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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 ended December 31, 1999 Commission file 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
------------------- ---------------------
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, in any amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant was $444,723,060 based on a closing market price of $16.9375 per
share on March 1, 2000, as reported on the composite tape for New York Stock
Exchange listed issues.
53,240,312 shares of common stock, without par value, were outstanding on
March 1, 2000.
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
We report operating results and financial data in four business segments:
World Systems, Mobile Communications, International and Laboratories.
. World Systems provides satellite capacity for voice, 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. The World
Systems segment also includes COMSAT General Corporation and COMSAT Digital
Teleport, Inc., which provide various satellite and ground segment services
to commercial and government customers.
. Mobile Communications provides voice, data, fax, telex and information
services for ships, aircraft and land mobile applications primarily using the
Inmarsat satellite system.
. International operates an integrated group of telecommunications companies
that provide individualized digital network solutions to business clients and
carriers in emerging markets overseas.
. Laboratories 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 included in Note 15 to the financial statements.
At year end 1999, COMSAT had approximately 1,700 employees. Of those,
approximately 100 employees were represented by a labor union. The union
employees work at two locations, the construction site of the radio astronomy
telescope project in Green Bank, West Virginia and COMSAT's land earth station
in Santa Paula, California.
Agreement and Plan of Merger with Lockheed Martin Corporation
COMSAT and Lockheed Martin Corporation entered into an Agreement and Plan
of Merger on September 18, 1998. Under the merger agreement, Lockheed Martin
agreed to acquire all of the outstanding common stock of COMSAT in a two-step
transaction. Lockheed Martin completed the first step of the transaction, a
cash tender offer to purchase 49% of COMSAT's outstanding common stock at $45.50
per share, on September 18, 1999. The second step of the transaction is the
merger of COMSAT with a Lockheed Martin subsidiary. In the merger, each share of
COMSAT common stock will be converted into one share of Lockheed Martin common
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stock. The merger remains subject to satisfaction of several conditions, which
principally include receipt of the remaining required regulatory approvals. The
business combination with Lockheed Martin is discussed in greater detail in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Outlook" and Note 2 to the financial statements.
In connection with the merger agreement, COMSAT and Lockheed Martin entered
into three additional agreements related to the overall transaction: a
shareholders agreement, a registration rights agreement, and a carrier
acquisition agreement. Those agreements are described in Note 2 to the
financial statements. Under the shareholders agreement, COMSAT agreed to name
three individuals designated by Lockheed Martin to its Board of Directors.
Marcus C. Bennett, Caleb B. Hurtt and John V. Sponyoe currently serve as
Lockheed Martin's designated directors under the terms of the shareholders
agreement.
To facilitate completion of the tender offer, and in accordance with the
terms of the carrier acquisition agreement, COMSAT sold COMSAT Government
Systems, Inc., an authorized common carrier subsidiary, to Lockheed Martin at
approximately book value. The operating results of COMSAT Government Systems are
included as part of the World Systems segment through September 18, 1999, the
date that COMSAT Government Systems was merged with a subsidiary of Lockheed
Martin.
Communications Satellite Act of 1962
COMSAT was incorporated in 1963 under District of Columbia law, as authorized
by the Communications Satellite Act of 1962. 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.
Prior to recent amendments enacted in March 2000, the Satellite Act regulated
various aspects of COMSAT's structure, ownership and operations. For example:
. The Satellite Act placed limitations on the percentage of outstanding COMSAT
common stock that a person or class of persons may hold.
. The Satellite Act provided that three of COMSAT's 15 director positions were
to be appointed by the President of the United States with the advice and
consent of the United States Senate.
. COMSAT's issuance of capital stock and borrowing of money is subject to
oversight by the Federal Communications Commission (FCC).
. On matters that may affect the national interest and foreign policy of the
United States, COMSAT's representative to INTELSAT receives instruction from
the U.S. Government pursuant to the Satellite Act.
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In March 2000, Congress passed and the President signed the Open-Market
Reorganization for the Betterment of International Telecommunications Act
(commonly referred to as the "ORBIT Act"). The ORBIT Act amends the Satellite
Act and repeals upon enactment the special restrictions on the ownership of
COMSAT's common stock. The legislation will permit the merger with Lockheed
Martin to be completed following receipt of the remaining required regulatory
approvals. The ORBIT Act repeals the provisions of the Satellite Act that
require COMSAT to have three Presidentially-appointed directors. Two of those
three positions were vacant pending Presidential appointment. The term of
COMSAT's remaining Presidentially-appointed director expired upon enactment of
the ORBIT Act. We also anticipate that, under the ORBIT Act, FCC regulation of
our capital structure will be eliminated. However, COMSAT will remain subject
to U.S. Government instruction, in its capacity as the U.S. Signatory to
INTELSAT, until the privatization of INTELSAT is completed.
The ORBIT Act also establishes deadlines for the privatization of INTELSAT
and the completion of initial public offerings by INTELSAT, Inmarsat and New
Skies, as well as specific criteria for determining whether the privatizations
of those entities are pro-competitive. If those criteria are not met, the FCC
may limit access by U.S. users to the satellite capacity of the privatized
entities for so-called "non-core" services. During the transition to
privatization, the ORBIT Act also codifies an FCC action taken in 1999 that
permits U.S. users and telecommunications providers to acquire satellite
capacity directly from INTELSAT without going through COMSAT ("Level 3" direct
access). In addition, the ORBIT Act removes COMSAT's immunity from suit in its
capacity as an INTELSAT Signatory, subject to a limited exception for actions
taken pursuant to U.S. Government instruction.
These and other provisions of the ORBIT Act are discussed in greater detail
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Outlook -- Regulatory and Legislative Developments."
Government Regulation
COMSAT is subject to regulation by the FCC under the Satellite Act and
Communications Act of 1934 with respect to various aspects of its World Systems
and Mobile Communications businesses. FCC decisions and policies have had, and
are expected to continue to have, a significant effect on COMSAT.
Specific aspects of the regulation of World Systems and Mobile
Communications are discussed in the narratives concerning those segments. See
"Business - COMSAT World Systems -Regulation" and "Business - COMSAT Mobile
Communications - Regulation."
In addition, national and local regulatory authorities regulate COMSAT's
operations in various developing foreign countries. The regulatory environment
in many of those countries is rapidly evolving as the economies of those
countries develop. COMSAT's operations in those countries have faced, and are
likely to continue to face, regulatory, economic and business uncertainty.
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COMSAT WORLD SYSTEMS
Services
World Systems 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.
World Systems' 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.
Digital satellite capacity leasing, including international VSAT (very small
aperature terminal) service, is the fastest growing source of revenues for World
Systems. World Systems' digital services provide fast, reliable and secure
connections to communication networks around the globe. Internet service
providers, carriers, and multinational corporations use World Systems' digital
services to extend their network reach to meet market demand. Customers also use
World Systems' international business service to implement their Internet
applications.
World Systems' digital services are well-suited for either high speed point-
to-point or point-to-multipoint Internet applications. In addition, World
Systems' digital satellite services offer asymmetric data rates, quick and
scalable satellite connectivity, and simplified network architectures. Global
demand for Internet access has been growing at a high rate. Internet
applications were the main growth driver for digital leases, VSAT and
international business services in 1999.
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 deliver communications to multiple sites. Used
primarily for data transmissions, VSATs also accommodate voice and video
communications.
For private-line customers, World Systems offers an all-digital international
business service, as well as an international VSAT (very small aperture
terminal) service. International business service 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.
World Systems also provides 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 MCI WorldCom, Inc., AT&T Corp. and Sprint Corporation. World
Systems offers significant discounts to customers entering into long-term
commitments for full-time voice-grade half-circuits. In October 1999, COMSAT
amended its inter-carrier agreement with AT&T to provide price reductions in
exchange for AT&T's commitment to maintain specified levels of traffic on the
INTELSAT system via COMSAT through at least 2006.
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World Systems' voice and data services are virtually all digital.
International digital route (IDR) service, for example, makes it possible for
communications carriers to provide digital public-switched telephone network
circuits. Carriers are able to use a single digital circuit to handle multiple
telephone calls simultaneously with existing technology.
World Systems provides digital and analog video transmission services to the
international broadcasting community. World Systems offers high-power, flexible
satellite capacity to broadcasters and news services under long-term and short-
term leases. World Systems also offers occasional use service on an as-needed
basis.
To maintain the quality of the INTELSAT network, World Systems provides
tracking, telemetry, control and monitoring (TTC&M) 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,
Internet protocol (IP), frame relay, integrated services digital network (ISDN),
and asynchronous transfer mode (ATM).
The World Systems segment also includes the operations of COMSAT General
Corporation and COMSAT Digital Teleport, Inc., both of which are wholly-owned
subsidiaries of COMSAT.
COMSAT General provides satellite-based communications services for various
business and government applications. Customers use COMSAT General's services
for voice, data, Internet and video broadcast applications. COMSAT General's
services include 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 provides satellite services to
customers using both international and domestic satellite systems, including
INTELSAT and Inmarsat. COMSAT General also accesses the INTELSAT system from
foreign countries. COMSAT General operates a satellite control facility and high
speed fiber interconnects to telecommunications carriers and Internet service
providers. In addition, COMSAT General provides transponder capacity on the
MARISAT and COMSTAR satellites. These satellites, however, have reached the end
of their estimated design lives and are currently in inclined orbit.
COMSAT Digital Teleport operates satellite earth station facilities in
Clarksburg, Maryland, Santa Paula, California, and Southbury, Connecticut.
COMSAT Digital Teleport provides satellite operation service for the MARISAT and
COMSTAR satellites, including tracking, telemetry, command and orbital
maintenance for those spacecraft.
COMSAT Digital Teleport provides turnkey communication services for Internet
service providers, international carriers, multinational corporations and
government agencies. These services include satellite segment, terrestrial
interconnnect, network management, and installation and maintenance of required
hardware. COMSAT Digital Teleport services support various applications via
satellite, including frame relay and asynchronous transfer mode.
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In September 1999, COMSAT Government Systems, Inc., a wholly-owned subsidiary
of COMSAT, was sold to Lockheed Martin as part of the transactions contemplated
by the merger agreement and the carrier acquisition agreement. COMSAT
Government Systems was established primarily to support the Commercial Satellite
Communications Initiative program of the Defense Information Systems Agency to
provide bulk commercial satellite transponder leases. Prior to the sale, COMSAT
Government Systems was included as part of the World Systems segment.
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
instruction 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 Signatory-owner or investor has rights and obligations in INTELSAT
analogous to those of a partner in a partnership. 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. Signatories also pay INTELSAT for their use of the
satellite system. The investment shares are readjusted in March of each year to
approximate the Signatories' respective portions of the total use of the
INTELSAT space segment for the previous six months. COMSAT's investment share,
the largest in INTELSAT, was 20.4% as of December 31, 1999, compared to 18.4% at
December 31, 1998. During 1999, we increased our total ownership share of
INTELSAT to 20.4%. Effective as of March 1, 2000, we increased our total
ownership share of INTELSAT to 22.5%.
At December 31, 1999, total INTELSAT owners' equity was approximately $1.55
billion. The rate of return on owners' capital varies based on business
conditions. INTELSAT does not guarantee a return to Signatories. The return on
World Systems investment in INTELSAT is included as part of World Systems'
operating results. A small portion of COMSAT's ownership in INTELSAT is held
through International. The return on International's investment in INTELSAT is
included as part of International's operating results.
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 typically is paid periodically as performance incentives over
the designated design life of the satellite contingent upon continued successful
operation of the satellite over a designated period.
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Under the launch service contracts, launch services costs typically are 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 2001 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
COMSAT in proportion to its interest in INTELSAT. Launch and post-separation
insurance for the INTELSAT satellites does not protect COMSAT against business
interruption, loss or delay of revenues and similar losses and may not fully
reimburse COMSAT or INTELSAT for their total expenditures. Beyond the one year
post-separation period, COMSAT and INTELSAT 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 COMSAT procures insurance for the
in-orbit failure of satellites beyond the one-year, post-separation period.
INTELSAT generally offers long-term commitments for transponder capacity of
one, two, three, five, ten or fifteen years for a range of services at INTELSAT
tariff rates which are progressively lower for the longer-term commitment
periods. We have entered into contracts for capacity with INTELSAT to deliver
service to our customers. The contract terms for the capacity range from one to
fifteen years. World Systems manages its capacity contracts with INTELSAT based
on customer demand for service.
INTELSAT Privatization
INTELSAT is continuing its efforts to transform itself from a treaty-based,
intergovernmental organization to a fully-private, commercial company. In
October 1999, INTELSAT's Assembly of Parties (a meeting of the member
governments of INTELSAT) unanimously approved a plan targeting the privatization
of INTELSAT as early as April 1, 2001. Following privatization, INTELSAT would
operate as a private corporation without intergovernmental privileges and
immunities. While the new, privatized company would not be publicly-traded
initially, it is contemplated that an initial public offering would take place
in 2002, subject to market conditions and the actual date operations are
transferred to the restructured INTELSAT. Additional information concerning
INTELSAT privatization is included as part of "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook -
Restructuring of INTELSAT."
INTELSAT has expressed concerns that the ORBIT Act potentially may violate
the INTELSAT Agreement by, among other matters, attempting to control the timing
of INTELSAT privatization, establishing privatization criteria, and restricting
INTELSAT to certain so-called "core" services if the privatization criteria are
not satisfied. INTELSAT's reaction to the ORBIT Act is discussed in greater
detail under "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Outlook - Legislative and Regulatory Developments."
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Regulation of World Systems
The FCC regulates World Systems' provision of communications services under
the Communications Act and the Satellite Act. World Systems 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.
Prior to passage of the ORBIT Act, the FCC adopted a new policy of direct
access to INTELSAT in the United States. The ORBIT Act codifies the FCC
rulemaking that permits U.S. users and telecommunications providers to acquire
satellite capacity directly from INTELSAT without going through COMSAT ("Level
3" direct access). In the direct access proceeding, the FCC rejected requests
to allow entities other than COMSAT to invest in INTELSAT proportionate to their
usage, finding that the FCC lacked the authority under the Satellite Act to
permit "Level 4" direct access. The ORBIT Act does not prescribe Level 4 direct
access.
The FCC also authorized COMSAT to file a tariff to charge all direct access
users a surcharge to recover the costs incurred by COMSAT as Signatory to
INTELSAT. COMSAT subsequently filed a direct access tariff that became
effective on December 6, 1999. Under the tariff, direct access users must pay
COMSAT 5.58% of the rate the direct access users pay for capacity ordered
directly from INTELSAT. The level of this surcharge will be reviewed in 2001,
and the surcharge will be eliminated upon privatization of INTELSAT. Direct
access is discussed in greater detail under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Outlook --
Regulatory and Legislative Developments" and in Note 11 to the financial
statements.
Direct access may fundamentally change the way COMSAT does business and
could adversely affect future World Systems' revenues. We discuss the potential
financial impact of direct access on COMSAT under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook - Potential
Trends That May Affect Operating Performance."
COMSAT pays required fees to the FCC for applications and other filings and
for annual regulatory fees applicable to it as a U.S. common carrier. To date,
however, the FCC has not imposed "space station" regulatory fees on COMSAT with
respect to the satellites of INTELSAT and Inmarsat. In December 1999, the U.S.
Court of Appeals for the D.C. Circuit reviewed the FCC order setting the
regulatory fees for 1998. The Court remanded the case to the FCC to reconsider
whether COMSAT should be subject to space station regulatory fees. The ORBIT
Act clarifies that the FCC has authority to impose regulatory fees on COMSAT
similar to the regulatory fees that it imposes on other entities providing
similar services. It is unclear whether space station regulatory fees can be
imposed on COMSAT, since COMSAT is a satellite services provider and not a
satellite system operator. Moreover, if such fees were imposed, it is unclear
how such fees would be calculated and which satellites would be affected. We
discuss the potential financial impact of "space station" regulatory fees on
COMSAT under "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Outlook - Legislative and Regulatory Developments."
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In November 1998, INTELSAT transferred five in-orbit satellites to New
Skies Satellites N.V. New Skies is an entirely separate, independent company
spun off from INTELSAT. In June 1998, the FCC issued a public notice requiring
U.S. earth stations using INTELSAT satellites that were scheduled to be
transferred to New Skies to file license modification applications in order to
access the New Skies system. Several companies, including COMSAT and COMSAT
General, filed applications in response to this notice. On August 6, 1999, the
FCC granted these applications for a three-year license term. U.S. earth
stations may now access New Skies satellites for both domestic and international
services. The FCC stated that it would consider extending these licenses for a
full ten-year term upon an appropriate showing by New Skies. In the meantime,
it directed New Skies to file quarterly status reports on its plans for an
initial public offering and its progress in achieving more complete independence
from INTELSAT.
The ORBIT Act establishes criteria for the pro-competitive privatization of
INTELSAT, Inmarsat and New Skies, including target dates for completion of their
initial public offerings. The ORBIT Act provides that, if these and other
criteria are not met, the FCC may not license U.S. users (or may limit such
licenses) to access the satellite capacity of the privatized entities for so-
called "non-core" services. We discuss the potential service offering
restrictions that the ORBIT Act may impose on INTELSAT, Inmarsat and New Skies
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Outlook - Legislative and Regulatory Developments."
In April 1998, the FCC granted COMSAT's petition to deregulate and
reclassify World Systems as a non-dominant common carrier in its major markets.
The FCC's decision eliminated 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 allowed World Systems to integrate earth
station and space segment services, requiring only that COMSAT list those
offerings separately in tariff filings at the FCC. In February 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.
In 1997, in its "DISCO-II" rulemaking proceeding, the FCC addressed whether
COMSAT could provide domestic satellite services within the United States via
INTELSAT. The FCC ruled that COMSAT must waive its limited immunity from suit
for actions related to its role as the U.S. Signatory to INTELSAT as a
precondition to providing such services. COMSAT appealed that ruling on the
grounds that the FCC lacked the authority to require COMSAT to abrogate its
limited immunity (since the immunity arose from international agreements entered
into by the U.S.). The ORBIT Act removes COMSAT's immunity from suit in its
capacity as an INTELSAT Signatory. A limited exception is provided for actions
taken to carry out instructions of the U.S. Government. Accordingly, we
anticipate that the FCC will now allow COMSAT to provide domestic satellite
services via INTELSAT.
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, Santa Paula,
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California and Paumalu, Hawaii that are licensed to COMSAT for use by World
Systems to provide tracking, telemetry, command and orbital maintenance to
INTELSAT under an engineering support contract.
Competition
World Systems is subject to substantial and increasing competition from U.S.
and foreign satellite service providers, as well as undersea 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, Eutelsat, Teleglobe 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 also faces direct competition from INTELSAT as a result of the FCC's
direct access order, which became effective in December 1999. INTELSAT now has
the authority to contract directly with U.S. carriers and users for satellite
capacity to and from the U.S. In addition, New Skies provides satellite
capacity to and from the U.S. directly and through others in competition with
the services offered by COMSAT.
In the direct access proceeding, several of COMSAT's largest customers asked
the FCC to nullify their contracts with COMSAT pursuant to the so-called "fresh
look" doctrine. The FCC rejected these requests, thus preserving COMSAT's
backlog of contractual capacity commitments. The FCC also declined to pursue
claims for "portability" of COMSAT's capacity to users. The ORBIT Act, however,
requires the FCC to complete a proceeding within six months of enactment to
determine if users or providers of telecommunications services have sufficient
opportunity to access INTELSAT space segment capacity directly from INTELSAT.
If the FCC determines that such opportunity does not exist, the FCC must take
appropriate action to facilitate direct access. However, the FCC is prohibited
by the ORBIT Act from modifying or abrogating COMSAT's contracts with its
customers and INTELSAT.
In addition, 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.
COMSAT also faces significant competition from service providers utilizing
undersea fiber optic cable systems to provide voice, data, and video services.
Undersea fiber optic cable is the predominant mode of transmission for voice and
data traffic, and is increasingly being used to
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carry transoceanic video programming. World Systems' major carrier customers are
co-owners of fiber optic cable systems.
Revenues
Approximately 55% of COMSAT's consolidated revenues in 1999 were derived from
World Systems' services (compared to 49% in 1998 and 51% in 1997).
Approximately 10% of COMSAT's consolidated revenues in 1999 were derived from
World Systems' services to its largest customer. Also in 1999, World Systems'
three largest customers were the source of approximately 19%, 17% and 15%,
respectively, of World Systems' revenues. See Note 15 to the financial
statements.
COMSAT MOBILE COMMUNICATIONS
COMSAT Mobile provides satellite telecommunications services for maritime,
aeronautical and land mobile applications, primarily using the Inmarsat
satellite system. Mobile operates land earth stations in Southbury, Connecticut
and Santa Paula, California, which serve the Inmarsat Atlantic and Pacific Ocean
Regions. Mobile also has contractual cooperative arrangements for shared access
to land earth stations located in Malaysia, Italy and Australia. These stations
enable Mobile to offer global coverage for its services. There are currently
approximately 185,000 mobile terminals operating in the Inmarsat system. Mobile
provides a full range of voice, facsimile, data and telex services, as well as
certain value-added services.
Maritime Services
Mobile provides satellite services for a full range of telephony and data
communications to and from ships and other vessels. Customers for these
services include maritime vessels, as well as U.S. carriers and foreign
telecommunications administrations. In addition to the traditional analog
Inmarsat A service, Mobile offers four digital services: Inmarsat-B, Inmarsat-C,
Inmarsat-M and Mini-M on a global basis. These digital 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.
Mobile also provides C-Band communications to cruise ships. For example, in
1999, Mobile signed a three-year agreement with Cunard Line Limited to provide
a combination of Inmarsat and C-Band communications to Cunard's fleet of eight
cruise ships on a global basis.
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Aeronautical Services
Mobile provides satellite telecommunications services for aeronautical
applications, including airline operational and administrative communications,
passenger telephone service and air traffic control. Customers of Mobile for
international aeronautical services include airline service providers,
commercial airlines, government aircraft and corporate aircraft.
Mobile provides aeronautical voice services in the Atlantic and Pacific Ocean
Regions through its earth stations at Southbury, Connecticut and Santa Paula,
California. Mobile provides aeronautical services in the Indian Ocean region
under arrangements with operators in Italy, Norway and Japan. There are
currently more than 2,400 aircraft equipped to use the Inmarsat aeronautical
system for voice and data services. Mobile provides aeronautical customers with
a data service for cockpit communications on commercial flights under an
agreement with Aeronautical Radio, Inc., an airline-owned service organization.
Mobile also provides aeronautical satellite communications services for
passengers (including telephone, fax and data transmission) to a number of
airlines including United, Delta and Air Canada. In 1999, CMC signed a three-
year agreement with Aerolineas Argentinas for similar services.
In 1996, the Federal Aviation Administration (FAA) awarded Mobile a 5-year,
$57 million contract to provide satellite services for its Wide Area
Augmentation System (WAAS). In early 2000, the FAA exercised an option and
extended the contract to September 2006 with an additional value of $24 million.
Land Mobile Services
Mobile 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.
Mobile's land mobile services are available on a global basis 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 low-cost, notebook-size Mini-M terminal. To promote the Mini-M
service, Mobile procured 5,000 of its own branded Planet 1TM terminals for
resale to customers. By year-end 1999, all of these terminals had been sold.
Many were sold to customers in response to anticipated possible year 2000
communications problems.
In 1999, Mobile signed a contract with the state-owned railroad of Argentina
to provide mobile satellite communications via Inmarsat-C, a data-only service,
for operational safety and monitoring.
Mobile plans to introduce a new land-based communications service in 2000
called COMSAT Mobile ISDN. This new service will provide voice and data up to
64 kpbs using a low cost and
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smaller-sized terminal. COMSAT Mobile ISDN will also allow for low-cost Internet
access via a packet-data service.
Leased Services
In 1999, Inmarsat designated a separate global constellation of satellites to
provide full-period lease services. This constellation uses two Inmarsat-2
satellites and a spare Inmarsat 3. Mobile has entered into contractual
arrangements that enable it to access this new constellation with operators in
Italy and Australia, and has made upgrades to its Southbury, Connecticut earth
station. As a result of these efforts, Mobile now provides global leased
services.
Inmarsat
The privatization of Inmarsat was completed on April 15, 1999. We now own
22.2% of Inmarsat Holdings, Ltd., a new, independent commercial company based in
London, England. The new company is not currently publicly traded but is
expected to conduct an initial public offering within approximately two years of
the privatization, subject to market conditions. As a result of the
privatization, we are using the equity method to account for our investment in
Inmarsat. We previously used the pro rata consolidation method. See Note 1 to
the financial statements.
Prior to privatization, Inmarsat was an 87-nation, intergovernmental
organization headquartered in London, England. It operated under three
agreements: an intergovernmental convention; a headquarters agreement with the
United Kingdom Government; and an operating agreement signed by each member
nation's government or designated telecommunications entity (a Signatory).
COMSAT was the U.S. Signatory. It represented the U.S. in Inmarsat, subject
to instruction from the Department of State (in concert with the Department of
Commerce and the FCC) on matters affecting U.S. national interest and foreign
policy.
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. 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 fifth
Inmarsat-3 satellite is planned to be used primarily for bulk services and
backup capacity.
Two of the four Inmarsat-2 satellites have been re-deployed to provide a
global lease constellation, along with one Inmarsat-3. The other two Inmarsat-2
satellites are used as in-orbit spares providing backup for global beam services
on the Inmarsat-3 satellites.
In December 1999, Inmarsat announced that it plans to procure a fourth
generation system at a cost of $1.4 billion. This will consist of two in-orbit
satellites plus one on-ground spare. Beginning in 2004, the Inmarsat-4
satellites are expected to offer an expanded range of personal,
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multimedia communications services at 144-432 kbps using portable, lightweight,
Internet-ready mobile satellite terminals.
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
COMSAT procures insurance for the in-orbit failure of satellites beyond the one-
year, post-separation period. COMSAT 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. COMSAT and Inmarsat rely
on spare and preemptible capacity 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.
Regulation of Mobile
As a common carrier, Mobile is subject to regulation by the FCC concerning its
provision of communications services and the rates it charges for those
services. Mobile is currently regulated as a dominant carrier. Several
existing FCC orders generally limit Mobile's services to international services.
Mobile is licensed by the FCC to provide international maritime, aeronautical,
and land mobile services on a worldwide basis, except for services that are
entirely within the United States.
With respect to land mobile services, Mobile is permitted to provide purely
domestic services only under a very limited number of circumstances. Most
recently, for example, COMSAT was authorized to provide "Y2K" contingency
services in the United States to a large number of commercial customers.
With respect to aeronautical services, in 1999, the FCC issued an order
granting Mobile permanent authority to provide service within the United States
on the domestic portions of international flights. Mobile is also authorized,
by long-standing grant of special temporary authority, to serve existing
customers operating aircraft entirely within the United States.
Following the privatization of Inmarsat, most of the provisions of the
Inmarsat Act governing COMSAT's rights and obligations are no longer in force.
Significantly, COMSAT is no longer the sole authorized provider of Inmarsat
space segment for U.S.-originating traffic, so there is no longer a legal bar to
other land earth station operators accessing Inmarsat space segment directly to
serve U.S.-based customers. Inmarsat's privatization also means that neither
Inmarsat nor COMSAT benefits any longer from so-called "privileges and
immunities." Accordingly, since the FCC's refusal to allow COMSAT to provide
domestic services via Inmarsat was predominantly based on perceived privileges
and immunities, COMSAT now plans to seek authority to provide domestic service.
Competition
Mobile competes on a global basis in the provision of its voice, fax and data
communications services. Mobile's maritime, land and aeronautical customers
have access to a broad array of alternative service providers and communications
technologies, including:
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. 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 Globalstar); and
. Terrestrial-based aeronautical.
Mobile competes for maritime, land mobile and aeronautical communications
business with other Inmarsat distributors operating land earth stations. Among
these is 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 and is now an investor in Inmarsat. IDB provides maritime,
land mobile and aeronautical services through its own U.S. land earth stations
using Inmarsat satellite capacity.
COMSAT currently competes with IDB/Stratos for U.S. originating shore-to-ship
Inmarsat traffic, and with other Inmarsat operators outside the United States.
MarineSat Communications Network and Marine Telecommunications Network also have
FCC licenses to resell Inmarsat services in competition with COMSAT as
resellers.
COMSAT competes directly with a number of other Inmarsat service providers
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 Telekom, KDD
(Japan) and Telenor (Norway). A total of 16 Inmarsat distributors offer global
service, and a number of others offer service in one or more ocean regions.
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 primarily 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 the Inmarsat end-user community. Except
for leased services, each time a call from an Inmarsat mobile terminal is made,
the customer placing the call can select any land earth station that 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.
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A significant competitor to Inmarsat service providers in the provision of
maritime communications is Very High Frequency (VHF) radio for short distance or
coastal communications, along with Medium Frequency (MF) and High Frequency (HF)
radio for communications over long distances. In addition to serving the
communications needs of small vessels which operate in coastal waters, maritime
radio can provide a low-cost alternative to Inmarsat services for ships which
must comply with Global Maritime Distress and Safety System (GMDSS) carriage
requirements. 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.
Mobile 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 Mobile 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 Mobile's land mobile services.
Mobile 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 (serving the United
States and Canada), MobilSat (Australia/New Zealand) and N-Star (Japan). Though
COMSAT has been foreclosed by FCC regulations from competing with AMSC and TMI
for land mobile traffic in the United States, all three companies compete for
customers operating in U.S. coastal waters. AMSC's services are sold through
its 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 such as TMI and its resellers can now offer services in the
United States.
Mobile expects to compete with Globalstar, a low-earth-orbit (LEO) satellite
provider. Globalstar completed the launch of its 48 satellite constellation in
November 1999, and commenced commercial service in 2000. Globalstar is a
limited partnership in which Loral Space Communications has a significant
ownership interest. It plans to provide global service through a network of 38
gateway stations. Approximately nine of those stations were believed to be in
operation at the end of 1999.
ICO Global Communications, which plans to provide mid-earth-orbit satellite
services, filed for reorganization under Chapter 11 of the Bankruptcy Code in
1999, but continues to seek external capital to complete the construction and
launch of its satellite system. During the third quarter of 1999, COMSAT wrote
off its 1.6% direct ownership interest in ICO. In addition, in the fourth
quarter of 1999, COMSAT wrote off its indirect investment in ICO via Inmarsat,
which
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also is an ICO shareholder. For additional discussion concerning the write-off
of COMSAT's investment in ICO, see note 5 to the financial statements.
Mobile also 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.
Revenues
Approximately 20% of COMSAT's consolidated revenues in 1999 were derived from
Mobile (compared to 27% in 1998 and 30% in 1997). No single customer of Mobile
provided more than 10% of COMSAT's consolidated revenues in 1999. See Note 15
to the financial statements for additional business segment information.
COMSAT INTERNATIONAL
Services
During 1999, COMSAT International began to shift its focus from offering
individualized digital network solutions to business clients and carriers to
providing virtual private networks operating on shared platforms utilizing the
Internet protocol. While offering its traditional dedicated network services
along with the virtual network functionality in selected emerging markets,
International continues to explore international telecommunications
opportunities particularly in those markets where its growing list of
multinational corporate customers plan to expand their operations.
International's customers are typically local, indigenous large and medium-sized
corporations, national branches of multinational corporations and major
telecommunications carriers and consortia.
International operated in 11 countries located in Latin America, Asia and
Europe in 1999. International's companies generally are wholly- or majority-
owned, with one exception - COMSAT Max Limited, International's operating
company in India. The following table shows the name of each of International's
operating companies, the country in which each company operates, and
International's percentage ownership of that company as of December 31, 1999.
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International Ownership
Company Country Percentage
- ------- ------- ----------
BelCom, Inc. Russian Federation & CIS 100%
COMSAT Argentina, S.A. Argentina 100
COMSAT Asia Incorporated China 61
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 49
COMSAT Mexico S.A. de C.V. Mexico 100
COMSAT Peru, S.A. Peru 100
COMSAT Digital Services Turkey 100
COMSAT Telecommunications Services Turkey 64
COMSAT Venezuela Venezuela 100
International launched a change in its product offerings in 1999
emphasizing virtual private networks operating via the Internet protocol. To
pursue this product shift in India, International chose to sell a 1% stake in
its COMSAT Max Limited venture to its Indian partner, Max, in order to comply
with the Indian regulatory requirement that Internet providers be majority-
Indian owned.
In 1999, International acquired the 15% stake owned by Sumitomo in COMSAT
Digital Services, which gives it 100% ownership, as it establishes itself as an
international Internet services provider.
During 1999, International introduced GlobalWay, a fully interconnected
regional network for Latin America. The network, using COMSAT Linkway 2000
equipment developed by COMSAT Laboratories, offers full-mesh connectivity among
the major Latin American business centers, such as Buenos Aires, Bogota,
Caracas, Lima, Sao Paulo and others, and with the United States via COMSAT's
Clarksburg, Maryland teleport. Because of the mesh architecture, delays
associated with traditional "hub-and-spoke" designs are eliminated.
GlobalWay also offers bandwidth on demand, a capability essential in the
corporate world of ever expanding high speed data networks, and a full range of
protocol offerings such as Frame Relay, ISDN, SS7 and the Internet Protocol.
International offers its customers a "one-stop shopping" bundle of
services. International employs various technologies in providing services to
customers, including satellite, microwave, fiber optic and local wireless
solutions. Besides the Internet protocol, which is increasingly becoming the
standard offering for International, ATM, frame relay and other communications
protocols also are available.
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In servicing its customers' applications, International provides a wide
range of service options from basic provision and maintenance of the customer's
network to full management of all network elements including router and facility
management. On some occasions, customers have "outsourced" their entire network
design, implementation and management to International. Customer service is
available in each of International's country operations which provides network
monitoring, testing and help desk service 24 hours per day, 7 days per week.
Apart from the recently introduced GlobalWay service, International has
the following family of product offerings which are available in each
International company, subject to local regulations:
. 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 transmission speeds is 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.
. 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 a customer's 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 - delivers an assured gateway to the Internet in two ways: by
providing local content via local networks and international content through
our international access nodes, which are directly connected to the World
Wide Web. COMSATWeb also provides a platform for corporate users to allow CI
to host their company's content and to enable other Internet applications,
such as E-commerce and public VPNs.
International 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.
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International'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 International
International'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, International's companies face increasing
business uncertainties which could have an adverse effect on their operations in
those countries.
Competition
International'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 International
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, International'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 International.
In countries that have liberalized their telecommunications laws, International
typically faces greater competition than in less liberalized markets.
International 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. In 1999, economic difficulties in Asia,
Russia and Brazil adversely affected International's operations in those
countries. There can be no assurance that the recent 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 International's existing or prospective customers, thereby
affecting International's ability to generate revenues or otherwise having a
material adverse affect on International's financial results and condition.
Revenues
Approximately 18% of COMSAT's consolidated revenues in 1999 were derived from
International (compared to 18% in 1998 and 16% in 1997). No single customer of
CI provided more than 10% of COMSAT's consolidated revenues in 1999. See Note 15
to the financial statements for additional business segment information.
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COMSAT LABORATORIES
Technology Consulting and Products
COMSAT Laboratories provides technical consulting support and advanced
communications products to customers worldwide. Technical consulting activities
encompass all aspects of satellite systems and technology, including the
analysis, design, and specification of satellite ground and space systems, and
the development of communications and network systems, in-orbit test facilities,
and specialized onboard satellite components. COMSAT Laboratories also
designs, develops, licenses and sells communications products and software for
satellite access, networking applications and satellite system planning and
management. 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.
Major customers include telecom equipment companies (e.g., Ericsson, Nokia,
Matra Marconi, Lucent, Alcatel, and Vertex), service providers (e.g., AT&T,
Telespazio, Bell South, Teleglobe, IMPSAT and the Indian Department of
Telecommunications), U.S. and foreign government agencies (e.g., U.S. Army
CECOM, NASA, Joint Battle Command, U.S. Defense Information Systems Agency and
the U.K. Ministry of Defense), satellite system operators (e.g., INTELSAT,
Eutelsat, Inmarsat, ICO, New Skies and Telesat Canada) and development stage
Ka-Band satellite systems (e.g., Astrolink, and ISKY.NET).
COMSAT Laboratories won external contracts with a total value of $55
million in 1999. Major new contracts awarded or begun in 1999 include: a
contract with Logicon for the U.S. Army CECOM Common Network Planning System; a
contract with the U.S. Army for the Satellite Simulator; and a contract with
Matra Marconi for a satcom modem. At December 31, 1999, COMSAT Laboratories'
backlog of orders totaled $58.8 million, as compared to $50.5 million at
December 31, 1998.
On-going contracts being performed in 1999 include: a contract with
Ericsson to design and develop the Astrolink Network Control Center; a contract
with INTELSAT to deliver the New Time Division Multiple Access (TDMA)
Infrastructure; a contract with Ericsson to design and develop the HPN ICONET
ground facilities subsystems; 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 sells the Linkway 2000(TM) product, a bandwidth-on-
demand, multiservice mesh networking terminal. The Linkway 2000 product
supports five advanced networking protocols: IP, ISDN, SS7, ATM and Frame Relay.
Telecommunications carriers can use the Linkway 2000 product to extend
international voice and data networks into remote locations that do not
currently have service. Internet service providers can use this product to
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more easily connect countries throughout the world to the U.S. Internet
backbone. The product can also be used by multinational corporations to network
their offices worldwide.
COMSAT Laboratories incurred research and development expenditures of $4.8
million in 1999, an increase of $1.6 million from 1998. These expenditures were
largely attributed to the development of its Linkway broadband satellite
networking product.
Revenues
Approximately 9% of COMSAT's consolidated revenues in 1999 were derived
from the Laboratories (compared to 7% in 1998 and 6% in 1997). See Note 15 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. and substantially all of
COMSAT RSI, Inc. (CRSI) as discontinued operations. COMSAT 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. 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. COMSAT has agreed to indemnify the purchasers of CRSI and JEFA
against certain losses (see note 7 to the financial statements).
COMSAT also has retained the long-term contract for the completion of the 100
meter radio astronomy telescope at Green Bank, West Virginia, including a $29
million claim for work performed in connection with the Green Bank contract,
which is currently in arbitration (see "Item 3 - Legal Proceedings" and Note 7
to the financial statements).
COMSAT also has 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 Notes 7 and 11 to the financial statements.
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INVESTMENTS
Inmarsat
Inmarsat completed its privatization on April 15, 1999. In 1999, we began
using the equity method of accounting to report our 22.2% ownership interest in
the new company. See Notes 1 and 5 to the financial statements.
New Skies
On November 30, 1998, INTELSAT transferred five in-orbit satellites and a
construction contract for a sixth satellite to New Skies. New Skies, which is
headquartered in the Netherlands, is a separate company that is independent of
INTELSAT. As of December 31, 1999, COMSAT directly owned 16.6% of New Skies.
See Note 5 to the financial statements. In February 2000, INTELSAT distributed
its 10% direct ownership in New Skies to its Signatories. As a result, COMSAT
now owns 18.6% of New Skies.
ICO Global Communications
ICO Global Communications (Holdings) Limited filed for Chapter 11
bankruptcy on August 27, 1999. Prior to the bankruptcy filing, COMSAT directly
owned approximately 1.6% of ICO. Inmarsat also was an investor in ICO. As a
result of the bankruptcy filing, COMSAT wrote off its 1.6% direct ownership
interest in ICO during the third quarter of 1999. Subsequently, Inmarsat wrote
off its investment in ICO in the fourth quarter of 1999. See Note 5 to the
financial statements. Under ICO's proposed recapitalization plan, all existing
ICO shareholders, including COMSAT and Inmarsat, would be substantially diluted
and would continue to hold only approximately 1% of ICO's equity in the
aggregate.
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Item 2: Properties
COMSAT PROPERTIES
Bethesda, Maryland Headquarters
At year end 1999, COMSAT's headquarters (as well as the headquarters for
World Systems, Mobile and International) were located in Bethesda, Maryland. We
lease the headquarters building from a limited partnership in which we hold 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, we entered into a 15-year lease with the partnership for the building.
See Note 10 to the financial statements.
Clarksburg, Maryland Facility
In 1997, we sold the office buildings and land at Clarksburg, Maryland that
serve as the headquarters for the Labs. We leased back the office buildings and
the adjoining land for a ten-year lease term. See Note 4 to the financial
statements. We operate earth stations on the leased land that are used by World
Systems to provide tracking, telemetry and control services to INTELSAT and by
COMSAT Digital Teleport to provide satellite services to customers and to house
satellite control and teleport facilities.
Other Properties
We also own or lease 10 properties in the United States.
We own earth stations at Santa Paula, California and Southbury, Connecticut,
and lease an earth station in Malaysia. Mobile uses these properties to provide
mobile communications services. We also own an earth station at Paumalu, Hawaii
that World Systems uses to provide satellite tracking, telemetry and control
services to INTELSAT.
COMSAT General owns 86.3% of the MARISAT Joint Venture, which operates the
MARISAT F-2, one of three satellites launched in 1976. The MARISAT F-1 and F-3
ceased commercial operations in 1996. COMSAT General also owns the COMSTAR D-4
satellite (launched in 1981) with capacity leased to Mobile and COMSAT
Government Systems, LLC, a subsidiary of Lockheed Martin.
International leases or owns facilities in each of the countries in which it
operates.
We believe that our properties are suitable and adequate for our current
business operations.
24
<PAGE>
INTELSAT Satellites
Our property accounts include our 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, five INTELSAT satellites and a
contract to construct a six satellite were transferred to New Skies on November
30, 1998. The transferred satellites are not included in the description below.
In 1999, two INTELSAT V satellites which had reached the end of their design
lives were deorbited. There is one INTELSAT VA satellite continuing to operate
in the INTELSAT system. This satellite has also reached the end of its design
life and is operating in an inclined orbit. The capacity of the INTELSAT VA is
17,000 voice circuits, or 57 television channels (depending on the configuration
of the satellite payload). The satellite was built by a predecessor of 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
in 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, 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; 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
25
<PAGE>
successfully launched in 1997. They were designed primarily to complement the
INTELSAT VI satellites and meet growing 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 was launched in June 1998 and is
designed for users requiring high power together with a wide coverage area 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 seven satellites. As of
December 31, 1999, the procurement of seven 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
2001 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.
In addition, in the first quarter of 2000, the INTELSAT Board of Governors
approved the procurement of two additional satellites that will be known as the
NI-Alpha series. The spacecraft are being built by Matra Marconi Space. The NI-
Alpha satellites are expected to provide up to 106 units of capacity with a
typical minimum power range from 32 to 52 DBW depending on the beam. The
satellites are being designed to expand the capacity available to the growing
Internet and video markets in the Americas and Western Europe beginning in 2003.
Item 3: Legal Proceedings
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 their 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
COMSAT. 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 intended
to join a lawsuit filed by former employees of Electromechanical Systems, Inc.
(EMS) under the qui tam
26
<PAGE>
provisions of the Civil False Claims Act. We acquired EMS in 1994 as part of our
acquisition of Radiation Systems, Inc., which became part of COMSAT RSI, Inc. We
began accounting for COMSAT RSI as a discontinued operation in 1997 and retained
EMS when we sold COMSAT RSI in 1998 (see Note 7 to the financial statements).
The lawsuit names EMS, COMSAT and several current and former EMS employees and
seeks potential damages estimated at up to $40.0 million. The Department of
Justice has been granted a stay of 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. We intend to
vigorously defend this matter but cannot predict the ultimate outcome or
estimate the amount of liability that could result from any civil or criminal
sanctions the government may seek.
In 1995, COMSAT 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 then commenced a
lawsuit against News Corporation to recover damages arising out of the alleged
breach of contract, 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. On December 29, 1999, the U.S.
District Court for the Central District of California issued an order granting
summary judgment for the defendants and dismissing COMSAT's claims. The issue of
News Corp.'s counter-claim is still before the District Court. COMSAT currently
is engaged in settlement discussions with the defendants to resolve the matter
on terms that would be favorable to COMSAT. If the matter is not settled,
COMSAT plans to appeal the District Court's summary judgment order.
Since November 1997, COMSAT 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 all U.S. satellite capacity utilized prior to
Inmarsat's privatization in April 1999. IDB/Stratos contend they were 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's first appeal of this
ruling was dismissed on procedural grounds. COMSAT has filed a second appeal
seeking a hearing on the merits of its contract claim. That appeal is still
pending. In January 1999, the Corporation filed a complaint at the FCC seeking
damages against IDB, which remains pending. 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.
In June 1999, after a competitive procurement, the U.S. Navy awarded a
contract to Mobile for leased-channel high-speed data satellite communications
services. A competing bidder, Stratos Mobile Networks (a subsidiary of Stratos
Global), sued in the U.S. Court of Federal Claims to challenge the award. The
court initially denied injunctive relief, and COMSAT began performing the
contract. In September 1999, however, the court concluded that Stratos had been
deprived of a fair opportunity to bid, because of a latent ambiguity in the
solicitation criteria. The court
27
<PAGE>
ordered a recompetition of the contract to be held by January 2000, with the
winner to begin performing the contract in January 2001. Both COMSAT and the
Navy appealed that decision, and the case is now pending in the Court of Appeals
for the Federal Circuit. In the meantime, the recompetition has been completed,
and the contract was awarded to Stratos. In March 2000, COMSAT filed suit in
United States District Court to overturn the results of the recompetition. If
the recompetition is not overturned, service under the contract will be
transitioned to Stratos on January 1, 2001. The contract is an indefinite
quantity and indefinite deliverables contract. Thus, even if the contract is
transferred to Stratos, the Navy will no longer be obligated to obtain service
through Stratos once the minimum service commitment to Stratos is satisfied.
Mobile plans to continue to compete vigorously for the Navy's business.
COMSAT retained the long-term contract for the completion of the 100 meter
radio astronomy telescope at Green Bank, West Virginia. COMSAT also retained
CRSI's $29 million claim for work performed under and relating to the contract,
which is currently in arbitration. The prime contractor has filed a counterclaim
seeking $13 million in damages for delay. The claim and counterclaim are
currently in arbitration. See Note 7 to the financial statements. There can be
no assurance that COMSAT will be successful in collecting all or any portion of
this claim.
In addition to the matters described above, see Note 11 to the financial
statements for a description of certain additional 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.
28
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
On December 31, 1999, there were 53,123,342 shares of common stock
outstanding. Of this number, 25,976,047 were Series II shares and 27,147,295
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, 1999, the Corporation had 26,286 Series I
holders and 32 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 1999 High Low Dividend
- ------------------ ---- --- --------
<S> <C> <C> <C>
First Quarter 36 11/16 27 .05
Second Quarter 35 1/8 27 13/16 .05
Third Quarter 37 1/16 26 5/8 .05
Fourth Quarter 29 15/16 15 3/8 .05
<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
</TABLE>
29
<PAGE>
Item 6: Selected Financial Data
<TABLE>
<CAPTION>
In thousands, except per share amounts 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $ 618,266 $ 616,469 $ 562,651 $ 545,100 $ 507,687
Operating expenses 556,171 556,967 480,683 437,875 387,873
Operating income 62,095 59,502 81,968 107,225 119,814
Income (loss) from continuing operations (2,566) 26,417 28,568 36,197 43,507
Net income (loss) (2,566) 26,417 (64,446) 8,622 37,817
Earnings (loss) per share-assuming dilution:
Income (loss) from continuing operations (0.05) 0.50 0.57 0.74 0.91
Net income (loss) (0.05) 0.50 (1.29) 0.18 0.79
Balance Sheet Data
Total assets 1,651,724 1,790,798 1,894,775 2,097,286 2,022,247
Long-term debt 408,979 446,832 461,960 578,379 590,378
Stockholders' equity 597,705 659,040 586,271 841,817 839,433
Dividends
Dividends paid 10,562 10,393 16,975 37,698 36,874
Dividends paid per share 0.20 0.20 0.35 0.78 0.78
Distribution of Ascent Entertainment Group, - - 194,633 - -
Inc. shares
</TABLE>
30
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
ANALYSIS OF OPERATIONS
Consolidated Operations
Continuing Operations
Revenues
Consolidated revenues in 1999 were $618 million, which was slightly above
1998. Lower revenues in Mobile Communications and International were more than
offset by increases in World Systems and the Laboratories. Consolidated
revenues 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.
Operating Income
Operating income in 1999 was $62 million, or 4% higher than 1998. In 1999,
we changed how we account for our investment in Inmarsat from pro-rata
consolidation to the equity method of accounting as a result of the
privatization of Inmarsat. See Note 1 to the financial statements. As a result
of this change, operating income in 1999 was lower by $26 million than it
otherwise would have been absent such change. During 1998, we recorded a $14
million impairment loss related to BelCom (International's company operating in
Russia and the Commonwealth of Independent States). Exclusive of the 1999
accounting change and the 1998 BelCom impairment loss, operating income in 1999
was $14 million higher than the previous year. This was primarily the result of
increased operating income in both World Systems and the Laboratories, partially
offset by decreases in both Mobile Communications and International. In
addition, costs related to the proposed merger with Lockheed Martin Corporation
were $10 million, an increase of $4 million over 1998.
For 1998, operating income was $60 million, or $22 million below 1997. The
decrease in operating income was primarily the result of the $14 million BelCom
impairment loss and increased losses in International of $12 million that were
primarily related to operations in Brazil. In addition, 1998 results included
$6 million of costs related to the proposed merger with Lockheed Martin.
Improvements in operating income in both Mobile Communications and World Systems
totaling $14 million partially offset those items in 1998.
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<PAGE>
Other Income (Expense), Net
Other income (expense), net for 1999 was an expense of $27 million, which
compares to income of $13 million in 1998. During the second half of 1999, we
wrote-off $36 million of direct investments in ICO Global Communications
(Holdings) Limited. Our 1999 results also include our share of Inmarsat's 1999
net loss of $17 million under the equity method, which includes our share of
Inmarsat's ICO write-off of $35 million. In addition, during 1999,
International sold its remaining investment in Viatel, Inc. and recorded a $26
million gain, which was $11 million higher than the 1998 gain on Viatel.
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 Viatel stock and income of $4 million from a settlement
agreement with ICO. See Note 5 to the financial statements. In addition, 1998
included a $2 million non-cash write-off of the Laboratories investment in
Superconducting Core Technologies that partially offset those items.
Interest Costs, Net of Amounts Capitalized
Interest costs, net of amounts capitalized for 1999, were $37 million,
which was $3 million below 1998. The decrease was primarily related to the
change in accounting related to our investment in Inmarsat. Inmarsat-related
interest costs of $4 million have been reclassified to equity income. For 1998,
interest costs, net of amounts capitalized, 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. to reduce debt. Lower amounts of interest
capitalized in 1998 due to the completion of satellites under construction
partially offset these decreases.
Income (Loss) Before Income Taxes
The loss before taxes for 1999 for continuing operations was $2 million,
which compares to income of $32 million for 1998. Exclusive of the ICO write-
off, income before taxes was $69 million or $37 million above 1998. This
improvement was primarily the result of improvements in World Systems and the
increased gain on the sale of Viatel stock. Partially offsetting this
improvement was lower earnings in Mobile Communications. See "Segment Operating
Results-Mobile Communications."
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 Mobile Communications and World Systems partially offset those items.
32
<PAGE>
Income Tax Expense
Income tax expense for 1999 was $1 million, compared to expense of $6
million for 1998. In both 1999 and 1998, certain pre-tax losses were non-
deductible for tax purposes, such as specific merger costs. The tax expense in
1998 was $6 million, which was $10 million below 1997. In the third quarter of
1998, we favorably resolved a state tax audit and reversed previously accrued
tax and interest costs of $4 million. In addition, in 1998, we reversed
previously accrued tax and interest costs of $17 million related to federal tax
matters that we determined were no longer required. See Note 14 to the
financial statements.
Income (Loss) from Continuing Operations before Extraordinary Item
The loss in 1999 from continuing operations was $3 million, which compares
to income from continuing operations of $26 million in 1998. Exclusive of the
write-off of our investment in ICO, income in 1999 was $42 million, or $16
million above the previous year. Income for 1998 from continuing operations was
$26 million, or $3 million below the previous year.
The loss per diluted share from continuing operations in 1999 was $0.05,
which compares to earnings per share in 1998 of $0.50. Exclusive of the ICO
write-off, diluted earnings per share from continuing operations were $0.79.
Diluted earnings per share for continuing operations for 1997 were $0.57. See
Note 12 to the financial statements.
Extraordinary Item
In 1997, COMSAT repurchased $90 million of its 8.125% notes and $10 million
of its 7.7% medium-term notes. See Note 8 to the financial statements. The
extraordinary loss from early extinguishment of debt, net of tax, for 1997 was
$4 million ($0.08 per share).
Discontinued Operations
During the second quarter of 1997, we began accounting for the operations
of both Ascent Entertainment Group, Inc. and substantially all of COMSAT RSI,
Inc. as discontinued operations. In 1997, we recorded a loss from discontinued
operations, net of tax, of $89 million ($1.78 per share, fully diluted). See
Note 7 to the financial statements.
Net Income (Loss)
The 1999 net loss was $3 million, compared to 1998 net income of $26
million. Excluding the ICO write-off, net income in 1999 was $42 million, or
$16 million above 1998 net income. For 1997, the net loss was $64 million.
The diluted net loss per share for 1999 was $0.05 as compared to earnings
per share for 1998 of $0.50. The diluted net loss per share for 1997 was $1.29.
See Note 12 to the financial statements.
33
<PAGE>
Segment Operating Results
We report our operating results in four segments: World Systems, Mobile
Communications, International and the Laboratories. We evaluate the performance
of our operating segments based on segment income (loss) before taxes and
interest costs. See Note 15 to the financial statements.
<TABLE>
<CAPTION>
In millions 1999 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
- --------
Satellite Services:
World Systems $ 342.9 $ 303.1 $ 286.1
Mobile Communications 123.0 169.1 167.9
-----------------------------
Total Satellite Services 465.9 472.2 454.0
-----------------------------
International 108.6 113.3 89.7
Laboratories 54.1 42.3 36.4
Eliminations and other (10.3) (11.3) (17.5)
-----------------------------
Total $ 618.3 $ 616.5 $ 562.6
=============================
SEGMENT INCOME (LOSS)
- ---------------------
Satellite Services:
World Systems $ 137.1 $ 113.1 $ 102.7
Mobile Communications (52.2) 31.9 23.8
-----------------------------
Total Satellite Services 84.9 145.0 126.5
-----------------------------
International 0.1 (21.0) (8.9)
Laboratories (0.8) (3.5) (1.8)
-----------------------------
Total segment income 84.2 120.5 115.8
General and administrative expenses (24.7) (25.6) (23.2)
Merger costs (10.3) (5.5) -
Interest costs, net of amounts capitalized (37.2) (39.8) (42.1)
Other income (expense), net (14.0) (17.4) (6.3)
-----------------------------
Total $ (2.0) $ (32.2) $ 44.2
=============================
</TABLE>
34
<PAGE>
Satellite Services
Satellite Services includes both the World Systems and Mobile
Communications operating segments. World Systems 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. Mobile Communications provides satellite
telecommunications services for maritime, aeronautical and land mobile
applications, primarily using the satellites of Inmarsat Holdings Limited
(formerly the International Mobile Satellite Organization). COMSAT is the U.S.
signatory to INTELSAT.
Satellite Services revenues in 1999 were $466 million, which was 1% below
1998. For 1998, revenues in Satellites Services were $472 million, an increase
of 4% over 1997. Satellite Services income before taxes was $85 million in
1999, as compared to $145 million in 1998. The decrease in income before taxes
was the result of the $71 million ICO write-off during the second half of 1999
in Mobile Communications. Exclusive of the ICO write-off, Satellite Services
income before taxes increased $11 million as compared to the prior year.
Satellite Services profit before taxes in 1998 was 15% better than 1997.
World Systems
World Systems revenues in 1999 were $343 million, an increase of 13% over
1998. The improvement in revenues was primarily the result of increased demand
for Internet services and other high-speed data traffic, and our increased
ownership in INTELSAT. A slight decline in voice revenues partially offset
those increases. In 1999, we paid $38 million to increase our total ownership
share of INTELSAT from 18.4% to 20.4%. For 1998, World Systems revenues were
$303 million, or 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.
World Systems segment income in 1999 was $137 million, a 21% improvement
over 1998. During the third quarter of 1999, World Systems extended the
depreciable lives of the INTELSAT satellites based on the current estimated
useful lives of those satellites. The change had the effect of increasing World
Systems' segment income by $10 million during the second half of 1999. The
remainder of the improvement in World Systems segment income was from increased
ownership in INTELSAT, lower operating expenses and revenue growth. Segment
income in 1998 for World Systems was $113 million, or 10% higher than the
previous year. The 1998 results include income of $4 million from a settlement
agreement with ICO. See Note 5 to the financial statements. The balance of the
improvement in segment income in 1998 primarily was due to higher revenues
offset, in part, by increased depreciation from placing new satellites in
service.
35
<PAGE>
On November 30, 1998, INTELSAT transferred five in-orbit satellites to New
Skies Satellites. New Skies, an independent company that was spun off from
INTELSAT, is headquartered in the Netherlands. In connection with the spin-off,
COMSAT received shares in New Skies. COMSAT currently owns 18.6% of New Skies.
Mobile Communications
Inmarsat completed its privatization on April 15, 1999. In 1999, we began
using the equity method of accounting to report our 22.2% ownership in the new
company. See Note 1 to the financial statements. Prior to 1999, we used the
pro rata method of consolidation to report our share of Inmarsat's operating
results. Under the pro rata method of consolidation, we reported our share of
Inmarsat's revenues (net of the space segment charges that we paid to Inmarsat),
cost of services, depreciation and amortization and interest costs in the
appropriate categories of our income statement. We now report our proportionate
share of Inmarsat's net operating results as equity income in "Other income
(expense), net" within the Mobile Communications operating segment. The space
segment charges that we pay to Inmarsat are now reported in cost of services.
Our share of Inmarsat's interest costs and income taxes are now reported within
the Mobile Communications segment. Prior to 1999, our share of Inmarsat's
interest costs were reported in "Interest costs, net of amounts capitalized" and
taxes related to our income from Inmarsat were reported in "Income tax expense."
Mobile Communications revenues in 1999 were $123 million, which was $46
million or 27% below 1998. This was primarily the result of lower analog
telephone traffic, principally due to lower usage in the U.S. Government sector
and lower amounts of carrier traffic. In addition, reporting Inmarsat's
revenues using the equity method of accounting lowered Mobile Communications
revenues by $18 million in 1999. For 1998, Mobile Communications revenues were
$169 million, an increase of 1% compared to 1997. In 1998, Mobile
Communications recorded increased revenues from the contract with the Federal
Aviation Administration on the Wide Area Augmentation System 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.
On August 27, 1999, ICO filed for Chapter 11 bankruptcy. As a result,
COMSAT wrote off its $36 million direct investment in ICO during the third
quarter of 1999. In addition, we also had an indirect investment in ICO through
our equity ownership in Inmarsat, which also is an ICO shareholder. During the
fourth quarter of 1999, Inmarsat advised COMSAT that it had written off its
investment in ICO. Accordingly, we recognized this loss in our share of
Inmarsat's net results in the fourth quarter of 1999. In total, COMSAT recorded
a pre-tax, non-cash write-off during 1999 of $71 million related to its
investments in ICO.
For 1999, Mobile Communications segment loss was $52 million as compared to
segment income of $32 million in the prior year. The 1999 loss resulted from
the ICO write-off. Exclusive of the ICO write-off, Mobile Communications segment
income was $19 million, which was $13 million below 1998. This decline in
segment income from 1998 was due to
36
<PAGE>
lower revenues and reporting our share of Inmarsat interest costs and income
taxes within the Mobile Communications segment. Mobile Communications' 1999
results included interest costs of $4 million and income taxes of $4 million.
Mobile Communications segment income 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.
International
International 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, 1999, International operated in 11
countries worldwide.
For 1999, International's revenues were $109 million or 4% below the
previous year. The decrease in International's revenues was the result of lower
revenues in Brazil caused primarily by the devaluation of the Brazilian
currency. The lower revenues in Brazil were offset, in part, by increases in
Argentina, Mexico, Colombia and Turkey. International's revenues in 1998 were
$113 million, which was 26% higher than in 1997. The higher revenues were
principally due to growth in Argentina, Brazil and Colombia.
International's segment income in 1999 was $0.1 million, which compares to
a segment loss of $21 million in 1998. During 1999 and 1998, International sold
its investment in Viatel, Inc. This sale resulted in a gain in 1999 of $26
million and in 1998 of $15 million. In addition, International recognized in
1998 a non-cash impairment loss at BelCom of $14 million. See Note 6 to the
financial statements. Exclusive of the gains on the sale of Viatel and the
impairment loss, International's 1999 segment loss was $26 million, compared to
$22 million in 1998. The decline in 1999 was due in part to fixed asset
adjustments in China and Brazil.
International's segment loss in 1998 was $21 million, as compared to a
segment loss of $9 million in 1997. In the third quarter of 1998, International
recorded the BelCom impairment loss of $14 million. In addition, International
had a $15 million gain from the sale of Viatel stock. Exclusive of the BelCom
impairment and the gain on the sale of stock, International's loss was $22
million, as compared to $9 million in 1997. The increased segment losses were
primarily due to higher depreciation, contract losses in Brazil, increased
losses in BelCom and start-up costs in Mexico.
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Laboratories
COMSAT Laboratories provides technical consulting services and develops
advanced communications technologies and products for satellite access and
networking applications.
Revenues at the Laboratories in 1999 were $54 million, or 28% higher than
the previous year. The improvement was from increases in both technical
consulting and product sales. The Laboratories' revenues for 1998 were $42
million, which was 16% higher than 1997. This increase was due to improvements
in technical consulting revenues.
The segment loss before taxes in 1999 was $1 million, which was $3 million
better than 1998. The 1998 segment loss included the non-cash $2 million write-
off of the Laboratories' investment in Superconducting Core Technologies, Inc.
Absent this write-off, the Laboratories segment results year-over-year improved
$1 million. In 1998, the Laboratories segment loss was $4 million, compared to
$2 million in 1997.
OUTLOOK
Many of the statements that follow are forward looking and relate to
anticipated future events and operating results. You should consider the
factors described under "Forward-Looking Statements - Safe Harbor Provisions"
in evaluating the forward-looking statements in this report.
Business Combination with Lockheed Martin
COMSAT entered into an Agreement and Plan of Merger with Lockheed Martin on
September 18, 1998. Under that agreement, Lockheed Martin agreed to acquire all
of COMSAT's outstanding common stock in a two-step transaction.
The first step, a cash tender offer to purchase up to 49% of COMSAT's
common stock at a price of $45.50 per share, was completed on September 18,
1999. As a result, Lockheed Martin now owns approximately 49% of COMSAT's
common stock.
The second step is the merger of COMSAT with a wholly-owned subsidiary of
Lockheed Martin. In the merger, shareholders will receive one share of Lockheed
Martin common stock for each share of COMSAT common stock that they own.
The Open-Market Reorganization for the Betterment of International
Telecommunications Act (commonly referred to as the "ORBIT Act"), which was
passed by Congress and signed by the President in March 2000, removes the
ownership limitation on COMSAT's common stock and will permit the merger to be
completed following receipt
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of required regulatory approvals and satisfaction of closing conditions. Other
provisions of the ORBIT Act are described under "Legislative and Regulatory
Developments." COMSAT expects that the required regulatory approvals will be
received and other closing conditions will be satisfied so that the merger can
be completed in the third quarter.
Completion of the merger remains subject to satisfaction of the conditions
set forth in the merger agreement. The principal remaining conditions are:
. Receipt of all consents and approvals from governmental authorities
(including the FCC and antitrust authorities); and
. There is no event that has had or would reasonably be expected to have a
significant adverse effect on COMSAT.
Before the merger can be completed, Lockheed Martin must obtain FCC
approval for the transfer of control of COMSAT. In addition, Lockheed Martin
must file notices under the Hart-Scott-Rodino Antitrust Improvements Act with
the Federal Trade Commission and the Department of Justice to report its
secondary acquisition, via the merger, of certain minority interests that COMSAT
currently holds (e.g., Inmarsat and New Skies). We expect that the FCC and
antitrust authorities will grant the final required approvals and consents.
Their response time could affect the estimated time frame for closing the
merger. We do not believe that passage of the ORBIT Act will have a significant
adverse effect on COMSAT. As discussed under "Legislative and Regulatory
Developments," certain of the actions that INTELSAT is contemplating in response
to passage of the ORBIT Act, if undertaken, might affect that conclusion. There
can be no assurance that a subsequent event will not occur which could
reasonably be expected to have a significant adverse effect on COMSAT. If the
merger is not completed by September 18, 2000, either Lockheed Martin or COMSAT
may terminate the merger agreement.
For the merger to qualify as a tax-free reorganization, the value of the
Lockheed Martin common stock exchanged for COMSAT common stock in the merger
must be at least 40% of the total consideration received by COMSAT shareholders
in the tender offer and merger combined, assuming that the tender offer and
merger are treated as a single integrated transaction for U.S. federal income
tax purposes. COMSAT shareholders that tendered shares in the tender offer
received $45.50 per share in cash. As a result, if the price of Lockheed Martin
common stock is less than $29.14 per share on the last full trading day prior to
consummation of the merger, the consideration to be received by COMSAT
shareholders in the merger will be taxable for U.S. federal income tax purposes
to the extent of any applicable gain or loss. If the merger had been
consummated as of March 15, 2000, based on the price for Lockheed Martin common
stock as of that date and assuming integration of the tender offer and merger,
the merger would not have qualified as a tax-free reorganization, and COMSAT
shareholders would have recognized gain or loss on the exchange of shares in the
merger. The tax consequences of the merger to you will depend on your own
situation. Therefore, you should consult your tax advisors for a full
understanding of these tax consequences.
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Restructuring of INTELSAT
INTELSAT is continuing its efforts to transform itself from a treaty-based,
intergovernmental organization to a fully-private, commercial company. In
October 1999, INTELSAT's Assembly of Parties (a meeting of the member
governments of INTELSAT) unanimously approved a plan targeting the privatization
of INTELSAT as early as April 1, 2001. Following privatization, INTELSAT would
operate as a private corporation without intergovernmental privileges and
immunities. While the new privatized company initially would not be publicly
traded, it is contemplated that an initial public offering would take place in
2002, subject to market conditions and the actual date operations are
transferred to the restructured INTELSAT. COMSAT is committed to privatizing
INTELSAT in a pro-competitive manner at the earliest possible time. As a
minority shareholder and the U.S. Signatory to INTELSAT, however, we lack the
ability to independently effect a restructuring of INTELSAT. The success and
timing of our efforts will depend on our ability to achieve a consensus among
other Signatories and participating member governments. Passage of the ORBIT
Act has decreased COMSAT's influence within INTELSAT.
Legislative and Regulatory Developments
In March 2000, Congress passed and the President signed the ORBIT Act. The
ORBIT Act amends the Communications Satellite Act of 1962 and repeals upon
enactment the special restrictions on the ownership of COMSAT stock. The
legislation will permit the merger with Lockheed Martin to be completed
following receipt of the remaining required regulatory approvals. FCC
regulation of COMSAT's capital structure will be eliminated upon enactment as
well.
The ORBIT Act also establishes an April 1, 2001 deadline for the
privatization of INTELSAT, as well as criteria for determining whether the
privatizations of INTELSAT, Inmarsat and New Skies are "pro-competitive." These
criteria include the requirement that each entity conduct an initial public
offering by a date certain, that such public offerings substantially dilute
existing ownership of the satellite systems and that each entity's board have a
majority of independent directors. The FCC may extend the deadlines for
completion of the public offering in consideration of market conditions and
relevant business factors related to the timing of the offering, but the
extensions may not permit the offering to occur after a specified date. The
dates prescribed by the ORBIT Act for the initial public offerings to occur and
the last extension dates are:
. For INTELSAT - October 1, 2001 (unless extended by the FCC but not
later than December 31, 2002);
. For Inmarsat - October 1, 2000 (unless extended by the FCC but not
later than December 31, 2001); and
. For New Skies - July 1, 2000 (unless extended by the FCC but not
later than July 31, 2001).
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The ORBIT Act provides that, if these and other criteria are not met, the
FCC may not license U.S. users (or may limit such licenses) to access the
satellite capacity of the privatized entities for so-called "non-core" services.
Non-core services include, for INTELSAT and New Skies, everything but capacity
for public-switched voice communications and occasional use television, and for
Inmarsat, all commercial services. COMSAT believes that the privatization
criteria are achievable within the statutory deadlines and, therefore, does not
believe that sanctions (other than possible user license conditions) are likely
to be imposed. The ORBIT Act also includes an exception for national security,
law enforcement and public safety applications, and various other
qualifications.
During the transition to privatization, the ORBIT Act also restricts
INTELSAT, Inmarsat and New Skies from providing "additional services." Unlike
the bill that previously passed the House, however, the ORBIT Act's definition
of additional services does not include any services that COMSAT is currently
providing. Thus, the ORBIT Act is not expected to disrupt the provision of
existing services, such as Internet and high-speed data transmission, by COMSAT
to its customers.
The ORBIT Act codifies an FCC action taken in 1999 that permits U.S. users
and telecommunication providers to acquire satellite capacity directly from
INTELSAT without going through COMSAT ("Level 3" direct access). Unlike the
bill previously passed by the House, however, the ORBIT Act does not allow
"Level 4" direct access (direct investment in INTELSAT by other U.S. system
users and telecommunication providers). As a result, COMSAT will remain the
sole U.S. investor in INTELSAT until privatization. The ORBIT Act also includes
specific language protecting the integrity of COMSAT's contracts.
The ORBIT Act repeals the provisions of the Satellite Act that require
COMSAT to have three Presidentially-appointed directors. Two of those three
positions were vacant pending Presidential appointment. The term of COMSAT's
remaining Presidentially-appointed director expired upon enactment of the ORBIT
Act.
In addition, the ORBIT Act removes COMSAT's immunity from suit in its
capacity as an INTELSAT Signatory. A limited exception is provided for actions
taken to carry out instructions of the U.S. Government. The ORBIT Act includes
other safeguards to limit COMSAT's liability for actions taken by INTELSAT.
Prior to enactment of the legislation, on September 15, 1999, the FCC
adopted a new policy of direct access to INTELSAT in the United States.
Specifically, the FCC authorized "Level 3" direct access. The FCC rejected
requests to allow entities other than COMSAT to invest in INTELSAT proportionate
to their usage, finding that the FCC lacked the authority under the Satellite
Act to permit "Level 4" direct access. In addition, the FCC authorized COMSAT
to file a tariff to charge all direct access users a surcharge to recover costs
incurred by COMSAT as Signatory to INTELSAT. COMSAT's new direct access tariff
became effective on December 6, 1999. Under the tariff, direct access users in
2000 must pay COMSAT 5.58% of the rate the direct access users pay to INTELSAT
for capacity ordered directly. The level of this
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surcharge will be reviewed in 2001, and the surcharge will be eliminated upon
privatization of INTELSAT.
In the direct access proceeding, the FCC also rejected claims that COMSAT's
long-term carrier contracts should be subject to government abrogation under the
"fresh look" doctrine, thus preserving COMSAT's backlog of contracted capacity
commitments. Moreover, the FCC declined to pursue claims for "portability" of
COMSAT's capacity to users.
The ORBIT Act, however, requires the FCC to complete a proceeding within
six months of enactment to determine if users or providers of telecommunications
services have sufficient opportunity to access INTELSAT space segment capacity
directly from INTELSAT. If the FCC determines that such opportunity does not
exist, the FCC must take appropriate action to facilitate direct access.
However, the FCC is prohibited by the ORBIT Act from modifying or abrogating any
COMSAT contract.
On March 1, 2000, in anticipation of passage of the ORBIT Act, INTELSAT's
Board of Governors authorized the Director General of INTELSAT, if he concludes
that INTELSAT's interests so require, to commence an arbitration to determine
whether the ORBIT Act violates the obligations of the United States as a member
government and party to the INTELSAT Agreement. On March 8, 2000, INTELSAT's
Director General sent a letter to the U.S. Secretary of State indicating that an
arbitration may be commenced if the ORBIT Act is enacted into law. The letter
was accompanied by an analysis, distributed to all parties and signatories, that
suggests that the ORBIT Act may violate the INTELSAT Agreement by, among other
matters, potentially attempting to control the timing of INTELSAT privatization,
limiting new INTELSAT services pending privatization, establishing privatization
criteria, and restricting INTELSAT to certain, so-called "core" services if the
privatization criteria are not satisfied. If commenced, the arbitration would
be held before an international panel of legal experts on which COMSAT would not
have representation. In addition, the INTELSAT Board of Governors expressed the
view that an Extraordinary Assembly of Parties may be required to discuss the
impact of the ORBIT Act on INTELSAT, the privatization process and compliance by
the United States with the INTELSAT Agreement.
If the Assembly of Parties finds that a party has failed to comply with its
obligations under the INTELSAT Agreement, the party is deemed to have withdrawn
from INTELSAT as of the date of such finding. In the Assembly of Parties, each
party has one vote. INTELSAT currently has 143 member governments. A vote of
two thirds of member governments present would be required to make the finding.
If the United States is deemed to have withdrawn from INTELSAT, COMSAT also
would have to simultaneously withdraw as the U.S. Signatory to INTELSAT, which
would result in the forced divestiture of its ownership interest in INTELSAT on
disadvantageous terms (e.g., at book value). Because the withdrawal of the
United States from INTELSAT would be adverse to the best interests of that
organization, we do not expect that an Assembly of Parties would expel the
United States.
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COMSAT pays required fees to the FCC for applications and other filings and
for annual regulatory fees applicable to it as a U.S. common carrier. The FCC
has not, however, imposed "space station" regulatory fees on COMSAT with respect
to the satellites of INTELSAT and Inmarsat. In December 1999, the U.S. Court of
Appeals for the D.C. Circuit reviewed the FCC order setting regulatory fees for
1998. The Court remanded the case to the FCC to reconsider COMSAT's long-
standing exemption from space station regulatory fees. The ORBIT Act clarifies
that the FCC has authority to impose regulatory fees on COMSAT similar to the
regulatory fees that it imposes on other entities providing similar services.
It is unclear whether space station regulatory fees can be imposed on COMSAT,
since COMSAT is a satellite services provider and not a satellite system
operator. Moreover, if such fees were imposed, it is unclear how such fees
would be calculated and which satellites would be affected. It is not expected
that space station regulatory fees would be imposed on COMSAT subsequent to the
privatization of INTELSAT and Inmarsat. Pending completion of a proceeding by
the FCC, it is difficult to quantify the level of space station fees that might
be imposed. We do not believe that such fees will have a material adverse
effect on COMSAT's long-term financial condition. Nevertheless, the imposition
of such fees could materially affect consolidated results of operations in a
given year or quarter.
Potential Trends That May Affect Operating Performance
Direct access could fundamentally change the way COMSAT does business.
Direct access may materially reduce World Systems' future revenues to the extent
that customers begin to contract directly with INTELSAT for new capacity and for
available non-COMSAT capacity as long-term contracts and capacity commitments
expire. Other users may elect to remain with COMSAT to take advantage of the
added value (such as circuit management for U.S.-overseas connectivities) that
COMSAT offers U.S. users. For example, on October 14, 1999, a month after the
FCC's direct access order, COMSAT executed an amended inter-carrier agreement
with AT&T Corporation which provides for price reductions in exchange for AT&T's
commitment to maintain specified levels of traffic on the INTELSAT system via
COMSAT through at least 2006. We expect World Systems' revenues for 2000 to be
at approximately the same level or slightly higher than in 1999.
In anticipation of privatization, World Systems plans to seek to maintain
its existing utilization of the INTELSAT satellite system to the extent possible
and, when available, to increase its ownership in connection with the annual
share re-determinations prior to privatization. Any increase in COMSAT's
ownership share would be expected to have a favorable impact on operating
results. In addition, during the third quarter of 1999, World Systems extended
the depreciable lives of the INTELSAT satellites based on the current estimated
useful lives of those satellites. The effect of this change over a full
calendar year will have a favorable impact on World Systems' comparative segment
income year over year in 2000. We expect World Systems segment income to be
better in 2000, as compared to 1999.
In the first quarter of 2000, COMSAT Mobile's two largest carrier customers
indicated that they no longer intend to continue routing U.S. originated fixed
to mobile traffic over the
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Inmarsat satellite system through COMSAT. In March 2000, one such carrier began
routing its U.S. originated fixed to mobile traffic through another Inmarsat
service provider. As a result, Mobile's revenues and segment income are expected
to be adversely affected in the near term in the absence of other offsetting
factors.
In International, we expect the growing demand for Internet services, the
introduction of Globalway service and the move to shared-use facilities to
generate improvements in revenues and segment operating results, excluding
unusual items (e.g., the gain on the sale of our Viatel shares in 1999). COMSAT
Laboratories expects continued revenue growth and segment operating result
improvement in 2000 driven in part by the introduction of its LINKWAY products.
On a consolidated basis, we expect COMSAT's net income in 2000 to be better
than in 1999, excluding unusual items (e.g., the ICO write-off and gain on the
sale of equity investments). In addition, COMSAT is currently at an advanced
stage of negotiations to settle a tax refund claim and a commercial lawsuit.
COMSAT is the plaintiff in both cases. Settlement of those matters on the terms
currently being discussed is expected to have a favorable material effect on
COMSAT's earnings. The outcome of those negotiations, however, is not assured.
As discussed below, various factors could cause our expectations and earnings
outlook to change.
Year 2000 Issue (Year 2000 Readiness Disclosure)
The year 2000 issue stems from existing computer programs that were written
using two digits rather than four digits to define the applicable year (e.g.,
"99" for 1999). It was expected that some computer programs with date-sensitive
software might not operate properly when the last two digits become "00," as
occurred on January 1, 2000. There was concern that year 2000 issues would
cause system failures and disrupt normal operations.
In the second half of 1996, we initiated a program to identify and address
year 2000 issues in order to avoid interruption to our operations at the turn of
the century. Each of our operating segments, as well as our administrative
functions, completed the inventory, assessment, remediation and testing phases
of the year 2000 implementation plan by the fourth quarter of 1999.
Since January 1, 2000, we have not experienced any material year 2000
problems. We are continuing to monitor all functions for year 2000 compliance.
The cost through December 31, 1999, to modify in-house management information
systems, customer products and other systems and equipment affected by the year
2000 issue was $7 million.
Forward-Looking Statements - Safe Harbor Provisions
This report contains "forward-looking statements" within the meaning of the
federal securities laws. Those statements are not based on historical fact and
may not prove to be
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accurate. Words such as "believe," "estimate," "anticipate," "project,"
"intend," expect," "plan," "scheduled" and similar expressions are intended to
identify forward-looking statements.
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. All forward-looking statements involve risks and
uncertainties. Forward-looking statements and COMSAT's future operating results
may be affected by various factors. These factors include, among others:
. the timing and outcome of regulatory and other governmental proceedings
. implementation of the ORBIT Act, including INTELSAT's reaction to its
enactment
. the proposed merger of COMSAT with Lockheed Martin
. developments concerning the privatization of INTELSAT
. market conditions and other factors affecting the ability of INTELSAT,
Inmarsat and New Skies to complete their planned initial public offerings
. international business conditions (e.g., foreign currency devaluation and
economic instability in foreign markets)
. increased competition for satellite and networking services
. the recent ability of users to access the INTELSAT satellite system
directly without contracting through COMSAT
. the responsiveness of customers to COMSAT's existing and new service
offerings
. the outcome of contingencies, including litigation and other matters
. economic, political and technological risks and uncertainties, and
. subsequent developments and changes in business conditions not currently
known or anticipated.
Accordingly, there can be no assurance that actual future results will not
differ materially from anticipated results.
You should not place undue reliance on forward-looking statements which
speak only as of the date of this report. We do not undertake any obligation to
update the forward-looking statements to reflect events or circumstances or
changes in expectations after the date of this report or to reflect the
occurrence of subsequent events. The forward-looking statements in this
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document are intended to be subject to the safe harbor protection provided by
the federal securities laws.
For additional discussion identifying some important factors that could
cause actual results to vary materially from those anticipated in the forward-
looking statements, see our SEC filings, including but not limited to our Annual
Report on Form 10-K for 1999 and subsequent filings, as well as the matters
identified throughout this report.
ANALYSIS OF CONSOLIDATED BALANCE SHEETS
Assets
The total assets at December 31, 1999 were $1,652 million, which was $139
million lower than December 31, 1998. The decrease was the result of the change
in accounting method related to our investment in Inmarsat, the write-off of our
direct and indirect investments in ICO and the impact on fixed assets of the
devaluation of the Brazilian currency. Partially offsetting these decreases was
an increase in current assets. At December 31, 1999, current assets were $291
million or $92 million higher than the end of the previous year. This increase
was in part due to an increase in cash and the reclassification of cash
surrender value of certain life insurance policies to current assets.
Property and equipment, net of depreciation, decreased $297 million during
1999. This decrease was primarily from the change in accounting related to our
investment in Inmarsat, which reduced property and equipment by $245 million.
In addition, the devaluation of the Brazilian currency resulted in a $51 million
reduction to property. Property and equipment additions in 1999 were $128
million. This increase was primarily related to World Systems' share of
INTELSAT's satellite construction program and investment in new communications
property and equipment in International.
Investments increased $79 million during 1999. The impact of the change in
accounting related to our investment in Inmarsat increased investments by $169
million. Partially offsetting this increase was the $71 million write-off of
our investments in ICO.
Liabilities
The total liabilities decreased during 1999 by $78 million. This was
primarily due to the change in accounting related to our investment in Inmarsat
as $67 million of long-term debt and $15 million of current maturities of long-
term debt were reclassified to investments.
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ANALYSIS OF CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash from operating activities for 1999 was $141 million, compared to $323
million in 1998. Exclusive of cash provided from discontinued operations, cash
from operating activities was $149 million, $71 million below 1998. This
decrease was due to the change in how we report our investment in Inmarsat.
Distributions from Inmarsat are now reported in investing activities, rather
than operating activities as was done prior to 1999. During 1999, the
corporation made interest payments, net of amounts capitalized, of $30 million
and paid income taxes of $22 million.
In 1999, the corporation used $78 million in investing activities, as
compared to $166 million in 1998. Property and equipment purchases during 1999
were primarily in World Systems and International, 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
International's Latin American companies. It is expected that the corporation's
capital expenditure purchases will be higher in 2000, as compared to 1999.
Net cash used in financing activities was $15 million in 1999, which was
$117 million less than the previous year. The corporation paid dividends of
$0.05 per share for each quarter of 1999.
Liquidity and Capital Resources
COMSAT's working capital at December 31, 1999 was $141 million, which was
$83 million higher than at the end of 1998. The improvement in working capital
during 1999 was primarily due to a decrease in capital expenditures, proceeds
from the sale of our investment in Viatel, Inc. and a distribution from Inmarsat
prior to its privatization. Partially offsetting these items was cash used to
increase our level of ownership in INTELSAT. Cash from operating activities in
2000 is expected to be used to fund growth and to finance working capital needs.
We have access to short-term and long-term financing at favorable rates.
Our current long-term debt ratings are A- from Standard and Poor's and Baa1 from
Moody's. Our current commercial paper ratings are A2 from Standard and Poor's
and P2 from Moody's. Following the announcement of the proposed merger with
Lockheed Martin, both Standard and Poor's and Moody's placed their ratings on
our long-term debt under review for possible downgrades. Shortly after
completion of the tender offer, Moody's downgraded COMSAT's long-term debt and
the Monthly Income Preferred Securities issued by COMSAT Capital I, L.P. from A3
to Baa1. Ratings from both Moody's and Standard and Poor's remain under review
for possible further downgrades as a result of the merger. The ratings for
commercial paper are not under review at this time.
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Our commercial paper program had no borrowings outstanding at December 31,
1999. A $140 million credit agreement, expiring at December 15, 2000, backs up
our commercial paper program. We had $36 million remaining under a $100 million
medium-term note program at December 31, 1999. The medium-term note program is
part of a $200 million debt securities shelf registration program initiated in
1994.
Our capital structure and debt-financing activities are currently regulated
by the FCC. Under the existing guidelines approved by FCC, we are 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. We were in
compliance with these guidelines at December 31, 1999, with a long-term debt to
total capital ratio of 40.6%, no short-term debt outstanding other than $1
million of current maturities of long-term debt, and an interest coverage ratio
of 4.0 to 1. We anticipate that, under the ORBIT Act, FCC regulation of our
capital structure and the resulting capitalization requirements will be
eliminated.
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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 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, 1999, no commercial paper was
outstanding.
The corporation invests its excess cash in highly liquid investments with a
maturity of three months or less. Such investments can expose the corporation's
operating results to changes in short-term rates.
As of December 31, 1999, the fair value of the corporation's fixed-rate,
long-term debt was $401,704,000. Assuming a 10% increase in interest rates, the
fair value of the corporation's fixed-rate, long-term debt would be
$393,795,000. Likewise, assuming a 10% decrease in interest rates, the fair
value of the corporation's fixed-rate, long-term debt would be $409,868,000.
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.
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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, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flow for each of the three years in the period ended December 31, 1999.
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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, 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
McLean, Virginia
February 17, 2000
(March 17,2000 as to the fourth paragraph of Note 2 and
the second paragraph of Note 11)
50
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
In thousands, except per share amounts 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $618,266 $616,469 $562,651
--------- --------- --------
Operating expenses:
Cost of services 347,202 284,053 263,934
Depreciation and amortization 164,787 219,883 184,206
Research and development 9,202 7,914 9,296
General and administrative 24,707 25,592 23,247
Impairment of long-lived assets - 14,000 -
Merger costs 10,273 5,525 -
--------- --------- --------
Total operating expenses 556,171 556,967 480,683
--------- --------- --------
Operating income 62,095 59,502 81,968
Other income (expense), net (26,823) 12,518 4,245
Interest costs (42,195) (44,502) (51,426)
Interest capitalized 4,973 4,690 9,394
--------- --------- --------
Income (loss) from continuing operations before taxes and
extraordinary item (1,950) 32,208 44,181
Income tax expense 616 5,791 15,613
--------- --------- --------
Income (loss) from continuing operations before
extraordinary item (2,566) 26,417 28,568
Discontinued operations, net of tax - - (89,068)
--------- --------- --------
Income (loss) before extraordinary item (2,566) 26,417 (60,500)
Extraordinary loss from early extinguishment of debt, net of tax - - (3,946)
--------- --------- --------
Net income (loss) $ (2,566) $ 26,417 $(64,446)
========= ========= ========
Earnings (loss) per common share - basic:
Income (loss) from continuing operations before
extraordinary item $ (0.05) $ 0.51 $ 0.58
Discontinued operations - - (1.82)
Extraordinary loss - - (0.08)
--------- --------- --------
Net income (loss) $ (0.05) $ 0.51 $ (1.32)
========= ========= ========
Earnings (loss) per common share - assuming dilution:
Income (loss) from continuing operations before
extraordinary item $ (0.05) $ 0.50 $ 0.57
Discontinued operations - - (1.78)
Extraordinary loss - - (0.08)
--------- --------- --------
Net income (loss) $ (0.05) $ 0.50 $ (1.29)
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
In thousands 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 78,632 $ 30,795
Receivables 149,973 131,052
Deferred income taxes 15,140 7,911
Other 45,546 16,243
Net assets of discontinued operations 1,331 12,964
---------- ----------
Total current assets 290,622 198,965
---------- ----------
Property and equipment 912,475 1,209,462
Investments 327,684 249,064
Other assets 120,943 133,307
---------- ----------
Total assets $1,651,724 $1,790,798
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 786 $ 14,962
Accounts payable and accrued liabilities 114,081 88,297
Due to related parties 27,893 30,424
Other 6,928 7,119
---------- ----------
Total current liabilities 149,688 140,802
---------- ----------
Long-term debt 408,979 446,832
Deferred income taxes 106,563 127,351
Deferred investment tax credits 3,651 6,158
Accrued post-retirement benefit costs 49,075 48,923
Other long-term liabilities 136,063 161,692
Commitments and contingencies (notes 10 & 11) - -
Preferred securities issued by subsidiary 200,000 200,000
Stockholders' equity:
Common stock, without par value, 100,000 shares authorized,
53,387 shares issued in 1999 and 52,713 shares issued in 1998 448,072 430,537
Preferred stock, 5,000 shares authorized, no shares issued
or outstanding
Retained earnings 229,681 242,809
Treasury stock, at cost, 264 shares in 1999 and 80 in 1998 (8,991) (3,109)
Unearned compensation (2,804) (4,652)
Accumulated other comprehensive loss (68,253) (6,545)
---------- ----------
Total stockholders' equity 597,705 659,040
---------- ----------
Total liabilities and stockholders' equity $1,651,724 $1,790,798
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (2,566) $ 26,417 $ (64,446)
Adjustments to reconcile net income (loss) to net cash provided by
continuing operations:
Depreciation and amortization 164,787 219,883 184,206
Equity in net loss of affiliates 16,202 - -
Write-off of investment 35,985 - -
Impairment of long-lived assets - 14,000 -
Loss from discontinued operations - - 89,068
Gain on sale of investments (29,701) (14,635) (1,987)
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 (23,397) (6,890) 3,953
Current liabilities (689) 21,441 (4,709)
Non-current liabilities (17,930) (38,516) 1,665
Other 5,915 (1,749) 1,165
----------- --------- ---------
Net cash provided by continuing operations 148,606 219,951 205,600
Net cash provided (used) by discontinued operations (7,186) 102,769 (36,865)
----------- --------- ---------
Net cash provided by operating activities 141,420 322,720 168,735
----------- --------- ---------
Investing activities:
Purchase of property and equipment (115,171) (187,838) (254,291)
Investments in unconsolidated businesses - (6,202) (19,950)
Proceeds from sale of land - - 9,293
Proceeds from note on sale of investments - - 19,097
Proceeds from sale of investments 33,591 19,871 9,060
Proceeds from sale of subsidiary 10,100 - -
Satellite insurance proceeds - 8,024 -
Decrease (increase) in INTELSAT ownership (38,064) (689) 23,232
Distribution from Inmarsat 31,248 - -
Decrease in Inmarsat ownership - 5,999 213
Other 189 (5,113) (7,704)
----------- --------- ---------
Net cash used in investing activities (78,107) (165,948) (221,050)
----------- --------- ---------
Financing activities:
Net short-term borrowings (repayments) - (149,506) 131,513
Repayments against company-owned life insurance policies - (64) (3,962)
Common stock issued 7,355 46,453 20,398
Repayment of long-term debt (7,887) (13,760) (114,903)
Payment of satellite performance incentives (4,382) (4,464) -
Cash dividends paid (10,562) (10,393) (16,975)
Proceeds from Clarksburg financing - - 34,342
----------- --------- ---------
Net cash provided (used) by financing activities (15,476) (131,734) 50,413
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents 47,837 25,038 (1,902)
Cash and cash equivalents, January 1 30,795 5,757 7,659
----------- --------- ---------
Cash and cash equivalents, December 31 $ 78,632 $ 30,795 $ 5,757
=========== ========= =========
Supplemental cash flow information:
Interest paid, net of amount capitalized $ 29,873 $ 36,807 $ 39,732
Income taxes paid (refunded) 22,317 (1,676) 11,404
Non-cash property additions:
Satellites 13,129 2,493 5,403
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.
53
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<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, 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) (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
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (2,566) (2,566)
Unrealized loss on securities
(net of tax benefit of $5,626) (10,626) (10,626)
Foreign currency translation
(net of tax benefit of $894) (51,636) (51,636)
Minimum pension liability (net
of tax of $337) 554 554
----------
Total comprehensive loss (64,274)
Cash dividends (10,562) (10,562)
Stock awards and options, 401(k)
and employee stock purchase plan 637 453 16,538 (5,882) 1,848 12,504
Other 37 37 997 997
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 53,387 53,123 $448,072 $(8,991) $ 229,681 $(2,804) $(68,253) $597,705
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation. Accounts of COMSAT
Corporation and its majority-owned subsidiaries (COMSAT or the corporation)
have been consolidated. Significant intercompany transactions have been
eliminated. Investments in nonconsolidated affiliates (20% - 50% owned
companies) are accounted for using the equity method of accounting. Equity
in the net income (loss) of the nonconsolidated affiliates is reported in
"Other income (expense), net" on the income statement.
The corporation has consolidated its shares of the accounts of the
International Telecommunications Satellite Organization (INTELSAT) and,
prior to 1999, its shares of the accounts of the International Mobile
Satellite Organization (Inmarsat). Inmarsat completed its privatization on
April 15, 1999. As a result, the corporation now uses the equity method of
accounting to report its 22.2% ownership in the privatized Inmarsat. As of
December 31, 1999, the corporation owned 20.4% of INTELSAT. The
corporation's ownership interests in INTELSAT and Inmarsat prior to 1999
are based primarily on the corporation's usage of these systems.
Prior to 1999, the corporation consolidated its share of the accounts of
Inmarsat and reported its share of Inmarsat's revenues (net of space
segment costs paid to Inmarsat), cost of services, depreciation and
amortization and interest costs in the respective categories of the income
statement. The corporation now reports its proportionate share of
Inmarsat's net operating results using the equity method of accounting.
Space segment charges paid to Inmarsat are now reported in cost of
services. The corporation also reclassified Inmarsat related amounts from
property and equipment, current maturities of long-term debt, due to
related parties and long-term debt to form its investment in 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.
55
<PAGE>
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.
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
totaling $19,898,000 and $87,589,000 at December 31, 1999 are included in
"Other current assets" and "Other assets," respectively. At December 31,
1998, cash surrender values of life insurance policies of $97,529,000 were
reported in "Other assets." "Other income (expense), net" on the income
statement includes $3,983,000, $3,185,000 and $3,379,000 from the increases
in the cash surrender values of these policies in 1999, 1998 and 1997,
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.
56
<PAGE>
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.
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 was originally effective for fiscal years
beginning after June 15, 1999. In June 1999, FASB delayed implementation
of this statement by one year, to June 15, 2000. The corporation will
adopt SFAS No. 133 in the first quarter of 2001 and is evaluating the
impact that implementation of this statement will have on its consolidated
financial statements.
2. AGREEMENT AND PLAN OF MERGER WITH LOCKHEED MARTIN CORPORATION
On September 18, 1998, COMSAT entered into an Agreement and Plan of Merger
with Lockheed Martin Corporation. Under the terms of the merger agreement,
Lockheed Martin has agreed to acquire all of COMSAT's outstanding common
stock in a two-step transaction.
The first step of the transaction, a tender offer to purchase up to 49% of
the COMSAT common stock at $45.50 per share in cash, was completed on
September 18, 1999. As a result, Lockheed Martin now owns approximately
49% of COMSAT's common stock.
The merger agreement also provides that, as soon as practical after
satisfaction of required closing conditions, COMSAT will be merged with a
subsidiary of Lockheed Martin. In the merger, each remaining outstanding
share of COMSAT common stock will be converted into the right to receive
one share of common stock of Lockheed Martin. The exchange ratio in the
merger is subject to adjustment in the event of changes in the
capitalization of Lockheed Martin.
Significant conditions to the consummation of the merger include: the
amendment of the Communications Satellite Act of 1962 and the receipt of
the approvals of the FCC and other governmental authorities required for
the consummation of the merger. In March 2000, Congress passed and the
President signed the Open Market Reorganization for the Betterment of
International Telecommunications Act (commonly referred to as the "ORBIT
Act"). The ORBIT Act amends the Satellite Act and repeals upon enactment
the special restrictions on the ownership of COMSAT common stock. The
legislation will permit the merger with Lockheed Martin to be completed
following receipt of the remaining required regulatory approvals. In
addition, the obligations of Lockheed Martin 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 on COMSAT.
In connection with the merger agreement, the parties also entered into
several related agreements. COMSAT entered into a shareholders agreement
with Lockheed Martin, pursuant to which, following consummation of the
tender offer, three individuals selected
57
<PAGE>
by Lockheed Martin, two of whom previously served on the Board of Directors
of COMSAT, were designated Lockheed Martin directors and appointed to
certain committees of the Board. Under the shareholders agreement, COMSAT
also 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 transaction
documents. 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 certain transfer
restrictions that would otherwise apply to Lockheed Martin and to recommend
the amendment to shareholders for their approval. The shareholders
agreement also places restrictions on Lockheed Martin with respect to the
divesture of its COMSAT common stock.
In addition, COMSAT and Lockheed Martin entered into a registration rights
agreement, pursuant to which, if the merger is not consummated, Lockheed
Martin will have demand and piggy-back registration rights to cause COMSAT
to register the shares of COMSAT common stock that it holds.
COMSAT also entered into a carrier acquisition agreement with Lockheed
Martin, pursuant to which a subsidiary of COMSAT was merged with a
subsidiary of Lockheed Martin to facilitate consummation of the tender
offer. COMSAT received cash of $10,100,000, which equaled the book value
of the subsidiary, COMSAT Government Systems, Inc.
In connection with the merger agreement, COMSAT adopted a retention bonus
plan. The retention bonus plan generally provides retention bonuses to key
employees who remain employed by COMSAT or who incur a defined termination
of employment 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 related to the merger.
3. RECEIVABLES
Receivables consisted of:
<TABLE>
<CAPTION>
In thousands 1999 1998
--------------------------------------------------------------
<S> <C> <C>
Commercial receivables $100,202 $108,738
Receivables under long-term contracts:
U.S. Government:
Amounts billed 8,573 7,375
Unbilled costs and accrued profits 10,868 9,505
Commercial customers:
Amounts billed 9,731 5,177
Unbilled costs and accrued profits 6,602 2,675
Related party receivables 16,337 4,836
Other 13,046 9,869
-------------------
Total 165,359 148,175
Less allowance for doubtful accounts (15,386) (17,123)
-------------------
Net $149,973 $131,052
===================
</TABLE>
58
<PAGE>
Unbilled amounts represent accumulated costs and accrued profits that will
be billed at future dates in accordance with contract terms and delivery
schedules. The 1999 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. In February 2000, the note was amended so
that the balance would be paid in installments with interest through
December 15, 2000. At December 31, 1999, the note balance of $6,854,000 is
included in "Other" in the table above.
4. PROPERTY AND EQUIPMENT
Property and equipment includes the corporation's shares of INTELSAT (for
both 1999 and 1998) and Inmarsat (for 1998) property and equipment.
<TABLE>
<CAPTION>
In thousands 1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Property and equipment at cost:
Satellites $ 1,547,248 $ 1,643,145
Furniture, fixtures and equipment 355,283 696,602
Buildings and improvements 105,743 107,772
Land 4,468 3,246
-------------------------
Total 2,012,742 2,450,765
Less accumulated depreciation (1,209,924) (1,298,336)
-------------------------
Net, in service 802,818 1,152,429
Property and equipment under construction:
INTELSAT satellites 94,312 37,393
Other 15,345 19,640
-------------------------
Total $ 912,475 $ 1,209,462
=========================
</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 16 years;
furniture, fixtures and equipment, 3 to 15 years; buildings and
improvements, 3 to 40 years.
Change in Depreciable Lives of Satellites. Effective July 1, 1999, the
corporation extended the depreciable lives of certain INTELSAT satellites
by two to three years to reflect the current estimated useful lives of
those satellites. This change in estimate had the effect of decreasing
depreciation expense in 1999 by $10,467,000 and the net loss by $6,568,000
($0.12 per share).
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 SFAS No. 121. 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
59
<PAGE>
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.
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 is being 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 of
this obligation at December 31, 1999 totals $31,534,000, of which
$2,592,0000 is reflected in "Accounts payable and accrued liabilities" and
the remainder in "Other long-term liabilities."
At December 31, 1999, the future lease payments pursuant to the sale-
leaseback are $5,273,000 in 2000, $5,418,000 in 2001, $5,567,000 in 2002,
$5,720,000 in 2003, $5,877,000 in 2004 and $16,992,000 thereafter.
60
<PAGE>
5. INVESTMENTS
Investments as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Unrealized
Holding
In thousands Cost Gain Total
-----------------------------------------------------------------------
<S> <C> <C> <C>
1999
----
Available-for-sale equity securities $ 2,507 $ 3,431 $ 5,938
--------------------------------
Equity investees:
Inmarsat 169,474 - 169,474
Other 1,142 - 1,142
--------------------------------
Total 170,616 - 170,616
--------------------------------
Cost investments:
New Skies 147,507 - 147,507
Other 9,561 - 9,561
--------------------------------
Total 157,068 - 157,068
--------------------------------
Total 330,191 3,431 333,622
Less current portion 2,507 3,431 5,938
--------------------------------
Total $327,684 - $327,684
================================
<CAPTION>
Unrealized
Holding
In thousands Cost Gain Total
-----------------------------------------------------------------------
<S> <C> <C> <C>
1998
----
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 145,298 - 145,298
ICO 29,484 - 29,484
Other 6,587 - 6,587
--------------------------------
Total 181,369 - 181,369
Equity investees 447 - 447
--------------------------------
Total $229,381 $19,683 $249,064
================================
</TABLE>
Summarized Financial Information. Summarized financial information for the
corporation's nonconsolidated affiliates (Inmarsat Holdings - 22.2%, COMSAT
Max Limited - 49% and Rock Spring II Limited Partnership - 50%), primarily
Inmarsat, accounted for by the equity method, is set forth below. The
corporation's equity in the net loss of these nonconsolidated affiliates
was $16,202,000 in 1999.
Summarized balance sheet information at December 31, 1999:
<TABLE>
<CAPTION>
In thousands 1999
-------------------------------------
<S> <C>
Current assets $ 263,242
Non current assets 911,346
------------
Total assets $1,174,588
============
Current liabilities $ 177,228
Non current liabilities 361,333
------------
Total liabilities $ 538,561
============
</TABLE>
61
<PAGE>
Summarized income statement information for year ended December 31, 1999:
<TABLE>
<CAPTION>
In thousands 1999
----------------------------
<S> <C>
Revenues $432,173
Operating income 138,606
Net loss (45,312)
</TABLE>
New Skies. Effective November 30, 1998, INTELSAT transferred five
operational satellites to New Skies Satellites N.V. New Skies is a
commercial company which was created by INTELSAT.
As a result of INTELSAT's transfer of the satellites, plus working capital,
the corporation reclassified $146,826,000 from property and equipment,
$2,711,000 from other cost investments and $4,239,000 from liabilities to
establish its $145,298,000 investment in New Skies in 1998. As of December
31, 1999, the corporation owned directly 16.6% of New Skies and accounts
for this investment using the cost method.
If New Skies had been formed as of January 1, 1998, and if the satellites
had 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. ICO Global Communications (Holdings) Limited filed for Chapter 11
bankruptcy on August 27, 1999. During the third quarter of 1999, the
corporation wrote-off its 1.6% direct ownership interest in ICO of
$35,985,000. In addition, the corporation had an indirect investment of
$34,650,000 in ICO through its investment in Inmarsat, which is also an ICO
shareholder. Inmarsat also subsequently wrote-off its investment in ICO,
and in the fourth quarter of 1999 the corporation recognized the loss as
part of its share of Inmarsat's net results.
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 in 1998. This income is recorded
in "Other income (expense), net" on the income statement.
Realized Gains (Losses). The corporation realized gains of $29,701,000,
$14,635,000 and $1,987,000 from the sale of investments during 1999, 1998
and 1997, respectively. In 1998, the corporation also wrote-off a
$1,950,000 investment accounted for using the cost method. These amounts
are reported in "Other income (expense), net" on the income statement.
6. 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
62
<PAGE>
Russia and the Commonwealth of Independent States (CIS). 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.
7. DISCONTINUED OPERATIONS
The corporation began accounting for Ascent Entertainment Group, Inc., 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.
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 a loss from operations of $17,779,000 (net of
a $5,047,000 tax benefit) in 1997. 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.
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.
COMSAT retained and is completing a long-term construction contract for a
radio astronomy telescope in Green Bank, West Virginia. 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 $13,141,000 in damages for delay. The claim
and counterclaim are currently in arbitration. There can be no assurance
that the
63
<PAGE>
corporation will be successful in collecting all or any portion of this
claim, or that the corporation will prevail in defense of the counterclaim.
Electromechanical Systems, Inc. (EMS) was excluded from the CRSI sale and
retained by the corporation pending possible sale. Effective December 31,
1999, the corporation will report EMS in continuing operations since a sale
has not been consummated. The estimated loss on disposal of CRSI in 1997
did not include an estimated loss on disposal for EMS. EMS' assets,
revenues and income have not been material to the corporation's financial
position or operating results. The corporation plans to continue to hold
EMS for sale.
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 and income of $207,000 (net of a $46,000 tax
expense) in 1997. 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 CRSI remaining at December 31, 1999 and 1998 amounted to
$10,493,000 and $15,016,000, respectively, and primarily consist of
receivables on long-term contracts, fixed assets, current liabilities and
the remaining reserve for estimated loss on disposal. Of these amounts,
$9,162,000 and $2,052,000 are reported in "Other assets" at December 31,
1999 and 1998, respectively.
8. DEBT
The corporation's capital and debt-financing activities are currently
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
a defined interest coverage ratio of 2.3 to 1. At December 31, 1999, the
corporation was in compliance with those guidelines. We anticipate that,
under the ORBIT Act, FCC regulation of our capital structure and the
resulting capitalization requirements will be eliminated.
64
<PAGE>
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 1999 1998
-----------------------------------------------------------------------
<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 29,758 26,980
7.375% INTELSAT Eurobonds due 2002 39,677 35,973
8.375% INTELSAT Eurobonds due 2004 39,677 35,973
6.625% INTELSAT Asian bonds due 2004 39,677 35,973
8.125% INTELSAT Eurobonds due 2005 39,677 35,973
INTELSAT capital lease 12,395 -
Inmarsat lease financing obligations - 82,135
Medium-term notes, 7.7%-8.66%, due 2006-2007 64,000 64,000
Discounts on notes payable (571) (688)
-------------------
Total 409,765 461,794
Less current portion (786) (14,962)
-------------------
Total long-term debt $408,979 $446,832
===================
</TABLE>
Maturities of long-term debt (excluding the 6.75% INTELSAT Eurobonds
discussed below) over the next five years are $786,000 in 2000, $75,974,000
in 2001, $40,827,000 in 2002, $1,228,000 in 2003 and $150,793,000 in 2004.
Commercial Paper. The corporation issues short-term commercial paper as
needed with repayment terms of 90 days or less under a $140,000,000
program. The corporation had no borrowings at December 31, 1999 or 1998.
Credit Facilities. The corporation has a $140,000,000 revolving credit
agreement, which expires in December 2000 and provides a backup source of
credit to the commercial paper program. There have been no borrowings
under this agreement.
INTELSAT Eurobonds. In January 2000, INTELSAT refinanced its 6.75%
Eurobonds due 2000 with borrowings under its commercial paper program.
INTELSAT also established the necessary credit facilities, through its
revolving credit agreement, to refinance the commercial paper on a long-
term basis. Therefore, the 6.75% Eurobonds remain classified in long-term
debt at December 31, 1999 because it is INTELSAT's intent to refinance its
commercial paper on a long-term basis.
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 at December 31, 1998.
65
<PAGE>
Financial Instruments. 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:
<TABLE>
<CAPTION>
1999 1998
-------------------- ------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8.125% notes due 2004 $ 70,475 $ 70,528 $ 70,475 $ 77,971
8.95% notes due 2001 75,000 76,518 75,000 80,525
INTELSAT bonds 188,466 192,266 170,872 183,974
Medium-term notes 64,000 62,392 64,000 72,162
Monthly income preferred securities 200,000 161,500 200,000 203,000
</TABLE>
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, 1999, 1998 and 1997.
10. COMMITMENTS
Property and Equipment. As of December 31, 1999, the corporation had
commitments to acquire property and equipment totaling $226,755,000. Of
this total, $204,440,000 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 $8,668,000 in 1999, $7,579,000 in
1998 and $5,367,000 in 1997. The future rental payments under operating
leases are $6,192,000 in 2000, $6,235,000 in 2001, $6,212,000 in 2002,
$5,372,000 in 2003, $5,161,000 in 2004 and $12,528,000 thereafter.
66
<PAGE>
Space Segment. At December 31, 1999, the corporation's commitments for
space segment capacity from Inmarsat, New Skies and other parties are
$26,112,000 in 2000, $25,391,000 in 2001, $23,447,000 in 2002, $16,631,000
in 2003, $13,362,000 in 2004 and $34,851,000 thereafter.
11. REGULATORY ENVIRONMENT AND CONTINGENCIES
Regulatory Environment. COMSAT is subject to regulation by the FCC, under
the Communications Satellite Act and the Communications Act, with respect
to various aspects of 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 March 2000, Congress passed and the President signed the ORBIT Act. The
ORBIT Act amends the Satellite Act and repeals upon enactment the special
restrictions on the ownership of COMSAT common stock and FCC regulation of
COMSAT's capital structure. The ORBIT Act also establishes deadlines for
the privatization of INTELSAT and the completion of initial public
offerings by INTELSAT, Inmarsat and New Skies, as well as specific criteria
for determining whether the privatizations of those entities are pro-
competitive. If those criteria are not met, the FCC may limit access by
U.S. users to the satellite capacity of the privatized entities for so-
called "non-core" services. During the transition to privatization, the
ORBIT Act also restricts INTELSAT, Inmarsat and New Skies from providing
certain additional services. The ORBIT Act also codifies an FCC action
taken in 1999 that permits U.S. users and telecommunications providers to
acquire satellite capacity directly from INTELSAT without going through
COMSAT ("Level 3" direct access). In addition, the ORBIT Act removes
provisions of the Satellite Act providing for Presidentially-appointed
COMSAT directors and removes COMSAT's immunity from suit in its capacity as
an INTELSAT Signatory, subject to a limited exception for actions taken
pursuant to U.S. Government instruction.
Prior to passage of the ORBIT Act, the FCC adopted a new policy of direct
access to INTELSAT in the United States. Specifically, the FCC authorized
"Level 3" direct access. The FCC rejected requests to allow entities other
than COMSAT to invest in INTELSAT proportionate to their usage, finding
that the FCC lacked the authority under the Satellite Act to permit "Level
4" direct access. In addition, the FCC authorized COMSAT to file a tariff
to charge all direct access users a surcharge to recover the costs incurred
by COMSAT as signatory to INTELSAT. COMSAT's new direct access tariff
became effective on December 6, 1999. Under the tariff, direct access
users must pay COMSAT 5.58% of the rate the direct access users pay to
INTELSAT for capacity ordered directly. The level of this surcharge will
be reviewed in 2001, and the surcharge will be eliminated upon
privatization of INTELSAT. The FCC also rejected claims that COMSAT's
long-term carrier contracts should be subject to government abrogation
under the "fresh look" doctrine, thus preserving COMSAT's backlog of
contracted
67
<PAGE>
capacity commitments. Moreover, the FCC declined to pursue claims for
"portability" of COMSAT's capacity to users.
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.
In February 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.
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 their
business. See Note 7 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 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 has been granted a stay of 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.
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.
68
<PAGE>
In response to a 1998 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 1998. In addition, the corporation has responded
to 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.
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998
----------------------------------------------------
<S> <C> <C>
Unrealized gain on securities $ 2,153 $ 12,779
Foreign currency translation (66,419) (14,783)
Minimum pension liability (3,987) (4,541)
---------------------
Total $(68,253) $ (6,545)
=====================
</TABLE>
The unrealized gain on securities is net of reclassification adjustments of
$12,373,000 and $1,707,000, net of tax, in 1999 and 1998, respectively, for
net realized gains on securities included in net income (loss).
69
<PAGE>
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 1999 1998 1997
------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations
before extraordinary item $ (2,566) $26,417 $28,568
========= ======= =======
Basic:
Weighted average shares outstanding 52,694 51,673 48,924
========= ======= =======
Per share $ (0.05) $ 0.51 $ 0.58
========= ======= =======
Assuming dilution:
Weighted average shares outstanding 52,694 51,673 48,924
Stock options - 1,415 766
Restricted stock awards and units - 195 313
--------- ------- -------
Total 52,694 53,283 50,003
========= ======= =======
Per share $ (0.05) $ 0.50 $ 0.57
========= ======= =======
</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 6,620,000
shares of common stock may be granted under the current plans. As of
December 31, 1999, 255,000 shares of the corporation's treasury stock and
6,365,000 unissued common shares were reserved for these plans. As of
December 31, 1999, no stock appreciation rights were outstanding.
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.
Stock option activity was as follows:
<TABLE>
<CAPTION>
Options in thousands 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1 3,431 5,152 4,478
Granted 813 997 655
Exercised (406) (2,465) (848)
Canceled (182) (253) (283)
Adjustment due to Ascent spinoff - - 1,150
-------- ------- -------
Outstanding at December 31 3,656 3,431 5,152
Exercisable at December 31 2,097 1,709 3,300
Average price
Outstanding at January 1 $21.46 $ 18.33 $22.20
Granted 29.30 31.14 25.01
Exercised 15.21 18.91 18.26
Canceled 28.77 20.75 18.68
Adjustment due to Ascent spinoff - - 17.84
Outstanding at December 31 23.54 21.46 18.33
Exercisable at December 31 19.78 17.79 18.92
</TABLE>
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<PAGE>
The weighted average fair value at date of grant for options granted during
1999, 1998 and 1997 was $16.08, $12.72 and $6.89, respectively. The fair
value of options at date of grant was estimated using the Black-Scholes
model assuming an expected option life of six years and the following
weighted average assumptions:
<TABLE>
<CAPTION>
Per share 1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Dividend yield 0.61% 0.84% 3.29%
Interest rate 5.18% 5.35% 6.47%
Volatility 56.13% 36.82% 37.21%
</TABLE>
Stock options outstanding and exercisable at December 31, 1999, 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> <C>
$ 4.81 - $ 8.60 113 6.3 $ 7.06 113 $ 7.06
14.51 - 18.85 775 6.2 16.00 775 16.00
20.05 - 29.90 1,877 8.1 23.98 969 21.28
30.12 - 38.79 891 8.9 31.23 240 31.82
------------------ ------------- ------------- --------- ------------- ----------------
4.81 - 38.79 3,656 7.8 23.54 2,097 19.78
================== ============= ============= ========= ============= ================
</TABLE>
Restricted Stock Awards. Restricted stock awards are shares of stock that
are subject to restrictions on their sale or transfer. In 1999, 1998 and
1997, 33,600, 30,800 and 152,470 "performance-based" restricted stock
awards were granted, respectively. 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 date of grant for
restricted stock awards granted during 1999, 1998 and 1997 was $29.13,
$30.81 and $23.71 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 (benefit) for all outstanding grants in 1999,
1998 and 1997 was $(80,000), $1,071,000 and $870,000, respectively.
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 1999, 1998 and 1997, respectively, 22,000, 36,850 and 54,360
restricted stock units were granted. The weighted average fair value for
the units granted during 1999, 1998 and 1997 was $29.34, $32.32 and $25.50
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 69,772 at December 31, 1999 and 80,036 at
December 31, 1998. The cost of these awards is amortized to expense over
the three-year vesting period. The expense (benefit) in 1999, 1998 and
1997 was $(30,000), $1,012,000 and $575,000, respectively.
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<PAGE>
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
1999, 1998 and 1997, was $30.92, $19.76 and $21.36 (adjusted to $17.22
subsequent to the Ascent spinoff), respectively.
There were 132,000 shares, 196,000 shares and 181,000 shares issued under
this plan at weighted average prices of $23.45, $19.76 and $18.26 for the
years ended December 31, 1999, 1998 and 1997, respectively. As of December
31, 1999, a total of 1,249,000 shares of the corporation's unissued common
stock have been reserved for this plan.
The weighted average fair value of the purchase rights granted pursuant to
this plan in 1999, 1998 and 1997 was $11.94, $5.66 and $5.95, 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 1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Dividend yield 0.61% 0.84% 3.30%
Interest rate 4.63% 5.56% 5.39%
Volatility 55.79% 36.52% 35.79%
</TABLE>
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
(loss) 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 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations
before extraordinary item:
As reported $(2,566) $26,417 $28,568
Proforma (7,945) 23,380 26,024
Earnings (loss) per common share - basic:
As reported $ (0.05) $ 0.51 $ 0.58
Proforma (0.15) 0.45 0.53
Earnings (loss) per common share - assuming dilution:
As reported $ (0.05) $ 0.50 $ 0.57
Proforma (0.15) 0.44 0.52
</TABLE>
The proforma effect on income (loss) 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.
72
<PAGE>
13. PENSION AND OTHER BENEFIT 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 1999 1998 1997
-----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,972 $ 2,401 $ 2,005
Interest cost 9,037 8,400 7,690
Expected return on plan assets (11,856) (10,158) (9,039)
Amortization of transition asset - (1,195) (1,208)
Amortization of prior service costs 363 382 386
-------------------------------
Net periodic pension expense (benefit) $ 516 $ (170) $ (166)
===============================
</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, 1999 and 1998:
<TABLE>
<CAPTION>
In thousands 1999 1998
------------------------------------------------ -------------------
<S> <C> <C>
Reconciliation of benefit obligation
Benefit obligation at January 1 $134,783 $119,826
Service cost 2,972 2,401
Interest cost 9,037 8,400
Actuarial (gain) loss (14,401) 8,654
Benefits paid from plan assets (4,941) (4,498)
-------- --------
Benefit obligation at December 31 $127,450 $134,783
======== ========
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $167,605 $150,874
Actual return on plan assets 21,999 21,229
Benefits paid from plan assets (4,941) (4,498)
-------- --------
Fair value of plan assets at December 31 $184,663 $167,605
======== ========
Funded status
Funded status at December 31 $ 57,213 $ 32,822
Unrecognized gain (62,762) (38,218)
Unrecognized prior service cost 783 1,146
-------- --------
Accrued pension liability $ (4,766) $ (4,250)
======== ========
Assumed discount rate 7.75% 6.75%
Assumed rate of compensation increase 5.50% 5.50%
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 1999 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 336 $ 324 $ 278
Interest cost 1,735 1,703 1,409
Amortization of transition obligation 266 266 266
Amortization of losses 1,003 842 210
-------- ------ ------
Net periodic pension expense $3,340 $3,135 $2,163
======== ====== ======
</TABLE>
73
<PAGE>
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, 1999 and 1998:
<TABLE>
<CAPTION>
In thousands 1999 1998
----------------------------------------------------------------------
<S> <C> <C>
Reconciliation of benefit obligation
Benefit obligation at January 1 $ 26,388 $ 21,193
Service cost 336 324
Interest cost 1,735 1,703
Actuarial (gain) loss (119) 4,895
Benefits paid (1,746) (1,727)
-------- --------
Benefit obligation at December 31 $ 26,594 $ 26,388
======== ========
In thousands 1999 1998
----------------------------------------------------------------------
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ - $ -
Employer contributions 1,746 1,727
Benefits paid (1,746) (1,727)
-------- --------
Fair value of plan assets at December 31 $ - $ -
======== ========
Funded status
Funded (unfunded) status at December 31 $(26,594) $(26,388)
Unrecognized loss 7,694 8,816
Unrecognized transition obligation 532 798
Additional minimum liability (6,884) (8,042)
-------- --------
Total accrued liability $(25,252) $(24,816)
======== ========
Intangible asset $ 532 $ 798
Amount recognized in accumulated
other comprehensive income (loss) $ 6,353 $ 7,244
Assumed discount rate 7.75% 6.75%
Assumed rate of compensation increase 5.50% 5.50%
</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 expense recognized each year were as follows: 1999 - 72,000 shares
($2,034,000), 1998 - 68,000 shares ($2,186,000) and 1997 - 108,000 shares
($2,433,000).
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 1999 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,165 $ 895 $ 666
Interest cost 2,469 2,252 1,877
Amortization of net gains (1,901) (1,841) (2,360)
--------- ------- -------
Net post-retirement benefit expense $ 1,733 $ 1,306 $ 183
========= ======= =======
</TABLE>
74
<PAGE>
The following tables show a reconciliation of the changes in the post-
retirement plan's benefit obligation and fair value of the plan assets as
well as the funded status of the plan as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
In thousands 1999 1998
------------------------------------------------------------------
<S> <C> <C>
Reconciliation of benefit obligation
Benefit obligation at January 1 $ 35,209 $ 28,890
Service cost 1,165 895
Interest cost 2,469 2,252
Plan amendments (1,332) (573)
Actuarial (gain) loss (2,375) 5,373
Benefits paid (1,581) (1,628)
-------- --------
Benefit obligation at December 31 $ 33,555 $ 35,209
======== ========
In thousands 1999 1998
------------------------------------------------------------------
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 $ - $ -
Employer contributions 1,581 1,628
Benefits paid (1,581) (1,628)
-------- --------
Fair value of plan assets at December 31 $ - $ -
======== ========
Funded status
Funded (unfunded) status at December 31 $(33,555) $(35,209)
Unrecognized gain loss (3,830) (1,455)
Unrecognized gain from plan changes (11,690) (12,259)
-------- --------
Accrued post-retirement benefit costs $(49,075) $(48,923)
======== ========
Assumed discount rate 7.75% 6.75%
Assumed rate of compensation increase 5.50% 5.50%
</TABLE>
An 8.0% increase in health care costs was assumed for 1999 with the rate
decreasing 0.5% each year to an ultimate annual rate of 5.5%. A 1.0%
change in the assumed health care cost trend rate would have the following
impact on post-retirement benefit cost and obligation:
<TABLE>
<CAPTION>
1.0% Change
------------------
In thousands Increase Decrease
-------------------------------------------------------- ------------------
<S> <C> <C>
Effect on total service and interest cost
component of post-retirement benefit cost $ 567 $ (448)
======== =======
Effect on the post-retirement benefit obligation $4,098 $(3,239)
======== =======
</TABLE>
14. INCOME TAXES
Income (loss) from continuing operations before taxes and extraordinary
item consisted of:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
United States $ 19,081 $ 63,144 $47,927
Foreign (21,031) (30,936) (3,746)
--------- -------- -------
Total $ (1,950) $ 32,208 $44,181
========= ======== =======
</TABLE>
75
<PAGE>
The components of income tax expense on continuing operations are:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 22,488 $ 6,914 $15,783
Deferred (17,989) 1,962 (2,162)
Investment tax credits (net) (1,671) (1,687) (1,837)
State and local (136) (2,369) 1,487
Foreign (2,076) 971 2,342
---------- ------- -------
Total $ 616 $ 5,791 $15,613
========== ======= =======
</TABLE>
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 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $ (686) $ 11,273 $15,463
Foreign losses 3,768 5,389 3,654
Investment tax credits (net) (1,671) (1,688) (1,837)
Adjustment to estimated income tax accruals - (14,208) (839)
State income taxes, net of federal income taxes (212) (1,569) 972
Life insurance (net) (1,304) (1,115) (1,183)
Other non-deductible costs 1,287 1,612 671
Merger costs 1,962 1,467 -
Impairment loss - 4,900 -
Inmarsat equity rate differences (2,263) - -
Other (265) (270) (1,288)
--------- -------- -------
Income tax expense $ 616 $ 5,791 $15,613
========= ======== =======
</TABLE>
The current and net non-current components of deferred tax accounts as
shown on the balance sheet at December 31, 1999 and 1998 are:
<TABLE>
<CAPTION>
In thousands 1999 1998
------------------------------------ ---------------------
<S> <C> <C>
Current deferred tax asset $ 15,140 $ 7,911
Non-current deferred tax liability (106,563) (127,351)
--------- ---------
Net liability $ (91,423) $(119,440)
========= =========
</TABLE>
76
<PAGE>
The deferred tax assets and liabilities at December 31, 1999 and 1998 are:
<TABLE>
<CAPTION>
In thousands 1999 1998
------------------------------------- ---------------------
<S> <C> <C>
Assets:
Post-retirement benefits $ 23,451 $ 23,425
Accrued expenses 39,985 42,787
NOL carryforward 7,634 9,818
Long-term contract revenues 8,350 6,876
Unrealized tax losses on securities 14,799 -
Foreign tax credit carryforward - 3,159
Alternative minimum tax credit 31,346 31,454
Other 4,050 4,954
--------- ---------
Total deferred tax assets 129,615 122,473
--------- ---------
Liabilities:
Property and equipment (158,668) (209,952)
Unrealized gain on securities (1,319) (6,098)
Foreign currency translation (2,264) (3,158)
Basis in cost investment (21,155) (22,705)
Basis in equity investment (37,632) -
--------- ---------
Total deferred tax liabilities (221,038) (241,913)
--------- ---------
Net liability $ (91,423) $(119,440)
========= =========
</TABLE>
In 1998 the corporation favorably resolved a state tax audit for the years
1992 through 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.
In addition in 1998, the corporation reversed previously accrued interest
costs of $2,456,000 and taxes of $15,100,000 for the years 1990 through
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 corporation and its subsidiaries are subject to, and are currently a
party to, federal, state and foreign tax audits in the ordinary course of
their business. 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 and
settlement discussions with the IRS and Department of Justice are at an
advanced stage. In addition, the corporation is currently contesting a
value-added tax assessment in Argentina and an import tax assessment in
Brazil. The corporation is unable to predict the outcome of these matters
or estimate the amount or timing of any settlement or tax liability that
might result. In the opinion of the corporation, adequate provision has
been made for income and other taxes for all periods through 1999.
77
<PAGE>
15. BUSINESS SEGMENT INFORMATION
The corporation reports operating results and financial data in four
segments: COMSAT World Systems (CWS), COMSAT Mobile Communications (CMC),
International (CI) and Laboratories (Labs). 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. through September 18, 1999, the date it was merged with a
subsidiary of Lockheed Martin, 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
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.
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, "Segment income
(loss)." 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 equal the amount presented as income before
taxes and extraordinary item in the consolidated income statements.
CWS's segment income in 1998 includes a $4,303,000 gain from a settlement
with ICO (see Note 5).
CMC's segment loss in 1999 includes the $35,985,000 write-off of its direct
investment in ICO and equity in the net loss of Inmarsat of $16,656,000,
which includes CMC's share of Inmarsat's ICO write-off of $34,650,000 (see
Note 5). CMC's total assets in 1999 include the $169,474,000 equity
investment in Inmarsat.
CI's segment loss in 1998 includes a $14,000,000, non-cash impairment loss
on long-lived assets (see Note 6). CI's 1999 and 1998 segment loss
includes realized gains of $25,671,000 and $14,635,000, respectively, from
the sale of marketable equity securities.
78
<PAGE>
<TABLE>
<CAPTION>
SATELLITE SERVICES
--------------------------------
In thousands CWS CMC TOTAL CI LABS OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Revenues:
External customers $341,154 $121,958 $ 463,112 $108,365 $46,789 $ - $ 618,266
Intersegment 1,719 1,040 2,759 185 7,318 (10,262) -
-----------------------------------------------------------------------------
Total 342,873 122,998 465,871 108,550 54,107 (10,262) 618,266
Segment income (loss) 137,068 (52,196) 84,872 142 (836) (86,128) (1,950)
Total assets 816,444 278,372 1,094,816 253,008 21,235 282,665 1,651,724
Capital expenditures 76,195 8,770 84,965 36,334 2,141 4,860 128,300
Depreciation and amortization 98,304 19,736 118,040 40,561 1,309 4,877 164,787
- ------------------------------------------------------------------------------------------------------------
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
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
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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Related Party Transactions. The corporation provides support services to
INTELSAT, satellite capacity to Lockheed Martin and support services and
satellite capacity to Inmarsat. The revenues from these services were
$35,343,000 in 1999, $15,385,000 in 1998 and $16,364,000 in 1997. These
revenues were recorded primarily in CWS, CMC and Labs.
Major Customers. Revenues from three major customers contributed
$226,776,000, $235,637,000 and $224,683,000 to the corporation's
consolidated revenues in 1999, 1998 and 1997, respectively.
79
<PAGE>
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 1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
United States $509,901 $ 503,363 $ 474,101
Foreign 108,365 113,106 88,550
-------- ---------- ----------
Total $618,266 $ 616,469 $ 562,651
======== ========== ==========
<CAPTION>
Property and Equipment
--------------------------------
In thousands 1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
United States $716,917 $ 954,953 $1,123,750
Foreign 195,558 254,509 235,543
-------- ---------- ----------
Total $912,475 $1,209,462 $1,359,293
======== ========== ==========
</TABLE>
80
<PAGE>
16. QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
In thousands, except per 1st 2nd 3rd 4th Total Year
share amounts Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999:
Revenues $144,541 $155,925 $155,705 $162,095 $618,266
Operating income 12,776 (1) 17,949 (1) 15,821 (1) 15,549 (1) 62,095
Net income (loss) 12,026 (2) 11,969 (3) (18,402) (4) (8,159) (5) (2,566)
Earnings (loss) per share:
Basic 0.23 0.23 (0.35) (0.15) (0.05)
Assuming dilution 0.22 0.22 (0.35) (0.15) (0.05)
Dividends per share 0.05 0.05 0.05 0.05 0.20
Stock price:
High 36 11/16 35 1/8 37 1/16 29 15/16 37 1/16
Low 27 27 13/16 26 5/8 15 3/8 15 3/8
Close 28 15/16 32 1/2 29 5/8 19 7/8 19 7/8
- -----------------------------------------------------------------------------------------------------------------------------------
1998:
Revenues $144,717 $151,045 $158,415 $162,292 $616,469
Operating income 19,676 20,962 2,377 (7) 16,487 (9) 59,502
Net income 3,850 (6) 4,074 6,569 (8) 11,924 (10) 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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Merger costs of $1,836,000, $2,057,000, $5,259,000 and $1,121,000 were
incurred in the first through fourth quarters of 1999, respectively.
(2) The first quarter of 1999 includes a pre-tax gain of $13,100,000 from
the sale of a marketable equity security.
(3) The second quarter of 1999 includes a pre-tax gain of $12,571,000 from
the sale of a marketable equity security.
(4) The third quarter of 1999 includes a pre-tax $35,985,000 write-off of
the corporation's direct investment in ICO.
(5) The fourth quarter of 1999 includes a pre-tax $34,650,000 loss from
Inmarsat's write-off of its investment in ICO and a pre-tax gain of
$2,922,000 from the sale of a marketable equity security.
(6) The first quarter of 1998 includes the $1,950,000 non-cash write-off of
an investment.
(7) 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.
(8) 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.
(9) The fourth quarter of 1998 includes merger costs of $2,025,000.
(10) 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.
81
<PAGE>
Item 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
DIRECTORS OF THE REGISTRANT
The Satellite Act provided that COMSAT's Board of Directors was to consist
of 15 directors, of whom 12 were to be elected annually by the shareholders for
terms of one year and three were 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 ORBIT Act,
which was enacted into law in March 2000, repeals the provisions of the
Satellite Act prescribing Presidentially-appointed directors. Prior to
enactment of the ORBIT Act, COMSAT's Board of Directors consisted of 13
directors, as there were two vacancies pending Presidential appointment. The
term of COMSAT's remaining Presidentially-appointed director expired upon
enactment of the ORBIT Act. COMSAT's Board of Directors currently consists of
12 directors, all of whom were elected by shareholders.
The following sets forth certain information concerning the directors of
the Corporation.
BETTY C. ALEWINE, 51, 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 COMSAT since July 1996. She also is a director of
New York Life Insurance Co., The Pittston Company, 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, as well as a
Vice Chairman of the Kennedy Center Corporate Fund.
MARCUS C. BENNETT, 64, is a director of various organizations. He was Executive
Vice President and Chief Financial Officer of Lockheed Martin from 1995 to
January 1999 and is a director of Lockheed Martin. 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.
Mr. Bennett has been appointed to the COMSAT Board by Lockheed Martin pursuant
to the terms of the shareholders agreement. Lockheed Martin owns approximately
49% of COMSAT's common stock.
82
<PAGE>
LUCY WILSON BENSON, 72, 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 or trustee of
funds of The Dreyfus Corporation, and is Vice Chairperson of the Atlantic
Council of the U.S. She also is a trustee of the Alfred P. Sloan Foundation,
Lafayette College and the Citizens Network for Foreign Affairs.
EDWIN I. COLODNY, 73, 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.
NEAL B. FREEMAN, 59, 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
Chairman of Foundation Management Institute and a director of GRC International,
Inc. and National Review, Inc.
CALEB B. HURTT, 68, 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 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. Mr. Hurtt has been appointed to
the COMSAT Board by Lockheed Martin pursuant to the terms of the shareholders
agreement. Lockheed Martin owns approximately 49% of COMSAT's common stock.
PETER W. LIKINS, 63, 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
or trustee of Parker Hannifin, Inc., Consolidated Edison, Inc. and the
University Medical Center in Tucson, Arizona.
LARRY G. SCHAFRAN, 61, has been the Managing General Partner of L.G. Schafran &
Associates, a real estate investment and development firm, since 1984. He
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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., Kasper A.S.L., Ltd.,
Banyon Strategic Realty Trust and Chairman of the Board of Directors of Delta-
Omega Technologies, Inc.
ROBERT G. SCHWARTZ, 71, 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 Lowe's Companies, Inc., Potlatch Corporation and the
Horatio Alger Association for Distinguished Americans.
JOHN V. SPONYOE, 61, is the Chief Executive Officer of Lockheed Martin Global
Telecommunications, a wholly owned subsidiary of Lockheed Martin Corporation
that was formed in August 1998. He was President of Lockheed Martin's
Electronics Platform Integration (EPI) Group from April 1997 to August 1998 and
was elected a corporate vice president by the Lockheed Martin board of directors
in January 1997. Mr. Sponyoe joined Lockheed Martin in April 1996 when Lockheed
Martin acquired Loral Federal Systems Owego, of which he was President. Mr.
Sponyoe joined Loral Corporation in March 1994 when Loral Corporation acquired
IBM Corporation's Federal Systems Division (FSD) Owego facility, of which he was
Vice President and General Manager. Mr. Sponyoe has been appointed to the
COMSAT Board by Lockheed Martin pursuant to the terms of the shareholders
agreement. Lockheed Martin owns approximately 49% of COMSAT's common stock.
KATHRYN C. TURNER, 52, 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, 59, 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 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------------------------
Name Title Age*
- -----------------------------------------------------------------------------
Betty C. Alewine President and Chief Executive Officer 51
Edward E. Berger Treasurer 42
Allen E. Flower Vice President and Chief Financial Officer 56
Alan G. Korobov Controller 51
John H. Mattingly President, COMSAT Satellite Services 49
Benjamin A. Pontano President, COMSAT Laboratories 56
James J. Welch President and General Manager, COMSAT 55
International
Warren Y. Zeger Vice President, General Counsel and Secretary 52
- -----------------------------------------------------------------------------
*As of March 1, 2000.
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.
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
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<PAGE>
through November 1995 and Controller from June 1992 to May 1995. He also is a
director of Calian Technology Ltd.
Mr. Korobov has been Controller since November 1995. He was Vice
President, Finance for COMSAT Mobile Communications 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.
Section 16(a) Beneficial Ownership Reporting Compliance
The Form 3 for Mr. John V. Sponyoe, a director of COMSAT, was filed
approximately one month after he became a director.
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<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 of Directors
after the annual meeting of shareholders. Those directors also receive a fee of
$1,000 per meeting for attending meetings of the Board of Directors, meetings of
committees of the Board of Directors or meetings held pursuant to a special
assignment. For service as chair of a committee of the Board of Directors, 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. Phantom stock units are held in an account for each director
pending retirement or termination of service on the Board of Directors. Upon
payment of a dividend on COMSAT common stock, an equivalent dollar amount is
converted to phantom stock units, based on the fair market value of the stock on
the dividend payment date, and credited to the director's account. The phantom
stock units increase or decrease in value based on an equivalent number of
shares of COMSAT 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 common stock equal to the number of phantom stock units credited to the
director's phantom stock unit 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 1999, Mr. Colodny received $215,000 per year.
Effective August 1, 1999, this amount was increased to $245,000. 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;
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<PAGE>
. 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
. 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 this date.
For 1999, Mr. Colodny elected to receive $100,000 of the annual cash
compensation payable to him as Chairman in stock. Pursuant to his election, he
was granted 2,756 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 of Directors. 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 1999:
. the interest crediting rate was prime plus 1% for amounts deferred after 1996,
12.75% for amounts deferred from February 1994 to December 1996 and 12.86% 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 $453,835.
In 1991, each director at that time serving on the Board of Directors
and participating in the plan was given an election to receive his 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 these 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 this director if this beneficiary is then receiving the
installment payments. The lump sum payment will be offset against the amounts
otherwise payable to the director or beneficiary under the plan.
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<PAGE>
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 account in
accordance with the terms of the plan and the participant's elections.
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 service on the Board of
Directors until the benefit reaches $200,000;
. payments increased by 5.5% for each additional year of service on the Board of
Directors to age 72 (this increased coverage does not apply to Presidentially-
appointed directors); and
. coverage continues after retirement from the Board of Directors.
For 1999, the aggregate value of split dollar life insurance premiums paid for
the benefit of all covered directors was $101,519.
Non-Employee Directors Stock Plan
Under the Non-Employee Directors Stock Plan, in April 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. 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;
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<PAGE>
. 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 1998 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.
Options become fully exercisable and continue in force for the
duration of their terms in the following situations:
. termination of service on the Board of Directors by reason of retirement at
age 72;
. expiration of a term as a Presidentially-appointed director;
. failure to stand for election with the Board of Directors' consent; or
. resignation with the Board of Directors' 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;
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. 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 of Directors, 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 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.
In September 1998, the plan was amended to provide that only the
closing of the merger with Lockheed Martin, and not any of the other
transactions contemplated by the merger agreement, would constitute a change in
control for purposes of this plan.
In 1999, options for a total of 64,493 shares of common stock were
granted to non-employee directors at a purchase price per share of $30.8750,
which was the fair market value of the common stock on the date of grant. In
1999, Mrs. Benson and Mr. Schwartz each exercised 2,480 options granted
previously under the plan, and realized net values, which is the market value on
exercise date less exercise price, of $52,312 and $48,049, 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. These agreements expired as of August 1999.
COMSAT entered into an agreement with Lawrence S. Eagleburger, a
director who retired effective October 14, 1999, to retain his advisory services
to the Chairman of the Board and the President and Chief Executive Officer for a
period of two years or until the closing of the Lockheed Martin merger,
whichever is earlier, at a rate of $25,000 per year.
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EXECUTIVE COMPENSATION
The following table shows the compensation for the three fiscal years
ended December 31, 1999 received by (i) the Chief Executive Officer; and (ii)
the other four most highly compensated executive officers of COMSAT who were
serving as such at year end 1999. These five 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.
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation | Long-Term Compensation
- -----------------------------------------------------------------------------------|----------------------------------------------
Name and Principal Year Salary Bonus(1) Other Annual | Restricted Securities
Position Compensation(2) | Stock Underlying All Other
| Award(s)(3) Options(#)(4) Compensation(5)
- ------------------ ---- -------- -------- --------------- | ----------- ------------- ---------------
<S> <C> <C> <C> <C> | <C> <C> <C>
Betty C. Alewine, 1999 $608,173 $455,863 $ 750 | $203,875 63,000 $ 25,301
President & Chief -------------------------------------------------|---------------------------------------------
Executive Officer 1998 533,173 406,258 665 | 182,625 30,000 22,736
-------------------------------------------------|---------------------------------------------
1997 472,116 306,756 $ 8,370 | 498,749 0 22,135
|
- -----------------------------------------------------------------------------------|---------------------------------------------
Allen E. Flower, Vice 1999 289,415 150,922 731 | 101,938 30,500 39,725
President and Chief -------------------------------------------------|---------------------------------------------
Financial Officer 1998 251,516 211,248 580 | 121,750 25,000 33,318
-------------------------------------------------|---------------------------------------------
1997 209,770 83,627 5,622 | 174,554 49,608 36,855
|
- -----------------------------------------------------------------------------------|---------------------------------------------
John H. Mattingly, 1999 329,539 176,827 0 | 87,375 22,500 4,800
President, COMSAT -------------------------------------------------|---------------------------------------------
Satellite Services 1998 270,539 173,146 0 | 91,313 20,000 4,800
-------------------------------------------------|---------------------------------------------
1997 190,308 75,029 0 | 74,820 24,804 4,750
|
- -----------------------------------------------------------------------------------|---------------------------------------------
James J. Welch, 1999 239,770 90,603 0 | 72,813 12,000 4,800
President and General -------------------------------------------------|---------------------------------------------
Manager, COMSAT 1998 35,481 36,816 0 | 77,563 15,000 757
International -------------------------------------------------|---------------------------------------------
1997 0 0 0 | 0 0 0
|
|
- -----------------------------------------------------------------------------------|---------------------------------------------
Warren Y. Zeger, 1999 329,346 133,686 667 | 101,938 30,500 78,911
Vice President, -------------------------------------------------|---------------------------------------------
General Counsel 1998 286,836 220,997 521 | 121,750 25,000 27,419
and Secretary -------------------------------------------------|---------------------------------------------
1997 229,808 94,348 5,466 | 174,554 49,608 26,938
|
|
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
1 Bonus for 1999 for each Named Executive Officer, as indicated below,
includes time-off buyback and unused credits under the Corporation's cafeteria
plan that were paid in cash to the Named Executive Officers. 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. Welch in 1998 includes a
signing bonus in the amount of $25,000.
Name Time-off Unused
Buyback Credits
---- -------- -------
Mrs. Alewine 0 863
Mr. Flower 4,032 1,890
Mr. Mattingly 3,600 7,227
Mr. Welch 4,500 1,103
Mr. Zeger 0 1,686
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- -------------------------------------------------------------------------------
2 Other Annual Compensation shown for 1997, 1998 and 1999 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.
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. Any RSAs granted to the Named Executive Officers in
1997 were forfeited in 1999 based on the non-satisfaction of certain required
performance measures during 1997 and 1998. The number and value of the
aggregate restricted stock holdings of each of the Named Executive Officers as
of December 31, 1999 are as follows:
Name Number of Value as of
RSAs/RSUs/PSUs 12/31/99
------------------ ------------------- -------------------
Mrs. Alewine 23,666 $461,487
Mr. Flower 12,957 252,662
Mr. Mattingly 7,984 155,688
Mr. Welch 4,500 87,750
Mr. Zeger 13,453 262,334
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.
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 1999 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.
Name 401(k) Plan Above-Market Life Insurance
Contributions Interest Premiums
--------------- ------------- ------------ --------------
Mrs. Alewine $4,800 $11,465 $9,036
Mr. Flower 4,800 14,991 19,934
Mr. Mattingly 4,800 0 0
Mr. Welch 4,800 0 0
Mr. Zeger 4,800 10,285 63,826
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Option Grants
The following table sets forth information on options granted to the
Named Executive Officers in 1999.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------------
Name Number of Securities % of Total Options Exercise Price Expiration Date Grant Date Present
Underlying Options Granted to Employees ($/Sh) Value(3)
Granted (#)(1) in Fiscal Year(2)
- ------------- -------------------- -------------------- --------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Mrs. Alewine 63,000 8.42% $29.1250 02/19/09 $1,013,040
Mr. Flower 30,500 4.08% $29.1250 02/19/09 490,440
Mr. Mattingly 22,500 3.01% $29.1250 02/19/09 361,800
Mr. Welch 12,000 1.60% $29.1250 02/19/09 192,960
Mr. Zeger 30,500 4.08% $29.1250 02/19/09 490,440
</TABLE>
- -------------------------------
1 The options shown were granted on February 19, 1999 to acquire the
Corporation's Common Stock. All options granted in 1999 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 1999 was
748,378.
3 The Corporation used the Black-Scholes option pricing model to determine
grant date present values using the following assumptions: a dividend yield of
0.61%; stock price volatility of 0.5613; a six-year option term; a risk-free
rate of return of 5.18%; 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.
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<PAGE>
Option Exercises and Fiscal Year-End Values
The following table sets forth information on (1) options exercised by the Named
Executive Officers in 1999, and (2) the number and value of their unexercised
options as of December 31, 1999.
Aggregated Option Exercises In 1999 And 12/31/99 Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The
Unexercised Options at 12/31/99(1) Money Options at 12/31/99
--------------------------------------------------------------------
Name Shares Value Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
Underlying
Options
Exercised (#)
- --------------------- ------------- -------------- --------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Mrs. Alewine 132,706 $2,981,142 234,741 85,500 $423,840 $0
Mr. Flower 0 $0 99,266 74,054 $393,470 $0
Mr. Mattingly 0 $0 33,524 49,902 $ 76,451 $0
Mr. Welch 0 $0 3,750 23,250 $ 0 $0
Mr. Zeger 0 $0 149,052 74,054 $259,830 $0
</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.
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 1999 is $130,000.
Estimated Annual Benefits - COMSAT Corporation Retirement Plan
- -------------------------------------------------------------------------------
Years of Service
- -------------------------------------------------------------------------------
Average Annual Salary ($) 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
650,000 85,034 130,000 130,000 130,000 130,000
700,000 89,034 130,000 130,000 130,000 130,000
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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, 1999 are as
follows:
Mrs. Alewine 13
Mr. Flower 30
Mr. Mattingly 5
Mr. Welch 1
Mr. Zeger 24
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 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."
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The annual benefits payable upon retirement at age 65 based upon the
48 consecutive months of highest compensation as of December 31, 1999 for each
of the Named Executive Officers under the plan are:
Mrs. Alewine $519,164
Mr. Flower $ 98,586
Mr. Mattingly N/A
Mr. Welch N/A
Mr. Zeger $135,662
Mrs. Alewine, Mr. Flower and Mr. Zeger are each 100% vested in the
plan. Mr. Mattingly and Mr. Welch 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 Mr. Welch but does not cover Mrs. Alewine, Mr. Flower or Mr.
Zeger, who each have severance arrangements under their employment agreements.
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 by COMSAT other than for cause or disability,
or by the participant for good reason, then, instead of any other severance
payments or severance benefits payable to the participant by COMSAT, the
participant will be entitled to receive the following during the benefits
continuation period, as defined below:
. base salary;
. targeted annual bonus under COMSAT's Annual Incentive Plan; and
. 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.
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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 Mr. Welch are Group I
Participants. If, however, the amount of the payment that the participant is
entitled to receive upon a termination of employment under the Retention Bonus
Plan, as described below, is greater than the aggregate amount that the
participant is entitled to receive under the amended severance plan, exclusive
of health and welfare benefits, then the participant will forfeit all rights to
receive these payments under the amended severance plan.
The amended severance plan also provides that, in the event of a
participant's termination of employment under the circumstances described above,
such participant would be entitled to receive a gross-up payment if any payment
or benefit to such participant would constitute an excess parachute payment
under Section 280G of the Internal Revenue Code.
Retention Bonus Plan
On September 18, 1998, COMSAT adopted the Retention Bonus Plan. The
Retention Bonus Plan generally provides retention bonuses to key employees who
remain employed by COMSAT, or whose employment is terminated under specific
circumstances, through specified dates following the signing of the merger
agreement. The Retention Bonus Plan covers approximately 108 participants, who
are classified as either Group I Participants or Group II Participants. The
plan covers Mr. Mattingly, who is a Group I Participant, but does not cover Mrs.
Alewine, Mr. Flower or Mr. Zeger, who each have similar bonus arrangements under
their employment agreements, or Mr. Welch.
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
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. a bonus on the 18-month anniversary of the closing of the merger equal to
100% of the sum of the participant'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 Participant elects to terminate his or her
employment for good reason, such Group I Participant 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 termination of employment under the Retention Bonus Plan, such
participant will not be entitled to any severance payment under any severance
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 as of July 19, 1996, and amended as of May 16, 1997 and July 18, 1997, and
has entered into employment agreements with Mr. Flower and Mr. Zeger dated as of
April 18, 1997, and amended as of July 18, 1997. On September 18, 1998, COMSAT
amended the employment agreements in connection with the 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
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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 of
Directors;
. eligibility for an annual bonus based on performance measures determined by
the Board of Directors' 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 the
following for a period of time as specified below:
(1) his or her then current base salary;
(2) 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
(3) 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.
. 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 of
Directors' discretion to waive such reduction;
. if Mr. Flower's employment is not renewed after April 17, 2002, Mr. Flower
will be entitled to receive:
(1) the benefits described above for one year thereafter, and
(2) 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 of Directors' 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,
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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 of Directors'
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.
Pursuant to her employment agreement, Mrs. Alewine was granted, on
October 17, 1996, 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; on October 17, 1996, 6,201 restricted stock units which
vest after three years; and on February 20, 1997, 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 Directors of COMSAT such that
the incumbent directors elected as of May 17, 1996 cease to constitute a
majority of the Board of Directors; 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;
. 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
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. 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 of Directors 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 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 of Directors or COMSAT's shareholders of the merger or the
merger agreement, the commencement or the closing of the tender offer, or the
acquisition by Lockheed Martin or Regulus of COMSAT Government Systems.
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 completion of the merger,
(b) the termination date of the merger pursuant to the merger agreement, or
(c) September 18, 2000,
equal to 150% of the sum of the executive's highest base salary plus the
executive's highest 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 highest base salary plus
the executive's highest 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, instead 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:
. for termination without cause on or before the applicable date for such
bonuses;
. by reason of the executive's death or disability; or
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. 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 of a post-closing severance payment 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 by COMSAT other than for cause or disability, or by the executive for good
reason, then, instead 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 executives 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
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(a) 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 employment within 30 days following the closing of the merger and
the executive's employment is terminated within the 30-day period, or
(b) 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.
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 of Directors 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, restricted stock awards, restricted stock
units and phantom stock units 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
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. 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 of Directors 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 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, and not any of the other
transactions contemplated by the merger agreement, will constitute a change in
control of COMSAT.
COMMITTEE ON COMPENSATION AND MANAGEMENT DEVELOPMENT REPORT ON EXECUTIVE
COMPENSATION
Committee Responsibilities. 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 1999
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).
Statement of Philosophy. 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.
Components of Compensation. The main components of the Corporation's
executive compensation 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.
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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 below under the
caption "Agreements with Executive Officers." The agreement determines her base
salary for each of the first two years and provides that thereafter her base
salary is to be reviewed annually for increases to be approved at the discretion
of the Board. In July 1999, the Committee recommended to the Board that Mrs.
Alewine's base salary be increased to $650,000 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
1999 that she presented to the Committee and the Corporation's achievement of
strategic objectives. These strategic objectives included the completion of the
Lockheed Martin tender offer, objectives stated in the 1999 Strategic Business
Plan and focus on profit increase, cost control and increased shareholder value.
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 1999 cash bonus award of $455,000 for Mrs. Alewine.
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 1999 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.
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
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arrangements may enhance shareholder value. The Corporation's long-term
compensation strategy includes a blend of stock compensation. For 1999, awards
by the Committee consisted of non-qualified stock options and restricted stock
awards (RSA's). 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 at or above 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 that included stock award recommendations. The Committee endorsed the
consultant's methodology for developing recommendations for 1999 stock grants
whereby base salary, bonus and long-term compensation (stock option and RSA's)
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 1999, Mrs. Alewine received a grant of 63,000 stock
options in accordance with the methodology approved by the Committee.
Stock options were granted to the other Named Executive Officers in
February 1999 as reflected in the table above setting forth 1999 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 1998.
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 the achievement of objective
performance-based criteria which have been approved by the Committee and a
length of service requirement. The percent of the award earned is based on the
achievement of the performance objectives over the performance period
established by the Committee. The RSA's 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 7,000 RSA's in February 1999. The other
Named Executive Officers also received RSA's in February 1999 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 RSA's 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 RSA's. The
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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
Neal B. Freeman, Chairman
Caleb B. Hurtt
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, 1995 and ending on December 31, 1999.
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 Mobile Satellite
Corporation (all years), Asia Satellite Telecom (1996-99), British Sky
Broadcasting Group (1995-99), Echostar Communications Corporation (1996-99),
Globalstar Telecommunications Ltd. (1996-99), Iridium World Communications
(1996-99), Loral Space and Communications Ltd. (1997-99), PanAmSat Corporation
(1996-99), PT Pasifik Satelit Nusantara (1996-99) and U.S. Satellite
Broadcasting Co. (1996-99). Returns for MCI WorldCom use WorldCom, Inc. data
for all years and include MCI Corporation data for 1998-99.
Comparison of Five-Year Cumulative Total Return Among
COMSAT, S & P 500 Index, & Peer Group Index
(Assumes $100 Invested on December 31, 1994 & Dividends Reinvested)
ANNUAL RETURN PERCENTAGE
Years Ending
Company Name/Index Dec 95 Dec 96 Dec 97 Dec 98 Dec 99
- -----------------------------------------------------------------------------
COMSAT CORP -SER 1 3.99 36.41 16.83 49.44 -44.39
S&P 500 INDEX 37.58 22.96 33.36 28.58 21.04
PEER GROUP 38.19 6.59 36.58 44.81 22.47
INDEXED RETURNS
Years Ending
Base
Period
Company Name/Index Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 DEC 99
- -------------------------------------------------------------------------------
COMSAT CORP -SER 1 100 103.99 141.86 165.74 247.68 137.74
S&P 500 INDEX 100 137.58 169.17 225.60 290.08 351.12
PEER GROUP 100 138.19 147.29 201.16 291.31 356.75
Peer Group Companies
- -------------------------------------------------------------------------------
AMERICAN MOBILE SATELLITE CP (95-99) SPRINT FON GROUP (ALL YEARS)
ASIA SATELLITE TELECOM -ADR (96-99) US SATELLITE BROADCST -CLA (96-98
ACAUIRED MAY "99)
AT&T CORP (ALL YEARS)
BRITISH SKY BRDCSTG GP -ADR (95-99)
ECHOSTAR COMMUN CORP -CL A (96-99)
GLOBAL STAR TELECOMM LTD (96-99)
IRIDIUM WORLD COMMUN -CL A (96-99)
LORAL SPACE & COMMUNICATIONS (95-97)
MCI WORLDCOM INC (96-97)
PANAMSAT CORP (96-97)
PT PASIFIK SATELIT NUS -ADR (96-99)
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Item 12: Security Ownership of Certain Beneficial Owners and Management
Beneficial Owners
We have reviewed the Schedules 13G or 13D filed with the Securities
and Exchange Commission (SEC) as of March 1, 2000, the most recent practicable
date for such information. Based on that information and other information
available to COMSAT, we believe 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.
Name and Address of Beneficial Owner Amount and Nature of Percent of Class
- -------------------------------------- -------------------- -----------------
Beneficial Ownership
--------------------
Lockheed Martin Corporation 25,958,282 48.76%
COMSAT Government Systems, LLC(1)
- ----------------
1 COMSAT Government Systems, LLC and Lockheed Martin Corporation jointly filed
a Schedule 13-D on September 20, 1999 reporting that COMSAT Government Systems,
LLC had acquired a total of 25,958,282 shares of COMSAT common stock. COMSAT
Government Systems, LLC, a Delaware limited liability company that was formerly
known as Regulus, LLC, is a wholly-owned subsidiary of Lockheed Martin
Corporation, a Maryland corporation. Both are located at 6801 Rockledge Drive,
Bethesda, Maryland 20817.
Management
The following table sets forth information as of March 1, 2000, 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.
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Name(1) Amount and Nature of
- ------- -----------------------
Beneficial Ownership(2)
-----------------------
- -----------------------------------------------------------------
Betty C. Alewine 357,107(3)
Marcus C. Bennett 7,441
Lucy Wilson Benson 42,285
Edwin I. Colodny 51,571
Allen E. Flower 161,078(4)
Neal B. Freeman 36,809
Caleb B. Hurtt 13,402
Peter W. Likins 39,724(5)
John H. Mattingly 73,134(6)
Larry G. Schafran 9,697(7)
Robert G. Schwartz 44,999
John V. Sponyoe 0
Kathryn C. Turner 8,344
James J. Welch 14,514(8)
Guy P. Wyser-Pratte 811,613(9)
Warren Y. Zeger 212,994(10)
All directors and executive officers as 1,979,907(11)
a group 19 persons
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 1999 and instead received phantom stock units which are not
included in their beneficial ownership of COMSAT Common Stock: Mr. Bennett,
Mrs. Benson, Mr. Hurtt, Mr. Schafran and Mrs. Turner. Beneficial ownership of
COMSAT common stock includes shares that may be acquired within 60 days after
March 1, 2000 through the exercise of options as follows: Mrs. Alewine, 257,991
shares; Mr. Bennett, 7,441 shares; Mrs. Benson, 39,686 shares; Mr. Colodny,
48,369 shares; Mr. Flower, 137,945 shares; Mr. Freeman, 34,726 shares; Mr.
Hurtt, 12,402 shares; Dr. Likins, 35,966 shares; Mr. Mattingly, 56,551 shares;
Mr. Schafran, 7,441; Mr. Schwartz, 39,686 shares; Mrs. Turner, 7,441 shares; Mr.
Welch, 6,750 shares; Mr. Wyser-Pratte, 7,441 shares; Mr. Zeger, 187,731 shares;
and all directors and executive officers as a group, 954,589 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 31,472 shares which are restricted against transfer and 862 shares
which are held in the Corporation's Savings and Profit-Sharing Plan as of March
1, 2000.
4 Includes 14,980 shares which are restricted against transfer and 742 shares
which are held in the Corporation's Savings and Profit-Sharing Plan as of March
1, 2000.
5 Includes 1,286 shares over which Dr. Likins shares voting power and
investment power with Mrs. Likins.
6 Includes 11,992 shares which are restricted against transfer and 652 shares
which are held in the Corporation's Savings and Profit-Sharing Plan as of March
1, 2000. Includes 226 shares held by Mr. Mattingly's mother for which Mr.
Mattingly disclaims beneficial ownership.
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7 Includes 2,256 shares held by Mrs. Schafran of which Mr. Schafran disclaims
beneficial ownership.
8 Includes 6,500 shares which are restricted against transfer and 353 shares
which are held in the Corporation's Savings and Profit-Sharing Plan as of March
1, 2000.
9 Includes 778,005 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
1.52% of the Corporation's outstanding Common Stock as of March 1, 2000.
10 Includes 14,236 shares which are restricted against transfer and 818 shares
which are held in the Corporation's Savings and Profit-Sharing Plan as of March
1, 2000.
11 Includes 2,482 shares with respect to which beneficial ownership is
disclaimed. Also includes an aggregate of 95,928 shares which are restricted
against transfer and 4,400 shares which are held in the Corporation's Savings
and Profit-Sharing Plan as of March 1, 2000. All directors and executive
officers as a group beneficially owned 3.72% of the Corporation's outstanding
Common Stock as of March 1, 2000.
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
During 1999, COMSAT had several business transactions, in the ordinary
course of its business on commercial terms, with Lockheed Martin from which
COMSAT derived revenues of $8.6 million. Of that amount, $8.1 million was
derived from the sale of satellite space segment capacity. The remaining
$500,000 in revenues was for system engineering consulting services under a
subcontract related to the Astrolink satellite project. Lockheed Martin owns
approximately 49% of COMSAT's outstanding common stock. Marcus C. Bennett,
Caleb B. Hurtt and John V. Sponyoe currently serve on the COMSAT Board of
Directors as the designated representatives of Lockheed Martin. Lockheed Martin
is entitled to designate three directors under the terms of a shareholders
agreement dated as of September 18, 1998. Messrs. Bennett and Hurtt also
currently serve on the Board of Directors of Lockheed Martin. Mr. Sponyoe is
the Chief Executive Officer of Lockheed Martin Global Telecommunications.
In addition, Kathryn C. Turner, a director of COMSAT and a member of
the Compensation Committee of COMSAT's Board of Directors, is the Chairperson,
Chief
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Executive Officer and sole shareholder of Standard Technology, Inc., a
technology, engineering and systems integration firm. Standard Technology has
provided services to Lockheed Martin under various contracts, which resulted
from arm's-length negotiations, in connection with a Department of Defense
mentor-protege program to encourage large defense contractors to subcontract
with minority-owned businesses. Lockheed Martin paid Standard Technology
$2,168,250 in 1999 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 December 31, 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.
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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,
1999, 1998 and 1997
(ii) Consolidated Balance Sheets as of December 31, 1999 and 1998
(iii) Consolidated Cash Flow Statements for the Years Ended December
31, 1999, 1998 and 1997
(iv) Statements of Changes in Consolidated Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997
(v) Notes to Consolidated Financial Statements for the Years Ended
December 31, 1999, 1998 and 1997
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, 1999
(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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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)
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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
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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)
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 (Incorporated by
reference from Exhibit No. 10.23 to Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1998)
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)
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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 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 (Incorporated by reference from Exhibit 10.32 to
Registrant's Report on Form 10-K for the fiscal year ended December 31,
1998)
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)
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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)
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)
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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)
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 (Incorporated by reference from Exhibit 10.50 to the Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1998)
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 (Incorporated by reference from Exhibit 10.51 to the Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1998)
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 (Incorporated by reference from Exhibit 10.52 to the
Registrant's Report on Form 10-K for the fiscal year ended December 31,
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 25, 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 25, 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 25, 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 25, 1998)
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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 25, 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 25, 1998)
10.59 Land Earth Station Operator Agreement among COMSAT Corporation, Inmarsat
Holdings LTD and Inmarsat LTD dated as of February 10, 1999 (Incorporated
by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for
the quarter ended June 30, 1999).
10.60 Shareholders Agreement between INMARSAT ONE LTD, subsequently renamed
Inmarsat Holdings LTD, and COMSAT Corporation dated as of February 9,
1999 (Incorporated by reference to Exhibit 10.2 to the Registrant's
Report on Form 10-Q for the quarter ended June 30, 1999).
10.61 Fifth Amendment to Agreement (see Exhibit 10.20), dated as of October 1,
1999, between the Registrant and AT&T Corp. relating to utilization of
space segment.
10.62 Consulting Agreement, between the Registrant and Lawrence S. Eagleburger,
dated as of October 14, 1999.
Exhibit No. 21 - Subsidiaries of the Registrant as of December 31, 1999
Exhibit No. 23 - Consents of experts and counsel
Consent of Independent Auditors dated March 28, 2000.
Exhibit No. 24 - Power of Attorney
Exhibit No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
*Compensatory plan or arrangement.
122
<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 30, 2000 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 indicated as of March 30, 2000.
(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)
123
<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/ Neal B. Freeman*
--------------------------------------
(Neal B. Freeman, Director)
By /s/ Caleb B. Hurtt*
--------------------------------------
(Caleb B. Hurtt, Director)
By /s/ Peter W. Likins*
--------------------------------------
(Peter W. Likins, Director)
By /s/ Larry G. Schafran*
--------------------------------------
(Larry G. Schafran, Director)
By /s/ John V. Sponyoe*
--------------------------------------
(John V. Sponyoe, Director)
124
<PAGE>
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)
*By /s/ Alan G. Korobov
--------------------------------------
Alan G. Korobov
Attorney-in-fact
125
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Balance at
Beginning Charged to Balance at
In thousands of Year Expenses Deductions(a) End of Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
1999:
Allowance for loss on accounts receivable $17,123 $5,472 $7,209 $15,386
Allowance for loss on investments $ 4,063 - $1,950 $ 2,113
</TABLE>
(a) Uncollectible amounts written off, recoveries of amounts previously
reserved, and other adjustments.
S-1
<PAGE>
INDEX OF EXHIBITS FILED WITH THIS REPORT
Exhibit No. Description
- ----------- -----------
10.61 Fifth Amendment to Agreement (see Exhibit 10.20), dated as of October
1, 1999, between the Registrant and AT&T Corp. relating to utilization
of space segment.
10.62 Consulting Agreement, between the Registrant and Lawrence S.
Eagleburger, dated as of October 14, 1999.
21 Subsidiaries of the Registrant as of December 31, 1999
23 Consent of Independent Auditors dated March 28, 2000
24 Power of Attorney
27 Financial Data Schedule
<PAGE>
Exhibit 10.61
FIFTH AMENDMENT TO AGREEMENT
----------------------------
This FIFTH AMENDMENT TO AGREEMENT is made effective October 1, 1999 by and
between AT&T Corp. ("AT&T") and COMSAT Corporation ("COMSAT").
WHEREAS, on July 27, 1993, AT&T and COMSAT entered into an Agreement for
the provision of telecommunications services (the "1993 Agreement"); and
WHEREAS, the 1993 Agreement was amended on May 23, 1994, December 7, 1995,
January 8, 1997 and July 29, 1997 (the "1994-1997 Amendments"); and
WHEREAS, the 1994-1997 Amendments were all submitted to the Federal
Communications Commission ("FCC") pursuant to Section 211 of the Communications
Act; and
WHEREAS, the Parties have decided to further amend the 1993 Agreement in
order to facilitate COMSAT's provision of satellite telecommunications services
to AT&T.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
the Parties hereby amend the 1993 Agreement as follows:
1. Article II, entitled "Definitions," is amended by modifying the
following definition as indicated:
6. Digital Bearer Circuits. 64 Kbps equivalent circuits (which may
-----------------------
or may not be aggregated into larger carrier sizes or contained
in Bulk Offering Allotments) used to carry public switched and
private line traffic, including IDR Circuits, TDMA Circuits, and
IBS Circuits with Rate 3/4 or 1/2 FEC coding, but excluding
leased transponder service for dedicated applications, e.g.,
wideband mobile, cable restoration, Internet. Carrier size
equivalents for IDR and IBS shall be as follows:
<TABLE>
<CAPTION>
Carrier Size No. of 64 Kbps Equivalents
- ---------------------- --------------------------
<S> <C>
512 Kbps 8
1.024 Mbps 16
1.544 Mbps 24
2.048 Mbps 30
6.312 Mbps 90
8.448 Mbps 120
</TABLE>
2
<PAGE>
2. Article II is further amended by adding the following definitions:
18. IBS Circuits. Circuits provided for "IBS" or "New IBS" Service
------------
as defined in COMSAT World Systems Tariffs F.C.C. No. 1 and
F.C.C. No. 3. For purposes of this Fifth Amendment to Agreement,
all IBS Circuits will be considered "New IBS."
19. Bulk Offering Allotment. An 18 or 36 MHz bandwidth allotment
-----------------------
provided pursuant to Article V of the 1993 Agreement.
20. Standard Circuits. Digital Bearer Circuits having terms of one
-----------------
year or more and going through Standard A or C earth stations
(or, in the case of IBS Circuits, Standard B or E-3 earth
stations as well) that are in carrier sizes of 1.544 Mbps or
greater with Rate 3/4 FEC coding.
3
<PAGE>
21. Non-Standard Circuits. Digital Bearer Circuits having terms of
---------------------
one year or more and going through Standard A or C earth stations
(or, in the case of IBS Circuits, Standard B or E-3 stations as
well) that are in carrier sizes smaller than 1.544 Mbps and/or
with Rate 1/2 FEC coding.
22. Sub-Standard Circuits. Digital Bearer Circuits having terms of
---------------------
less than one year and/or going through earth stations smaller
than Standard A or C (or, in the case of IBS Circuits, smaller
than Standard B or E-3).
23. Baseline Amount. The number of Digital Bearer Circuits leased
---------------
from COMSAT by AT&T as of October 1, 1999.
24. Minimum Amounts. The minimum number of Digital Bearer Circuits
---------------
that AT&T commits to lease from COMSAT under Article III.K at all
times during each of the years 2000 through 2006.
4
<PAGE>
25. Maximum Amount. The maximum number of Digital Bearer Circuits
--------------
that AT&T may lease from COMSAT under Article III.L at any given
time during each of the years 2003 through 2006 under the terms
of this Fifth Amendment to Agreement.
26. Current Monthly Rates. The COMSAT rates for Digital Bearer
---------------------
Circuits currently applicable to AT&T pursuant to tariff or
contract immediately prior to the effective date of this Fifth
Amendment to Agreement.
27. Current Average Rate. The average of the Current Monthly Rates
--------------------
AT&T paid to COMSAT pursuant to tariff or contract for Digital
Bearer Circuits immediately prior to the effective date of this
Fifth Amendment to Agreement.
28. Incremental Circuits. Digital Bearer Circuits in excess of 105%
--------------------
of the Baseline Amount as defined herein.
5
<PAGE>
3. Article III, entitled "Previously Committed Circuits," is amended by
adding the following paragraphs K through L:
K. AT&T agrees to lease from COMSAT on a take-or-pay basis the
following Minimum Amounts of Digital Bearer Circuits during each of the
years 2000 through 2006:
2000: 85.02% of Baseline Amount
2001: 82.36% of Baseline Amount
2002: 79.70% of Baseline Amount
2003: 44.28% of Baseline Amount
2004: 22.14% of Baseline Amount
2005: 22.14% of Baseline Amount
2006: 8.86% of Baseline Amount
In each year, AT&T must pay for the full Minimum Amount throughout the
entire year.
L. AT&T may lease from COMSAT the following Maximum Amounts of Digital
Bearer Circuits during each of the years 2003 through 2006 under the terms
of this Fifth Amendment to Agreement:
2003: 200% of Minimum Amount
2004: 200% of Minimum Amount
2005: 200% of Minimum Amount
2006: 200% of Minimum Amount
6
<PAGE>
Starting no later than January 1, 2002, AT&T and COMSAT shall negotiate
future traffic commitments in terms of price, lease term and volume. If
there is no follow-on agreement in place by December 31, 2002, Digital
Bearer Circuits shall be made available to AT&T by COMSAT at the rates
resulting from application of paragraphs G through I of Article IV below
only for circuits comprising no more than the Maximum Amount specified
above, and any Digital Bearer Circuits above the Maximum Amount shall be
the subject of a separate negotiation.
4. Article IV, entitled "Base and Additional Circuits," is amended by
adding the following paragraphs G through M:
G. Subject to the conditions set forth in paragraphs H through K
below, in consideration for the total value of AT&T's circuit commitments
under paragraph K of Article III above, COMSAT's monthly rates for AT&T's
Standard and Non-Standard Digital Bearer Circuits shall be the Current
Monthly Rates less the following discounts off the Current Average Rate:
7
<PAGE>
As of October 1, 1999: 9.75%
As of January 1, 2001: 18.22%
As of January 1, 2002: 26.68%
For administrative convenience, COMSAT shall bill AT&T for each Digital
Bearer Circuit at the average of the applicable monthly rates for all of
AT&T's Digital Bearer Circuits, except as provided in paragraphs H and I
below.
H. If at any time the total number of AT&T's Non-Standard Circuits
exceeds 10% of the total number of AT&T's active Standard and Non-Standard
Circuits, all Non-Standard Circuits in excess of 10% shall be charged at
the monthly rate resulting from application of paragraph G, plus a
surcharge of 30%. If at any time the total number of AT&T's Non-Standard
Circuits with 1/2 FEC coding exceeds 3.3% of the total number of AT&T's
active Standard and Non-Standard Circuits, all Non-Standard Circuits with
1/2 FEC coding in excess of 3.3% shall be charged at the monthly rate
resulting from application of paragraph G, plus a surcharge of 30%. All
Sub-Standard Circuits shall be charged at the applicable Current Monthly
Rate, less the discounts set forth in paragraph G above. Absent contrary
direction from AT&T, COMSAT will apply the 1-year Current
8
<PAGE>
Monthly Rate (less discount). In no event shall the rate charged to AT&T by
COMSAT be less than the rate charged to COMSAT by INTELSAT. All Non-
Standard and Sub-Standard Circuits (along with all Standard Circuits) shall
be counted toward AT&T's fulfillment of the Minimum Amounts set forth in
Article III.K above.
I. In the event that AT&T's total number of Digital Bearer Circuits
leased from COMSAT exceeds 105% of the Baseline Amount during any of the
years 2000 through 2002, the following additional discounts shall apply to
the rates resulting from the application of paragraph G for Incremental
Circuits:
Greater than 105% of Baseline Amount: 5%
Greater than 110% of Baseline Amount: 7%
J. All Digital Bearer Circuits subject to the rates resulting from
application of paragraphs G through I above shall be leased on a take-or-
pay basis. In the event AT&T does not take the service, no lump sum
termination charges shall apply so long as AT&T continues to pay for the
service on a monthly basis. Lease terms for all Digital Bearer Circuits
subject to existing lease commitments as of
9
<PAGE>
the effective date of this Fifth Amendment to Agreement shall remain
unchanged until such time as AT&T's commitment to Minimum Amounts of
Digital Bearer Circuits is greater than AT&T's existing lease commitments,
at which time that overall commitment shall supersede the lease term
commitment for any particular circuit, except that lease terms for all
Digital Bearer Circuits above the Minimum Amounts shall run for a period of
one year. Circuits ordered by AT&T on a month-to-month basis shall be
treated as Sub-Standard Circuits.
K. The rates resulting from application of paragraphs G through I
shall be applicable only to Digital Bearer Circuits on INTELSAT satellites
(including replacement satellites, and taking into account the
implementation of 2 degrees spacing in the Pacific Ocean Region) at orbital
locations that were in operation as of the effective date of this Fifth
Amendment to Agreement. These rates shall also apply to capacity on
INTELSAT satellites (if any) at other orbital locations to the extent that
COMSAT can move its leased capacity to those locations without adverse
impact on its cost structure. Otherwise, rates on such satellites shall be
the subject of a separate negotiation.
10
<PAGE>
L. All FM Circuits leased from COMSAT by AT&T, regardless of their
current lease term, shall convert as of October 1, 1999 to month-to-month
leases at a rate of $565 per circuit per month.
M. All circuits on all satellites are provided subject to availability
from INTELSAT.
5. Article V, entitled "Bulk Offering," is amended by adding the following
paragraph P:
P. In calculating the number of AT&T's Digital Bearer Circuits for
purposes of Articles III and IV above, each of the Bulk Offering Allotments
provided pursuant to this Article shall be counted at capacity (i.e., 540
Digital Bearer Circuits per 36 MHz). AT&T remains responsible for loading
the Bulk Offering Allotments and the rate of fill shall have no bearing on
the terms of this Fifth Amendment to Agreement. In addition, the lease
terms of the Bulk Offering Allotments shall be unaffected by this Fifth
Amendment to Agreement.
11
<PAGE>
6. Article VII, entitled "Customer-Supplier Relationship," is amended by
designating the existing text of the Article as paragraph A and adding the
following paragraphs B and C:
B. AT&T and COMSAT agree that, during the term of this Agreement as
amended, the rates, terms and conditions set forth in this Agreement as
amended shall not be subject to any right of renegotiation or rescission
that may be conferred by statute or regulation, and AT&T hereby irrevocably
waives any such right.
C. AT&T further agrees that, upon execution of this Fifth Amendment
to Agreement, COMSAT may issue a press release announcing that agreement.
The text of COMSAT's press release shall be subject to AT&T's approval,
which approval shall not be unreasonably withheld. COMSAT agrees that it
shall not, without AT&T's prior written consent: (1) engage in any other
advertising, promotion or publicity related to this Agreement as amended,
or (2) make any other public use of AT&T's trade name, trademark, service
mark, insignia, symbol, logo, or other designation of AT&T Corp. or its
affiliates.
12
<PAGE>
7. Article IX, entitled "Term of Agreement," is amended to read as
follows:
The term of this Agreement as amended shall commence on October 1,
1999 and shall run through December 31, 2006. All lease terms for Digital
Bearer Circuits that are active as of the effective date of this Fifth
Amendment to Agreement and had expiration dates after December 31, 2006
shall now expire on December 31, 2006. All applicable rates, terms and
conditions for Digital Bearer Circuits leased during the term of this
Agreement as amended shall survive until the expiration of that circuit's
lease term. Thus, for example, the rates, terms and conditions for a one-
year Digital Bearer Circuit activated on May 1, 2006 would remain in effect
until April 30, 2007.
8. All other provisions of the 1993 Agreement as amended in 1994, 1995 and
1997 shall be interpreted in a manner consistent with this Fifth Amendment, but
otherwise shall remain unchanged and continue to have full force and effect.
9. This Fifth Amendment to Agreement may be executed in counterparts;
shall become effective as of October 1, 1999, upon execution by authorized
representatives of both Parties; and shall be submitted to the FCC pursuant to
Section 211 of the Communications Act.
13
<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto has executed this Fifth
Amendment to Agreement.
AT&T CORP. COMSAT CORPORATION
By: /s/ John D. Cornetta By: /s/ John H. Mattingly
-------------------- ---------------------
John D. Cornetta John H. Mattingly
Procurement Director President, COMSAT Satellite Services
Date: October 14, 1999
14
<PAGE>
Exhibit 10.62
October 7, 1999
The Honorable Lawrence S. Eagleburger
Baker, Donelson, Bearman & Caldwell
801 Pennsylvania Avenue, N.W.
Suite 800
Washington, D.C. 20004
ADVISORY SERVICES AGREEMENT
Dear Mr. Eagleburger:
This agreement is made by COMSAT Corporation ("COMSAT") for the purpose of
retaining your advisory services to the Chairman of the Board and the President
and Chief Executive Officer of COMSAT.
As a special advisor, you will be asked to meet with the Chairman and the
Chief Executive Officer at such times as mutually convenient, and from time to
time, to advise in such areas as:
. strategic planning
. corporate governance
. legislative matters
. other issues as identified by the Chairman of the Board or the President
and Chief Executive Officer.
The term of this agreement will commence on October 15, 1999 and remain in
effect through October 14, 2001 or the effective date of the merger between
COMSAT and Lockheed Martin Corporation, whichever is earlier.
COMSAT agrees to pay you $25,000 per year for your advisory services
during the term of this agreement. The annual advisory fee will be payable on
or about October 15 of each year during the term of the agreement, provided that
if the Lockheed Martin merger is consummated on or before October 15, 2000, this
agreement will terminate thereupon and the second annual payment will not be
made. Expenses associated with the costs of business travel in connection with
services provided for the Chairman and/or the Chief Executive Officer will be
reimbursable.
<PAGE>
The Honorable Lawrence S. Eagleburger
October 7, 1999
Page 2
Please indicate your concurrence with this agreement by signing below and
returning the signed agreement to me.
Sincerely,
/s/ Warren Y. Zeger
Warren Y. Zeger
/s/ Lawrence S. Eagleburger 10/12/99
- --------------------------- --------
Lawrence S. Eagleburger Date
<PAGE>
Exhibit 21
SUBSIDIARIES OF COMSAT CORPORATION
(As of December 31, 1999)
Bethesda Real Property, Inc.
COMSAT Capital I, L.P.
COMSAT Digital Teleport, Inc.
COMSAT General Corporation
COMSAT General Telematics, Inc.
COMSAT Technology, Inc.
Electromechanical Systems, Inc.
COMSAT International, Inc.
BelCom, Inc.
ZAO BelComRus
ZAO MKT
ZAO Stavropol-Cellular
ZAO Novocom
COMSAT Argentina, S.A.
COMSAT Asia Incorporated
Guanzhou T.H. Communication Technology Services, Ltd.
COMSAT China/Hong Kong, Ltd.
COMSAT do Brasil Equipamentos de 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 Investments, Inc. Mauritius
COMSAT de Mexico, S.A. de C.V.
COMSAT Peru, S.A.
COMSAT Venezuela, COMSATVEN, C.A.
CI Services, Inc.
COMSAT Laboratories Inc.
COMSAT Laboratories India, Inc.
Indicom Personal Communications Private Ltd.
COMSAT Mobile Investments, Inc.
COMSAT New Services, Inc.
COMSAT Overseas, Inc.
COMSAT Personal Communications, Inc.
CRSI Acquisition, Inc.
<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-3, 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. 333-3061 on Form S-3 and Registration Statement
No. 333-78759 on Form S-8 of our report dated February 17, 2000 (March 17, 2000
as to the fourth paragraph of Note 2 and the second paragraph of Note 11),
appearing in this Annual Report on Form 10-K of COMSAT Corporation for the year
ended December 31, 1999.
Deloitte & Touche LLP
McLean, VA
March 28, 2000
<PAGE>
Exhibit 24
POWER OF ATTORNEY
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 this report and 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.
By /s/ Betty C. Alewine
--------------------------------------
(Betty C. Alewine, President and Chief
Executive Officer and Director)
By /s/ Allen E. Flower
--------------------------------------
(Allen E. Flower, Vice President and
Chief Financial Officer)
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)
<PAGE>
By /s/ Neal B. Freeman
--------------------------------------
(Neal B. Freeman, Director)
By /s/ Caleb B. Hurtt
--------------------------------------
(Caleb B. Hurtt, Director)
By /s/ Peter W. Likins
--------------------------------------
(Peter W. Likins, Director)
By /s/ Larry G. Schafran
--------------------------------------
(Larry G. Schafran, Director)
By /s/ John V. Sponyoe
--------------------------------------
(John V. Sponyoe, 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)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for twelve months ended December 31, 1999 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000022698
<NAME> COMSAT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 78,632
<SECURITIES> 0
<RECEIVABLES> 149,973
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 290,622
<PP&E> 2,122,399
<DEPRECIATION> 1,209,924
<TOTAL-ASSETS> 1,651,724
<CURRENT-LIABILITIES> 149,688
<BONDS> 408,979
0
0
<COMMON> 448,072
<OTHER-SE> 149,633
<TOTAL-LIABILITY-AND-EQUITY> 1,651,724
<SALES> 0
<TOTAL-REVENUES> 618,266
<CGS> 0
<TOTAL-COSTS> 347,202
<OTHER-EXPENSES> 208,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,222
<INCOME-PRETAX> (1,950)
<INCOME-TAX> 616
<INCOME-CONTINUING> (2,566)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,566)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
