds and Deductible held by Landlord at the time of final adjustment of
the loss or at the time of any Requisition.
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(C) Ten percent (10%) of the cost of the
Restoration shall be held back by Mortgagee or the Insurance Trustee until
Tenant has complied with all of the provisions of this Section 15.
For purposes of this Subsection 15(f), an "Approved Credit Rating Agency"
shall mean Standard & Poor's, Moody's or any other nationally recognized
rating agency.
(g) If any Damage shall occur, then, to the extent
Landlord is compensated by the Rent Insurance required by Section
14(a)(iv), Base Rent shall abate from the date of the Damage, until the
date the Restoration is completed, to the extent that the Main Building is
rendered unusable by the Damage.
(h) Despite the foregoing, if (i) Damage in excess of TWO
MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($2,500,000) or in excess
of an amount equal to the remaining payments of Base Rent due under this
Lease, whichever is less, is caused by a casualty which is not an Insurable
Casualty, or (ii) during the last two (2) Lease Years of the Term, Damage
is caused by an Insurable Casualty and the loss amounts to twenty-five
percent (25%) or more of the Replacement Value of the Main Building, then,
in either event, Tenant shall have the right to terminate this Lease by
giving written notice of termination to Landlord within ninety (90) days
after the occurrence of such Damage provided that the Rent Insurance
required by Section 14(a)(iv) is then in effect. In the event of such
termination, the Term of this Lease shall expire and come to an end thirty
(30) days after the day that the notice is given with the same force and
effect as if that day had been the Expiration Date and any insurance
proceeds payable for the Damage shall exclusively belong to Landlord.
Thereafter, neither party shall have any further rights or liabilities
under this Lease, except with respect to any obligations which arose or
accrued before the termination or with respect to any rights or liabilities
which expressly survive termination under the terms of this Lease. As used
in this Lease "Insurable Casualty" means any casualty, regardless of the
degree of the Damage, covered by Insurance which Tenant is required to
maintain under Section 14, whether or not Tenant maintains such insurance.
Notwithstanding any other provision contained in this Section, Tenant shall
not be entitled to terminate this Lease (A) if the Damage is caused by (i)
any fraudulent or dishonest act or acts committed by the Tenant or any of
the Tenant's employees with the manifest intent to (a) cause the Tenant to
sustain such loss and (b) obtain financial benefit for the Tenant, Tenant's
employee, or for any other person or organization intended by the Tenant or
the Tenant's employee to receive such benefit (other than salaries,
commissions, fees, bonuses, promotions, awards, profit sharing, pensions,
or other employee benefits earned in the normal course of employment), or
(ii) the risks of contraband or illegal trade, or (iii) any of the
following: (1) defective design or specifications, faulty material, or
faulty workmanship; (2) mechanical breakdown; (3) ordinary wear and tear,
gradual deterioration, insect, vermin, inherent vice and loss of use; (4)
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normal settling or shrinkage of walls, floors, or ceilings; or (5) loss of
market, business interruption, or extra expense loss due to delay with
respect to property in transit; or (B) in the case of clause (i) of the
first sentence of this Subsection 15(h), if Landlord provides the funds, in
excess of the applicable amount set forth in such clause (i), necessary to
cause Restoration of the Main Building, in which event such funds will be
applied in the manner provided in Subsection 15(c), as if such funds were
insurance proceeds.
(i) Notwithstanding any other provision contained in this
Section, all insurance proceeds payable for loss or damage to Tenant's
Personal Property shall be the exclusive property of and be paid directly
to Tenant.
(j) Tenant hereby releases Landlord and Landlord hereby
releases Tenant from any and all liability for any loss, damage or injury
to person or property occurring in, on, about or to the Master Lease
Property, the Main Building Area or personal property within the Main
Building Area, by reason of fire or other casualty, to the extent proceeds
of Insurance are received for such loss, damage, or injury or to the extent
such proceeds should have been received under Insurance required to be
carried by this Lease. Because the provisions of this Subsection will
preclude the assignment of any claim mentioned herein by way of subrogation
or otherwise to an insurance company or any other person, Tenant shall give
to each insurance company which has issued to it one or more policies of
insurance, notice of the terms of the release contained in this Subsection,
and have such insurance policies properly endorsed, if necessary, to
prevent the invalidation of insurance coverages by reason of the release
contained in this Subsection.
SECTION 16. INDEMNIFICATION
(a) Tenant will protect, indemnify and save harmless
Landlord from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses (including without
limitation, reasonable attorneys' fees and expenses) imposed upon or
incurred by or asserted against Land lord by reason of (i) any accident,
injury to or death of persons or loss of or damage to property occurring on
or about the Master Lease Property or any part thereof caused by the
negligence or intentional misconduct of Tenant or its Agents; (ii) any
failure on the part of Tenant to perform or comply with any of the terms of
this Lease; or (iii) performance of any labor or services or the furnishing
of any materials or other property in respect of the Master Lease Property
or any part thereof at the direction of Tenant. Tenant hereby releases
Landlord from any and all liability for the same.
(b) Landlord will protect, indemnify and save harmless
Tenant from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses (including without
limitation, reasonable attorneys' fees and
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expenses) imposed upon or incurred by or asserted against Tenant by reason
of (i) any accident, injury to or death of persons or loss of or damage to
property occurring on or about the Master Lease Property or any part
thereof, caused by the negligence or intentional misconduct of Landlord or
its Agents; (ii) any failure on the part of Landlord to perform or comply
with any of the terms of this Lease; or (iii) performance of any labor or
services or the furnishing of any materials or other property in respect of
the Master Lease Property or any part thereof at the direction of Landlord.
Landlord hereby releases Tenant from any and all liability for the same.
(c) The amount which any party (an "Indemnifying Party")
is or may be required to pay to any other party (an "Indemnitee") pursuant
to this Section 16 shall be reduced (including, without limitation,
retroactively) by any insurance proceeds (or the amount of insurance
proceeds that would have been recovered had insurance required by this
Lease been obtained) or other amounts actually recovered by or on behalf of
such Indemnitee, in reduction of the related loss. If an Indemnitee shall
have received payment (an "Indemnity Payment") required by this Lease from
an Indemnifying Party in respect of any loss and shall subsequently
actually receive insurance proceeds or other amounts in respect to such
loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal
to the amount of such insurance proceeds or other amounts actually received
(up to but not in excess of the amount of any Indemnity Payment made
hereunder). An insurer who would otherwise be obligated to pay any claim
shall not be relieved of the responsibility with respect thereto, or,
solely by virtue of the indemnification provisions hereof, have any
subrogation rights with respect thereto, it being expressly understood and
agreed no insurer or any other third party shall be entitled to a
"windfall" (i.e., a benefit they would not be entitled to receive in the
absence of the indemnification provisions) by virtue of the indemnification
provisions hereof.
(d) Procedures for indemnification of Third Party Claims
shall be as follows:
(i) If an Indemnitee shall receive notice or
otherwise learn of the assertion by a person (including, without
limitation, any governmental entity) who is not a party to this Lease (or a
subsidiary an affiliate of either party) of a claim or of the commencement
by any such person of any action (a "Third Party Claim") with respect to
which an Indemnifying Party may be obligated to provide indemnification
pursuant to this Section 16 or any other Section of this Lease, such
Indemnitee shall give such Indemnifying Party written notice thereof
promptly after becoming aware of such Third Party Claim; provided that the
failure of any Indemnitee to give notice as provided in this Section 16(d)
shall not relieve the Indemnifying Party of its obligations hereunder,
except to the extent that such Indemnifying Party is actually prejudiced by
such failure to give
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notice. Such notice shall describe the Third Party Claim in
reasonable detail.
(ii) An Indemnifying Party may elect to defend
or to seek to settle or compromise, at such Indemnifying Party's own expense
and such Indemnifying Party's own counsel, any Third Party Claim, as
provided hereafter. Within thirty (30) days after receipt of notice from an
Indemnitee in accordance with Subsection 16(d)(i) (or sooner, if the nature
of such Third Party Claim so requires), the Indemnifying Party shall notify
the Indemnitee of its election whether the Indemnifying Party will assume
responsibility for defending such Third Party Claim. After notice from an
Indemnifying Party to an Indemnitee of its election to assume the defense
of a Third Party Claim, such Indemnifying Party shall not be liable to such
Indemnitee under this Section 16 for any legal or other expenses (except
expenses approved in advance by the Indemnifying Party) subsequently
incurred by such Indemnitee in connection with the defense thereof;
provided that if the defendants with respect to any such Third Party Claim
include both the Indemnifying Party and one or more Indemnitees and in any
Indemnitee's reasonable judgment a conflict of interest between one or more
of such Indemnitees and such Indemnifying Party exists in respect to such
claim, such Indemnitees shall have the right to employ separate counsel to
represent such Indemnitees and in that event the reasonable fees and
expenses of such separate counsel (but not more than one separate counsel
reasonably satisfactory to the Indemnifying Party) shall be paid by such
Indemnifying Party. If an Indemnifying Party elects not to assume
responsibility for defending a Third Party Claim, or fails to notify an
Indemnitee of its election as provided in this Subsection 16(d)(ii), such
Indemnitee may defend or, subject to the remainder of this Subsection
16(d)(ii), seek to compromise or settle such Third Party Claim without
prejudice to such Indemnitee's rights, if any, to continue to seek
indemnification hereunder. Notwithstanding the foregoing, neither an
Indemnifying Party nor an Indemnitee may settle or compromise any claim
over the objection of the other; provided, however, that consent to
settlement or compromise shall not be unreasonably withheld or delayed.
Neither an Indemnifying Party nor an Indemnitee shall consent to entry of
any judgment or enter into any settlement of any Third Party Claim which
does not include as an unconditional term thereof the giving by a claimant
or plaintiff to such Indemnitee, in the case of a consent or settlement by
an Indemnifying Party, or to the Indemnifying Party, in the case of a
consent or settlement by an Indemnitee, of a written release from all
liability in respect to such Third Party Claim.
(iii) If an Indemnifying Party chooses to defend
or to seek to compromise or settle any Third Party Claim, the related
Indemnitee shall make reasonably available to such Indemnifying Party any
personnel or any books, records or other documents within its control or
which it otherwise has the ability to make available that are necessary or
appropriate for such defense, settlement or compromise of such Third Party
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Claims, subject to the establishment of reasonably appropriate
confidentiality arrangements and arrangements to preserve any applicable
privilege (including, the attorney-client privilege) and shall cooperate in
such defense, compromise or settlement. If an Indemnifying Party chooses to
defend or to seek to compromise or settle any Third Party Claim, the
related Indemnitee shall be entitled to attend and participate in any such
proceeding, discussion or negotiation at its own expense.
(iv) Notwithstanding anything else in this
Section 16 to the contrary, if an Indemnifying Party notifies the related
Indemnitee in writing of such Indemnifying Party's desire to settle or
compromise a Third Party Claim on the basis set forth in such notice
(provided that such settlement or compromise includes as an unconditional
term thereof the giving by the claimant or plaintiff of a written release
of the Indemnitee from all liability in respect thereof and does not
include any non-monetary remedy) and provides the Indemnitee a copy of a
written proposal of the applicable claimant to settle on such terms, and
the Indemnitee notifies the Indemnifying Party in writing within ten (10)
business days of such notice that such Indemnitee declines to accept any
such settlement or compromise, such Indemnitee may continue to contest such
Third Party Claim, free of any participation by such Indemnifying Party, at
such Indemnitee's sole expense. In such event, the obligation of such
Indemnifying Party to such Indemnitee with respect to such Third Party
Claim shall be equal to (i) the costs and expenses of such Indemnitee prior
to the date such Indemnifying Party notifies such Indemnitee of the offer
to settle or compromise (to the extent such costs and expenses are
otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the amount
of any offer of settlement or compromise which such Indemnitee declined to
accept and (B) the actual out-of-pocket amount such Indemnitee is obligated
to pay subsequent to such date as a result of such Indemnitee's continuing
to defend such Third Party Claim (including attorneys fees and expenses).
(v) Any claim on account of a loss which does not
result from a Third Party Claim shall be asserted by written notice given
by the Indemnitee to the related Indemnifying Party. Such Indemnifying
Party shall have a period of 30 days after the receipt of such notice
within which to respond thereto. If such Indemnifying Party does not
respond within such thirty (30) day period, such Indemnifying Party shall
be deemed to have refused to accept responsibility to make payment. If such
Indemnifying Party does not respond within such thirty (30) day period or
rejects such claim in whole or in part, such Indemnitee shall follow the
dispute resolution procedures set forth in Subsection 11(c).
(vi) In addition to any adjustments required
pursuant to Subsection 16(c), if the amount of any loss shall, at any time
subsequent to the payment required by this Lease, be reduced by recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith,
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shall promptly be repaid by the Indemnitee to the Indemnifying Party.
(vii) In the event of payment by an Indemnifying
Party to any Indemnitee in connection with any Third Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place and
the place of such Indemnitee as to any events or circumstances in respect
of which such Indemnitee may have any right or claim relating to such Third
Party Claim against any claimant or plaintiff asserting such Third Party
Claim or against any other person. Such Indemnitee shall cooperate with
such Indemnifying Party in a reasonable manner, and at the cost and expense
of such Indemnifying Party, in prosecuting any subrogated right or claim.
(vii) If any indemnity payment required to be made
hereunder is denominated in a currency other than United States dollars,
such payment shall be made in United States dollars and the amount thereof
shall be computed using the foreign exchange rate for such currency
determined as of the date that notice of the claim with respect to which
such indemnity payment is made or given by, or on behalf of, the Indemnitee
to the Indemnifying Party.
(e) The provisions of this Section 16 shall survive any
termination of this Lease.
SECTION 17. CONDEMNATION
(a) (i) If any part of the Master Lease Property is taken
or condemned for a public or quasi-public use (a sale in lieu of
condemnation to be deemed a taking or condemnation) ("Taken" or a "Taking",
as the context shall require), this Lease shall, as to the part Taken,
terminate as of the date title shall vest in the condemnor and continue in
full force as to the remainder. In the event of such a partial Taking, Rent
shall be equitably adjusted by Landlord and Tenant taking into account the
portion of the Master Lease Property so Taken; provided, that there shall
be no adjustment in Base Rent unless, and only to the extent that, a
portion of the Main Building is Taken. With respect to any other portions
of the Master Lease Property Taken, adjustment shall be made only to the
Additional Rent applicable to and the obligation to Care for such portion.
Tenant, at its cost and expense, shall proceed with Restoration, subject to
Unavoidable Delays, of the remaining portion of the Master Lease Property
to a complete architectural unit, to the extent practicable and
economically feasible and to the extent the net condemnation award is
sufficient to pay in full the cost of such Restoration. Such Restoration
shall be performed in the same manner and pursuant to the same conditions
as set forth in Section 15 hereof with respect to Restoration as a result
of Damage. If the parties cannot agree upon such Rent adjustment or
Restoration requirements, such dispute shall be decided by binding
arbitration comparable to that provided for in Section 11(c).
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(ii) Tenant waives all claims against Landlord and
any Mortgagee by reason of any partial Taking, and Tenant covenants and
agrees that Tenant will make no claim against the condemning authority by
reason of the partial Taking, except for damages payable for injury to
Personal Property or any Alterations that Tenant is entitled to remove upon
the expiration of this Lease, for loss of use of the Main Building Area, or
for relocation expenses; provided, however, that Tenant's claims do not
reduce Landlord's award for its fee interest subject to Tenant's leasehold
interest. In such event, Tenant shall be entitled to receive such amounts.
Landlord or any Mortgagee having a right thereto shall be entitled to
receive any and all awards paid by the condemning authority in connection
with such partial Taking, provided that such condemnation award received by
Landlord or such Mortgagee, less the reasonable costs incurred by Landlord
and such Mortgagee in connection with the collection of such award shall be
applied to the cost of such Restoration, subject to the same conditions to
release set forth in Section 15 hereof. Any balance of the award remaining
after completion of such Restoration and not used for such Restoration, may
be retained by Landlord or such Mortgagee.
(iii) Notwithstanding the foregoing provisions of
this Subsection (a), in the case of partial Taking of the Main Building, if
Landlord or Tenant shall reasonably determine that the remaining portion of
the Main Building cannot practicably be so restored to a complete
architectural unit or that such Restoration is not economically feasible or
that after the Restoration, the remainder of the Main Building would not be
suitable for the uses permitted hereunder, then either Landlord or Tenant
may terminate this Lease by notice to the other party, and, upon such
termination, Tenant and Landlord shall have no further obligations
hereunder, except with respect to any obligations which arose or accrued
before the termination of this Lease or to the extent obligations are to
survive the termination of this Lease as otherwise provided in this Lease.
Any dispute as to the right of Landlord or Tenant to terminate this Lease
under this Subsection (iii) shall be determined by arbitration in
accordance with Section 11(c). In the event of a Taking that does not
result in the termination of this Lease, but results in a Taking of any
portion of the Main Building Area, Landlord shall provide Tenant with a
portion of the Unimproved Area for use for replacement parking adjacent to
the remaining Main Building Area and access and utilities to the Main
Building to the extent such items are affected by the Taking. Nothing
herein shall be construed to require Landlord to incur any material expense
in connection therewith.
(b) In the event of a total Taking of the Main Building
Area, this Lease shall terminate as of the date title shall vest in the
condemnor and, upon such termination, Landlord and Tenant shall have no
further obligations hereunder, except with respect to any breaches which
occurred before the termination of this Lease or to the extent obligations
are to survive the termination of this Lease as otherwise provided in
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this Lease. Landlord shall be entitled to receive any and all awards paid
by the condemning authority in connection with such Taking, except to the
extent Tenant is entitled to recovery under Subsection 17(a)(ii).
SECTION 18. LIENS
If, because of any act or omission of Tenant or anyone
claiming by, through, or under Tenant, any mechanic's lien or other lien
shall be filed against the Master Lease Property or any portion thereof, or
against other property of Landlord, whether or not such lien is valid or
enforceable as such, Tenant shall, at its own expense, cause the same to be
discharged of record within a reasonable time, not to exceed 30 days, after
the date of filing thereof, and shall also defend and indemnify Landlord
and any Mortgagee and hold them harmless from any and all claims, losses,
damages, judgments, settlements, costs and expenses, including reasonable
attorneys' fees, resulting therefrom or incurred in connection therewith.
Tenant shall not mortgage, pledge, hypothecate or assign as security its
interest in the Master Lease Property or under this Lease.
SECTION 19. EXISTING SPACE LEASES; ASSIGNMENT AND
SUBLETTING
(a) On the Effective Date, the Main Building is subject
to those certain leases listed in Exhibit G attached hereto and made a part
hereof (the "Existing Space Leases"), which were entered into by Tenant, as
lessor thereunder, prior to closing under the Sales Agreement. Landlord has
not assumed any of Tenant's obligations thereunder. For so long as this
Lease remains in effect, Tenant covenants and agrees to continue to
discharge all of the lessor's obligations under the Existing Space Leases,
whether accrued or accruing before or during the Term. Tenant shall
indemnify, defend, and hold harmless Landlord against any obligation of
Landlord under the Existing Space Leases arising or accruing during the
Term, except to the extent Tenant is unable to perform such obligations as
a result of Landlord's breach of its obligations under this Lease. During
the Term, Tenant shall have the right to (i) collect and retain for its own
account (subject to Subsection (c) below) all rents and other payments due
from tenants under Existing Space Leases ("Existing Tenants"), (ii) hold
and apply any security deposits of Existing Tenants in accordance with the
Existing Space Leases (provided, however, that Tenant shall deliver such
security deposits to Landlord at the expiration or earlier termination of
this Lease to the extent such security deposits have not been applied by
Tenant pursuant to the applicable Existing Space Lease or returned to the
applicable Existing Tenant, and the term of the applicable Existing Space
Lease extends beyond the Term), and (iii) terminate, modify or otherwise
deal with the Existing Space Leases as Tenant, in its sole discretion,
deems appropriate; provided, however, (A) such right shall automatically
end upon the termination of this Lease for any reason, (B) none of the
Existing Space Leases shall be modified to provide for a term
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which extends beyond the Term, unless Landlord gives its prior written
consent to such extended term, which consent may be granted or withheld in
Landlord's sole discretion, (C) each modification of an Existing Space
Lease shall be subject and subordinate to this Lease, and in the event of
the expiration or termination of this Lease, Landlord shall not be required
to recognize such modification without its express written agreement to be
bound by same, which may be given or not in Landlord's sole discretion, and
(D) Tenant shall promptly provide to Landlord copies of all documents
terminating or modifying any Existing Space Lease.
(b) Tenant may assign its interest in this Lease (an
"Assignment") or sublet all or any portion of the Main Building (a
"Sublease"), without the consent of Landlord. The term of any such Sublease
shall not exceed the Term, unless Landlord gives its prior written consent
to such extended term, which consent may be granted or withheld in
Landlord's sole discretion. In the event of any Assignment or Sublease,
Tenant shall nevertheless at all times remain fully responsible and liable
for the payment of Rent and the performance and observance of all of
Tenant's other obligations under this Lease. Each Sublease shall be subject
and subordinate to this Lease. If requested by Tenant, Landlord shall enter
into a nondisturbance agreement with respect to any Sublease on
substantially the same terms as are contained in the nondisturbance
agreement attached hereto as Exhibit H (the "Landlord Approved SNDA"),
provided that (i) the Sublease does not, in any material respect, impose
greater obligations on the sublandlord or grant greater rights to the
subtenant than those existing as of the Effective Date under the Existing
Space Leases, (ii) term of the Sublease does not extend past the Term
(unless expressly approved by Landlord as provided above), and (iii) the
Sublease (y) is an arms-length transaction and such subtenant was obtained,
and the economic terms of such Sublease were negotiated by, a third party
leasing agent using marketing efforts customarily used for Comparable
Properties, or (z) requires the subtenant to pay basic rent at Fair Market
Sublease Rent and a pro rata share of increases in operating expenses,
taxes and insurance (a "Non-Broker Sublease"). Landlord agrees at any time
hereafter, upon ten (10) business days prior written notice, to execute and
deliver, and cause its Mortgagee to recognize, the Landlord Approved SNDA,
provided the Landlord Approved SNDA has been duly executed by Tenant and
such subtenant. Promptly upon entering into any Assignment or Sublease,
Tenant shall provide Landlord with copies of all documents effecting such
Assignment or Sublease.
(c) In the event of a Non-Broker Sublease, Landlord and
Tenant shall attempt in good faith to agree as to the Fair Market Sublease
Rent, and if Landlord and Tenant fail to promptly agree as to the Fair
Market Sublease Rent (the "Sublease Arbitration Deadline"), Fair Market
Sublease Rent shall be determined as follows:
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(i) Fair Market Sublease Rent shall be the rent
which would be asked of subtenants as of the anticipated date of execution
of the Sublease for space comparable to the subject space of the Sublease
in the Germantown/Clarksburg areas of Montgomery County, Maryland, taking
into account the term of the Sublease, the size of the premises being
subleased and the value of brokerage commissions, rental abatements, rental
credits, and tenant allowances, if any, being offered or paid under such
subleases.
(ii) Landlord and Tenant shall use the same
methodology of the arbitration proceedings described in
Subsections 28(d)(ii) and (iii).
(d) As a part of Additional Rent, Tenant shall pay to
Landlord one-half of any Profit derived from any renewal of an Existing
Lease (a "Lease Renewal") or from any Assignment or Sublease during the
Term. As to each Lease Renewal, Assignment, and Sublease, "Profit" shall
mean the excess, if any, of the following: the gross amount collected by
Tenant under or with respect to the Lease Renewal, Assignment, or Sublease
over a specific period of time (the "Measuring Period"), less (i) the Base
Rent paid by Tenant to Landlord over the Measuring Period for the same
space as is the subject of the Lease Renewal, Assignment, or Sublease (the
"Subject Space"), (ii) all other amounts paid by Tenant with respect to the
Measuring Period and relating to the Master Lease Property as required by
this Lease, pro-rated based upon the rentable area of the Subject Space
compared to the rentable area of the Main Building, (iii) a management fee
to Tenant equal to three percent (3%) of the amount collected by Tenant
under or with respect to the Lease Renewal, Assignment, or Sublease over
the Measuring Period, (iv) all reasonable costs of collection paid by
Tenant to collect the sums payable under the Lease Renewal, Assignment, or
Sublease, and (v) reasonable and customary brokerage fees, the cost of
tenant improvements, reasonable attorneys' fees and all other out of pocket
costs paid by Tenant to third parties in connection with the Lease Renewal,
Assignment, or Sublease. Tenant shall provide to Landlord on or before the
sixtieth (60th) day following each Lease Year in which Profit is received
by Tenant a calculation and payment of Profit for the preceding Lease Year.
The calculation shall be certified by Tenant as being accurate and
complete, to the best of its knowledge, along with such information and
materials (including, but not limited to, copies of invoices, calculations
and allocations) in support thereof, as Landlord may reasonably request.
Despite the foregoing, no calculation or payment of Profit shall be
required with respect to any Assignment or Sublease to a subsidiary of
Tenant or arising from a sale of any division or subsidiary of Tenant, a
sale of all or substantially all of the assets or capital stock of Tenant,
or any merger or consolidation of Tenant.
(e) If there is an Event of Default, in addition to any
other remedies provided by this Lease or by law or in equity, at its
option, Landlord may collect directly from any Existing
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Tenant, Assignee or lessee under a Sublease ("Subtenant") all rent becoming
due to Tenant by reason of the applicable Existing Lease, Assignment or
Sublease. Any collection by Landlord from the Existing Tenant, Assignee or
Subtenant shall not be construed to constitute a novation or release of
Tenant from the further performance of its obligations under this Lease or
an acceptance of the terms of such Existing Lease, Assignment or Sublease.
(f) Any amounts collected by Landlord pursuant to Section
19(e) or otherwise from an Existing Tenant, Assignee or Subtenant which are
applicable to any period preceding the Expiration Date (had this Lease run
its full Initial Term as may have been extended), less Landlord's share of
any Profit attributable to such amounts and less Landlord's reasonable
costs of collection, shall be applied by Landlord to the reduction of
Tenant's remaining liability, if any, under this Lease.
SECTION 20. SUBORDINATION OR SUPERIORITY OF LEASE
(a) Except as otherwise provided in this Section, the
rights and interest of Tenant under this Lease shall be subject and
subordinate to any mortgages that may be placed upon the Master Lease
Property and to any and all advances to be made thereunder, and to the
interest thereon, and all renewals, replacements, extensions, bifurcations
and splits thereof, if the Mortgagee named in said mortgage shall elect to
subject and subordinate the rights and interest of Tenant under this Lease
to the lien of its mortgage. Any Mortgagee may elect to give the rights and
interest of Tenant under this Lease priority over the lien of its mortgage.
In the event of either such election and upon notification by such
Mortgagee to Tenant to that effect, the rights and interest of Tenant under
this Lease shall be deemed to be subordinate to, or to have priority over,
as the case may be, the lien of said mortgage, whether this Lease is dated
prior to or subsequent to the date of said mortgage without any further
action required by Landlord or Mortgagee; provided, however, that as a
condition precedent to any subordination of this Lease, Landlord delivers
in advance a non-disturbance agreement duly executed by Mortgagee and
Landlord. The non-disturbance agreement shall be substantially in the form
attached to and made a part of this Lease as Exhibit I (the "Tenant
Approved SNDA") or in a commercially reasonable form and subject to the
approval of Tenant, not to be unreasonably withheld. Tenant agrees at any
time hereafter, upon ten (10) business days prior written notice, to
execute and deliver the Tenant Approved SNDA.
(b) Nothing contained in this Lease shall limit or
curtail Landlord's right to sell, mortgage or otherwise transfer its fee
interest in the Master Lease Property, or affect Landlord's right to assign
the Rent payable under this Lease either as collateral security under a
mortgage or otherwise. Any such sale, mortgage, transfer or assignment
shall be binding on Tenant but shall be subject to this Lease.
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SECTION 21. DEFAULTS AND REMEDIES
(a) The occurrence of any one or more of the following
events shall be a default and breach of this Lease by Tenant (collectively,
"Events of Default"):
(i) Tenant shall fail to pay any installment of
Rent when the same shall be due and payable and fail to cure such default
within nine (9) days after receiving written notice from Landlord
specifying the default. For the purposes of this Subparagraph 21(a)(i),
Tenant agrees notice by Mortgagee, or Landlord's loan service provider,
given according to the terms of Section 26, shall be deemed sufficient
notice.
(ii) Tenant shall fail to perform or observe any
other term, condition, covenant or obligation required to be performed or
observed by it under this Lease for a period of thirty (30) days after
written notice from Landlord specifying such default; provided, however,
that if the term, condition, covenant or obligation to be performed by
Tenant is of such nature that the same cannot reasonably be performed
within such thirty (30) day period, such default shall be deemed to have
been cured if Tenant commences such performance within the thirty (30) day
period and thereafter diligently undertakes to complete the cure and in all
events cures the default within one hundred twenty (120) days of Landlord's
notice, subject to extension for Unavoidable Delays.
(iii) An Event of Default, as defined therein,
shall occur under that certain lease agreement, dated of even date
herewith, between Landlord and Tenant with respect to the Installations
Premises (the "Facilities Lease").
(iv) Termination or rejection of this Lease
pursuant to Section 22.
(v) Assumption or assignment of this Lease, under
the conditions referred to in Section 22, unless the requirements of
Section 22 applicable to such assumption or assignment are satisfied.
(b) Upon the occurrence of any Event of Default, Landlord
shall have the following rights and remedies, in addition to those allowed
by law or equity, any one or more of which may be exercised concurrently
and without further notice to or demand upon Tenant:
(i) Landlord may re-enter the Master Lease
Property and cure any default of Tenant, in which event Tenant shall
reimburse Landlord as Additional Rent for any reasonable costs and expenses
which Landlord may incur to cure such default; and Landlord shall not be
liable to Tenant for any loss or damage which Tenant may sustain by reason
of Landlord's action, except loss or damage caused by Landlord's negligence
or intentional misconduct.
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(ii) Landlord may terminate this Lease, in which
event: (A) Tenant shall not thereafter be entitled to possession of the
Master Lease Property and Tenant shall immediately thereafter surrender, or
cause to be surrendered, the Master Lease Property to Landlord; (B)
Landlord may re-enter the Master Lease Property and dispossess Tenant by
summary proceedings, ejectment or other legal process and may remove its
effects, without prejudice to any other remedy which Landlord may have for
possession or arrearages in Rent; and (C) Tenant shall be liable for all
loss or damage which Landlord may sustain by reason of such termination and
re-entry; and Landlord may re-let all or any part of the Master Lease
Property for a term different from that which would otherwise have
constituted the balance of the Term and for Rent and on terms and
conditions different from those contained herein, whereupon Tenant shall be
obligated to pay to Landlord the deficiency, if any, between the Rent
provided for herein and that provided for in any lease covering a
subsequent re-letting of the Master Lease Property, for the period which
would otherwise have constituted the balance of the Term, together with all
of Landlord's reasonable costs and expenses of preparing the Master Lease
Property for re-letting, including all repairs, tenant finish improvements,
brokers' and attorneys' fees, and all loss or damage which Landlord may
sustain by reason of such re-letting, it being expressly understood and
agreed that the liabilities and remedies specified above shall survive the
termination of this Lease. Landlord shall make diligent efforts to mitigate
its damages in the event of an Event of Default.
(iii) (A) Notwithstanding the termination of this
Lease, Landlord may declare all Base Rent which would have been due under
this Lease for the balance of the Term to be immedi ately due and payable.
In that event, Tenant shall be obligated to pay an amount in cash that
would be necessary to purchase U.S. Obligations in such amounts and having
such maturities that the principal and interest of such U.S. Obligations
would be sufficient to provide funds as close as possible but in no event
less or later than the payments due under this Lease as Base Rent as and
when such payments would be due if no acceleration of the Base Rent had
occurred (the "Accelerated Payment"). U.S. Obligations are obligations or
securities not subject to prepayment, call or early redemption which are
direct obligations of, or obligations fully guaranteed as to timely payment
by, the United States of America or any agency or instrumentality thereof,
the obligations of which are backed by the full faith and credit of the
United States of America.
(B) Upon receipt of the Accelerated Payment,
Landlord shall use commercially reasonable efforts to lease the vacant
areas of the Main Building at the then currently existing fair market
rental rate for Comparable Buildings. From and after the Event of Default
all rent and other payments, except for security deposits, collected under
leases entered into after the Event of Default ("Post Default Leases") and
under any Existing Space Leases, Subleases, or occupancy or concession
agreements in effect as of the Event of Default shall be placed in a
separate
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escrow account (the "Escrow Account") held by a mutually acceptable
escrowee (the "Escrowee"). Also, any refunds of Impositions paid by Tenant
and received by Landlord shall be placed in the Escrow Account. The Escrow
Account shall be interest bearing and earn at least a money market rate of
interest. All interest earned shall become part of the escrow fund and be
treated in the same manner as the principal in the Escrow Account. The Post
Default Leases and all Existing Space Leases, Subleases, and occupancy and
concession agreements in effect as of the Event of Default are collectively
referred to as the "Mitigation Leases". The funds contained in the Escrow
Account shall be disbursed in the following manner and with the following
priority: (i) all direct and reasonable operating expenses ("Operating
Expenses") paid by Landlord relating to the Master Lease Property during
the "Default Measuring Period" (defined below) shall be paid to Landlord,
(ii) a management fee equal to three percent (3%) of the amount collected
by Landlord from the Mitigation Leases during the Default Measuring Period
shall be paid to Landlord, (iii) all direct and reasonable costs of
collection paid by Landlord to collect the sums payable under the
Mitigation Leases shall be paid to Landlord, (iv) reasonable and customary
brokerage fees, the reasonable cost of designing, constructing and
installing tenant improvements, reasonable attorneys' fees and all other
reasonable out of pocket costs paid by Landlord during the Default
Measuring Period to third parties in connection with the Mitigation Leases
(including the fees of the Escrowee and the Escrow Account) shall be paid
to Landlord, (v) Tenant shall be paid up to the amount that Tenant was
scheduled to pay as Base Rent during the Default Measuring Period, and (vi)
the remainder shall be shared equally by Landlord and Tenant. As used in
this Section, the term "Default Measuring Period" shall mean (1) as to the
payments contemplated in (i) through (iv) above, each consecutive one (1)
month period after the establishment of the Escrow Account until the date
the Term would have expired but for the early termination of this Lease,
and (2) as to the payments contemplated in (v) and (vi) above, each
consecutive three (3) month period after the establishment of the Escrow
Account until the date the Term would have expired but for the early
termination of this Lease. The first Default Measuring Period, however,
shall also include the period from the date of the Event of Default to the
date the Escrow Account was established. Escrowee shall make disbursements
to the parties in the priority described above on or about the fifteenth
(15th) day after the end of each Default Measuring Period. Within ten (10)
days after the end of each Default Measuring Period relating to the
payments contemplated in (i) through (iv) above, Landlord shall furnish to
Escrowee and Tenant a written statement setting forth in reasonable detail
all amounts paid into the Escrow Account and all amounts for which Landlord
is claiming payment with respect to the immediately preceding Default
Measuring Period. The statement shall be certified by Landlord as being
accurate and shall be accompanied by invoices and other documentation
reasonably evidencing the amounts claimed for payment. Escrowee shall
withhold from the payments made under (v) and (vi) above one-fourth of the
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reasonably estimated real estate taxes and Insurance premiums which are
next due with respect to the Master Lease Property, less the amounts of any
real estate taxes or Insurance premiums required to be directly paid by
tenants under the Mitigation Leases (the "Tax and Insurance Holdbacks").
Escrowee shall release Tax and Insurance Holdbacks to Landlord when and to
the extent that real estate taxes and Insurance premiums are payable by
Landlord with respect to the Master Lease Property. At the time of each
such disbursement to Landlord, Escrowee shall also disburse to Tenant the
amount, if any, by which the Tax and Insurance Holdbacks held by Escrowee
exceed the tax bill or Insurance premiums paid with such Tax and Insurance
Holdbacks. Although the last Default Measuring Period shall end on the date
the Term would have expired but for the early termination of this Lease,
any amounts collected by Landlord under the Mitigation Leases after that
date and attributable to any period which occurred prior to that date shall
be paid directly by Landlord to Tenant. No party shall be paid for any
amount described in this Subsection (B) to the extent such party was
otherwise reimbursed for such amount, including, without limitation,
previous payment by the Escrowee or previous reimbursement under the
Mitigation Leases. For the purposes of this Section, "Operating Expenses"
includes the amortized cost of capital improvements properly allocable to
the Default Measuring Period but excludes (1) debt service and other costs
of Landlord's financing, (2) capital expenditures (except for the amortized
portion properly allocable to the Default Measuring Period), (3) management
fees, (4) overhead, (5) depreciation, (6) accountants' fees, (7) any losses
or expenses covered by Insurance, whether or not such Insurance is in fact
maintained, or compensable by condemnation proceeds, (8) any amount
incurred by reason of the negligence or intentional misconduct of Landlord
or its Agents, (9) fines or penalties, and (10) any amounts paid by
specific tenants. Any refunds, discounts, or recoupments of Operating
Expenses received by Landlord shall be accounted for by Landlord and
credited back to Tenant. Tenant, at reasonable times and upon reasonable
notice, shall have the right to audit Landlord's books and records relating
to Operating Expenses; provided, however, in no event shall Landlord be
required to keep such underlying receipts for Operating Expenses beyond a
date which is three (3) years after Escrowee makes a disbursement for such
Operating Expenses. The cost of capital expenditures shall be amortized
over the useful life of each such capital expenditure as determined for
federal income tax purposes. Notwithstanding the foregoing, Landlord shall
not be entitled to payment from the Escrow Account for any costs of capital
improvements, repairs, or maintenance that Tenant would not have been
obligated to undertake under the standard of Care set forth in Section 11
of this Lease or for any other Operating Costs which Tenant would not have
been obligated to pay under this Lease. Notwithstanding anything to the
contrary contained herein, until the expiration of 91 days after Landlord's
receipt of the Accelerated Payment, Tenant shall not make any claim against
Landlord that Landlord has failed to use diligent efforts to mitigate its
damages after the Event of
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Default which gave rise to the Accelerated Payment. This provision shall
survive the termination of this Lease.
(C) In the event that Landlord exercises its
remedy under Subsection (iii)(A) of this Section, performance of Landlord's
obligations under Subsection (iii)(B) of this Subsection shall be deemed
satisfaction of Landlord's duty to mitigate its damages.
(iv) Landlord may sue for injunctive relief or to
recover damages for any loss resulting from the breach.
(c) Any agreement for an extension of the Term or for any
other additional period after the Term shall not thereby prevent Landlord
from terminating this Lease for any reason specified in this Lease. If any
such right of termination is exercised by Landlord during the Term or any
extension thereof, Tenant's right to any extension or additional period
shall thereby be automatically canceled. Any such right of termination of
Landlord contained herein shall continue during the Term and any subsequent
extension hereof.
(d) The failure or delay by either party to enforce or
exercise at any time any of the rights or remedies or other provisions of
this Lease shall not be construed to be a waiver thereof, nor affect the
validity of any part of this Lease or the right of that party thereafter to
enforce each and every such right or remedy or other provisions. No waiver
of any default or breach of this Lease shall be held to be a waiver of any
other default or breach. No act or omission by Landlord during the Term
shall be deemed an acceptance of a surrender of the Master Lease Property
and no agreement to accept such a surrender shall be valid unless in
writing and signed by Landlord.
(e) If either party defaults under this Lease and the
other party places the enforcement of all or any part of this Lease or the
collection of any sum due or to become due under this Lease or the recovery
of possession of the Master Lease Property in the hands of an attorney, and
such party prevails in litigation concerning such issue, the defaulting
party agrees to reimburse the prevailing party for the reasonable
attorney's fees incurred thereby.
SECTION 22. BANKRUPTCY OR INSOLVENCY
Landlord and Tenant agree that the following shall apply
in the event of the bankruptcy or insolvency of Tenant:
(a) If a petition is filed by, or an order for relief is
entered against Tenant under Chapter 7 of the Bankruptcy Code and the
trustee of Tenant elects to assume this Lease for the purpose of assigning
it, such assumption and assignment may be made only if all of the terms and
conditions of Subsections (b) and (d) below are satisfied. To be effective,
an election to assume this Lease must be in writing, addressed to Landlord, and
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all of the conditions herein stated, which Landlord and Tenant acknowledge
to be commercially reasonable, must have been satisfied. If the trustee
fails so to elect to assume this Lease within sixty (60) days after such
filing or order or such additional time as the Bankruptcy Court, for cause,
may fix, this Lease will be deemed to have been rejected, and Landlord
shall then immediately be entitled to possession of the Master Lease
Property without further obligation to Tenant or the trustee, and this
Lease shall be terminated. Landlord's right to be compensated for damages
in the bankruptcy proceeding, however, shall survive such termination.
(b) If Tenant files a petition for reorganization under
Chapters 11 or 13 of the Bankruptcy Code, or if a pro ceeding filed by or
against Tenant under any other chapter of the Bankruptcy Code is converted
to a chapter 11 or 13 proceeding and Tenant's trustee or Tenant as
debtor-in-possession fails to assume this Lease within 60 days from the
date of the filing of such petition or conversion or such additional time
as the Bankruptcy Court, for cause, may fix, then the trustee or the
debtor-in-possession shall be deemed to have rejected this Lease. To be
effective, any election to assume this Lease must be in writing, addressed
to Landlord and, if there has been a default under the Lease, all of the
following conditions, which Landlord and Tenant acknowledge to be
commercially reasonable, must have been satisfied:
(i) The trustee or the debtor-in-possession has
cured or has provided to Landlord adequate
assurance that:
(A) It will cure all monetary
defaults under this Lease
within the number of days
specified in Section 21(a)(I)
of this Lease from the date of
assumption; and
(B) It will cure all nonmonetary
defaults under this Lease
within the number of days
specified in Section 21(a)(ii)
of this Lease from the date of
assumption.
(ii) The trustee or the debtor-in-possession
has compensated Landlord, or has
provided Landlord with adequate
assurance that Landlord will be
compensated promptly for any pecuniary
loss it has incurred arising from the
default of Tenant, the trustee, or the
debtor-in-possession.
(iii) The trustee or the debtor-in-possession
has provided Landlord with adequate
assurance of the future performance of
each of Tenant's obligations under this
Lease; provided,
however, that:
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(A) From and after the date of
assumption of this Lease, until
the date of the assignment of
this Lease, it shall pay all
monetary obligations,
including, without limitation,
the Rent payable under this
Lease, in advance on each date
that such amounts are payable.
(B) It shall also deposit with
Landlord, as security for the
timely payment of Rent, an
amount equal to three months'
Base Rent and other monetary
charges accruing under this
Lease;
(C) If not otherwise required by
the terms of this Lease, it
shall also pay in advance, on
each day that any installment
of Base Rent is payable,
one-twelfth (1/12) of Tenant's
Imposition, Insurance and other
obligations under this Lease.
(c) If the trustee or the debtor-in-possession has
assumed this Lease, pursuant to Subsection (a) or (b) above, and elects to
assign Tenant's interest under this Lease or the estate created by that
interest to any other person, such interest or estate may be assigned only
if the intended assignee has provided adequate assurance of future
performance of all of the terms, covenants, and conditions of this Lease.
For the purposes of this Subsection (d), "adequate assurance of future
performance" means that Landlord has ascertained that each of the following
condition has been satisfied:
The assignee has submitted a current
financial statement which shows a net worth and
working capital in amounts sufficient to assure
the future performance by the assignee of
Tenant's obliga tions under this Lease.
(d) When, pursuant to the Bankruptcy Code, the trustee or
the debtor-in-possession is obligated to pay reasonable use and occupancy
charges for the use of all or part of the Master Lease Property, it is
agreed that such charges will not be less than the Base Rent as defined in
this Lease, plus Additional Rent and other monetary obligations of Tenant
included herein.
(e) Except to the extent provided by law, neither
Tenant's interest in this Lease nor any estate of Tenant created in this
Lease shall pass to any trustee, receiver, assignee for the benefit of
creditors, or any other person or entity, nor otherwise by operation of law
under the laws of any state having jurisdiction of the person or property
of Tenant, unless Landlord consents in writing to such transfer. Landlord's
acceptance of Rent or any other payments from any trustee, receiver,
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assignee, person, or other entity will not be deemed to have waived, or waive,
either the requirement of Landlord's consent or Landlord's right to terminate
this Lease for any transfer of Tenant's inter est under this Lease without
such consent.
SECTION 23. SURRENDER OF MASTER LEASE PROPERTY
Upon the expiration or earlier termination of this Lease,
Tenant shall surrender the Master Lease Property to Landlord, broom-clean,
in good order, condition and repair (except for ordinary wear and tear and
conditions which existed on the Master Lease Property prior to the
Effective Date and subject to Sections 15 and 17), free of all Personal
Property and Restricted Property (except for Restricted Property belonging
to any Existing Tenant or Subtenant whose Existing Lease or Sublease
Landlord has expressly agreed in writing may continue), and free of
violation of Applicable Laws in all material respects subject to Section
5(b)(iv). To the extent Tenant fails to comply with the requirements of
this Section, Landlord may restore the Master Lease Property to such
condition at Tenant's expense.
SECTION 24. NON-CONSENSUAL HOLDING OVER
In the event Tenant remains in possession of the Master
Lease Property or any part thereof without the consent of Landlord after
the expiration or earlier termination of this Lease, Tenant shall be
deemed, at Landlord's election, to hold the Master Lease Property as a
tenant at sufferance subject to all of the terms, conditions, covenants and
provisions of this Lease which shall be applicable during such time (the
"Non- Consensual Holdover Period"), except that, for each month during the
Non-Consensual Holdover Period, Tenant shall pay to Landlord one hundred
fifty percent (150%) of the sum of the last current full monthly
installment of Base Rent plus Additional Rent, which shall be payable to
Landlord within five (5) business days of notice from Landlord. In
addition, such election shall not preclude Landlord from seeking, and shall
be cumulative with, any other remedy under this Lease or granted by law or
in equity. No holding over by Tenant, as described in this Section 24,
whether with or without the consent of Landlord, shall operate to extend
this Lease.
SECTION 25. QUIET ENJOYMENT
If and for so long as Tenant pays the prescribed Rent and
performs or observes all of the terms, conditions, covenants and
obligations of this Lease required to be performed or observed by it
hereunder, Tenant shall at all times during the Term have the peaceable and
quiet enjoyment, possession, occupancy and use of the Master Lease Property
without any inter ference from Landlord, or anyone claiming through or
under Landlord, subject to any matters of record as of the Effective Date
to which this Lease is subject.
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SECTION 26. NOTICES
Any notice, demand or request required or permitted to be
given under this Lease or by law shall be deemed to have been given if in
writing and delivered addressed to the party who is to receive such notice,
demand or request at the address set forth below or at such other address
as Landlord or Tenant may specify from time to time by notice. Delivery
hereunder shall be deemed to include pre-paid courier delivery (by a
reputable courier delivery service), pre-paid overnight delivery (by a
reputable overnight delivery service), postage and fees paid U.S. Postal
Service express mail or certified mail, return receipt requested, or
facsimile transmission with electronic verification during normal business
hours, if sent to the address of the parties designated hereunder, and
shall be deemed received on the next business day such notice is delivered
or refused at such address except notices sent by fax shall be deemed
received upon electronic verification.
Landlord: LCOR Incorporated
6701 Democracy Boulevard
Bethesda, MD 20817
Attn: Mr. R. William Hard
Facsimile: (301) 897-3713
with copies to: Jones, Day, Reavis & Pogue
1450 G Street, N.W.
Washington, DC 20005-2088
Attn: Sigmund T. Weiner, Esq.
Facsimile: (202) 737-2832
LCOR Incorporated
300 Berwyn Park, Suite 104
Berwyn, PA 19312
Attention: Mr. Peter DiLullo
Facsimile: (610) 408-4420
Tenant: COMSAT Corporation
6560 Rock Spring Drive
Bethesda, MD 20817
Attention: General Manager Corporate
Services
Facsimile: (301) 214-7147
with a copy to: COMSAT Corporation
6560 Rock Spring Drive
Bethesda, MD 20817
Attention: General Counsel
Facsimile: (301) 214-7128
Any copies required to be sent as above provided are for the convenience of
the parties and no such copy shall constitute adequate notice for the
purposes of this Section.
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SECTION 27. HAZARDOUS MATERIALS
Landlord and Tenant agree as follows with respect to the
existence or use of "Hazardous Material" on the Master Lease Property or in
the Main Building.
(a) If the use, storage, handling, generation, or
disposal of Hazardous Material on or in the Master Lease Property during
the Term results in the release or threatened release of Hazardous
Materials at, on or under the Master Lease Property in violation of
Applicable Law, or otherwise necessitates investigation or cleanup of
Hazardous Material as required under Applicable Law ("Environmental
Conditions"), Tenant shall indemnify, defend and hold Landlord harmless
from any and all claims, judgments, damages, penalties, fines, costs,
liabilities or losses (including, without limitation, sums paid in
settlement of claims, attorneys' fees, consultant fees and expert fees but
excluding consequential damages and any injury to the value of the
Property, provided that this clause shall not be construed as reducing the
Remediation Obligation) which arise during or after the Term as a direct
result thereof. This indemnification of Landlord by Tenant includes,
without limitation, reasonable costs incurred in connection with any
investigation of site conditions or any cleanup, remedial, removal or
restoration work required by any federal, state or local governmental
agency because of Hazardous Material present in the soil or groundwater on
or under the Master Lease Property or in any improvements on the Master
Lease Property. This indemnification, however, shall not apply to any
Environmental Conditions caused by the acts or omissions of Landlord or its
Agents. The indemnification and hold harmless obligations of Tenant under
this Section 27 shall survive any termination of this Lease for a period of
twenty-four (24) months after the termination. At the end of the
twenty-four (24) month period, this indemnification and all of Tenant's
obligations under this Section shall expire, except as to matters
specifically made the subject of a lawsuit filed against Tenant before the
expiration of the twenty-four (24) month period. Without limiting the
foregoing, if the use, storage, handling, generation, or disposal of
Hazardous Material on or in the Master Lease Property during the Term
results in any Environmental Conditions, then, provided that the
Environmental Condition is not caused by the acts or omissions of Landlord
or its Agents, Tenant shall promptly take all actions, at its sole expense,
as are necessary to return the Master Lease Property to substantially the
condition existing prior to thereto or to such other condition as may
satisfy the applicable governmental authorities (the "Remediation
Obligation"). Landlord's approval of such actions shall first be obtained,
which approval shall not be unreasonably withheld. Nothing in this Section
shall be deemed to prohibit or limit any action by Tenant against any party
or parties responsible for the contamination.
(b) Landlord and Tenant acknowledge that asbestos
containing materials ("ACM") are located in certain portions of the Main
Building. Except for the ACM to be removed by Tenant as part of the Roof Work,
and so long as not required by Applicable Laws, Tenant shall not be required to
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remove or otherwise treat or abate the other ACM located in the Main Building;
provided, that during the Term Tenant covenants and agrees (i) to continue
implementation of the Operations and Maintenance Plan described in Exhibit J
attached hereto and made a part hereof at all times in compliance with
Applicable Laws in all material respects; (ii) to take such actions with
respect to the ACM as may be necessary to comply with Applicable Laws and to
maintain the habitability of the Main Building; and (iii) to indemnify and hold
Landlord harmless (except to the extent caused by Landlord) from any and all
claims, judgments, damages, penalties, fines, costs, liabilities or
losses (including, without limitation, reasonable attorneys' fees and costs)
arising out of or relating to claims for tort liability brought by Tenant
or its Agents for events occurring or accruing during the Term as a result
of the existence of the ACM in the Main Building.
(c) Landlord shall have the right, at any time, to cause
the groundwater, soil, improvements and air at the Master Lease Property to
be investigated to detect the presence of Hazardous Material during the
Term, including, but not limited to, the installation of testing wells and
other devices in locations selected by Landlord at Landlord's sole
discretion. Landlord shall supply Tenant with copies of final investigation
reports. The cost of such investigations and of the maintenance, repair and
replacement of such wells and other devices shall be fully paid for by
Landlord, unless Landlord's investigations reveal Environmental Conditions
which Tenant is obligated to remediate under this Section. In that event,
Tenant, within 30 days after receiving a copy of such investigation report
and a statement of charges from Landlord, shall pay for the cost of the
investigation. Any dispute under this Subsection shall be resolved under
the arbitration proceedings set forth in Subsection 11(c).
(d) As used herein, the term "Hazardous Material" means
any hazardous or toxic substance, material or waste which is or becomes
regulated by any local governmental authority, the State of Maryland or the
United States Government or other Applicable Law. The term "Hazardous
Material" includes, without limitation, any material or substance which is
(i) designated as a "hazardous substance" pursuant to Section 307 of the
Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq. (33
U.S.C. Section 1317), (ii) defined as a "hazardous waste" pursuant to
Section 3001 of the Federal Solid Waste Disposal Act, 42 U.S.C. Section
6901 et seq. (42 U.S.C. Section 6921), or (iii) defined as a "hazardous
substance" pursuant to Section 101 of the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.
(42 U.S.C. Section 9601), or (iv) petroleum, petroleum product,
polychlorinated biphenyls or urea formaldehyde.
(e) Within 30 days of the Expiration Date, if requested
by Landlord, Tenant shall remove all fuel oil and other liquid contents and
Hazardous Materials (collectively, the "Contents") from all now or
hereafter active underground storage tanks located on the Master Lease Property
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and dispose of such contents off of the Master Lease Property and in accordance
with Applicable Laws. Tenant shall not be obligated to remove, close or
take any other action to de-commission the tanks during or after the Term.
If, however, during the Term governmental authorities require such removal,
closure or other action and the requirement is not prompted by Landlord's
request to remove the Contents or any Development by Landlord or its Agents,
Tenant shall comply with such request subject to Subsection 5(B)(iv)(d).
(f) Notwithstanding anything contained in this Lease,
Tenant shall have no obligation or liability to Landlord with respect to:
(i) Any Hazardous Material which may exist on
the Master Lease Property as of the Effective Date, except to the extent that
Tenant is specifically required to take action regarding such Hazardous
Material by the governmental authority having jurisdiction.
(ii) Hazardous Material that migrates, flows,
percolates, diffuses or in any way moves on to or under the Master Lease
Property from sources outside the Master Lease Property.
(iii) Hazardous Material present on or in the
Master Lease Property as a result of any discharge, dumping or spilling
(whether accidental or otherwise) on areas of the Master Lease Property,
except the Main Building Area, by persons other than Tenant or its Agents.
SECTION 28. RIGHT TO RENEW TERM
(a) Provided that this Lease is then in full force and
effect, and provided that no Event of Default exists at the time of the
Renewal Notice or the date of commencement of the Renewal Term, Landlord
hereby grants to the Tenant an option (the "Renewal Option") to renew the
Initial Term of this Lease on the same terms, conditions and provisions as
contained in this Lease, except as noted herein, for a period of five (5)
years after the Expiration Date of the Initial Term (the "Renewal Term"),
which Renewal Option period shall, except as provided below, commence
immediately following the expiration of the Initial Term and end at 11:59
p.m. of the fifth anniversary of such date.
(b) The Renewal Option shall be exercised, if at all, by
written notice (the "Renewal Notice") from Tenant to Landlord of its
election, said notice to be given no later than the twenty-four (24) months
prior to the Expiration Date of the Initial Term. If the Renewal Notice is
not so given by Tenant to Landlord, the Renewal Option shall be deemed
waived.
(c) The Renewal Term shall be upon the same terms,
covenants and conditions as provided in this Lease except as follows:
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(i) Tenant shall not have any further right to
extend the Term or holdover after the end of the Term.
(ii) The annual Base Rent for the first year of
the Renewal Term shall be equal to the lesser of (i) the Fair Market Rent,
and (ii) one hundred two and 75/100ths percent (102.75%) of the Base Rent
rate in effect under this Lease immediately prior to commencement of the
Renewal Term; but in no event less than the annual Base Rent rate in effect
during the sixth Lease Year of the Initial Term (as reflected in Subsection
4(a)(vi)).
(iii) The annual Base Rent shall be increased
during the Renewal Term by two and 75/100ths percent (2.75%) per year on a
cumulative compounded basis.
(d) Landlord and Tenant shall attempt in good faith to
agree as to the Fair Market Rent, and if Landlord and Tenant fail to agree
as to the Fair Market Rent at least six (6) months prior to the Expiration
Date of the Initial Term (the "Arbitration Deadline"), Fair Market Rent
shall be determined as follows:
(i) Fair Market Rent shall be the triple net rent
which would be asked of tenants as of the date of commencement of the
Renewal Term for space comparable to the Main Building under five (5) year
leases in the Germantown/Clarksburg areas of Montgomery County, Maryland,
taking into account the size of the premises being leased by Tenant and the
value of brokerage commissions, rental abatements, rental credits, and
tenant allowances, if any, being offered or paid under such leases.
(ii) Tenant shall initiate the process to
determine Fair Market Rent by giving written notice to Landlord setting
forth the name and address of a leasing broker selected by Tenant to
determine the Fair Market Rent. Within five (5) days after receipt of
Tenant's notice, Landlord shall notify Tenant in writing of the name and
address of a leasing broker selected by Landlord to determine the Fair
Market Rent. Each broker shall independently make his or her determination
of the Fair Market Rent within twenty (20) days after the appointment of
Landlord's broker. The Fair Market Rent shall be deemed to be the average
of the two determinations unless the higher of such determinations is
greater than one hundred five percent (105%) of the lower of the
determinations. If the higher determination is greater than one hundred
five (105%) of the lower determination, the brokers selected by Landlord
and Tenant shall together select a third broker within five (5) days after
rendering their determinations. The third broker shall have ten (10) days
to make his or her determination of the Fair Market Rent and upon such
determination, the Fair Market Rent shall be deemed to be the median
determination made by the three (3) brokers. If Landlord fails to give
Tenant timely notice of Landlord's selection of a broker, the broker
selected by Tenant shall solely determine Fair Market Rent.
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(iii) Each broker appointed pursuant to this
Subsection shall be a disinterested broker licensed in the State of
Maryland having recognized competence in the field of commercial leasing
and a minimum of ten (10) years experience as a commercial leasing broker
or agent in the Montgomery County area. Each party shall pay for the cost
of the broker which it selects and the parties shall share equally the cost
of the third broker, if any.
(e) Upon the valid exercise by Tenant of the Renewal
Option, at the request of either party hereto and within thirty (30) days
after such request, Landlord and Tenant shall enter into a written
supplement to this Lease incorporating the terms, conditions and provisions
applicable to the Renewal Term as determined in accordance with the
provisions of this Section; provided, that if the amount of Base Rent for
the first year of the Renewal Term has not then been set, such amount shall
be entered into such supplement when determined.
SECTION 29. SECURITY DEPOSIT
If at any time during the Term, the credit rating of
Tenant's corporate debt drops below BBB as rated by Standard & Poor's (or
the equivalent rating by any other national rating agency designated by
Landlord), upon notice from Landlord, Tenant shall deposit a sum with
Landlord equal to one month's installment of the then applicable annual
Base Rent ("Security Deposit"), as security for the full and faithful
performance by Tenant, of each and every term, covenant, and condition of
this Lease. If there an event of Default, Landlord may use the Security
Deposit as payment of any Rent or other payment due from Tenant to Landlord
or to otherwise cure any default of Tenant hereunder. To the extent that
any of the Security Deposit is used for this purpose, Tenant shall pay such
amount to Landlord along with the next month's Rent in order to replenish
the Security Deposit to the original amount stated herein. The Security
Deposit shall be returned to Tenant within thirty (30) days of the
Expiration Date or earlier termination of this Lease to the extent that
such amount is not depleted in order to remedy any default by Tenant
hereunder.
SECTION 30. MISCELLANEOUS GENERAL PROVISIONS
(a) Payments Deemed Rent. Any amounts of money to be paid
by Tenant to Landlord pursuant to the provisions of this Lease, whether or
not such payments are denominated Rent or Additional Rent and whether or
not they are to be periodic or recurring, shall be deemed Rent or
Additional Rent for purposes of this Lease; and any failure to pay any of
same shall entitle Landlord to exercise all of the rights and remedies
afforded hereby or by law or in equity for the collection and enforcement
of Tenant's obligation to pay Rent. Tenant's obligation to pay any such
Rent or Additional Rent pursuant to the provisions of this Lease shall
survive the expiration or other termination of
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this Lease and the surrender of possession of the Master Lease Property.
(b) Interest on Deposits. Any amount deposited with
Landlord under this Lease shall be held by Landlord in a federally insured,
interest bearing account. Any interest earned on such deposit shall accrue
to Tenant and shall be transferred to Tenant promptly after the Expiration
Date or such earlier time as may be specified in this Lease unless Landlord
is required by Applicable Laws to return such interest to Tenant sooner
than stated herein. Any amount deposited with Mortgagee by Tenant (or by
Landlord on Tenant's behalf) shall be held by Mortgagee pursuant to
Applicable Laws and pursuant to the security documents between Landlord and
Mortgagee. No interest shall accrue unless required by Applicable Laws or
such security documents. Notwithstanding the foregoing, any amounts placed
in the Escrow Account shall be governed by the provisions of Subsection
21(b)(iii)(B).
(c) Landlord Cross Default. Any default by Landlord
under the Facilities Lease shall be a default by Landlord under
this Lease.
(d) Estoppel Letters. Tenant shall, within ten (10)
business days following written request from Landlord, execute, acknowledge
and deliver to Landlord or to any then existing or prospective lender,
investor or purchaser, with respect to the Master Lease Property or any
part thereof, designated by Landlord, a written statement certifying (i)
that this Lease is in full force and effect (if such is the case) and
unmodified (or, if modified, stating the nature of such modification), (ii)
the date to which Rent has been paid, (iii) that there are not, to Tenant's
actual knowledge, any uncured defaults by Landlord or Tenant (or specifying
such defaults if any are claimed), and (iv) such other matters as Landlord
may reasonably request. Any such statement may be relied upon by any such
then existing or prospective lender, investor or purchaser. If Tenant fails
to deliver such statement within the ten (10) business day period and if
following the expiration of that period Landlord gives a second written
request for the statement and Tenant fails to deliver the statement within
five (5) business days after the second request, Tenant shall conclusively
be deemed to have responded that this Lease is in full force and effect and
unmodified and that there are no uncured defaults in Landlord's performance
hereunder.
(e) Brokers. Each party represents and warrants to the
other that no broker procured this Lease on its behalf and that such party
had no conversations or negotiations with any broker concerning the leasing
of the Master Lease Property, other than Barnes, Morris, Pardoe and Foster,
which firm is receiving a commission from Tenant in connection with the
Purchase and Sale Agreement and is not entitled to a commission in
connection with this Lease. Each party shall indemnify the other against
liability in connection with a breach of its representation and
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warranty in this Subsection and in connection with any claim for a
brokerage or finder's commission or fee arising out of its acts. This
indemnification shall survive any termination of this Lease.
(f) Applicable Law. This Lease and all matters pertinent
thereto shall be construed and enforced in accordance with the Applicable
Laws of the State of Maryland, excluding choice of laws principles.
(g) Entire Agreement. This Lease, including all exhibits
hereto, constitutes the entire agreement between the parties hereto with
respect to the leasing of the Master Lease Property and may not be modified
except by an instrument in writing executed by the parties hereto.
(h) Binding Effect. This Lease and the respective rights
and obligations of the parties hereto shall inure to the benefit of and be
binding upon the successors and assigns of the parties hereto as well as
the parties themselves; subject, however, to Subsection (o) below.
(i) Survival. All provisions of this Lease which by their
express terms survive termination of this Lease or which by the operation
of their terms are intended to be performed, in whole or in part, after
termination of this Lease, shall survive any termination of this Lease.
(j) Severability. If any provision of this Lease shall be
held to be invalid, void or unenforceable, such provision shall be deemed
reformed to be valid, in effect and enforceable, and to be as close in
meaning and intent as the defective provision and still the remaining
provisions hereof shall not be affected or impaired, and such remaining
provisions shall remain in full force and effect.
(k) Headings, Gender, etc. As used in this Lease, the
word "person" shall mean and include, where appropriate, an individual,
corporation, partnership or other entity; the plural shall be substituted
for the singular, and the singular for the plural, where appropriate; and
words of any gender shall include any other gender. The topical headings of
the several paragraphs of this Lease are inserted only as a matter of
convenience and reference, and do not affect, define, limit or describe the
scope or intent of this Lease. References in this Lease to Sections and
Subsections are references to Sections and Subsections of this Lease.
(l) Waiver of Jury. To the extent permitted by Applicable
Laws, each of Landlord and Tenant hereby waives any right it may have to a
jury trial in the event of litigation between Landlord and Tenant
pertaining to this Lease.
(m) Landlord's Right to Cure. Landlord may, but shall
not be obligated to, cure any default by Tenant, specifically including, but
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not by way of limitation, Tenant's failure to pay Impositions, obtain
Insurance, Care for the Master Lease Property, or satisfy lien claims,
after complying with any applicable notice and cure provisions established
under this Lease; and whenever Landlord so elects, all reasonable out of
pocket costs and expenses paid by Landlord in curing such default, including,
without limitation, reasonable attorneys' fees, shall be Additional Rent due
on the next scheduled Rent payment date.
(n) Relationship of Parties. Nothing contained herein
shall be deemed or construed by the parties hereto, nor by any third party,
as creating the relationship of principal and agent or of partnership, or
of joint venture by the parties hereto, it being understood and agreed that
no provision contained in this Lease nor any act of the parties hereto
shall be deemed to create any relationship other than the relationship of
Landlord and Tenant.
(o) Landlord Means Owner. The term "Landlord" as used in
this lease, so far as covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner or owners at
the time in question of the Master Lease Property and, in the event of any
transfer or transfers of the title to all of the Master Lease Property,
Landlord herein named (and in case of any subsequent transfer or
conveyances, the then grantor) shall be automatically freed and relieved,
from and after the date of such transfer or conveyance, of all liability as
respects the performance of any covenants or obligations on the part of
Landlord contained in this Lease thereafter to be performed (but not any
liabilities accrued prior to the date of transfer); provided that any funds
in the hands of such Landlord or the then grantor at the time of such
transfer, in which Tenant has an interest, shall be turned over to the
grantee, and any amount then due and payable to Tenant by Landlord or the
then grantor under any provisions of this Lease, shall be paid to Tenant
and further provided that the transferee assumes in writing all of the
covenants and obligations of Landlord to observed and performed on and
after the date of transfer.
(p) References to Size. Landlord and Tenant acknowledge
and agree that any references in this Lease to the size of the Property,
the Main Building Area, the Main Building or any portion thereof are for
convenience only and regardless of whether the actual size of such areas is
greater or less than the size stated in this Lease, all obligations of the
parties hereunder, including without limitation, the obligation to pay Rent
shall remain the same and shall not be affected by any errors in references
to size.
(q) Unavoidable Delays. For purposes of this Lease, the
term "Unavoidable Delays" shall mean delays caused by strikes, lockouts,
acts of God, inability to obtain labor or materials, governmental
restrictions or inaction, enemy action, civil commotion, fire, terrorist
action, epidemic, public utility failure, unavoidable casualty, moratorium
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or similar laws prohibiting performance, weather conditions or any other
similar matter which shall be beyond the reasonable control of Landlord or
Tenant, as the case way be; but the lack or insufficiency of funds shall not
constitute an Unavoidable Delay.
(r) Landlord's Approvals. Wherever Landlord's consent or
approval are required under this Lease, Landlord shall approve or
disapprove the matter within ten (10) business days after Tenant requests
the consent or approval in writing. If Landlord fails to do so and if,
following the expiration of the ten (10) business day period, Tenant gives
a second written request for the consent or approval and Landlord fails to
approve or disapprove the matter within five (5) business days after the
second request, Landlord shall conclusively be deemed to have consented to
or approved the matter, as the case may be.
(s) Rate of Interest. If any amount owed by Landlord to
Tenant under this Lease remains unpaid after such amount is due and notice
thereof has been given to Landlord, the outstanding amount shall bear
interest at the Stipulated Rate from the date such amount is due and such
notice is given to the date such amount is paid.
(t) Cooperation of Parties. Whenever the parties are
required to cooperate with each other under this Lease but are entitled to
reimbursement for their out-of-pocket costs to third parties, the party
that is obligated to cooperate shall provide an estimate of such third
party costs to the party requesting such cooperation and obtain the prior
written approval from such other party not to be unreasonably withheld or
delayed before such costs are incurred.
(u) Reconciliation. Nothing in this Lease shall prevent
or impair Tenant from performing its obligations or observing its covenants
under the Existing Space Leases. Further, nothing in this Lease shall
prevent or impair any of the Existing Tenants from exercising their rights
and privileges under the Existing Space Leases. No such action by Tenant or
the Existing Tenants in accordance with the Existing Space Leases shall be
deemed to be a breach or default by Tenant under this Lease.
(v) Memorandum of Lease. Upon request of either party the
other party shall promptly execute and deliver a memorandum or other short
form version of this Lease setting forth the basic terms of this Lease
excluding Rent. The party recording such memorandum, short form version, or
other document giving notice of this Lease shall pay any and all
recordation and transfer taxes due in connection with such recordation.
(w) Financial Reports. In the event that Tenant is no
longer a publicly traded company with common stock trading on either the
New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock
Exchange (or, in the event the Tenant's stock is no longer traded on such
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exchanges, or a successor or reasonably equivalent exchange), Tenant shall
supply Landlord, within ten (10) business days of Landlord's request
therefor (to be no more frequent than once per year), copies of Tenant's most
recent financial reports. Such reports shall (i) include an income
statement, balance sheet, statement owner's equity and statement of cash
flows, (ii) shall be audited by a certified public accountant or, to the
extent audited Financial Reports are not otherwise obtained by Tenant for
other purposes, certified by the chief financial officer of Tenant, to
his/her knowledge, as being true, correct and complete financial reports,
and (iii) shall be dated no later than twelve months prior to Landlord's
request. Notwithstanding the foregoing, in the event that Landlord requests
such financial reports within one hundred twenty (120) days after Tenant's
fiscal year end, Tenant shall have up to one hundred twenty (120) days
from such fiscal year end to supply such reports to Landlord; provided
Tenant has given Landlord its most recent financial reports and such reports
are not dated earlier than twelve (12) months prior to Tenant's fiscal year end.
(x) Landlord's Affiliates. Notwithstanding anything
contained in this Lease to the contrary, any act or omission of an
affiliate of Landlord on any Excluded Areas shall not be a default of
Landlord under this Lease. In no event shall this provision be construed in
any manner as a waiver of any right that Tenant has at law or in equity
against such affiliate as a result of such act or occurrence.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this
Lease to be executed as of the day and year stated herein.
LANDLORD:
LCOR CLARKSBURG L.L.C.
By: Clarksburg Management, Inc.
By:/s/ Michael T. Goulder
Name: Michael T. Goulder
Title: Vice President
TENANT:
COMSAT CORPORATION
By: /s/ Allen E. Flower
Name: Allen E. Flower
Title: Vice President and
Chief Financial Officer
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SCHEDULE I
Defined Terms
AAA: Section 11(c)
ACM: Section 27(b)
Accelerated Payment: Section 21(b)(iii)(A)
Additional Easements: Section 6(f)
Additional Rent: Section 4(b)
Adequate Assurance of
Future Performance: Section 22(d)
All Risks Policy: Section 14(a)(i)
Alterations: Section 13(a)
Applicable Laws: Section 5(b)(iv)
Appurtenances: Section 6(d)
Arbitration Deadline: Section 28(d)
Architect: Section 15(b)(i)
Assignment: Section 19(b)
Base Rent: Section 4(a)
Blanket Policy: Section 14(e)
Building A, B or C: Definitions of Main Building
Care, Care for,
Care of: Section 11(a)
Communication Facilities: Section 6(a)(iii)
Comparable Buildings: Section 11(a)
Comparable Properties: Section 11(b)
Contents: Section 27(e)
Damage: Section 15(a)
Declaration: Section 11(b)
Default Measuring Period: Section 21(b)(iii)(B)
Development: Section 6(a)
Effective Date: Preamble
Environmental Conditions: Section 27(a)
Escrow Account: Section 21(b)(iii)(B)
Escrowee: Section 21(b)(iii)(B)
Events of Default: Section 21(a)
Existing Space Leases: Section 19(a)
Existing Tenants: Section 19(a)
Facilities Lease: Section 21(a)(iii)
Flood and Earthquake
Insurance: Section 14(f)
Flood Zone: Section 14(f)
Hazardous Material: Section 27 and 27(d)
Holdover Notice: Section 3(b)(i)
Holdover Period: Section 3(b)(i)
Holdover Space: Section 3(b)(ii)
Impositions: Section 7(a) and (d)
Indemnifying Party: Section 16(c)
Indemnitee: Section 16(c)
Indemnity Payment: Section 16(c)
Initial Term: Section 3(a)
Institutional Mortgagee: Section 15(c)(i)
Insurable Casualty: Section 15(h)
Insurance: Section 14(a)
Insurance Notice: Section 14(g)
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SCHEDULE I (cont'd)
Insurance Trustee: Section 15(c)
Landlord: Preamble; Section 30(o)
Landlord Approved SNDA: Section 19(b)
Lease: Preamble
Lease Renewal: Section 19(d)
Lease Year: Section 3(c)
Liability Policy: Section 14(a)(ii)
Measuring Period: Section 19(d)
Mitigation Leases: Section 21(b)(iii)(B)
Mortgagee: Section 7(e)(i)
Non-Broker Sublease: Section 19(b)
Non-Consensual Holdover
Period: Section 24
Operating Expenses: Section 21(b)(iii)(B)
Personal Property: Section 13(b)
Plans: Section 13(a)(i)
Post Default Leases: Section 21(b)(iii)(B)
Preapproved Alterations: Section 13(a)
Prime Rate: Section 4(h)
Profit: Section 19(d)
Purchase and Sale
Agreement: Recital (a)
Remediation Obligation: Section 27(a)
Renewal Notice: Section 28(b)
Renewal Option,
Renewal Term: Section 28(a)
Rent: Section 4(b)
Rent Insurance: Section 14(a)(iv)
Replacement Value: Section 14(a)(i)
Requisition: Section 15(c)(i)
Restoration: Section 15(a)
Restricted Areas: Section 12(a)
Restricted Property: Section 13(b)
Roof Based Facilities: Section 13(a)
Roof Work: Section 11(e)
Security Deposit: Section 29
Seismic Activity Zone: Section 14(f)
Signs: Section 9(a)
Standard Rating: Section 14(g)
Stipulated Rate: Section 4(h)
Sublease: Section 19(b)
Sublease Arbitration
Deadline: Section 19(c)
Subject Space: Section 19(d)
Subtenant: Section 19(e)
Taken, Taking: Section 17(a)(i)
Tax and Insurance
Holdbacks: Section 21(b)(iii)(B)
Tenant: Preamble
Tenant Approved SNDA: Section 20(a)
Tenant's Knowledge: Section 15(c)(ii)
Term: Section 3(a)
Third Party Claim: Section 16(d)(i)
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Triggering Event: Section 6(b)
Unavoidable Delays: Section 30(q)
Utilities: Section 8(a)
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Schedule II
Deductibles
I. All Risk Policy $100,000
Flood and Earthquake Insurance $150,000
II. In the event that Tenant's corporate debt drops below BB, as rated
by an Approved Credit Rating Agency, the following deductibles
shall apply:
All Risk Policy $25,000
Flood and Earthquake Insurance $50,000
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SCHEDULE OF EXHIBITS
EXHIBIT SECTION
Exhibit A (Description of Land) 1(a)
Exhibit B (Description of Main 1(a)
Building Area)
Exhibit C (Description of 1(a)
Installations Premises)
Exhibit D Intentionally Omitted
Exhibit E (Wire Instructions) 4(g)
Exhibit F (Roof Work) 11(e)
Exhibit G (Existing Space Leases) 19(a)
Exhibit H (Landlord Approved SNDA) 19(b)
Exhibit I (Tenant Approved SNDA) 20(a)
Exhibit J (Operations and 27(b)
Maintenance Plan)
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EXHIBIT 10.51
FACILITIES LEASE AGREEMENT
BY AND BETWEEN
LCOR CLARKSBURG L.L.C., AS LANDLORD
AND
COMSAT CORPORATION, AS TENANT
CLARKSBURG, MONTGOMERY COUNTY, MARYLAND
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TABLE OF CONTENTS
INTRODUCTION
Section 1. DEFINITIONS........................................1
Section 2. LEASE OF INSTALLATIONS PREMISES....................2
Section 3. TERM...............................................2
Section 4. RENT...............................................3
Section 5. USE OF THE INSTALLATIONS PREMISES..................5
Section 6. DEVELOPMENT; DESIGNATION OF THE EXCLUDED
AREAS.........................................7
Section 7. TAXES AND IMPOSITIONS..............................9
Section 8. UTILITIES.........................................12
Section 9. SIGNS.............................................13
Section 10. AS-IS CONDITION OF INSTALLATIONS
PREMISES.....................................13
Section 11. REPAIRS, MAINTENANCE AND MANAGEMENT...............14
Section 12. ACCESS TO INSTALLATIONS PREMISES..................15
Section 13. ALTERATIONS AND PERSONAL PROPERTY.................16
Section 14. INSURANCE.........................................17
Section 15. DAMAGE OR DESTRUCTION.............................20
Section 16. INDEMNIFICATION...................................21
Section 17. CONDEMNATION......................................25
Section 18. LIENS.............................................26
Section 19. EXISTING SPACE LEASES; ASSIGNMENT AND
SUBLETTING...................................27
Section 20. SUBORDINATION OR SUPERIORITY OF LEASE.............28
Section 21. DEFAULTS AND REMEDIES.............................29
Section 22. BANKRUPTCY OR INSOLVENCY..........................34
Section 23. SURRENDER OF INSTALLATIONS PREMISES...............36
Section 24. NON-CONSENSUAL HOLDING OVER.......................36
Section 25. QUIET ENJOYMENT...................................37
Section 26. NOTICES...........................................37
Section 27. HAZARDOUS MATERIALS...............................38
Section 28. RIGHT TO RENEW TERM...............................40
Section 29. SECURITY DEPOSIT..................................41
Section 30. MISCELLANEOUS GENERAL PROVISIONS..................41
SCHEDULE I
SCHEDULE OF EXHIBITS
<PAGE>
FACILITIES LEASE AGREEMENT
THIS FACILITIES LEASE AGREEMENT (this "Lease") is entered
into and made effective as of the 12th day of September, 1997 (the
"Effective Date"), by and between LCOR CLARKSBURG L.L.C., a Delaware
limited liability company ("Landlord") and COMSAT Corporation, a District
of Columbia corporation ("Tenant").
WITNESSETH:
(a) Prior to but contemporaneously with the execution and
delivery of this Lease, Tenant sold and transferred the Installations
Premises to Landlord pursuant to that certain Agreement of Sale dated the
Effective Date, by and between Tenant, as seller, and Landlord, as
purchaser (the "Purchase and Sale Agreement").
(b) Landlord desires to lease to Tenant, and Tenant
desires to lease back from Landlord, the Installations Premises, all as set
forth and on the terms and conditions contained in this Lease.
NOW THEREFORE, in consideration of the mutual promises
set forth in this Lease and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged by each party, Landlord
and Tenant agree as follows:
SECTION 1. DEFINITIONS
(a) The following terms shall have the meanings ascribed
thereto below:
Agents: The agents, employees, contractors,
subcontractors, affiliates, licensees and invitees of each party
(and in the case of Tenant, subtenants).
Auxiliary Buildings: All buildings now or hereafter
located on the Installations Premises and currently consisting of three
buildings which, for the purposes of this Lease, Landlord and Tenant agree
contain, in the aggregate, 36,000 gross square feet of space.
Communications Facilities: The satellite dishes,
antennae, or similar structures or equipment now or hereafter
located on the Installation Premises.
Expiration Date: The ending date of the Term.
Installations Premises: Certain portions of the Land as
described and shown on Exhibit C attached hereto and made a part hereof,
and containing the Auxiliary Buildings and the Communications Facilities.
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Land: Approximately 227 acres of land located in
Clarksburg, Montgomery County, Maryland, as described or shown on Exhibit A
attached hereto and made a part hereof.
Master Lease Property: The Land, together with all
improvements located thereon, less the Installations Premises and
the Excluded Areas.
Main Building Area: The Main Building and the Parking
Areas, access drives, and other appurtenant areas serving the Buildings on
such area, as described or shown on Exhibit B attached hereto and made a
part hereof.
Parking Areas: Those certain areas located on the
Installations Premises and designated for use for parking of
motor vehicles as of the Effective Date.
Unimproved Area: The Master Lease Property, less the
Main Building Area.
(b) Other terms shall have meanings ascribed to such
terms in this Lease and as shown on Schedule I attached hereto and made a
part hereof.
SECTION 2. LEASE OF INSTALLATIONS PREMISES
Landlord, for and in consideration of the rents,
covenants and agreements hereinafter reserved, mentioned and contained on
the part of Tenant and its successors and assigns, to be paid, kept and
performed, has leased, rented, let and demised, and by these presents does
lease, rent, let and demise unto Tenant, and Tenant does hereby take and
hire, upon and subject to the covenants, agreements, provisions,
limitations and conditions herein expressed, the Installations Premises.
SECTION 3. TERM
(a) The initial term of this Lease (the "Initial Term")
shall be for a period of ten (10) years commencing on the Effective Date
and ending at 11:59 p.m. local time on the day preceding the tenth
anniversary of the Effective Date, unless this Lease shall be sooner
terminated as hereinafter provided or as provided by law. Notwithstanding
the foregoing, if the Term ends on any day other than the last day of any
calendar month, the Term shall be extended so that the last day of the Term
is the last day of such calendar month. The Initial Term, as may be
extended by exercise of Section 28, may sometimes be collectively referred
to in this Lease as the "Term".
(b) As used in this Lease, the term "Lease Year" means
each consecutive period of twelve (12) calendar months during the Term,
commencing on the Effective Date. If, however, the Effective Date is other
than the first day of a calendar month, the first Lease Year shall begin on
the Effective Date and end on
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the first anniversary of the last day of the calendar month in which the
Effective Date falls, and each succeeding Lease Year shall be each
succeeding consecutive period of twelve (12) calendar months thereafter
during the Term.
SECTION 4. RENT
(a) Tenant covenants and agrees to pay Landlord in lawful
money of the United States, annual base rent for the Installations Premises
("Base Rent") in twelve (12) equal monthly installments, in advance, on or
before the first day of each and every month throughout the Term, as
follows:
(i) FOUR HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS
($425,000.00) during the first Lease Year.
(ii) FOUR HUNDRED THIRTY-SIX THOUSAND SIX HUNDRED
EIGHTY-SEVEN AND 50/100 DOLLARS ($436,687.50), during the second Lease
Year.
(iii) FOUR HUNDRED FORTY-EIGHT THOUSAND SIX HUNDRED
NINETY-SIX AND 41/100 DOLLARS ($448,696.41), during the third Lease Year.
(iv) FOUR HUNDRED SIXTY-ONE THOUSAND THIRTY-FIVE AND
56/100 DOLLARS ($461,035.56), during the fourth Lease Year.
(v) FOUR HUNDRED SEVENTY-THREE THOUSAND SEVEN HUNDRED
FOURTEEN AND 04/100 DOLLARS ($473,714.04), during the fifth Lease Year.
(vi) FOUR HUNDRED EIGHTY-SIX THOUSAND SEVEN HUNDRED
FORTY-ONE AND 18/100 DOLLARS ($486,741.18), during the sixth Lease Year.
(vii) FIVE HUNDRED THOUSAND ONE-HUNDRED TWENTY-SIX AND
56/100 DOLLARS ($500,126.56), during the seventh Lease Year.
(viii) FIVE HUNDRED THIRTEEN THOUSAND EIGHT HUNDRED
EIGHTY AND 04/00 DOLLARS ($513,880.04), during the eighth Lease Year.
(ix) FIVE HUNDRED TWENTY-EIGHT THOUSAND TWELVE AND 10/100
DOLLARS ($528,012.10), during the ninth Lease Year.
(x) FIVE HUNDRED FORTY-TWO THOUSAND FIVE HUNDRED
THIRTY-TWO AND 43/100 DOLLARS ($542,532.43), during the tenth Lease Year.
Notwithstanding the foregoing, if the Effective Date shall be a day other
than the first day of a calendar month, there shall be due and payable on
the Effective Date, as the installment of Base Rent for such fractional
month, an amount determined by dividing the Base Rent for the first Lease
Year by 365 and multiplying the
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result by the number of days from the Effective Date through the
end of such month.
(b) Tenant also covenants and agrees to pay, as
additional rent (the "Additional Rent"), all sums, Impositions, costs,
expenses and other payments which Tenant in any of the provisions of this
Lease assumes, agrees or is obligated to pay, or which shall become
otherwise due and payable from Tenant to Landlord under this Lease (other
than Base Rent). Base Rent and Additional Rent may sometimes be
collectively referred to herein as "Rent".
(c) It is the purpose and intent of Landlord and Tenant
that, except as explicitly set forth herein, the Base Rent shall be
absolutely net to Landlord, so that this Lease shall yield, net to
Landlord, the net annual rent specified in Subsection (a) of this Section 4
in each Lease Year during the Term and that all costs, expenses and
obligations of every kind and nature whatsoever, in connection with or
relating to the Installations Premises shall be the obligation of Tenant
and shall be paid by Tenant.
(d) The Base Rent shall be paid to Landlord promptly when
due without notice or demand therefor, and without any abatement (except as
explicitly stated to the contrary in Section 8), deduction or set-off for
any reason whatsoever.
(e) No payment by Tenant or receipt or acceptance by
Landlord of a lesser amount than the correct Rent shall be deemed to be
other than a payment on account, nor shall any endorsement or statement on
any check or any letter accompanying any check or payment be deemed an
accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance or pursue any
other remedy in this Lease or as provided by law or in equity.
(f) If any of the Rent payable under the terms and
provisions of this Lease shall be or become uncollectible, reduced or
required to be refunded because of any rent control or similar act or law
enacted by a valid governmental authority, Tenant shall enter into such
agreements and take such other steps that Landlord may request and as may
be legally permissible to permit Landlord to collect the maximum rents
which, from time to time during the continuance of such legal rent
restriction, may be legally permissible (and not in excess of the amounts
reserved therefor under this Lease). Upon the termination of such legal
rent restriction, (i) the Rent shall become and thereafter be payable in
accordance with the amounts reserved herein for the periods following such
termination, and (ii) Tenant shall promptly pay to Landlord, to the maximum
extent legally permissible, an amount equal to (a) the Rent which would
have been paid pursuant to this Lease but for such legal rent restriction,
less (b) the Rent paid by Tenant during the period such rent restriction
was in effect.
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(g) All Rent and other payments required to be made by
Tenant to Landlord shall be delivered to Landlord by wire transfer pursuant
to the wire transfer instructions as shown on Exhibit E attached hereto and
made a part hereof or to any other single party that Landlord may specify
from time to time by written notice given to Tenant.
(h) In recognition of the extra costs to Landlord
resulting from Tenant's failure to make timely payment of any installment
of Base Rent, if any such installment is not paid within nine (9) days
after its due date, the delinquent amount shall be subject to a service
charge of five percent (5%) of such delinquent amount, or such lesser
charge as may be the maximum charge permitted by law. In addition, if any
installment of Base Rent or any other sum due Landlord under this Lease
remains unpaid seventy-five (75) days after its due date, the outstanding
amount shall bear interest at an annual rate of two percent (2%) over the
"Prime Rate" then prevailing or such lesser rate as may be the maximum rate
permitted by law (the "Stipulated Rate"), and calculated from the due date
of such sum and continuing through the date such sum is paid in full. As
used in this Lease, the term "Prime Rate" means the prime rate of interest
for large money center banks as published in the Money Rates section of the
Wall Street Journal or if the Wall Street Journal ceases to publish such
rate, as established by reference to such other authority as is generally
accepted in the business community as a source for determining the "Prime
Rate".
SECTION 5. USE OF THE INSTALLATIONS PREMISES
(a) The Installations Premises may be occupied and used
for any lawful purpose and shall not be used for any other purpose. In
addition, Tenant shall have easements on, over, across and through the Main
Building Area and the Unimproved Area for (i) access to the Installations
Premises via roads existing in the Unimproved Area and the Main Building
Area as of the Effective Date, or as may be relocated as expressly provided
for in this Lease, (ii) purposes which are incidental to use of the
Installation Premises, such as use, maintenance, repair, and replacement of
utilities, storm drainage facilities, and signage serving or used in
connection with the Installation Premises, (iii) reasonable recreation
uses, such as use of the existing recreational facilities, and (iv)
temporary activities and uses that Tenant reasonably deems desirable.
Notwithstanding anything to the contrary contained in this Lease, with
respect to the uses described in clauses (iii) and (iv) above, (y) the
Tenant shall ensure that such uses do not interfere with the Development,
and (z) no action or omission of Landlord, or its Agents, successors and
assigns that interferes with such uses shall be a default of Landlord under
this Lease.
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(b) Tenant further agrees as follows:
(i) Tenant and its Agents shall use the
Installations Premises and conduct their business thereon in a safe,
careful, reputable and lawful manner.
(ii) Tenant shall obtain, or cause to be obtained,
all certificates, licenses and permits necessary for its, or its subtenants',
occupancy, use, operation and maintenance of the Installations Premises. Upon
reasonable advance request by Tenant, Landlord shall reasonably cooperate with
Tenant in Tenant's obtaining such necessary certificates, licenses or permits,
including, without limitation, signing applications for the same within ten (10)
business days after Tenant's request if Landlord's signing is required by
Applicable Law or requested by a governmental authority; provided, that Landlord
shall not be required to incur any out-of-pocket costs to third parties in
connection therewith. Tenant shall promptly reimburse Landlord for any of its
reasonable out-of-pocket costs to third parties for review or advice about such
certificates, licenses or permits.
(iii) Tenant shall not commit, nor allow to be
committed, in, on or about the Installations Premises, any act of waste,
including any act which might deface, damage or destroy any improvement
thereon, or any part thereof. Further, Tenant shall not permit any noise or
odor to be emitted from the Installations Premises which is unlawful or
which constitutes a legal nuisance. Notwithstanding the foregoing, Tenant
shall not have any responsibility for any waste, noise, or odor caused by
Landlord or its Agents.
(iv) Tenant shall promptly comply in all material
respects with all present and future laws, statutes, ordinances, rules,
regulations and orders of any federal, state, municipal or other government
or agency thereof having jurisdiction over and relating to the use,
condition and occupancy of the Installations Premises, and any covenants,
conditions and restrictions of record existing as of the Effective Date and
governing the Installations Premises (collectively, the "Applicable Laws").
Tenant acknowledges that the Applicable Laws are of public record and that
Tenant knows the character of its operation on the Installations Premises.
Tenant shall have sole responsibility for its compliance with the
Applicable Laws in all material respects, and Tenant's inability to so
comply shall not be cause for Tenant to terminate this Lease.
Notwithstanding the foregoing:
(A) Tenant shall not be required to comply
with any Applicable Laws to the extent that Tenant or the Installations
Premises are legally "grandfathered" or exempt from the application of such
Applicable Laws or Tenant may obtain from the appropriate authorities a
waiver or variance with respect to compliance.
<PAGE>
(B) Tenant shall not be required to comply
with any legal requirements in connection with the Installations Premises
arising out of or relating to the Development or arising out of other acts
or omissions of Landlord or its Agents on or with respect to the
Installations Premises. All of such requirements on the Installations
Premises shall be promptly complied with by Landlord in all material
respects, at its own expense.
(C) Tenant shall not be obligated to
correct any violations of Applicable Laws which may exist on the
Installations Premises as of the Effective Date, except to the extent
specifically required to do so by written notice from the governmental
authority having jurisdiction.
(D) Tenant shall have the right to contest
by appropriate legal proceedings, conducted diligently and in good faith,
without expense to Landlord, the validity or application of any Applicable
Laws. If compliance with the Applicable Law being contested may legally be
delayed pending the prosecution of the proceeding, Tenant may delay
compliance until the final determination of the proceeding. Landlord shall
execute and deliver, within ten (10) business days after request by Tenant,
any appropriate papers and/or other instruments that may be necessary to
permit Tenant to contest the validity or application of the Applicable Law.
Landlord shall otherwise reasonably cooperate with Tenant in the contest,
provided that Landlord shall not be required to incur any out-of-pocket
costs to third parties in connection therewith. Notwithstanding the
foregoing, Tenant shall ensure that any such contest does not cause any
lien to be filed against the Installations Premises or any portion thereof.
SECTION 6. DEVELOPMENT; DESIGNATION OF THE EXCLUDED
AREAS
(a) Tenant acknowledges that, among other purposes,
Landlord purchased the Land for possible development and/or sale of all or
portions of the Unimproved Area. Although Landlord is not required to
develop or sell any of the Unimproved Area, Landlord is contemplating a
"mixed-use" development thereon, consisting of, among other things, uses of
varying densities, sizes and natures, and infrastructure in order to serve
same (all or any portion thereof, the "Development"). The Development shall
be at Landlord's sole cost. Tenant acknowledges that the Development may
require Landlord to change the zoning classification of the Installations
Premises. Tenant covenants and agrees that during the Term it shall not
object to, and shall reasonably cooperate with Landlord with respect to,
Development by Landlord or its successors of any of the Unimproved Area
and shall reasonably cooperate so as to avoid interference with the
Development. Notwithstanding the foregoing:
<PAGE>
(i) The Development by Landlord shall not
interfere with Tenant's or its subtenants' use of the
Installations Premises.
(ii) No rezoning or other development approvals
sought by Landlord for all or any part of the Installations Premises shall
prohibit, restrict, or make non-conforming any of the uses which may be
conducted on the Installations Premises under the I-3 zoning applicable to
such property as of the Effective Date.
(iii) Landlord acknowledges that the
uninterrupted operation of the Communications Facilities is of critical
importance to Tenant. Landlord shall not oppose the installation or
continued operation of the Communications Facilities.
(iv) Tenant shall not be required to incur any
liability or out of pocket expense to third parties in providing
cooperation to Landlord or its successors with respect to Development.
(b) Intentionally Omitted.
(c) Intentionally Omitted.
(d) In the event that ownership of any portion of the
Main Building Area or Unimproved Area is transferred to another party (an
"Excluded Area") and such Excluded Area contains any road, utility line,
drainage line, storm water management facility, sign, or other improvement
or amenity then being used by Tenant in connection with the Auxiliary
Buildings or the Communications Facilities (collectively, "Appurtenances"),
then, automatically upon such transfer of the Excluded Area, Tenant shall
be deemed to have easements for the continued uninterrupted use of the
Appurtenances for so long as this Lease remains in effect. The easements
provided for in this subsection shall include the right of Tenant to enter
upon the Excluded Area to inspect, maintain, repair, and replace the
Appurtenances. Notwithstanding the foregoing, Landlord may temporarily
discontinue any of the Appurtenances for a period of not more than
forty-eight (48) hours if Landlord provides Tenant with temporary
Appurtenances, provided such temporary Appurtenances allow Tenant and its
Agents to use the Installations Premises without any material diminishment
of Tenant's or its Agents' use of the Installations Premises or any
material interference with the business operations of Tenant or its
subtenants on the Installations Premises.
(e) Notwithstanding anything to the contrary contained in
this Lease, Tenant shall not be required to pay for any incremental,
additional or increased cost of Insurance or any increased costs of Care of
the Installations Premises which are attributable to Development or any
other acts or omissions of
<PAGE>
Landlord or its Agents with respect to the Installations Premises or the
Unimproved Area.
(f) In addition to the easements for existing
Appurtenances provided for in Subsection 6(d), Landlord shall grant to
Tenant, or to any utility company or governmental authority designated by
Tenant, such other easements for utilities, drainage, stormwater
management, and other similar matters on, under, and across the Main
Building Area or Unimproved Area as may be reasonably required in
connection with the use or occupancy of the Installations Premises and in
accordance with this Lease ("Additional Easements"). No Additional
Easements shall materially and adversely affect the Development or
materially increase the cost of Development. Landlord shall have a
reasonable right of approval of the location of all Additional Easements.
All Additional Easements shall be granted without charge within ten (10)
business days after written request by Tenant, accompanied by the
instrument to be executed and a plat showing the location of the Additional
Easement. Landlord shall make good faith and commercially reasonable
efforts to cause its mortgagees to subordinate their liens against the Main
Building Area or Unimproved Area to any Additional Easements.
SECTION 7. TAXES AND IMPOSITIONS
(a) Tenant covenants and agrees to pay, not later than
the first day on which any interest or penalty will accrue or be assessed
for the non-payment thereof, all of the following items applicable to or
affecting the Installations Premises or any part thereof accruing or
payable from and after the Effective Date and during the Term or applicable
thereto: (i) all real estate taxes and assessments (including, without
limitation, assessments for special business improvement or assessment
districts), (ii) personal property taxes, (iii) occupancy and rent taxes
specifically imposed on tenants in Montgomery County or attributable to
subtenants of Tenant, (iv) water and sewer rents, rates and charges, (v)
vault taxes and charges, (vi) certificate, license and permit fees, (vii)
any taxes, assessments or governmental levies, general and special,
ordinary and extraordinary, foreseen and unforeseen, of any kind and nature
whatsoever which at any time prior to or during or applicable to the Term
or any part thereof may be assessed, levied, confirmed, imposed upon, or
grow or accrue or become due and payable out of, or charged with respect
to, or become a lien on, the Installations Premises or any part thereof, or
the sidewalks or streets in front of or adjoining the Installations
Premises, or any vault, passageway or space in, over or under such sidewalk
or street, or any other appurtenances to the Installations Premises, or any
personal property, equipment or other facility used in the operation
thereof, or any use or occupation of the Installations Premises, or any
document by which Tenant creates or transfers an interest or estate in the
Installations Premises, and (vii) any fines or penalties or
<PAGE>
similar governmental charges applicable with respect to any of the
foregoing, together with interest and costs thereon (all such items
aforesaid may sometimes be collectively referred to herein as
"Impositions").
(b) If, by law, any Imposition imposed during the Term,
which is an assessment not related to general real estate taxes, may at the
option of the taxpayer be paid in installments (whether or not interest
shall accrue on the unpaid balance of such Imposition), Tenant may exercise
the option to pay the same (and any accrued interest on the unpaid balance
of such Imposition) in installments and, in such event, shall pay such
installments plus interest as may become due during the Term of this Lease;
provided, that all such payments shall be made before any fine, penalty, or
other charge for non-payment of any installment may be added thereto.
(c) Any Imposition (including, without limitation, those
Impositions which have been converted into installment payments by Tenant
as referred to in Subsection (b) above) relating to a period of time which
is partially within the Term and partially beyond the Expiration Date shall
be adjusted between Landlord and Tenant as of the Expiration Date so that
Landlord shall pay that portion of such Imposition which is attributable to
any period of time after the Expiration Date and Tenant shall pay the
remainder thereof. This subsection shall survive termination of the Lease.
(d) Notwithstanding the foregoing, Tenant shall not be
required to pay municipal, state or federal income, excess profits, capital
levy, rental (except as set forth in clause (iii) of Subsection (a)),
estate, succession, inheritance, transfer, recordation (except to the
extent described in Section 30(v)) or gift taxes of Landlord, any corporate
franchise tax imposed upon Landlord or any tax imposed because of the
nature of the business entity of Landlord; provided, however, that if at
any time during the Term, the method of taxation prevailing at the
Effective Date shall be altered so that, in substitution for ad valorem
real estate taxes, any new Imposition or charge, or any part thereof, shall
be measured by or be based in whole or in part upon the Installations
Premises and shall be imposed upon Landlord, then all such new Impositions
or charges, or any part thereof, shall be deemed to be included within the
term "Impositions", and Tenant shall pay and discharge the same as herein
provided in respect of the payment of Impositions.
(e) (i) If permitted by Applicable Law, and provided no
Event of Default is then in existence, Tenant shall have the right, at its
own expense, to contest the amount or validity, in whole or in part, of any
Imposition by appropriate proceedings diligently conducted in good faith.
If, under Applicable Law, the contested Imposition must be paid before
undertaking the contest, Tenant shall pay such Imposition (which payment
may be made under protest, at Tenant's option) or, if permitted by
<PAGE>
Landlord and any mortgagee of Landlord (including trustees or beneficiaries
of deeds of trust) ("Mortgagee"), either deposit with Landlord, Mortgagee
or the assessing body, as Landlord, Mortgagee or the assessing body may
require, an amount sufficient to pay all amounts referred to in Subsection
(ii) below, or undertake such other method of securing payment of such
amounts as is satisfactory to Landlord, Mortgagee and the assessing body.
(ii) Upon the termination of any such proceeding,
Tenant shall pay the amount of such Imposition or part thereof as finally
determined as due in such proceedings, the payment of which may have been
deferred during the prosecution of such proceedings, together with any
costs, fees, interest, penalties or other liabilities in connection
therewith, and, upon such payment, Landlord shall, provided an Event of
Default is not then in existence, return or request Mortgagee to return any
amount still on deposit with it or with Mortgagee with respect to such paid
Imposition. If at any time during the continuance of such proceedings
Landlord, Mortgagee or the assessing body shall deem the amount deposited
or the undertaking insufficient, Tenant shall, upon thirty (30) days prior
written notice, make an additional undertaking or deposit with Landlord,
Mortgagee or the assessing body, as Landlord or Mortgagee reasonably may
request, or as the assessing body may require, and upon failure of Tenant
to do so, the amount theretofore deposited shall be applied by Landlord,
Mortgagee or the assessing body to the payment, removal and discharge of
such Imposition and the interest and penalties in connection therewith and
any costs, fees (including, without limitation, reasonable attorneys' fees
and disbursements) or other liabilities accruing in any such proceedings,
and the balance, if any, shall be returned to Tenant, or the deficiency, if
any, shall be paid by Tenant immediately on demand of Landlord or Mortgagee
to the taxing authority to which such Imposition is payable. This
subsection shall survive termination of this Lease.
(f) Landlord or Tenant may, if it shall so desire,
endeavor at any time or times to obtain a lowering of the assessed
valuation upon the Installations Premises, or any part thereof, for the
purpose of reducing Impositions thereon, and in such event, the other party
will reasonably cooperate in effecting such reduction, but shall not be
required to incur any out-of-pocket costs in so cooperating.
(g) Landlord shall not be required to join in any
proceedings referred to in Subsection (e) above unless the provisions of
any law, rule or regulation at the time in effect shall require that such
proceedings be brought by or in the name of Landlord or any owner of the
Installations Premises, in which event, Landlord shall join in such
proceedings or permit the same to be brought in its name and shall sign all
documents reasonably necessary to prosecute the proceedings. Landlord shall
not be subject to any liability for the payment of any costs or expenses in
connection with any such proceedings, and Tenant will
<PAGE>
indemnify and save harmless Landlord from and against any such costs and
expenses, including, but not limited to, reasonable attorneys' fees and
disbursements, and from any liability resulting from such proceeding. After
reimbursing and indemnifying Landlord for the items referred to in the
preceding sentence, Tenant shall be entitled to any refund with respect to
any Imposition and penalties or interest thereon which have been paid by
Tenant (whether directly or through escrowed funds), or which have been
paid by Landlord but previously reimbursed in full to Landlord by Tenant.
Tenant's right to the refund shall survive termination of this Lease.
(h) The certificate, advice, statements, or bill of the
appropriate official designated by law to make or issue the same or to
receive payment of any Imposition shall be prima facie evidence that the
Imposition is due and unpaid at the time of the making or issuance of such
certificate, advice statement or bill.
(i) Tenant shall make all payments of Impositions
directly to the appropriate governmental authorities, and Landlord appoints
Tenant the attorney-in-fact of Landlord for the purpose of making all
payments to be made by Tenant pursuant to any of the provisions of this
Lease to persons or entities other than Landlord. In case any person or
entity to whom any sum is directly payable by Tenant under any of the
provisions of this Section 7 shall refuse to accept payment of such sum
from Tenant, Tenant shall thereupon give written notice of such fact to
Landlord and shall pay such sum directly to Landlord and Landlord shall
promptly pay such sum to such person or entity.
(j) Tenant shall deliver to Landlord duplicate receipts
or photostatic copies thereof, or other evidence reasonably satisfactory to
Landlord (followed by such duplicate receipts or copies, when available)
showing the payment of all Impositions, within ten (10) business days after
the respective payments are required to be made by Tenant and Landlord
requests such evidence in writing.
(k) Landlord shall furnish to Tenant copies of all
notices of assessment and bills relating to Impositions within ten (10)
business days after Landlord receives any of the same from the governmental
authorities.
SECTION 8. UTILITIES
(a) Tenant agrees to pay all charges made against the
Installations Premises for gas, heat, water, electricity, sewage
disposition, telephone and all other utilities and services related to the
Installations Premises during the Term (collectively, the "Utilities").
(b) Tenant understands, acknowledges and agrees that any
one or more of the Utilities may be interrupted or diminished by reason of
causes beyond Landlord's reasonable control; that
<PAGE>
Landlord does not represent or warrant the uninterrupted avail ability of
the Utilities; that Tenant shall be solely responsible for obtaining and
maintaining the use of the Utilities; and that, unless caused by Landlord
or its Agents, any such interruption or diminishment shall not (i) be
deemed an eviction or disturbance of Tenant's right to possession,
occupancy and use of the Installations Premises or any part thereof, or
(ii) render Landlord liable to Tenant in damages by abatement of Rent or
otherwise, or relieve Tenant from the obligation to perform its covenants
under this Lease. In pursuing the Development, Landlord shall take and
cause its Agents to take best efforts to avoid the interruption or
diminishment of the Utilities.
SECTION 9. SIGNS
(a) Tenant shall not inscribe, paint, affix or display
any sign, advertisement or notice (collectively "Signs") on any portion of
the Installations Premises (or on any interior portion of the Auxiliary
Buildings that is visible from the exterior) not presently located thereon
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed.
(b) Tenant shall not inscribe, paint, affix or display
any Sign on any portion of the Unimproved Area not presently located
thereon without the prior written consent of Landlord, which consent shall
be in Landlord's sole and absolute discretion.
(c) Despite the foregoing, Tenant shall not require
Landlord's consent to replace any Sign existing as of the Effective Date
provided that the dimensions and location of the new Sign are substantially
the same as those of the existing Sign.
SECTION 10. AS-IS CONDITION OF INSTALLATIONS
PREMISES
PRIOR TO THE EFFECTIVE DATE, TENANT OWNED THE LAND FOR APPROXIMATELY THIRTY
(30) YEARS, DEVELOPED THE IMPROVEMENTS THEREON, INCLUDING BUT NOT LIMITED
TO THE AUXILIARY BUILDINGS AND COMMUNICATIONS FACILITIES, AND OCCUPIED THE
AUXILIARY BUILDINGS. CONSEQUENTLY, UPON THE EFFECTIVE DATE, TENANT SHALL
ACCEPT THE INSTALLATIONS PREMISES IN "AS IS" CONDITION. TENANT AGREES AND
ACKNOWLEDGES THAT LANDLORD HAS NOT MADE ANY REPRESENTATION RESPECTING OR
ANY WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, REGARDING THE INSTALLATIONS
PREMISES, INCLUDING, WITHOUT LIMITATION, REPRESENTATIONS OR WARRANTIES
REGARDING THE PHYSICAL NATURE OR CONDITION OF THE INSTALLATIONS PREMISES.
TENANT ACKNOWLEDGES THAT IT IS COGNIZANT OF AND SATISFIED WITH ALL ASPECTS
OF THE INSTALLATIONS PREMISES, AND THAT AS PROVIDED HEREIN THIS TRANSACTION
IS AN "AS IS" TRANSACTION.
<PAGE>
SECTION 11. REPAIRS, MAINTENANCE AND MANAGEMENT
(a) Tenant shall, at its sole expense, keep, maintain,
manage and operate (collectively, "Care" or "Care for" or "Care of" as the
context may require) the Installations Premises in a neat, orderly and safe
condition, in substantially the same manner as Tenant has been maintaining
the Installations Premises as of the Effective Date, and in compliance with
all Applicable Laws in all material respects. In addition, all repairs made
by Tenant shall be reasonably suited to accomplish their intended purposes
and shall be in compliance with Applicable Laws in all material respects.
Tenant shall in any event make all repairs necessary to avoid damage or
injury to persons or property. Landlord shall have no obligation whatsoever
to Care for the Installations Premises except that Landlord shall be
responsible for any repairs necessitated by Landlord or its Agents.
Further, Tenant, while it was owner of the Property, recorded a Declaration
of Easements, Covenants, and Restrictions (the "Declaration"). Landlord
hereby delegates to Tenant, and Tenant hereby accepts from Landlord, the
maintenance and repair obligations applicable to the owner of the
Installations Premises and described in Section 6 of the Declaration.
(b) If any dispute shall arise between Landlord and
Tenant as to the standard of Care required under Subsection (a) above, the
matter shall be resolved by binding arbitration in accordance with the then
prevailing Commercial Arbitration Rules of the American Arbitration
Association (the "AAA"). Upon demand for arbitration by either party in
accordance with such rules, the matter shall be decided by a single
arbitrator in Montgomery County, Maryland, selected in accordance with the
prevailing Commercial Arbitration Rules of the AAA. In deciding any matter
relating to the Installations Premises, the arbitrator shall take into
account the age and character of the improvements on the Installation
Premises, the standards of Care set forth in this Section 11, and the
remaining Term of this Lease. The arbitrator shall hold a hearing on the
matter within forty-five (45) days after he or she is appointed. At least
twenty (20) days before the hearing, each party shall submit to the other
party a written statement of its case, copies of all documents upon which
it intends to rely at the hearing, and a list of the witnesses it intends
to call to testify at the hearing. The hearing shall be concluded within
fifteen (15) days after the initial hearing date and the arbitrator shall
decide the matter within fifteen (15) days after the hearing is concluded.
The arbitrator shall render his or her decision in writing, setting forth
the reasons for the decision. Each party shall bear its own costs related
to the arbitration, except that the parties shall share equally all filing
fees and other costs imposed by the AAA in connection with the arbitration
and the fees of the arbitrator. The decision of the arbitrator shall be
final and non-appealable and judgment on the decision may be entered in any
court of competent jurisdiction.
<PAGE>
(c) Unless required by Applicable Laws, Tenant shall not
be required to (i) improve, upgrade, re-model, retrofit, or renovate all or
any part of the Installations Premises or (ii) subject to Subsection 11(a)
(excluding the requirement that Care be in substantially the same manner as
Tenant has been maintaining the Installations Premises as of the Effective
Date), make any replacement or major repair of any component, element or
system of the Installations Premises.
(d) Landlord agrees that during the Term, Tenant shall
have the right, after providing prior written notice to Landlord, to
enforce any rights of Landlord under applicable warranties, guarantees,
licenses and permits applicable to the Installations Premises. Landlord
shall sign such documents and otherwise reasonably cooperate with Tenant to
facilitate such enforcement, provided that Landlord shall not be required
to incur any out of pocket expense to third parties in so doing.
SECTION 12. ACCESS TO INSTALLATIONS PREMISES
Tenant acknowledges that Landlord has a significant
economic interest in the Care of the safety and condition of persons and
property located on and near the Installations Premises and that Landlord,
pursuant thereto, has a need, from time to time, to inspect the
Installations Premises to insure Tenant's conformity with the covenants of
this Lease. Tenant, therefore, hereby authorizes Landlord and any parties
authorized by Landlord to perform such inspections of the Installations
Premises as Landlord from time to time may reasonably deem appropriate.
Landlord shall have the right to enter any part of the Installations
Premises at all reasonable times, upon reasonable advance notice to Tenant
and accompanied by a representative of Tenant, for the purposes of making
such inspections, showing the Installations Premises to prospective
purchasers, investors, mortgagees and tenants, and making such repairs,
alterations or improvements to the Installations Premises as Landlord may
deem necessary or desirable if Tenant fails to properly Care for same after
notice and opportunity to cure as provided for in Section 21(a). No such
entry shall materially interfere with the use and occupancy of the
Installations Premises by Tenant, its subtenants and licensees. Landlord
shall incur no liability to Tenant for such entry except in the case of
death, bodily injury, or property damage caused by Landlord or its Agents.
Notwithstanding the foregoing, Landlord shall have no right to enter upon
those portions of the Installations Premises which are secured or
confidential areas pursuant to Applicable Laws or agreements to which
Tenant is subject ("Restricted Areas"). Further, no person who is a foreign
national may enter into the Auxiliary Buildings or Antenna Ranges on behalf
of Landlord, unless approval of such person is obtained from Tenant in
advance. Such approval may be withheld only to the extent entry by such
person would violate Applicable Laws or agreements to which Tenant is
subject.
<PAGE>
SECTION 13. ALTERATIONS AND PERSONAL PROPERTY
(a) Tenant, at its sole expense and without Landlord's
approval, shall have the right to make any alterations, additions,
installations or other improvements ("Alterations") to the Installations
Premises, including, but not limited to, constructing or installing
additional Auxiliary Buildings and Communications Facilities on the
Installations Premises. In addition, Tenant, at its sole expense and
without Landlord's approval, may remove or demolish all or any portion of
the Auxiliary Buildings or Communications Facilities. All buildings
constructed on the Installations Premises after the Effective Date shall be
of a similar or better quality of construction as the Auxiliary Buildings
located on the Installations Premises as of the Effective Date.
(b) Any Alteration shall be subject, however, in all
cases to the following:
(i) All Alterations shall be made at the sole
cost and expense of Tenant and in a good and workmanlike manner and in
compliance with all Applicable Laws in all material respects.
(ii) The Installations Premises at all times shall
be kept by Tenant free of liens for labor and materials supplied or claimed
to have been supplied to the Installations Premises in connection with the
Alterations.
(iii) Notice is hereby given that Landlord shall
not be liable for any labor or materials furnished to or for Tenant.
Furthermore, notice is hereby given to Tenant and Tenant's mechanics,
laborers and materialmen with respect to the Installations Premises that no
mechanic's, materialman's or laborer's lien shall attach to or affect the
reversion or other interest of Landlord in or to the Installations
Premises.
(iv) Worker's compensation, builder's risk and
general liability insurance with respect to the Alteration as required by
Section 14 shall be maintained by Tenant.
(c) All Communication Facilities and personal property,
including, but not limited to, trade fixtures, furniture, furnishings,
telephone switching equipment, generators and uninterrupted power supply
equipment, Restricted Property and moveable equipment ("Tenant's
Property"), upon or in the Installations Premises shall remain the property
of Tenant or its Agents, as the case may be, or remain under Tenant's
control, and shall be removed by Tenant, or caused to be removed by Tenant,
at its sole cost and expense, upon termination of this Lease or surrender
by Tenant of the Installations Premises to Landlord; provided, however,
that Tenant shall not be required to remove the footings, foundations,
concrete bases or underground bases, or underground cabling or conduits and
such items shall become
<PAGE>
the property of Landlord upon the expiration or earlier termination of this
Lease. (The term "Tenant's Property" does not include Fixtures and Limited
Personal Property as defined in the Purchase and Sale Agreement.) Further,
Tenant shall not be required to remove, or cause to be removed, the
property of International Telecommunications Satellite Organization
("Intelsat") in the portion of the Installations Premises described in that
certain Agreement of Lease between Tenant and Intelsat dated October 25,
1990. If Tenant's removal of Tenant's Property shall create an unsafe or
unsightly condition, Tenant shall repair the condition at its sole cost and
expense, reasonable wear and tear excepted, but such obligation shall in no
event be deemed to require Tenant to remove the items which Tenant may
leave on the Installations Premises pursuant to the preceding provisions of
this Subsection (c). If Tenant fails to so remove and repair, Landlord
shall have the right to remove the Tenant's Property and to dispose of the
same and to repair the Installations Premises without accountability to
Tenant, and at the sole cost and expense of Tenant. The "Restricted
Property" shall mean all personal property, including, but not limited to
documents and equipment, which are required to be secured or kept
confidential pursuant to Applicable Laws or agreements to which Tenant is
subject. The Restricted Property shall at all times, both during and after
the Term, be the sole responsibility of Tenant. Tenant covenants and agrees
that no Restricted Property shall be left in or upon the Installations
Premises after termination of this Lease or surrender by Tenant of the
Installations Premises to Landlord. Upon the expiration or earlier
termination of this Lease all right, title and interest to any underground
storage tanks located in the Installations Premises shall automatically
convey to Landlord without the requirement that either party execute any
other documents to effectuate the conveyance and shall become part of
Landlord's property.
SECTION 14. INSURANCE
(a) At all times during the Term, Tenant, at its own cost
and expense, shall carry and maintain the insurance coverage set forth
below (the "Insurance"):
(i) Hazard insurance covering the Installations
Premises (including, without limitation, all Alterations now or hereafter
made to the Installations Premises) under an "All Risks of Physical Loss"
policy (an "All Risks Policy") written in an amount equal to an amount
necessary to satisfy Tenant's obligations as lessor, in the event of a
casualty, under the Existing Leases or Subleases and the cost of debris
removal and the value of grading, paving and landscaping in the event of
damage caused by casualty to improvements covered by such insurance.
(ii) Commercial liability insurance with respect to the
Installations Premises and the operations related thereto,
<PAGE>
whether conducted on or off the Installations Premises, against liability
for death, bodily injury, and property damage (the "Liability Policy"). The
Liability Policy shall be on an occurrence basis and specifically shall
include:
(A) Contractual liability to cover Tenant's
obligations to indemnify Landlord as required under this Lease; and
(B) Water damage and sprinkler leakage legal liability.
The Liability Policy shall be written for a combined single limit of not
less than Ten Million Dollars ($10,000,000). Such limit shall be subject to
reasonable increase from time to time (but not more than once every
twenty-four (24) months) in accordance with the limits then being
customarily carried with respect to similar properties in Montgomery
County, Maryland ("Comparable Properties"), or operations similar to those
being conducted on the Installations Premises. Tenant may satisfy the
required coverage limits for the Liability Policy by carrying a combination
of primary and excess liability policies providing aggregate coverage in at
least the limits stated herein for such policy.
(b) Tenant further covenants and agrees, at its sole cost
and expense, to procure and maintain or cause to be procured and maintained
at all times all necessary worker's compensation insurance covering all
persons employed by Tenant, Existing Tenants and Subtenants in and about
the Installations Premises.
(c) Tenant further covenants and agrees, at its sole cost
and expense, to procure and maintain or cause to be procured and maintained
at all times Comprehensive Automobile Insurance covering all owned,
non-owned, and hired automobiles of tenant in limits of not less than One
Million Dollars ($1,000,000).
(d) In addition to the insurance carried by Tenant,
during the course of any Alteration or Care work undertaken by a contractor
hired by or for Tenant, Tenant shall require such contractor to carry
public liability insurance in limits of not less than Two Million Dollars
($2,000,000).
(e) Tenant may at its option provide any Insurance
coverage under a blanket insurance policy instead of a separate policy or
policies, provided that the certificate or certificates issued under such
blanket insurance policy, and the coverage afforded thereby, conforms in
all respects to the requirements hereof.
(f) Intentionally Omitted.
(g) All Insurance shall be in such form and shall be
issued by such responsible insurance companies licensed to do
<PAGE>
business in the State of Maryland as are reasonably approved by Landlord.
Any insurance company rated by Bests Insurance Reports (or any successor
publication of comparable standing) as A-, VIII or better and by Standard &
Poor's (or any successor of comparable standing) as "A" or better (or the
equivalent of such rating) shall be deemed a responsible company and
acceptable to Landlord. Upon the Effective Date, and thereafter, not less
than five (5) days prior to the expiration dates of the expiring policies
of Insurance originals of replacement policies or renewal certificates, as
the case may be, bearing notations evidencing the payment of premiums or
accompanied by other evidence reasonably satisfactory to Landlord of each
payment, shall be delivered by Tenant to Landlord ("Insurance Notice"). If
Tenant does not provide Landlord with the Insurance Notice or if Tenant
lets any Insurance lapse, Landlord shall have the right, without providing
any notice to Tenant, to procure replacement coverage that is effective
upon such lapse and Tenant shall promptly reimburse Landlord for the
reasonable cost thereof.
(h) All policies of Insurance shall name Landlord,
Tenant, and, if requested by Landlord in writing, any Mortgagee as
insureds, as their respective interests may appear. All policies of
Insurance other than the Liability Policy shall, if requested in writing by
Landlord, name the Mortgagee as a loss payee, as the interest of such
Mortgagee may appear, but subject to the provisions of Section 15. Any
request of coverage as to a Mortgagee shall set forth the name and address
of the Mortgagee.
(i) Tenant shall not violate or permit to be violated any
of the conditions, provisions or requirements of any Insurance policy, and
Tenant shall perform, satisfy and comply with, or cause to be performed,
satisfied and complied with, the conditions, provisions and requirements of
all Insurance policies and the companies writing such policies so that, at
all times, the Insurance shall be provided by companies reasonably
acceptable to Landlord, except as otherwise provided in Subsection 14(g).
(j) Each policy or certificate of Insurance shall contain
(i) an agreement by the insurer that such policy shall not be canceled,
modified or denied renewal without at least thirty (30) days prior written
notice to Landlord and any Mortgagee named as an insured or loss payee,
except that if the reason for cancellation or denial of renewal is
nonpayment of premiums, the notice will be at least ten (10) days, and (ii)
a waiver of subrogation by the insurer.
(k) If by reason of changed economic conditions the
Insurance amounts referred to in this Lease become inadequate, upon
Landlord's request, the limits shall be reasonably increased by Tenant from
time to time (but not more often than once every twenty-four (24) months)
to meet the changed conditions, but any changes in limits shall be
consistent with what is customary for
<PAGE>
Comparable Properties or for operations similar to those conducted on the
Installations Premises. Upon the reasonable request of Landlord, Tenant
shall procure and obtain such types of insurance in lieu of the current
insurance then required under this Lease; provided that such replacement
coverage is substantially similar in scope and nature as the Insurance then
required under this Lease and is the type of insurance that is customary
for Comparable Properties or for operations similar to those conducted on
the Installations Premises. Notwithstanding the foregoing, in the event
that Landlord makes such request during the term of the policy of the
insurance that is being replaced, Tenant shall not be required to procure
replacement coverage until the scheduled expiration or earlier termination
of such policy; provided, however, in no event shall such period exceed
twelve (12) months.
(l) Notwithstanding any provisions in this Section 14 or
elsewhere in this Lease to the contrary, any deductible to the All Risk
Policy shall be deemed an amount covered by Insurance and shall be promptly
paid by Tenant in the event of damage required to be covered by Insurance.
SECTION 15. DAMAGE OR DESTRUCTION
(a) In case of damage to or destruction of the
Installations Premises or any part thereof by fire or other casualty
("Damage"), Tenant will promptly give written notice thereof to Landlord.
In the case of Damage, whether or not covered by Insurance, Tenant shall
continue to pay Rent without any abatement, deduction or set-off and this
Lease shall not terminate.
(b) All insurance proceeds payable for Damage or for loss
or damage to Tenant's Property shall be the exclusive property of and be
paid directly to Tenant. Subject to Subsection 11(a) (excluding the
requirement that Care be in substantially the same manner as Tenant has
been maintaining the Installations Premises as of the Effective Date),
Tenant shall have no obligation to restore the Installations Premises after
Damage.
(c) Tenant hereby releases Landlord and Landlord hereby
releases Tenant from any and all liability for any loss, damage or injury
to person or property occurring in, on, about or to the Installations
Properties or personal property by reason of fire or other casualty, to the
extent proceeds of Insurance are received for such loss, damage, or injury
or to the extent such proceeds should have been received under Insurance
required to be carried by this Lease. Because the provisions of this
Subsection will preclude the assignment of any claim mentioned herein by
way of subrogation or otherwise to an insurance company or any other
person, Tenant shall give to each insurance company which has issued to it
one or more policies of insurance, notice of the terms of the release
contained in this Subsection, and have such
<PAGE>
insurance policies properly endorsed, if necessary, to prevent the
invalidation of insurance coverages by reason of the release contained in
this Subsection.
SECTION 16. INDEMNIFICATION
(a) Tenant will protect, indemnify and save harmless
Landlord from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses (including without
limitation, reasonable attorneys' fees and expenses) imposed upon or
incurred by or asserted against Land lord by reason of (i) any accident,
injury to or death of persons or loss of or damage to property occurring on
or about the Installations Premises or any part thereof caused by the
negligence or intentional misconduct of Tenant or its Agents; (ii) any
failure on the part of Tenant to perform or comply with any of the terms of
this Lease; or (iii) performance of any labor or services or the furnishing
of any materials or other property in respect of the Installations Premises
or any part thereof at the direction of Tenant. Tenant hereby releases
Landlord from any and all liability for the same.
(b) Landlord will protect, indemnify and save harmless
Tenant from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses (including without
limitation, reasonable attorneys' fees and expenses) imposed upon or
incurred by or asserted against Tenant by reason of (i) any accident,
injury to or death of persons or loss of or damage to property occurring on
or about the Installations Premises or any part thereof, caused by the
negligence or intentional misconduct of Landlord or its Agents; (ii) any
failure on the part of Landlord to perform or comply with any of the terms
of this Lease; or (iii) performance of any labor or services or the
furnishing of any materials or other property in respect of the
Installations Premises or any part thereof at the direction of Landlord.
Landlord hereby releases Tenant from any and all liability for the same.
(c) The amount which any party (an "Indemnifying Party")
is or may be required to pay to any other party (an "Indemnitee") pursuant
to this Section 16 shall be reduced (including, without limitation,
retroactively) by any insurance proceeds (or the amount of insurance
proceeds that would have been recovered had insurance required by this
Lease been obtained) or other amounts actually recovered by or on behalf of
such Indemnitee, in reduction of the related loss. If an Indemnitee shall
have received payment (an "Indemnity Payment") required by this Lease from
an Indemnifying Party in respect of any loss and shall subsequently
actually receive insurance proceeds or other amounts in respect to such
loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal
to the amount of such insurance proceeds or other amounts actually received
(up to but not in excess of the amount of any Indemnity
<PAGE>
Payment made hereunder). An insurer who would otherwise be obligated to pay
any claim shall not be relieved of the responsibility with respect thereto,
or, solely by virtue of the indemnification provisions hereof, have any
subrogation rights with respect thereto, it being expressly understood and
agreed no insurer or any other third party shall be entitled to a
"windfall" (i.e., a benefit they would not be entitled to receive in the
absence of the indemnification provisions) by virtue of the indemnification
provisions hereof.
(d) Procedures for indemnification of Third Party Claims
shall be as follows:
(i) If an Indemnitee shall receive notice or
otherwise learn of the assertion by a person (including, without
limitation, any governmental entity) who is not a party to this Lease (or a
subsidiary an affiliate of either party) of a claim or of the commencement
by any such person of any action (a "Third Party Claim") with respect to
which an Indemnifying Party may be obligated to provide indemnification
pursuant to this Section 16 or any other Section of this Lease, such
Indemnitee shall give such Indemnifying Party written notice thereof
promptly after becoming aware of such Third Party Claim; provided that the
failure of any Indemnitee to give notice as provided in this Section 16(d)
shall not relieve the Indemnifying Party of its obligations hereunder,
except to the extent that such Indemnifying Party is actually prejudiced by
such failure to give notice. Such notice shall describe the Third Party
Claim in reasonable detail.
(ii) An Indemnifying Party may elect to defend
or to seek to settle or compromise, at such Indemnifying Party's own expense
and such Indemnifying Party's own counsel, any Third Party Claim, as
provided hereafter. Within thirty (30) days after receipt of notice from an
Indemnitee in accordance with Subsection 16(d)(i) (or sooner, if the nature
of such Third Party Claim so requires), the Indemnifying Party shall notify
the Indemnitee of its election whether the Indemnifying Party will assume
responsibility for defending such Third Party Claim. After notice from an
Indemnifying Party to an Indemnitee of its election to assume the defense
of a Third Party Claim, such Indemnifying Party shall not be liable to such
Indemnitee under this Section 16 for any legal or other expenses (except
expenses approved in advance by the Indemnifying Party) subsequently
incurred by such Indemnitee in connection with the defense thereof;
provided that if the defendants with respect to any such Third Party Claim
include both the Indemnifying Party and one or more Indemnitees and in any
Indemnitee's reasonable judgment a conflict of interest between one or more
of such Indemnitees and such Indemnifying Party exists in respect to such
claim, such Indemnitees shall have the right to employ separate counsel to
represent such Indemnitees and in that event the reasonable fees and
expenses of such separate counsel (but not more than one separate counsel
reasonably satisfactory to the Indemnifying
<PAGE>
Party) shall be paid by such Indemnifying Party. If an Indemnifying Party
elects not to assume responsibility for defending a Third Party Claim, or
fails to notify an Indemnitee of its election as provided in this
Subsection 16(d)(ii), such Indemnitee may defend or, subject to the
remainder of this Subsection 16(d)(ii), seek to compromise or settle such
Third Party Claim without prejudice to such Indemnitee's rights, if any, to
continue to seek indemnification hereunder. Notwithstanding the foregoing,
neither an Indemnifying Party nor an Indemnitee may settle or compromise
any claim over the objection of the other; provided, however, that consent
to settlement or compromise shall not be unreasonably withheld or delayed.
Neither an Indemnifying Party nor an Indemnitee shall consent to entry of
any judgment or enter into any settlement of any Third Party Claim which
does not include as an unconditional term thereof the giving by a claimant
or plaintiff to such Indemnitee, in the case of a consent or settlement by
an Indemnifying Party, or to the Indemnifying Party, in the case of a
consent or settlement by an Indemnitee, of a written release from all
liability in respect to such Third Party Claim.
(iii) If an Indemnifying Party chooses to defend
or to seek to compromise or settle any Third Party Claim, the related
Indemnitee shall make reasonably available to such Indemnifying Party any
personnel or any books, records or other documents within its control or
which it otherwise has the ability to make available that are necessary or
appropriate for such defense, settlement or compromise of such Third Party
Claims, subject to the establishment of reasonably appropriate
confidentiality arrangements and arrangements to preserve any applicable
privilege (including, the attorney-client privilege) and shall cooperate in
such defense, compromise or settlement. If an Indemnifying Party chooses to
defend or to seek to compromise or settle any Third Party Claim, the
related Indemnitee shall be entitled to attend and participate in any such
proceeding, discussion or negotiation at its own expense.
(iv) Notwithstanding anything else in this
Section 16 to the contrary, if an Indemnifying Party notifies the related
Indemnitee in writing of such Indemnifying Party's desire to settle or
compromise a Third Party Claim on the basis set forth in such notice
(provided that such settlement or compromise includes as an unconditional
term thereof the giving by the claimant or plaintiff of a written release
of the Indemnitee from all liability in respect thereof and does not
include any non-monetary remedy) and provides the Indemnitee a copy of a
written proposal of the applicable claimant to settle on such terms, and
the Indemnitee notifies the Indemnifying Party in writing within ten (10)
business days of such notice that such Indemnitee declines to accept any
such settlement or compromise, such Indemnitee may continue to contest such
Third Party Claim, free of any participation by such Indemnifying Party, at
such Indemnitee's sole expense. In such event, the obligation of such
Indemnifying Party to such Indemnitee with respect to such Third
<PAGE>
Party Claim shall be equal to (i) the costs and expenses of such Indemnitee
prior to the date such Indemnifying Party notifies such Indemnitee of the
offer to settle or compromise (to the extent such costs and expenses are
otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the amount
of any offer of settlement or compromise which such Indemnitee declined to
accept and (B) the actual out-of-pocket amount such Indemnitee is obligated
to pay subsequent to such date as a result of such Indemnitee's continuing
to defend such Third Party Claim (including attorneys fees and expenses).
(v) Any claim on account of a loss which does not
result from a Third Party Claim shall be asserted by written notice given
by the Indemnitee to the related Indemnifying Party. Such Indemnifying
Party shall have a period of 30 days after the receipt of such notice
within which to respond thereto. If such Indemnifying Party does not
respond within such thirty (30) day period, such Indemnifying Party shall
be deemed to have refused to accept responsibility to make payment. If such
Indemnifying Party does not respond within such thirty (30) day period or
rejects such claim in whole or in part, such Indemnitee shall follow the
dispute resolution procedures set forth in Subsection 11(c).
(vi) In addition to any adjustments required
pursuant to Subsection 16(c), if the amount of any loss shall, at any time
subsequent to the payment required by this Lease, be reduced by recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith, shall promptly be repaid by the
Indemnitee to the Indemnifying Party.
(vii) In the event of payment by an Indemnifying
Party to any Indemnitee in connection with any Third Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place and
the place of such Indemnitee as to any events or circumstances in respect
of which such Indemnitee may have any right or claim relating to such Third
Party Claim against any claimant or plaintiff asserting such Third Party
Claim or against any other person. Such Indemnitee shall cooperate with
such Indemnifying Party in a reasonable manner, and at the cost and expense
of such Indemnifying Party, in prosecuting any subrogated right or claim.
(vii) If any indemnity payment required to be made
hereunder is denominated in a currency other than United States dollars,
such payment shall be made in United States dollars and the amount thereof
shall be computed using the foreign exchange rate for such currency
determined as of the date that notice of the claim with respect to which
such indemnity payment is made or given by, or on behalf of, the Indemnitee
to the Indemnifying Party.
<PAGE>
(e) The provisions of this Section 16 shall survive any
termination of this Lease.
SECTION 17. CONDEMNATION
(a) If any portion of the Installations Premises is taken
or condemned for a public or quasi-public use or is sold to a governmental
or quasi-governmental authority in lieu of condemnation ("Taken" or a
"Taking", as the context shall require), this Lease shall, as to the part
Taken, terminate as of the date that title shall vest in the condemning
authority and continue in full force and effect as to the remainder. In the
event of such a Taking, Rent shall not be adjusted and Tenant shall
continue to pay Base Rent with respect to the portion of the Installations
Premises which has been Taken and Landlord shall retain its remedies under
this Lease with respect to Tenant's obligation to pay such Base Rent.
(b) Landlord and Tenant shall cooperate in applying for
and obtaining the maximum payment or award on account of a Taking. After
deducting all expenses incurred in connection with obtaining the payment or
award (including reasonable attorneys' fees), the net payment or award (the
"Net Award") shall be distributed as follows. Tenant shall be entitled to
claim and receive from the Net Award: (i) all amounts designated as being
payable for relocation or similar expenses, (ii) the amount attributable to
the fair market value of Tenant's leasehold interest in the portion of the
Installations Premises so Taken, (iii) the amount attributable to the fair
market value of all of Tenant's Property so Taken or damaged by the Taking
and (iv) the amount attributable to the fair market value of all buildings
and improvements so Taken or damaged by the Taking, to the extent that
Tenant actually replaces or repairs same. Landlord shall be entitled to
claim and receive from the Net Award (i) the amount attributable to the
fair market value of Landlord's fee simple interest, as such interest is
subject to this Lease, in the portion of the Installations Premises so
Taken, as such interest is subject to this Lease, and (ii) the amount
attributable to the fair market value of Landlord's fee simple interest, as
such interest is subject to this Lease, in all of the buildings and
improvements so Taken or damaged by the Taking, to the extent that Tenant
does not replace or repair same. Any dispute between Landlord and Tenant
with respect to the distribution and apportionment of the Net Award under
the foregoing provisions shall be decided by arbitration pursuant to the
provisions of Subsection 11(b), with the arbitrator to be a disinterested
appraiser holding the designation "MAI" or other equivalent professional
designation and having at least ten (10) years experience appraising
commercial properties in Montgomery County, Maryland. Any portion of the
Net Award remaining after distribution to Tenant and Landlord, as
aforesaid, shall belong to Landlord.
<PAGE>
(c) In the event, however, that the area of the
Installations Premises shown on Exhibit F or any portion thereof is Taken,
Tenant will not be entitled to make any claim to the condemning authority
with respect to that Taking, except for relocation expenses and the fair
market value of Tenant's Property so Taken or damaged by the Taking.
(d) Notwithstanding the foregoing provisions of this
Section 17, in the case of a Taking of the entire Installations Premises,
this Lease shall terminate as of the date that title shall vest in the
condemning authority. Further, in the case that the Taking involves such a
material portion of the Installations Premises that it is not economically
or technologically practical for Tenant or Subtenants to use the remaining
portion of the Installations Premises for a satellite earth station, Tenant
may terminate this Lease by written notice to Landlord and this Lease shall
terminate as of the date that title shall vest in the condemning authority.
Upon termination under this Subsection 17(d), Rent shall be adjusted to the
date of termination and Landlord and Tenant shall have no further
obligations hereunder, except with respect to any obligations which arose
or accrued before the termination of this Lease or to the extent
obligations are to survive the termination of this Lease as otherwise
expressly provided in this Lease. Any dispute as to the right of Tenant to
terminate this Lease under this Subsection 17(d) shall be decided by
arbitration in accordance with Subsection 11(b).
(e) In no event shall Tenant be obligated to restore the
Auxiliary Buildings or any other part of the Installations Premises which
are damaged by a Taking. If, however, this Lease does not terminate under
Subsection 17(d), Tenant shall take such actions with respect to any
damaged portion of the Installations Premises as are reasonably necessary
to comply with Tenant's obligations of Care under Subsection 11(a).
SECTION 18. LIENS
If, because of any act or omission of Tenant or anyone
claiming by, through, or under Tenant, any mechanic's lien or other lien
shall be filed against the Installations Premises or any portion thereof,
or against other property of Landlord, whether or not such lien is valid or
enforceable as such, Tenant shall, at its own expense, cause the same to be
discharged of record within a reasonable time, not to exceed thirty (30)
days, after the date of filing thereof, and shall also defend and indemnify
Landlord and any Mortgagee and hold them harmless from any and all claims,
losses, damages, judgments, settlements, costs and expenses, including
reasonable attorneys' fees, resulting therefrom or incurred in connection
therewith. Tenant shall not mortgage, pledge, hypothecate or assign as
security its interest in the Installations Premises or under this Lease.
<PAGE>
SECTION 19. EXISTING SPACE LEASES; ASSIGNMENT AND
SUBLETTING
(a) On the Effective Date, the Installations Premises is
subject to those certain leases listed in Exhibit G attached hereto and
made a part hereof (the "Existing Space Leases"), which were entered into
by Tenant, as lessor thereunder, prior to closing under the Sales
Agreement. Landlord has not assumed any of Tenant's obligations thereunder.
For so long as this Lease remains in effect, Tenant covenants and agrees to
continue to discharge all of the lessor's obligations under the Existing
Space Leases, whether accrued or accruing before or during the Term. Tenant
shall indemnify, defend, and hold harmless Landlord against any obligation
of Landlord under the Existing Space Leases arising or accruing during the
Term, except to the extent Tenant is unable to perform such obligations as
a result of Landlord's breach of its obligations under this Lease. During
the Term, Tenant shall have the right to (i) collect and retain for its own
account (subject to Subsection (c) below) all rents and other payments due
from tenants under Existing Space Leases ("Existing Tenants"), (ii) hold
and apply any security deposits of Existing Tenants in accordance with the
Existing Space Leases (provided, however, that Tenant shall deliver such
security deposits to Landlord at the expiration or earlier termination of
this Lease to the extent such security deposits have not been applied by
Tenant pursuant to the applicable Existing Space Lease or returned to the
applicable Existing Tenant, and the term of the applicable Existing Space
Lease extends beyond the Term), and (iii) terminate, modify or otherwise
deal with the Existing Space Leases as Tenant, in its sole discretion,
deems appropriate; provided, however, (A) such right shall automatically
end upon the termination of this Lease for any reason, (B) none of the
Existing Space Leases shall be modified to provide for a term which extends
beyond the Term, unless Landlord gives its prior written consent to such
extended term, which consent may be granted or withheld in Landlord's sole
discretion, (C) each modification of an Existing Space Lease shall be
subject and subordinate to this Lease, and in the event of the expiration
or termination of this Lease, Landlord shall not be required to recognize
such modification without its express written agreement to be bound by
same, which may be given or not in Landlord's sole discretion, and (D)
Tenant shall promptly provide to Landlord copies of all documents
terminating or modifying any Existing Space Lease.
(b) Tenant may assign its interest in this Lease (an
"Assignment") or sublet all or any portion of the Installations Premises (a
"Sublease"), without the consent of Landlord. The term of any such Sublease
shall not exceed the Term, unless Landlord gives its prior written consent
to such extended term, which consent may be granted or withheld in
Landlord's sole discretion. In the event of any Assignment or Sublease,
Tenant shall nevertheless at all times remain fully responsible and liable
for the payment of Rent and the performance and observance
<PAGE>
of all of Tenant's other obligations under this Lease. Each Sublease shall
be subject and subordinate to this Lease. If requested by Tenant, Landlord
shall enter into a nondisturbance agreement with respect to any Sublease on
substantially the same terms as are contained in the nondisturbance
agreement attached hereto as Exhibit H (the "Landlord Approved SNDA"),
provided that (i) the Sublease does not, in any material respect, impose
greater obligations on the sublandlord or grant greater rights to the
subtenant than those existing as of the Effective Date under the Existing
Space Leases, (ii) term of the Sublease does not extend past the Term
(unless expressly approved by Landlord as aforesaid), and (iii) the
Sublease (y) is an arms-length transaction and such subtenant was obtained,
and the economic terms of such Sublease were negotiated by, a third party
leasing agent using marketing efforts customarily used for Comparable
Properties, or (z) requires the subtenant to pay basic rent at the then
current Base Rent rate per square foot under this Lease and a pro rata
share of increases in operating expenses, Impositions and insurance.
Landlord agrees at any time hereafter, upon ten (10) business days prior
written notice, to execute and deliver, and cause its Mortgagee to
recognize, the Landlord Approved SNDA, provided the Landlord Approved SNDA
has been duly executed by Tenant and such subtenant. Promptly upon entering
into any Assignment or Sublease, Tenant shall provide Landlord with copies
of all documents effecting such Assignment or Sublease.
(c) If there is an Event of Default, in addition to any
other remedies provided by this Lease or by law or in equity, at its
option, Landlord may collect directly from any Existing Tenant, Assignee or
lessee under a Sublease ("Subtenant") all rent becoming due to Tenant by
reason of the applicable Existing Lease, Assignment or Sublease. Any
collection by Landlord from the Existing Tenant, Assignee or Subtenant
shall not be construed to constitute a novation or release of Tenant from
the further performance of its obligations under this Lease or an
acceptance of the terms of such Existing Lease, Assignment or Sublease.
(d) Any amounts collected by Landlord pursuant to Section
19(c) or otherwise from an Existing Tenant, Assignee or Subtenant which are
applicable to any period preceding the Expiration Date (had this Lease run
its full Initial Term as may have been extended), shall be applied by
Landlord to the reduction of Tenant's remaining liability, if any, under
this Lease.
SECTION 20. SUBORDINATION OR SUPERIORITY OF LEASE
(a) Except as otherwise provided in this Section, the
rights and interest of Tenant under this Lease shall be subject and
subordinate to any mortgages that may be placed upon the Installations
Premises and to any and all advances to be made thereunder, and to the
interest thereon, and all renewals, replacements, extensions, bifurcations
and splits thereof, if the Mortgagee named in said mortgage shall elect to
subject and
<PAGE>
subordinate the rights and interest of Tenant under this Lease to the lien
of its mortgage. Any Mortgagee may elect to give the rights and interest of
Tenant under this Lease priority over the lien of its mortgage. In the
event of either such election and upon notification by such Mortgagee to
Tenant to that effect, the rights and interest of Tenant under this Lease
shall be deemed to be subordinate to, or to have priority over, as the case
may be, the lien of said mortgage, whether this Lease is dated prior to or
subsequent to the date of said mortgage without any further action required
by Landlord or Mortgagee; provided, however, that as a condition precedent
to any subordination of this Lease, Landlord delivers in advance a
non-disturbance agreement duly executed by Mortgagee and Landlord. The
non-disturbance agreement shall be substantially in the form attached to
and made a part of this Lease as Exhibit I (the "Tenant Approved SNDA") or
in a commercially reasonable form and subject to the approval of Tenant,
not to be unreasonably withheld. Tenant agrees at any time hereafter, upon
ten (10) business days prior written notice, to execute and deliver the
Tenant Approved SNDA.
(b) Nothing contained in this Lease shall limit or
curtail Landlord's right to sell, mortgage or otherwise transfer its fee
interest in the Installations Premises, or affect Landlord's right to
assign the Rent payable under this Lease either as collateral security
under a mortgage or otherwise. Any such sale, mortgage, transfer or
assignment shall be binding on Tenant but shall be subject to this Lease.
(c) Landlord acknowledges that the term of the Intelsat
Lease extends beyond the Expiration Date.
SECTION 21. DEFAULTS AND REMEDIES
(a) The occurrence of any one or more of the following
events shall be a default and breach of this Lease by Tenant (collectively,
"Events of Default"):
(i) Tenant shall fail to pay any installment of
Rent when the same shall be due and payable and fail to cure such default
within nine (9) days after receiving written notice from Landlord
specifying the default. For the purposes of this Subparagraph 21(a)(i),
Tenant agrees notice by Mortgagee, or Landlord's loan service provider,
given according to the terms of Section 26, shall be deemed sufficient
notice.
(ii) Tenant shall fail to perform or observe any
other term, condition, covenant or obligation required to be performed or
observed by it under this Lease for a period of thirty (30) days after
written notice from Landlord specifying such default; provided, however,
that if the term, condition, covenant or obligation to be performed by
Tenant is of such nature that the same cannot reasonably be performed
within such thirty (30) day period, such default shall be deemed to have
been cured if Tenant commences such performance within the 30 day period
and thereafter
<PAGE>
diligently undertakes to complete the cure and in all events cures the
default within one hundred twenty (120) days of Landlord's notice, subject
to extension for Unavoidable Delays.
(iii) An Event of Default, as defined therein,
shall occur under that certain lease agreement, dated of even date herewith,
between Landlord and Tenant with respect to the Master Lease Property (the
"Master Lease").
(iv) Termination or rejection of this Lease
pursuant to Section 22.
(v) Assumption or assignment of this Lease, under
the conditions referred to in Section 22, unless the requirements of
Section 22 applicable to such assumption or assignment are satisfied.
(b) Upon the occurrence of any Event of Default, Landlord
shall have the following rights and remedies, in addition to those allowed
by law or equity, any one or more of which may be exercised concurrently
and without further notice to or demand upon Tenant:
(i) Landlord may re-enter the Installations
Premises and cure any default of Tenant, in which event Tenant shall
reimburse Landlord as Additional Rent for any reasonable costs and expenses
which Landlord may incur to cure such default; and Landlord shall not be
liable to Tenant for any loss or damage which Tenant may sustain by reason
of Landlord's action, except loss or damage caused by Landlord's negligence
or intentional misconduct.
(ii) Landlord may terminate this Lease, in which
event: (A) Tenant shall not thereafter be entitled to possession of the
Installations Premises and Tenant shall immediately thereafter surrender,
or cause to be surrendered, the Installations Premises to Landlord; (B)
Landlord may re-enter the Installations Premises and dispossess Tenant by
summary proceedings, ejectment or other legal process and may remove its
effects, without prejudice to any other remedy which Landlord may have for
possession or arrearages in Rent; and (C) Tenant shall be liable for all
loss or damage which Landlord may sustain by reason of such termination and
re-entry; and Landlord may re-let all or any part of the Installations
Premises for a term different from that which would otherwise have
constituted the balance of the Term and for Rent and on terms and
conditions different from those contained herein, whereupon Tenant shall be
obligated to pay to Landlord the deficiency, if any, between the Rent
provided for herein and that provided for in any lease covering a
subsequent re-letting of the Installations Premises, for the period which
would otherwise have constituted the balance of the Term, together with all
of Landlord's reasonable costs and expenses of preparing the Installations
Premises for re- letting, including all repairs, tenant finish
improvements, brokers' and attorneys' fees, and all loss or damage which
Landlord
<PAGE>
may sustain by reason of such re-letting, it being expressly understood and
agreed that the liabilities and remedies specified above shall survive the
termination of this Lease. Landlord shall make diligent efforts to mitigate
its damages in the event of an Event of Default.
(iii) (A) Notwithstanding the termination of this
Lease, Landlord may declare all Base Rent which would have been due under
this Lease for the balance of the Term to be immediately due and payable.
In that event, Tenant shall be obligated to pay an amount in cash that
would be necessary to purchase U.S. Obligations in such amounts and having
such maturities that the principal and interest of such U.S. Obligations
would be sufficient to provide funds as close as possible but in no event
less or later than the payments due under this Lease as Base Rent as and
when such payments would be due if no acceleration of the Base Rent had
occurred (the "Accelerated Payment"). U.S. Obligations are obligations or
securities not subject to prepayment, call or early redemption which are
direct obligations of, or obligations fully guaranteed as to timely payment
by, the United States of America or any agency or instrumentality thereof,
the obligations of which are backed by the full faith and credit of the
United States of America.
(B) Upon receipt of the Accelerated Payment,
Landlord shall use commercially reasonable efforts to lease the portions of
the Installations Premises not subject of other leases at the then
currently existing fair market rate for Comparable Properties. From and
after the Event of Default all rent and other payments, except for security
deposits, collected under leases entered into after the Event of Default
("Post Default Leases") and under any Existing Space Leases, Subleases, or
occupancy or concession agreements in effect as of the Event of Default
shall be placed in a separate escrow account (the "Escrow Account") held by
a mutually acceptable escrowee (the "Escrowee"). Also, any refunds of
Impositions paid by Tenant and received by Landlord shall be placed in the
Escrow Account. The Escrow Account shall be interest bearing and earn at
least a money market rate of interest. All interest earned shall become
part of the escrow fund and be treated in the same manner as the principal
in the Escrow Account. The Post Default Leases and all Existing Space
Leases, Subleases, and occupancy and concession agreements in effect as of
the Event of Default are collectively referred to as the "Mitigation
Leases". The funds contained in the Escrow Account shall be disbursed in
the following manner and with the following priority: (i) all direct and
reasonable operating expenses ("Operating Expenses") paid by Landlord
relating to the Installations Premises during the "Default Measuring
Period" (defined below) shall be paid to Landlord, (ii) a management fee
equal to three percent (3%) of the amount collected by Landlord from the
Mitigation Leases during the Default Measuring Period shall be paid to
Landlord, (iii) all direct and reasonable costs of collection paid by
Landlord to collect the sums payable under the Mitigation Leases shall be
paid to Landlord, (iv) reasonable and customary brokerage fees, reasonable
attorneys' fees
<PAGE>
and all other reasonable out of pocket costs paid by Landlord during the
Default Measuring Period to third parties in connection with the Mitigation
Leases (including the fees of the Escrowee and the Escrow Account) shall be
paid to Landlord, (v) Tenant shall be paid up to the amount that Tenant was
scheduled to pay as Base Rent during the Default Measuring Period, and (vi)
the remainder shall be shared equally by Landlord and Tenant. As used in
this Section, the term "Default Measuring Period" shall mean (1) as to the
payments contemplated in (i) through (iv) above, each consecutive one (1)
month period after the establishment of the Escrow Account until the date
the Term would have expired but for the early termination of this Lease,
and (2) as to the payments contemplated in (v) and (vi) above, each
consecutive three (3) month period after the establishment of the Escrow
Account until the date the Term would have expired but for the early
termination of this Lease. The first Default Measuring Period, however,
shall also include the period from the date of the Event of Default to the
date the Escrow Account was established. Escrowee shall make disbursements
to the parties in the priority described above on or about the fifteenth
(15th) day after the end of each Default Measuring Period. Within ten (10)
days after the end of each Default Measuring Period relating to the
payments contemplated in (i) through (iv) above, Landlord shall furnish to
Escrowee and Tenant a written statement setting forth in reasonable detail
all amounts paid into the Escrow Account and all amounts for which Landlord
is claiming payment with respect to the immediately preceding Default
Measuring Period. The statement shall be certified by Landlord as being
accurate and shall be accompanied by invoices and other documentation
reasonably evidencing the amounts claimed for payment. Escrowee shall
withhold from the payments made under (v) and (vi) above one-fourth of the
reasonably estimated real estate taxes and Insurance premiums which are
next due respect to the Installations Premises, less the amounts of any
real estate taxes or Insurance premiums required to be directly paid by
tenants under the Mitigation Leases (the "Tax and Insurance Holdbacks").
Escrowee shall release the Tax and Insurance Holdbacks to Landlord when and
to the extent that real estate taxes and Insurance premiums are payable by
Landlord with respect to the Installations Premises. At the time of each
such disbursement to Landlord, Escrowee shall also disburse to Tenant the
amount, if any, by which the Tax and Insurance Holdbacks held by Escrowee
exceed the tax bill or Insurance premiums paid with such Tax and Insurance
Holdbacks. Although the last Default Measuring Period shall end on the date
the Initial Term would have expired but for the early termination of this
Lease, any amounts collected by Landlord under the Mitigation Leases after
that date and attributable to any period which occurred prior to that date
shall be paid directly by Landlord to Tenant. No party shall be paid for
any amount described in this Subsection (B) to the extent such party was
otherwise reimbursed for such amount, including, without limitation,
previous payment by the Escrowee or previous reimbursement under the
Mitigation Leases. For the purposes of this Section, "Operating Expenses"
excludes (1) debt service and other costs of Landlord's financing, (2)
capital expenditures,
<PAGE>
except to the extent that Landlord is obligated to make capital
improvements under the terms of Existing Space Leases and Subleases in
effect as of the Event of Default, and then only to the extent that the
amortized cost of such capital improvements is properly allocable to the
Default Measuring Period, (3) management fees, (4) overhead, (5)
depreciation, (6) accountants' fees, (7) any losses or expenses covered by
Insurance, whether or not such Insurance is in fact maintained, or
compensable by condemnation proceeds, (8) any amount incurred by reason of
the negligence or intentional misconduct of Landlord or its Agents, (9)
fines or penalties, and (10) any amounts paid by specific tenants. Any
refunds, discounts, or recoupments of Operating Expenses received by
Landlord shall be accounted for by Landlord and credited back to Tenant.
Tenant, at reasonable times and upon reasonable notice shall have the right
to audit Landlord's books and records relating to Operating Expenses;
provided, however, in no event shall Landlord be required to keep such
underlying receipts for Operating Expenses beyond a date which is three (3)
years after Escrowee makes a disbursement for such Operating Expenses. The
cost of capital expenditures which may be included as Operating Expenses as
provided above shall be amortized over the useful life of each such capital
expenditure as determined for federal income tax purposes. Notwithstanding
the foregoing, Landlord shall not be entitled to payment from the Escrow
Account for any costs of repairs or maintenance that Tenant would not have
been obligated to undertake under the standard of Care set forth in Section
11 of this Lease or for any other Operating Costs which Tenant would not
have been obligated to pay under this lease. Notwithstanding anything to
the contrary contained herein, until the expiration of 91 days after the
receipt of the Accelerated Payment, Tenant shall not make any claim against
Landlord that Landlord has failed to use diligent efforts to mitigate its
damages after the Event of Default which gave rise to the Accelerated
Payment. This provision shall survive the termination of this Lease.
(iv) Landlord may sue for injunctive relief or to
recover damages for any loss resulting from the breach.
(c) Any agreement for an extension of the Term or for any
other additional period after the Term shall not thereby prevent Landlord
from terminating this Lease for any reason specified in this Lease. If any
such right of termination is exercised by Landlord during the Term or any
extension thereof, Tenant's right to any extension or additional period
shall thereby be automatically canceled. Any such right of termination of
Landlord contained herein shall continue during the Term and any subsequent
extension hereof.
(d) The failure or delay by either party to enforce or
exercise at any time any of the rights or remedies or other provisions of
this Lease shall not be construed to be a waiver thereof, nor affect the
validity of any part of this Lease or the right of that party thereafter to
enforce each and every such right or remedy or other provisions. No waiver
of any default or breach
<PAGE>
of this Lease shall be held to be a waiver of any other default or breach.
No act or omission by Landlord during the Term shall be deemed an
acceptance of a surrender of the Installations Premisesand no agreement to
accept such a surrender shall be valid unless in writing and signed by
Landlord.
(e) If either party defaults under this Lease and the
other party places the enforcement of all or any part of this Lease or the
collection of any sum due or to become due under this Lease or the recovery
of possession of the Installations Premises in the hands of an attorney,
and such party prevails in litigation concerning such issue, the defaulting
party agrees to reimburse the prevailing party for the reasonable
attorney's fees incurred thereby.
SECTION 22. BANKRUPTCY OR INSOLVENCY
Landlord and Tenant agree that the following shall apply
in the event of the bankruptcy or insolvency of Tenant:
(a) If a petition is filed by, or an order for relief is
entered against Tenant under Chapter 7 of the Bankruptcy Code and the
trustee of Tenant elects to assume this Lease for the purpose of assigning
it, such assumption and assignment may be made only if all of the terms and
conditions of Subsections (b) and (d) below are satisfied. To be effective,
an election to assume this Lease must be in writing, addressed to Landlord,
and all of the conditions herein stated, which Landlord and Tenant
acknowledge to be commercially reasonable, must have been satisfied. If the
trustee fails so to elect to assume this Lease within 60 days after such
filing or order or such additional time as the Bankruptcy Court, for cause,
may fix, this Lease will be deemed to have been rejected, and Landlord
shall then immediately be entitled to possession of the Installations
Premises without further obligation to Tenant or the trustee, and this
Lease shall be terminated. Landlord's right to be compensated for damages
in the bankruptcy proceeding, however, shall survive such termination.
(b) If Tenant files a petition for reorganization under
Chapters 11 or 13 of the Bankruptcy Code, or if a proceeding filed by or
against Tenant under any other chapter of the Bankruptcy Code is converted
to a chapter 11 or 13 proceeding and Tenant's trustee or Tenant as
debtor-in-possession fails to assume this Lease within 60 days from the
date of the filing of such petition or conversion or such additional time
as the Bankruptcy Court, for cause, may fix, then the trustee or the
debtor-in-possession shall be deemed to have rejected this Lease. To be
effective, any election to assume this Lease must be in writing, addressed
to Landlord and, if there has been a default under the Lease, all of the
following conditions, which Landlord and Tenant acknowledge to be
commercially reasonable, must have been satisfied:
<PAGE>
(i) The trustee or the debtor-in-possession has
cured or has provided to Landlord adequate
assurance that:
(A) It will cure all monetary
defaults under this Lease
within the number of days
specified in Section 21(a)(I)
of this Lease from the date of
assumption; and
(B) It will cure all nonmonetary
defaults under this Lease
within the number of days
specified in Section 21(a)(ii)
of this Lease from the date of
assumption.
(ii) The trustee or the debtor-in-possession
has compensated Landlord, or has
provided Landlord with adequate
assurance that Landlord will be
compensated promptly for any pecuniary
loss it has incurred arising from the
default of Tenant, the trustee, or the
debtor-in- possession.
(iii) The trustee or the debtor-in-possession
has provided Landlord with adequate
assurance of the future performance of
each of Tenant's obligations under this
Lease; provided,
however, that:
(A) From and after the date of
assumption of this Lease, until
the date of the assignment of
this Lease, it shall pay all
monetary obligations,
including, without limitation,
the Rent payable under this
Lease, in advance on each date
that such amounts are payable.
(B) It shall also deposit with
Landlord, as security for the
timely payment of Rent, an
amount equal to three months'
Base Rent and other monetary
charges accruing under this
Lease;
(C) If not otherwise required by
the terms of this Lease, it
shall also pay in advance, on
each day that any installment
of Base Rent is payable, one-
twelfth of Tenant's Imposition,
Insurance and other obligations
under this Lease.
(c) If the trustee or the debtor-in-possession has
assumed this Lease, pursuant to Subsection (a) or (b) above, and elects to
assign Tenant's interest under this Lease or the estate created by that
interest to any other person, such interest or estate may be assigned only
if the intended assignee has provided
<PAGE>
adequate assurance of future performance of all of the terms,
covenants, and conditions of this Lease.
For the purposes of this Subsection (d), "adequate assurance of future
performance" means that Landlord has ascertained that each of the following
condition has been satisfied:
The assignee has submitted a current financial statement which shows a net
worth and working capital in amounts sufficient to assure the future
performance by the assignee of Tenant's obligations under this Lease.
(d) When, pursuant to the Bankruptcy Code, the trustee or
the debtor-in-possession is obligated to pay reasonable use and occupancy
charges for the use of all or part of the Installations Premises, it is
agreed that such charges will not be less than the Base Rent as defined in
this Lease, plus Additional Rent and other monetary obligations of Tenant
included herein.
(e) Except to the extent provided by law, neither
Tenant's interest in this Lease nor any estate of Tenant created in this
Lease shall pass to any trustee, receiver, assignee for the benefit of
creditors, or any other person or entity, nor otherwise by operation of law
under the laws of any state having jurisdiction of the person or property
of Tenant, unless Landlord consents in writing to such transfer. Landlord's
acceptance of Rent or any other payments from any trustee, receiver,
assignee, person, or other entity will not be deemed to have waived, or
waive, either the requirement of Landlord's consent or Landlord's right to
terminate this Lease for any transfer of Tenant's interest under this Lease
without such consent.
SECTION 23. SURRENDER OF INSTALLATIONS PREMISES
Upon the expiration or earlier termination of this Lease,
Tenant shall surrender the Installations Premises to Landlord, broom-clean,
in good order, condition and repair (except for ordinary wear and tear and
conditions which existed on the Installations Premises prior to the
Effective Date and subject to Sections 15 and 17), free of all Tenant's
Property (except as otherwise provided in Subsection 13(c), Personal
Property and Restricted Property (except for Restricted Property belonging
to any Existing Tenant or Subtenant whose Existing Lease or Sublease
Landlord has expressly agreed in writing may continue), and free of
violation of Applicable Laws in all material respects subject to Section
5(b)(iv). To the extent Tenant fails to comply with the requirements of
this Section, Landlord may restore the Installations Premises to such
condition at Tenant's expense.
SECTION 24. NON-CONSENSUAL HOLDING OVER
In the event Tenant remains in possession of the
Installations Premises or any part thereof without the consent of Landlord
after the expiration or earlier termination of this Lease,
<PAGE>
Tenant shall be deemed, at Landlord's election, to hold the Installations
Premises as a tenant at sufferance subject to all of the terms, conditions,
covenants and provisions of this Lease which shall be applicable during
such time (the "Holdover Period"), except that, for each month during the
Holdover Period, Tenant shall pay to Landlord 150% of the sum of the last
current full monthly installment of Base Rent plus Additional Rent, which
shall be payable to Landlord within five (5) business days of notice from
Landlord. In addition, such election shall not preclude Landlord from
seeking, and shall be cumulative with, any other remedy under this Lease or
granted by law or in equity. No holding over by Tenant, as described in
this Section 24, whether with or without the consent of Landlord, shall
operate to extend this Lease.
SECTION 25. QUIET ENJOYMENT
If and for so long as Tenant pays the prescribed Rent and
performs or observes all of the terms, conditions, covenants and
obligations of this Lease required to be performed or observed by it
hereunder, Tenant shall at all times during the Term have the peaceable and
quiet enjoyment, possession, occupancy and use of the Installations
Premises without any interference from Landlord, or anyone claiming through
or under Landlord, subject to any matters of record as of the Effective
Date to which this Lease is subject.
SECTION 26. NOTICES
Any notice, demand or request required or permitted to be
given under this Lease or by law shall be deemed to have been given if in
writing and delivered addressed to the party who is to receive such notice,
demand or request at the address set forth below or at such other address
as Landlord or Tenant may specify from time to time by notice. Delivery
hereunder shall be deemed to include pre-paid courier delivery (by a
reputable courier delivery service), pre-paid overnight delivery (by a
reputable overnight delivery service), postage and fees paid U.S. Postal
Service express mail or certified mail, return receipt requested, or
facsimile transmission with electronic verification during normal business
hours, if sent to the address of the parties designated hereunder, and
shall be deemed received on the next business day such notice is delivered
or refused at such address except notices sent by fax shall be deemed
received upon electronic verification.
Landlord: LCOR Incorporated
6701 Democracy Boulevard
Bethesda, MD 20817
Attn: Mr. R. William Hard
Facsimile: (301) 897-3713
with copies to: Jones, Day, Reavis & Pogue
1450 G Street, N.W.
Washington, DC 20005-2088
Attn: Sigmund T. Weiner, Esq.
Facsimile: (202) 737-2832
<PAGE>
LCOR Incorporated
300 Berwyn Park, Suite 104
Berwyn, PA 19312
Attention: Mr. Peter DiLullo
Facsimile: (610) 408-4420
Tenant: COMSAT Corporation
6560 Rock Spring Drive
Bethesda, MD 20817
Attention: General Manager Corporate
Services
Facsimile: (301) 214-7147
with a copy to: COMSAT Corporation
6560 Rock Spring Drive
Bethesda, MD 20817
Attention: General Counsel
Facsimile: (301) 214-7128
Any copies required to be sent as above provided are for the convenience of
the parties and no such copy shall constitute adequate notice for the
purposes of this Section.
SECTION 27. HAZARDOUS MATERIALS
Landlord and Tenant agree as follows with respect to the
existence or use of "Hazardous Material" on the Installations Premises.
(a) If the use, storage, handling, generation, or
disposal of Hazardous Material on or in the Installations Premises during
the Term results in the release or threatened release of Hazardous
Materials at, on or under the Installations Premises in violation of
Applicable Law, or otherwise necessitates investigation or cleanup of
Hazardous Material as required under Applicable Law ("Environmental
Conditions"), Tenant shall indemnify, defend and hold Landlord harmless
from any and all claims, judgments, damages, penalties, fines, costs,
liabilities or losses (including, without limitation, sums paid in
settlement of claims, attorneys' fees, consultant fees and expert fees but
excluding consequential damages and any injury to the value of the
Property, provided that this clause shall not be construed as reducing the
Remediation Obligation) which arise during or after the Term as a direct
result thereof. This indemnification of Landlord by Tenant includes,
without limitation, reasonable costs incurred in connection with any
investigation of site conditions or any cleanup, remedial, removal or
restoration work required by any federal, state or local governmental
agency because of Hazardous Material present in the soil or groundwater on
or under the Installations Premises or in any improvements on the
Installations Premises. This indemnification, however, shall not apply to
any Environmental Conditions caused by the acts or omissions of
<PAGE>
Landlord or its Agents. The indemnification and hold harmless obligations
of Tenant under this Section 27 shall survive any termination of this Lease
for a period of twenty-four (24) months after the termination. At the end
of the twenty-four (24) month period, this indemnification and all of
Tenant's obligations under this Section shall expire, except as to matters
specifically made the subject of a lawsuit filed against Tenant before the
expiration of the twenty-four (24) month period. Without limiting the
foregoing, if the use, storage, handling, generation, or disposal of
Hazardous Material on or in the Installations Premises during the Term
results in any Environmental Conditions, then, provided that the
Environmental Condition is not caused by the acts or omissions of Landlord
or its Agents, Tenant shall promptly take all actions, at its sole expense,
as are necessary to return the Installations Premises to substantially the
condition existing prior to thereto or to such other condition as may
satisfy the applicable governmental authorities (the "Remediation
Obligation"). Landlord's approval of such actions shall first be obtained,
which approval shall not be unreasonably withheld. Nothing in this Section
shall be deemed to prohibit or limit any action by Tenant against any party
or parties responsible for the contamination.
(b) Tenant covenants and agrees that during the Term it
shall continue implementation of the Operations and Maintenance Plan
described in Exhibit J attached hereto and made a part hereof at all times
in compliance with Applicable Laws in all material respects.
(c) Landlord shall have the right, at any time, to cause
the groundwater, soil, improvements and air at the Installations Premises
to be investigated to detect the presence of Hazardous Material during the
Term, including, but not limited to, the installation of testing wells and
other devices in locations selected by Landlord at Landlord's sole
discretion. Landlord shall supply Tenant with copies of final investigation
reports. The cost of such investigations and of the maintenance, repair and
replacement of such wells and other devices shall be fully paid for by
Landlord, unless Landlord's investigations reveal Environmental Conditions
which Tenant is obligated to remediate under this Section. In that event,
Tenant, within thirty (30) days after receiving a copy of such
investigation report and a statement of charges from Landlord, shall pay
for the cost of the investigation. Any dispute under this Subsection shall
be resolved under the arbitration proceedings set forth in Subsection
11(b).
(d) As used herein, the term "Hazardous Material" means
any hazardous or toxic substance, material or waste which is or becomes
regulated by any local governmental authority, the State of Maryland or the
United States Government or other Applicable Law. The term "Hazardous
Material" includes, without limitation, any material or substance which is
(i) designated as a "hazardous substance" pursuant to Section 307 of the
Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq. (33
U.S.C. Section 1317), (ii) defined as a "hazardous waste" pursuant to
Section 3001
<PAGE>
of the Federal Solid Waste Disposal Act, 42 U.S.C. Section 6901 et
seq. (42 U.S.C. Section 6921), or (iii) defined as a "hazardous
substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq. (42 U.S.C. Section 9601), or (iv) petroleum,
petroleum product, polychlorinated biphenyls or urea formaldehyde.
(e) Within 30 days of the Expiration Date, if requested
by Landlord, Tenant shall remove all fuel oil and other liquid contents and
Hazardous Materials (collectively, the "Contents") from all now or
hereafter active underground storage tanks located on the Installations
Premises and dispose of such contents off of the Installations Premises and
in accordance with Applicable Laws. Tenant shall not be obligated to
remove, close or take any other action to de-commission the tanks during or
after the Term. If, however, during the Term governmental authorities
require such removal, closure or other action and the requirement is not
prompted by Landlord's request to remove the Contents or any Development by
Landlord or its Agents, Tenant shall comply with such request subject to
Subsection 5(b)(iv)(d).
(f) Notwithstanding anything contained in this Lease,
Tenant shall have no obligation or liability to Landlord with respect to:
(i) Any Hazardous Material which may exist on the
Installations Premises as of the Effective Date, except to the extent that
Tenant is specifically required to take action regarding such Hazardous
Material by the governmental authority having jurisdiction.
(ii) Hazardous Material that migrates, flows,
percolates, diffuses or in any way moves on to or under the Installations
Premises from sources outside the Installations Premises.
SECTION 28. RIGHT TO RENEW TERM
(a) Provided that this Lease is then in full force and
effect, and provided that no Event of Default exists at the time of the
Renewal Notice or the date of commencement of the Renewal Term, Landlord
hereby grants to the Tenant an option (the "Renewal Option") to renew the
Initial Term of this Lease on the same terms, conditions and provisions as
contained in this Lease, except as noted herein, for a period of five years
after the Expiration Date of the Initial Term (the "Renewal Term"), which
Renewal Option period shall, except as provided below, commence immediately
following the expiration of the Initial Term and end at 11:59 p.m.
of the fifth anniversary of such date.
(b) The Renewal Option shall be exercised, if at all, by
written notice (the "Renewal Notice") from Tenant to Landlord of its
election, said notice to be given no later than the eighteen (18) months
prior to the Expiration Date of the Initial Term. If
<PAGE>
the Renewal Notice is not so given by Tenant to Landlord, the Renewal
Option shall be deemed waived.
(c) The Renewal Term shall be upon the same terms,
covenants and conditions as provided in this Lease except as follows:
(i) Tenant shall not have any further right to
extend the Term or holdover after the end of the Term.
(ii) The annual Base Rent for the first year of the
Renewal Term shall be equal to 102.75% of the Base Rent rate in effect
under this Lease immediately prior to commencement of the Renewal Term.
(iii) The annual Base Rent shall be increased
during the Renewal Term by 2.75% per year on a cumulative compounded
basis.
SECTION 29. SECURITY DEPOSIT
If at any time during the Term, the credit rating of
Tenant's corporate debt drops below BBB as rated by Standard & Poor's (or
the equivalent rating by any other national rating agency designated by
Landlord), upon notice from Landlord, Tenant shall deposit a sum with
Landlord equal to one month's installment of the then applicable annual
Base Rent ("Security Deposit"), as security for the full and faithful
performance by Tenant, of each and every term, covenant, and condition of
this Lease. If there an event of Default, Landlord may use the Security
Deposit as payment of any Rent or other payment due from Tenant to Landlord
or to otherwise cure any default of Tenant hereunder. To the extent that
any of the Security Deposit is used for this purpose, Tenant shall pay such
amount to Landlord along with the next month's Rent in order to replenish
the Security Deposit to the original amount stated herein. The Security
Deposit shall be returned to Tenant within 30 days of the Expiration Date
or earlier termination of this Lease to the extent that such amount is not
depleted in order to remedy any default by Tenant hereunder.
SECTION 30. MISCELLANEOUS GENERAL PROVISIONS
(a) Payments Deemed Rent. Any amounts of money to be paid
by Tenant to Landlord pursuant to the provisions of this Lease, whether or
not such payments are denominated Rent or Additional Rent and whether or
not they are to be periodic or recurring, shall be deemed Rent or
Additional Rent for purposes of this Lease; and any failure to pay any of
same shall entitle Landlord to exercise all of the rights and remedies
afforded hereby or by law or in equity for the collection and enforcement
of Tenant's obligation to pay Rent. Tenant's obligation to pay any such
Rent or Additional Rent pursuant to the provisions of this Lease shall
survive the expiration or other termination of this Lease and the surrender
of possession of the Master Lease Property.
<PAGE>
(b) Interest on Deposits. Any amount deposited with
Landlord under this Lease shall be held by Landlord in a federally insured,
interest bearing account. Any interest earned on such deposit shall accrue
to Tenant and shall be transferred to Tenant promptly after the Expiration
Date or such earlier time as may be specified in this Lease unless Landlord
is required by Applicable Laws to return such interest to Tenant sooner
than stated herein. Any amount deposited with Mortgagee by Tenant (or by
Landlord on Tenant's behalf) shall be held by Mortgagee pursuant to
Applicable Laws and pursuant to the security documents between Landlord and
Mortgagee. No interest shall accrue unless required by Applicable Laws or
such security documents. Notwithstanding the foregoing, any amounts placed
in the Escrow Account shall be governed by the provisions of Subsection
21(b)(iii)(B).
(c) Landlord Cross Default. Any default by Landlord
under the Master Lease shall be a default by Landlord under this
Lease.
(d) Estoppel Letters. Tenant shall, within ten (10)
business days following written request from Landlord, execute, acknowledge
and deliver to Landlord or to any then existing or prospective lender,
investor or purchaser, with respect to the Installations Premises or any
part thereof, designated by Landlord, a written statement certifying (i)
that this Lease is in full force and effect (if such is the case) and
unmodified (or, if modified, stating the nature of such modification), (ii)
the date to which Rent has been paid, (iii) that there are not, to Tenant's
actual knowledge, any uncured defaults by Landlord or Tenant (or specifying
such defaults if any are claimed), and (iv) such other matters as Landlord
may reasonably request. Any such statement may be relied upon by any such
then existing or prospective lender, investor or purchaser. If Tenant fails
to deliver such statement within the 10 business day period and if
following the expiration of that period Landlord gives a second written
request for the statement and Tenant fails to deliver the statement within
5 business days after the second request, Tenant shall conclusively be
deemed to have responded that this Lease is in full force and effect and
unmodified and that there are no uncured defaults in Landlord's performance
hereunder.
(e) Brokers. Each party represents and warrants to the
other that no broker procured this Lease on its behalf and that such party
had no conversations or negotiations with any broker concerning the leasing
of the Installations Premises, other than Barnes, Morris, Pardoe and
Foster, which firm is receiving a commission from Tenant in connection with
the Purchase and Sale Agreement and is not entitled to a commission in
connection with this Lease. Each party shall indemnify the other against
liability in connection with a breach of its representation and warranty in
this Subsection and in connection with any claim for a brokerage or
finder's commission or fee arising out of its acts. This indemnification
shall survive any termination of this Lease.
<PAGE>
(f) Applicable Law. This Lease and all matters pertinent
thereto shall be construed and enforced in accordance with the Applicable
Laws of the State of Maryland, excluding choice of laws principles.
(g) Entire Agreement. This Lease, including all exhibits
hereto, constitutes the entire agreement between the parties hereto with
respect to the leasing of the Installations Premises and may not be
modified except by an instrument in writing executed by the parties hereto.
(h) Binding Effect. This Lease and the respective rights
and obligations of the parties hereto shall inure to the benefit of and be
binding upon the successors and assigns of the parties hereto as well as
the parties themselves; subject, however, to Subsection (o) below.
(i) Survival. All provisions of this Lease which by their
express terms survive termination of this Lease or which by the operation
of their terms are intended to be performed, in whole or in part, after
termination of this Lease, shall survive any termination of this Lease.
(j) Severability. If any provision of this Lease shall be
held to be invalid, void or unenforceable, such provision shall be deemed
reformed to be valid, in effect and enforceable, and to be as close in
meaning and intent as the defective provision and still the remaining
provisions hereof shall not be affected or impaired, and such remaining
provisions shall remain in full force and effect.
(k) Headings, Gender, etc. As used in this Lease, the
word "person" shall mean and include, where appropriate, an indivi dual,
corporation, partnership or other entity; the plural shall be substituted
for the singular, and the singular for the plural, where appropriate, and
words of any gender shall include any other gender. The topical headings of
the several paragraphs of this Lease are inserted only as a matter of
convenience and reference, and do not affect, define, limit or describe the
scope or intent of this Lease. References in this Lease to Sections and
Subsections are references to Sections and Subsections of this Lease.
(l) Waiver of Jury. To the extent permitted by Applicable
Laws, each of Landlord and Tenant hereby waives any right it may have to a
jury trial in the event of litigation between Landlord and Tenant
pertaining to this Lease.
(m) Landlord's Right to Cure. Landlord may, but shall not
be obligated to, cure any default by Tenant, specifically including, but
not by way of limitation, Tenant's failure to pay Impositions, obtain
Insurance, Care for the Installations Premises, or satisfy lien claims,
after complying with any applicable notice and cure provisions established
under this Lease; and whenever Landlord so elects, all reasonable out of
pocket costs and expenses
<PAGE>
paid by Landlord in curing such default, including, without limitation,
reasonable attorneys' fees, shall be Additional Rent due on the next
scheduled Rent payment date.
(n) Relationship of Parties. Nothing contained herein
shall be deemed or construed by the parties hereto, nor by any third party,
as creating the relationship of principal and agent or of partnership, or
of joint venture by the parties hereto, it being understood and agreed that
no provision contained in this Lease nor any act of the parties hereto
shall be deemed to create any relationship other than the relationship of
Landlord and Tenant.
(o) Landlord Means Owner. The term "Landlord" as used in
this lease, so far as covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner or owners at
the time in question of the Installations Premises and, in the event of any
transfer or transfers of the title to all of the Installations Premises,
Landlord herein named (and in case of any subsequent transfer or
conveyances, the then grantor) shall be automatically freed and relieved,
from and after the date of such transfer or conveyance, of all liability as
respects the performance of any covenants or obligations on the part of
Landlord contained in this Lease thereafter to be performed (but not any
liabilities accrued prior to the date of transfer); provided that any funds
in the hands of such Landlord or the then grantor at the time of such
transfer, in which Tenant has an interest, shall be turned over to the
grantee, and any amount then due and payable to Tenant by Landlord or the
then grantor under any provisions of this Lease, shall be paid to Tenant
and further provided that the transferee assumes in writing all of the
covenants and obligations of Landlord to observed and performed on and
after the date of transfer.
(p) References to Size. Landlord and Tenant acknowledge
and agree that any references in this Lease to the size of the Property,
the Auxiliary Building Areas, the Auxiliary Buildings or any portion
thereof are for convenience only and regardless of whether the actual size
of such areas is greater or less than the size stated in this Lease, all
obligations of the parties hereunder, including without limitation, the
obligation to pay Rent shall remain the same and shall not be affected by
any errors in references to size.
(q) Unavoidable Delays. For purposes of this Lease, the
term "Unavoidable Delays" shall mean delays caused by strikes, lockouts,
acts of God, inability to obtain labor or materials, governmental
restrictions or inaction, enemy action, civil commotion, fire, terrorist
action, epidemic, public utility failure, unavoidable casualty, moratorium
or similar laws prohibiting performance, severe weather conditions or any
other similar matter which shall be beyond the reasonable control of
Landlord or Tenant, as the case way be; but the lack or insufficiency of
funds shall not constitute an Unavoidable Delay.
<PAGE>
(r) Landlord's Approvals. Wherever Landlord's consent or
approval are required under this Lease, Landlord shall approve or
disapprove the matter within ten (10) business days after Tenant requests
the consent or approval in writing. If Landlord fails to do so and if,
following the expiration of the ten (10) business day period, Tenant gives
a second written request for the consent or approval and Landlord fails to
approve or disapprove the matter within five (5) business days after the
second request, Landlord shall conclusively be deemed to have consented to
or approved the matter, as the case may be.
(s) Rate of Interest. If any amount owed by Landlord to
Tenant under this Lease remains unpaid after such amount is due and notice
thereof has been given to Landlord, the outstanding amount shall bear
interest at the Stipulated Rate from the date such amount is due and such
notice is given to the date such amount is paid.
(t) Cooperation of Parties. Whenever the parties are
required to cooperate with each other under this Lease but are entitled to
reimbursement for their out-of-pocket costs to third parties, the party
that is obligated to cooperate shall provide an estimate of such third
party costs to the party requesting such cooperation and obtain the prior
written approval from such other party not to be unreasonably withheld or
delayed before such costs are incurred.
(u) Reconciliation. Nothing in this Lease shall prevent
or impair Tenant from performing its obligations or observing its covenants
under the Existing Space Leases. Further, nothing in this Lease shall
prevent or impair any of the Existing Tenants from exercising their rights
and privileges under the Existing Space Leases. No such action by Tenant or
the Existing Tenants in accordance with the Existing Space Leases shall be
deemed to be a breach or default by Tenant under this Lease.
(v) Memorandum of Lease. Upon request of either party the
other party shall promptly execute and deliver a memorandum or other short
form version of this Lease setting forth the basic terms of this Lease
excluding Rent. The party recording such memorandum, short form version, or
other document giving notice of this Lease shall pay any and all
recordation and transfer taxes due in connection with such recordation.
(w) Financial Reports. In the event that Tenant is no
longer a publicly traded company with common stock trading on either the
New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock
Exchange (or, in the event the Tenant's stock is no longer traded on such
exchanges, or a successor or reasonably equivalent exchange), Tenant shall
supply Landlord, within ten (10) business days of Landlord's request
therefor (to be no more frequent than once per year), copies of Tenant's
most recent financial reports. Such reports shall (i) include an income
statement, balance sheet, statement owner's equity and statement of
<PAGE>
cash flows, (ii) shall be audited by a certified public accountant or, to
the extent audited Financial Reports are not otherwise obtained by Tenant
for other purposes, certified by the chief financial officer of Tenant, to
his/her knowledge, as being true, correct and complete financial reports,
and (iii) shall be dated no later than twelve months prior to Landlord's
request. Notwithstanding the foregoing, in the event that Landlord requests
such financial reports within one hundred twenty (120) days after Tenant's
fiscal year end, Tenant shall have up to one hundred twenty (120) days from
such fiscal year end to supply such reports to Landlord; provided Tenant
has given Landlord its most recent financial reports and such reports are
not dated earlier than twelve (12) months prior to Tenant's fiscal year
end.
(x) Landlord's Affiliates. Notwithstanding anything
contained in this Lease to the contrary, any act or omission of an
affiliate of Landlord on any Excluded Areas shall not be a default of
Landlord under this Lease. In no event shall this provision be construed in
any manner as a waiver of any right that Tenant has at law or in equity
against such affiliate as a result of such act or occurrence.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Lease to be executed as of the day and year stated herein.
LANDLORD:
LCOR CLARKSBURG L.L.C.
By: Clarksburg Management, Inc.
By: /s/ Michael T. Goulder
Name: Michael T. Goulder
Title: Vice President
TENANT:
COMSAT CORPORATION
By: /s/ Allen E. Flower
Name: Allen E. Flower
Title: Vice President and
Chief Financial Officer
<PAGE>
SCHEDULE I
AAA: Section 11(b)
Accelerated Payment: Section 21(b)(iii)(A)
Additional Easements: Section 6(f)
Additional Rent: Section 4(b)
Adequate Assurance of
Future Performance: Section 22(d)
All Risks: Section 14(a)(i)
Alterations: Section 13(a)
Applicable Laws: Section 5(b)(iv)
Appurtenances: Section 6(d)
Assignment: Section 19(b)
Base Rent: Section 4(a)
Care, Care for,
Care of: Section 11(a)
Comparable Properties: Section 14(a)(ii)
Contents: Section 27(e)
Damage: Section 15(a)
Declaration: Section 11(a)
Default Measuring
Period: Section 21(b)(iii)(B)
Development: Section 6(a)
Effective Date: Preamble
Environmental
Conditions: Section 27(a)
Escrow Account: Section 21(b)(iii)(B)
Escrowee: Section 21(b)(iii)(B)
Events of Default: Section 21(a)
Excluded Area: Section 6(d)
Existing Space Leases: Section 19(a)
Existing Tenants: Section 19(a)
Hazardous Material: Section 27 and 27(d)
Holdover Period: Section 24
Impositions: Section 7(a) and 7(d)
Indemnifying Party: Section 16(c)
Indemnitee: Section 16(c)
Indemnity Payment: Section 16(c)
Initial Term: Section 3(a)
Insurance: Section 14(a)
Insurance Notice: Section 14(g)
Intelsat: Section 13(c)
Landlord: Preamble, Section 30(o)
Landlord Approved SNDA: Section 19(b)
Lease: Preamble
Lease Year: Section 3(b)
Liability Policy: Section 14(a)(ii)
Master Lease: Section 21(a)(iii)
Mitigation Leases: Section 21(b)(iii)(B)
Mortgagee: Section 7(e)(i)
Net Award: Section 17(b)
Operating Expenses: Section 21(b)(iii)(B)
<PAGE>
Post Default Leases: Section 21(b)(iii)(B)
Prime Rate: Section 4(h)
Purchase and Sale
Agreement: Recital (a)
Remediation Obligation: Section 27(a)
Renewal Notice: Section 28(b)
Renewal Option,
Renewal Term: Section 28(a)
Rent: Section 4(b)
Restricted Areas: Section 12
Restricted Property: Section 13(c)
Security Deposit: Section 29
Signs: Section 9(a)
Stipulated Rate: Section 4(h)
Sublease: Section 19(b)
Subtenant: Section 19(c)
Taken, Taking: Section 17(a)
Tax and Insurance
Holdbacks: Section 21(b)(iii)(B)
Tenant: Preamble
Tenant Approved SNDA: Section 20(a)
Tenant's Property: Section 13(c)
Term: Section 3(a)
Third Party Claim: Section 16(d)(i)
Unavoidable Delays: Section 30(q)
Utilities: Section 8(a)
<PAGE>
SCHEDULE OF EXHIBITS
EXHIBIT SECTION
Exhibit A (Description of Land) 1(a)
Exhibit B (Description of 1(a)
Main Building Area)
Exhibit C (Description of 1(a)
Installations Premises)
Exhibit D Intentionally Omitted
Exhibit E (Wire Instructions) 4(g)
Exhibit F (Portion of Installations
Premises) 17(c)
Exhibit G (Existing Space Leases) 19(a)
Exhibit H (Landlord Approved SNDA) 19(b)
Exhibit I (Tenant Approved SNDA) 20(a)
Exhibit J (Operations and Maintenance 27(b)
Plan)
<PAGE>
EXHIBIT 10.52
AGREEMENT
AMONG
COMSAT CORPORATION
COMSAT ARGENTINA S. A.
AND
ICO GLOBAL COMMUNICATIONS (HOLDINGS) LIMITED
ICO GLOBAL COMMUNICATIONS HOLDINGS B.V.
ICO GLOBAL COMMUNICATIONS SERVICES INC.
Dated as of September 30, 1998
<PAGE>
AGREEMENT
This Agreement ("Agreement") is made and entered into as of the
30th day of September,1998 ("Effective Date") by and among the following
parties:
COMSAT Corporation, a Washington D.C. corporation ("COMSAT
Corporation"), with its principal place of business at
6560 Rock Springs Drive, Bethesda, Maryland 20817,
U.S.A.;
COMSAT ARGENTINA S. A., a sociedad anonime ("COMSAT
Argentina"), with its principal place of business at Carlos
Pellegrini 1363, 6th Floor, (1011) Buenos Aires, Argentina;
ICO Global Communications (Holdings) Limited, a Bermuda
corporation ("ICO Bermuda"), with its principal place of
business at Clarendon House, 2 Church Street, Hamilton,
Bermuda;
ICO Global Communications Holdings B.V., a Netherlands
corporation ("ICO Netherlands"), with its principal place
of business at Drentestraat 20, 1083 HK Amsterdam, The
Netherlands; and
ICO Global Communications Services Inc., a Delaware
corporation ("ICO Services"), with its principal place of
business at The Corporation Trust Company, 1209 Orange
Street, Wilmington, Delaware, USA.
In consideration of the covenants contained in this Agreement, the parties
hereto hereby agree as follows:
Section 1. Defined Terms.
Each of the terms set forth below, when used in this Agreement, will have
the definition set forth opposite such term:
Closing Date - The date to be agreed to by the parties, as more fully set
forth in Section 9 hereof.
Closing - The closing of the transactions contemplated by this Agreement
pursuant to Section 9 hereof.
<PAGE>
COMSAT - COMSAT Corporation and COMSAT Argentina.
COMSAT Entity - COMSAT Corporation and each of its direct and indirect
subsidiaries.
COMSAT Shares - The ICO Bermuda shares owned , respectively, on the date of
this Agreement by COMSAT Corporation , being a total of 2,015,604 shares,
and COMSAT Argentina , being a total of 1,226,007 shares, as such shares
and the number thereof may change to reflect any changes in the share
capital of ICO Bermuda or the relationship between ICO Bermuda and any
successor entity at any time during the period of performance of this
Agreement.
COMSAT Subscription Agreements - The Subscription Agreements dated January,
1995, and all amendments thereto, between COMSAT Corporation and COMSAT
Argentina, respectively, and a predecessor to ICO Bermuda and related
documents and similar documents between any COMSAT Entity and any ICO
Entity.
Distribution Rights - All rights and preferences of any COMSAT Entity to
distribute any services of any ICO Entity or otherwise act for any ICO
Entity anywhere in the world, including but not limited to all such rights
and preferences that may have been granted or promised by any ICO Entity to
any COMSAT Entity, including without limitation, any distribution rights
granted, promised or referred to in the Information Memorandum, COMSAT
Subscription Agreements, actions of or publications by any ICO Entity or
its Board of Directors, or employees or agents, or other agreement, whether
referred to as distribution rights, commercial rights, gateway operator,
service partner, service provider, right to be a National Service
Wholesaler, National Service Retailer, Service Wholesaler, Service
Retailer, or otherwise . Nothing herein shall be construed as preventing
COMSAT from acting as a non-exclusive provider to International Mobile
Satellite Organization ("Inmarsat") for the distribution in the United
States of non-hand held ICO products for the maritime and aeronautical
market segments or non-hand held ICO services for the maritime and
aeronautical market segments.
ICO - ICO Bermuda, ICO Netherlands, and ICO Services. ICO Services is a
wholly owned subsidiary of ICO Netherlands, which is a wholly owned
subsidiary of ICO Global Communications (Netherlands Antilles) N.V., a
Netherlands Antilles corporation, which is a wholly owned subsidiary of ICO
Global Communications (Operations) Limited, a Cayman Islands corporation,
which is a wholly owned subsidiary of ICO Bermuda.
ICO Entity - ICO Bermuda and each of its direct and indirect subsidiaries.
ICO Services/USEI Memorandum of Understanding - A memorandum of
understanding in form and substance acceptable to ICO Services setting
forth in outline form an agreement between USEI and ICO Services or an
entity designated by ICO Services that would, among other things, (i)
replace the Main Agreement, (ii) set forth USEI's consent to the transfer
by COMSAT to ICO Services or an entity designated by ICO Services of the
USEI Agreement and USEI Lease
<PAGE>
without condition at the request of ICO, and (iii) provide that the USEI
Agreement can be terminated by COMSAT or, in the event the USEI Agreement
has been transferred to ICO Services or an entity designated by ICO
Services, by ICO Services or such entity without cost to COMSAT, ICO
Services, or such entity.
ICO Cayman Islands - ICO Global Communications (Holdings) Limited, a
corporation organized under the laws of the Cayman Islands.
Information Memorandum - The Information Memorandum dated 16 September 1994
as amended by the First Addendum thereto dated 18 January 1995 and the
Second Addendum thereto dated 23 January 1995, referred to in the COMSAT
Subscription Agreement, pursuant to which COMSAT Corporation and COMSAT
Argentina acquired the COMSAT Shares.
Interconnect Agreement - Interconnect Agreement dated March 5, 1997 between
COMSAT Corporation and ICO Netherlands and all amendments thereto, if any.
Licenses - All licenses, authorizations, approvals, and permits and
applications therefor from any governmental authority obtained or applied
for by (i) COMSAT Corporation in connection with the Interconnect Agreement
and the Main Agreement or either or in the performance of its obligations
thereunder or in connection with any Distribution Rights and/or (ii) COMSAT
Argentina in connection with any Distribution Rights.
Main Agreement - Main Agreement dated March 5, 1997 between COMSAT
Corporation and ICO Services and all amendments thereto, if any.
Main Agreement Documents - All plans, reports, memoranda, test results,
insurance policies, schedules and other documents of whatsoever nature
created or obtained by COMSAT Corporation in connection with the
performance of its obligations under the Main Agreement and Interconnect
Agreement or either and that are reasonably necessary to continue the
installation, operations, maintenance, and interconnection of the SAN and
not subject to attorney-client privilege.
Main Agreement Subcontracts - All agreements entered into by any COMSAT
Entity with third parties pursuant to or in connection with the performance
of COMSAT Corporation's obligations under the Main Agreement and
Interconnect Agreement or either.
Parent Company Guaranty - The Parent Company Guaranty dated March 5, 1997
executed by ICO Cayman Islands in favor of COMSAT Corporation relating to
the Main Agreement and the Interconnect Agreement.
SAN - The Satellite Access Node constructed pursuant to the Main Agreement.
<PAGE>
Site Lease - The Lease of Earth Station Site dated April 4, 1997 between
COMSAT Corporation and USEI and all amendments thereto, if any. Transition
Agreement - The Transition Agreement to be entered into by ICO Services and
COMSAT at the Closing, the form of which is attached hereto as Annex 1.
USEI - U.S. Electrodynamics, Inc., a corporation organized under the laws of
the state of Washington, USA.
USEI Agreement - The Agreement dated April 4, 1997 between COMSAT
Corporation and USEI relating to the construction and operation of the SAN
and all amendments thereto, if any.
Section 2. Payment.
At the Closing, ICO Bermuda (or, at ICO Bermuda's direction, any one or
more of the parties included within the definition of ICO) will pay to
COMSAT, by wire transfer to the bank account designated in writing by
COMSAT, in immediately available funds, the aggregate sum of (i) in
consideration for terminating the Main Agreement and Interconnect
Agreement, U.S. dollars four million five hundred thousand (U.S. $
4,500,000), and (ii) an additional sum (in U.S. dollars) equal to all
amounts which the parties hereto agree are or will be owed by ICO to COMSAT
Corporation through the Closing Date pursuant to the Main Agreement and
Interconnect Agreement that have not been paid as of such date, which sum
shall be determined no ;later than five (5) days prior to the Closing.
Section 3. Termination.
The Interconnect Agreement and Main Agreement shall terminate as of the
Closing Date, except for the following portions of the Interconnect
Agreement and Main Agreement which will remain in effect:
(a) Sections 12,18, 19, and 34 of the Interconnect Agreement, and
(b) Sections C10, H4, H5, H14, and H15.13 of the Main Agreement.
Section 4. Transfers To ICO and Transition Agreement.
(A) At the Closing, COMSAT Corporation and ICO Services or other entity
designated by ICO Services will execute and deliver, as of the Closing
Date, an Assignment and Assumption Agreement in the form attached hereto as
Annex 2, pursuant to which (i) COMSAT Corporation will assign or transfer
to ICO Services or other entity designated by ICO Services, all rights,
<PAGE>
titles, and interests under the following, and (ii) ICO Services or other
entity designated by ICO Services will assume the obligations of COMSAT
Corporation that arise after the Closing under the following, and (iii) ICO
Services will indemnify COMSAT against all claims by third parties
(including costs) accruing after the Closing in connection with such
assumed obligations and reimburse COMSAT for any taxes or fees that may
become payable as a result of such assignment or transfer of rights,
titles, and interests under, the following:
(1) Site Lease;
(2) All Main Agreement Documents;
(3) All Main Agreement Subcontracts;
(4) All Licenses (to the extent transferable and subject to any
conditions applicable to transfer);
(5) All rights, titles, and interests of COMSAT Corporation in and
to all equipment, facilities, improvements, structures, and other
physical property and rights of whatsoever nature acquired by
COMSAT Corporation in connection with or for the SAN being
constructed pursuant to the Main Agreement or in connection with
the Interconnect Agreement; and
(6) All Distribution Rights.
(B) Except as otherwise agreed by the parties to facilitate the transition
services under the Transition Agreement, COMSAT Corporation will deliver to
ICO at or before the Closing the following documents which are defined in
the Main Agreement in whatever state of completion or readiness such
documents may exist on the Closing Date and otherwise on an "as is" basis:
As Built Plans
Confidential Information (received from ICO in connection with the
Main Agreement or Interconnect Agreement)
Plans
Requisite Consents (to the extent transferable and subject to any
conditions of transfer applicable thereto)
Site Lease
Building Contract
Copy of all Building Contractor Insurance Policies in COMSAT's
possession
Warranties applicable to equipment installed pursuant to the Main
Agreement
and all subcontracts, consulting agreements, utility agreements and similar
agreements entered into by COMSAT Corporation pursuant to the Main
Agreement.
(C) COMSAT Corporation will deliver to ICO at or before the Closing the
following with respect to the Interconnect Agreement:
<PAGE>
(1) Confidential Information, as defined in the Interconnect
Agreement, received from ICO in connection with the
Interconnect Agreement,
(2) Names, addresses, telephone numbers, and other relevant
information relating all parties to which COMSAT Corporation
provided quotes for ICO interconnect services, and
(3) Such other information as may be in COMSAT's possession and
that COMSAT may have created or obtained prior to the
Effective Date in order to perform its obligations under the
Interconnect Agreement ("ICO Interconnect Information"),
provided that COMSAT shall not be obligated to deliver
quotes, traffic estimates or other information that is
derived from or represents a commingling of ICO Interconnect
Information and other COMSAT proprietary information (such as
quotes based on a bundling of forecasted ICO traffic and
other non-ICO related traffic).
At the request of ICO Services at any time during the term of the
Transition Agreement, COMSAT will assign or otherwise transfer to a party
designated by ICO Services or amend or otherwise take all actions required
to substitute such party in place of COMSAT as the applicant under,
whichever ICO Services elects, all licenses and other permits and
authorizations applied for by COMSAT to the U.S. Federal Communications
Commission pursuant to the Main Agreement or Interconnect Agreement.
(D) At the Closing, ICO Services and COMSAT will enter into the Transition
Agreement.
(E) If the Closing occurs, at the request of ICO Services at any time at or
prior to termination of the Transition Agreement and without the need for
further documentation other than the providing of written notice therefor
from ICO Services to COMSAT Corporation, COMSAT Corporation shall transfer
to ICO Services or other entity designated by ICO Services the rights of
COMSAT Corporation under the USEI Agreement, and ICO Services or such other
entity shall assume the obligations of COMSAT Corporation under the USEI
Agreement that arise after such transfer.
Section 5. Registration Rights.
(A) No ICO Entity will object to or hinder the sale by COMSAT
Corporation or COMSAT Argentina of any or all of the COMSAT Shares
in a private sale not prohibited by the rules or regulations of
the U.S. Securities and Exchange Commission ("SEC"). ICO Bermuda
shall promptly register in its company register the transfer of
such shares from COMSAT pursuant to such sale from COMSAT to any
purchaser designated by COMSAT pursuant to such sale provided such
transfer is made in accordance with, and not in violation of, the
Bye-laws and/or Memorandum of Continuance of ICO Bermuda or any
successor entity thereof and all applicable laws and regulations.
In furtherance thereof:
<PAGE>
(1) ICO Bermuda hereby represents and warrants to COMSAT, which
representation and warranty shall survive the execution,
delivery, and any Closing hereunder, that as of the date of
this Agreement there is nothing in the Bye-laws, Memorandum of
Continuance or other charter document of ICO Bermuda that would
restrict ICO Bermuda's ability to register such transfer of
shares except for the provisions of Bye-laws 55, 56, and 57 of
ICO Bermuda's Bye-laws, a copy of which are attached hereto
as Annex 6.
(2) Until the earlier of (i) January 1, 2000 or (ii) until neither
COMSAT Corporation nor COMSAT Argentina holds any COMSAT Shares,
ICO Bermuda or any successor entity shall remain current with all
public filings and other public disclosures required to be made
with the SEC under the Securities Exchange Act of 1934, as
amended, and other applicable laws and regulations.
(B) If ICO Bermuda or any successor entity thereof files a
registration statement with the SEC with respect to the offer and sale
to the public in the United States of any of ICO Bermuda's (or any
successor entity's) authorized and unissued ordinary shares, par value
$0.01 per shares, (the "ICO Offered Shares") at any time during the
two year period commencing on January 1, 1999, then COMSAT Corporation
and COMSAT Argentina will have the right to require ICO Bermuda or any
successor entity thereof to include in such registration statement any
COMSAT Shares owned by COMSAT Corporation and/or COMSAT Argentina as
of the date of this Agreement which COMSAT Corporation or COMSAT
Argentina notifies ICO Bermuda in writing that it desires to sell in
the offering (the "COMSAT Offered Shares"). ICO Bermuda shall provide
COMSAT at least twenty days advance written notice of its intent to
file any such registration statement with the SEC, and COMSAT shall
thereafter have fifteen days to notify ICO Bermuda of its desire to
sell the COMSAT Offered Shares pursuant to such registration
statement. The aforementioned right to require any or all of the
COMSAT Shares to be included in a registration statement filed by ICO
Bermuda or any successor entity with the SEC shall be subject to the
following conditions:
the receipt by ICO Bermuda of a written opinion of US legal counsel
reasonably satisfactory to ICO to the effect that registration under
the Securities Act of 1933 is required (because in the judgment of
such counsel there is no applicable exemption) in connection with the
transaction contemplated by COMSAT Corporation or COMSAT Argentina
involving the COMSAT Offered Shares;
in the opinion of the lead underwriter for the offering (the lead
underwriter will be selected by ICO Bermuda) market conditions would
allow for the sale of both the ICO Offered Shares and the COMSAT
Offered Shares;
if any ICO shareholder other than COMSAT Corporation or COMSAT
Argentina to which ICO Bermuda has given demand or piggyback
registration rights as of the date of this Agreement (an "other ICO
shareholder") demands that its ICO shares be registered, ICO will not
be required to include any COMSAT Offered Shares in the registration
unless in the
<PAGE>
good faith opinion of the lead underwriter market conditions would
allow for the sale of the ICO Offered Shares, the COMSAT Offered Shares
and the shares of each such other ICO shareholder;
if as of the closing of the sale of the shares subject to any such
registration the lead underwriter deems it necessary to reduce the
number of shares proposed to be sold, any such reduction will apply
first to the COMSAT Offered Shares;
COMSAT proposes no changes to the underwriting agreement or other
documentation required to be approved by COMSAT in connection with the
offering (other than changes reasonably required to include the COMSAT
Offered Shares in such offering) if such underwriting agreement and
other such documentation are satisfactory to ICO Bermuda and, if
applicable, each such other ICO shareholder; provided such agreement
will not (i) obligate COMSAT to adhere to any lock-up period for
COMSAT Offered Shares not included in such offering or (ii) provide
for any deferral of payment to COMSAT for the shares sold by it in
such offering; and
COMSAT will bear its legal fees and its related costs (including the
proportionate share of any NASD and SEC filing fees) and the
underwriter fees and discounts attributable to the COMSAT Offered
Shares.
In any such offering ICO Bermuda will enter into customary
underwriting arrangements, supply information, make requests, and otherwise
use reasonable commercial efforts, including (except as indicated above)
the payment of necessary fees for the preparation, filing, and printing of
the registration statement and exhibits thereto (including copies of
preliminary and final prospectuses and to obtain all legal opinions,
auditors consents, and comfort letters, and participate in and cooperate
with due diligence activities and any "road shows" or similar marketing
efforts if requested by the lead underwriter to facilitate the offering.
ICO Bermuda will deliver or cause to be delivered to COMSAT such number of
copies as may be reasonably requested by COMSAT of preliminary and final
registration statements and prospectuses (including any revised or
supplemental prospectuses) and except as indicated above will pay all
expenses in connection with the registration of the COMSAT Offered Shares.
ICO Bermuda and any successor entity thereof will indemnify and hold
harmless COMSAT and its officers, directors, employees, agents,
representatives and underwriters against claims, losses, damages,
liabilities and expenses (including attorneys fees and sums payable in
satisfaction of judgments or decrees) resulting from or attributable to any
untrue statement of a material fact or allegedly untrue statement or
alleged omission to state therein any material fact required to be stated
or necessary to make any statements not misleading except insofar as the
information shall have been furnished in writing to ICO Bermuda by COMSAT
Corporation or COMSAT Argentina, or other violations or non-compliance by
ICO Bermuda with applicable laws or regulations or contractual obligations,
relating to such offering, and if such indemnification is deemed void as
against public policy shall contribute to COMSAT such sums as would be
equal to any payments otherwise payable to COMSAT and its officers,
directors, employees, agents, representatives and underwriters to indemnify
and hold harmless each of them pursuant to this Section 6(B).
<PAGE>
Section 6. Representations.
(A) COMSAT Corporation hereby covenants and agrees that the copies of the
Site Lease, USEI Agreement, and Main Agreement Subcontracts heretofore
delivered to ICO are the originals or true copies of the originals of such
documents and that such documents at the Closing will be in full force and
effect and that COMSAT will not be in breach of its obligations thereunder.
COMSAT Corporation hereby represents and warrants that (i) COMSAT
Corporation is the owner free and clear of all liens, claims, and
encumbrances of the rights attributed to COMSAT Corporation under (and
subject to the terms of) the Interconnect Agreement, Main Agreement, Site
Lease, USEI Agreement, and Main Agreement Subcontracts, and (ii) neither
COMSAT Corporation nor COMSAT Argentina has assigned or otherwise
transferred or encumbered or entered into any agreements with any third
party that creates any rights, liens, claims, and encumbrances on or to the
Distribution Rights, and (iii) COMSAT Corporation and COMSAT Argentina each
has the authority and power to enter into this Agreement and to perform its
obligations hereunder.
(B) ICO hereby represents and warrants to COMSAT and agrees that (i) ICO is the
owner free and clear of all liens, claims, and encumbrances of the rights
attributed to ICO under the Interconnect Agreement and Main Agreement and
(ii) ICO has the authority and power to enter into this Agreement and to
perform its obligations hereunder, (iii) the information set forth on Annex
4 hereto with respect to registration rights granted to other shareholders
of ICO Bermuda is true and correct, and (iv) ICO Bermuda has succeeded to
and is fully liable for the obligations of its predecessor, ICO Cayman
Islands, under the Parent Company Guaranty.
(C) At the Closing, COMSAT and ICO will each execute and deliver to the other a
Representation and Warranty Agreement in the form attached hereto as Annex
5, pursuant to which each such party makes, as of the Closing Date, the
same covenants, representations, and warranties as are set forth in this
Section 6.
Section 7. Mutual Releases.
At the Closing, COMSAT and ICO will execute and deliver a Mutual Release in
the form attached hereto as Annex 3, pursuant to which COMSAT will release,
or will cause to be released, each ICO Entity from, and ICO will release,
or will cause to be released, each COMSAT Entity from, all claims and
causes of action whatsoever related to the Distribution Rights or any
rights or warranties related to the Main Agreement, the Interconnect
Agreement, and the Main Agreement Subcontracts (except as provided for in
Section 3 hereto) which any COMSAT Entity or ICO Entity, as the case may
be, may have against any ICO Entity or COMSAT Entity, as the case may be,
and COMSAT will agree not to assert (and will cause each COMSAT Entity not
to assert) against any ICO Entity
<PAGE>
or any other person or entity not a party to this Agreement any claims
arising out of or connected with the Distribution Rights and/or any matters
contained in the letter from Crowell & Moring to ICO Bermuda dated 15 April
1998 and the draft Writ sent to ICO Bermuda on 9 June 1998.
Section 8. USEI Transactions.
Forthwith after the Effective Date, COMSAT will (i) notify USEI that COMSAT
and ICO have entered into this Agreement and that COMSAT has no objection
to USEI conducting negotiations with ICO Services in an attempt to reach
agreement on an ICO Services/USEI Memorandum of Understanding (ii)
cooperate with ICO to the extent reasonably requested in ICO's efforts to
enter into the ICO Services/USEI Memorandum of Understanding and (iii) seek
the written consent of USEI to assign the USEI Agreement to ICO Services or
any entity designated by ICO Services.
(B) Forthwith after the Effective Date, ICO Services or other entity
designated by ICO will use good faith efforts to enter into the ICO
Services/USEI Memorandum of Understanding not later than 60 days after the
Effective Date.
Section 9. Closing.
(A) Unless otherwise hereafter mutually agreed in writing by the parties
hereto, the Closing Date will be a date acceptable to COMSAT and ICO not
later than 30 days after the Effective Date; PROVIDED THAT the Closing
shall not occur on such date unless on or prior thereto either of the
following conditions has occurred (i) USEI and ICO Services or an entity
designated by ICO Services have entered into the ICO Services/USEI
Memorandum of Understanding or (ii) USEI has given (and not withdrawn) its
consent for COMSAT to assign the USEI Agreement to ICO Services or any
entity designated by ICO Services. If neither of the conditions referred to
in (i) or (ii) of this Section 9(A) has occurred within such 30 day period,
the Closing Date shall be deferred to a date acceptable to ICO and COMSAT
not later than 60 days after the Effective Date; PROVIDED THAT if neither
of the conditions referred to in (i) or (ii) of this Section 9(A) has
occurred on or before 60 days after the Effective Date, each of COMSAT and
ICO will have the right to terminate this Agreement by giving written
notice thereof to the other party. If this Agreement is so terminated, no
party hereto will have any right or obligation under this Agreement.
(B) The Closing and the performance by the parties hereto of their respective
obligations under this Agreement at the Closing are conditional upon the
occurrence or fulfillment prior to the Closing of the conditions to Closing
expressly set forth in this Agreement and the performance by COMSAT and ICO
of their respective obligations at the Closing.
(C) The Closing will occur at 10 o'clock AM on the Closing Date in the
offices of COMSAT Corporation at 6560 Rock Springs Drive, Bethesda MD
20817 U.S.A. At the Closing each party
<PAGE>
hereto will execute and deliver the documents required and take the other
action required to be taken to fulfill at the Closing all the obligations
of such part under this Agreement.
Section 10. General.
(i) All notices sent by COMSAT or ICO to the other party will be sent
by telefax or delivered to the address for such party set forth
below:
Notices to COMSAT Notices to ICO
COMSAT Corporation ICO Global Communications
6560 Rock Springs Drive 1 Queen Caroline Street
Bethesda MD 20817 Hammersmith London W6 9 BN
USA United Kingdom
Attention: General Counsel Attention: General Counsel
Fax. No. 301-214-7145 Fax No. 44-181-741-0851
(ii) No party hereto will have any right to assign or otherwise
transfer or encumber its rights or obligations under this
Agreement.
(iii) This Agreement shall be governed by and interpreted and construed
in accordance with English Law; provided, however, that all suits,
claims, actions, proceedings or disputes arising or brought under
Section 5 "Registration Rights" of this Agreement shall be
governed by and interpreted and construed in accordance with the
laws of the State of New York without regard to conflicts of laws
principles.
(iv) The parties agree that the courts of England are to have exclusive
jurisdiction to settle any dispute which may arise in connection
with the validity, effect, interpretation or performance of this
Agreement or otherwise arising out of or in connection with this
Agreement or any of its terms.
(v) At the request of any party hereto, all the parties hereto will
execute and deliver all other documents that may be required to
give effect to the agreements contemplated by this Agreement.
(vi) The Parent Company Guaranty will remain in effect after the
Closing and will cover only (i) the obligations of ICO Services
under the Transition Agreement, and (ii) the obligations of ICO
under the Main Agreement and Interconnect Agreement that remain in
effect after the Closing pursuant to Section 3 and the Assignment
and Assumption Agreement hereof.
<PAGE>
(vii) It is expressly agreed and acknowledged by each of the parties
that the execution and performance of this Agreement is not, and
is not to be construed as, any admission whatsoever of any
liability on the part of any of the parties to this Agreement.
(viii) Except to the extent required by applicable law and to parties
with whom any party has contracted or may contract or intend to
contract with respect to any of the matters that are the subject
of this Agreement, no party hereto shall make any announcement,
news release, or other public statement regarding this Agreement
or its subject matter without prior written approval of the other
parties, such approval not to be unreasonably withheld or delayed.
(ix) This Agreement sets out the entire agreement and understanding
between the parties in respect of the subject matter of this
Agreement. It is agreed that:
(a) No party hereto has entered into this Agreement in
reliance on any representation, warranty or undertaking
of any other party which is not expressly set out or
referred to in this Agreement,
(b) No party shall have any remedy in respect of any
misrepresentation or untrue statement made by any other
party which is not contained in this Agreement, and
(c) This clause shall not exclude any liability for fraudulent
misrepresentation.
(x) At and after the Closing, each of COMSAT and ICO will execute and
deliver all documents and take all actions required to give effect
to the agreements of the parties set forth in this Agreement.
(xi) Attached hereto and hereby made a part hereof are the following
Annexes:
Annex 1. Form of Transition Agreement
Annex 2. Form of Assignment and Assumption Agreement
Annex 3. Form of Mutual Release
Annex 4. Information Relating to Registration Rights granted to other
Shareholders of ICO Bermuda
Annex 5. Form of Representation and Warranty Agreement
Annex 6. Bye-laws 55, 56, and 57 of ICO Bermuda
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement on
the date first mentioned above.
COMSAT Corporation ICO GLOBAL COMMUNICATIONS
(HOLDINGS) LIMITED
By: /s/ John Mattingly By: /s/ Olof Lundberg
Name: John Mattingly Name: Olof Lundberg
Title: President, COMSAT Title: CEO
Satellite Services
COMSAT ARGENTINA S. A. ICO GLOBAL COMMUNICATIONS
HOLDINGS B.V.
By: /s/ Luis Valencia By: /s/ Olof Lundberg
Name: Luis Valencia Name: Olof Lundberg
Title: President of the Board of Directors Title: CEO
ICO GLOBAL COMMUNICATIONS
SERVICES INC.
By: /s/ Olof Lundberg
Name: Olof Lundberg
Title: CEO
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF COMSAT CORPORATION
(As of December 31, 1998)
Bethesda Real Property, Inc.
COMSAT Capital I, L.P.
COMSAT Digital Teleport, Inc.
COMSAT General Corporation
COMSAT General Telematics, Inc.
COMSAT Technology, Inc.
CTS Transnational, Inc.
Electromechanical Systems, Inc.
COMSAT Government Systems, Inc.
COMSAT International, Inc.
BelCom, Inc.
ZAO BelComRus
BelCom Rep Office
ZAO MKT
ZAO Novocom
Stavropol-Cellular
COMSAT Argentina, S.A.
COMSAT Asia (L) Incorporated
Guanzhou T.H. Communication Technology Services, Ltd.
Tian Hang Technology Services, Ltd.
COMSAT do Brasil Equipamentos Telecommunicacoes, Ltda.
COMSAT Brasil, Ltda.
COMSAT de Colombia, S.A.
Comunicaciones Satelitales de Columbia, S.A.
COMSAT Dijital Hizmetleri Ticaret Anonim Sirketi
COMSAT de Guatemala, S.A
COMSAT Iletisim Hizmetleri Ticaret Anonim Sirketi
COMSAT Max Limited
COMSAT de Mexico, S.A. de C.V.
COMSAT de Panama, S.A.
COMSAT Peru, S.A.
COMSAT Venezuela, COMSATVEN, C.A.
CIV C.I.S. Holdings, Inc.
COMSAT Laboratories Inc.
COMSAT Laboratories India, Inc.
Indicom Personal Communications Private Ltd. (99%)
COMSAT Mobile Investments, Inc.
COMSAT Overseas, Inc. (owns 1% of Indicom Personal Communications Private
Ltd.)
COMSAT Personal Communications, Inc.
CRSI Acquisition, Inc. d/b/a COMSAT RSI, JEFA Wireless Systems
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in COMSAT Corporation's
Registration Statement No. 2-87942 on Form S-8, Registration Statement
No. 33-5259 on Form S-8, Registration Statement No. 33-25124 on Form S-8,
Registration Statement No. 33-35364 on Form S-8, Registration Statement
No. 33-53610 on Form S-8, Registration Statement No. 33-51661 on Form S-3,
Registration Statement No. 33-54369 on Form S-8, Registration Statement
No. 33-54685 on Form S-8, Registration Statement No. 33-56331 on Form S-8,
Registration Statement No. 33-56333 on Form S-8, Registration Statement
No. 33-59531 on Form S-8, Registration Statement No. 33-59513 on Form S-8,
Registration Statement No. 33-59841 on Form S-3, Registration Statement
No. 33-33061 on Form S-3 of our report dated February 18, 1999, appearing in
this Annual Report on Form 10-K of COMSAT Corporation for the year ended
December 31, 1998.
Deloitte & Touche LLP
Washington, D.C.
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
the financial statements for the year ended December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000022698
<NAME> COMSAT Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 30,795
<SECURITIES> 0
<RECEIVABLES> 148,175
<ALLOWANCES> (17,123)
<INVENTORY> 0
<CURRENT-ASSETS> 198,965
<PP&E> 2,507,798
<DEPRECIATION> 1,298,336
<TOTAL-ASSETS> 1,790,798
<CURRENT-LIABILITIES> 140,802
<BONDS> 446,832
0
0
<COMMON> 430,537
<OTHER-SE> 228,503
<TOTAL-LIABILITY-AND-EQUITY> 1,790,798
<SALES> 0
<TOTAL-REVENUES> 616,469
<CGS> 0
<TOTAL-COSTS> 284,053
<OTHER-EXPENSES> 272,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,812
<INCOME-PRETAX> 32,208
<INCOME-TAX> 5,791
<INCOME-CONTINUING> 26,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,417
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.50
</TABLE>
