-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UtxF8n4mhfc/1eet0nNI2vDWwU+QziXlUJdhZTzMxwgOpwzk6FGddYbJS5d5v5sF dseucBNPJ0FBTl1yi7hPdw== 0000022698-98-000006.txt : 19980401 0000022698-98-000006.hdr.sgml : 19980401 ACCESSION NUMBER: 0000022698-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMSAT CORP CENTRAL INDEX KEY: 0000022698 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 520781863 STATE OF INCORPORATION: DC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04929 FILM NUMBER: 98583782 BUSINESS ADDRESS: STREET 1: 6560 ROCK SPRING DR CITY: BETHESDA STATE: MD ZIP: 20817 BUSINESS PHONE: 3012133000 MAIL ADDRESS: STREET 1: 6560 ROCK SPRING DRIVE CITY: BETHESDA STATE: MD ZIP: 20817 FORMER COMPANY: FORMER CONFORMED NAME: COMMUNICATIONS SATELLITE CORP /DE/ DATE OF NAME CHANGE: 19930719 10-K 1 COMSAT CORPORATION'S FORM 10-K, FYE 12-31-97 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 Commission file number 1-4929 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 on Title of each class 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 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by non-affiliates of the Registrant was $1,635,327,690 based on a closing market price of $33 7/16 per share on February 27, 1998, as reported on the composite tape for New York Stock Exchange listed issues. 51,012,180 shares of common stock, without par value, were outstanding on February 28, 1998. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference: Part of the Form 10-K into Title which the document is incorporated ----- ---------------------------------- COMSAT - Annual Meeting of Part III Shareholders - Notice and Proxy Statement - 1998 PART I ITEM 1. BUSINESS GENERAL INFORMATION BUSINESS SEGMENTS COMSAT Corporation (COMSAT, the corporation or Registrant) reports operating results and financial data in two business segments: Satellite Services and Network Services. The Satellite Services segment consists of the corporation's COMSAT World Systems (CWS) and COMSAT Mobile Communications (CMC) businesses. CWS provides voice, data, video and audio communications services between the U.S. and other countries using the satellite system of the International Telecommunications Satellite Organization (INTELSAT). CMC provides voice, data, fax, telex and information services for ships, aircraft and land mobile applications throughout the world primarily using the satellite system of the International Mobile Satellite Organization (Inmarsat). The Network Services segment consists of the corporation's COMSAT International (CI), COMSAT Laboratories (Labs) and Government Programs businesses. CI operates an integrated group of telecommunications companies that are engaged principally in providing individualized digital communications network solutions to business clients and carriers in high-growth emerging markets overseas. Labs provides technical consulting in the design and development of advanced digital communications technologies and also designs, develops and licenses communications products for satellite access, compression and networking applications. Government Programs includes the operations of COMSAT General Corporation (COMSAT General) and COMSAT Government Services, Inc. (CGSI), both of which are wholly-owned subsidiaries of the corporation. The Labs and Government Programs sectors of Network Services now include certain non-manufacturing, telecommunications contracts and businesses that were previously reported as part of COMSAT RSI, Inc. (CRSI) in the Technology Services segment. The revenues, operating income (loss) and identifiable assets by business segment, for each of the last three years are shown in Note 15 to the financial statements. During the second quarter of 1997, the corporation began accounting for the operations of both Ascent Entertainment Group, Inc. (Ascent) and substantially all of the manufacturing assets of CRSI as discontinued operations. See Note 2 to the financial statements. Ascent, through its subsidiaries, provides on-demand in-room entertainment programming and information services primarily to the domestic lodging industry, owns a professional basketball team and a professional hockey team, owns a film and television production company, and provides satellite distribution support services to the National Broadcasting Company (NBC). The corporation distributed its 80.67% ownership interest in Ascent to shareholders on June 27, 1997. 2 CRSI designs, manufactures and integrates earth stations, as well as wireless and advanced antenna systems. In March 1998, the corporation entered into a stock purchase agreement to sell substantially all of CRSI. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." 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. Also included as part of discontinued operations is Electromechanical System, Inc. (EMS), a wholly-owned subsidiary of CRSI, and an equity ownership interest in Plexsys International Corporation (Plexsys), which are being retained by COMSAT per the terms of the stock purchase agreement, pending evaluation of available alternatives. The long-term contract for construction of a radio telescope in Greenbank, West Virginia also is to be retained and completed by the corporation in connection with the stock purchase agreement Prior to the second quarter of 1997, the corporation reported operating results and financial data in three business segments: International Communications (consisting of CWS, CMC and CI), Technology Services (consisting of CRSI and the Labs) and Entertainment (consisting of Ascent). The corporation had approximately 2,732 employees as of December 31, 1997, approximately 1,367 of whom were employed in the corporation's continuing operations. None of the employees is represented by a labor union, except for approximately 68 employees working for CRSI on the construction of the Greenbank radio telescope. The union employees are expected to become employees of COMSAT or a subsidiary on or prior to consummation of the CRSI sale. COMMUNICATIONS SATELLITE ACT OF 1962 COMSAT was incorporated in 1963 under District of Columbia law, as authorized by the Communications Satellite Act of 1962 (the Satellite Act). In 1993, COMSAT changed its corporate name from "Communications Satellite Corporation" to "COMSAT Corporation." COMSAT is not an agency or establishment of the U.S. Government. The U.S. Government has not invested funds in COMSAT, guaranteed funds invested in COMSAT or guaranteed the payment of dividends by COMSAT. Although COMSAT is a private corporation, the Satellite Act governs certain aspects of COMSAT's structure, ownership and operations, including the following: three of COMSAT's 15 directors are 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 must be authorized by the Federal Communications Commission (FCC); there are limitations on the classes of persons that may hold shares of COMSAT's common stock and on the number of shares a person or class of persons may hold; and, on matters that may affect the national interest and foreign policy of the United States, COMSAT's representatives to INTELSAT and Inmarsat receive instructions from the U.S. Government. Congress has reserved the right to amend the Satellite Act, and amendments, if any, could materially affect the corporation. 3 In June 1997, a bill captioned as the "Communications Satellite Competition and Privatization Act of 1997" (H.R. 1872) was introduced in the U.S. House of Representatives by Congressmen Thomas Bliley and Edward Markey. If enacted as proposed, H.R. 1872 would have a material adverse effect on COMSAT's financial condition and results of operations by restricting or prohibiting COMSAT from offering certain existing and future services via the INTELSAT and Inmarsat satellite systems, would relieve major customers from existing contracts with the corporation and would damage or impair COMSAT's investment in INTELSAT and Inmarsat by, among other actions, requiring the return or orbital positions and spectrum currently needed in INTELSAT and Inmarsat operations. Moreover, the bill would direct the FCC to require direct access to INTELSAT and Inmarsat in the U.S. market and discontinue COMSAT's exclusive provider role. The corporation is, and plans to continue, opposing H.R. 1872 in its present form. For a discussion of H.R. 1872, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." GOVERNMENT REGULATION Under the Satellite Act, the International Maritime Satellite Telecommunications Act of 1978 (the Inmarsat Act) and the Communications Act of 1934, as amended (the Communications Act), COMSAT is subject to regulation by the FCC with respect to its capital and organizational structure, as well as CWS's and CMC's plant, operations, services and rates. FCC decisions and policies have had and will continue to have a significant impact on the corporation. For a discussion of certain of these matters see Note 9 to the financial statements. In April 1997, the corporation petitioned the FCC for classification as a non-dominant carrier and for regulatory forbearance. Because COMSAT is currently classified by the FCC as a dominant carrier, COMSAT is subject to rate base/rate-of-return regulation for the services it provides via the INTELSAT system, is required to file tariffs for voice, data and video service on 14 days' notice, and is subject to structural separation requirements. In contrast, COMSAT's competitors are entirely free of rate-of return regulation, tariff regulation and structural separation requirements. The petition requests that limits on the corporation's rate of return and structural separation requirements be removed and that CWS be allowed to change its tariff rates and introduce new services on one-day notice. The corporation believes that the relief requested will enable the corporation to compete more effectively under current market conditions. In particular, lifting rate-of-return regulation and more flexible tariffing requirements, are expected to permit the corporation to offer customers a wider range of services at lower prices by eliminating inefficiencies associated with structural separation and cost-of-services rules. The petition would not eliminate all FCC regulatory oversight over COMSAT or all existing regulatory constraints. If COMSAT is classified as a non-dominant carrier or the FCC exercises its forbearance authority, COMSAT would continue to be governed by the reasonableness and nondiscrimination requirements of the Communications Act, would still file tariffs, and would remain subject to the FCC's complaint procedures. In addition, COMSAT's capital structure and debt-financing activities would continue to be regulated by the FCC under the Satellite Act. See "Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources." The Satellite Act provides that no shareholder 4 (other than communications common carriers authorized to hold shares by the FCC) may own more than 10% of the corporation's common stock. COMSAT also is barred from providing domestic service in the U.S., which precludes it from providing "one-stop" shopping for international and domestic services. In addition, unlike its competitors, COMSAT is only permitted to provide earth station services through a separate subsidiary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook" for a discussion of proposed legislation which could affect certain of those requirements. CI's companies operate in various developing countries and are subject to regulation by the local regulatory authorities in those countries. Because the regulatory environment in those countries is rapidly evolving as the local economies are developing, CI's companies face increasing business uncertainties which could have an adverse effect on their operations in those countries. For a discussion of a pending regulatory proceeding in Argentina affecting COMSAT Argentina, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook-Network Services." SATELLITE SERVICES COMSAT WORLD SYSTEMS SERVICES. COMSAT World Systems (CWS) provides satellite capacity for telephone, data, video and audio communications services between the United States and the rest of the world using the global network of INTELSAT satellites. CWS's customers include U.S. international communications common carriers, teleports, private network providers, multinational corporations, U.S. and international broadcasters, news-gathering organizations, digital audio companies and the U.S. government. The largest portion of CWS's revenues comes from leasing full-time voice grade half-circuits (two-way communications links between an earth station and an INTELSAT satellite) to U.S. international communications common carriers. The three largest carrier customers are AT&T Corp. (AT&T), MCI International Inc. (MCI) and Sprint Communications Company (Sprint). CWS offers significant discounts to customers entering into long-term commitments for full-time voice-grade half-circuits. Approximately 93% of all eligible voice-grade half-circuits are now under such commitments. CWS's voice and data services are primarily digital, which provides higher quality transmissions than analog services. CWS's International Digital Route (IDR) service, for example, makes it possible for communications carriers to provide digital public-switched telephone network circuits. The carriers apply techniques to such circuits that permit a single digital circuit to handle multiple telephone calls simultaneously. For private-line customers, CWS offers an all-digital International Business Service (IBS), as well as an international VSAT (Very Small Aperture Terminal) service. IBS offers customers high-speed, digital communications for voice, data, facsimile and video conferencing using on-premise earth stations that eliminate the need for costly land-line connections. At year-end 1997, approximately 95% of CWS's IBS traffic was covered by long-term commitments. CWS's customers have established 5 international VSAT networks in both Latin America and Europe. Using on-premise antennas as small as 1.8 meters in combination with the high-power satellites in the INTELSAT network, corporations doing business internationally can deliver communications to multiple sites. Used primarily for data transmissions, VSATs can also accommodate voice and video communications. To the growing international broadcasting community, CWS provides both digital and analog transmission services on a long-term, short-term or occasional as-needed basis. With the introduction of the INTELSAT VII, VIIA and VIII satellites (see "Item 2. Properties -- INTELSAT Satellites"), CWS has expanded the availability of high-power, flexible capacity for broadcasters and satellite news gatherers. To maintain the quality of the INTELSAT network, CWS provides tracking, telemetry, control and monitoring services to INTELSAT and engages in a program of research and development to ensure that the satellite system accommodates the latest communications technologies, including broadband, integrated services digital networks (ISDN), and asynchronous transfer mode (ATM). INTELSAT. INTELSAT is a 142-nation organization headquartered in Washington, D.C. It operates under three agreements: (1) an intergovernmental agreement; (2) a headquarters agreement with the U.S. Government; and (3) an operating agreement signed by each nation's government or designated telecommunications entity (a signatory). COMSAT is the U.S. signatory. It represents the United States in INTELSAT, subject to instructions from the Department of State (in concert with the Department of Commerce and the FCC) on matters that may affect the national interest and foreign policy of the United States. Each signatory has rights and obligations in INTELSAT analogous to those of a partner. Each owns an investment share, makes proportionate contributions to INTELSAT's capital costs, and receives proportionate distributions of INTELSAT's net revenues after deductions for operating expenses. The investment shares are readjusted as of March 1 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 18.0% as of December 31, 1997 and 19.1% as of December 31, 1996. Signatories also pay INTELSAT for their use of the satellite system. In 1997, INTELSAT established a range of 17-21% for the pretax target rate of return on signatory capital used by another signatory or from non-owners who use the satellite system. The actual rate of return on signatory's capital was 18.3% in 1997. In 1998, COMSAT expects to receive a pretax rate of return of between 15% to 19% on its capital investment after appropriate accounting adjustments. CWS realized revenue from its INTELSAT ownership, net of use charges paid, of $35.4 million in 1997. At December 31, 1997, total INTELSAT Owners' Equity was approximately $2.04 billion. 6 At year end 1997, approximately 78% of CWS's IDR, IBS and FM traffic was under long term commitments with INTELSAT. CWS has short-term commitments with INTELSAT for the remaining portion of its FM, IDR and IBS traffic. CWS also enters into commitments with INTELSAT for video traffic, which vary in length depending on the length of commitments from CWS's customers. Under the INTELSAT agreements, the member nations that authorize international satellite systems separate from INTELSAT are required to ensure that such systems are technically compatible with the INTELSAT system and will not cause significant economic harm to the INTELSAT system. Beginning in 1990, INTELSAT initiated certain reforms to its process for coordinating with these separate satellite systems. These reforms culminated in 1997, when INTELSAT decided to effectively eliminate the economic harm test. As a result, there is no longer a limit on the number of circuits that a separate system can provide beyond which it would be deemed to cause significant economic harm to the INTELSAT system. In addition, the submission of non-technical information is no longer required in connection with INTELSAT coordination procedures. For a discussion of separate satellite systems competition to CWS, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook" and Note 9 to the financial statements. The corporation continues to promote efforts to restructure the INTELSAT satellite system. For a discussion of the current status of INTELSAT restructuring, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." 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 60% of spacecraft cost is typically paid to the manufacturer during construction prior to spacecraft delivery and satellite launch. In addition, approximately 20% typically is paid after the satellite has been placed in orbit and has satisfactorily completed in-orbit testing. The remaining portion of the spacecraft cost is payable periodically as performance incentives over the designated design life of the satellite contingent upon continued successful operation of the satellite during the respective periods. Under the launch service contracts, launch services costs are typically paid in quarterly installments with the final payment due at the end of the planned launch period. Launch payments are payable in full whether or not the launch has resulted in launch success. INTELSAT has purchased launch and post-separation insurance coverage for possible losses that may occur during the launch and subsequent one year periods for satellites scheduled for launch during 1998. The coverage includes the cost of the satellite and launch services, as well as the cost of the insurance itself. The corporation typically buys additional insurance to cover its capitalized interest associated with the satellites. Neither the corporation nor INTELSAT has procured insurance to cover in-orbit failures beyond one year after launch. While the corporation and INTELSAT typically procure insurance coverage of the type described, there can be no assurance that insurance coverage will be available on commercially reasonable terms or purchased by INTELSAT or the corporation for future launches. 7 Effective January 1, 1998, the corporation changed its accounting policy with respect to the cost of series satellites lost at launch or in orbit and its accounting policy with respect to satellite performance incentives paid to manufacturers. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." INTELSAT generally offers its customers (including COMSAT) long-term commitments for transponder capacity of one, five, ten or fifteen years for a range of services at tariff rates which are progressively lower for the longer term commitment periods. As of December 31, 1997, certain customers of INTELSAT, including COMSAT, had long-term commitments in effect, representing approximately 70% and 74% of the total analog and digital services traffic, respectively. Over 75% of the commitments are fo a fifteen year term. COMPETITION. CWS competes with operators of high capacity fiber-optic and other submarine cables in service along major traffic routes worldwide. CWS's major carrier customers (including its three largest customers, AT&T, MCI and Sprint) are co-owners of submarine cables. COMSAT is currently the only U.S. entity that may provide international space segment to customers using INTELSAT satellites. In connection with CWS's petition for non-dominant status (discussed below), several of CWS's customers have asked the FCC to allow some form of direct access to the INTELSAT system. The corporation has opposed these requests and believes that the Satellite Act requires U.S. access to INTELSAT to be obtained through COMSAT. In November 1997, the FCC issued an order in its "DISCO-II" rulemaking proceeding addressing, among other matters, COMSAT's provision of INTELSAT services within the United States. The FCC ruled that, before COMSAT may provide such service, it must first waive the limited immunity from suit which it has with respect to its actions as U.S. Signatory to INTELSAT. COMSAT has appealed that ruling on the ground that its limited immunity arises from international agreements entered into by the U.S. which may not be abrogated by the FCC. TARIFFS AND REVENUES. Under the Satellite Act and the Communications Act, COMSAT is subject to regulation by the FCC with respect to CWS's communications services and the rates charged for those services. CWS provides its services on a non-discriminatory basis to all customers, either under tariffs filed with the FCC or on the basis of inter-carrier contracts. CWS filed a petition for rulemaking with the FCC seeking incentive-based regulation of its multi-year, switched-voice services for carriers in January 1992. In the absence of FCC action on the petition, CWS filed a petition for partial relief in July 1994. This petition requested expedited FCC action to approve streamlined tariff procedures for all of CWS's INTELSAT satellite services. The petition was also accompanied by an extensive economic study which concluded that CWS faces substantial effective competition in all geographic and service market segments from existing and planned fiber optic cables, separate satellite facilities, and regional and foreign satellite systems, and that its access to the INTELSAT system does not confer upon CWS any market power in the provision of transoceanic telecommunications facilities. The FCC has not acted on CWS's 1992 petition, but in August 1996 the FCC issued an order granting CWS's 1994 request for streamlined tariffing for its switched-voice and private line services. The FCC did not grant CWS's request for streamlined tariffing of its video services, but invited CWS to file a new petition 8 with updated data seeking such relief, which CWS did in October 1996. That petition was granted by the FCC in August 1997 with respect to CWS's full-time video and audio services. Petitions for reconsideration or review of the FCC's August 1996 and August 1997 orders were filed by one of CWS's separate system competitors and are now pending before the FCC. In April 1997, the corporation formally petitioned the FCC to re-classify it as a non-dominant carrier or, alternatively, forbearance from dominant carrier regulation pursuant to Section 10(c) of the Telecom Act of 1996. The corporation expects that the FCC will act on the petition in 1998. See "Government Regulation," "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook" and Note 9 to the financial statements. CWS has entered into inter-carrier contracts with each of its three largest customers, AT&T, MCI and Sprint. Pursuant to those contracts, CWS reduced its rates for 10- and 15-year IDR and TDMA digital "base" circuits activated prior to January 1, 1992, and also reduced its rates beginning in 1996 for 7-year and longer IDR and TDMA circuits activated after January 1, 1992. Additional rate reductions occurred on January 1, 1997. In 1997, COMSAT filed tariff rate reductions of between 8% and 10% for IBS and VSAT services. In addition, higher speeds and larger bandwidth sizes were made available to accommodate the growing demand of Internet services. Approximately 47% of the corporation's consolidated revenues in 1997 were derived from CWS's services (compared to 50% in 1996 and 1995). Approximately 9% of the corporation's consolidated revenues in 1997 were derived from CWS's services to AT&T. Also in 1997, CWS's three largest customers, AT&T, MCI and Sprint, were the source of approximately 20%, 19% and 8%, respectively, of CWS's revenues. COMSAT MOBILE COMMUNICATIONS COMSAT Mobile Communications (CMC) provides satellite telecommunications services for maritime, aeronautical and land mobile applications, primarily using Inmarsat satellites and COMSAT's land earth stations in Connecticut and California, which serve the Atlantic and Pacific Ocean Regions, respectively, and in Malaysia and Turkey, which serve the Indian Ocean Region. These stations enable CMC to offer global coverage for its services. There are currently more than 104,000 mobile terminals operating in the Inmarsat system. As described below, CMC provides a full range of voice, facsimile, data and telex services, as well as certain value-added services. MARITIME SERVICES. CMC provides satellite services for communications to and from ships and other vessels. Customers for these services include transport ship operators, cruise ships and their passengers, fishing vessel operators, oil and mining interests, pleasure boat operators, U.S. Navy ships and foreign telecommunications administrations. 9 In addition to standard telephony services, CMC's services include group call messaging to a fleet of ships, electronic mail services, a direct-dial telephone service for passengers and crew on board ships, a news summary distribution service, access to data bases through personal computers, and other office communications services for facsimile transmissions, worldwide teleconferencing and current financial news reports. In 1997, COMSAT entered into a memorandum of understanding with the U.S. Coast Guard (USCG) and the National Oceanic and Atmospheric Administration (NOAA) to provide Inmarsat standard-C services in support of USCG position reporting and NOAA survey programs. CMC offers two digital services, Inmarsat-B and Inmarsat-M, in the Atlantic, Pacific and Indian Ocean Regions. These services provide more efficient use of the Inmarsat satellite capacity, help to significantly lower the cost of using satellite communications, and expand the potential customer base for maritime and land mobile services. CMC also offers a multi-channel version of Inmarsat-M service that allows cruise ships and other high-volume users to increase their channel capacity and offer lower rates to their customers. In 1997, CMC entered into a five year marketing and distribution agreement with Morsviazsputnik to expand distribution of CMC services to Russian-flagged vessels. In addition, CMC has entered into agreements with Telecom Italia, Videsh Sanchar Nigam Limited (VSNL), OTE and other Inmarsat signatories to permit those entities to resell CMC services through "hosting" arrangements, pursuant to which the unique Inmarsat identification code of each entity is "hosted" at CMC's land earth stations, allowing their customers to use CMC services in other regions in which such entities do no have their own facilities. CMC is currently examining similar arrangements with resellers in other markets. In 1997, CMC entered into a teaming arrangement with AT&T to provide satellite communications for "Afloat Personnel Telecommunications Services" on board U.S. Navy vessels. CMC has provided leased services to AT&T to support this service offering. AERONAUTICAL SERVICES. CMC provides satellite telecommunications services for aeronautical applications, including airline operational and administrative communications, passenger telephone service and, prospectively, air traffic control. Customers of CMC for international aeronautical services include airline service providers, commercial airlines, government aircraft and corporate aircraft. By an FCC Report and Order issued in 1989, COMSAT was authorized: (i) to be the sole U.S. provider of Inmarsat space segment capacity for aeronautical services; (ii) to provide ground segment aeronautical services in connection with the Inmarsat space segment on a non-exclusive basis; and (iii) to provide such aeronautical services only to aircraft engaged in international flights, including international flights over U.S. airspace. Another entity, the American Mobile Satellite Corporation (AMSC), was designated to be the sole provider of certain domestic aeronautical and land mobile satellite services. In 1995, CMC applied to the FCC for authority to offer domestic aeronautical services. CMC's request is pending before the FCC. In 1996, CMC began offering domestic aeronautical services on an interim basis pursuant to temporary authority granted by the FCC, pending completion of an FCC rulemaking proceeding, which is still ongoing. 10 CMC provides aeronautical services with a data service for cockpit communications on commercial flights under an agreement with Aeronautical Radio, Inc., an airline-owned service organization. CMC also provides aeronautical voice services in the Atlantic and Pacific Ocean Regions through its earth stations at Southbury, Connecticut and Santa Paula, California. There are currently more than 1,400 aircraft equipped to use the Inmarsat aeronautical system, equally split between voice and data services. A service agreement with Kokusai Denshin Denwa Co., Ltd. (KDD), the Japanese signatory to Inmarsat, provides that CMC may use KDD's ground earth station serving the Indian Ocean Region to serve CMC's aeronautical customers, and CMC may serve KDD's customers flying in the Atlantic Ocean Region. Under the agreement, CMC and KDD provide mutual back-up in the Pacific Ocean Region for aeronautical customers of both companies. A service agreement with GTE Airfone, Incorporated, a provider of air-to-ground passenger telephone service using terrestrial facilities, enables it to extend its current service to transoceanic flights by acquiring satellite and ground earth station services from CMC. COMSAT has been selected by United Airlines to provide satellite communications services for passengers (including telephone, fax and data transmission) on approximately 74 United Airlines aircraft, in exchange for making available to United Airlines a financing facility of up to $7 million to promote the use of satellite phones on United Airlines aircraft. The $7 million facility will be drawn upon as United Airlines installs seat-back phones on those aircraft. CMC also was selected in 1997 to provide satellite communication services to the international fleet of Delta Airlines (approximately 48 aircraft). CMC entered into agreements with AT&T Wireless, Inc. to provide satellite communications to the passenger cabins and with DeltaTel, Inc. to provide cockpit communications. CMC also concluded an agreement with AT&T to accept the use of the AT&T calling card to support this service offering. In addition, COMSAT provides voice service to Air Canada passengers on 20 aircraft pursuant to an existing arrangement which commenced in 1994. In late 1996, the Federal Aviation Administration (FAA) selected CMC to provide satellite and uplink services for the Wide Area Augmentation System (WAAS). For a further discussion of the WAAS contract, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." LAND MOBILE SERVICES. CMC provides telecommunications services for international land mobile applications, using mobile and portable terminals located outside of the United States. Customers for these services include broadcasters, foreign telecommunications authorities and U.S. and foreign corporations and government agencies. 11 CMC's land mobile services are currently available using transportable versions of Inmarsat's Inmarsat-A and Inmarsat-B mobile earth stations (telephone, facsimile, data, and telex), a briefcase-size Inmarsat-M terminal and a smaller data-only Inmarsat-C terminal through CMC's C-Link service. C-Link service is a low-cost text messaging service that permits smaller vessels and land mobile units to use the global satellite network. The briefcase-size Inmarsat-M terminals provide a more portable and less expensive telephone service for international travelers, the news media, government officials and others who travel to remote parts of the world where reliable communications services are often not available. The corporation commenced commercial Planet 1 service in January 1997. The Planet 1 terminal is a six pound, laptop computer-sized satellite terminal which utilizes the Inmarsat-3 satellites. This product addresses the demand for global personal communications ahead of the availability of hand-held satellite services. All five of the Inmarsat-3 satellites have been launched and placed in service. In 1997, COMSAT entered into an agreement with Embratel permitting Embratel to resell CMC mini-M service in Brazil. Similar arrangements are being pursued in other countries. COMSAT is not generally authorized to provide U.S. domestic land mobile services. However, it is providing U.S. domestic service to certain individual end users under special temporary authorities from the FCC. In 1995, COMSAT applied to the FCC for regular authority to offer land mobile services domestically. In 1996, COMSAT applied to the FCC for blanket authority to construct and operate up to 5,000 Planet 1 terminals in the United States. The FCC has not yet ruled on those applications. In November 1997, the FCC issued an order in its "DISCO II" rulemaking proceeding addressing, along with other issues, COMSAT's provision of Inmarsat services within the United States. The FCC ruled that, before COMSAT may provide domestic service within the United States via Inmarsat, it must first waive its immunity from suit, including suit under the U.S. antitrust laws, stemming from its role as U.S. signatory to Inmarsat. COMSAT has appealed that ruling. Based in part on this DISCO II policy, the FCC staff has since denied a COMSAT request for authority to operate up to 50 Planet 1 terminals domestically. COMSAT has since sought reconsideration of the staff decision by the full Commission and a partial waiver of the DISCO II policy. In its DISCO II order, the FCC also stated that it will allow COMSAT to provide international service to and from Inmarsat terminals within the U.S., but ruled in January 1998, with regard to a COMSAT Planet 1 application, that COMSAT must first show that the service can be restricted to calls originating or terminating outside of the U.S. COMSAT has since filed an amendment to its underlying Planet 1 application containing proposed means of providing such assurance. The FCC has not yet ruled o COMSAT's application as amended. INMARSAT. Inmarsat is an 81-nation organization headquartered in London, England. It operates under three agreements: (1) an intergovernmental convention; (2) a headquarters agreement with the U.K. Government; and (3) an operating agreement signed by each nation's government or designated telecommunications entity (signatory). COMSAT is the U.S. signatory. It represents the United States in Inmarsat, subject to instructions from the Department of State (in concert with the Department of Commerce and the FCC) on matters that may affect the national interest and foreign policy of the United States. 12 Each signatory has rights and obligations in Inmarsat analogous to those of a partner. Each owns an investment share, makes proportionate contributions to Inmarsat's capital costs, and receives proportionate distributions of Inmarsat's space segment charges after deductions for operating expenses. The investment shares are readjusted as of February 1 of each year to approximate the Signatories' respective portions of the total utilization of the Inmarsat space segment for the previous year. COMSAT's investment share, the largest in Inmarsat, was 23.0% as of December 31, 1997, which is unchanged from December 31, 1996. On February 1, 1998, COMSAT's share was reduced to 22.3%. At December 31, 1997, total Inmarsat Owners' Equity was approximately $978 million. The corporation continues to promote efforts for the privatization of Inmarsat. For a discussion of the current status of INTELSAT restructuring, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." The Inmarsat-3 satellites are the primary operational Inmarsat spacecraft and are used for on-demand services such as Inmarsat A, B, M, Mini-M, C, and Aeronautical. Some services such as Mini-M and Aero-I are spot beam only services and can only be supported on the Inmarsat-3 satellites. Four Inmarsat-3 satellites are operational (two in the Atlantic Ocean Region and one in each of the Pacific and Indian Ocean Regions) and one serves as an in orbit spare. The Inmarsat-2 satellites are expected to provide full time pre-emptible lease services and backup for global beam services on the Inmarsat-3 satellites. Four Inmarsat-2 satellites are in orbit. Inmarsat procured the Inmarsat-2 and Inmarsat-3 satellites and launch services under long-term, multi-satellite contracts which provided for payments by Inmarsat over the contract periods. The contracts for the construction of the Inmarsat-3 satellites required performance-based incentive payments for each satellite after 60 days of successful in-orbit testing and after successful emergence of the spacecraft from the first eclipse season. Additional incentive payments are made quarterly based on continuous satisfactory operation of the satellite through the end of its orbital life. Incentive payments were not paid by Inmarsat in connection with the procurement of the Inmarsat-2 satellites. As of December 31, 1997, Inmarsat did not have any contracts to procure additional satellites. Inmarsat has purchased an insurance policy which provides insurance coverage after one satellite failure for certain in-orbit failures for the Inmarsat-3 satellites for 365 days after launch. Neither Inmarsat nor COMSAT carries insurance for in-orbit failures beyond 365 days after launch for the Inmarsat-3 satellites. Similarly, there is no insurance in place for in-orbit failure for the Inmarsat-2 satellites. Effective January 1, 1998, the corporation changed its accounting policy with respect to the cost of series satellites lost at launch or in orbit and its accounting policy with respect to satellite performance incentives paid to manufacturers. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." 13 Inmarsat generally offers its customers (including COMSAT) satellite capacity on demand generally under terms that require payments on a per minute basis. In contrast to INTELSAT, Inmarsat has relatively few long-term commitments for satellite capacity. ICO. In late 1996 and early 1997, the corporation reduced its direct investment in ICO Global Communications (Holdings) Limited (ICO) and presently owns 1.7%. See Note 5 to the financial statements. The corporation also continues to hold an indirect share of ICO through its ownership interest in Inmarsat, which is also an ICO shareholder. The corporation is evaluating its plans with respect to distribution of ICO products and services and will continue to assess whether its direct ownership i properly aligned with those plans. ICO was formed to provide hand-held satellite communications services outside of the Inmarsat organization to allow a more commercial focus than the current Inmarsat system. The other current major investors in ICO, besides the Corporation and Inmarsat, include Inmarsat signatories and Hughes Communications, Inc. (Hughes) and TRW, Inc., which are expected to compete with the corporation as service providers in the U.S. and other markets. For a discussion of the proposed ICO satellite system and the corporation's investment in ICO, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook" and Notes 8 and 10 to the financial statements. On May 1, 1995, COMSAT filed an application with the FCC for authority to participate in Inmarsat's procurement of space segment from ICO for specialized (non-handheld) communications services. In that application, COMSAT also sought an FCC ruling that ICO had been structured in compliance with the requirements for COMSAT's participation in ICO set out in a prior FCC ruling. The application is being opposed by certain of the corporation's competitors. The FCC has not acted on that application. In 1997, COMSAT concluded agreements with ICO to construct, operate and interconnect a "satellite access node" (SAN) in Brewster, Washington. It is contemplated that the Brewster SAN will become part of ICO's backbone network. COMPETITION. Under the Inmarsat Act, COMSAT is the designated U.S. signatory to the Inmarsat Operating Agreement, and is the sole U.S. operating entity and investor in the Inmarsat system. CMC competes for maritime, land mobile and aeronautical communications business with other Inmarsat Signatories operating land earth stations and with IDB Mobile Communications, Inc. (IDB), another U.S. land earth station operator. IDB provides maritime, land mobile and aeronautical services through its own U.S. land earth stations, using Inmarsat satellite capacity obtained from CMC, as well as through certain foreign earth stations. In October 1997, IDB informed COMSAT that it was no longer purchasing Inmarsat satellite capacity used by its U.S. land earth stations from COMSAT, but was instead purchasing that capacity from another signatory. COMSAT believes that IDB is required, under the terms of its service contract with COMSAT, U.S. law and the Inmarsat Operating Agreement, to purchase that capacity from COMSAT. After attempts to resolve this issue failed, COMSAT in January 1998 filed a lawsuit against IDB seeking damages for breach of contract in the United States District Court for the Southern District of Maryland. In February 1998, IDB filed a petition for a 14 declaratory ruling asking the FCC to rule that operators of U.S. Inmarsat Land earth stations may purchase Inmarsat satellite capacity from foreign signatories and a motion to dismiss or stay COMSAT's lawsuit until the FCC rules. COMSAT has filed an opposition to both aspects of IDB's motion. The court has not yet ruled. In addition, CMC competes with American Mobile Satellite Corporation (AMSC), which launched its own satellite in 1995 to offer U.S. domestic and international mobile satellite services. CMC also competes for maritime communications business with domestic and international operators of cellular radio services, high frequency radio services, mobile satellites and C-band and Ku-band satellites, and in the future is expected to compete with the FCC-licensed low-earth-orbit ("Big Leo") satellite systems of Iridium and GlobalStar and the medium-earth-orbit satellite system of ICO. Operators of C-band satellites have been successful in capturing a significant portion of the maritime communications business with the U.S. Navy and cruise ships. These competitive forces have and are expected to continue to exert downward pressure on CMC's pricing for services provided through the Inmarsat system. FCC decisions also may significantly affect the competition for products and services offered by CMC. In November 1993, the FCC authorized AT&T to provide shore-to-ship Inmarsat service under an agreement with CMC. In December 1993, AT&T filed a new application to provide "branded end-to-end" Standard-A mobile satellite service in the ship-to-shore direction, which COMSAT opposed. In early 1996, AT&T was granted FCC authorization to offer such service. In June 1996, CMC and AT&T concluded an Interconnection and Service Agreement to address interconnection of facilities and settlement issues. In December 1994, IDB filed two applications seeking authority to provide Inmarsat-M and Inmarsat-B services to maritime and land mobile users through foreign land earth stations in the shore-to-ship direction in the Atlantic and Pacific Ocean regions. In that proceeding, IDB contended that the Inmarsat Act allows U.S. carriers to use Inmarsat land earth stations and space segment obtained from foreign Inmarsat Signatories for U.S.-originating traffic, a position COMSAT opposes. IDB withdrew it applications in July 1995. In August 1995, however, Cruisephone filed applications, which are being opposed by COMSAT, that raise similar issues. In January 1997, IDB filed another application, which COMSAT has opposed, seeking authority to provide Inmarsat-M and -B services (including carriage of U.S.-originating fixed-to-mobile traffic) through foreign land earth stations using Inmarsat satellite capacity procured from foreign signatories. The FCC has not yet ruled on these applications. In March 1993, the FCC granted COMSAT a waiver that would allow COMSAT to provide equipment, software and value-added services to customers directly through CMC, rather than through a separate subsidiary, thereby avoiding substantial duplication of personnel and other costs, subject to COMSAT's establishing certain non-structural safeguards. To satisfy the FCC's conditions, COMSAT filed a proposed cost allocation manual and a plan for implementing certain non-accounting safeguards requested by the FCC. The FCC approved cost allocation manual in July 1995. The FCC has since approved the second compliance filing, but has conditioned the waiver's effectiveness on COMSAT's submission, and the FCC's approval, of a revised cost allocation manual. COMSAT submitted the revised cost allocation manual in January 1998. The FCC has not yet acted on that filing. 15 In 1995, COMSAT petitioned the FCC for authorization to provide the same kinds of value-added services to its aeronautical and land mobile customers. The FCC granted this petition in 1996, subject to FCC approval of non-structural safeguards -- which approval was granted in 1997. The FCC has made the effectiveness of this waiver conditional upon its approval of COMSAT's revised cost allocation manual. REVENUES. Approximately 30% of the corporation's consolidated revenues in 1997 were derived from CMC (compared to 30% in 1996 and 36% in 1995). No single customer of CMC provided more than 10% of the corporation's consolidated revenues in 1997. NETWORK SERVICES COMSAT INTERNATIONAL COMSAT International (CI) operates an integrated group of telecommunications companies that are engaged principally in providing individualized digital network solutions to business clients and carriers in selected markets. CI also is actively engaged in the development of prospective international telecommunications opportunities that are consistent with its digital networking strategy. CI's existing and prospective companies typically are and will be located in those rapidly growing markets where a significant number of CI's existing or targeted clients are located (or where they intend to locate). As of December 31, 1997, CI operated 15 companies worldwide. These companies are located in Latin America, Asia and Europe. CI's companies generally are wholly- or majority-owned, with the exception of COMSAT Max Limited, CI's company operating in India, and Viatel, Inc. (Viatel), the European facilities-based carrier and call-back company. At December 31, 1997, CI beneficially owned 50% and 9.5%, respectively, of COMSAT Max Limited and Viatel, respectively. CI's clients are typically local, indigenous large and medium-sized corporations, national branches of multinational corporations and major telecommunications carriers and consortia. CI continued to develop new opportunities around the world in 1997. In particular, CI expanded its activities in Latin America through the acquisition of IntelComRed S.A. de C.V., a Mexican satellite services company, and renamed it COMSAT Mexico S.A. de C.V. Primarily through the completion of a statutory merger under Delaware law, CI also increased its ownership interest and operating control of BelCom, Inc. (BelCom) to 100%. BelCom currently provides telecommunications services in the Russian Federation and certain countries of the Newly Independent States (NIS), including Kazakhstan, Uzbekistan and Turkmenistan. In addition, CI sold its 19.66% interest in Philippine Global Communications, Inc. (PhilCom) (see Notes 3 and 5 to the financial statements) in January 1997. CI's companies operate in numerous and diverse markets, as reflected in the table set forth below. Consequently, 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 16 laws, CI's principal competitor is typically the local Postal, Telegraph and Telephone administration (PTT), together with a limited number of companies that provide telecommunications services similar to those offered by CI. In countries that have liberalized their telecommunications laws, CI typically faces greater competition than in less liberalized markets.
CI COMPANY COUNTRY CI OWNERSHIP PERCENTAGE - ---------- ------- ----------------------- BelCom, Inc. Russian Federation and NIS 100 % COMSAT Argentina, S.A. Argentina 100 COMSAT Asia (L) China 55 Incorporated COMSAT de Colombia, S.A. Colombia 100 Communicaciones Satelitales de Colombia 94 Colombia COMSAT de Bolivia S.R.I. Bolivia 100 COMSAT Brasil Ltda. Brazil 100 COMSAT de Guatemala, S.A. Guatemala 100 COMSAT Max Limited India 50 COMSAT Mexico S.A. de C.V. Mexico 100 COMSAT Peru, S.A. Peru 65 COMSAT Digital Services Turkey 85 COMSAT Telecommunications Turkey 51 Services COMSAT Venezuela, Venezuela 100 COMSATVEN, C.A Venezuela 100 Viatel, Inc. U.S., Europe, Latin America 9.5 and Asia
COMSAT LABORATORIES COMSAT Laboratories consists of two main business segments: technical consulting and communications products. Technical consulting activities include the design and development of advanced digital communications technologies, systems and networking solutions to commercial and government customers worldwide. COMSAT Laboratories also designs, develops and licenses communications products for access, compression and networking applications as well as software for satellite system planning and management. COMSAT Laboratories also licenses new technology it develops to other companies for commercialization. Customers include U.S. and foreign government agencies, commercial entities, INTELSAT and Inmarsat. In addition, COMSAT Laboratories conducts research and development on a broad range of telecommunications devices, subsystems, transmission systems, technologies and techniques in support of other COMSAT businesses. 17 On-going contracts being performed in 1997 include: a contract to design, manufacture and deliver S-band mobile satellite communications equipment; a contract with AT&T to deliver second generation TDMA terminals; a contract with Ericsson to design and develop the HPN ICONET ground facilities subsystems; contracts with INTELSAT to design STRIP 7 and develop a software system for generating INTELSAT TDMA burst time plans; a contract with NASA to provide operation and maintenance support for the ACTS (Advanced Communications Technology Satellite) program; and a variety of technical consulting contracts for INTELSAT, Inmarsat and other governmental and private industry customers. COMSAT Laboratories won external contracts with a total value of $29.7 million in 1997. Major new contracts awarded or begun in 1997 include: a contract with Ericsson to design and develop the HPN ICONET ground facilities subsystem for ICO; a contract with Lockheed Martin for the ACES In-Orbit-Test System; a contract with Iridium for its second generation system; a contract with Raytheon for ATM satellite link adapter for the Midas program. Revenue from external customers was $24.6 million in 1997 and $32.3 million in 1996. COMSAT Laboratories support of other COMSAT divisions totaled $11.8 million in 1997 and $11.4 million in 1996. At December 31, 1997, COMSAT Laboratories' backlog of orders totaled $28.3 million, as compared to $21.3 million at December 31, 1996. COMSAT Laboratories incurred research and development expenditures of $3.7 million in 1997, a decrease of $2.6 million from 1996. These expenditures were largely attributed to the development of its video compression, asynchronous transfer mode (ATM) and software products. COMSAT Laboratories expects R&D expenses to increase in the future as it pursues additional commercial activities. GOVERNMENT PROGRAMS Network Services' government and commercial programs businesses consist of the operations of COMSAT Government Services, Inc. (CGSI) and COMSAT General Corporation, both of which are wholly-owned subsidiaries of the corporation. CGSI was incorporated in 1997 to focus more directly on the government satellite market and develop other government service applications. The core business for CGSI is the Commercial Satellite Communications Initiative (CSCI) program which is a contract with the Defense Information Systems Agency (DISA) to provide commercial satellite services. CGSI provides satellite bandwidth, operates two bandwidth management centers currently, and provides satellite engineering services under the CSCI contract. COMSAT General provides satellite earth station service through facilities located in Clarksburg, Maryland, Santa Paula, California and Southbury, Connecticut. COMSAT General operates antennas, a satellite control facility, and high speed fiber interconnects to telecommunications carriers and Internet service providers. COMSAT General services include transmission and reception capability to INTELSAT and non INTELSAT satellites for voice, data, Internet and video broadcasts. 18 COMSAT General also provides satellite operation service for the Marisat and Comstar satellites, which includes tracking, telemetry, command, and maintenance of these assets. In addition to operating these satellites, COMSAT General also leases transponder capacity on those satellites. COMSAT General provides services to both commercial and government customers. DISCONTINUED OPERATIONS ASCENT During 1995, the corporation incorporated and transferred all of its entertainment assets to COMSAT Entertainment Group, Inc., which was subsequently renamed Ascent Entertainment Group, Inc. (Ascent). An initial public offering of Ascent's common stock was completed in December 1995. Ascent's common stock is traded on the Nasdaq National Market under the symbol "GOAL." Following the offering, the corporation owned 80.67% of Ascent's common stock. During the second quarter of 1997, the corporation began accounting for the operations of substantially all of CRSI as discontinued operations See Note 2 to the financial statements. The corporation distributed its 80.67% ownership interest in Ascent to shareholders on June 27, 1997. Ascent's principal business is providing pay-per-view entertainment and information services through its 57 percent-owned subsidiary On Command Corporation. In addition, Ascent is involved in other entertainment-related businesses including ownership and operation of the NBA Denver Nuggets and NHL Colorado Avalanche, development and management of The Pepsi Center through Ascent Arena Company, and Beacon Communications, a motion picture and television production company. COMSAT RSI COMSAT RSI, Inc. (CRSI) was formed in 1994 in connection with the acquisition by the corporation of Radiation Systems, Inc. (RSI). The corporation combined RSI with certain of its then existing antenna and wireless networks product and system integration operations to form CRSI. During the second quarter of 1997, the corporation began accounting for the operations of substantially all of CRSI as discontinued operations. See Note 2 to the financial statements. In March 1998, the corporation entered into a stock purchase agreement to sell substantially all of CRSI. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." 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. Also included as part of discontinued operations is Electromechanical System, Inc. (EMS), a wholly-owned subsidiary of CRSI, and an equity ownership interest in Plexsys International Corporation (Plexsys), which are being retained by COMSAT per the terms of the stock purchase agreement, pending evaluation of available alternatives. The long-term contract for construction of a radio telescope in Greenbank, West Virginia also is to be retained by the corporation in connection with the stock purchase agreement. The Labs sector of the Network Services segment and the Government Programs sector of Satellite Services now includes certain non-manufacturing, telecommunications contracts and businesses that were previously reported as part of CRSI in the Technology Services segment. 19 CRSI designs, manufactures and integrates earth stations, as well as wireless and advanced antenna systems. CRSI has three operating groups: Advanced Systems, Communication Systems and Wireless Networks. These groups include 10 business units, 9 of which are vertically integrated to serve global telecommunications markets. The remaining unit serves the global machine tool market. CRSI's customers include the U.S. Government, U.S. Government prime contractors, foreign governments, domestic and foreign telecommunication service providers, broadcast and cable television operators, and a wide variety of other commercial customers. CRSI's manufactured products include a broad range of parabolic antennas and line-of-sight microwave antennas, cellular and personal communication system (PCS) antennas, satellite frequency converters, microwave components, Ultra-Small Aperture Terminal (USAT) and VSAT equipment, cellular switch and base station radio equipment, servo control systems, vehicle-mounted mobile antennas, multiplexers, antenna monitor and control systems, antenna positioning systems, tactical military antennas, air traffic control antennas, radar antennas, radio telescope antennas, tactical masts, monopoles, towers, and optical measuring devices. CRSI designs, integrates, installs and tests large-scale wireless and satellite ground systems, private VSAT networks, video distribution networks, and network control systems. In addition, CRSI provides turnkey gateway antennas and network control systems for regional and global fixed and mobile satellite systems. CRSI competes with major companies around the world in several telecommunications markets. Major competitors in the communications systems market include Scientific Atlanta, Inc.; California Microwave, Inc.; Globecomm Systems, Inc.; Alcatel N.V.; Miteq, Inc.; LNR Communications, Inc.; SSE Telecom, Inc.; NEC; Harris Corporation; and Mitsubishi. In the wireless networks market, competitors include GM Hughes Electronics Corporation; Gilat Satellite Networks Ltd.; ViaSat, Inc.; Andrew Corporation; Kathrein; Cellwave; Allgon; Gabriel Electronics, Inc.; Ericsson Radio Systems AB; Northern Telecom Limited; Stanilite; Celcore (recently acquired by DSC Communications Corp.); Alcatel NV; STM Wireless, Inc.; EMS Technologies, Inc.; and Allen Telecom, Inc. The advanced systems markets competition includes Datron Systems, Inc.; TIW Systems, Inc.; Electrospace Systems, Inc.; Signal Processors, Ltd.; Marconi Radar Systems Limited; Cosser Electronics Limited (Raytheon); Tech-Sym Corporation; and Vertex Communications Corporation. Certain companies like Hughes, Scientific Atlanta, California Microwave, Harris, Alcatel and Andrew Corporation compete in most of CRSI's markets. Many of these companies are considerably larger and have greater financial resources than CRSI. In all market areas, CRSI competes on the basis of price, performance, on-time delivery, reliability and customer support. As part of the stock purchase agreement, the corporation has agreed to retain the long-term contract for the completion of the 100 meter radio telescope at Green Bank, West Virginia. COMSAT or a subsidiary also will retain the CRSI employees at the site and assume the contracts with two unions that provide on-site labor. CRSI will provide the surface panels and certain other services related to completion of the servo-drive system for the telescope under a separate subcontract. COMSAT is in negotiation with Associated Universities Incorporated, which operates the National Radio Astronomy Observatory at Green Bank under a Co-operative Agreement with the National Science Foundation, for novating of the original contract for construction of the telescope from CRSI to COMSAT. Novation of the Greenbank contract is a condition to the purchaser's obligation to close under the stock purchase agreement. CRSI's $29 million claim for work 20 performed under and relating to the Greenbank contract, which is currently in arbitration, also will be assigned to COMSAT in connection with stock purchase agreement. There can be no assurance that the corporation will be successful in collecting all or any portion of the claim. Electromechanical Systems, Inc. (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. CRSI also owns approximately 53% of the outstanding equity securities of Plexsys International Corporation (Plexsys). Plexsys provides turn-key cellular and wireless local loop systems primarily targeted at thin-route applications in rural or developing markets and manufactures switching and base station equipment. Most of Plexsys' business is in international markets. In February and March 1998, Plexsys substantially reduced its operations and laid off most of its staff. The corporation doe not anticipate that it will recover its investment in Plexsys or certain amounts owed it by Plexsys. The corporation believes that the reserves it has established for the disposition of CRSI generally are adequate to absorb any losses that are likely to be incurred in connection with Plexsys. There can be no assurance, however, that additional reserves will not be required. INVESTMENTS The corporation's investments are discussed at Note 5 to the financial statements. ITEM 2. PROPERTIES COMSAT PROPERTIES At year end 1997, the headquarters of the corporation and the headquarters of the Satellite Services segment and CI were located in a building in Bethesda, Maryland, which the corporation leases from a limited partnership in which it holds a 50% interest, primarily as a limited partner. The managing general partner also owns a 50% interest in the partnership. An affiliate of the managing general partner owns the building site and has leased this site to the partnership. The corporation has entered into a 15-year lease with the partnership for the new building (see Note 8 to the financial statements). In 1997, the corporation sold the office buildings and land at Clarksburg, Maryland that serve as the headquarters of COMSAT Laboratories, as well as offices for certain operations of CRSI. The corporation leased back the office buildings for a ten-year lease term. See Note 4 to the financial statements. 21 The corporation also owns two manufacturing facilities in Dulles, Virginia, one of which serves as the headquarters of CRSI, and land located nearby that is used as an antenna test range by CRSI. Further, the corporation owns or leases 10 other properties in the United States, leases two properties in England and a sales office in Beijing, China. The properties owned by CRSI are to be transferred upon consummation of the proposed sale of CRSI and the purchaser will assume the leases for the CRS leased properties in accordance with the terms of the stock purchase agreement. COMSAT General owns 86.3% of the MARISAT Joint Venture, which still operates the MARISAT F-2, one of the three satellites launched in 1976, with capacity leased to the U.S. Navy and Fugro N.V., a Netherlands company. The MARISAT F-1 and F-3 ceased commercial operations in 1996. COMSAT General owns the COMSTAR D-4 satellite (launched in 1981) with capacity leased to CMC and the U.S. Navy. The corporation leases earth stations in Turkey and Malaysia, and owns earth stations at Santa Paula, California and Southbury, Connecticut that are used by CMC to provide mobile communications services. A leased earth station in Fucino, Italy along with the California and Connecticut earth stations are used by CRSI to provide TT&C services. The corporation owns earth stations at Clarksburg, Maryland and Paumalu, Hawaii that are used by CWS to provide TT&C services to INTELSAT. The corporation owns an additional earth station at Clarksburg, Maryland which is used by Network Services' Government Programs to house its Satellite Control and Teleport Facilities as well as the Bandwidth Management Center for the U.S. Government CSCI Program. CI leases facilities in each of the countries in which it operates. See "General Information - Network Services - COMSAT International" above for a listing of the countries in which CI operates. The corporation's properties are believed to be suitable and adequate for the corporation's business operations. INTELSAT SATELLITES The corporation's property accounts include CWS's pro-rata share of INTELSAT satellites. The INTELSAT satellites currently used and under construction are described below. Some of these satellites are planned to be transferred to a separate entity as a result of INTELSAT restructuring. For a discussion of the current status of INTELSAT restructuring, see "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Outlook." There are seven INTELSAT V and VA satellites continuing to operate in the INTELSAT system. All these satellites have reached the end of their design lives and are operating in an inclined orbit. Their capacities range from 15,000 to 17,000 voice circuits or 51 to 57 television channels (or some combination of each depending on the configuration of the satellite). The satellites were built by a predecessor to Space Systems/Loral. 22 The INTELSAT VI series consists of five satellites, constructed by Hughes Aircraft Company, a subsidiary of General Motors Corporation. These satellites have an average capacity of at least 24,000 bearer circuits or 87 television channels. The INTELSAT VI satellites, the last of which was launched on October 1991, currently provide primarily backbone public switched network (PSN) services in the Atlantic and Indian Ocean regions. The INTELSAT-K satellite, constructed by General Electric Technical Services Company, Inc., which was subsequently acquired by Lockheed Martin Corporation and launched in 1992, has an average capacity of 7,000 bearer circuits or 32 television channels. The INTELSAT-K satellite provides video transponder leases to European and North American customers. The INTELSAT VII series consists of six satellites constructed by Space Systems/Loral. These satellites have an average capacity of at least 17,050 bearer circuits or 62 television channels (or a capacity of 62 36MHz units with a typical minimum power range of 29 to 34.5 decibels relative to one watt (DBW) at C-band and 44 DBW at Ku-band depending on the beam). The last INTELSAT VII satellite was launched in June 1996. These satellites were designed to replace the V/VA satellites. They provide improved utilization and flexibility, with improved radio frequency power, enhanced Ku-band coverage and increased C-band connectivity compared to the V/VA satellites. The INTELSAT VIIA series, also constructed by Space Systems/Loral, consists of two satellites having an average capacity of at least 19,250 bearer circuits or 70 television channels (or a capacity of 70 36MHz units with a typical minimum power range of 29 to 36 DBW at C-band and 42.7 to 45 DBW at Ku-band depending on the beam). Of the three INTELSAT VIIA satellites constructed, the first INTELSAT VIIA satellite was successfully launched in May 1995; the launch of the second VIIA, in February 1996 was a failure (see Note 4 to the financial statements); and the third VIIA was successfully launched in March 1996. These satellites provide an enhancement over the VII satellites to meet increased demand for high power Ku-band capacity. New cross-strapped connectivity from Ku-band to C-band allows the provision of satellite news gathering (SNG) service using a roving Ku-band Spot Beam in the uplink. The INTELSAT VIII series consists of four 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 four INTELSAT VIII satellites were 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 two satellites constructed by Lockheed Martin Corporation. These satellites have 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 bean). The INTELSAT VIIIA (F-6) was successfully launched in February 1998. The INTELSAT VIIIA (F-5) is scheduled for launch later in 1998. The INTELSAT VIIIA satellites are 23 designed for users requiring high power together with a wide coverage areas in C-band for the provision of services such as video, VSAT applications and PSN. They use complex state-of-the-art antenna technology to provide improved coverage of land areas of North and South America. COMSAT has applied to the FCC for authorization to participate in the procurement of the K-TV satellite. This spacecraft is being constructed by Matra Marconi Space and has a capacity of 30 36MHz transponders with a typical minimum range of 36 to 52 DBW depending on the beam. It is expected that the satellite will be launched in the first quarter of 1999. The satellite was designed to provide high power Ku-band capacity specifically for direct-to-home television service, and VSAT network applications, such as data distribution and contribution, including INTERNET/INTRANET networks. The K-TV satellite will provide coverage over areas of India, China and Indonesia/Malaysia. COMSAT has applied to the FCC for authorization to participate in the procurement of up to five INTELSAT IX satellites. As of December 31, 1997, procurement of four 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 in the years 2000 and 2001. 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 PSN services in the Atlantic and Indian Ocean regions. The INTELSAT IX satellites will be INTELSAT's largest capacity satellite with advanced communications and RF performance. The corporation has purchased insurance to cover the launch and subsequent in-orbit testing of the INTELSAT VIII and VIIIA satellites. Partial loss in-orbit insurance for the remaining four INTELSAT VIII and VIIIA satellites was purchased for the first 365 days after launch. Effective January 1, 1998, the corporation changed its accounting policy with respect to the cost of series satellites lost at launch or in orbit and its accounting policy with respect to satellite performance incentives paid to manufacturers. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." INMARSAT SATELLITES The corporation's property accounts include CMC's PRO-RATA share of Inmarsat satellites. The Inmarsat satellites currently used and under construction are described below. The second-generation Inmarsat satellite system, known as the Inmarsat-2 series, consists of four satellites constructed by an international consortium led by British Aerospace Dynamics Corporation. These satellites are now used primarily for leases and backup capacity. The Inmarsat-2 satellites are expected to be moved, depending on traffic demand, to new orbital locations where they will provide full time pre-emptible lease services. The Inmarsat-2 series satellites also provide backup for global beam services on the Inmarsat-3 satellites. Some services such as Mini-M and Aero-I are spot beam only services and can only be supported on the Inmarsat-3 satellites. 24 The third-generation Inmarsat satellite system, known as the Inmarsat-3 series, consists of five satellites constructed by Lockheed Martin Astro Space. These satellites use spot-beam technology, which allows reuse of the scarce frequency resources allocated for mobile satellite communications. The Inmarsat-3s are about eight times more powerful than the Inmarsat-2 series. All five of these satellites were launched successfully. Four of the Inmarsat-3 satellites are the primary operational Inmarsat spacecraft and are used for on-demand services such as Inmarsat A, B, M, Mini-M, C, and Aero. The fifth Inmarsat-3 satellite is planned to be used primarily for leases and backup capacity. Inmarsat has purchased an insurance policy for 365 day in-orbit coverage after launch. For a discussion of financing arrangements related to the Inmarsat-2 and -3 satellites, see Note 6 to the financial statements. Effective January 1, 1998, the corporation changed its accounting policy with respect to the cost of series satellites lost at launch or in orbit and its accounting policy with respect to satellite performance incentives paid to manufacturers. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook." ITEM 3. LEGAL PROCEEDINGS Neither COMSAT nor any of its subsidiaries is a party to, and none of their property is the subject of, material pending legal proceedings, and no such proceedings are known to be contemplated by governmental authorities, except for the matters described in Notes 8 and 9 to the financial statements and as discussed below. In 1995, the corporation entered into a five-year agreement with News Corporation to provide satellite services beginning in 1996. In March 1996, News Corporation rescinded this agreement. The corporation has commenced a lawsuit against News Corporation and other parties to recover damages arising out of News Corporation's breach of obligation to COMSAT. News Corporation has asserted a counter claim for return of the deposit it originally paid. In October 1997, IDB informed COMSAT that it was no longer purchasing Inmarsat satellite capacity used by its U.S. land earth stations from COMSAT, but was instead purchasing that capacity from another signatory. COMSAT believes that IDB is required, under the terms of its service contract with COMSAT, U.S. law and the Inmarsat Operating Agreement, to purchase that capacity from COMSAT. After attempts to resolve this issue failed, COMSAT in January 1998 filed a lawsuit against IDB seeking damages for breach of contract in the United States District Court for the Southern District of Maryland. In February 1998, IDB filed a petition for a declaratory ruling asking the FCC to rule that operators of U.S. Inmarsat land earth stations may purchase Inmarsat satellite capacity from foreign signatories and a motion to dismiss or stay COMSAT's lawsuit until the FCC rules. COMSAT has filed an opposition to both aspects of IDB's motion. The court has not yet ruled. COMSAT and its subsidiaries are a party to various lawsuits and arbitration proceedings and are subject to various claims and inquiries, which generally are incidental to the ordinary course of its business. The outcome of legal proceedings cannot be predicted with certainty. Based on currently available information, however, management does not believe that the outcome of any matter which is pending or threatened, either individually or in the aggregate, will have a materially adverse effect o the consolidated financial condition of the corporation but could materially affect consolidated results of operations in a given year or quarter. 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
EXECUTIVE OFFICERS OF THE REGISTRANT AGE AS OF NAME OFFICER MARCH 1, 1998 ---- ------- -------------- Betty C. Alewine President and Chief Executive Officer 49 Allen E. Flower Vice President and Chief Financial Officer 54 Dwight Jasmann* President and General Manager, 61 COMSAT International Alan G. Korobov Controller 49 John H. Mattingly President, COMSAT Satellite Services 47 Benjamin A. Pontano President, COMSAT Laboratories 54 Raymond D. Thomas President, COMSAT RSI, Inc. 47 Warren Y. Zeger Vice President, General Counsel and Secretary 50 - ------------- *Mr. Jasmann resigned as an executive officer effective as of February 2, 1998.
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 an officer and any other officer or director and no arrangement or understanding between an officer and any other person pursuant to which he or she was selected as an 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. Flower has been Vice President and Chief Financial Officer since November 1995. From November 1995 to September 1996, he was also Acting Treasurer. He was Controller and Acting Chief Financial Officer from April 1995 through November 1995 and Controller from June 1992 to May 1995. He is a director of Calian Technology Ltd., in which the corporation holds a minority equity investment. Mr. Jasmann served as President and General Manager, COMSAT International from August, 1996 to February, 1998. He previously worked for AirTouch Communications as Vice President of Human Resources and Corporate Services and for AT&T, where in his last position he was Managing President and Managing Director of AT&T Asia/Pacific. He is a director of Elcotel, Inc. 26 Mr. Korobov has been Controller since November 1995. He was Vice President, Finance for CMC from January 1993 to September 1995. Mr. Mattingly has been President, COMSAT Satellite Services since September 1997. He was President, COMSAT World Systems from May 1997 to September 1997 and Vice President and General Manager, COMSAT World Systems from March 1995 to September 1997. He previously served as Vice President, European Ventures, COMSAT International Ventures. Before joining COMSAT in November 1994, he was Senior Vice President and General Manager of OrionNet, Inc. Mr. 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. Thomas has been President of COMSAT RSI, Inc. since January 1997, having served as acting President from September 1996. From 1994 until September 1996, he was Group Vice President of CRSI's Communication Systems Group. In 1993, he was appointed President of Fixed Earth Station Systems. 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. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of December 31, 1997, there were 50,055,871 shares of common stock, without par value, of the corporation (COMSAT Common Stock) outstanding: 50,036,887 were Series I shares, held by approximately 35,000 holders of record other than communications common carriers; and 18,984 were Series II shares, held by 35 common carriers. The principal market for COMSAT Common Stock is the New York Stock Exchange, where it is traded under the symbol "CQ." COMSAT 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. 27 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:
COMSAT COMMON STOCK -------------------------------------------- CALENDAR YEAR 1997 HIGH LOW DIVIDEND - ------------------ -------- ---------- -------- First Quarter 28 1/2 23 .195 Second Quarter 26 11/16 19 5/8 .05 Third Quarter 24 5/16 20 13/16 .05 Fourth Quarter 25 3/4 20 5/16 .05 CALENDAR YEAR 1996 HIGH LOW DIVIDEND - ------------------ -------- ---------- -------- First Quarter 25 5/8 16 3/4 .195 Second Quarter 33 1/8 23 3/8 .195 Third Quarter 26 1/2 18 3/4 .195 Fourth Quarter 26 3/4 21 1/2 .195
ITEM 6: SELECTED FINANCIAL DATA FOR THE REGISTRANT FOR EACH OF THE LAST FIVE FISCAL YEARS
In thousands, except per share amounts 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Revenues $ 562,651 $ 545,100 $ 507,687 $ 500,687 $ 488,876 Operating expenses 480,683 437,875 387,873 367,324 359,351 Operating income 81,968 107,225 119,814 133,363 129,525 Income from continuing operations 28,568 36,197 43,507 69,245 70,011 Net income (loss) (64,446) 8,622 37,817 77,642 84,394 Earnings (loss) per share - assuming dilution: Income from continuing operations 0.57 0.74 0.91 1.47 1.49 Net income (loss) (1.29) 0.18 0.79 1.65 1.80 BALANCE SHEET DATA Total assets 1,894,775 2,097,286 2,022,247 1,851,351 1,651,792 Long-term debt 461,960 578,379 590,378 511,474 401,154 Stockholders' equity 586,271 841,817 839,433 826,916 763,440 DIVIDENDS Dividends paid 16,975 37,698 36,874 33,547 30,410 Dividends paid per share 0.345 0.78 0.78 0.76 0.74 Distribution of Ascent Entertainment Group, Inc. shares 194,633 - - - -
Notes: (1) As discussed in Note 2 to the financial statements, the corporation began accounting for Ascent Entertainment Group, Inc. and substantially all of COMSAT RSI as discontinued operations in 1997. Accordingly, all prior periods have been restated to present Ascent and CRSI as discontinued operations. (2) The corporation adopted SFAS No. 128, "Earnings per Share" in 1997 and, accordingly, has restated earnings (loss) per share amounts, for all prior periods presented. 28 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF OPERATIONS CONSOLIDATED OPERATIONS During the second quarter of 1997, the corporation began accounting for the operations of both Ascent Entertainment Group, Inc. (Ascent) and substantially all of COMSAT RSI, Inc. (CRSI) as discontinued operations. The consolidated financial statements have been restated for all periods presented to reflect the results of operations and net assets of Ascent and CRSI as discontinued operations. CONTINUING OPERATIONS Consolidated revenues from continuing operations in 1997 were $563 million, $18 million higher than the previous year. This improvement was the result of a 19% increase in Network Services segment revenues which was, in part, offset by a 1% decrease in Satellite Services segment revenues. Consolidated revenues for 1996 were $545 million, an increase of $37 million as compared to 1995. Network Services segment revenues in 1996 were 58% higher than 1995, while Satellite Services revenues were slightly below the previous year. Operating income from continuing operations for 1997 was $82 million, as compared to $107 million for 1996. The lower operating income was primarily the result of lower operating income in the Satellite Services segment and a larger operating loss in the Network Services segment. The decrease in the Satellite Services segment was primarily the result of a lower investment base in COMSAT World Systems (CWS) upon which the regulated rate of return is calculated and increased depreciation from new satellites in COMSAT Mobile Communications (CMC). The increased loss in the Network Services segment resulted from the positive impact in 1996 from a licensing agreement that resolved patent-infringement disputes with certain manufacturers of television encryption and decryption equipment at COMSAT Laboratories which did not reoccur in 1997. Also affecting 1997 operating income were expenses of $4 million for a proxy contest and related litigation brought to enforce certain provisions of the Communications Satellite Act of 1962, which were settled in the second quarter of 1997. Operating income in 1996 was $107 million, $13 million below 1995. Other income (expense) for 1997 was a net expense of $3 million, $4 million lower than 1996. This was primarily attributable to improvements in the results of COMSAT International's (CI) equity investments. Other income (expense) for 1996 was a net expense of $7 million, $5 million higher than 1995. This was due to a full year of dividend payments in 1996 on the Monthly Income Preferred Securities (MIPS), which were issued in July 1995 (see Note 7 to the financial statements), offset by a $3 million gain on the sale of ICO Global Communications (Holdings) Limited (ICO) shares. See Note 5 to the financial statements. 29 Interest expense, net of amounts capitalized for 1997, was $42 million, $7 million higher than 1996. The increase primarily reflects reduced interest capitalized due to the completion of several satellite projects. For 1996, interest expense net of amounts capitalized was $35 million, $4 million below the previous year. This improvement was the result of lower interest expense, offset by a decrease in the amount of interest capitalized. In 1997, the corporation sold its Clarksburg, Maryland property and recognized a pre-tax gain of $7 million on the sale of the land. See Note 4 to the financial statements. The consolidated tax rate on income from continuing operations before taxes and the extraordinary item for 1997 has improved over 1996's effective tax rate principally because of a reduction in state income tax expense. Income from continuing operations before extraordinary item for 1997 was $29 million, $7 million below last year. Income for 1996 from continuing operations before extraordinary item was $36 million, $7 million below 1995. Basic earnings per share for continuing operations for 1997 were $0.58, $0.18 below 1996. For 1996, basic earnings per share were $0.76, as compared to $0.93 for 1995. Diluted earnings per share for continuing operations for 1997 were $0.57, a $0.17 decrease from 1996. Diluted earnings per share for continuing operations for 1996 and 1995 were $0.74 and $0.91, respectively. See Note 10 to the financial statements. Extraordinary loss from early extinguishment of debt, net of tax, for 1997 was $4 million ($0.08 per share). This represents the costs incurred in 1997 from the corporation's repurchase of $90 million of its 8.125% notes and $10 million of its 7.7% medium-term notes. See Note 6 to the financial statements. DISCONTINUED OPERATIONS The loss in 1997 from discontinued operations, net of tax, was $89 million ($1.78 per share, fully diluted) compared to losses of $28 million ($0.56 per share) for 1996 and $6 million ($0.12 per share) for 1995. Discontinued operations include the operations of both Ascent and substantially all of CRSI. COMSAT began accounting for substantially all of CRSI as a discontinued operation on June 30, 1997. During the fourth quarter, the corporation recognized an additional charge to discontinued operations of $30 million, after tax, related to the sale of CRSI. This additional charge is primarily attributable to losses now anticipated on the sale of CRSI as well as adjustments in the estimated cost to complete certain long-term contracts. The total loss in discontinued operations for CRSI for 1997 was $60 million, after tax. See Note 2 to the financial statements and Management's Discussion and Analysis - Outlook. 30 COMSAT began accounting for Ascent as a discontinued operation on May 16, 1997, when COMSAT's board of directors decided to distribute the corporation's 80.67% interest in Ascent to COMSAT's shareholders. On June 27, 1997, COMSAT completed the spinoff of Ascent as a tax-free dividend to COMSAT's shareholders. The 1997 loss from discontinued operations for Ascent was $29 million, net of tax. See Note 2 to the financial statements. CONSOLIDATED RESULTS On a consolidated basis, including discontinued operations and the extraordinary item, the net loss for 1997 was $64 million versus 1996 net income of $9 million. For 1995, the consolidated net income was $38 million. Basic losses per share for 1997 were $1.32, as compared to 1996 earnings per share of $0.18. Basic earnings per share for 1995 were $0.81. Diluted losses per share for 1997 were $1.29, as compared to diluted earnings per share for 1996 and 1995 of $0.18 and $0.79, respectively. See Note 10 to the financial statements. 31 SEGMENT OPERATING RESULTS The corporation has reported operating results in two segments -- Satellite Services and Network Services (see Note 15 to the financial statements). The Satellite Services segment includes both COMSAT World Systems (CWS) and COMSAT Mobile Communications (CMC). The Network Services segment includes COMSAT International (CI), COMSAT Laboratories and Government Programs. COMSAT Laboratories and Government Programs results now include certain non-manufacturing, telecommunications contracts and businesses that were previously reported as part of CRSI.
In millions 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- REVENUES - -------- Satellite Services: World Systems $ 262.9 $ 273.0 $ 254.7 Mobile Communications 167.8 160.9 180.4 --------------- --------------- --------------- Total Satellite Services 430.7 433.9 435.1 --------------- --------------- --------------- Network Services: International 89.7 58.1 37.7 Laboratories 36.3 43.7 25.9 Government Programs 44.0 40.7 26.8 --------------- --------------- --------------- Total Network Services 170.0 142.5 90.4 --------------- --------------- --------------- Eliminations and other (38.1) (31.3) (17.8) --------------- --------------- --------------- Total $ 562.6 $ 545.1 $ 507.7 =============== =============== =============== OPERATING INCOME (LOSS) - ----------------------- Satellite Services: World Systems $ 100.4 $ 104.6 $ 109.8 Mobile Communications 23.1 31.9 54.9 --------------- --------------- --------------- Total Satellite Services 123.5 136.5 164.7 --------------- --------------- --------------- Network Services: International (14.0) (17.3) (20.7) Laboratories (2.0) 7.1 (4.0) Government Programs (0.4) 5.1 6.6 --------------- --------------- --------------- Total Network Services (16.4) (5.1) (18.1) --------------- --------------- --------------- Total segment operating income 107.1 131.4 146.6 Provision for restructuring - - (3.9) General and administrative expense (23.2) (24.0) (19.9) Other (1.9) (0.2) (3.0) --------------- --------------- --------------- Total $ 82.0 $ 107.2 $ 119.8 =============== =============== ===============
32 SATELLITE SERVICES Satellite Services includes the Federal Communications Commission (FCC) regulated and non-regulated businesses of CWS and CMC. CWS provides international voice, data, video and audio communications as the statutorily designated U.S. participant in the global satellite system of the International Telecommunications Satellite Organization (INTELSAT). CMC provides maritime, aeronautical and land mobile communications services as the statutorily designated U.S. participant in the global satellite system of the International Mobile Satellite Organization (Inmarsat). Revenues in the Satellite Services segment in 1997 were $431 million, 1% below last year. Revenues in 1996 were $434 million, $1 million below 1995. Operating income in the Satellite Services segment in 1997 was $124 million, a decline of $12 million as compared to 1996. Operating income in 1996 was $137 million, $28 million below the previous year. CWS revenues for 1997 were $263 million, 4% below 1996. Increased revenues from Very Small Aperture Terminal (VSAT) leases and International Business Service (IBS) traffic were offset by contracted reductions in full-time voice revenues and lower fiber-optic cable restoration revenues. The lower voice revenues stemmed primarily from scheduled rate reductions in long-term carrier contracts with AT&T, MCI and Sprint, CWS's three largest international carrier customers. CWS's 1996 revenues were $273 million, which reflects a 7% increase over 1995. The improvement in revenues came primarily from increases in VSAT leases, IBS traffic and CWS's share of revenues from the INTELSAT system. These increases were partially offset by reduced revenues from scheduled rate reductions in long-term carrier contracts. Operating income for CWS in 1997 was $100 million, 4% below last year. The 1997 results reflect increased depreciation from placing in service three INTELSAT satellites during the past 12 months, offset in part by improved earnings realized on carrier-to-carrier contracts and the recovery of certain litigation costs. Operating income in 1996 in CWS was $105 million, a 5% decrease from the prior year. The decline in operating income was the result of a lower investment base upon which the regulated rate of return is calculated. This was the result of insurance proceeds received from the February 1996 launch failure of the INTELSAT 708 satellite. See Note 4 to the financial statements. Revenues in CMC for 1997 were $168 million, an increase of 4% compared to the prior year. The higher revenues were primarily the result of sales of Planet 1 terminals and service, and increases in CMC's share of revenues from the Inmarsat system. Offsetting this increase in revenues were decreases in analog telephone transmissions and lower volume in the bulk service contract with IDB Mobile Communications (IDB). CMC's 1996 revenues were $161 million, a decrease of 11% as compared to 1995. The lower revenues were primarily the result of decreases in analog telephone and telex revenues, expiration of the American Mobile Satellite Corporation (AMSC) service contract in December 1995 and lower volume in the bulk service contract with IDB. 33 CMC's operating income for 1997 was $23 million, $9 million below 1996. The decrease was primarily the result of increased depreciation associated with two Inmarsat-3 satellites placed in service during 1997, and lower revenues and increased costs related to Planet 1 service, which began commercial operation in 1997. Operating income in CMC for 1996 was $32 million, or 42% lower than 1995 due to lower revenues, increased depreciation expense associated with two Inmarsat-3 satellites placed in service during 1996 and increased costs related to the start up of Planet 1 service. NETWORK SERVICES Network Services includes CI, COMSAT Laboratories and Government Programs. CI operates an integrated group of telecommunications businesses in countries with rapidly growing telecommunications markets and provides individualized digital network solutions to customers located in these markets. COMSAT Laboratories consists of two main businesses -- technical consulting and communications products. Government Programs includes the Commercial Satellite Communications Initiative (CSCI) contract, Satellite Control Facility and Special Program Office. Network Services segment revenues in 1997 were $170 million, $28 million, or 19% higher than 1996. Included in revenues and operating income during 1996 was $8 million related to a licensing agreement that resolved patent infringement disputes with certain manufacturers of television encryption and decryption equipment at COMSAT Laboratories. Revenues for the Network Services segment in 1996 were $143 million, a 58% improvement over 1995. The 1997 Network Services segment operating loss was $16 million, compared to an operating loss of $5 million in the prior year. The 1996 loss was lower primarily due to the positive impact of the licensing agreement noted above. The operating loss in 1996 was $13 million lower than 1995. CI's revenues in 1997 and 1996 were $90 million and $58 million, respectively, 54% better than each of their comparative years. The increase in revenues in CI was driven primarily by improvements in CI's operations in Brazil, Argentina and Venezuela. Partially offsetting the increase in 1996 as compared to 1995 was a decline in revenues in BelCom, CI's company operating in Russia and in the Newly Independent States (NIS). CI's operating loss in 1997 was $14 million, $3 million lower than 1996. The improvement was primarily the result of a decrease in losses at BelCom. Revenue commitments under long-term contracts increased to $323 million at December 31, 1997, as compared to $220 million at the end of 1996. CI's operating loss in 1996 was $17 million, 16% less than the previous year's loss of $21 million. This improvement was primarily the result of the increase in revenues in Brazil and a decrease in the operating losses at BelCom. Partially offsetting these improvements were start-up costs associated with CI's newer companies in China, Colombia and Venezuela. In May 1997, CI acquired full ownership of the Mexican corporation IntelCom Red S.A. de C.V., which was previously a wholly owned subsidiary of ICG Satellite Services, Inc., and renamed it COMSAT Mexico S.A. de C.V. (COMSAT Mexico). COMSAT Mexico offers business customers digital, domestic and international private-line services to support voice, data and image applications. In January 1997, CI sold its remaining interest in Philippine Global Communications, Inc. (PhilCom) at book value for $34 million. See Notes 3 and 5 to the financial statements. 34 COMSAT Laboratories' revenues for 1997 were $36 million, as compared to $44 million for 1996. Exclusive of the $8 million of revenues related to the 1996 agreement that resolved patent disputes, COMSAT Laboratories' 1997 revenues were at approximately the same level as 1996, and 1996 revenues were 39% higher than 1995. The operating loss for COMSAT Laboratories for 1997 was $2 million, compared to operating income of $7 million for 1996. Exclusive of the income related to the agreement on patent disputes, the 1997 operating loss was $1 million more than 1996, and the 1996 operating loss was $3 million lower than 1995. The Laboratories' backlog at December 31, 1997, was $28 million, 33% higher than at the end of 1996. Government Programs' revenues in 1997 were $44 million, an increase of $3 million over the previous year. The increased revenues were related to the CSCI contract and were offset by lower revenues from two Marisat satellites that ceased operating in 1996 after 20 years of service. Revenues in Government Programs in 1996 were $41 million, $14 million higher than 1995. This increase was primarily due to increased revenues associated with the CSCI contract, which started in the fourth quarter of 1995. The operating loss for Government Programs in 1997 was $400,000, compared to operating income of $5 million for 1996. This was the result of lower revenues from the loss of the Marisat satellites and increased costs associated with the CSCI contract. Government Programs 1996 operating income was $2 million below 1995. OUTLOOK MANY OF THE STATEMENTS THAT FOLLOW ARE FORWARD-LOOKING AND RELATE TO ANTICIPATED FUTURE EVENTS AND OPERATING RESULTS. STATEMENTS THAT LOOK FORWARD IN TIME ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ASSUMPTIONS, WHICH MAY BE AFFECTED BY SUBSEQUENT DEVELOPMENTS AND BUSINESS CONDITIONS, AND NECESSARILY INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS AND THE CORPORATION'S FUTURE OPERATING RESULTS MAY BE AFFECTED BY THE TIMING AND OUTCOME OF PENDING REGULATORY AND LEGISLATIVE ACTIONS, INCLUDING THE CORPORATION'S PETITION BEFORE THE FCC FOR CLASSIFICATION AS A NON-DOMINANT CARRIER AND A BILL INTRODUCED IN CONGRESS WHICH CALLS FOR THE PRIVATIZATION OF INTELSAT AND INMARSAT; EFFORTS TO RESTRUCTURE INTELSAT AND INMARSAT; COMPETITIVE BUSINESS CONDITIONS; THE DISPOSITION OF DISCONTINUED OPERATIONS; AND OTHER FACTORS. THEREFORE, THERE CAN BE NO ASSURANCE THAT ACTUAL FUTURE RESULTS WILL NOT DIFFER MATERIALLY FROM ANTICIPATED RESULTS. ALTHOUGH THE CORPORATION HAS ATTEMPTED TO IDENTIFY SOME OF THE IMPORTANT FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED, THOSE FACTORS SHOULD NOT BE VIEWED AS THE ONLY FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS. In March 1997, COMSAT's board of directors approved a strategic plan to refocus the corporation on international satellite services and digital networking services and technology as discussed in the corporation's 1996 Annual Report on Form 10-K. As a part of the strategic plan, the corporation decided to divest its ownership interest in Ascent and sell substantially all of the assets and operations of CRSI as well as other non-core assets. On June 27, 1997, the corporation distributed its ownership interest in Ascent to its shareholders through a tax-free dividend. 35 In March 1998, the corporation signed a stock purchase agreement to sell substantially all of CRSI for $116.5 million. The sale price is subject to adjustment based on inter-company loans and advances between COMSAT and CRSI at the time of the closing. Closing for the sale is expected to occur on or before June 30, 1998, and is dependent upon completion of certain conditions agreed to by the parties, third party consents and regulatory filings. The financial impact of the transaction was included in the corporation's 1997 loss from discontinued operations. As part of the agreement, the corporation is retaining Electromechanical Systems, Inc. and Plexsys International Corporation, pending evaluation of available alternatives. COMSAT also will retain and complete a long-term construction contract for a radio telescope in Green Bank, West Virginia. JEFA Wireless Systems, a wholly owned subsidiary, was disposed of in a separate transaction in February 1998. The corporation's 1998 operating income from continuing operations is expected to be better than 1997, while the net income from continuing operations is expected to be at approximately the same level as 1997. Following is a discussion of COMSAT's two business segments. SATELLITE SERVICES In the first quarter of 1998, continued progress was made in the corporation's ongoing efforts to restructure INTELSAT and Inmarsat. The INTELSAT Board of Governors and an internal working group have approved a restructuring plan that involves creation of a separate entity (referred to as "INC") to which six satellites would be transferred. An Assembly of Parties (meeting of governments) is now scheduled for March 1998 at which final approval for an overall restructuring plan is to be considered. Assuming that schedule is maintained, INC would be formally established as a separate business entity in the second quarter of 1998, and an initial public offering for INC would be expected to occur sometime during the first half of 1999. The restructuring plan to be considered by the Assembly of Parties includes recommendations on several key issues, including INC's ownership structure and competitive safeguards. As currently proposed, INTELSAT's direct ownership in INC would be limited to 10%, and individual ownership levels would be limited to 17%. The proposal, however, would grandfather the corporation's direct ownership in INC pending completion of the initial public offering to the extent that the corporation's direct ownership would exceed the limit ultimately established. At its March 1998 meeting, the Inmarsat Council approved a plan to transfer the operating assets of the current Inmarsat intergovernmental organization to a new company. The Council will present its proposed plan to the Inmarsat Assembly of Parties for consideration at a meeting now scheduled for April 1998. Under the proposal, the target date for completing the transition to a private company is January 1, 1999. While the new company initially would not be publicly traded, it is expected that the company would proceed with an initial public offering within 24 months after its creation. As currently proposed, individual ownership in the new company would be capped at 15%, although COMSAT's current 22% ownership in Inmarsat would be grandfathered. Prior to the public offering, owners would be able to trade shares, and strategic investors would be able to invest up to $500 million in equity in the new company. 36 Approval of the restructuring proposals under consideration at INTELSAT and Inmarsat will require a vote of two-thirds of the member governments that are present and voting (up to 142 in the case of INTELSAT and 81 in the case of Inmarsat, with each having one vote) at the Assembly of Parties at which approval is sought. The Inmarsat restructure timetable is contingent on Inmarsat member governments reaching broad consensus on implementing the proposed amendments to the Inmarsat Convention prior to formal ratification. If such consensus is not achieved, the ratification process could take longer. The corporation, as a minority shareholder and the U.S. signatory to both organizations, lacks the ability to independently effect a restructuring of either INTELSAT or Inmarsat. The success and timing of the corporation's privatization efforts will be dependent upon the corporation's ability to achieve a consensus among other signatories and participating member governments. In April 1997, the corporation petitioned the FCC for classification as a non-dominant carrier and for regulatory forbearance. The petition requests that limits on the company's rate of return and structural separation requirements be removed and that CWS be allowed to change its tariff rates and introduce new services over the INTELSAT satellite system on one-day notice. The petition has been opposed by certain of the corporation's competitors and customers. The corporation expects that the FCC will act on the petition in 1998, but cannot predict with accuracy the outcome and timing of FCC regulatory action nor whether the FCC may impose conditions on a grant of the corporation's petition, such as allowing customers some form of direct access to the INTELSAT system, abrogating certain provisions of the corporation's inter-carrier agreements with its largest carrier customers, or requiring the corporation to waive its privileges and immunities as a INTELSAT signatory. The U.S. House of Representatives Commerce Committee has approved a bill entitled the "Communications Satellite Competition and Privatization Act of 1997" (H.R. 1872) over strong bipartisan opposition for consideration by the House of Representatives. To become law, the bill will have to be approved by the full House, considered and passed by the U.S. Senate and signed by the President. While the corporation supports the bill's stated objective of privatizing INTELSAT and Inmarsat in a pro-competitive manner, COMSAT is strongly opposed to the bill as proposed, since it would have an extremely punitive effect on COMSAT and its shareholders. However, the bill is in an early stage of the legislative process, and the corporation expects that the objectionable provisions of the bill will be addressed and resolved in the later stages of the process. As proposed, H.R. 1872 could restrict COMSAT from offering certain existing and future services via the INTELSAT and Inmarsat satellite systems and might relieve major customers from existing traffic contracts with the corporation. The bill could impair COMSAT's investment in INTELSAT and Inmarsat by, among other actions, possibly requiring the return of orbital positions and spectrum needed in INTELSAT and Inmarsat operations. The bill also would direct the FCC to permit other companies to directly access the INTELSAT and Inmarsat satellite systems in the U.S., thus discontinuing COMSAT's exclusive provider role, subject to certain safeguards that would insure fair compensation to COMSAT. On the plus side, the bill would no longer require the FCC to defer action on the corporation's petition for non-dominant carrier classification until direct access is granted. The bill, however, would link the removal of the existing 10% ownership limitation on COMSAT's common stock under the Satellite Act to the point in time when direct access is granted. The bill also specifies criteria for the privatization and proposed restructuring of INTELSAT that, if not agreed to by the other member nations of INTELSAT, might restrict INTELSAT's proposed new commercial affiliate, INC, from 37 accessing the U.S. market. In addition, if the privatization of INTELSAT and Inmarsat is not completed by a mandatory timetable in accordance with the criteria, non-core INTELSAT and Inmarsat services might be foreclosed from U.S. markets. The corporation is, and will continue, opposing the bill, unless it is modified in an acceptable, pro-competitive manner that would not adversely affect the corporation's business and the value of its shareholders' investments in the INTELSAT and Inmarsat satellite systems. Effective January 1, 1998, the corporation changed its accounting policy with respect to the cost of series 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 costs of such failed series satellites were amortized over their original useful lives. Partial in-orbit failures will be evaluated for impairment according to the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." Effective January 1, 1998, the corporation also changed its accounting policy with respect to satellite performance incentives paid to manufacturers to capitalize the net present value of such payments as a component of the cost of the satellite. Previously, certain of these payments were expensed as paid. These changes will not have a material effect on the corporation's financial statements. COMSAT World Systems (CWS) continues to be well positioned with major international carriers through long-term agreements to provide cost-competitive services for bulk usage beyond the year 2000. In addition, CWS expects growth from the provision of services in emerging markets, including international VSAT and Asynchronous Transfer Mode (ATM) services. CWS is expected to face increasing competition over the longer term. In addition to seven satellites currently on order, INTELSAT has signed a lease for capacity aboard the INSAT-2E satellite in the Asia-Pacific region, planned for launch in the second half of 1998. INTELSAT launched four VIII series satellites successfully in 1997 and plans for two launches in 1998. The new INTELSAT VIII series satellites offer higher-power C-band capabilities to address various markets. COMSAT Mobile Communications (CMC) plans to continue to expand its service offerings and value-added products to meet anticipated growth in customers' needs. The increasing number of digital terminals with improved operating efficiency and reduced service charges are expected to continue to provide traffic growth in land mobile, small commercial and pleasure boat, and business traveler markets. CMC expects to continue to face increasing competition from existing Inmarsat service providers, other wireless communications services (including C-band) and other potential market entrants. In late 1996, the Federal Aviation Administration (FAA) selected CMC to provide satellite and uplink services for the Wide Area Augmentation System (WAAS). The initial contract is expected to generate revenues of $57 million through 2001 and could generate revenues of up to $100 million if all options are exercised through 2006. 38 In late 1996 and early 1997, the corporation reduced its direct ownership in ICO and presently owns 1.7%. The corporation also continues to hold an indirect share of ICO through its ownership in Inmarsat, which is also an ICO shareholder. The corporation is evaluating its plans with respect to distribution of ICO products and services and will continue to assess whether its direct ownership is properly aligned with those plans. As with any new product, there are a number of factors that may affect the corporation's ability to offer Planet 1 and ICO services on a profitable basis. Such factors include the level of consumer acceptance and demand, the quality and pricing of competitive services, and the performance of ground and space systems and customer terminals. In order to offer Planet 1 and ICO services, the corporation must obtain certain regulatory approvals. See Notes 8 and 9 to the financial statements. In addition, ICO must receive the funding required to complete its satellite system. NETWORK SERVICES COMSAT International (CI) will continue to operate an integrated group of telecommunications companies that are engaged principally in providing individualized digital network solutions to business clients and carriers in selected markets. CI also plans to develop prospective international telecommunications opportunities that are consistent with its digital networking strategy. In this regard, CI will continue to target those rapidly growing markets where a significant number of CI's existing or targeted clients are located (or in which they intend to locate). CI's general financial performance benchmark is for individual companies to be operationally cash-flow positive within three years and profitable after five years of operation absent unforeseen circumstances or problems. As part of its integrated approach to management of those companies, CI evaluates operating performance, strategic fit and overall effectiveness of managerial control to determine whether to continue to increase or reduce its investment in individual companies. CI is currently reviewing its investment in BelCom. In early 1997, the Communications Secretariat of Argentina (Secretariat) issued resolutions which reserve for Nahuelsat, the domestic Argentine satellite operator, certain exclusive rights for the sale of domestic Ku-band satellite services in Argentina. COMSAT Argentina has reserved sufficient Ku-band capacity to address its current and future business requirements through 1998. Following 1998, however, COMSAT Argentina will be required to secure additional capacity from Nahuelsat for new business. There can be no assurance that adequate Ku-band space segment will be available at that time, or that Nahuelsat will have adequate back-up capacity in the event of a satellite failure, or that if space segment is available, it will be priced competitively. In September 1997, the Secretariat issued a resolution that permits Telintar, the exclusive provider of international voice telephony and data services in Argentina, to provide switched domestic Internet services within Argentina. The resolution is drafted broadly enough that it also may be construed to permit Telintar to provide switched domestic data services. Presently it is unclear, however, whether the Secretariat will interpret the resolution to apply to domestic data services. COMSAT Argentina challenged the resolution on the ground that domestic switching of Internet and/or data services by Telintar is not permitted under its franchise. In November 1997, COMSAT Argentina received a preliminary injunction 39 suspending the resolution. The injunction will remain in effect until the Secretariat rules on COMSAT Argentina's request for administrative relief from the resolution. The Secretariat has also appealed the imposition of the preliminary injunction. The resolution, together with other recent actions of the Secretariat, including its resolutions awarding Nahuelsat the exclusive right to sell domestic Ku-band capacity in Argentina, appears to indicate a willingness of the Secretariat to adopt initiatives that benefit large, domestic and incumbent telecommunications service providers to the detriment of competitors, such as COMSAT Argentina, which are smaller than the domestic incumbents. The corporation intends to monitor regulatory developments in Argentina closely. There can be no assurance, however, that the recent actions of the Secretariat or other regulatory developments in respect to those actions will be resolved without any material affect on COMSAT Argentina's future business prospects. YEAR 2000 ISSUE The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year (i.e. "97" for 1997). Certain of the corporation's computer programs that have date-sensitive software may not operate properly when the last two digits become "00", as will occur on January 1, 2000. To the extent that this situation may exist, there is a potential for computer system failure or miscalculations, which could cause disruption of operations. The problem is not limited to computer programs, as some of the corporation's equipment that has date-sensitive processors may not be able to process dates after December 31, 1999. In the second half of 1996, the corporation initiated a program to identify and properly address issues associated with the year 2000 problem in order to avoid interruption to the corporation's operations at the turn of the century. The corporation has made substantial progress in assessing how it will be impacted by the year 2000 issue. Currently, the corporation is in the process of modifying or replacing computer systems and other date-sensitive equipment, so that the corporation's key systems will be year 2000 compliant. The corporation presently believes that such changes to the corporation's key systems and equipment will be completed and tested by the end of the second quarter of 1999. The corporation's current estimate is that it will cost between $3 million and $5 million prior to January 1, 2000, to modify its in-house management information systems, customer products, and other systems and equipment impacted by the year 2000 issue. The corporation does not expect the costs directly attributable to the year 2000 issue to have a material effect on its consolidated results from operations in a given year. Year 2000 modifications and replacements are based on management's best estimates, which were derived using assumptions of future events, including the continued availability of resources and the reliability of third party modification plans. Specific factors that might cause material differences in the estimates include, but are not limited to, the availability and cost of personnel with appropriate necessary skills, the ability to locate and correct all relevant computer code and similar uncertainties. 40 ANALYSIS OF CONSOLIDATED BALANCE SHEETS ASSETS The corporation ended 1997 with $1.9 billion of assets, as compared to $2.1 billion at December 31, 1996. Included in current assets in each of their respective periods were $142 million and $378 million associated with the net assets of discontinued operations. Current assets decreased during 1997 by $220 million, of which $209 million was related to the spinoff of Ascent which occurred in June 1997. See Note 2 to the financial statements. Property and equipment additions amounted to $259 million for 1997. The increase in property and equipment was primarily related to the investment in new communication property and equipment at CI and additions related to CWS's and CMC's share of INTELSAT and Inmarsat satellite programs. Investments decreased $33 million during 1997 as the corporation sold its remaining interest in PhilCom in January 1997 at book value of $34 million. See Notes 3 and 5 to the financial statements. LIABILITIES The corporation's total liabilities increased during 1997 by $53 million. This was primarily the result of a $15 million increase in borrowings and an increase of $36 million related to the Clarksburg, Maryland building financing transaction. See Note 4 to the financial statements. ANALYSIS OF CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Cash from operating activities for 1997 was $169 million, 14% below 1996. The Satellite Services segment generated the majority of the corporation's cash from operations. The corporation made interest payments, net of amounts capitalized, of $40 million and tax payments of $11 million. During 1997, the corporation used $221 million in investing activities, a 5% decrease from 1996. The 1997 purchases of property and equipment occurred in both the Satellite Services and Network Services segments, as the corporation continued to make capital investments equal to its related shares of INTELSAT's and Inmarsat's satellite programs and purchased communications plant and equipment predominantly in CI's Latin American companies. The corporation expects to make additional investments in property and equipment in 1998 at approximately the same level as 1997. Cash proceeds from financing activities in 1997 were a net $50 million, as the corporation received $34 million as a result of the Clarksburg financing transaction. See Note 4 to the financial statements. Of the total increase in short-term borrowings, $106 million was used to repurchase $100 million of long-term debt. See Note 6 to the financial statements. The quarterly dividend throughout 1996 and the first quarter of 1997 was $0.195 per share and for the last three quarters of 1997 was $0.05 per share. 41 LIQUIDITY AND CAPITAL RESOURCES The corporation's working capital at December 31, 1997, was $22 million, $354 million lower than at December 31, 1996. The decrease in working capital during 1997 was primarily the result of the reduction in current assets of $209 million due to the spinoff of Ascent on June 27, 1997 (see Note 2 to the financial statements), and the use of $106 million of commercial paper to repurchase long-term debt (see Note 6 to the financial statements). Cash from operating activities and short-term borrowings will be used for the near term to fund growth and to finance working capital needs. The corporation has access to short-term and long-term financing at favorable rates. The corporation's current long-term debt ratings are A- from Standard and Poor's and A3 from Moody's. The corporation's current commercial paper ratings are A2 from Standard and Poor's and P2 from Moody's. The corporation's $200 million commercial paper program had $150 million in borrowings outstanding at December 31, 1997. A $200 million credit agreement, expiring in 1999, backs up the corporation's commercial paper program. The corporation plans to reduce short-term debt with the proceeds from the sale of substantially all of the assets and operations of CRSI. Consummation of the sale of CRSI, however, remains subject to certain conditions. See Management's Discussion and Analysis - Outlook. During 1997, the corporation repurchased a total of $90 million of its 8.125% notes due 2004 using proceeds from short-term debt. This reduced the total outstanding of the 8.125% notes from $160 million at December 31, 1996, to $70 million at December 31, 1997. In addition, the corporation repurchased $10 million of its 7.7% medium-term notes using proceeds from short-term debt. This reduced the corporation's total outstanding medium-term notes from $74 million at December 31, 1996, to $64 million at December 31, 1997. The corporation had $36 million remaining under a $100 million medium-term note program at December 31, 1997. The medium-term note program is part of a $200 million debt securities shelf registration program initiated in 1994. The corporation's capital structure and debt-financing activities are regulated by the FCC. The corporation is required to submit a capitalization plan to the FCC for review annually. In August 1997, the FCC approved the corporation's 1997 capitalization plan. Under the approved FCC guidelines, the corporation is subject to a limit of $200 million in short-term debt, a maximum long-term, debt-to-total-capital ratio of 45% and an interest coverage ratio of 2.3 to 1. The latter two guidelines are measured at year end. The corporation was in compliance with the guidelines at December 31, 1997, with a long-term, debt-to-total-capital ratio of 44.1%, $163 million in short-term debt outstanding and an interest coverage ratio of 2.6 to 1. If the corporation were to fail to satisfy one or more of the FCC guidelines as of an applicable measurement date, the corporation would be required to seek advance FCC approval of future financing activities on a case-by-case basis. If such approval were not granted, the corporation could be required to reduce or reschedule planned capital investments, reduce cash outlays, reduce debt or sell assets. 42 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flow for each of the three years in the period ended December 31, 1997. 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 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. Deloitte & Touche LLP Washington, D.C. February 12, 1998 (March 16, 1998 as to the tenth paragraph of Note 2) 43 COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995
In thousands, except per share amounts 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- REVENUES $ 562,651 $ 545,100 $ 507,687 ------------ ------------ ------------ OPERATING EXPENSES: Cost of services 263,934 247,120 214,244 Depreciation and amortization 184,206 155,296 140,757 Research and development 9,296 11,518 9,114 General and administrative 23,247 23,941 19,856 Provision for restructuring - - 3,902 ------------ ------------ ------------ Total operating expenses 480,683 437,875 387,873 ------------ ------------ ------------ OPERATING INCOME 81,968 107,225 119,814 Other income (expense), net (3,016) (7,409) (2,166) Interest cost (51,426) (50,455) (59,215) Interest capitalized 9,394 15,760 20,355 Gain on sale of land 7,261 - - ------------ ------------ ------------ Income from continuing operations before taxes and extraordinary item 44,181 65,121 78,788 Income tax expense 15,613 28,924 35,281 ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 28,568 36,197 43,507 DISCONTINUED OPERATIONS, NET TAX: Loss from operations (17,572) (27,575) (5,690) Loss on disposal (71,496) - - ------------ ------------ ------------ Loss from discontinued operations (89,068) (27,575) (5,690) ------------ ------------ ------------ Income (loss) before extraordinary item (60,500) 8,622 37,817 Extraordinary loss from early extinguishment of debt (net of tax) (3,946) - - ------------ ------------ ------------ NET INCOME (LOSS) $ (64,446) $ 8,622 $ 37,817 ============ ============ ============ EARNINGS (LOSS) PER COMMON SHARE - BASIC: Income from continuing operations before extraordinary item $ 0.58 $ 0.76 $ 0.93 Discontinued operations (1.82) (0.58) (0.12) Extraordinary item (0.08) - - ------------ ------------ ------------ Net income (loss) $ (1.32) $ 0.18 $ 0.81 ============ ============ ============ EARNINGS (LOSS) PER COMMON SHARE-ASSUMING DILUTION: Income from continuing operations before extraordinary item $ 0.57 $ 0.74 $ 0.91 Discontinued operations (1.78) (0.56) (0.12) Extraordinary item (0.08) - - ------------ ------------ ------------ Net income (loss) $ (1.29) $ 0.18 $ 0.79 ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 44 COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
In thousands 1997 1996 - --------------------------------------------------------------------------------------------------------------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 5,757 $ 7,659 Receivables 147,621 133,952 Deferred income taxes 7,469 6,050 Other 14,918 12,348 Net assets of discontinued operations 142,484 378,175 ------------- ------------- Total current assets 318,249 538,184 ------------- ------------- Property and equipment 1,359,293 1,322,985 Investments 91,543 124,442 Goodwill 12,722 13,189 Other assets 112,968 98,486 ------------- ------------- TOTAL ASSETS $ 1,894,775 $ 2,097,286 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ 13,785 $ 13,802 Commercial paper 149,506 17,993 Accounts payable and accrued liabilities 89,772 73,426 Due to related parties 34,664 42,263 Accrued income taxes 5,743 9,741 Accrued interest 3,176 5,377 ------------- ------------- Total current liabilities 296,646 162,602 ------------- ------------- Long-term debt 461,960 578,379 Deferred income taxes 112,226 112,894 Deferred investment tax credits 9,523 12,350 Accrued post-retirement benefit costs 49,246 50,423 Other long-term liabilities 178,903 138,821 Commitments and contingencies (notes 8, 9 & 14) - - Preferred securities issued by subsidiary 200,000 200,000 STOCKHOLDERS' EQUITY: Common stock, without par value, 100,000 shares authorized, 50,197 shares issued in 1997 and 49,090 in 1996 366,901 340,691 Preferred stock, 5,000 shares authorized, no shares issued or outstanding - - Retained earnings 226,785 502,839 Treasury stock, at cost, 141 shares in 1997 and 269 in 1996 (1,758) (3,006) Unearned compensation (4,739) (3,757) Other (918) 5,050 ------------- ------------- Total stockholders' equity 586,271 841,817 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,894,775 $ 2,097,286 ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 45 COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995
In thousands 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $ (64,446) $ 8,622 $ 37,817 Adjustments to reconcile net income (loss) to net cash provided by continuing operations: Depreciation and amortization 184,206 155,296 140,757 Loss from discontinued operations 89,068 27,575 5,690 Provision for restructuring - - 3,902 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 3,953 (12,539) 4,623 Current liabilities (4,709) 34,935 (27,973) Non-current liabilities 1,665 15,770 18,676 Other (822) 2,092 27,260 ------------ ------------- ------------- Net cash provided by operating activities of continuing operations 205,600 231,751 210,752 Net cash provided (used) by discontinued operations (36,865) (35,009) 3,691 ------------ ------------- ------------- Net cash provided by operating activities 168,735 196,742 214,443 ------------ ------------- ------------- INVESTING ACTIVITIES: Purchase of property and equipment (254,291) (267,279) (212,754) Investments in unconsolidated businesses (19,950) (59,923) (30,591) Proceeds from sale of property 9,293 - - Proceeds from note on sale of investments 19,097 - - Proceeds from sale of investments 9,060 26,076 - Insurance proceeds from satellite launch failure - 54,443 - Decrease (increase) in INTELSAT ownership 23,232 (1,238) 17,919 Decrease (increase) in Inmarsat ownership 213 5,746 (6,978) Other (7,704) 8,328 (1,132) ------------ ------------- ------------- Net cash used in investing activities (221,050) (233,847) (233,536) ------------ ------------- ------------- FINANCING ACTIVITIES: Net short-term borrowings (repayments) 131,513 17,993 (121,356) Borrowings (repayments) against company-owned life insurance policies (3,962) (51,443) 2,542 Common stock issued 20,398 13,837 10,834 Proceeds from issuance of preferred securities of subsidiary - - 200,000 Repayment of long-term debt (114,903) (9,848) (2,975) Proceeds from issuance of long-term debt - - 81,986 Cash dividends paid (16,975) (37,698) (36,874) Proceeds from Clarksburg financing 34,342 - - Other - - (12,617) ------------ ------------- ------------- Net cash provided (used) by financing activities 50,413 (67,159) 121,540 ------------ ------------- ------------- Net increase (decrease) in cash and cash equivalents (1,902) (104,264) 102,447 Cash and cash equivalents, beginning of year 7,659 111,923 9,476 ------------ ------------- ------------- Cash and cash equivalents, end of year $ 5,757 $ 7,659 $ 111,923 ============ ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid, net of amount capitalized $ 39,732 $ 29,519 $ 36,438 Income taxes paid 11,404 1,945 19,209 Non-cash financing of Inmarsat satellites 5,403 5,602 7,551 Distribution of Ascent Entertainment Group, Inc. shares 194,633 - -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 46 COMSAT CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995
Shares Shares Common Retained Treasury Unearned In thousands Issued Outstanding Stock Earnings Stock Compensation Other - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 48,054 46,811 $312,143 $532,229 $(12,502) $(7,249) $2,295 Net income 37,817 Cash dividends (36,874) Stock awards and options, 401(k) and employee stock purchase plan activity 413 799 8,905 3,482 1,147 Investors' Plus plan 145 145 3,026 Minimum pension liability adjustment (2,006) Translation adjustment (3,664) Other 66 618 ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 48,612 47,755 324,074 533,238 (9,020) (5,484) (3,375) Net income 8,622 Cash dividends (37,698) Stock awards and options, 401(k) and employee stock purchase plan activity 398 986 12,862 6,014 468 Investors' Plus plan 80 80 1,777 Minimum pension liability adjustment 383 Translation adjustment 924 Unrealized gain on available for sale securities, net of taxes 8,624 Other 1,978 (1,323) 1,259 (1,506) ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 49,090 48,821 340,691 502,839 (3,006) (3,757) 5,050 Net loss (64,446) Cash dividends (16,975) Distribution of Ascent Entertainment Group, Inc. shares (194,633) Stock awards and options, 401(k) and employee stock purchase plan activity 1,027 1,155 24,296 1,248 (982) Investors' Plus plan 80 80 1,914 Minimum pension liability adjustment 958 Translation adjustment (1,515) Unrealized loss on available for sale securities, net of taxes (5,565) Other 154 ------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 50,197 50,056 $366,901 $226,785 $ (1,758) $(4,739) $ (918) ========================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 47 COMSAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. Accounts of COMSAT Corporation and its majority-owned subsidiaries (COMSAT or the corporation) have been consolidated. Significant intercompany transactions have been eliminated. Ascent Entertainment Group, Inc. and COMSAT RSI are accounted for as discontinued operations (see Note 2). The corporation has consolidated its shares of the accounts of the International Telecommunications Satellite Organization (INTELSAT) and the International Mobile Satellite Organization (Inmarsat). The corporation's ownership interests in INTELSAT and Inmarsat are based primarily on the corporation's usage of these systems. As of December 31, 1997, the corporation owned 18.0% of INTELSAT and 23.0% of Inmarsat. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that directly affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used in determining the loss on disposal of discontinued operations and in accounting for long-term contracts, allowance for doubtful accounts, depreciation and amortization, employee benefit plans, taxes and contingencies. REVENUE RECOGNITION. Revenue from satellite services is recognized over the period during which the satellite services are provided. Revenue from long-term product, system integration and related services contracts is accounted for using the percentage-of-completion (cost-to-cost) method. Revenue from other services is recorded as services are provided. INCOME TAXES AND INVESTMENT TAX CREDITS. The provision for income taxes includes taxes currently payable and those deferred because of differences between the financial statement and tax bases of assets and liabilities. The corporation has earned investment tax credits on certain INTELSAT and Inmarsat satellite costs. These tax credits have been deferred and are being recognized as reductions to the tax provision over the estimated service lives of the related assets. EVALUATION OF LONG-LIVED ASSETS. In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the corporation evaluates the potential impairment of long-lived assets, including goodwill, based upon projections of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Management believes no material impairment of these assets exists at December 31, 1997. 48 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 stockholders' equity until realized. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. Realized gains and losses are reported in "Other income (expense), net" on the income statement. GOODWILL. Goodwill is amortized over 10 to 25 years. Accumulated goodwill amortization was $2,077,000 and $1,276,000 at December 31, 1997 and 1996, respectively. OTHER ASSETS. The cash surrender values of life insurance policies (net of loans) totaling $86,597,000 and $71,724,000 at December 31, 1997 and 1996, respectively, are included in "Other assets." "Other income (expense), net" on the income statement includes the increases in the cash surrender values of these policies. STOCK-BASED COMPENSATION. SFAS No. 123, "Accounting for Stock-Based Compensation," requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on fair value of the equity instrument awarded (see Note 10). The corporation has chosen to continue to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation costs for stock options are measured as the excess, if any, of the quoted market price of the corporation's stock at the date of the grant over the amount an employee must pay to acquire the stock. CASH FLOW INFORMATION. The corporation considers highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. STATEMENT PRESENTATION. Certain prior period amounts have been reclassified to conform with the current year's presentation. Most notably, costs that are passed through to customers in the Government Programs segment are now netted against the associated revenues. In addition, the corporation's share of Inmarsat revenues, net of the amount paid for using the Inmarsat satellite system, is presented in revenues. These reclassifications had no impact on previously reported results of operations or stockholders' equity. NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 will require the corporation to display its minimum pension liability adjustment, foreign currency translation adjustment and unrealized gain (loss) on available for sale securities as a component of comprehensive income rather than a component of changes in stockholders' equity. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments and the related disclosures 49 about products and services, geographic areas and major customers. Adoption of SFAS No. 131 will not have a material effect on the corporation's presentation of operating segments and related disclosures. Both statements are effective for financial statements issued for fiscal years beginning after December 15, 1997. 2. DISCONTINUED OPERATIONS The corporation began accounting for Ascent Entertainment Group, Inc. (Ascent), its entertainment subsidiary, and substantially all of the assets and operations of COMSAT RSI, Inc. (CRSI), its manufacturing subsidiary, as discontinued operations in the second quarter of 1997. The consolidated financial statements have been restated for all prior periods presented to reflect the results of operations and net assets of Ascent and CRSI as discontinued operations. The income (loss) from discontinued operations, net of tax, for Ascent and CRSI for the three years ended December 31, 1997, is summarized below:
In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------------- Ascent $ (29,068) $ (28,148) $ (6,360) CRSI (60,000) 573 670 ------------- ------------ ------------ Total $ (89,068) $ (27,575) $ (5,690) ============= ============ ============
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. Ascent was accounted for as a discontinued operation beginning on May 16, 1997, the date on which the corporation's Board of Directors adopted a formal plan to effect the distribution. The loss from the discontinued Ascent operations, net of tax, is composed of :
In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------------- Revenues $ 177,481 $ 258,120 $ 202,332 ============= ============ ============ Loss from operations before taxes $ (22,826) $ (38,785) $ (8,137) Income tax benefit 5,047 10,637 1,777 ------------- ------------ ------------ Loss from operations (17,779) (28,148) (6,360) Loss on disposal before taxes (9,095) Income tax expense (2,194) ------------- Loss on disposal (11,289) ------------- ------------ ------------ Loss from discontinued operations $ (29,068) $ (28,148) $ (6,360) ============= ============ ============
50 The loss on disposal includes an operating loss of $5,020,000 ($3,861,000 net of tax) for the period May 17, 1997, through June 27, 1997, and costs of $4,075,000 incurred by COMSAT to facilitate the distribution. The tax expense associated with the loss on disposal includes $4,421,000 to recognize additional taxes on deferred intercompany gains while Ascent was included in COMSAT's consolidated tax return. The operating results are net of minority interest in net losses of consolidated subsidiaries. In December 1995, Ascent completed a public offering of 5,750,000 shares of its common stock. COMSAT retained 24,000,000 shares or 80.67% of Ascent. Concurrent with the public offering, Ascent repaid a $140,000,000 intercompany note payable to COMSAT. Included in the 1995 loss from operations is a pre-tax gain of $19,286,000 as a result of the public offering. The tax-free dividend of Ascent common stock was recorded as a reduction of COMSAT's consolidated retained earnings. At June 27, 1997, the book value of the net assets of Ascent totaled $194,633,000 and consisted of the following:
In thousands 1997 ------------------------------------------------------------------------------------------------------- Current assets $ 89,170 Fixed assets, net 308,174 Intangible and other assets 343,330 Short-term debt 176,000 Other current liabilities 151,317 Long-term debt 50,000 Other non-current liabilities 168,724 ------------ Net assets $ 194,633 ============
COMSAT RSI, INC --------------- Substantially all of CRSI was accounted for as discontinued operations beginning on June 30,1997. CRSI designs, manufactures and integrates earth stations as well as wireless and advanced antenna systems. In February 1998, the corporation sold substantially all of the assets of JEFA Wireless Systems (JEFA), a wholly owned subsidiary of CRSI engaged in the wireless communications integration and intelligent transportation systems business in a separate transaction. Pursuant to the sale agreement, the corporation assigned to the buyer its rights in certain contracts and made a payment of $4,663,000, net of a working capital adjustment at closing, to complete the transaction. 51 On March 16, 1998, the corporation entered into a stock purchase agreement to sell substantially all of the remainder of CRSI's businesses for cash of $116,500,000, subject to an adjustment based on intercompany loans and advances between the corporation and CRSI at closing. Closing for the CRSI sale is expected to occur on or before June 30, 1998, and is dependent upon completion of certain conditions agreed to by the parties, third party consents and regulatory filings. As part of the agreement, the corporation is retaining Electromechanical Systems, Inc. and Plexsys International Corporation, pending evaluation of available alternatives. COMSAT will also retain and complete a long-term construction contract for a radio telescope in Green Bank, West Virginia. Discontinued operations include management's best estimates of the amounts expected to be realized on the sale of net assets, operating losses through anticipated disposal dates, facility closure costs and the estimated costs to complete the long-term contract retained by the corporation. These estimates could change as additional costs are incurred to complete the disposal and the long-term contract. The income (loss) from the discontinued CRSI operations, net of tax, is composed of:
In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------------- Revenues $ 121,291 $ 217,183 $ 161,823 ============= ============ ============ Income from operations before taxes $ 253 $ 805 $ 2,097 Income tax expense (46) (232) (1,427) ------------- ------------ ------------ Income from operations 207 573 670 ------------- Estimated loss on disposal before taxes (80,133) Income tax benefit 19,926 ------------- Estimated loss on disposal (60,207) ------------- ------------ ------------ Income (loss) from discontinued operations $ (60,000) $ 573 $ 670 ============= ============ ============
The estimated loss on disposal includes a provision of $50,296,000 ($39,603,000 net of tax) to writedown CRSI's and JEFA's assets to their net realizable value. The estimated loss on disposal also includes the estimated loss from CRSI and JEFA operations through the anticipated disposal dates of $29,837,000 ($20,604,000 net of tax). The estimated loss from operations of CRSI and JEFA includes operating losses, facility closure costs and the estimated cost to complete the long-term contract to be retained and completed by the corporation pursuant to the sale terms. Certain of the losses are not deductible, causing the effective tax benefit to be lower than the benefit at the federal statutory rate of 35%. 52 The net assets of the discontinued operations included in the consolidated balance sheets as of December 31, 1997 and 1996, are as follows:
1997 1996 ---------- ------------------------------------------- In thousands CRSI Ascent CRSI Total ------------------------------------------------------------------------------------------------------------ Current assets $ 181,456 $ 76,809 $ 173,021 $ 249,830 Fixed assets, net 33,871 301,498 32,280 333,778 Intangible and other assets 12,989 351,364 11,720 363,084 Short-term debt 4,422 145,500 417 145,917 Other current liabilities 28,790 136,789 39,775 176,564 Provision for estimated loss on disposal 49,504 - - - Long-term debt 1,540 52,000 5,095 57,095 Other non-current liabilities 1,576 186,182 2,759 188,941 ---------- ---------- ---------- ---------- Net assets of discontinued operations $ 142,484 $ 209,200 $ 168,975 $ 378,175 ========== ========== ========== ==========
3. RECEIVABLES Receivables are composed of:
In thousands 1997 1996 ------------------------------------------------------------------------------------------------------------ Commercial receivables $ 120,320 $ 112,376 Receivables under long-term contracts: U.S. Government: Amounts billed 5,991 6,499 Unbilled costs and accrued profits 9,577 7,695 Commercial customers: Amounts billed 4,197 1,442 Unbilled costs and accrued profits 239 2,151 Related party receivables 6,422 2,825 Other 15,610 12,123 ---------- ---------- Total 162,356 145,111 Less allowance for doubtful accounts (14,735) (11,159) ---------- ---------- Net $ 147,621 $ 133,952 ========== ==========
Unbilled amounts represent accumulated costs and accrued profits that will be billed at future dates in accordance with contract terms and delivery schedules. All of the 1997 amounts are expected to be collected within one year. In January 1997, the corporation sold its remaining 19.66% interest in Philippine Global Communications, Inc. (PhilCom) at book value for $34,292,000. At closing, the corporation received $1,702,000 in cash and the balance in the form of notes and contractual rights that provide for payments, including interest, through December 31, 1998. The corporation received payments amounting to $22,021,000 during 1997. At December 31, 1997, the balance of $12,731,000 is recorded above in other receivables and is due in two payments during 1998 (see Note 5). 53 4. PROPERTY AND EQUIPMENT Property and equipment include the corporation's shares of INTELSAT and Inmarsat property and equipment.
In thousands 1997 1996 ------------------------------------------------------------------------------------------------------- Property and equipment at cost: Satellites $ 1,695,352 $ 1,546,891 Furniture, fixtures and equipment 595,812 463,593 Buildings and improvements 108,635 106,270 Land 3,244 5,219 ------------ ------------ Total 2,403,043 2,121,973 Less accumulated depreciation (1,161,242) (1,027,437) ------------ ------------ Net property and equipment in service 1,241,801 1,094,536 Property and equipment under construction: INTELSAT satellites 88,540 111,222 Inmarsat third-generation satellites 5,353 53,323 Other 23,599 63,904 ------------ ------------ Total $ 1,359,293 $ 1,322,985 ============ ============
Depreciation is calculated using the straight-line method over the estimated service life of each asset. The service lives for property and equipment are: satellites, 10 to 13 years; furniture, fixtures and equipment, 3 to 15 years; buildings and improvements, 3 to 40 years. Satellites include construction costs, launch costs, direct development costs, insurance costs and capitalized interest. Costs of series satellites that are lost at launch or that fail in orbit are carried, net of any insurance proceeds, in the property accounts. The remaining net amounts are depreciated over the estimated service life of a satellite of the same series. At December 31, 1997 and 1996, no failed series satellites were included in property. Non-series satellites that are lost at launch or fail in orbit are charged to operations. On February 14, 1996, the launch of the INTELSAT 708 satellite failed. The corporation's share of the satellite's costs was fully insured. Insurance proceeds totaling $54,443,000 were received in the second quarter of 1996. SALE OF LAND. In September 1997, COMSAT sold its Clarksburg, Maryland office building and the surrounding land for $45,750,000 in an all-cash transaction. A gain of $7,261,000 ($4,211,000 net of tax) was recognized on the sale of land. The corporation also entered into a 10-year lease agreement with the new owner to continue occupying the office building, that principally houses COMSAT Laboratories. In addition to lease payments, the corporation is responsible for taxes, insurance and maintenance of the building. The sale-leaseback of the office building has been accounted for as a financing due to COMSAT's continuing involvement as the lessor of floor space in the building to non-COMSAT tenants. As a result, the historical cost of the building remains in property and will be depreciated over the 10-year lease term. 54 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 at an interest rate of 8.50% as the lease payments are made. The net present value at December 31, 1997, totals $35,645,000, of which $2,042,000 is reflected in other current liabilities and the remainder in other long-term liabilities. At December 31, 1997, the future lease payments pursuant to the sale-leaseback are $4,994,000 in 1998, $5,131,000 in 1999, $5,273,000 in 2000, $5,418,000 in 2001, $5,567,000 in 2002 and $28,488,000 thereafter. Rental income expected to be received through non-cancellable sub-leases is $1,254,000 in 1998, $869,000 in 1999, $236,000 in 2000, $81,000 in 2001, $3,000 in 2002 and $74,000 thereafter. 5. INVESTMENTS ICO. At December 31, 1997 and 1996, the corporation's direct investment in ICO Global Communications (Holdings) Limited (ICO) amounted to $35,985,000 and $30,794,000, respectively. The accompanying balance sheet also includes the corporation's $35,800,000 and $30,713,000 share of Inmarsat's investment in ICO as of December 31, 1997 and 1996, respectively (See Note 8). In December 1996, the corporation reduced its direct investment in ICO by selling 777,701 of its shares to other ICO shareholders for $29,941,000. The corporation recognized a gain of $2,722,000 that is included in "Other income (expense), net" on the income statement. PHILCOM. In June 1994, the corporation acquired an interest of approximately 17% in PhilCom, a provider of international communications services in the Philippines, for $42,141,000. The corporation's share of PhilCom's income or losses was recorded using the "equity method" of accounting through the third quarter of 1996 and is included in "Other income (expense), net" on the income statement. In the fourth quarter of 1996, the corporation sold a portion of its interest in PhilCom at book value for $3,517,000. The remainder of its investment in PhilCom was sold in January 1997 at book value (see Note 3). MARKETABLE SECURITIES. Marketable equity securities classified as available for sale are summarized as follows:
Unrealized In thousands Cost Fair Value Holding Gain --------------------------------------------------------------------------------------------------- December 31, 1997 $10,583 $13,209 $ 2,626 December 31, 1996 11,592 22,780 11,188
55 The corporation realized a gain of $1,987,000 from the sale of marketable equity securities during 1997. The corporation recognized losses of $1,008,000 and $1,105,000 during 1997 and 1996, respectively, for a decline in value of a marketable equity security that was deemed other than temporary. The gains and losses are recorded in "Other income (expense), net" on the income statement. 6. DEBT The corporation's capital and debt-financing activities are regulated by the Federal Communications Commission (FCC). The corporation is required to submit a financial plan to the FCC for review annually. Under existing FCC guidelines, the corporation is subject to a limit of $200,000,000 in short-term borrowings, a maximum long-term, debt- to-total-capital ratio of 45% and an interest coverage ratio, as defined, of 2.3 to 1. At December 31, 1997, the corporation was in compliance with those guidelines. COMMERCIAL PAPER. The corporation issues short-term commercial paper as needed with repayment terms of 90 days or less under a $200,000,000 program. The corporation had outstanding borrowings of $149,506,000 at December 31, 1997 and $17,993,000 at December 31, 1996. The weighted average interest rate on these borrowings was 6.51% and 7.25% at December 31, 1997 and 1996, respectively. CREDIT FACILITIES. The corporation has a $200,000,000 revolving credit agreement, which expires in December 1999, as a backup to the commercial paper program. There have been no borrowings under this agreement. LONG-TERM DEBT. Long-term debt, including the corporation's share of INTELSAT and Inmarsat debt, at each year end consists of:
In thousands 1997 1996 ----------------------------------------------------------------------------------------------------- 8.125% notes due 2004 $ 70,475 $ 160,000 8.95% notes due 2001 75,000 75,000 6.75% INTELSAT Eurobonds due 2000 26,932 28,693 7.375% INTELSAT Eurobonds due 2002 35,910 38,258 8.375% INTELSAT Eurobonds due 2004 35,910 38,258 6.625% INTELSAT Asian bonds due 2004 35,910 38,258 8.125% INTELSAT Eurobonds due 2005 35,910 38,258 Inmarsat lease financing obligations 96,504 103,186 Medium-term notes, 7.7% - 8.66%, due 2006 - 2007 64,000 74,000 Discounts on notes payable (806) (1,730) ----------- ---------- Total 475,745 592,181 Less current maturities (13,785) (13,802) ----------- ---------- Total long-term debt $ 461,960 $ 578,379 =========== ==========
The principal amount of debt (excluding the Inmarsat lease financing obligations) maturing over the next five years is $0 in 1998 and 1999, $26,932,000 in 2000, $75,000,000 in 2001 and $35,910,000 in 2002. 56 EARLY EXTINGUISHMENT OF DEBT. During the period March 25, 1997, through April 9, 1997, the corporation offered to purchase for cash its 8.125% notes due April 1, 2004, in a fixed-spread offering. The corporation repurchased $89,525,000 of the 8.125% notes and also $10,000,000 of its 7.7% medium-term notes using proceeds from short-term debt. 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 borrowed (pound)140,400,000 sterling under a capital lease agreement to finance the construction of second-generation Inmarsat satellites. Inmarsat also entered into another capital lease arrangement to finance the construction costs of its third-generation satellites. As of December 31, 1997, (pound)131,800,000 sterling of the (pound)197,000,000 sterling available for this purpose has been borrowed. The corporation's share of these lease obligations is included in long-term debt. Inmarsat has hedged its obligations through various foreign exchange transactions to minimize the effect of fluctuating interest and exchange rates (see Note 14). The corporation's share of the payments under these lease obligations for each of the next five years is $19,130,000 in 1998, $19,616,000 in 1999, $20,765,000 in 2000, $21,450,000 in 2001, $12,222,000 in 2002 and $29,402,000 thereafter. These payments include interest totaling $26,081,000 and a current maturity of $13,785,000. 7. 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. COMSAT Capital has been consolidated in the financial statements of the corporation since the third quarter of 1995. 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, $16,250,000 and $7,358,000 in 1997, 1996 and 1995, respectively, and are included in "Other income (expense), net" on the income statement. 57 8. COMMITMENTS AND CONTINGENCIES PROPERTY AND EQUIPMENT. As of December 31, 1997, the corporation had commitments to acquire property and equipment totaling $194,543,000. Of this total, $166,957,000 is payable over the next three years. These commitments are related principally to the corporation's share of INTELSAT and Inmarsat 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 $10,242,000 in 1997, $5,179,000 in 1996 and $5,096,000 in 1995. The future rental payments under operating leases are $17,677,000 in 1998, $19,858,000 in 1999, $21,874,000 in 2000, $13,607,000 in 2001, $13,645,000 in 2002 and $55,317,000 thereafter. GOVERNMENT CONTRACTS. The corporation and its subsidiaries are subject to, and are currently a party to, audits and investigations by various agencies which oversee contract performance in connection with the corporation's contracts with the U.S. Government. 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. ENVIRONMENTAL ISSUES. The corporation reviews, on a quarterly basis, its estimates of costs of compliance with environmental laws and the cleanup of various sites, including sites which governmental agencies have designated the corporation as a potentially responsible party. When it is probable that obligations have been incurred and where a minimum cost or a reasonable estimate of the cost of compliance or remediation can be determined, the applicable amount is accrued. Because of the uncertainties associated with environmental assessment and remediation activities, future expense to remediate currently identified sites could be higher than the liability currently accrued. Based on currently available information, however, management does not believe that any costs incurred in excess of those currently accrued will have a materially adverse effect on the financial condition of the corporation. INVESTMENT IN ICO. In 1994, the corporation and Inmarsat committed to invest in ICO (see Note 5). ICO plans to build and operate spacecraft and related terrestrial facilities for the provision of worldwide mobile communications via handheld devices. As of December 31, 1997, the corporation's investment totaled $35,985,000, and the corporation's share of Inmarsat's investment totaled $35,800,000. As of December 31, 1997, the corporation had fulfilled its direct and, through Inmarsat, its indirect investment commitments to ICO. 58 The corporation has applied to the FCC for authority to participate as an investor and service provider in ICO. In acting on the application, which is being opposed by ICO's competitors, the FCC will determine whether the corporation satisfies the requisite legal and policy criteria to participate in ICO. The corporation believes that all necessary operating authorizations with respect to ICO will be obtained, although the FCC may condition the use of ICO telephones in the U.S. on reciprocal access by ICO's U.S. competitors to foreign markets. In addition, the provision of ICO service in the U.S. may be subject to the availability of adequate spectrum on an economic basis. In May 1996 TRW, Inc. (TRW) filed a lawsuit against ICO in the U.S. District Court for the Central District of California seeking injunctive relief and unspecified monetary damages. The lawsuit, as amended, alleged that the proposed ICO satellite system would infringe two patents held by TRW. In December 1997, TRW and ICO reached an agreement that settled this dispute. 9. REGULATORY ENVIRONMENT AND LITIGATION REGULATORY ENVIRONMENT. Under the Communications Act of 1934 and the Communications Satellite Act of 1962, as amended, the corporation is subject to regulation by the FCC with respect to communications facilities and services provided through the INTELSAT and Inmarsat systems and to the rates charged for those services. 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 which could have an adverse effect on their operations in those countries. Until 1985, the corporation was, with minor exceptions, the sole U.S. provider of international fixed satellite communications services. Since then, the FCC has authorized several international satellite systems separate from INTELSAT. These separate U.S. systems currently compete against the corporation for voice, video and data traffic. In 1993, the FCC substantially eliminated prior restrictions on the ability of separate systems to offer public switched telephony services, thereby increasing competition to the corporation in the voice market. The remaining FCC restrictions on competitive systems expired on December 31, 1996. In April 1997, the corporation petitioned the FCC for classification as a non-dominant carrier and for regulatory forbearance. The petition requests that limits on the corporation's rate of return and structural separation requirements be removed and that the corporation be allowed to change its tariff rates and introduce new services over the INTELSAT satellite system on one-day notice. The petition has been opposed by certain of the corporation's competitors and customers. The corporation expects that the FCC will act on the petition in 1998, but cannot predict with accuracy the outcome and timing of FCC regulatory action nor whether the FCC may impose conditions on a grant of the corporation's petition, such as allowing customers some form of direct access to the INTELSAT system, abrogating certain provisions of the corporation's inter-carrier agreements with its largest carrier customers or requiring the corporation to waive its privileges and immunities as an INTELSAT signatory. 59 In May 1996, the corporation received authority to provide communication services, including Planet 1 and other land mobile services outside of North America, over the Inmarsat-3 satellites. The corporation has applied to the FCC for authorization to offer Planet 1 and other mobile services in the U.S. Those applications, which have been opposed by certain of the corporation's competitors, are pending before the FCC. LITIGATION. The corporation and its subsidiaries are a party to various lawsuits and arbitration proceedings and are subject to various claims and inquiries, which generally are incidental to the ordinary course of its business. 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 materially adverse effect on the consolidated financial condition of the corporation but could materially affect consolidated results of operations in a given year or quarter. The FCC has adopted a rule requiring any common carrier that provides interstate service in the U.S. to contribute to a universal service fund based on the carrier's total interstate and international revenues. In addition to its international services, the corporation provides a small amount of interstate services which the FCC has ruled makes the corporation subject to the full contribution requirements. The corporation has appealed the FCC's ruling to the U.S. Court of Appeals for the Fifth Circuit and has also petitioned the FCC for a partial waiver of the contribution requirement. If the corporation were to lose both proceedings, the corporation would be required to make contributions estimated at between $4,000,000 and $5,000,000 per year, based on its 1997 interstate and international revenues, which is more than its annual interstate revenues. 10. COMMON STOCK EARNINGS PER SHARE. The corporation has implemented SFAS No. 128, "Earnings Per Share," which is effective for fiscal periods ending after December 15, 1997. Accordingly, the corporation has restated earnings (loss) per share amounts for all prior periods reported. SFAS No. 128 requires the presentation of basic earnings per share (EPS) and diluted earnings per share, instead of the primary and fully diluted EPS that was required by Accounting Principles Board No. 15. 60 The following reconciliation illustrates the calculation of the corporation's basic and diluted earnings per share amounts:
In thousands, except per share amounts 1997 1996 1995 ------------------------------------------------------------------------------------------------------- Income from continuing operations before extraordinary item $ 28,568 $ 36,197 $ 43,507 ============ ============ ============ Basic: Weighted average shares 48,924 47,870 46,848 ============ ============ ============ Per share $ 0.58 $ 0.76 $ 0.93 ============ ============ ============ Assuming dilution: Weighted average shares 48,924 47,870 46,848 Stock options 766 647 410 Restricted stock awards and units 313 402 539 ------------ ------------ ------------ Total 50,003 48,919 47,797 ============ ============ ============ Per share $ 0.57 $ 0.74 $ 0.91 ============ ============ ============
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 6,441,000 shares of common stock may be granted under the current plans. As of December 31, 1997, 133,000 shares of the corporation's treasury stock and 6,308,000 unissued common shares were reserved for these plans. As of December 31, 1997, no stock appreciation rights were outstanding. Adjustments were made to equitably increase the number of shares and decrease the exercise price for all outstanding stock options as a result of the tax-free spinoff of Ascent. Vested stock options held by Ascent employees generally expired 90 days after the date of the spinoff. Unvested stock options held by Ascent employees continue to vest as long as the employee is employed by Ascent and then expire 90 days after vesting. Adjustments were also made to increase the number of restricted stock awards and restricted stock units outstanding for the effect of the Ascent spinoff. STOCK OPTIONS. Under the current plans, the exercise price for stock options may not be less than the fair market value of the stock when granted. Options vest over three years and expire after 10 to 15 years. The exercise price of certain options granted prior to 1993, pursuant to an expired plan, is equal to 50% of the market price on the grant date. The cost of these awards, which is the 50% discount to market when granted, was recorded as unearned compensation in stockholders' equity. This unearned compensation has been amortized to expense over the three-year vesting period. 61 Stock option activity was as follows:
In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------- Outstanding at January 1 4,478 4,415 3,742 Granted 655 899 1,204 Exercised (848) (481) (327) Canceled (283) (355) (204) Adjustment due to Ascent spinoff 1,150 - - ------ ------ ------ Outstanding at December 31 5,152 4,478 4,415 ====== ====== ====== Exercisable at December 31 3,300 2,270 1,792 ====== ====== ====== Weighted average option exercise price information is as follows: Per share 1997 1996 1995 -------------------------------------------------------------------------------------------------- Outstanding at January 1 $22.20 $22.08 $22.31 Granted 25.01 19.44 19.31 Exercised 18.26 17.24 12.80 Canceled 18.68 20.37 24.00 Adjustment due to Ascent spinoff 17.84 - - Outstanding at December 31 18.33 22.20 22.08 Exercisable at December 31 18.92 23.00 20.19 The weighted average fair value at date of grant for options granted during 1997, 1996 and 1995 was $6.89, $5.59 and $6.04, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model assuming an expected option life of seven years and the following weighted average assumptions: Per share 1997 1996 1995 ------------------------------------------------------------------------------------------------- Dividend yield 3.29% 3.37% 3.29% Interest rate 6.47 5.70 7.30 Volatility 37.21 29.47 28.82
Stock options outstanding and exercisable at December 31, 1997, are as follows:
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 ------------------ ------------ ------------- ------------ ----------- ---------------- $ 4.81 - $ 8.59 211 3.37 $ 6.93 211 $ 6.93 10.94 - 14.51 829 3.44 14.09 324 13.44 15.02 - 18.85 1,310 7.52 16.36 670 16.59 20.06 - 24.44 2,802 7.64 21.37 2,095 21.72 ------------ ----------- $ 4.81 - $24.44 5,152 6.24 $18.33 3,300 $18.92 ============ ===========
62 RESTRICTED STOCK AWARDS. Restricted stock awards are shares of stock that are subject to restrictions on their sale or transfer. In 1997, 1996 and 1995, 152,470, 66,000 and 91,000 "performance-based" restricted stock awards were granted, respectively. The 1997 amount includes an adjustment of outstanding awards due to the Ascent spinoff. Grantees have record ownership of the underlying securities, however all such securities are subject to forfeiture at the end of a two-year performance period. In addition to the two-year performance period, the awards are further subject to a three-year vesting schedule. The weighted average fair value at date of grant for restricted stock awards granted during 1997, 1996 and 1995 was $23.71, $18.00 and $19.69 per share, respectively, which in each case was equal to the market value of the common stock at the date of grant. At the end of the two-year performance period with respect to the 1996 and 1995 grants, 37,250 and 76,000 shares, net of amounts forfeited, had met the performance criteria. The expected cost of all grants is amortized over the performance and vesting period. The expense for all outstanding grants was $870,000 in 1997, $1,296,000 in 1996 and $939,000 in 1995. 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 1997, 1996 and 1995, respectively, 54,360, 34,000 and 71,000 restricted stock units were granted . The 1997 amount includes an adjustment of outstanding units due to the Ascent spinoff. The weighted average fair value for the units granted during 1997, 1996 and 1995 was $25.50, $18.99 and $19.67 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 110,200 at December 31, 1997, and 197,000 at December 31, 1996. The cost of these awards is amortized to expense over the three-year vesting period. The expense in 1997, 1996 and 1995 was $575,000, $924,000 and $679,000, respectively. EMPLOYEE STOCK PURCHASE PLAN. Employees may purchase stock at a discount through the corporation's Employee Stock Purchase Plan. The purchase price of the shares is the lower of 85% of the fair market value of the stock on the offering date, or 85% of the fair market value of the stock on the last business day of each month throughout the one-year offering period. The purchase price on the respective offering dates for 1997, 1996 and 1995, was $21.36 (adjusted to $17.22 subsequent to Ascent spinoff), $16.04 and $16.74, respectively. There were 181,000 shares, 254,000 shares and 236,000 shares issued under this plan at weighted average prices of $18.26, $16.03 and $16.37 for the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, a total of 1,578,000 shares of the corporation's unissued common stock has been reserved for this plan. 63 The weighted average fair value of the purchase rights granted pursuant to this plan in 1997, 1996 and 1995 was $5.95, $4.07 and $4.56, 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:
Per share 1997 1996 1995 ------------------------------------------------------------------------------------------------- Dividend yield 3.30% 3.89% 3.15% Interest rate 5.39 5.11 6.40 Volatility 35.79 27.33 32.15
PRO FORMA DISCLOSURES. Had stock-based compensation cost for the corporation's stock incentive plans been determined based on the fair value at the grant dates for awards under those plans, the corporation's income from continuing operations before extraordinary item would have been decreased by $2,544,000, $1,928,000 and $1,451,000 in 1997, 1996 and 1995, respectively. Assuming dilution, the earnings per share for income from continuing operations before extraordinary item would have decreased by $0.05, $0.04 and $0.03 in 1997, 1996 and 1995, respectively. The pro forma effect on income from continuing operations before extraordinary item for 1997, 1996 and 1995 is not representative of the pro forma effect on income from continuing operations before extraordinary item in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. 11. 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:
In thousands 1997 1996 1995 ---------------------------------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 2,205 $ 2,590 $ 2,606 Interest cost on projected benefit obligation 7,690 7,213 6,995 Credit for actual return on pension plan assets (28,627) (15,323) (23,924) Net amortization and deferral 18,566 5,981 15,197 ---------- ---------- ---------- Net pension expense (benefit) $ (166) $ 461 $ 874 ========== ========== ==========
The corporation recognized a $1,380,000 curtailment gain in the second quarter of 1995 which arose from the reduction of pension benefits for a group of employees. 64 The following table shows the pension plan's obligations and assets as well as the liability recorded in the corporation's balance sheet at each year end:
In thousands 1997 1996 ------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ 105,726 $ 89,773 ============ ============ Accumulated benefit obligation $ 108,108 $ 92,095 ============ ============ Actuarial present value of projected benefit obligation for service rendered to date $ 119,826 $ 103,608 Pension plan assets at fair value 150,874 126,936 ------------ ------------ Plan assets greater than projected benefit obligation 31,048 23,328 Unrecognized net gain (34,273) (25,512) Unrecognized transition asset at January 1, 1986, being amortized over 13 years (1,195) (2,402) ------------ ------------ Net pension liability $ (4,420) $ (4,586) ============ ============ Assumed discount rate 7.00% 7.50% Assumed rate of compensation increase 5.00% 5.00% Expected rate of return on pension plan assets 9.00% 9.00%
The plan's assets consist primarily of common stocks, corporate and government bonds and short-term investments. The corporation's policy is to fund the minimum actuarially computed contributions required by law. The corporation made a $1,065,000 cash contribution to the plan in 1996. No contribution was required for 1997. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The corporation has an unfunded supplemental pension plan for executives. The expense for this plan was $2,163,000, $2,817,000 and $2,505,000 for 1997, 1996 and 1995, respectively. The corporation recorded a minimum plan liability for the excess of the accumulated benefit obligation over the accrued plan liability. This was reported as a reduction to stockholders' equity of $2,222,000 as of December 31, 1997 and $3,180,000 as of December 31, 1996. These amounts are net of deferred income taxes and an intangible asset recorded for the unrecognized transition obligation. 65 The following table shows the plan's obligations as well as the liability recorded in the corporation's balance sheet at each year end:
In thousands 1997 1996 ------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation $ 19,941 $ 20,913 ============ ============ Projected benefit obligation $ 21,193 $ 22,136 ============ ============ Accrued liability $ 19,941 $ 20,913 ============ ============ Assumed discount rate 7.00% 7.50% Assumed rate of compensation increase 5.00% 5.00%
401(K) PLAN. The corporation has a 401(k) plan for qualifying employees. A portion of employee contributions is matched by the corporation with shares of its common stock. The number of shares contributed to the plan and the respective market values each year were as follows: 1997 - 108,000 shares ($2,433,000), 1996 - 140,000 shares ($3,035,000) and 1995 - 177,000 shares ($3,386,000). 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 the net post-retirement benefit expense for each year were:
In thousands 1997 1996 1995 ---------------------------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 666 $ 1,019 $ 1,128 Interest cost on accumulated post-retirement benefit obligation 1,877 2,496 2,778 Net amortization and deferral (2,360) (1,219) (1,241) --------- --------- --------- Net post-retirement benefit expense $ 183 $ 2,296 $ 2,665 ========= ========= =========
The corporation recognized a $1,300,000 curtailment gain in the second quarter of 1995 which arose from the elimination of post-retirement health care benefits for a group of employees. 66 The following table shows the plan's obligations as well as the liability recorded in the corporation's balance sheet at each year end.
In thousands 1997 1996 ----------------------------------------------------------------------------------------------------- Accumulated post-retirement benefit obligation: Retirees $ 17,022 $ 16,792 Fully eligible active participants 4,158 4,038 Other active participants 7,710 8,630 ---------- ---------- Total 28,890 29,460 Unrecognized gain from plan changes 13,527 15,368 Unrecognized net gain 6,829 5,595 ---------- ---------- Net post-retirement benefit liability $ 49,246 $ 50,423 ========== ========== Assumed discount rate 7.00% 7.50% Assumed rate of compensation increase 5.00% 5.00%
An 8.50% increase in health care costs was assumed for 1997 with the rate decreasing 0.5% each year to an ultimate rate of 5.50%. Increasing the assumed trend rate by 1.0% each year would have increased the accumulated post-retirement benefit obligation as of December 31, 1997, by $3,200,000 and the benefit expense for 1997 by $299,200. 12. INCOME TAXES Income (loss) from continuing operations before taxes and extraordinary item consisted of:
In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------------- United States $ 47,927 $ 73,707 $ 89,724 Foreign (3,746) (8,586) (10,936) ------------ ------------ ------------ Total $ 44,181 $ 65,121 $ 78,788 ============ ============ ============ The components of income tax expense on continuing operations are: In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------------- Federal: Current $ 15,783 $ 22,910 $ 18,301 Deferred (2,162) (1,076) 15,031 Investment tax credits (net) (1,837) (1,844) (2,150) State and local 1,487 6,779 4,282 Foreign 2,342 2,155 (183) ------------ ------------ ------------ Total $ 15,613 $ 28,924 $ 35,281 ============ ============ ============
67 The difference between income tax expense computed at the statutory Federal tax rate and the corporation's effective tax rate is:
In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------------- Federal income taxes computed at the statutory rate $ 15,463 $ 22,792 $ 27,576 Foreign losses 3,654 4,335 3,951 Investment tax credits (net) (1,837) (1,844) (2,150) Losses (income) with no tax benefit (839) (506) 3,833 State income taxes, net of Federal income tax benefit 972 4,408 2,777 Life insurance (net) (1,183) (1,173) (842) Other (617) 912 136 ------------ ------------ ------------ Income tax expense $ 15,613 $ 28,924 $ 35,281 ============ ============ ============
The current and net non-current components of deferred tax accounts as shown on the balance sheet at December 31, 1997 and 1996 are:
In thousands 1997 1996 ------------------------------------------------------------------------------------------------------- Current deferred tax asset $ 7,469 $ 6,050 Non-current deferred tax liability (112,226) (112,894) ------------ ------------ Net liability $ (104,757) $ (106,844) ============ ============
The deferred tax assets and liabilities at December 31, 1997 and 1996 are:
In thousands 1997 1996 ------------------------------------------------------------------------------------------------------- Assets: Post-retirement benefits $ 22,042 $ 22,267 Accrued expenses 45,803 45,655 Alternative minimum tax credit 30,476 26,887 Long-term contract revenues 7,946 7,915 Other 3,181 3,820 ------------ ------------ Total deferred tax assets 109,448 106,544 ------------ ------------ Liabilities: Property and equipment (214,025) (209,717) Investments - unrealized gains (180) (3,501) Other - (170) ------------ ------------ Total deferred tax liabilities (214,205) (213,388) ------------ ------------ Net liability $ (104,757) $ (106,844) ============ ============
The Internal Revenue Service (IRS) has completed examinations of the Federal income tax returns of the corporation through 1989. The IRS is currently in the process of completing examinations of the corporation's Federal income tax returns for 1990 through 1994. The corporation has also amended its returns and filed claims for refunds for 1979 through 1987, which the IRS has denied. The corporation is contesting the IRS's denial. In the opinion of the corporation, adequate provision has been made for income taxes for all periods through 1997. 68 13. PROVISION FOR RESTRUCTURING In the third quarter of 1995, the corporation recorded a pre-tax charge of $3,902,000, net of discontinued operations, to strategically restructure elements of the business units included in continuing operations. About 110 employees were severed as part of these activities. The provision included $1,858,000 for employee severance costs in COMSAT World Systems (CWS), COMSAT Mobile Communications (CMC) and COMSAT International (CI), and $2,044,000 to downsize one of its divisions at COMSAT Laboratories. The actions taken in CWS and CMC were associated with the consolidation of the management and administration of these two businesses into one business unit. As a result, various administrative, marketing and other positions were eliminated. All of the restructuring actions were substantially completed at the end of 1995. 14. FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS The corporation owns a 50% interest in a partnership which owns the headquarters building leased by the corporation (see Note 8). The corporation has guaranteed repayment of a portion of the partnership's mortgage on the building. The balance of the guarantee was $1,745,000 as of December 31, 1997. The guarantee will be reduced as the loan's principal balance is repaid. The corporation was also contingently liable to banks for $12,889,000 as of December 31, 1997, for outstanding letters of credit securing performance of certain contracts. The estimated fair value of these instruments is not significant. Inmarsat has entered into foreign currency contracts designed to minimize exposure to exchange rate fluctuations on fixed operating expenses denominated primarily in British pounds sterling. At December 31, 1997, Inmarsat had several contracts maturing primarily in 1998 to purchase foreign currency for a total of $119,714,000. The corporation's share of the estimated fair value of these contracts, as determined by a bank, is an unrealized gain of approximately $1,319,000 at December 31, 1997. Inmarsat has entered into interest rate and foreign currency swap arrangements to minimize the exposure to interest rate and foreign currency exchange fluctuations related to its satellite financing obligations. Inmarsat borrowed and is obligated to repay pounds sterling. The pounds sterling borrowed were swapped for U.S. dollars with an agreement to exchange the dollars for pounds sterling in order to meet the future lease payments. Inmarsat pays interest on the dollars at an average fixed rate of 8.8%, and it receives variable interest on the sterling amounts based on short-term LIBOR rates. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements. The currency swap arrangements have been designated as hedges, and any gains or losses are included in the measurement of the debt. The effect of these swaps is to change the sterling lease obligation into fixed-interest-rate dollar debt. As of December 31, 1997, Inmarsat had $367,060,000 of swaps to be exchanged for (pound)233,615,000 sterling at various dates through 2007. Inmarsat is exposed to loss if one or more of the counter parties defaults. However, Inmarsat does not anticipate non-performance by the counter parties as all are major financial institutions. The corporation's share of the estimated fair value of these swaps is an unrealized loss of 69 $8,427,000 at December 31, 1997. The fair value was estimated by computing the present value of the dollar obligations using current rates available for issuance of debt with similar terms and the current value of the sterling at year-end exchange rates. The fair value of long-term debt (excluding capitalized leases) shown below was estimated by obtaining a yield-adjusted price as of December 31, 1997, for each obligation from an investment banker.
Book Fair In thousands Amount Value ----------------------------------------------------------------------------------------------------- 8.125% notes due 2004 $ 70,475 $ 74,971 8.95% notes due 2001 75,000 80,123 INTELSAT bonds 170,572 180,425 Medium-term notes 64,000 69,035
The fair values of the remaining long-term debt not itemized above and the corporation's other financial instruments are approximately equal to their carrying values. 15. BUSINESS SEGMENT INFORMATION The corporation reports operating results and financial data in two business segments: Satellite Services and Network Services. The Satellite Services segment consists of activities undertaken by the corporation in its COMSAT World Systems (CWS) and COMSAT Mobile Communications (CMC) businesses. CWS provides voice, data, video and audio communications services between the U.S. and other countries using the INTELSAT satellite network. CMC provides voice, data, fax, telex and information services for ships, aircraft and land mobile applications throughout the world using the Inmarsat satellite system. The Network Services segment consists of activities undertaken by the corporation in its COMSAT International (CI), COMSAT Laboratories (Labs) and Government Programs 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 provides technical consulting in the design and development of advanced digital communication technologies and also designs, develops and licenses communication products for satellite access, compression and networking applications. Government Programs includes the Commercial Satellite Communications Initiative (CSCI) contract, Satellite Control Facility and Special Program Office. Labs and Government Programs results now include certain non-manufacturing, telecommunications contracts and businesses that were previously reported as part of CRSI in the Technology Services segment. 70
SEGMENT INFORMATION In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------------- REVENUES (1) ------------ Satellite Services: World Systems $ 262,906 $ 272,969 $ 254,683 Mobile Communications 167,850 160,922 180,384 ------------- ------------- ------------ Total Satellite Services 430,756 433,891 435,067 ------------- ------------- ------------ Network Services: International 89,661 58,084 37,708 Laboratories 36,371 43,686 25,924 Government Programs 44,048 40,716 26,761 ------------- ------------- ------------ Total Network Services 170,080 142,486 90,393 Eliminations and other (38,185) (31,277) (17,773) ------------- ------------- ------------ Total $ 562,651 $ 545,100 $ 507,687 ============= ============= ============ OPERATING INCOME (LOSS) (2) --------------------------- Satellite Services: World Systems $ 100,408 $ 104,593 $ 109,815 Mobile Communications 23,114 31,872 54,864 ------------- ------------- ------------ Total Satellite Services 123,522 136,465 164,679 ------------- ------------- ------------ Network Services: International (13,975) (17,281) (20,708) Laboratories (2,043) 7,098 (4,004) Government Programs (434) 5,126 6,586 ------------- ------------- ------------ Total Network Services (16,452) (5,057) (18,126) ------------- ------------- ------------ Total segment operating income 107,070 131,408 146,553 Provision for restructuring (3) - - (3,902) General and administrative expenses (23,247) (23,941) (19,856) Other (1,855) (242) (2,981) ------------- ------------- ------------ Total $ 81,968 $ 107,225 $ 119,814 ============= ============= ============
71 SEGMENT INFORMATION (CONTINUED)
In thousands 1997 1996 1995 ------------------------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS AS OF DECEMBER 31: Satellite Services: World Systems $ 742,908 $ 791,497 $ 832,823 Mobile Communications 436,886 440,856 418,878 ------------- ------------- ------------ Total Satellite Services 1,179,794 1,232,353 1,251,701 ------------- ------------- ------------ Network Services: International 308,148 199,510 116,861 Laboratories 12,183 14,643 8,895 Government Programs 18,430 17,149 11,597 ------------- ------------- ------------ Total Network Services 338,761 231,302 137,353 Corporate and other assets (4) 376,220 633,631 633,193 ------------- ------------- ------------ Total $ 1,894,775 $ 2,097,286 $ 2,022,247 ============= ============= ============ PROPERTY AND EQUIPMENT ADDITIONS: Satellite Services: World Systems $ 87,939 $ 110,231 $ 137,762 Mobile Communications 54,457 70,616 39,795 ------------- ------------- ------------ Total Satellite Services 142,396 180,847 177,557 ------------- ------------- ------------ Network Services: International 114,110 89,857 41,025 Laboratories 1,173 1,009 1,439 Government Programs 181 - - ------------- ------------- ------------ Total Network Services 115,464 90,866 42,464 Corporate and other assets 1,639 1,193 717 ------------- ------------- ------------ Total $ 259,499 $ 272,906 $ 220,738 ============= ============= ============ DEPRECIATION AND AMORTIZATION: Satellite Services: World Systems $ 97,379 $ 91,729 $ 87,980 Mobile Communications 57,204 45,207 40,096 ------------- ------------- ------------ Total Satellite Services 154,583 136,936 128,076 ------------- ------------- ------------ Network Services: International 25,623 14,814 8,244 Laboratories 991 956 1,242 Government Programs 442 456 910 ------------- ------------- ------------ Total Network Services 27,056 16,226 10,396 Corporate and other assets 2,567 2,134 2,285 ------------- ------------- ------------ Total $ 184,206 $ 155,296 $ 140,757 ============= ============= ============
72 (1) World Systems' revenues include intersegment sales totaling $20,773,000 in 1997, $15,931,000 in 1996 and $7,124,000 in 1995. The Laboratories revenues include intersegment sales totaling $11,820,000 in 1997, $11,368,000 in 1996 and $8,596,000 in 1995. Intersegment sales for other segments are not significant. (2) The method of allocating certain research and development costs was changed in 1997, and prior years' segment results have been restated for this change. (3) If the 1995 provision for restructuring (see Note 13) had been charged to segment operating income, the amounts allocated to each segment would have been: World Systems $315,000, Mobile Communications $1,343,000, International $200,000 and Laboratories $2,044,000. (4) The corporation's net assets of discontinued operations and investments in unconsolidated businesses are included in Corporate and other assets. GEOGRAPHIC INFORMATION. COMSAT International operations are located in Latin America, India, China, Russia and Turkey. Revenues, operating income and identifiable assets for COMSAT International's Latin American operations are as follows:
In thousands 1997 1996 1995 ---------------------------------------------------------------------------------------------------- Revenues $ 80,217 $ 50,464 $ 26,701 Operating income 2,947 3,064 902 Identifiable assets at December 31 252,764 160,615 76,163
RELATED PARTY TRANSACTIONS. The corporation provides support services to INTELSAT and support services and satellite capacity to Inmarsat. The revenues from these services were $16,364,000 in 1997, $17,996,000 in 1996 and $22,208,000 in 1995. These revenues were recorded primarily in World Systems, Mobile Communications and Laboratories. SIGNIFICANT CUSTOMERS. Revenues in 1997, 1996 and 1995 included sales to the U.S. Government of $88,917,000, $70,502,000 and $55,855,000, to AT&T of $61,044,000, $69,197,000 and $81,866,000, and to MCI of $59,634,000, $57,261,000 and $59,001,000, respectively. Substantially all of the U.S. Government sales are reported in Mobile Communications and Government Programs. Substantially all of the sales to AT&T and MCI are reported in World Systems and Mobile Communications. 73
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) In thousands, except per share amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year ----------------------------------------------------------------------------------------------------------------------- 1997: Revenues $ 133,531 $ 142,437 $ 145,332 $ 141,351 $ 562,651 Operating income 23,151 23,412 17,653 17,752 81,968 Income from continuing operations before extraordinary item 8,099 9,098 (1) 9,395 (2) 1,976 (1) 28,568 Loss from discontinued operations (12,380) (16,481) (30,207) (30,000) (89,068) Extraordinary loss (1,010) (2,936) - - (3,946) Net income (loss) (5,291) (10,319) (20,812) (28,024) (64,446) Earnings (loss) per share: Basic: Income from continuing operations before extraordinary item 0.17 0.19 0.19 0.04 0.58 Loss from discontinued operations (0.26) (0.34) (0.62) (0.61) (1.82) Extraordinary item (0.02) (0.06) - - (0.08) Net income (loss) (0.11) (0.21) (0.42) (0.57) (1.32) Assuming Dilution: Income from continuing operations before extraordinary item 0.16 0.18 0.19 0.04 0.57 Loss from discontinued operations (0.25) (0.33) (0.60) (0.59) (1.78) Extraordinary item (0.02) (0.06) - - (0.08) Net income (loss) (0.11) (0.21) (0.41) (0.55) (1.29) Dividends per share 0.195 0.05 0.05 0.05 0.345 Stock price: High 28 1/2 26 11/16 24 5/16 25 3/4 28 1/2 Low 23 19 5/8 20 13/16 20 5/16 19 5/8 Close 24 3/8 23 13/16 23 13/16 24 1/4 24 1/4 ----------------------------------------------------------------------------------------------------------------------- 1996: Revenues $ 128,192 $ 132,718 $ 141,914 (3) $ 142,276 $ 545,100 Operating income 27,386 26,217 30,912 22,710 107,225 Income from continuing operations 11,142 8,332 8,208 8,515 (4) 36,197 Loss from discontinued operations (1,815) (2,550) (3,171) (20,039) (27,575) Net income (loss) 9,327 5,782 5,037 (11,524) 8,622 Earnings (loss) per share: Basic: Income from continuing operations 0.23 0.17 0.17 0.18 0.76 Loss from discontinued operations (0.04) (0.05) (0.07) (0.42) (0.58) Net income (loss) 0.20 0.12 0.10 (0.24) 0.18 Assuming Dilution: Income from continuing operations 0.23 0.17 0.17 0.17 0.74 Loss from discontinued operations (0.04) (0.05) (0.07) (0.41) (0.56) Net income (loss) 0.19 0.12 0.10 (0.24) 0.18 Dividends per share 0.195 0.195 0.195 0.195 0.78 Stock price: High 25 5/8 33 1/8 26 1/2 26 3/4 33 1/8 Low 16 3/4 23 3/8 18 3/4 21 1/2 16 3/4 Close 23 3/8 26 22 5/8 24 5/8 24 5/8
(1) The second and fourth quarters of 1997 include a pre-tax gain of $1,987,000 from the sale of marketable securities and a pre-tax loss of $1,008,000 for a decline in value of a marketable security, respectively. (2) The third quarter of 1997 includes a pre-tax gain of $7,261,000 from a sale of land. (3) Revenues in the third quarter of 1996 include $7,800,000 in royalties related to a licensing agreement that resolved patent infringement disputes. (4) The fourth quarter of 1996 includes a pre-tax gain of $2,722,000 from the corporation's sale of ICO shares and a pre-tax loss of $1,105,000 for a decline in value of a marketable security. 74 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Except for the portion of Item 10 relating to Executive Officers which is included in Part I of this Report, the information called for by Items 10-13 is incorporated by reference from the COMSAT - 1998 Annual Meeting of Shareholders - Notice and Proxy Statement - (to be filed pursuant to Regulation 14A not later than 120 days after the close of the fiscal year) which meeting involves the election of directors, in accordance with General Instruction G to the Annual Report on Form 10-K. ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report 1. Consolidated Financial Statements and Supplementary Data of Registrant a. Independent Auditors' Report b. Consolidated Financial Statements of COMSAT Corporation and Subsidiaries (i) Consolidated Income Statements for the Years Ended December 31, 1997, 1996 and 1995 (ii) Consolidated Balance Sheets as of December 31, 1997 and 1996 (iii) Consolidated Cash Flow Statements for the Years Ended December 31, 1997, 1996 and 1995 (iv) Statements of Changes in Consolidated Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 (v) Notes to Consolidated Financial Statements for the Years Ended December 31, 1997, 1996 and 1995 75 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, 1997 a. Schedule II -- Valuation and Qualifying Accounts All Schedules (except as listed above) 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. (b) Reports on Form 8-K The corporation filed a Report on Form 8-K dated October 22, 1997 related to the release of the corporation's financial results for the quarter ending September 30, 1997. (c) Exhibits (listed according to the number assigned in the table in Item 601 of Regulation S-K) 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) 3.2 By-laws of Registrant, as amended through February 16, 1996 (Incorporated by reference from Exhibit No. 3.2 to Registrant's Report on Form 10-K for the fiscal year ended 1995) 3.3 Regulations adopted by Registrant's Board of Directors pursuant to Section 5.02(c) of 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) 76 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) 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) 77 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) 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. 78 10.10 to Registrant'sReport on Form 10-K for the fiscal year ended December 31, 1997) 10.9* Registrant's Non-Employee Directors Stock Plan (Incorporated by reference from Exhibit No. 10.11 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996) 10.10 Agreement to Acquire and Lease (and Supplemental Agreements thereto) dated September 28 and October 10, 1988, respectively, among the International Maritime Satellite Organization (Inmarsat), the North Sea Marine Leasing Company, British Aerospace Public Limited Company, the European Investment Bank, Kreditanstalt Fuer Wiederaufbau, European Investment Bank (as Agent and as Trustee), Instituto Mobiliare Italiano, Credit National, Hellenic Industrial Development Bank, and Society Nationale de Credit a L'Industrie relating to the financing of three Inmarsat spacecraft (Incorporated by Reference from Exhibit No. 3(a) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1988) 10.11* Registrant's 1990 Key Employee Stock Plan (Incorporated by reference from Exhibit No. 10 (p) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989) 10.12 Amended and Restated Agreement, dated November 14, 1990, of Limited Partnership of Rock Spring II Limited Partnership (Incorporated by reference from Exhibit No. 10(a) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.13 Amended and Restated Lease Agreement, dated November 14, 1990, of Limited Partnership of Rock Spring II Limited Partnership (Incorporated by reference from Exhibit No. 10(b) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.14 Amended and Restated Ground Lease Indenture, dated November 14, 1990, between Anne D. Camalier (Landlord) and Rock Spring II Limited Partnership (Tenant) (Incorporated by reference from Exhibit No. 10(c) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.15 Finance Facility Contract (and Supplemental Agreements thereto), dated December 20, 1991, among the International Maritime Satellite Organization (Inmarsat), Abbey National plc, General Electric Technical Services Company, Inc., European Investment Bank, Kreditanstalt Fuer Wiederaufbau, Instituto Mobiliare Italiano S.p.A., Credit National, Societe Nationale de Credit a L'Industrie, Finansieringsinstituttet for Industri OG Haandvaerk A/S, De Nationale Investeringsbank NV, and Osterreichische Investitionkredit Aktiengesellschaft relating to the financing of three Inmarsat spacecraft (Incorporated by reference from Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991) 79 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 September 1, 1993, between Registrant and MCI International, Inc. relating to exchange of traffic (Incorporated by reference from Exhibit No. 10(dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 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) 80 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 February 18, 1994, between Registrant and AT&T relating to exchange of traffic (Incorporated by reference from Exhibit No. 10(jj) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 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) 81 10.35 Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Morgan Guaranty Trust Company, Fiscal Agent and Principal Paying Agent, dated as of October 14, 1994 (Incorporated by reference from Exhibit No. 10(gg) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.36* Registrant's Annual Incentive Plan (Incorporated by reference from Exhibit No. 10(hh) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.37 Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Morgan Guaranty Trust Company, Fiscal Agent and Principal Paying Agent, dated as of February 28, 1995 (Incorporated by reference from Exhibit No. 10(ii) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 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 10.42 Amended and Restated Employment Agreement, dated as of July 18, 1997, between the Registrant and Allen E. Flower 10.43 Amended and Restated Employment Agreement, dated as of July 18, 1997, between the Registrant and Warren Y. Zeger EXHIBIT NO. 21 - SUBSIDIARIES OF THE REGISTRANT AS OF MARCH 31, 1998 EXHIBIT NO. 23 - CONSENTS OF EXPERTS AND COUNSEL Consent of Independent Auditors dated March 27, 1998. EXHIBIT NO. 27 - FINANCIAL DATA SCHEDULE *Compensatory plan or arrangement. 82 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 31, 1998 By /S/ ALAN G. KOROBOV ----------------------------- (Alan G. Korobov, Controller) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY EACH OF THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITY AND AS OF MARCH 31, 1998. EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS THE REGISTRANT'S VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, VICE PRESIDENT AND GENERAL COUNSEL OR CONTROLLER HIS OR HER TRUE AND LAWFUL ATTORNEY-IN-FACT, WITH FULL POWER OF SUBSTITUTION, FOR HIM OR HER AND IN HIS OR HER NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS FORM 10-K, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT, OR HIS SUBSTITUTE, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. (1) Principal executive officer By /s/ Betty C. Alewine ------------------------------------ (Betty C. Alewine, President and Chief Executive Officer and Director) (2) Principal financial officer By /s/ Allen E. Flower ------------------------------------ (Allen E. Flower, Vice President and Chief Financial Officer) (3) Principal accounting officer By /s/ Alan G. Korobov ------------------------------------ (Alan G. Korobov, Controller) 83 (4) Board of Directors By /s/ Edwin I. Colodny ------------------------------------ (Edwin I. Colodny, Chairman and Director) By /s/ Marcus C. Bennett ------------------------------------ (Marcus C. Bennett, Director) By /s/ Lucy Wilson Benson ------------------------------------ (Lucy Wilson Benson, Director) By /s/ Lawrence S. Eagleburger ------------------------------------ (Lawrence S. Eagleburger, Director) By /s/ Neal B. Freeman ------------------------------------ (Neal B. Freeman, Director) By /s/ Caleb B. Hurtt ------------------------------------ (Caleb B. Hurtt, Director) By /s/ Peter S. Knight ------------------------------------ (Peter S. Knight, Director) By /s/ Peter W. Likins ------------------------------------ (Peter W. Likins, Director) By /s/ Charles T. Manatt ------------------------------------ (Charles T. Manatt, Director) 84 By /s/ Larry G. Schafran ------------------------------------ (Larry G. Schafran, Director) By /s/ Robert G. Schwartz ------------------------------------ (Robert G. Schwartz) By /s/ Kathryn C. Turner ------------------------------------ (Kathryn C. Turner, Director) By /s/ Guy P. Wyser-Pratte, Director ------------------------------------ (Guy P. Wyser-Pratte, Director) 85 EXHIBIT INDEX Exhibit NO. DESCRIPTION - --- ----------- 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) 3.2 By-laws of Registrant, as amended through February 16, 1996 (Incorporated by reference from Exhibit No. 3.2 to Registrant's Report on Form 10-K for the fiscal year ended 1995) 3.3 Regulations adopted by Registrant's Board of Directors pursuant to Section 5.02(c) of 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) 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) 86 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) 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) 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) 87 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) 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) 88 10.12 Amended and Restated Agreement, dated November 14, 1990, of Limited Partnership of Rock Spring II Limited Partnership (Incorporated by reference from Exhibit No. 10(a) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.13 Amended and Restated Lease Agreement, dated November 14, 1990, of Limited Partnership of Rock Spring II Limited Partnership (Incorporated by reference from Exhibit No. 10(b) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.14 Amended and Restated Ground Lease Indenture, dated November 14, 1990, between Anne D. Camalier (Landlord) and Rock Spring II Limited Partnership (Tenant) (Incorporated by reference from Exhibit No. 10(c) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.15 Finance Facility Contract (and Supplemental Agreements thereto), dated December 20, 1991, among the International Maritime Satellite Organization (Inmarsat), Abbey National plc, General Electric Technical Services Company, Inc., European Investment Bank, Kreditanstalt Fuer Wiederaufbau, Instituto Mobiliare Italiano S.p.A., Credit National, Societe Nationale de Credit a L'Industrie, Finansieringsinstituttet for Industri OG Haandvaerk A/S, De Nationale Investeringsbank NV, and Osterreichische Investitionkredit Aktiengesellschaft relating to the financing of three Inmarsat spacecraft (Incorporated by reference from Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991) 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) 89 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 September 1, 1993, between Registrant and MCI International, Inc. relating to exchange of traffic (Incorporated by reference from Exhibit No. 10(dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.24 Agreement dated November 30, 1993, between the Registrant and Sprint Communications Company L.P. relating to utilization of space segment (Incorporated by reference from Exhibit No. 10(ee) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.25 Amendment to Exhibit 10.24 dated April 7, 1995 (Incorporated by reference from Exhibit No. 10(a)(i) to Registrant's Report on Form 10-Q/A Amendment No. 2 dated June 29, 1995 for the quarter ended March 31, 1995) 10.26 Agreement dated December 10, 1993, between Registrant and Sprint International relating to the exchange of traffic (Incorporated by reference from Exhibit No. 10(ff) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.27 Credit Agreement dated as of December 17, 1993 among Registrant, NationsBank of North Carolina, N.A., Bank of America National Trust and Savings Association, The First National 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) 90 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 February 18, 1994, between Registrant and AT&T relating to exchange of traffic (Incorporated by reference from Exhibit No. 10(jj) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.33 Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Bankers Trust Company, Fiscal Agent and Principal Paying Agent, dated as of March 22, 1994 (Incorporated by reference from Exhibit No. 10(kk) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.34 Distribution Agreement dated July 11, 1994 between Registrant and CS First Boston Corporation, Salomon Brothers Inc and Nationsbanc Capital Markets, Inc., as Distributors, of Registrant's Medium-Term Notes, Series A (Incorporated by reference from Exhibit No. 10(ff) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.35 Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Morgan Guaranty Trust Company, Fiscal Agent and Principal Paying Agent, dated as of October 14, 1994 (Incorporated by reference from Exhibit No. 10(gg) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.36* Registrant's Annual Incentive Plan (Incorporated by reference from Exhibit No. 10(hh) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.37 Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Morgan Guaranty Trust Company, Fiscal Agent and Principal Paying Agent, dated as of February 28, 1995 (Incorporated by reference from Exhibit No. 10(ii) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 91 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 10.42 Amended and Restated Employment Agreement, dated as of July 18, 1997, between the Registrant and Allen E. Flower 10.43 Amended and Restated Employment Agreement, dated as of July 18, 1997, between the Registrant and Warren Y. Zeger 21 Subsidiaries of the Registrant as of March 31, 1998 23 Consent of Independent Auditors dated March 27, 1998. 27 Financial Data Schedule *Compensatory plan or arrangement. 92 COMSAT CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1997, 1996 and 1995
Balance at Beginning of Charged to Balance at In thousands Year Expenses Deductions(a) End of Year ------------------------------------------------------------------------------------------------------------------- 1995: Allowance for loss on accounts receivable $ 4,419 $ 3,846 $ 14 $ 8,251 1996: Allowance for loss on accounts receivable $ 8,251 $ 3,847 $ 939 $11,159 Allowance for loss on investments - $ 1,105 - $ 1,105 1997: Allowance for loss on accounts receivable $11,159 $ 6,306 $ 2,730 $14,735 Allowance for loss on investments $ 1,105 $ 1,008 - $ 2,113
(a) As discussed in Note 2 to the financial statements, the corporation began accounting for Ascent Entertainment Group, Inc. and substantially all of COMSAT RSI as discontinued operations in 1997. Accordingly, all prior periods have been restated to present Ascent and CRSI as discontinued operations. (b) Uncollectible amounts written off, recoveries of amounts previously reserved, and other adjustments. EX-10 2 EXHIBIT 10.41 AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- This AMENDED AND RESTATED AGREEMENT is made as of July 19, 1996, and amended as of May 16, 1997 and July 18, 1997, by and between COMSAT Corporation ("COMSAT"), a District of Columbia corporation, and Betty C. Alewine, a resident of the Commonwealth of Virginia (the "Executive"). WHEREAS, the COMSAT Board of Directors (the "Board") elected the Executive as President and Chief Executive Officer and a member of the Board (a "Director") on July 19, 1996; WHEREAS, the Board believes it to be in the best interests of COMSAT to enter into this Agreement to ensure the Executive's continuing services to COMSAT; and WHEREAS, COMSAT desires to continue to employ the Executive as President and Chief Executive Officer of COMSAT, and the Executive desires to continue such employment, on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, and intending to be legally bound hereby, COMSAT and the Executive agree as follows: 1. EMPLOYMENT; DUTIES. ------------------ (a) EMPLOYMENT AND EMPLOYMENT PERIOD. COMSAT shall employ the Executive to serve as President and Chief Executive Officer of COMSAT or any successor entity for a period (the "Employment Period") commencing on July 19, 1996 (the "Effective Date") and continuing thereafter for successive three-year terms from each successive day thereafter until July 19, 2003 unless terminated in accordance with the provisions of this Agreement. Notwithstanding the foregoing, COMSAT may appoint another person to serve as President during the Employment Period. In that event, the Executive's title shall become Chief Executive Officer and the President shall report to the Executive in her capacity as Chief Executive Officer. The appointment of a President shall not be deemed to constitute "Good Reason" for purposes of Section 5 of this Agreement. Each 12-month period ending on the anniversary date of the Effective Date is sometimes referred to herein as a "year of the Employment Period." (b) OFFICES, DUTIES AND RESPONSIBILITIES. The Executive shall report directly and solely to the Board. Throughout the Employment Period, COMSAT shall cause Executive to be nominated and recommended for election as a Director at each meeting of COMSAT shareholders at which directors are to be elected and to be included as a recommended nominee for election in any proxy provided to shareholders in connection with such meeting. The Executive's offices initially shall be located at COMSAT's present headquarters in Bethesda, Maryland. The Executive shall have all duties and authority customarily accorded a chief executive officer, including, without limitation, the lead responsibility with full autonomy, subject to the customary authority and direction of the Board, to manage the overall business and operations of COMSAT. All employees of COMSAT shall report, directly or indirectly, to the Executive, and the Executive shall have the authority to hire and fire all such employees within established budget parameters, PROVIDED that the Board shall approve (i) any salary actions (including hiring decisions) for employees of COMSAT which result in an annual salary in excess of the amount established by the Board from time to time, bu in no event less than $100,000, and (ii) any bonuses to be awarded to employees of COMSAT under the COMSAT Annual Incentive Plan (the "AIP") or any other bonuses to be awarded in excess of the amount established by the Board from time to time. The Executive's management of COMSAT shall be (x) in accordance with the policies of the Board and COMSAT's Policies and Procedures, both as in effect from time to time, and (y) within the limits of an annual budget for COMSAT which shall be approved by the Board a least 30 days before the beginning of the fiscal year to which such budget relates. If the Executive proposes the expenditure of any amounts which exceed the applicable annual budgets for COMSAT, such excess amounts shall not be committed to Executive's authority unless and until specifically authorized and approved by the Board. (c) DEVOTION TO INTERESTS OF COMSAT. During the Employment Period, the Executive shall devote her best efforts and full business time and attention to the performance of her duties hereunder. Notwithstanding the foregoing, the Executive shall be entitled to serve on the boards of directors of non-profit organizations and, commencing on the second anniversary of the Effective Date, the boards of directors of for-profit organizations that do not compete with COMSAT. Prior to joinin any boards of directors in addition to those on which she is serving as of the Effective Date, the Executive shall consult with the Board to confirm that such memberships shall not unreasonably or materially interfere with the performance of her duties hereunder. In addition, the Executive may speak and write independently, if such activity does not conflict with the best interests of COMSAT. The Executive may keep all fees and other monies paid for such outside board memberships and activities in accordance with COMSAT corporate policy. 2. COMPENSATION AND FRINGE BENEFITS. -------------------------------- (a) BASE COMPENSATION. COMSAT shall pay the Executive a base salary ("Base Salary") during the Employment Period with payments made in installments in accordance with COMSAT's regular practice for compensating executive personnel, PROVIDED that in no event shall such payments be made less frequently than twice per month. The Base Salary for the first year of -2- the Employment Period shall be $450,000. Effective on July 19, 1997, the Base Salary shall be increased to $500,000. Thereafter, the Base Salary for the Executive shall be reviewed for increases each subsequent year during the Employment Period commencing the third year of the Employment Period. Any further Base Salary increases shall be approved by the Board in its sole discretion. (b) BONUS COMPENSATION. The Executive will be eligible to receive bonuses ("Annual Bonus") during the Employment Period under the AIP in accordance with the following parameters: (i) the target bonus for each year during the Employment Period shall be 70% of Base Salary for achieving 100% of the target level for the performance measures; and (ii) the performance measures, the relative weight to be accorded each performance measure and the amount of bonus payable in relation to the target bonus for achieving more or less than 100% of the target level for the performance measures shall be determined for each year during the Employment Period by the Committee on Compensation and Management Development of the Board (the "Compensation Committee") after consultation with the Executive. As part of the consultation process set forth in the preceding sentence, the Executive shall prepare before the end of each fiscal year ending during the Employment Period a business plan for COMSAT with respect to at least the following three-year period. The Board shall consider and approve such plans on an annual basis, subject to such modifications as are otherwise consistent with this Agreement, and each fiscal year the current plan shall be considered by the Compensation Committee as the basis for establishing the bonus standards for such year with such reasonable modifications as the Compensation Committee may reasonably determine and which are consistent with this Agreement. (c) FRINGE BENEFITS. The Executive shall continue to be entitled to the fringe benefits for COMSAT senior executives which she enjoyed immediately prior to the Effective Date, including (i) participation in the COMSAT Directors and Executives Deferred Compensation Plan, the COMSAT Split Dollar Insurance Plan, the COMSAT Educational Grant Program, the COMSAT Retirement Plan, the COMSAT Savings and Profit-Sharing Plan, the COMSAT 1995 Key Employee Stock Plan (the "Stock Plan"), the COMSAT Employee Stock Purchase Plan, the COMSAT health and disability insurance programs and the COMSAT financial planning program, (ii) an annual physical examination by a physician of her choice in the Washington, D.C. metropolitan area at COMSAT's expense, and (iii) reimbursement of reasonable expenses incurred in connection with travel and entertainment related to COMSAT's business and affairs. The Executive also shall be entitled to such additional fringe benefits as are made available to COMSAT senior executives during the Employment Period on a most favored nations basis. The Executive further shall be entitled to reimbursement of the Executive's reasonable legal fees and costs incurred in connection with the -3- negotiation and execution of this Agreement, subject to a cap of $12,000. COMSAT reserves the right to modify or terminate from time to time the fringe benefits provided to the senior management group. (d) STOCK OPTIONS. On October 17, 1996 (the "Grant Date"), COMSAT shall grant to the Executive non-statutory stock options (the "Options") under the Stock Plan to purchase 150,000 shares of COMSAT's common stock, without par value ("Common Stock"), at a purchase price equal to the average of the high and low selling price of the Common Stock as reported under New York Stock Exchange-Composite Transactions on the Grant Date. The Options shall carry a term of ten years and shall be exercisable by the Executive in accordance with the following schedule: (i) 25% of the Options on and after the first anniversary of the Grant Date; (ii) an additional 25% of the Options on and after the second anniversary of the Grant Date; and (iii) the remaining 50% of the Options on and after the third anniversary of the Grant Date. The Options shall be represented by a stock option agreement in the form customarily used by COMSAT for such agreements which shall contain appropriate terms consistent with the provisions of this Agreement. During the Employment Period, the Executive may be granted additional non-statutory stock options as determined by the Compensation Committee in its sole discretion. (e) RSAS. On February 20, 1997, COMSAT shall grant to the Executive 20,000 Restricted Stock Awards ("RSAs") under the Stock Plan. Such RSAs shall vest in accordance with (i) the performance standards for the two-year performance period following the date of grant which are adopted by the Compensation Committee for RSAs granted generally on such date, and (ii) the following schedule thereafter for the portion of such RSAs which are earned during the performance period: (x) 20% of such portion on and after February 20, 2000; (y) an additional 40% of such portion on and after February 20, 2001; and (z) the remaining 40% of such portion on and after February 20, 2002. (f) RSUS. On the Grant Date, COMSAT shall grant to the Executive 5,000 Restricted Stock Units ("RSUs") under the Stock Plan. Such RSUs shall entitle the Executive to receive "dividend equivalents" (when and in the same amounts as dividends are paid on the Common Stock) as provided under the Stock Plan, and shall vest three (3) years from the Grant Date if the Executive is still employed by COMSAT at such time. (g) SERP. The Executive shall continue to participate in the COMSAT Insurance and Retirement Plan for Executives (the "SERP"). Any future amendments or changes to the SERP which provide for a reduction, deferral or elimination of benefits payable to participants in the SERP shall expressly not apply to the Executive unless the Executive consents otherwise. -4- 3. TRADE SECRETS; RETURN OF DOCUMENTS AND PROPERTY. ----------------------------------------------- (a) Executive acknowledges that during the course of her employment she will receive secret, confidential and proprietary information ("Trade Secrets") of COMSAT and of other companies with which COMSAT does business on a confidential basis and that Executive will create and develop Trade Secrets for the benefit of COMSAT. Trade Secrets shall include, without limitation, matters of a technical nature, such as scientific and engineering secrets, "know-how," formulae, secret processe or machines, inventions and computer programs (including documentation of such programs), and matters of a business nature, such as customer data and proprietary information about costs, profits, markets, sales and customer databases, and other information of a similar nature to the extent not available to the public, and plans for future development. All Trade Secrets disclosed to or created by Executive shall be deemed to be the exclusive property of COMSAT (as the context may require). Executive acknowledges that Trade Secrets have economic value to COMSAT due to the fact that Trade Secrets are not generally known to the public or the trade and that the unauthorized use or disclosure of Trade Secrets is likely to be detrimental to the interests of COMSAT and its subsidiaries. Executive therefore agrees to hold in strict confidence and not to disclose to any third party any Trade Secret acquired or created or developed by Executive during the term of this Agreement except (i) when Executive uses or discloses any Trade Secret in the proper course of the Executive's rendition of services to COMSAT hereunder, (ii) when such Trade Secret becomes public knowledge other than through a breach of this Agreement, or (iii) when Executive is required to disclose any Trade Secret pursuant to any valid legal process. The Executive shall notify COMSAT immediately of any such legal process in order to enable COMSAT to contest such legal process's validity. After termination of this Agreement, the Executive shall not use or otherwise disclose Trade Secrets unless such information (x) becomes public knowledge other than through a breach of this Agreement, (y) is disclosed to the Executive by a third party who is entitled to receive and disclose such Trade Secret, or (z) is required to be disclosed pursuant to any valid legal process, in which case the Executive shall notify COMSAT immediately of any such legal process in order to enable COMSAT to contest such legal process's validity. (b) Upon the effective date of notice of the Executive's or COMSAT's election to terminate this Agreement, or at any time upon the request of COMSAT, the Executive (or her heirs or personal representatives) shall deliver to COMSAT (i) all documents and materials containing or otherwise relating to Trade Secrets or other information relating to COMSAT's business and affairs, and (ii) all documents, materials and other property belonging to COMSAT, which in either case are in the possession or under the control of the Executive (or her heirs or personal representatives). The Executive shall be entitled to keep her personal records (including Rolodex) relating to COMSAT's business and affairs -6- except to the extent those contain documents or materials described in clause (i) of the preceding sentence. 4. DISCOVERIES AND WORKS. All discoveries and works made or conceived by the Executive during her employment by COMSAT pursuant to this Agreement, jointly or with others, that relate to COMSAT's activities ("Discoveries and Works") shall be owned by COMSAT. Discoveries and Works shall include, without limitation, inventions, computer programs (including documentation of such programs), technical improvements, processes, drawings and works of authorship. The Executive shall (a) promptly notify, make full disclosure to, and execute and deliver any documents requested by, COMSAT to evidence or better assure title to such Discoveries and Works in COMSAT, (b) assist COMSAT in obtaining or maintaining for itself at its own expense United States and foreign patents, copyrights, trade secret protection or other protection of any and all such Discoveries and Works, and (c) promptly execute, whether during her employment by COMSAT or thereafter, all applications or other endorsements necessary or appropriate to maintain patents and other rights for COMSAT and to protect their title thereto. Any Discoveries and Works which, within six months after the termination of the Executive's employment by COMSAT, are made, disclosed, reduced to a tangible or written form or description, or are reduced to practice by the Executive and which pertain to work performed by the Executive while with COMSAT shall, as between the Executive and COMSAT, be presumed to have been made during the Executive's employment b COMSAT. 5. TERMINATION. This Agreement shall remain in effect during the Employment Period, and this Agreement and Executive's employment with COMSAT may be terminated only as follows: (a) By the Executive at any time upon forty-five (45) days advance written notice to COMSAT for "Good Reason" (as defined below). In such event or if the Executive's employment is terminated by COMSAT without "cause" (as defined below), the Executive shall be entitled to receive the following benefits until the earlier of (i) three (3) years from the effective date of such termination, or (ii) the later of (A) July 19, 2003 or (B) one year from such effective date: (i) her then current Base Salary; (ii) an Annual Bonus equal to seventy percent (70%) of her then current Base Salary; and (iii) all other benefits provided pursuant to Sections 2(c), (d), (e), (f) and (g) of this Agreement, which shall be deemed to vest fully and immediately if subject to vesting. The Executive shall have no obligation to seek other employment in the event of her termination pursuant to this paragraph (a), and any such employment shall not mitigate COMSAT's obligations hereunder. "Good Reason" shall mean any of the following: (I) any substantial reduction (except in connection with the termination of her employment voluntarily by the Executive or by COMSAT for "cause" as defined below) by COMSAT, without the Executive's express written consent, of her -6- responsibilities as President and Chief Executive Officer of COMSAT; (II) any change in the reporting structure set forth in Section 1(b) above; (III) any reduction in Executive's title; (IV) any relocation of the Executive's offices outside the Washington, D.C. metropolitan area by COMSAT without the Executive's express written consent prior to the third anniversary of the Effective Date; (V) any material default of the provisions of Section 2 of this Agreement which continues for twenty (20) business days following COMSAT's receipt of written notice from the Executive specifying the manner in which COMSAT is in default of such provisions; (VI) the Executive is not reelected to or is removed from the Board; or (VII) any officer superior to the Executive is appointed by COMSAT. (b) By COMSAT at any time upon ten (10) days written notice to the Executive, and after an opportunity to discuss such decision with the Board, for "cause." For purposes of this Agreement, COMSAT shall have "cause" to terminate the Executive's employment hereunder upon (i) the continued and deliberate failure of the Executive to perform her material duties, in a manner substantially consistent with the manner reasonably prescribed by the Board and in accordance with the terms of this Agreement (other than any such failure resulting from her incapacity due to physical or mental illness), which failure continues for twenty (20) business days following the Executive's receipt of written notice from the Board specifying the manner in which the Executive is in default of her duties, (ii) the engaging by the Executive in intentional serious misconduct that is materially and demonstrably injurious to COMSAT or its reputation, which misconduct, if it is reasonably capable of being cured, is not cured by the Executive within twenty (20) business days following the Executive's receipt of written notice from the Board specifying the serious misconduct engaged in by the Executive, (iii) the conviction of the Executive of commission of a felony involving a crime of moral turpitude, whether or not such felony was committed in connection with COMSAT's business, or (iv) any material breach by the Executive of Section 8 hereof, which breach, if it is reasonably capable of being cured, is not cured by the Executive within twenty (20) business days following the Executive's receipt of written notice from the Board specifying the breach of Section 8 by the Executive. If COMSAT shall terminate the Executive's employment for "cause," COMSAT, in full satisfaction of all of COMSAT's obligations under this Agreement and in respect of the termination of the Executive's employment with COMSAT, shall pay the Executive her Base Salary and all other compensation, benefits and reimbursement through the date of termination of her employment. -7- (c) If, prior to the expiration or termination of the Employment Period, the Executive shall have been unable to perform substantially her duties by reason of disability or impairment of health for at least six consecutive calendar months, COMSAT shall have the right to terminate this Agreement by giving sixty (60) days written notice to the Executive to that effect, but only if at the time such notice is given such disability or impairment is still continuing. Following the expiration of the notice period, the Employment Period shall terminate with the payment of the Executive's Base Salary for the month in which notice is given and a prorated Annual Bonus through such month. In the event of a dispute as to whether the Executive is disabled within the meaning of this paragraph (a), or the duration of any disability, either party may request a medical examination of the Executive by a doctor appointed by the Chief of Staff of a hospital selected by mutual agreement of the parties, or as the parties may otherwise agree, and the written medical opinion of such doctor shall be conclusive and binding upon the parties as to whether the Executive has become disabled and the date when such disability arose. The cost of any such medical examinations shall be borne by COMSAT. In no event shall this Agreement terminate before COMSAT's long-term disability benefits under applicable plans become payable to the Executive. (d) If, prior to the expiration or termination of the Employment Period, the Executive shall die, COMSAT shall pay to the Executive's estate her Base Salary and a prorated Annual Bonus through the end of the month in which the Executive's death occurred, at which time the Employment Period shall terminate without further notice. (e) If either the Executive or COMSAT elects not to renew the Executive's employment with COMSAT at the end of the Employment Period, the Executive shall be entitled to receive payments under the SERP beginning on August 1, 2003, the first day of the month after the end of such period, calculated in accordance with the provisions of the plan based on the Executive's retirement on that date, PROVIDED that the Board reserves the discretion to waive the applicable early retirement reduction under the plan in such event. If the Executive's employment with COMSAT under this Agreement is terminated either by the Executive for Good Reason or by COMSAT without "cause," the Executive shall be entitled to receive payments under the SERP beginning on June 1, 2003, the first day of the month after the Executive's 55th birthday, calculated in accordance with the provisions of the plan as if the Executive retired on that date, PROVIDED that the Board reserves the discretion to waive the applicable early retirement reduction under the plan in such event. 6. CHANGE OF CONTROL. (a) In the event that the Board in its sole discretion determines that repeal of the ownership restrictions on COMSAT capital stock in the -8- Communications Satellite Act of 1962 is reasonably imminent, the parties shall negotiate in good faith to adopt a "change of control" provision applicable to this Agreement which shall set forth (i) the events that shall constitute a "change of control" for this purpose, (ii) the consequences under this Agreement if such a "change of control" occurs and (iii) such other terms and conditions as the parties shall mutually agree to. (b) Any "change of control" provisions adopted by COMSAT applicable to any COMSAT benefits plans which provide for the accelerated vesting and/or payment of any benefits for its senior executives shall apply to the Executive to the same extent as other COMSAT senior executives on a most favored nations basis with respect to the benefits affected by such COMSAT provisions. (c) If a change of control (as defined for purposes of COMSAT's benefit plans) occurs during the Employment Period, the change of control shall not adversely affect any of the Executive's rights under this Agreement, and this Agreement shall continue in effect according to its terms. In the event of a change of control, the Executive shall be entitled to vesting and payment of benefits according to the terms of this Agreement or COMSAT's applicable plans, whichever is more favorable. 7. CERTAIN ADDITIONAL PAYMENTS. --------------------------- (a) Notwithstanding anything in this Agreement to the contrary, in the event that it shall be determined that any payment or benefit to the Executive, whether pursuant to the terms of this Agreement or otherwise (a "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the Executive shall be paid an additional amount (a "Gross-Up Payment") such that the net amount retained by the Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment taxes and excise tax, including any interest and penalties with respect thereto, imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the date the Payment is made, net of the reduction in federal income taxes that the Executive may obtain from the deduction of such state and local income taxes. (b) All determinations to be made under this Section 7 shall be made by COMSAT's independent public accountant immediately prior to the date the Payment is made (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations and workpapers both to -9- COMSAT and the Executive within 10 days of such date. Any such determination by the Accounting Firm shall be binding upon COMSAT and the Executive. Within five days after receipt of the Accounting Fir s determination, COMSAT shall pay to the Executive the Gross-Up Payment determined by the Accounting Firm. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of a Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments shall be made under this Section such that the net amount which is payable to the Executive after taking into account the provisions of Section 4999 of the Code and any interest and penalties shall reflect the intent of the parties as expressed in paragraph (a) above, in the manner determined by the Accounting Firm. The Executive shall notify COMSAT in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by COMSAT of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise COMSAT of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to COMSAT (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If COMSAT notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give COMSAT any information reasonably requested by COMSAT relating to such claim; (ii) take such action in connection with contesting such claim as COMSAT shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by COMSAT; (iii) cooperate with COMSAT in good faith in order effectively to contest such claim; and (iv) permit COMSAT to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that COMSAT shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any excise tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7, COMSAT shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as COMSAT shall -10- determine. COMSAT's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in paragraphs (b) and (c) above shall be borne solely by COMSAT. COMSAT agrees to indemnify and hold harmless the Accounting Firm from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to paragraphs (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 8. NON-COMPETITION. (a) As an inducement for COMSAT to enter into this Agreement, the Executive agrees that for a period commencing as of the Effective Date and running through the earlier of (i) the end of the Employment Period if the Executive remains employed by COMSAT for the entire Employment Period or (ii) one year following termination of the Executive's employment by COMSAT for "cause" as defined in Section 5(b) hereof, or by the Executive for any reason (other than Good Reason, in which case the provisions of this paragraph (a) shall not apply) (the "Non-Competition Period"), the Executive shall not, without the prior written consent of the Board, engage or participate, directly or indirectly, as principal, agent, employee, employer, consultant, stockholder, partner or in any other individual capacity whatsoever, in the conduct or management of, or own any stock or any other equity investment in or debt of, any business which is competitive with any business conducted by COMSAT. For the purpose of this Agreement, a business shall be considered to be competitive with any business of COMSAT only if such business is engaged in providing services or products (i) comparable to or competitive with (A) any service or product currently provided by COMSAT during the Employment Period; (B) any service or product which evolves from or results from enhancements in the ordinary course during the Non-Competition Period to the services or products provided by COMSAT as of the date hereof or during the Employment Period; or (C) any future service or product of COMSAT as to which the Executive materially and substantially participated in the development or enhancement, and (ii) to customers, distributors or clients of the type served by COMSAT during the Non-Competition Period. (b) NON-SOLICITATION OF EMPLOYEES. During the Non-Competition Period, the Executive will not (for her own benefit or for the benefit of any person or entity other than COMSAT) solicit, or assist any person or entity other than COMSAT to solicit, any officer, director, executive or -11- employee (other than an administrative or clerical employee) of COMSAT to leave his or her employment. (c) REASONABLENESS; INTERPRETATION. The Executive acknowledges and agrees, solely for purposes of determining the enforceability of this Section 8 (and not for purposes of determining the amount of money damages or for any other reason), that (i) the markets served by COMSAT are national and international and are not dependent on the geographic location of executive personnel or the businesses by which they are employed; (ii) the length of the Non-Competition Period is linked to th term of the Employment Period and the severance benefit provided for in Section 5(a); and (iii) the above covenants are manifestly reasonable on their face, and the parties expressly agree that such restrictions have been designed to be reasonable and no greater than is required for the protection of COMSAT. In the event that the covenants in this Section 8 shall be determined by any court of competent jurisdiction in any action to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, they shall be interpreted to extend only over the maximum period of time for which they may be enforceable, and/or over the maximum geographical area as to which they may be enforceable and/or to the maximum extent in all other respects as to which they may be enforceable, all as determined by such court in such action. (d) INVESTMENT. Nothing in this Agreement shall be deemed to prohibit the Executive from owning equity or debt investments in any corporation, partnership or other entity which is competitive with COMSAT, PROVIDED that such investments (i) are passive investments and constitute five percent (5%) or less of the outstanding equity securities of such an entity the equity securities of which are traded on a national securities exchange or other public market, or (ii) are approved by the Board. 9. INDEMNIFICATION; LIABILITY INSURANCE. The Executive shall be entitled to indemnification and coverage under COMSAT's liability insurance policy for directors and officers to the same extent as other directors and officers of COMSAT. In addition, the Executive shall be indemnified to the maximum extent permitted by law of the jurisdiction in which COMSAT is incorporated, as it may be amended from time to time. 10. ENFORCEMENT. ----------- (a) The Executive acknowledges that a breach of the covenants or provisions contained in Sections 3, 4 and 8 of this Agreement will cause irreparable damage to COMSAT, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the Executive agrees that if the Executive breaches or threatens to breach any of the covenants or provisions -12- contained in Sections 3, 4 and 8 of this Agreement, in addition to any other remedy which may be available at law or in equity, COMSAT shall be entitled to seek specific performance and injunctive relief in a court of competent jurisdiction after notice and a hearing. (b) The parties expressly agree that any litigation directly or indirectly arising out of or relating to this Agreement, including an action brought by COMSAT pursuant to paragraph (a) of this Section 10, shall be brought in a court of competent jurisdiction in the State of Maryland. 11. SEVERABILITY. Should any provision of this Agreement be determined to be unenforceable or prohibited by any applicable law, such provision shall be ineffective to the extent, and only to the extent, of such unenforceability or prohibition without invalidating the balance of such provision or any other provision of this Agreement, and any such unenforceability or prohibition in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12. ASSIGNMENT. The Executive's rights and obligations under this Agreement shall not be assignable by the Executive. COMSAT's rights and obligations under this Agreement shall not be assignable by COMSAT except as incident to the transfer, by merger or otherwise, of all or substantially all of the business of COMSAT. In the event of any such assignment by COMSAT, all rights of COMSAT hereunder shall inure to the benefit of the assignee, PROVIDED that all references herein to COMSAT shall be deemed to refer with equal force and effect to any corporate or other successor of COMSAT. 13. NOTICES. All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method, provided that in such case it shall also be sent by certified or registered mail, return receipt requested; the day after it is sent, if sent for next day delivery to a domestic address by recognize overnight delivery service (E.G., Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. Unless otherwise changed by notice, in each case notice shall be sent to: If to Executive, addressed to: Betty C. Alewine 1742 Creek Crossing Road Vienna, Virginia 22182 -13- With a copy (not constituting notice) to: Williams & Connolly 725 Twelfth Street, N.W. Washington, DC 20005 Attention: Robert B. Barnett, Esq. Telecopier No.: (202) 434-5029 If to COMSAT, addressed to: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: Vice President, Human Resources and Organization Development Telecopier No.: (301) 214-7134 With a copy (not constituting notice) to: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: Robert N. Davis, Jr. Telecopier No.: (301) 214-7128 14. MISCELLANEOUS. This Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. The validity, interpretation, performance and enforcement of the Agreement shall be governed by the laws of the State of Maryland without giving effect to conflicts of laws principles thereof. The headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. The waiver by any party of a breach of any term or condition of this Agreement by the other party shall not operate as nor be construed as a waiver of any subsequent breach thereof or a waiver of a breach of any other term or condition o this Agreement. This Agreement may be signed in two (2) or more counterparts, each of which shall constitute an original but all of which together shall form only a single instrument. -14- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of July 18, 1997. /s/ Betty C. Alewine ------------------------------- Betty C. Alewine, Executive COMSAT Corporation By: /s/ Edwin I. Colodny -------------------------- Edwin I. Colodny, Chairman -15- EX-10 3 EXHIBIT 10.42 AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- This AMENDED AND RESTATED AGREEMENT is made as of April 18, 1997, and amended as of July 18, 1997, by and between COMSAT Corporation ("COMSAT"), a District of Columbia corporation, and Allen Flower, a resident of the Commonwealth of Virginia (the "Executive"). WHEREAS, the Executive serves as Vice President and Chief Financial Officer of COMSAT; WHEREAS, the Board of Directors of COMSAT (the "Board") believes it to be in the best interests of COMSAT to enter into this Agreement to ensure the Executive's continuing services to COMSAT; and WHEREAS, COMSAT desires to continue to employ the Executive as Vice President and Chief Financial Officer of COMSAT, and the Executive desires to continue such employment, on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, and intending to be legally bound hereby, COMSAT and the Executive agree as follows: 1. EMPLOYMENT; DUTIES. ------------------ (a) EMPLOYMENT AND EMPLOYMENT PERIOD. COMSAT shall employ the Executive to serve as Vice President and Chief Financial Officer of COMSAT or any successor entity for a period (the "Employment Period") commencing on April 18, 1997 (the "Effective Date") and continuing thereafter until April 17, 2000 unless terminated in accordance with the provisions of this Agreement. Each 12-month period ending on the anniversary date of the Effective Date is referred to herein as a "year of the Employment Period." (b) OFFICES, DUTIES AND RESPONSIBILITIES. The Executive shall report to the Chief Executive Officer of COMSAT. The Executive's offices initially shall be located at COMSAT's present headquarters in Bethesda, Maryland. The Executive shall have all duties and authority customarily accorded a Vice President and Chief Financial Officer. (c) DEVOTION TO INTERESTS OF COMSAT. During the Employment Period, the Executive shall devote his best efforts and full business time and attention to the performance of his duties hereunder. Notwithstanding the foregoing, the Executive shall be entitled to undertake outside activities (E.G. charitable, educational, personal interests, and board of directors memberships) that do not compete with COMSAT and do not unreasonably or materially interfere with the performance of his duties hereunder as reasonably determined by the Chief Executive Officer in consultation with the Executive. 2. COMPENSATION AND FRINGE BENEFITS. (a) BASE COMPENSATION. COMSAT shall pay the Executive a base salary ("Base Salary") during the Employment Period, with payments made in installments in accordance with COMSAT's regular practice for compensating executive personnel, provided that in no event shall such payments be made less frequently than twice per month. The initial annual Base Salary shall be $210,000. Thereafter, the Base Salary for the Executive shall be reviewed for increases annually during the Employment period, consistent with COMSAT's normal review process. Any Base Salary increases shall be approved by the Board in its sole discretion. (b) BONUS COMPENSATION. The Executive will be eligible to receive bonuses ("Annual Bonus") during the Employment Period under the Annual Incentive Plan (the "AIP") in accordance with the following parameters: (i) the target bonus for each year during the Employment Period shall be 50% of Base Salary for achieving 100% of the target level for the performance measures and (ii) the performance measures, the relative weight to be accorded each performance measure and the amount of bonus payable in relation to the target bonus for achieving more or less than 100% of the target level for the performance measures shall be determined for each year during the Employment Period by the Committee on Compensation and Management Development of the Board (the "Compensation Committee"). (c) FRINGE BENEFITS. The Executive shall be entitled to the fringe benefits in effect for COMSAT senior executives from time to time, including (i) participation in the COMSAT Directors and Executives Deferred Compensation Plan, the COMSAT Split Dollar Insurance Plan, the COMSAT Educational Grant Program, the COMSAT Retirement Plan, the COMSAT Savings and Profit-Sharing Plan, the COMSAT 1995 Key Employee Stock Plan, the COMSAT Employee Stock Purchase Plan, the COMSAT health and disability insurance programs and the COMSAT financial planning program and (ii) reimbursement of reasonable expenses incurred in connection with travel and entertainment related to COMSAT's business and affairs. The Executive also shall be entitled to such other or additional fringe benefits as are made available to COMSAT senior executives during the Employment Period. COMSAT reserves the right to modify or terminate at any time the fringe benefits provided to the senior management group. (d) SERP. The Executive shall continue to participate in the COMSAT Insurance and Retirement Plan for Executives (the "SERP"). Any future amendments or changes to the SERP which provide for a reduction, deferral or elimination of benefits payable to participants in the SERP shall expressly not apply to the Executive unless the Executive consents otherwise. (e) LEGAL EXPENSES. The Executive shall be entitled to reimbursement of the Executive's reasonable legal fees and costs incurred in connection with the negotiation and execution of this Agreement, subject to a maximum reimbursement of $5,000. -2- 3. TRADE SECRETS; RETURN OF DOCUMENTS AND PROPERTY. ----------------------------------------------- (a) The Executive acknowledges that during the course of his employment he will receive secret, confidential and proprietary information ("Trade Secrets") of COMSAT and of other companies with which COMSAT does business on a confidential basis and that the Executive will create and develop Trade Secrets for the benefit of COMSAT. Trade Secrets shall include, without limitation, matters of a technical nature, such as scientific and engineering secrets, "know-how," formulae, secret processes or machines, inventions and computer programs (including documentation of such programs), and matters of a business nature, such as customer data and proprietary information about costs, profits, markets, sales and customer databases, and other information of a similar nature to the extent not available to the public, and plans for future development. All Trade Secrets disclosed to or created by the Executive shall be deemed to be the exclusive property of COMSAT. The Executive acknowledges that Trade Secrets have economic value to COMSAT due to the fact that Trade Secrets are not generally known to the public or the trade and that the unauthorized use or disclosure of Trade Secrets is likely to be detrimental to the interests of COMSAT and its subsidiaries. The Executive therefore agrees to hold in strict confidence and not to disclose to any third party any Trade Secret acquired or created or developed by the Executive during the term of this Agreement except (i) when the Executive uses o discloses any Trade Secret in the proper course of the Executive's rendition of services to COMSAT hereunder, (ii) when such Trade Secret becomes public knowledge other than through a breach of this Agreement, or (iii) when the Executive is required to disclose any Trade Secret pursuant to any valid legal process. The Executive shall notify COMSAT immediately of any such legal process in order to enable COMSAT to contest such legal process's validity. After termination of this Agreement, the Executive shall not use or otherwise disclose Trade Secrets unless such information (x) becomes public knowledge other than through a breach of this Agreement, (y) is disclosed to the Executive by a third party who is entitled to receive and disclose such Trade Secret, or (z) is required to be disclosed pursuant to any valid legal process, in which case the Executive shall notify COMSAT immediately of any such legal process in order to enable COMSAT to contest such legal process's validity. (b) Upon the effective date of notice of the Executive's or COMSAT's election to terminate this Agreement, or at any time upon the request of COMSAT, the Executive (or his heirs or personal representatives) shall deliver to COMSAT (i) all documents and materials containing or otherwise relating to Trade Secrets or other information relating to COMSAT's business and affairs, and (ii) all documents, materials and other property belonging to COMSAT, which in either case are in the possession or under the control of the Executive (or his heirs or personal representatives). The Executive shall be entitled to keep his personal records (including Rolodex) relating to COMSAT's business and affairs except to the extent those contain documents or materials described in clause (i) of the preceding sentence. 4. DISCOVERIES AND WORKS. All discoveries and works made or conceived by the Executive during his employment by COMSAT pursuant to this Agreement, jointly or with others, that relate to COMSAT's activities ("Discoveries and Works") shall be owned by COMSAT. Discoveries and Works -3- shall include, without limitation, inventions, computer programs (including documentation of such programs), technical improvements, processes, drawings and works of authorship. The Executive shall (a) promptly notify, make full disclosure to, and execute and deliver any documents requested by, COMSAT to evidence or better assure title to such Discoveries and Works in COMSAT, (b) assist COMSAT in obtaining or maintain for itself at its own expense United States and foreign patents, copyrights, trade secret protection or other protection of any and all such Discoveries and Works, and promptly execute, whether during his employment by COMSAT or thereafter, all applications or other endorsements necessary or appropriate to maintain patents and other rights for COMSAT and to protect its title thereto. Any Discoveries and Works which, within six months after the termination of the Executive's employment by COMSAT, are made disclosed, reduced to a tangible or written form or description, or are reduced to practice by the Executive and which pertain to work performed by the Executive while with COMSAT shall, as between the Executive and COMSAT, be presumed to have been made during the Executive's employment by COMSAT. 5. TERMINATION. This Agreement shall remain in effect during the Employment Period, and this Agreement and Executive's employment with COMSAT may be terminated only as follows: (a) The Executive's employment may be terminated by the Executive at any time upon 45 days advance written notice to COMSAT for "Good Reason" (as defined below). In such event, or if the Executive's employment is terminated by COMSAT without "Cause" (as defined below), the Executive shall be entitled to receive the following benefits until the later of (x) one year after the date of the Executive's termination of employment or (y) April 17, 2000: (i) The Executive's Base Salary in effect at the date of termination; (ii) An Annual Bonus equal to 50% of his then current Base Salary; and (iii) All benefits provided pursuant to Sections 2(c) and (d) of this Agreement, which shall be deemed to vest fully and immediately if subject to vesting; provided, however, that in the event COMSAT is precluded from providing coverage under any such benefit plan by applicable law or regulation, COMSAT may provide the Executive with a payment equal to the cost of such coverage without regard to tax effect. The foregoing benefits shall be calculated in accordance with the provisions of the applicable plans as if the Executive had retired on his date of termination, provided that the Board reserves the discretion to waive the applicable early retirement reduction under the SERP in such event. (b) "Good Reason" shall mean the occurrence of any of the following (other than for "Cause"), without the Executive's express written consent: (i) the assignment to the Executive of duties inconsistent with the Executive's status as an executive officer of COMSAT or a substantial reduction by COMSAT of the Executive's responsibilities as an executive officer of COMSAT; (ii) any relocation of the Executive's offices outside the Washington, D.C. metropolitan area by COMSAT prior to the third -4- anniversary of the Effective Date; or (iii) any material default of the provisions of Section 2 of this Agreement which continues for 20 business days following COMSAT's receipt of written notice from the Executive specifying the manner in which COMSAT is in default of such provisions. In order for the Executive to terminate employment for "Good Reason," the Executive must give COMSAT written notice of his termination of employment for "Good Reason," stating the basis for the termination, within 90 days after the Executive learns of the occurrence of the event constituting "Good Reason." (c) The Executive's employment may be terminated by COMSAT for Cause at any time upon ten days written notice to the Executive, and after giving the Executive an opportunity to discuss such decision with the Board. For purposes of this Agreement, COMSAT shall have "Cause" to terminate the Executive's employment hereunder upon (i) the continued and deliberate failure of the Executive to perform his material duties, in a manner substantially consistent with the manner reasonably prescribed by the Board and in accordance with the terms of this Agreement (other than any such failure resulting from his incapacity due to physical or mental illness), which failure continues for 20 business days following the Executive's receipt of written notice from the Board specifying the manner in which the Executive is in default of his duties, (ii) the engaging by the Executive in intentional serious misconduct that is materially and demonstrably injurious to COMSAT or its reputation, which misconduct, if it is reasonably capable of being cured, is not cured by the Executive within 20 business days following the Executive's receipt of written notice from the Board specifying the serious misconduct engaged in by the Executive, (iii) the conviction of the Executive of commission of a felony, whether or not such felony was committed in connection with COMSAT's business, or (iv) any material breach by the Executive of Section 10 hereof, which breach, if it is reasonably capable of being cured, i not cured by the Executive within 20 business days following the Executive's receipt of written notice from the Board specifying the breach of Section 10 by the Executive. If COMSAT shall terminate the Executive's employment for "Cause," COMSAT, in full satisfaction of all of COMSAT's obligations under this Agreement and in respect of the termination of the Executive's employment with COMSAT, shall pay the Executive his Base Salary and any other compensation, benefits and reimbursements due him under COMSAT plans through the date of termination of his employment. (d) If, prior to the expiration or termination of the Employment Period, the Executive shall have been unable to perform substantially his duties by reason of disability or impairment of health for at least six consecutive calendar months, COMSAT shall have the right to terminate this Agreement by giving 60 days written notice to the Executive to that effect, but only if at the time such notice is given such disability or impairment is still continuing. Following the expiration of the notice period, the Employment Period shall terminate with the payment of the Executive's Base Salary for the month in which notice is given and a prorated Annual Bonus through such month. In the event of a dispute as to whether the Executive is disabled within the meaning of this Section 5(d), or the duration of any disability, either party may request a medical examination of the Executive by a doctor appointed by the Chief of Staff of a hospital selected by mutual agreement of the parties, or as the parties may otherwise agree, and -5- the written medical opinion of such doctor shall be conclusive and binding upon the parties as to whether the Executive has become disabled and the date when such disability arose. The cost of any such medical examinations shall be borne by COMSAT. In no event shall this Agreement terminate before COMSAT's long-term disability benefits under applicable plans become payable to the Executive. (e) If, prior to the expiration or termination of the Employment Period, the Executive shall die, COMSAT shall pay to the Executive's estate his Base Salary and a prorated Annual Bonus through the end of the month in which the Executive's death occurred, at which time the Employment Period shall terminate without further notice. (f) If COMSAT elects not to renew the Executive's employment with COMSAT at the end of the Employment Period and the Executive terminates employment at the end of the Employment Period, the Executive shall be entitled to receive the payments described in Section 5(a)(i), (ii) and (iii) for the period beginning on the date of the Executive's termination of employment and ending one year after the Executive's termination of employment. (g) If either the Executive or COMSAT elects not to renew the Executive's employment with COMSAT at the end of the Employment Period, the Executive shall be entitled to receive payments under the SERP beginning on May 1, 2000 (the first day of the month after the end of such period), calculated in accordance with the provisions of the SERP based on the Executive's retirement on that date, provided that the Board reserves the discretion to waive the applicable early retirement reduction under the SERP in such event. If the Executive's employment with COMSAT under this Agreement is terminated either by the Executive for Good Reason or by COMSAT without Cause before the Executive attains age 55, the Executive shall be entitled to receive payments under the SERP beginning on December 1, 1998 (the first day of the month after the Executive's 55th birthday), calculated in accordance with the provisions of the SERP as if the Executive retired on that date, provided that the Board reserves the discretion to waive the applicable early retirement reduction under the SERP in such event. If the Executive dies before payments begin under the SERP, the Executive's surviving spouse, if any, shall receive under the SERP a $200,000 lump sum death benefit, plus annual benefit payments for a ten year period equal to 50% of the Executive's accrued benefit under the SERP, according to the terms of the SERP. The provisions of this Section 5(g) shall be administered consistent with the terms of the SERP. (h) If the Executive voluntarily terminates employment with COMSAT, such termination shall not be considered a breach of this Agreement by the Executive and shall not adversely affect the Executive's right to receive such benefits as may be payable to the Executive on account of his termination of employment under applicable COMSAT plans. The Executive shall remain obligated to comply with the provisions of Sections 3, 4, 10 and 12 of this Agreement. -6- 6. CHANGE OF CONTROL. If a change of control (as defined for purposes purposes of COMSAT's benefit plans) occurs during the Employment Term, the change of control shall not adversely affect any of the Executive's rights under this Agreement, and this Agreement shall continue in effect according to its terms. In the event of a change of control, the Executive shall be entitled to vesting and payment of benefits according to the terms of this Agreement or COMSAT's applicable plans, whichever is more favorable. 7. CERTAIN ADDITIONAL PAYMENTS. (a) Notwithstanding anything in this Agreement to the contrary, in the event that it shall be determined that any payment or benefit to the Executive, whether pursuant to the terms of this Agreement or otherwise (a "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the Executive shall be paid an additional amount (a "Gross-Up Payment") such that the net amount retained by the Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment taxes and excise tax, including any interest and penalties with respect thereto, imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the date the Payment is made, net of the reduction in federal income taxes that the Executive may obtain from the deduction of such state and local income taxes. (b) All determinations to be made under this Section 7 shall be made by COMSAT's independent public accountant immediately prior to the date the Payment is made (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations and workpapers both to COMSAT and the Executive within 10 days of such date. Any such determination by the Accounting Firm shall be binding upon COMSAT and the Executive. Within five days after receipt of the Accounting Firm's determination, COMSAT shall pay to the Executive the Gross-Up Payment determined by the Accounting Firm. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of a Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments shall be made under this Section such that the net amount which is payable to the Executive after taking into account the provisions of Section 4999 of the Code and any interest and penalties shall reflect the intent of the partie as expressed in paragraph (a) above, in the manner determined by the Accounting Firm. The Executive shall notify COMSAT in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by COMSAT of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise COMSAT of -7- the nature of such claim and the date on which such claim is requested to b paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to COMSAT (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If COMSAT notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give COMSAT any information reasonably requested by COMSAT relating to such claim; (ii) take such action i connection with contesting such claim as COMSAT shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by COMSAT; (iii) cooperate with COMSAT in good faith in order effectively to contest such claim; and (iv) permit COMSAT to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that COMSAT shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any excise tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7, COMSAT shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as COMSAT shall determine. COMSAT's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in paragraphs (b) and (c) above shall be borne solely by COMSAT. COMSAT agrees to indemnify and hold harmless the Accounting Firm from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to paragraphs (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 8. SURVIVORSHIP. The respective rights and obligations of the parties hereunder shall survive any termination of the Executive's employment and the Employment Term to the extent necessary to the intended preservation of such rights and obligations. 9. MITIGATION AND NO OFFSETS. The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. COMSAT's obligations to make payments under this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, -8- recoupment, defense or other right which COMSAT may have against the Executive or others. 10. NON-COMPETITION. (a) NON-COMPETITION AGREEMENT. As an inducement for COMSAT to enter into this Agreement, the Executive agrees that, during the Non-Competition Period (as defined below), the Executive shall not, without the prior written consent of the Board, engage or participate, directly or indirectly, as principal, agent, employee, employer, consultant, stockholder, partner or in any other individual capacity whatsoever, in the conduct or management of, or own any stock or any other equity investment in or debt of, any business which is competitive with any business conducted by COMSAT. The Non-Competition Period is the period commencing as of the Effective Date and running through the date that is one year following the date on which the Executive's employment with COMSAT terminates for any reason. (b) COMPETITIVE BUSINESS. For the purpose of this Agreement, a business shall be considered to be competitive with any business of COMSAT only if such business is engaged in providing services or products (i) comparable to or competitive with (A) any service or product currently provided by COMSAT during the Employment Period; (B) any service or product which evolves from or results from enhancements in the ordinary course during the Non-Competition Period to the services or products provided by COMSAT as of the date hereof or during the Employment Period; or (C) any future service or product of COMSAT as to which the Executive materially and substantially participated in the development or enhancement, and (ii) to customers, distributors or clients of the type served by COMSAT during the Non-Competition Period. (c) NON-SOLICITATION OF EMPLOYEES. During the Non-Competition Period, the Executive will not (for his own benefit or for the benefit of any person or entity other than COMSAT) solicit, or assist any person or entity other than COMSAT to solicit, any officer, director, executive or employee (other than an administrative or clerical employee) of COMSAT to leave his or her employment. (d) REASONABLENESS; INTERPRETATION. The Executive acknowledges and agrees, solely for purposes of determining the enforceability of this Section 10 (and not for purposes of determining the amount of money damages or for any other reason), that (i) the markets served by COMSAT are national and international and are not dependent on the geographic location of executive personnel or the businesses by which they are employed; (ii) the length of the Non-Competition Period is linked to the term of the Employment Period; and (iii) the above covenants are manifestly reasonable on their face, and the parties expressly agree that such restrictions have been designed to be reasonable and no greater than is required for the protection of COMSAT. In the event that the covenants in this Section 10 shall be determined by any court of competent jurisdiction in any action to -9- be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, they shall be interpreted to extend only over the maximum period of time for which they may be enforceable, and/or over the maximum geographical area as to which they may be enforceable and/or to the maximum extent in all other respects as to which they may be enforceable, all as determined by such court in such action. (e) INVESTMENT. Nothing in this Agreement shall be deemed to prohibit the Executive from owning equity or debt investments in any corporation, partnership or other entity which is competitive with COMSAT, provided that such investments (i) are passive investments and constitute five percent or less of the outstanding equity securities of such an entity the equity securities of which are traded on a national securities exchange or other public market, or (ii) are approved by the Board. 11. INDEMNIFICATION; LIABILITY INSURANCE. The Executive shall be entitled to indemnification and coverage under COMSAT's liability insurance policy for officers to the same extent as other officers of COMSAT. In addition, the Executive shall be indemnified to the maximum extent permitted by law of the jurisdiction in which COMSAT is incorporated, as it may be amended from time to time. 12. ENFORCEMENT. ----------- (a) The Executive acknowledges that a breach of the covenants or provisions contained in Sections 3, 4 and 10 of this Agreement will cause irreparable damage to COMSAT, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the Executive agrees that if the Executive breaches or threatens to breach any of the covenants or provisions contained in Sections 3, 4 and 10 of this Agreement, in addition to any other remedy which may be available at law or in equity, COMSAT shall be entitled to seek specific performance and injunctive relief in a court of competent jurisdiction after notice and a hearing. (b) The parties expressly agree that any litigation directly or indirectly arising out of or relating to this Agreement, including an action brought by COMSAT pursuant to this Section 12, shall be brought in a court of competent jurisdiction in the State of Maryland. 13. EXPENSES OF ENFORCING THE AGREEMENT. If the Executive brings an action to enforce any of the obligations of COMSAT under this Agreement and prevails on any material issue, COMSAT shall pay the Executive on demand the amount necessary to reimburse the Executive in full for all reasonable expenses (including reasonable attorneys' fees and legal expenses) incurred by the Executive in enforcing the obligations of COMSAT under this Agreement. 14. SEVERABILITY. Should any provision of this Agreement be determined to be unenforceable or prohibited by any applicable law, such provision shall be ineffective to the extent, and only to the extent, of such unenforceability or prohibition without invalidating the balance of -10- such provision or any other provision of this Agreement, and any such unenforceability or prohibition in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. ASSIGNMENT. The Executive's rights and obligations under this Agreement shall not be assignable by the Executive. COMSAT's rights and obligations under this Agreement shall not be assignable by COMSAT except as incident to the transfer, by merger or otherwise, of all or substantially all of the business of COMSAT. In the event of any such assignment by COMSAT, all rights of COMSAT hereunder shall inure to the benefit of the assignee, provided that all references herein to COMSAT shall be deemed to refer with equal force and effect to any corporate or other successor of COMSAT. 16. NOTICES. All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method, provided that in such case it shall also be sent by certified or registered mail, return receipt requested; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (E.G., Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. Unless otherwise changed by notice, in each case notice shall be sent to: If to the Executive, addressed to: Allen E. Flower 3601 N. Lincoln Street Arlington, Virginia 22207 With a copy (not constituting notice) to: Joseph E. Bachelder, Esquire 780 Third Avenue New York, N.Y. 10017 If to COMSAT, addressed to: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: Betty C. Alewine Telecopier No.: (301) 214-7134 -11- With a copy (not constituting notice) to: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: Robert N. Davis, Jr. Telecopier No.: (301) 214-7128 17. MISCELLANEOUS. This Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. The validity, interpretation, performance and enforcement of the Agreement shall be governed by the laws of the State of Maryland without giving effect to conflicts of laws principles thereof. The headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. The waiver by any party of a breach of any term or condition of this Agreement by the other party shall not operate as nor be construed as a waiver of any subsequent breach thereof or a waiver of a breach of any other term or condition o this Agreement. This Agreement may be signed in two or more counterparts, each of which shall constitute an original but all of which together shall form only a single instrument. -12- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of July 18, 1997. /s/ A. E. Flower ----------------------------------------- Allen Flower, Executive COMSAT Corporation By: /s/ Betty C. Alewine ------------------------------------- Betty C. Alewine President and Chief Executive Officer -13- EX-10 4 EXHIBIT 10.43 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This AMENDED AND RESTATED AGREEMENT is made as of April 18, 1997, and amended as of July 18, 1997, by and between COMSAT Corporation ("COMSAT"), a District of Columbia corporation, and Warren Y. Zeger, a resident of the State of Maryland (the "Executive"). WHEREAS, the Executive serves as Vice President, General Counsel and Secretary of COMSAT; WHEREAS, the Board of Directors of COMSAT (the "Board") believes it to be in the best interests of COMSAT to enter into this Agreement to ensure the Executive's continuing services to COMSAT; and WHEREAS, COMSAT desires to continue to employ the Executive as Vice President, General Counsel and Secretary of COMSAT, and the Executive desires to continue such employment, on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, and intending to be legally bound hereby, COMSAT and the Executive agree as follows: 1. EMPLOYMENT; DUTIES. (a) EMPLOYMENT AND EMPLOYMENT PERIOD. COMSAT shall employ the Executive to serve as Vice President, General Counsel and Secretary of COMSAT or any successor entity for a period (the "Employment Period") commencing on April 18, 1997 (the "Effective Date") and continuing thereafter until April 17, 2002 unless terminated in accordance with the provisions of this Agreement. Each 12-month period ending on the anniversary date of the Effective Date is referred to herein as a "year of the Employment Period." (b) OFFICES, DUTIES AND RESPONSIBILITIES. The Executive shall report to the Chief Executive Officer of COMSAT. The Executive's offices initially shall be located at COMSAT's present headquarters in Bethesda, Maryland. The Executive shall have all duties and authority customarily accorded a Vice President, General Counsel and Secretary. (c) DEVOTION TO INTERESTS OF COMSAT. During the Employment Period, the Executive shall devote his best efforts and full business time and attention to the performance of his duties hereunder. Notwithstanding the foregoing, the Executive shall be entitled to undertake outside activities (E.G. charitable, educational, personal interests, and board of directors memberships) that do not compete with COMSAT and do not unreasonably or materially interfere with the performance of his duties hereunder as reasonably determined by the Chief Executive Officer in consultation with the Executive. 2. COMPENSATION AND FRINGE BENEFITS. -------------------------------- (a) BASE COMPENSATION. COMSAT shall pay the Executive a base salary ("Base Salary") during the Employment Period, with payments made in installments in accordance with COMSAT's regular practice for compensating executive personnel, provided that in no event shall such payments be made less frequently than twice per month. The initial annual Base Salary shall be $230,000. Thereafter, the Base Salary for the Executive shall be reviewed for increases annually during the Employment Period, consistent with COMSAT's normal review process. Any Base Salary increases shall be approved by the Board in its sole discretion. (b) BONUS COMPENSATION. The Executive will be eligible to receive bonuses ("Annual Bonus") during the Employment Period under the Annual Incentive Plan (the "AIP") in accordance with the following parameters: (i) the target bonus for each year during the Employment Period shall be 50% of Base Salary for achieving 100% of the target level for the performance measures and (ii) the performance measures, the relative weight to be accorded each performance measure and the amount of bonus payable in relation to the target bonus for achieving more or less than 100% of the target level for the performance measures shall be determined for each year during the Employment Period by the Committee on Compensation and Management Development of the Board (the "Compensation Committee"). (c) FRINGE BENEFITS. The Executive shall be entitled to the fringe benefits in effect for COMSAT senior executives from time to time, including (i) participation in the COMSAT Directors and Executives Deferred Compensation Plan, the COMSAT Split Dollar Insurance Plan, the COMSAT Educational Grant Program, the COMSAT Retirement Plan, the COMSAT Savings and Profit-Sharing Plan, the COMSAT 1995 Key Employee Stock Plan, the COMSAT Employee Stock Purchase Plan, the COMSAT health and disability insurance programs and the COMSAT financial planning program and (ii) reimbursement of reasonable expenses incurred in connection with travel and entertainment related to COMSAT's business and affairs. The Executive also shall be entitled to such other or additional fringe benefits as are made available to COMSAT senior executives during the Employment Period. COMSAT reserves the right to modify or terminate at any time the fringe benefits provided to the senior management group. (d) SERP. The Executive shall continue to participate in the COMSAT Insurance and Retirement Plan for Executives (the "SERP"). Any future amendments or changes to the SERP which provide for a reduction, deferral or elimination of benefits payable to participants in the SERP shall expressly not apply to the Executive unless the Executive consents otherwise. -2- (e) LEGAL EXPENSES. The Executive shall be entitled to reimbursement of the Executive's reasonable legal fees and costs incurred in connection with the negotiation and execution of this Agreement, subject to a maximum reimbursement of $5,000. 3. TRADE SECRETS; RETURN OF DOCUMENTS AND PROPERTY. ----------------------------------------------- (a) The Executive acknowledges that during the course of his employment he will receive secret, confidential and proprietary information ("Trade Secrets") of COMSAT and of other companies with which COMSAT does business on a confidential basis and that the Executive will create and develop Trade Secrets for the benefit of COMSAT. Trade Secrets shall include, without limitation, matters of a technical nature, such as scientific and engineering secrets, "know-how," formulae, secret processes or machines, inventions and computer programs (including documentation of such programs), and matters of a business nature, such as customer data and proprietary information about costs, profits, markets, sales and customer databases, and other information of a similar nature to the extent not available to the public, and plans for future development. All Trade Secrets disclosed to or created by the Executive shall be deemed to be the exclusive property of COMSAT. The Executive acknowledges that Trade Secrets have economic value to COMSAT due to the fact that Trade Secrets are not generally known to the public or the trade and that the unauthorized use or disclosure of Trade Secrets is likely to be detrimental to the interests of COMSAT and its subsidiaries. The Executive therefore agrees to hold in strict confidence and not to disclose to any third party any Trade Secret acquired or created or developed by the Executive during the term of this Agreement except (i) when the Executive uses o discloses any Trade Secret in the proper course of the Executive's rendition of services to COMSAT hereunder, (ii) when such Trade Secret becomes public knowledge other than through a breach of this Agreement, or (iii) when the Executive is required to disclose any Trade Secret pursuant to any valid legal process. The Executive shall notify COMSAT immediately of any such legal process in order to enable COMSAT to contest such legal process's validity. After termination of this Agreement, the Executive shall not use or otherwise disclose Trade Secrets unless such information (x) becomes public knowledge other than through a breach of this Agreement, (y) is disclosed to the Executive by a third party who is entitled to receive and disclose such Trade Secret, or (z) is required to be disclosed pursuant to any valid legal process, in which case the Executive shall notify COMSAT immediately of any such legal process in order to enable COMSAT to contest such legal process's validity. (b) Upon the effective date of notice of the Executive's or COMSAT's election to terminate this Agreement, or at any time upon the request of COMSAT, the Executive (or his heirs or personal representatives) shall deliver to COMSAT (i) all documents and materials containing or otherwise relating to Trade Secrets or other information relating to COMSAT's business and affairs, and (ii) all documents, materials and other property belonging to COMSAT, which in either case are in the possession or under the control of the Executive (or his heirs or personal representatives). The Executive shall be entitled to keep his personal records (including Rolodex) relating to COMSAT's business and affairs -3- except to the extent those contain documents or materials described in clause (i) of the preceding sentence. 4. DISCOVERIES AND WORKS. All discoveries and works made or conceived by the Executive during his employment by COMSAT pursuant to this Agreement, jointly or with others, that relate to COMSAT's activities ("Discoveries and Works") shall be owned by COMSAT. Discoveries and Works shall include, without limitation, inventions, computer programs (including documentation of such programs), technical improvements, processes, drawings and works of authorship. The Executive shall (a) promptly notify, make full disclosure to, and execute and deliver any documents requested by, COMSAT to evidence or better assure title to such Discoveries and Works in COMSAT, (b) assist COMSAT in obtaining or maintain for itself at its own expense United States and foreign patents, copyrights, trade secret protection or other protection of any and all such Discoveries and Works, and promptly execute, whether during his employment by COMSAT or thereafter, all applications or other endorsements necessary or appropriate to maintain patents and other rights for COMSAT and to protect its title thereto. Any Discoveries and Works which, within six months after the termination of the Executive's employment by COMSAT, are made, disclosed, reduced to a tangible or written form or description, or are reduced to practice by the Executive and which pertain to work performed by the Executive while with COMSAT shall, as between the Executive and COMSAT, be presumed to have been made during the Executive's employment by COMSAT. 5. TERMINATION. This Agreement shall remain in effect during the Employment Period, and this Agreement and Executive's employment with COMSAT may be terminated only as follows: (a) The Executive's employment may be terminated by the Executive at any time upon 45 days advance written notice to COMSAT for "Good Reason" (as defined below). In such event, or if the Executive's employment is terminated by COMSAT without "Cause" (as defined below), the Executive shall be entitled to receive the following benefits until April 17, 2002: (i) The Executive's Base Salary in effect at the date of termination; (ii) An Annual Bonus equal to 50% of his then current Base Salary; and (iii) All benefits provided pursuant to Sections 2(c) and (d) of this Agreement, which shall be deemed to vest fully and immediately if subject to vesting; provided, however, that in the event COMSAT is precluded from providing coverage under any such benefit plan by applicable law or regulation, COMSAT may provide the Executive with a payment equal to the cost of such coverage without regard to tax effect. The foregoing benefits shall be calculated in accordance with the provisions of the applicable plans as if the Executive had retired on his date of -5- termination, provided that the Board reserves the discretion to waive the applicable early retirement reduction under the SERP in such event. (b) "Good Reason" shall mean the occurrence of any of the following (other than for "Cause"), without the Executive's express written consent: (i) the assignment to the Executive of duties inconsistent with the Executive's status as an executive officer of COMSAT or a substantial reduction by COMSAT of the Executive's responsibilities as an executive officer of COMSAT; (ii) any relocation of the Executive's offices outside the Washington, D.C. metropolitan area by COMSAT prior to the third anniversary of the Effective Date; or (iii) any material default of the provisions of Section 2 of this Agreement which continues for 20 business days following COMSAT's receipt of written notice from the Executive specifying the manner in which COMSAT is in default of such provisions. In order for the Executive to terminate employment for "Good Reason," the Executive must give COMSAT written notice of his termination of employment for "Good Reason," stating the basis for the termination, within 90 days after the Executive learns of the occurrence of the event constituting "Good Reason." (c) The Executive's employment may be terminated by COMSAT for Cause at any time upon 10 days written notice to the Executive, and after giving the Executive an opportunity to discuss such decision with the Board. For purposes of this Agreement, COMSAT shall have "Cause" to terminate the Executive's employment hereunder upon (i) the continued and deliberate failure of the Executive to perform his material duties, in a manner substantially consistent with the manner reasonably prescribe by the Board and in accordance with the terms of this Agreement (other than any such failure resulting from his incapacity due to physical or mental illness), which failure continues for 20 business days following the Executive's receipt of written notice from the Board specifying the manner in which the Executive is in default of his duties, (ii) the engaging by the Executive in intentional serious misconduct that is materially and demonstrably injurious to COMSAT or its reputation, which misconduct, if it is reasonably capable of being cured, is not cured by the Executive within 20 business days following the Executive's receipt of written notice from the Board specifying the serious misconduct engaged in by the Executive, (iii) the conviction of the Executive of commission of a felony, whether or not such felony was committed in connection with COMSAT's business, or (iv) any material breach by the Executive of Section 10 hereof, which breach, if it is reasonably capable of being cured, is not cured by the Executive within 20 business days following the Executive's receipt of written notice from the Board specifying the breach of Section 10 by the Executive. If COMSAT shall terminate the Executive's employment for "Cause," COMSAT, in full satisfaction of all of COMSAT's obligations under this Agreement and in respect of the termination of the Executive's employment with COMSAT, shall pay the Executive his Base Salary and any other compensation, benefits and reimbursements due him under COMSAT plans through the date of termination of his employment. (d) If, prior to the expiration or termination of the Employment Period, the Executive shall have been unable to perform substantially his duties by reason of disability or impairment of health for at least six -5- consecutive calendar months, COMSAT shall have the right to terminate this Agreement by giving 60 days written notice to the Executive to that effect, but only if at the time such notice is given such disability or impairment is still continuing. Following the expiration of the notice period, the Employment Period shall terminate with the payment of the Executive's Base Salary for the month in which notice is given and a prorated Annual Bonus through such month. In the event of a dispute as to whether the Executive is disabled within the meaning of this Section 5(d), or the duration of any disability, either party may request a medical examination of the Executive by a doctor appointed by the Chief of Staff of a hospital selected by mutual agreement of the parties, or as the parties may otherwise agree, and the written medical opinion of such doctor shall be conclusive and binding upon the parties as to whether the Executive has become disabled and the date when such disability arose. The cost of any such medical examinations shall be borne by COMSAT. In no event shall this Agreement terminate before COMSAT's long-term disability benefits under applicable plans become payable to the Executive. (e) If, prior to the expiration or termination of the Employment Period, the Executive shall die, COMSAT shall pay to the Executive's estate his Base Salary and a prorated Annual Bonus through the end of the month in which the Executive's death occurred, at which time the Employment Period shall terminate without further notice. (f) If either the Executive or COMSAT elects not to renew the Executive's employment with COMSAT at the end of the Employment Period, the Executive shall be entitled to receive payments under the SERP beginning on May 1, 2002 (the first day of the month after the end of such period), calculated in accordance with the provisions of the SERP based on the Executive's retirement on that date, provided that the Board reserves the discretion to waive the applicable early retirement reduction under the SERP in such event. If the Executive's employment with COMSAT under this Agreement is terminated either by the Executive for Good Reason or by COMSAT without Cause before the Executive attains age 55, the Executive shall be entitled to receive payments under the SERP beginning on April 1, 2002 (the first day of the month after the Executive's 55th birthday), calculated in accordance with the provisions of the SERP as if the Executive retired on that date, provided that the Board reserves the discretion to waive the applicable early retirement reduction under the SERP in such event. If the Executive dies before payments begin under the SERP, the Executive's surviving spouse, if any, shall receive under the SERP a $200,000 lump sum death benefit, plus annual benefit payments for a ten year period equal to 50% of the Executive's accrued benefit under the SERP, according to the terms of the SERP. The provisions of this Section 5(f) shall be administered consistent with the terms of the SERP. (g) If the Executive voluntarily terminates employment with COMSAT, such termination shall not be considered a breach of this Agreement by the Executive and shall not adversely affect the Executive's right to receive such benefits as may be payable to the Executive on account of his -6- termination of employment under applicable COMSAT plans. The Executive shall remain obligated to comply with the provisions of Sections 3, 4, 10 and 12 of this Agreement. 6. CHANGE OF CONTROL. If a change of control (as defined for purposes of COMSAT's benefit plans) occurs during the Employment Term, the change of control shall not adversely affect any of the Executive's rights under this Agreement, and this Agreement shall continue in effect according to its terms. In the event of a change of control, the Executive shall be entitled to vesting and payment of benefits according to the terms of this Agreement or COMSAT's applicable plans, whichever is more favorable. 7. CERTAIN ADDITIONAL PAYMENTS. --------------------------- (a) Notwithstanding anything in this Agreement to the contrary, in the event that it shall be determined that any payment or benefit to the Executive, whether pursuant to the terms of this Agreement or otherwise (a "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the Executive shall be paid an additional amount (a "Gross-Up Payment") such that the net amount retained by the Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment taxes and excise tax, including any interest and penalties with respect thereto, imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the date the Payment is made, net of the reduction in federal income taxes that the Executive may obtain from the deduction of such state and local income taxes. (b) All determinations to be made under this Section 7 shall be made by COMSAT's independent public accountant immediately prior to the date the Payment is made (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations and workpapers both to COMSAT and the Executive within 10 days of such date. Any such determination by the Accounting Firm shall be binding upon COMSAT and the Executive. Within five days after receipt of the Accounting Firm's determination, COMSAT shall pay to the Executive the Gross-Up Payment determined by the Accounting Firm. (c) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of a Payment or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments shall be made under this Section such that the net amount which is payable to the Executive after taking into account the provisions of Section 4999 of the Code and any interest and penalties shall reflect the intent of the partie as expressed in paragraph (a) above, in the manner determined by the -7- Accounting Firm. The Executive shall notify COMSAT in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by COMSAT of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise COMSAT of the nature of such claim and the date on which such claim is requested to b paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to COMSAT (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If COMSAT notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give COMSAT any information reasonably requested by COMSAT relating to such claim; (ii) take such action i connection with contesting such claim as COMSAT shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by COMSAT; (iii) cooperate with COMSAT in good faith in order effectively to contest such claim; and (iv) permit COMSAT to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that COMSAT shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any excise tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7, COMSAT shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as COMSAT shall determine. COMSAT's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in paragraphs (b) and (c) above shall be borne solely by COMSAT. COMSAT agrees to indemnify and hold harmless the Accounting Firm from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to paragraphs (b) and (c) above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 8. SURVIVORSHIP. The respective rights and obligations of the parties hereunder shall survive any termination of the Executive's employment and the Employment Term to the extent necessary to the intended preservation of such rights and obligations. 9. MITIGATION AND NO OFFSETS. The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise and there shall be no -8- offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. COMSAT's obligations to make payments under this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which COMSAT may have against the Executive or others. 10. NON-COMPETITION. --------------- (a) NON-COMPETITION AGREEMENT. As an inducement for COMSAT to enter into this Agreement, the Executive agrees that, during the Non-Competition Period (as defined below), the Executive shall not, without the prior written consent of the Board, engage or participate, directly or indirectly, as principal, agent, employee, employer, consultant, stockholder, partner or in any other individual capacity whatsoever, in the conduct or management of, or own any stock or any other equity investment in or debt of, any business which is competitive with any business conducted by COMSAT. The Non-Competition Period is the period commencing as of the Effective Date and running through the date that is one year following the date on which the Executive's employment with COMSAT terminates for any reason. (b) COMPETITIVE BUSINESS. For the purpose of this Agreement, a business shall be considered to be competitive with any business of COMSAT only if such business is engaged in providing services or products (i) comparable to or competitive with (A) any service or product currently provided by COMSAT during the Employment Period; (B) any service or product which evolves from or results from enhancements in the ordinary course during the Non-Competition Period to the services or products provided by COMSAT as of the date hereof or during the Employment Period; or (C) any future service or product of COMSAT as to which the Executive materially and substantially participated in the development or enhancement, and (ii) to customers, distributors or clients of the type served by COMSAT during the Non-Competition Period. Without limiting the foregoing, employment of the Executive by a law firm as a lawyer will not be considered employment with a competitor for purposes of this Agreement. (c) NON-SOLICITATION OF EMPLOYEES. During the Non-Competition Period, the Executive will not (for his own benefit or for the benefit of any person or entity other than COMSAT) solicit, or assist any person or entity other than COMSAT to solicit, any officer, director, executive or employee (other than an administrative or clerical employee) of COMSAT to leave his or her employment. (d) REASONABLENESS; INTERPRETATION. The Executive acknowledges and agrees, solely for purposes of determining the enforceability of this Section 10 (and not for purposes of determining the amount of money damages or for any other reason), that (i) the markets served by COMSAT are national and international and are not dependent on the geographic location of executive personnel or the businesses by which they are employed; (ii) -9- the length of the Non-Competition Period is linked to the term of the Employment Period; and (iii) the above covenants are manifestly reasonable on their face, and the parties expressly agree that such restrictions have been designed to be reasonable and no greater than is required for the protection of COMSAT. In the event that the covenants in this Section 10 shall be determined by any court of competent jurisdiction in any action to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, they shall be interpreted to extend only over the maximum period of time for which they may be enforceable, and/or over the maximum geographical area as to which they may be enforceable and/or to the maximum extent in all other respects as to which they may be enforceable, all as determined by such court in such action. (e) INVESTMENT. Nothing in this Agreement shall be deemed to prohibit the Executive from owning equity or debt investments in any corporation, partnership or other entity which is competitive with COMSAT, provided that such investments (i) are passive investments and constitute five percent or less of the outstanding equity securities of such an entity the equity securities of which are traded on a national securities exchange or other public market, or (ii) are approved by the Board. 11. INDEMNIFICATION; LIABILITY INSURANCE. The Executive shall be entitled to indemnification and coverage under COMSAT's liability insurance policy for officers to the same extent as other officers of COMSAT. In addition, the Executive shall be indemnified to the maximum extent permitted by law of the jurisdiction in which COMSAT is incorporated, as it may be amended from time to time. 12. ENFORCEMENT. ----------- (a) The Executive acknowledges that a breach of the covenants or provisions contained in Sections 3, 4 and 10 of this Agreement will cause irreparable damage to COMSAT, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the Executive agrees that if the Executive breaches or threatens to breach any of the covenants or provisions contained in Sections 3, 4 and 10 of this Agreement, in addition to any other remedy which may be available at law or in equity, COMSAT shall be entitled to seek specific performance and injunctive relief in a court of competent jurisdiction after notice and a hearing. (b) The parties expressly agree that any litigation directly or indirectly arising out of or relating to this Agreement, including an action brought by COMSAT pursuant to this Section 12, shall be brought in a court of competent jurisdiction in the State of Maryland. 13. EXPENSES OF ENFORCING THE AGREEMENT. If the Executive brings an action to enforce any of the obligations of COMSAT under this Agreement and -10- prevails on any material issue, COMSAT shall pay the Executive on demand the amount necessary to reimburse the Executive in full for all reasonable expenses (including reasonable attorneys' fees and legal expenses) incurred by the Executive in enforcing the obligations of COMSAT under this Agreement. 14. SEVERABILITY. Should any provision of this Agreement be determined to be unenforceable or prohibited by any applicable law, such provision shall be ineffective to the extent, and only to the extent, of such unenforceability or prohibition without invalidating the balance of such provision or any other provision of this Agreement, and any such unenforceability or prohibition in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. ASSIGNMENT. The Executive's rights and obligations under this Agreement shall not be assignable by the Executive. COMSAT's rights and obligations under this Agreement shall not be assignable by COMSAT except as incident to the transfer, by merger or otherwise, of all or substantially all of the business of COMSAT. In the event of any such assignment by COMSAT, all rights of COMSAT hereunder shall inure to the benefit of the assignee, provided that all references herein to COMSAT shall be deemed to refer with equal force and effect to any corporate or other successor of COMSAT. 16. NOTICES. All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method, provided that in such case it shall also be sent by certified or registered mail, return receipt requested; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (E.G., Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. Unless otherwise changed by notice, in each case notice shall be sent to: If to the Executive, addressed to: Warren Y. Zeger 10705 Stapleford Hall Drive Potomac, MD 20854 With a copy (not constituting notice) to: Joseph E. Bachelder, Esquire 780 Third Avenue New York, N.Y. 10017 -11- If to COMSAT, addressed to: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: Betty C. Alewine Telecopier No.: (301) 214-7134 With a copy (not constituting notice) to: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: Robert N. Davis, Jr. Telecopier No.: (301) 214-7128 17. MISCELLANEOUS. This Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. The validity, interpretation, performance and enforcement of the Agreement shall be governed by the laws of the State of Maryland without giving effect to conflicts of laws principles thereof. The headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. The waiver by any party of a breach of any term or condition of this Agreement by the other party shall not operate as nor be construed as a waiver of any subsequent breach thereof or a waiver of a breach of any other term or condition o this Agreement. This Agreement may be signed in two or more counterparts, each of which shall constitute an original but all of which together shall form only a single instrument. -12- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of July 18, 1997. /s/ Warren Y. Zeger ---------------------------------------------- Warren Y. Zeger, Executive COMSAT Corporation By: /s/ Betty C. Alewine ------------------------------------- Betty C. Alewine President and Chief Executive Officer -13- EX-21 5 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT AS OF MARCH 31, 1998 Jurisdiction of Subsidiary Incorporation - ---------- --------------- Bethesda Real Property, Inc. Delaware COMSAT Capital I, L.P. Delaware COMSAT Digital Teleport, Inc. Delaware COMSAT General Corporation Delaware COMSAT General Telematics, Inc. Delaware COMSAT Technology, Inc. Delaware CTS Transnational, Inc. Delaware COMSAT Government Systems, Inc. Delaware COMSAT International, Inc. Delaware BelCommunications, Ltd. Republic of Cyprus BelCom, Inc. Delaware BelCom Cellular, Inc. Delaware BelComRus Russian Federation BelCom Central Asia, Ltd. Kazakhstan COMSAT Argentina, S.A. Argentina COMSAT Asia (L) Incorporated Malaysia COMSAT Brasil, Ltda. Brazil COMSAT de Bolivia, SRL Bolivia COMSAT do Brasil Equipamentos Telecommunicacoes Ltda. Brazil COMSAT de Colombia, S.A. Colombia COMSAT de Guatemala, S.A. Guatemala COMSAT de Mexico, S.A. Mexico COMSAT de Panama, S.A. Panama COMSAT Dijital Hizmetleri Ticaret Anonim Sirketi Turkey COMSAT Iletisim Hizmetleri Ticaret Anonim Sirketi Turkey COMSAT Investments Inc., Mauritius Mauritius COMSAT MAX, Ltd. India COMSAT Peru, S.A. Peru COMSAT Venezuela, COMSATVEN, C.A. Venezuela Comunicaciones Satelitales de Colombia, S.A. Colombia CIV C.I.S. Holdings, Inc. Delaware Guangzhou Tian Hang Communication Technology Services, Ltd. China International Company of Telecommunications Russian Federation Stavropol Cellular Communications Russion Federation Tian Hang Technology Services, Ltd. Hong Kong ZAO Novocom Russian Federation COMSAT Laboratories, Inc. Delaware Indicom Personal Communications Pvt. Limited India COMSAT Laboratories India, Inc. Delaware COMSAT Mobile Investments, Inc. Delaware COMSAT Overseas, Inc. Delaware COMSAT Personal Communications, Inc. Delaware COMSAT RSI, Inc. Delaware Anghel Laboratories, Inc. Delaware C&S Antennas, Inc. Delaware C&S Antennas Limited United Kingdom COMSAT RSI Communications Corp. Delaware COMSAT RSI Foreign Sales Corporation US Virgin Islands COMSAT RSI International Limited United Kingdom COMSAT RSI Maryland, Inc. Delaware CRSI Acquisition, Inc. Delaware CSA Limited United Kingdom Mark Antenna Products, Inc. Nevada Mexia Fabricators, Inc. Texas Plexsys International Corporation Illinois PG Technology Limited United Kingdom Radiation Systems Electromechanical Systems, Incorporated Florida Radiation Systems Precision Controls, Inc. Nevada Universal Antennas Incorporated Nevada EX-23 6 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in COMSAT Corporation's Registration Statement No. 2-87942 on Form S-8, Registration Statement No. 33-5259 on Form S-8, Registration Statement No. 33-25124 on Form S-8, Registration Statement No. 33-35364 on Form S-8, Registration Statement No. 33-53610 on Form S-8, Registration Statement No. 33-51661 on Form S-3, Registration Statement No. 33-54369 on Form S-8, Registration Statement No. 33-54685 on Form S-8, Registration Statement No. 33-54687 on Form S-8, Registration Statement No. 33-56331 on Form S-8, Registration Statement No. 33-56333 on Form S-8, Registration Statement No. 33-59531 on Form S-8, Registration Statement No. 33-59513 on Form S-8, Registration Statement No. 33-59841 on Form S-3, Registration Statement No. 33-33061 on Form S-3 of our report dated February 12, 1998 (March 16, 1998 as to the tenth paragraph of Note 2), appearing in this Annual Report on Form 10-K of COMSAT Corporation for the year ended December 31, 1997. Deloitte & Touche LLP Washington, D.C. March 27, 1998 EX-27 7 FDS --
5 This schedule contains summary financial information extracted from the financial statements for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 0000022698 COMSAT Corporation 1,000 U.S. Dollars Year DEC-31-1997 JAN-01-1997 DEC-31-1997 1 5,757 0 162,356 (14,735) 0 318,249 2,520,535 1,161,242 1,894,775 296,646 461,960 0 0 366,901 219,320 1,894,775 0 562,651 0 263,934 216,749 0 42,032 44,181 15,613 28,568 (89,068) (3,946) 0 (64,446) (1.32) (1.29)
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