-----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, WKOJc1fwqUXbrMnp2Kpi4Gal0OID247dp3XCL2GyX9MKp6lYAnTD81KsiYT1BZxF tKcqbNRo5+i11xFTa5FR6A== 0000928385-99-000926.txt : 19990326 0000928385-99-000926.hdr.sgml : 19990326 ACCESSION NUMBER: 0000928385-99-000926 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: 99572577 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 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year Commission file ended December 31, 1998 number 1-4929 COMSAT Corporation (Exact name of registrant as specified in its charter) District of Columbia 52-0781863 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6560 Rock Spring Drive, Bethesda, MD 20817 (Address of principal executive offices) Registrant's telephone number, including area code:(301) 214-3000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, without par value New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange 8 1/8% Cumulative Monthly Income New York Stock Exchange Preferred Securities of COMSAT Capital I, L.P. Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------- ----------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates of the Registrant was $1,497,888,670 based on a closing market price of $29.75 per share on March 1, 1999, as reported on the composite tape for New York Stock Exchange listed issues. 52,617,999 shares of common stock, without par value, were outstanding on March 1, 1999. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference: NONE. PART I Item 1: Business GENERAL INFORMATION Business Segments COMSAT Corporation (COMSAT, the Corporation or Registrant) reports operating results and financial data in four business segments: COMSAT World Systems (CWS), COMSAT Mobile Communications (CMC), COMSAT International (CI) and COMSAT Laboratories (Labs). . CWS provides satellite capacity for telephone, data, Internet, video and audio communications services between the U.S. and the rest of the world using the global satellite networks of the International Telecommunications Satellite Organization (INTELSAT) and New Skies Satellites, N.V. (New Skies). The CWS segment also includes COMSAT General Corporation (COMSAT General), COMSAT Digital Teleport, Inc. (CDTI) and COMSAT Government Systems, Inc. (CGSI), which provide various satellite and ground segment services to commercial and government customers. . CMC provides satellite telecommunications services for maritime, aeronautical and land mobile applications primarily using the satellite system of the International Mobile Satellite Organization (Inmarsat). . CI operates an integrated group of telecommunications companies that principally provide individualized digital network solutions and value added services to business clients and carriers in selected emerging markets. . Labs provides technical consulting services and develops advanced communications technologies and products for satellite access and networking applications. Financial information by business segment for each of the last three years is set forth in Note 16 to the financial statements. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information," in 1998 which changes the way the Corporation reports information about its operating segments. Prior to the fourth quarter of 1998, the Corporation reported operating results and financial data in two business segments: Satellite Services (consisting of CWS and CMC) and Network Services (consisting of CI, Labs and Government Programs). The Corporation began accounting for substantially all of its former entertainment and manufacturing businesses as discontinued operations in the second quarter of 1997. For information concerning the Corporation's discontinued operations, see "Business - Discontinued Operations" and Note 3 to the financial statements. 2 The Corporation had approximately 1,600 employees as of December 31, 1998. The only employees represented by a labor union are the approximately 126 employees working on the construction of the radio astronomy telescope project in Green Bank, West Virginia. Communications Satellite Act of 1962 COMSAT was incorporated in 1963 under District of Columbia law, as authorized by the Communications Satellite Act of 1962 (the Satellite Act). In 1993, COMSAT changed its corporate name from "Communications Satellite Corporation" to "COMSAT Corporation." COMSAT is not an agency or establishment of the United States Government. The U.S. Government has not invested funds in COMSAT, guaranteed funds invested in COMSAT or guaranteed the payment of dividends by COMSAT. The U.S. Government has no ownership interest in COMSAT. Although COMSAT is a private corporation, the Satellite Act regulates certain aspects of COMSAT's structure, ownership and operations, including: . three of COMSAT's 15 director positions are appointed by the President of the United States with the advice and consent of the United States Senate (one of those positions is currently vacant); . COMSAT's issuance of capital stock and borrowing of money must be authorized by the Federal Communications Commission (FCC); . there are limitations on the classes of persons that may hold shares of COMSAT's common stock and on the percentage of outstanding shares a person or class of persons may hold; and . on matters that may affect the national interest and foreign policy of the United States, COMSAT's representatives to INTELSAT and Inmarsat receive instructions from the U.S. Government. Congress has reserved the right to amend the Satellite Act, and amendments, if any, could materially affect the Corporation. Legislation is currently pending in Congress to overhaul the Satellite Act. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook - Regulatory and Legislative Developments." Government Regulation Under the Satellite Act, the International Maritime Satellite Telecommunications Act of 1978 (the Inmarsat Act) and the Communications Act of 1934, as amended (the Communications Act), COMSAT is subject to regulation by the FCC with respect to its capital and organizational structure, as well as CWS's and CMC's plant, operations, services and rates. In addition, COMSAT General and CGSI are common carriers regulated by the FCC. FCC decisions and policies have had and will continue to have a significant impact on the Corporation. Specific aspects of the regulation of CWS and CMC are discussed in the narratives concerning those segments. See "Business - COMSAT World Systems 3 - - Regulation of CWS" and "Business - COMSAT Mobile Communications - Regulation of CMC." Certain parts of COMSAT's business are also regulated by foreign governments. COMSAT World Systems Services CWS provides satellite capacity for telephone, data, Internet, video and audio communications services between the United States and the rest of the world using the global satellite networks of INTELSAT and New Skies. CWS's customers include U.S. international communications common carriers, teleports, private network providers, multinational corporations, U.S. and international broadcasters, news-gathering organizations, digital audio companies and the U.S. government. The largest portion of CWS's revenues comes from providing full-time voice- grade half-circuits (two-way communications links between an earth station and an INTELSAT satellite) to U.S. international communications common carriers. The three largest carrier customers are AT&T Corporation (AT&T), MCI WorldCom, Inc. (MCI WorldCom) and Sprint Corporation (Sprint). CWS offers significant discounts to customers entering into long-term commitments for full-time voice- grade half-circuits. Approximately 95% of all eligible voice-grade half- circuits are now under such commitments. At year end 1998, approximately 81% of CWS's International Digital Route (IDR) and International Business Service (IBS) traffic was under long-term commitments with INTELSAT. CWS has short-term commitments with INTELSAT for the remaining portion of its IDR and IBS traffic. CWS also enters into commitments with INTELSAT for video traffic, which vary in length depending on the length of commitments from CWS's customers. CWS's voice and data services are virtually all digital. CWS's IDR service, for example, makes it possible for communications carriers to provide digital public-switched telephone network circuits. The carriers apply techniques to such circuits that permit a single digital circuit to handle multiple telephone calls simultaneously. For private-line customers, CWS offers an all-digital IBS, as well as an international VSAT (very small aperture terminal) service. IBS offers customers high-speed, digital communications for voice, data, facsimile and video conferencing using on-premise earth stations that eliminate the need for costly land-line connections. At year end 1998, approximately 97% of CWS's IBS traffic was covered by long-term commitments. CWS's customers have established international VSAT networks in both Latin America and Europe. Using on-premise antennas as small as 1.8 meters in combination with the high-power satellites in the INTELSAT network, corporations doing business internationally can deliver communications to multiple sites. Used primarily for data transmissions, VSATs can also accommodate voice and video communications. CWS's carrier and Internet Service Provider customers frequently employ either IBS or international VSAT services to implement their Internet applications. These services are well- suited for either high speed point-to-point or point-to-multipoint Internet applications. In addition to providing reliable worldwide access to the Internet, IBS and VSAT services offer features to customers, such as simplified network architectures, asymmetric data rates, and quick turnup of satellite 4 connectivity. The global demand for Internet access has been growing at a high rate. The applicability of IBS and VSAT for the support of Internet applications is the main growth driver for these services. To the growing international broadcasting community, CWS provides both digital and analog transmission services on a long-term, short-term or occasional as-needed basis. With the introduction of the INTELSAT VII, VIIA and VIII satellites, CWS has expanded the availability of high-power, flexible capacity for broadcasters and satellite news gatherers. See "Item 2: Properties - - INTELSAT Satellites." To maintain the quality of the INTELSAT network, CWS provides tracking, telemetry, control (TT&C) and monitoring services to INTELSAT and engages in a program of research and development to ensure that the satellite system accommodates the latest communications technologies, including broadband, integrated services digital networks (ISDN), and asynchronous transfer mode (ATM). The CWS business also includes the operations of COMSAT General, CDTI and CGSI, all of which are wholly-owned subsidiaries of the Corporation. COMSAT General provides a line of satellite-based communications services to provide business data solutions. This includes satellite circuits, ground station transit services, connecting terrestrial links, baseband network terminal equipment and engineering services for international host nation licensing and approvals. COMSAT General provides services to commercial, government and international organizations, and is an FCC-licensed common carrier. COMSAT General also operates via the INTELSAT system from certain foreign countries. COMSAT General operates satellite earth station facilities located in Clarksburg, Maryland, Santa Paula, California, and Southbury, Connecticut. COMSAT General also operates a satellite control facility and high speed fiber interconnects to telecommunications carriers and Internet service providers. COMSAT General provides its customers with satellite services over a variety of international and domestic satellite systems, including INTELSAT and Inmarsat, for voice, data, Internet and one-way video broadcast. COMSAT General provides satellite operation service for the MARISAT and COMSTAR satellites, which includes tracking, telemetry, command and orbital maintenance for these spacecraft. In addition to operating the satellites, COMSAT General also provides transponder capacity on such satellites. CDTI provides turnkey satellite services through facilities located in Clarksburg, Maryland and Santa Paula, California. CDTI network services include satellite and terrestrial segments, network management, and installation and maintenance of required hardware. CDTI also offers bundled satellite service including space and ground segment for Internet, video, and digital data applications. CGSI is a wholly-owned subsidiary established primarily to support the Commercial Satellite Communications Initiative (CSCI) program. CGSI has a contract with the Defense Information Systems Agency (DISA) to provide bulk commercial satellite transponder leases. CGSI also operates two bandwidth management centers. 5 Revenues Approximately 49% of the Corporation's consolidated revenues in 1998 were derived from CWS services (compared to 51% in 1997 and 55% in 1996). Approximately 9% of the Corporation's consolidated revenues in 1998 were derived from CWS services to AT&T. Also in 1998, CWS's three largest customers, AT&T, MCI WorldCom and Sprint, were the source of approximately 19%, 18% and 7%, respectively, of CWS's revenues. See Note 16 to the financial statements. INTELSAT INTELSAT is a 143-member international organization headquartered in Washington, D.C. It operates under three agreements: an intergovernmental agreement; a headquarters agreement with the U.S. Government; and an operating agreement signed by each member nation's government or designated telecommunications entity (a Signatory). COMSAT is the U.S. Signatory. It represents the U.S. in INTELSAT, subject to instructions from the Department of State (in concert with the Department of Commerce and the FCC) on matters that may affect U.S. national interest and foreign policy. Each shareholder has rights and obligations in INTELSAT analogous to those of a partner. Each owns an investment share, makes proportionate contributions to INTELSAT's capital costs, and receives proportionate distributions of INTELSAT's net revenues after deductions for operating expenses. Shareholders also pay INTELSAT for their use of the satellite system. The investment shares are readjusted in March each year to approximate the shareholders' respective portions of the total use of the INTELSAT space segment for the previous six months. CWS's investment share, the largest in INTELSAT, was approximately 18.0% as of December 31, 1998, which was unchanged from December 31, 1997. Effective March 1, 1999, CWS's investment share in INTELSAT increased to approximately 19.8%. At December 31, 1998, total INTELSAT owners' equity was approximately $1.63 billion. The rate of return on shareholders' capital is subject to change based on business conditions. INTELSAT does not guarantee a return to Signatories. Since 1995 INTELSAT has allowed non-Signatory telecommunications entities to participate as shareholders in the organization. As of December 31, 1998, there were 48 non-Signatory shareholders accounting for total shares of 6.6%. As of December 31, 1998, COMSAT Argentina and COMSAT General together owned approximately 0.4% of INTELSAT. INTELSAT generally procures spacecraft and launch services under long-term, multi-satellite contracts which provide for payments by INTELSAT over the contract periods. Under the satellite construction contracts, approximately 70% of spacecraft cost is typically paid to the manufacturer during construction prior to spacecraft delivery and satellite launch. In addition, approximately 15% typically is paid after the satellite has been placed in orbit and has satisfactorily completed in-orbit testing. The remaining portion of the spacecraft cost is payable periodically as performance incentives over the designated design life of the satellite contingent upon continued successful operation of the satellite during the respective periods. 6 Under the launch service contracts, launch services costs are typically paid in quarterly installments with the final payment due at the end of the planned launch period. Launch payments are payable in full whether or not the launch has resulted in launch success. INTELSAT has purchased launch and post-separation insurance coverage for possible losses that may occur during the launch and subsequent one-year periods for satellites scheduled for launch from 2000 through 2002. The coverage includes the cost of the satellite, launch services and associated capitalized interest, as well as the cost of the insurance itself. This insurance protects the Corporation in proportion to the Corporation's interest in INTELSAT. Launch and post-separation insurance for the INTELSAT satellites does not protect the Corporation against business interruption, loss or delay of revenues and similar losses and may not fully reimburse the Corporation or INTELSAT for their respective expenditures. Beyond this one year post-separation period, the Corporation and INTELSAT intend to rely on the spare capacity on the satellite fleets, to the extent available, to avoid an interruption of customer service and revenues. Neither INTELSAT nor the Corporation procures insurance for the in-orbit failure of satellites beyond the one-year, post-separation period. In the event of a complete in-orbit failure beyond the one-year, post-separation period, the Corporation would be required to write off the value of its proportionate investment in that satellite. Partial in-orbit failures will be evaluated for impairment according to the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of." Effective January 1, 1998, the Corporation changed its accounting policy with respect to the cost of series satellites lost at launch or in orbit and its accounting policy with respect to satellite performance incentives paid to manufacturers. See Note 5 to the financial statements. INTELSAT generally offers long-term commitments for transponder capacity of one, two, three, five, ten or fifteen years for a range of services at tariff rates which are progressively lower for the longer term commitment periods. As of December 31, 1998, COMSAT had commitments with INTELSAT of five years or more in effect representing approximately 66.34% of COMSAT's total analog services traffic with INTELSAT, 63.5% of its total digital services traffic with INTELSAT, 81% of its total voice service with INTELSAT and 91% of its total video service traffic with INTELSAT. Approximately 54% of COMSAT's commitments with INTELSAT are for a fifteen year term. New Skies and INTELSAT Privatization The Corporation continues to promote efforts to restructure the INTELSAT satellite system. See "Business - Investments - New Skies Satellites, N.V.," "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook - Satellite Services - Restructuring of INTELSAT and Inmarsat" and Note 6 to the financial statements. Regulation of CWS Under the Satellite Act and the Communications Act, COMSAT is subject to regulation by the FCC with respect to CWS's communications services and the rates charged for those services. CWS provides its services on a non- discriminatory basis to all customers, either under tariffs filed with the FCC or on the basis of inter-carrier contracts. 7 On April 24, 1998, the FCC granted the Corporation's petition for reclassification as a non-dominant common carrier in markets that represent approximately 90% of CWS's revenues. For those markets, rate-of-return regulation was lifted immediately. On February 10, 1999, the FCC eliminated COMSAT's remaining rate-of-return regulation along thin routes in favor of COMSAT's incentive-based pricing plan. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook - Regulatory and Legislative Developments." On October 28, 1998, the FCC issued a separate notice of proposed rulemaking to explore the implications of enabling users to have direct access to the INTELSAT system, which would end COMSAT's status as the exclusive provider of INTELSAT services in the U.S. In the direct access notice, the FCC tentatively concluded, among other things, that it lacks the statutory authority to impose Level 4 direct access (by which users could invest and acquire an ownership interest in INTELSAT), but does have the authority to require Level 3 direct access (by which users could directly contract with INTELSAT for capacity and bypass COMSAT). The FCC sought comments on its tentative conclusion that it would serve the public interest to mandate Level 3 direct access. The Corporation filed comments contesting the basis for the FCC's proposed action. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook - Regulatory and Legislative Developments." In November 1997, the FCC issued an order in its "DISCO-II" rulemaking proceeding addressing, among other matters, COMSAT's provision of INTELSAT services within the United States. The FCC ruled that, before COMSAT may provide such domestic satellite services, it must first waive the limited immunity from suit which it has with respect to its actions as U.S. Signatory to INTELSAT. COMSAT has appealed that ruling on the ground that its limited immunity arises from international agreements entered into by the U.S. which may not be abrogated by the FCC. COMSAT General is licensed by the FCC to operate the MARISAT F-2 and COMSTAR D-4 satellites and is the licensee of a number of earth stations, which are chiefly located at Clarksburg, Maryland. There are also several earth stations located at Clarksburg, Maryland and Paumulu, Hawaii that are licensed to the Corporation for use by CWS. In addition, CGSI is the licensee of two earth stations located at Clarksburg, Maryland. See "Item 2: Properties." Competition CWS is subject to substantial and increasing competition from satellite service providers, undersea cable operators and fiber optic cable systems. Currently there are more than fifty satellite operators with over 180 geostationary satellites providing services around the globe. Of those, over 50 satellites are capable of providing international service to or from the U.S. in competition with COMSAT. Competing satellite service providers offer a full range of services. Voice and data services are provided by numerous satellite systems, including Hughes/PanAmSat, Loral/Orion, GE Americom, Columbia Communications, JSAT and others. A number of satellite systems provide video service in direct competition with COMSAT and INTELSAT, including Hughes/PanAmSat, Loral/Orion, Columbia Communications and regional satellite systems (e.g., Hispasat, JSAT, and France Telecom). Many of the Corporation's competitors have plans to substantially expand capacity over the next few years. COMSAT is currently the only U.S. entity that may provide international space segment to customers using INTELSAT satellites. In the above-mentioned FCC direct access proceeding, CWS's 8 largest customers have asked the FCC to allow direct access to the INTELSAT system, and have also asked the FCC to nullify their long term contracts with CWS pursuant to the so-called "fresh look" doctrine. The Corporation has opposed these requests. For additional information concerning direct access and "fresh look," see "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations -Outlook - Regulatory and Legislative Developments." In addition to the competitors described above, COMSAT also faces competition from other countries' INTELSAT Signatories in the provision of voice, video and data services. Earth stations located in other countries that are within the footprint of satellites sending signals to U.S. earth stations may be providing service to customers in the U.S. by routing traffic through a non-U.S. earth station connected to U.S. customers by domestic satellite or fiber optic cable. Such competitive service is believed to be primarily offered by Canada's Signatory, Teleglobe, but may also be available from other countries' Signatories, including Mexico. COMSAT also faces significant competition from service providers utilizing undersea fiber optic cable systems to provide voice, data, and video services. Fiber optic undersea cable is increasingly being used to carry transoceanic video programming. CWS's major carrier customers (including its three largest customers, AT&T, MCI WorldCom and Sprint) are co-owners of fiber cable systems. COMSAT Mobile Communications Services CMC provides satellite telecommunications services for maritime, aeronautical and land mobile applications, primarily using Inmarsat satellites. CMC operates land earth stations in Southbury, Connecticut and Santa Paula, California, which serve the Atlantic and Pacific Ocean Regions, respectively, and in Malaysia and (until CMC's lease expires on June 30, 1999) Turkey, which serve the Indian Ocean Region. These stations enable CMC to offer global coverage for its services. There are currently approximately 143,000 mobile terminals operating in the Inmarsat system. As described below, CMC provides a full range of voice, facsimile, data and telex services, as well as certain value-added services. Maritime Services CMC provides satellite services for communications to and from ships and other vessels. Customers for these services include transport ship operators, cruise ships and their passengers, fishing vessel operators, oil and mining interests, pleasure boat operators, U.S. Navy ships and foreign telecommunications administrations. In addition to telephony services, CMC's services include group call messaging to a fleet of ships, electronic mail services, a direct-dial telephone service for passengers and crew on board ships, a news summary distribution service, access to data bases through personal computers, and other office communications services for facsimile transmissions, worldwide teleconferencing and current financial news reports. 9 In May 1998, CMC implemented service with the U.S. Coast Guard (USCG) and the National Oceanic and Atmospheric Administration (NOAA) to provide Inmarsat standard-C services in support of USCG position reporting and NOAA survey programs. CMC offers three digital services, Inmarsat-B, Inmarsat-C and Inmarsat-M, in the Atlantic, Pacific and Indian Ocean Regions. These services provide more efficient use of the Inmarsat satellite capacity, help to significantly lower the cost of using satellite communications, and expand the potential customer base for maritime and land mobile services. CMC also offers a multi-channel version of Inmarsat-M service that allows cruise ships and other high-volume users to increase their channel capacity and offer lower rates to their customers. In October 1998, CMC entered into a nine year agreement with AT&T to provide global satellite communications for "Afloat Personnel Telecommunications Services" on board U.S. Navy vessels. CMC will provide bulk capacity satellite services to AT&T to support telephone service for sailors at sea. Aeronautical Services CMC provides satellite telecommunications services for aeronautical applications, including airline operational and administrative communications, passenger telephone service and, prospectively, air traffic control. Customers of CMC for international aeronautical services include airline service providers, commercial airlines, government aircraft and corporate aircraft. CMC provides aeronautical services with a data service for cockpit communications on commercial flights under an agreement with Aeronautical Radio, Inc., an airline-owned service organization. CMC also provides aeronautical voice services in the Atlantic and Pacific Ocean Regions through its earth stations at Southbury, Connecticut and Santa Paula, California. There are currently more than 1,600 aircraft equipped to use the Inmarsat aeronautical system, equally split between voice and data services. A service agreement with Kokusai Denshin Denwa Co., Ltd. (KDD), the Japanese Signatory to Inmarsat, provides that CMC may use KDD's ground earth station serving the Indian Ocean Region to serve CMC's aeronautical customers, and CMC may serve KDD's customers flying in the Atlantic Ocean Region. Under the agreement, CMC and KDD provide mutual back-up in the Pacific Ocean Region for aeronautical customers of both companies. A service agreement with GTE Airfone, Inc., a provider of air-to-ground passenger telephone service using terrestrial facilities, enables it to extend its current service to transoceanic flights by acquiring satellite and ground earth station services from CMC. CMC has been selected by United Airlines to provide satellite communications services for passengers (including telephone, fax and data transmission) on approximately 104 United Airlines aircraft. CMC has provided financing for 74 of these aircraft of up to $7 million to promote the use of satellite phones on United Airlines aircraft. The $7 million facility is being drawn upon as United Airlines installs seat-back phones on those aircraft. 10 CMC also has been selected to provide satellite communication services to the international fleet of Delta Airlines. CMC entered into agreements with AT&T Wireless, Inc. to provide satellite communications to the passenger cabins and with DeltaTel, Inc. to provide cockpit communications. CMC has implemented service with AT&T to accept the use of the AT&T calling card to support this service offering. In addition, COMSAT provides voice service to Air Canada passengers pursuant to an existing arrangement which commenced in 1994. In late 1996, the Federal Aviation Administration (FAA) selected CMC to provide satellite and uplink services for the Wide Area Augmentation System (WAAS). In July 1998, CMC signed a five year $57 million agreement with the FAA to complete the agreement and began earth station services. Land Mobile Services CMC provides telecommunications services for international land mobile applications, using mobile and portable terminals located outside of the United States. Customers for these services include broadcasters, foreign telecommunications authorities and U.S. and foreign corporations and government agencies. CMC's land mobile services are currently available using transportable versions of Inmarsat's Inmarsat-A and Inmarsat-B mobile earth stations (telephone, facsimile, data, and telex), a briefcase-size Inmarsat-M terminal and a smaller data-only Inmarsat-C terminal through CMC's C-Link service. C- Link service is a low-cost text messaging service that permits smaller vessels and land mobile units to use the global satellite network. The briefcase-size Inmarsat-M terminals provide a more portable and less expensive telephone service for the news media, government officials and others who travel to remote parts of the world where reliable communications services are often not available. The Corporation commenced commercial Planet 1 service in January 1997. The Planet 1 terminal is a six pound, laptop computer-sized satellite terminal which utilizes the Inmarsat-3 satellites. CMC has entered into a number of agreements to resell Planet 1 service. Revenues Approximately 27% of the Corporation's consolidated revenues in 1998 were derived from CMC (compared to 30% in 1997 and 30% in 1996). No single customer of CMC provided more than 10% of the Corporation's consolidated revenues in 1998. See Note 16 to the financial statements. Inmarsat Pending its expected privatization in April 1999, Inmarsat is an 87-nation organization headquartered in London, England. It operates under three agreements: an intergovernmental convention; a headquarters agreement with the United Kingdom (U.K.) Government; and an operating agreement signed by each member nation's government or designated telecommunications entity (a Signatory). COMSAT is the U.S. Signatory. It represents the U.S. in Inmarsat, subject to instructions from the Department of State (in concert with the Department of Commerce and the FCC) on matters that may affect U.S. national interest and foreign policy. 11 Each Signatory has rights and obligations in Inmarsat analogous to those of a partner. Each owns an investment share, makes proportionate contributions to Inmarsat's capital costs, and receives proportionate distributions of Inmarsat's space segment charges after deductions for operating expenses. The investment shares are typically readjusted as of February 1 of each year to approximate the signatories' respective portions of the total utilization of the Inmarsat space segment for the previous year. Due to the expected privatization of Inmarsat in April 1999, this readjustment did not occur as of February 1, 1999. COMSAT's investment share, the largest in Inmarsat, was 22.2% as of December 31, 1998 as compared to 23.0% at December 31, 1997. At December 31, 1998, total Inmarsat owners' equity was approximately $850 million. The Corporation continues to promote efforts for the privatization of Inmarsat. Inmarsat is expected to become an independent commercial company in April 1999. The privatization will affect the manner in which the Corporation accounts for its ownership interest in Inmarsat. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook - Satellite Services - Restructuring of INTELSAT and Inmarsat." The Inmarsat-3 satellites are the primary operational Inmarsat spacecraft and are used for on-demand services such as Inmarsat A, B, M, Mini-M, C, and Aeronautical. Some services such as Mini-M and Aero-I are spot beam only services and can only be supported on the Inmarsat-3 satellites. Four of the Inmarsat-3 satellites are the primary operational Inmarsat spacecraft and are used for on-demand services such as Inmarsat A, B, M, Mini-M, C, and Aeronautical. The fifth Inmarsat-3 satellite is planned to be used primarily for bulk services and backup capacity. The Inmarsat-2 satellites are expected to provide full time pre-emptible services and backup for global beam services on the Inmarsat-3 satellites. Four Inmarsat-2 satellites are in orbit. Inmarsat procured the Inmarsat-2 and Inmarsat-3 satellites and launch services under long-term, multi-satellite contracts which provided for payments by Inmarsat over the contract periods. The contracts for the construction of the Inmarsat-3 satellites required performance-based incentive payments for each satellite after 60 days of successful in-orbit testing and after successful emergence of the spacecraft from the first eclipse season. Additional incentive payments are made quarterly based on continuous satisfactory operation of the satellite through the end of its orbital life. Incentive payments were not paid by Inmarsat in connection with the procurement of the Inmarsat-2 satellites. As of December 31, 1998, Inmarsat did not have any contracts to procure additional satellites. All of the existing Inmarsat satellites have been in orbit for more than one year and, as a result, are no longer insured for in-orbit loss under the terms of the insurance policies procured at the time of launch. Neither Inmarsat nor the Corporation procures insurance for the in-orbit failure of satellites beyond the one-year, post-separation period. In the event of a complete in-orbit failure of an existing Inmarsat satellite, the Corporation would be required to write off the value of its proportionate investment in that satellite. The Corporation evaluates partial in-orbit failures and determines whether a write-off is appropriate based on the degree of impairment. The Corporation also does not procure insurance to protect against business interruption, loss or delay of revenues and similar losses for potential in- orbit failure of the Inmarsat satellites. The Corporation and Inmarsat rely on spare and preemptible capacity 12 on the satellite fleets, to the extent available, to minimize potential interruption of customer service and revenues in the event of an in-orbit failure. Effective January 1, 1998, the Corporation changed its accounting policy with respect to the cost of series satellites lost at launch or in orbit and its accounting policy with respect to satellite performance incentives paid to manufacturers. See Note 5 to the financial statements. Inmarsat generally offers its service providers satellite capacity on demand generally under terms that require payments on a per minute basis. Inmarsat has established a full period bulk capacity program which will increase the inventory of satellite products that CMC can offer for future sale. Regulation of CMC Under the Inmarsat Act, COMSAT is subject to regulation by the FCC with respect to CMC's communications services and the rates charged for these services. CMC is currently regulated as a dominant carrier and its operations are generally restricted to international service. Regulatory constraints on CMC are expected to be eased after Inmarsat is privatized. However, upon privatization of Inmarsat, CMC will no longer hold the legal status as the sole authorized U.S. provider of Inmarsat service originating in the U.S. By an FCC Report and Order issued in 1989, COMSAT was authorized: (i) to be the sole U.S. provider of Inmarsat space segment capacity for aeronautical services; (ii) to provide ground segment aeronautical services in connection with the Inmarsat space segment on a non-exclusive basis; and (iii) to provide such aeronautical services only to aircraft engaged in international flights, including international flights over U.S. airspace. Another entity, the American Mobile Satellite Corporation (AMSC), was designated to be the sole provider of certain domestic aeronautical and land mobile satellite services. In 1995, CMC applied to the FCC for authority to offer domestic aeronautical services. CMC's request is pending before the FCC. In 1996, CMC began offering domestic aeronautical services on an interim basis pursuant to temporary authority granted by the FCC. The FCC has regularly renewed COMSAT's temporary authorization, and COMSAT continues to offer domestic aeronautical services thereunder. COMSAT is not generally authorized to provide U.S. domestic land mobile services. In limited circumstances, the Corporation provides U.S. domestic service to certain individual end users under special temporary authorities from the FCC. In November 1997, the FCC issued an order in its "DISCO II" rulemaking proceeding addressing, along with other issues, COMSAT's provision of Inmarsat services within the United States. The FCC ruled that, before COMSAT may provide domestic service within the United States via Inmarsat, it must first waive its immunity from suit, including suit under the U.S. antitrust laws, stemming from its role as U.S. Signatory to Inmarsat. The new commercial entity which will be created upon the privatization of Inmarsat will not have the privileges and immunities that the current Inmarsat inter-governmental, treaty- based organization has currently. COMSAT's limited privileges and immunities in respect of the successor to Inmarsat also will be eliminated. Absent that impediment, the Corporation expects that the FCC will grant it authorization to offer Inmarsat services within the United States following privatization. 13 Competition CMC competes internationally in the provision of voice, fax and data communications services over the Inmarsat satellite system. CMC's maritime, land and aeronautical customers have access to a broad array of alternative service providers and communications technologies, including: . Inmarsat services provided by other Inmarsat distributors and resellers; . High Frequency (HF), Very High Frequency (VHF) and other forms of maritime radio; . C-Band and Ku-Band Satellites (maritime C-Band for cruise ships and VSAT systems on land using Ku-Band); . Regional Satellite Systems (AMSC, TMI, and others used for land and maritime); . Cellular (used widely on land, and in maritime coastal markets); . New Global Satellite Systems (such as the low earth orbit satellite system of Iridium); and . Terrestrial-based aeronautical. Under the Inmarsat Act, COMSAT is the designated U.S. Signatory to the Inmarsat Operating Agreement, and is the sole U.S. operating entity and investor in the Inmarsat system. CMC competes for maritime, land mobile and aeronautical communications business with other Inmarsat Signatories operating land earth stations and with IDB Mobile Communications, Inc. (IDB), another U.S. land earth station operator and a subsidiary of Stratos Global Corporation, which became Canada's Signatory in 1998. IDB provides maritime, land mobile and aeronautical services through its own U.S. land earth stations using Inmarsat satellite capacity obtained from a foreign Signatory. COMSAT is currently involved in legal proceedings against IDB. See "Item 3: Legal Proceedings." With regard to U.S.-originating shore-to-ship Inmarsat traffic, COMSAT currently has the exclusive right under the Inmarsat Act to be the provider of Inmarsat space segment. Nonetheless, COMSAT currently competes with another land earth station operator, IDB, for shore-to-ship traffic. MarineSat Communications Network and Marine Telecommunications Network also have FCC licenses to provide these services in competition with COMSAT as resellers. COMSAT competes directly with a number of other Inmarsat Signatories that operate land earth stations around the world and offer many of the same services as COMSAT. These include British Telecom, France Telecom, Station 12 (the Netherlands), Telstra (Australia), Stratos (Canada), Deutsche Telecom, KDD (Japan) and Telenor (Norway). A total of 16 Signatories offer global service, and a number of others offer service in one or more ocean regions. In addition, there are U.S. carriers licensed to resell Inmarsat services, including IDB, Stratos Mobile Networks, and MarineSat Communications Network (subsidiaries of Stratos Global Corporation) and Marine Telecommunications Network (a subsidiary of ICG Satellite). Inmarsat's competitive environment is very different from that of INTELSAT, in which a given call between two countries is "shared," with each country accounting for one "half-circuit." Inmarsat instead relies on a demand-assigned mode of operation which results in a high degree of intra-system competition among the more than 30 Inmarsat land earth station operators (LESOs) that compete for traffic generated from Inmarsat's approximately 143,000 system-wide terminals. Each time a call from an Inmarsat mobile terminal is made, the end- user placing the call can select any land earth station that 14 serves the respective Inmarsat satellite to complete his transaction. COMSAT and all LESOs effectively compete for each and every mobile-originated Inmarsat call as it is made. Additionally, Inmarsat recently adopted a plan to privatize in April 1999. As a result, COMSAT will lose its present status as sole provider of Inmarsat satellite capacity for U.S. shore-to-ship traffic and for U.S. land earth stations. With privatization, competition among Inmarsat service providers is expected to increase for shore-to-ship services. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook - Satellite Services -Restructuring of INTELSAT and Inmarsat." Inmarsat's most significant competitor in the provision of maritime communications is VHF radio for short distance or coastal communications, along with Medium Frequency (MF) and HF radio for communications over long distances. In addition to serving the communications needs of small vessels which operate in coastal waters, maritime radio provides a lower-cost alternative to Inmarsat services for ships which must comply with GMDSS carriage requirements. It is difficult to estimate the number of maritime radio coast stations or ship terminals in service around the world. However, in the United States alone, an estimated 600,000 maritime radio licensees, utilizing more than 300 public coast stations, rely on maritime radio for ship-to-ship and ship-to-shore communications, including calls that are interconnected to the terrestrial public switched network. There are approximately 10 licensed operators of public coast stations in the United States. Major operators of global maritime radio networks serving the United States include MariTEL, Globe Wireless, and Maritex. Maritime C-Band is used for a large volume of maritime communications traffic from cruise ships sailing in the Caribbean and Alaskan regions for ship- to-shore and shore-to-ship communications. Whereas Inmarsat-based operators such as COMSAT were previously the largest communications providers to cruise ships, in recent years these customers have increasingly been serviced by Maritime C- Band operators such as MTN that use the satellite capacity of Hughes/PanAmSat, INTELSAT and others. CMC also faces competition from cellular service. A significant amount of maritime traffic in U.S. and nearby waters operates within range of shore-based cellular, and many of these ships rely heavily on cellular service. Cellular competes with CMC for coastal communications traffic from passenger ships, fishing vessels and pleasure craft operating in the Caribbean, Alaskan fishing regions and along the U.S. coastline. The rapid build-out of cellular networks around the world also provides competition to CMC's land mobile services. CMC competes in the maritime and land mobile markets with a number of regional mobile satellite systems that operate using their own GEO satellites. These include AMSC (serving North and Central America), TMI (Canada), MobilSat (Australia/New Zealand) and N-Star (Japan). Though COMSAT has been foreclosed by FCC regulations from competing with AMSC for land mobile traffic in the United States, both companies actively compete for customers operating in U.S. coastal waters. AMSC's services are sold through their exclusive distributor, Stratos Mobile. Because the United States, pursuant to the 1997 WTO Basic Telecommunications Agreement, committed to open up its markets to foreign competition, foreign-licensed satellite operators using regional satellites can now routinely offer services in the United States. For example, TMI, a Canadian company, has applied to provide land 15 mobile satellite services in the United States using the Canadian MSAT-1 satellite and the FCC recently authorized a U.S. company, SatCom, to provide such services via MSAT-1. CMC now competes with Iridium, the first of several proposed low-earth- orbit (LEO) satellite providers, to complete its satellite network. Iridium began commercial service in November 1998. Iridium uses a network of 66 satellites to offer voice and paging services on a global basis, and is now competing directly with Inmarsat for provision of global mobile satellite services. Due to its low-earth orbit system, Iridium is able to utilize smaller handheld terminals which are easier to carry than the smallest laptop size terminals currently needed for Inmarsat access. CMC also competes with VSAT services. Inmarsat communications on land are best suited for short-term, rapid deployment applications and are often used by government, media and relief organizations for this purpose. However, VSATs offer a more cost effective alternative for customers whose communications requirements are likely to involve more than two hours of traffic usage a day on a long-term basis. Today there are thousands of VSAT sites all over the globe, many of which have been deployed to replace higher cost Inmarsat communications or to provide for higher data transmission rates than Inmarsat. CMC faces competition from terrestrial radio networks to provide aeronautical communications services. Most aeronautical communications in the United States rely on terrestrial radio networks operated by GTE Airfone, AT&T Wireless and ARINC. Satellite-based systems are less frequently used for such communications and represent a smaller segment of the overall aeronautical communications services market. FCC decisions also may significantly affect the competition for products and services offered by CMC. See "- Regulation of CMC." COMSAT INTERNATIONAL Services CI operates an integrated group of telecommunications companies that are engaged principally in providing individualized digital network solutions to business clients and carriers in selected markets. CI also is exploring the development of prospective international telecommunications opportunities that are consistent with its digital networking strategy. CI's existing and prospective companies typically are and will be located in those rapidly growing markets where a significant number of CI's existing or targeted clients are located (or where they intend to locate). As of December 31, 1998, CI operated in 11 countries located in Latin America, Asia and Europe. CI's companies generally are wholly- or majority- owned, with one exception. At December 31, 1998, CI beneficially owned 50% of COMSAT Max Limited, CI's operating company in India. CI's clients are typically local, indigenous large and medium-sized corporations, national branches of multinational corporations and major telecommunications carriers and consortia. 16 The following chart sets forth the CI businesses as of December 31, 1998:
CI Company Country CI Ownership Percentage BelCom, Inc. Russian Federation & CIS 100% COMSAT Argentina, S.A. Argentina 100% COMSAT Asia (L) Incorporated China 55% COMSAT de Colombia, S.A. Colombia 100% Communicaciones Satelitales de Colombia Colombia 100% COMSAT Brasil Ltda. Brazil 100% COMSAT de Guatemala, S.A. Guatemala 100% COMSAT Max Limited India 50% COMSAT Mexico S.A. de C.V. Mexico 100% COMSAT Peru, S.A. Peru 100% COMSAT Digital Services Turkey 85% COMSAT Telecommunications Services Turkey 64% COMSAT Venezuela Venezuela 100%
CI continued to develop its businesses in 1998. In particular, CI purchased all outstanding minority shareholdings in its Latin American companies, including 35% of COMSAT Peru, S.A. held by Avantec, S.A. and 6% of Communicaciones Satelitales de Colombia held by several individual minority shareholders. As a result, all of CI's Latin American operations are now wholly-owned companies. Due to a restrictive regulatory environment, CI decided to convert its Bolivian operations to inactive status, pending possible liberalization and business opportunities in the future. CI employs various technologies including satellite, microwave, fiber optic, frame relay and ATM in the design and implementation of network solutions for its clients. Each of CI's operations centers is open seven days per week, 24 hours per day to monitor, test, and provide help desk services to clients. CI provides a wide range of service options to its corporate clients from basic provision and maintenance of the customer's network to full management of the network including router and facility management, from each of CI's network management centers. The services provided by CI operating companies depend on local regulations and are built from the following "family" of offerings: . COMSATLink - services that assure a constant dedicated circuit ---------- between locations for the transmission of voice, data and video communications. Customers use the service for applications requiring LAN interconnection, Internet access, and voice trunking both domestically and internationally. . COMSATNet - a service connecting multiple locations to a central --------- host location or with each other. Typical applications are point-of- sale networks, credit card verification, banking, lottery, Internet access, inventory management and others. A wide range of speeds are available both domestically and internationally. . COMSATCast - an effective solution for customers having one-way ---------- (broadcast) data, audio and video requirements. Transmission from a central location can be sent to many locations simultaneously for applications such as the distribution of financial market data, news, weather data, radio programming, corporate training and television programming. 17 . COMSATDVnet - a Dynamic Virtual Network service that takes ----------- advantage of broadband technologies and flexible, cost-effective bandwidth allocation to bring high-performance data services tailored to the customers network and management needs. Uses include WAN and LAN interconnections, Internet access, remote database access, file transfer and sharing, E-mail, E-commerce, virtual private networks, packetized voice and video, order entry systems and more. Speeds range from 64kbps to 45mbps. . COMSATWeb - provides a variety of Internet service configurations --------- with integrated offerings under development now. Sales and Marketing CI has direct sales personnel in each of its operations. In some of the larger countries, marketing agreements have also been established with various companies to provide additional geographic coverage of the market. CI's target market consists of corporate clients, both national and international, Internet service providers (ISPs) and telecommunications carriers who need local presence for provision of corporate networks. Regulation of CI CI's companies operate in various developing countries and are subject to regulation by the local regulatory authorities in those countries. Because the regulatory environment in those countries is rapidly evolving as the local economies are developing, CI's companies face increasing business uncertainties which could have an adverse effect on their operations in those countries. Competition CI's companies operate in numerous and diverse markets. Competition in these markets tends to be fragmented. Competitors are different in each region and in some cases, in each country in which CI operates. The degree of regulation and the level of competition in these countries varies considerably. In some countries there is full competition, and in others competition is limited by law. The competitive conditions faced by each company are the result of differing and changing regulatory policies and economic conditions. In those countries that have not yet undergone a substantial liberalization of their telecommunications laws, CI's principal competitor is typically a version of the local Postal, Telegraph and Telephone administration (PTT), together with a limited number of companies that provide telecommunications services similar to those offered by CI. In countries that have liberalized their telecommunications laws, CI typically faces greater competition than in less liberalized markets. CI faces certain operational risks inherent to the countries in which it operates. These risks are typical of emerging markets and include changes in government regulations and licensing requirements, tariffs, taxes, sanctions and other trade barriers, exchange controls, bureaucratic impediments, political, social and economic instability, inflation, devaluation, interest rate and exchange rate fluctuations. There can be no assurance that the current economic difficulties faced in Asia, Russia, Brazil and elsewhere, or any future economic difficulties, or any other risks enumerated above or otherwise, will not adversely 18 impact CI's existing or prospective customers, thereby affecting CI's ability to generate revenues or otherwise having a material adverse affect on CI's financial results and condition. Revenues Approximately 18% of the Corporation's consolidated revenues in 1998 were derived from CI (compared to 16% in 1997 and 11% in 1996). No single customer of CI provided more than 10% of the Corporation's consolidated revenues in 1998. See Note 16 to the financial statements. COMSAT LABORATORIES Services COMSAT Laboratories provides technical consulting services and develops communications products. Technical consulting activities include the design and development of advanced digital communications technologies, systems and networking solutions. COMSAT Laboratories also designs and develops communications products and software for satellite access, networking applications and satellite system planning and management. Customers include U.S. and foreign government agencies, commercial entities, INTELSAT, Inmarsat and ICO Global Communications (Holdings) Ltd. (ICO). In addition, COMSAT Laboratories conducts research and development (R&D) on a broad range of telecommunications devices, subsystems, transmission systems, technologies and techniques in support of other COMSAT businesses. On-going contracts being performed in 1998 include: a contract with Ericsson to design and develop the HPN ICONET ground facilities subsystems; a consulting agreement with Iridium related to the design of its next generation system; a contract with AT&T to deliver second generation Time Division Multiple Access (TDMA) terminals; contracts with INTELSAT to design STRIP7 and develop a software system for generation INTELSAT TDMA burst time plans; a contract with NASA to provide operation and maintenance support for the ACTS (Advanced Communications Technology Satellite) program; and a variety of technical consulting contracts for INTELSAT, Inmarsat, ICO and other governmental and private industry customers. COMSAT Laboratories won external contracts with a total value of $53 million in 1998. Major new contracts awarded or begun in 1998 include: a contract with INTELSAT for new TDMA infrastructure; a contract with Lockheed Martin for the ACES In-Orbit-Test; a contract with WorldSpace; and a contract with NASA for ACTS. At December 31, 1998, COMSAT Laboratories' backlog of orders totaled $50.5 million, as compared to $28.3 million at December 31, 1997. The Labs developed the Linkway 2000 product which is used commercially in the Link One/SM/ service, a new global satellite networking solution. The Linkway 2000 product supports two advanced networking protocols, ATM and Frame Relay. Telecommunications carriers can use the Link One service and the Linkway 2000 product to extend international voice and data networks into remote locations that do not currently have service. ISPs can use this service to more easily connect countries throughout the world to the U.S. Internet backbone. The service can also be used by multinational corporations to network their offices worldwide. 19 COMSAT Laboratories incurred research and development expenditures of $3.2 million in 1998, a decrease of $0.5 million from 1997. These expenditures were largely attributed to the development of its broadband VSAT, ATM and software products. Revenues Approximately 7% of the Corporation's consolidated revenues in 1998 were derived from the Labs (compared to 6% in 1997 and 8% in 1996). See Note 16 to the financial statements. DISCONTINUED OPERATIONS During the second quarter of 1997, the Corporation began accounting for the operations of both Ascent Entertainment Group, Inc. (Ascent) and substantially all of COMSAT RSI, Inc. (CRSI) as discontinued operations. See Note 3 to the financial statements. The Corporation distributed its 80.67% ownership interest in Ascent to COMSAT's shareholders on June 27, 1997. On June 25, 1998, COMSAT completed the sale of substantially all of CRSI to a subsidiary of TBG Industries, Inc. (TBG) for net cash proceeds of approximately $111.9 million, after adjusting for changes in intercompany loans and advances. The sale of substantially all of the assets and liabilities of JEFA Wireless Systems, a subsidiary of CRSI, was completed in a separate transaction in February 1998. The Corporation has agreed to indemnify the purchasers of CRSI and JEFA against certain losses. See Note 3 to the financial statements. The Corporation has retained the long-term contract for the completion of the 100 meter radio astronomy telescope at Green Bank, West Virginia. CRSI's $29 million claim for work performed under and relating to the Green Bank contract, which is currently in arbitration, has been assumed by COMSAT. See "Item 3: Legal Proceedings" and Note 3 to the financial statements. The Corporation has also retained Electromechanical Systems, Inc. (EMS), a former subsidiary of CRSI. EMS designs, manufactures and installs multi-axis positioning control units (pedestals) for precision tracking and pointing for air traffic control, weather, radar, communication and surveillance equipment. EMS also provides repair and restoration service for various antenna pedestals for its customers. More than 90% of EMS's current business is with military and government customers, nearly all in the U.S. EMS and the Corporation have been named as defendants in a pending qui tam lawsuit under the Civil False Claims Act. There is also a separate criminal investigation into the same allegations. See "Item 3: Legal Proceedings" and Note 11 to the financial statements. CRSI previously owned a 53% equity interest in Plexsys International Corporation (Plexsys). Plexsys ceased doing business on July 1, 1998. This investment was not sold to TBG in connection with the sale of CRSI and has been written off by the Corporation. 20 INVESTMENTS New Skies Satellites, N.V. On November 30, 1998, INTELSAT transferred six satellites (five currently in orbit and one scheduled to be launched during 1999) to New Skies. New Skies, which is headquartered in the Netherlands, is a separate company that is independent of INTELSAT. As of December 31, 1998, the Corporation owned 16.6% of New Skies. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook - Satellite Services - Restructuring of INTELSAT and Inmarsat" and Note 6 to the financial statements. ICO Global Communications (Holdings) Limited As of December 31, 1998, the Corporation directly owned 1.6% of ICO. Together with the Corporation's indirect ownership of ICO through its ownership interest in Inmarsat, which is also an ICO shareholder, the Corporation owned an aggregate of 3.7% of ICO. See Note 6 to the financial statements. ICO was formed to provide hand-held satellite communications services outside of the Inmarsat organization to allow a more commercial focus than the current Inmarsat system. In 1997, COMSAT concluded agreements with ICO to construct, operate and interconnect a "satellite access node" (SAN) in Brewster, Washington. In December 1998, COMSAT reached an agreement with ICO to transfer the SAN facility back to ICO. The agreement also waives any rights to distribute ICO services that COMSAT may have obtained by virtue of its 1995 subscription agreement. In consideration of its settlement agreement, COMSAT received a cash payment of $4.5 million. See "Item 7: Management's Discussion of Financial Condition and Results of Operations - Consolidated Operations" and Note 6 to the financial statements. 21 Item 2: Properties COMSAT PROPERTIES Bethesda, Maryland Headquarters At year end 1998, the headquarters of the Corporation and the headquarters of CWS, CMC and CI were located in a building in Bethesda, Maryland, which the Corporation leases from a limited partnership in which it holds a 50% interest, primarily as a limited partner. The managing general partner also owns a 50% interest in the partnership. An affiliate of the managing general partner owns the building site and has leased this site to the partnership. In 1993, the Corporation entered into a 15-year lease with the partnership for the building. See Note 10 to the financial statements. Clarksburg, Maryland Facility In 1997, the Corporation sold the office buildings and land at Clarksburg, Maryland that serve as the headquarters of the Labs and CGSI. The Corporation leased back the office buildings and the land underlying its earth stations for a ten-year lease term. See Note 5 to the financial statements. The Corporation owns an earth station at Clarksburg, Maryland that is used by COMSAT General to house its Satellite Control and Teleport Facilities as well as the Bandwidth Management Center operated by CGSI for the U.S. Government CSCI Program. The Corporation also owns an earth station at Clarksburg, Maryland that is used by CWS to provide TT&C services to INTELSAT. CDTI provides turnkey satellite services at Clarksburg, Maryland. Other Properties The Corporation owns or leases 10 properties in the United States and leases a sales office in Beijing, China. The Corporation owns earth stations at Santa Paula, California and Southbury, Connecticut, and leases earth stations in Turkey (which lease expires June 30, 1999) and Malaysia, that are used by CMC to provide mobile communications services. The Corporation owns an earth station at Paumalu, Hawaii that is used by CWS to provide TT&C services to INTELSAT. COMSAT General owns 86.3% of the MARISAT Joint Venture, which operates the MARISAT F-2, one of the three satellites launched in 1976, with capacity leased to Fugro N.V., a Netherlands company. The MARISAT F-1 and F-3 ceased commercial operations in 1996. COMSAT General owns the COMSTAR D-4 satellite (launched in 1981) with capacity leased to CMC and the U.S. Navy. CI leases or owns facilities in each of the countries in which it operates. See "Item 1: Business -COMSAT International" above for a listing of the countries in which CI operates. The Corporation's properties are believed to be suitable and adequate for the Corporation's business operations. 22 INTELSAT Satellites The Corporation's property accounts include CWS's pro rata share of INTELSAT satellites. The INTELSAT satellites currently in use and under construction are described below. As a result of the INTELSAT restructuring, six INTELSAT satellites were transferred to New Skies on November 30, 1998. Five of the transferred satellites were in use and one is under construction. The transferred satellites are not included in the description below. See "Item 7: Management's Discussion and Analysis of Financial Condition and the Results of Operations -Outlook - Satellite Services - Restructuring of INTELSAT and Inmarsat." There are three INTELSAT V and VA satellites continuing to operate in the INTELSAT system. All of these satellites have reached the end of their design lives and are operating in an inclined orbit. Their capacities range from 15,000 to 17,000 voice circuits or 51 to 57 television channels (or some combination of each depending on the configuration of the satellite). The satellites were built by a predecessor to Space Systems/Loral. The INTELSAT VI series consists of five satellites, constructed by Hughes Aircraft Company, now a subsidiary of General Motors Corporation. These satellites have an average capacity of at least 24,000 bearer circuits or 87 television channels. The INTELSAT VI satellites, the last of which was launched on October 1991, currently provide primarily backbone public switched network (PSN) services in the Atlantic and Indian Ocean regions. The INTELSAT VII series consists of five satellites constructed by Space Systems/Loral. These satellites have an average capacity of at least 17,050 bearer circuits or 62 television channels (or a capacity of 62 36MHz units with a typical minimum power range of 29 to 34.5 decibels relative to one watt (DBW) at C-band and 44 DBW at Ku-band depending on the beam). The last INTELSAT VII satellite was launched in June 1996. These satellites were designed to replace the V/VA satellites. They provide improved utilization and flexibility, with improved radio frequency power, enhanced Ku-band coverage and increased C-band connectivity compared to the V/VA satellites. The INTELSAT VIIA series, also constructed by Space Systems/Loral, consists of two satellites having an average capacity of at least 19,250 bearer circuits or 70 television channels (or a capacity of 70 36MHz units with a typical minimum power range of 29 to 36 DBW at C-band and 42.7 to 45 DBW at Ku-band depending on the beam). Of the three INTELSAT VIIA satellites constructed, the first INTELSAT VIIA satellite was successfully launched in May 1995; the launch of the second VIIA, in February 1996, was a launch failure (see Note 5 to the financial statements); and the third VIIA was successfully launched in March 1996. These satellites provide an enhancement over the VII satellites to meet increased demand for high power Ku-band capacity. New cross-strapped connectivity from Ku-band to C-band allows the provision of satellite news gathering (SNG) service using a roving Ku-band Spot Beam in the uplink. The INTELSAT VIII series consists of three satellites constructed by Lockheed Martin Corporation. These satellites have an average capacity of 21,000 bearer circuits or 76 television channels (or a capacity of 76 36MHz units with a typical power range of 29 to 34.5 DBW at C-band and 44 DBW at Ku- band depending on the beam). All three INTELSAT VIII satellites were successfully launched in 1997. They were designed primarily to complement the INTELSAT VI satellites and meet growing 23 demand for C-band services. The INTELSAT VIII series satellites provide new television broadcast mode capability with simultaneous up link from the Northeast zone beam and down link from three West zone beams. The INTELSAT VIII series satellites also provide expanded SNG service with the capability to cross connect any of the Ku-band spot beams to any of the global beams in certain transponders. The INTELSAT VIIIA series consists of one satellite constructed by Lockheed Martin Corporation. The satellite has an average capacity of at least 11,600 bearer circuits or 38 television channels (or a capacity of 42 36MHz units with a power range of 39.7 to 42 DBW at C-band and 50.4 to 51.7 DBW at Ku-band depending on the beam). The INTELSAT VIIIA (F-5) was launched in June 1998. The INTELSAT VIIIA satellite is designed for users requiring high power together with a wide coverage areas in C-band for the provision of services such as video, VSAT applications and PSN. It uses complex state-of-the-art antenna technology to provide improved coverage of land areas of North and South America. The INTELSAT IX series currently consists of five satellites. As of December 31, 1998, procurement of five satellites had been approved by the INTELSAT Board of Governors. These spacecraft are to be built by Space Systems/Loral and are intended to replace the INTELSAT VI satellites between 2000 and 2002. The INTELSAT IX satellites are expected to have an average capacity of 98 36MHz transponders with a typical minimum power range of 31 to 47 DBW depending on the beam. The satellites will provide primarily high connectivity backbone public network services in the Atlantic and Indian Ocean regions. The INTELSAT IX satellites will be INTELSAT's largest capacity satellites with advanced communications and RF performance. Inmarsat Satellites The Corporation's property accounts include CMC's pro rata share of Inmarsat satellites. The Inmarsat satellites currently used are described below. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook - Satellite Services - Restructuring of INTELSAT and Inmarsat." The second-generation Inmarsat satellite system, known as the Inmarsat-2 series, consists of four satellites constructed by an international consortium led by British Aerospace Dynamics Corporation. These satellites are now used primarily for bulk services and backup capacity. The Inmarsat-2 satellites are expected to be moved, depending on traffic demand, to new orbital locations where they will provide full time pre-emptible lease services. The Inmarsat-2 series satellites also provide backup for global beam services on the Inmarsat-3 satellites. Some services such as Mini-M and Aero-I are spot beam only services and can only be supported on the Inmarsat-3 satellites. The third-generation Inmarsat satellite system, known as the Inmarsat-3 series, consists of five satellites constructed by Lockheed Martin Astro Space. These satellites use spot-beam technology, which allows reuse of the scarce frequency resources allocated for mobile satellite communications. The Inmarsat-3 satellites are about eight times more powerful than the Inmarsat-2 series. All five of these satellites were launched successfully. Four of the Inmarsat-3 satellites are the primary operational Inmarsat spacecraft and are used for on-demand services such as Inmarsat A, B, M, Mini-M, C, and Aeronautical. The fifth Inmarsat-3 satellite is planned to be used primarily for bulk services and backup capacity. 24 Item 3: Legal Proceedings In addition to the matters described below, certain legal proceedings, which are either pending or known to be contemplated by governmental authorities, to which COMSAT or any of its subsidiaries is a party are described in Notes 10 and 11 to the financial statements. In 1995, the Corporation entered into a five-year agreement with News Corporation to provide satellite services beginning in 1996. In March 1996, News Corporation unilaterally terminated this agreement. The Corporation has commenced a lawsuit against News Corporation to recover damages arising out of the alleged breach of obligation to COMSAT, and against PanAmSat Corporation and Televisa for allegedly inducing the breach. News Corporation has asserted a counter claim for return of the $5 million deposit it originally paid. Since November 1997, the Corporation has been in a dispute with IDB Mobile Communications, Inc. and its parent, Stratos Global Corporation of Canada, about IDB/Stratos' refusal to pay COMSAT as U.S. Signatory to Inmarsat for the satellite capacity used by their U.S. land earth stations. Stratos became Canada's Signatory to Inmarsat in 1998. COMSAT contends that IDB is required, under contract and by U.S. law (including the Maritime Satellite Act of 1978), to pay solely COMSAT for that U.S. satellite capacity. IDB/Stratos contend they are permitted to secure capacity from foreign Signatories. In February 1998 they asked the FCC for a declaratory ruling to that effect, which COMSAT opposed; the petition remains pending. In January 1998, the Corporation sued IDB for breach of contract. The court dismissed the contract case but ruled that COMSAT could seek to enforce its statutory rights at the FCC. COMSAT has appealed this ruling. In January 1999, the Corporation filed a complaint at the FCC seeking damages against IDB, which remains pending. In addition, IDB/Stratos have three applications pending at the FCC for authority to provide various Inmarsat services, which COMSAT has opposed unless conditioned on use of satellite capacity provided by COMSAT as U.S. Signatory. Also pending at the FCC is a complaint filed against COMSAT by IDB/Stratos in September 1997 challenging the Corporation's rates for certain Inmarsat services. The Corporation has retained the long-term contract for the completion of the 100 meter radio astronomy telescope at Green Bank, West Virginia. CRSI's $29 million claim for work performed under and relating to the Green Bank contract, which is currently in arbitration, has been assumed by COMSAT. The prime contractor has filed a counterclaim seeking $12.9 million in damages for delay. The claim and counterclaim are currently in arbitration. There can be no assurance that the Corporation will be successful in collecting all or any portion of this claim. COMSAT and its subsidiaries are a party to various lawsuits and arbitration proceedings and are subject to various claims and inquiries, which generally are incidental to the ordinary course of its business. The outcome of legal proceedings cannot be predicted with certainty. Based on currently available information, however, management does not believe that the outcome of any matter which is pending or threatened, either individually or in the aggregate, will have a material adverse effect on the consolidated financial condition of the Corporation. Nevertheless, the outcome of such matters could materially affect consolidated results of operations in a given year or quarter. 25 Item 4: Submission of Matters to a Vote of Security Holders None. 26 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters On December 31, 1998, there were 52,633,577 shares of common stock outstanding. Of this number, 18,958 were Series II shares and 52,614,619 were Series I shares. Series II shares are shares held by communications common carriers authorized to hold shares by the FCC. Series I shares are held by other persons. As of December 31, 1998, the Corporation had 32,711 Series I holders and 36 Series II holders of record. The principal market for COMSAT's common stock is the New York Stock Exchange, where it is traded under the symbol "CQ." COMSAT's common stock is also listed on the Chicago Stock Exchange and the Pacific Stock Exchange in the United States and on the Swiss Exchange. The Corporation's transfer agent, registrar and dividend disbursing agent is The Bank of New York, 101 Barclay Street, New York, New York. The high and low sales prices of, and the dividends declared on, each share of COMSAT common stock for the last two years are as follows:
Calendar Year 1998 High Low Dividend - -------------------- -------- -------- -------- First Quarter 36 21 5/8 .05 Second Quarter 42 3/4 27 3/4 .05 Third Quarter 36 7/8 21 13/16 .05 Fourth Quarter 39 5/8 32 7/16 .05 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
27 Item 6: Selected Financial Data
In thousands, except per share amounts 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Summary of Operations Revenues $ 616,469 $ 562,651 $ 545,100 $ 507,687 $ 500,687 Operating expenses 556,967 480,683 437,875 387,873 367,324 Operating income 59,502 81,968 107,225 119,814 133,363 Income from continuing operations 26,417 28,568 36,197 43,507 69,245 Net income (loss) 26,417 (64,446) 8,622 37,817 77,642 Earnings (loss) per share-assuming dilution: Income from continuing operations 0.50 0.57 0.74 0.91 1.47 Net income (loss) 0.50 (1.29) 0.18 0.79 1.65 Balance Sheet Data Total assets 1,790,798 1,894,775 2,097,286 2,022,247 1,851,351 Long-term debt 446,832 461,960 578,379 590,378 511,474 Stockholders' equity 659,040 586,271 841,817 839,433 826,916 Dividends Dividends paid 10,393 16,975 37,698 36,874 33,547 Dividends paid per share 0.20 0.35 0.78 0.78 0.76 Distribution of Ascent Entertainment Group, - 194,633 - - - Inc. shares
28 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations ANALYSIS OF OPERATIONS Consolidated Operations Continuing Operations Consolidated revenues from continuing operations in 1998 were $616 million, an increase of 10% as compared to the previous year. This improvement was the result of increases in all business segments. Consolidated revenues in 1997 were $563 million, or 3% higher than 1996. This increase was predominantly the result of COMSAT International (CI) revenue growth as compared to 1996. Operating income from continuing operations in 1998 was $60 million, which was $22 million below 1997. The decrease in operating income was primarily the result of a $14 million impairment loss related to BelCom (a CI company operating in Russia and the Commonwealth of Independent States) and increased losses in CI of $12 million, which were primarily related to operations in Brazil. In addition, 1998 results included $6 million of costs related to the proposed merger with Lockheed Martin Corporation. Improvements in operating income in both the COMSAT Mobile Communications (CMC) and COMSAT World Systems (CWS) segments totaling $14 million partially offset those items. Operating income from continuing operations for 1997 was $82 million, as compared to $107 million for 1996. The 1997 decline in operating income was primarily the result of lower operating income in the CWS, CMC and COMSAT Laboratories (Labs) segments, partially offset by improvements in CI. The decrease in CWS was primarily the result of a lower investment base in CWS, which reduced operating income under rate of return regulation. The decrease in CMC was due to increased depreciation from new satellites. The decrease in the Labs was due to the non-recurrence in 1997 of the positive impact in 1996 of a licensing agreement that resolved a patent-infringement dispute. Expenses of $4 million for a proxy contest and related litigation, which were settled in the second quarter of 1997, also affected 1997 operating income. Other income (expense), net for 1998 was income of $13 million, which was $9 million better than 1997. This was primarily the result of a $15 million gain from the sale of a portion of CI's investment in Viatel, Inc. and income of $4 million from an agreement with ICO Global Communications (Holdings) Limited (ICO) that settled a dispute between the corporation and ICO. See Note 6 to the financial statements. In addition, 1998 included a $2 million non-cash write- off of the Labs' investment in Superconducting Core Technologies that partially offset those items. For 1997, other income (expense), net was income of $4 million, which was $11 million better than 1996. This was primarily attributable to a $7 million gain on the sale of the corporation's Clarksburg, Maryland property and improvements in the results of CI's equity investments. Interest costs, net of amounts capitalized for 1998, were $40 million, or $2 million lower than 1997. The lower interest costs were due to the reversal of $4 million of previously accrued interest costs related to income taxes (discussed below in income tax expense) and lower borrowings as a result of the use of the proceeds from the sale of COMSAT RSI, Inc. (CRSI) to reduce debt. Lower amounts of 29 interest capitalized due to the completion of satellites under construction partially offset these decreases. Interest costs, net of amounts capitalized for 1997, were $42 million, which was $7 million higher than 1996. The increase primarily reflected reduced interest capitalized as compared to 1996. Income from continuing operations before taxes and extraordinary item for 1998 was $32 million, or $12 million below the previous year. This decrease was principally due to the impairment loss related to BelCom, increased losses in Brazil, merger costs and the non-recurrence of the gain on the sale of the Clarksburg property. The gain from the sale of Viatel stock and improvements in both CMC and CWS partially offset those items. Income from continuing operations before taxes and extraordinary item for 1997 was $44 million, or $21 million below 1996. This was primarily the result of the factors noted above in the discussion of operating income, partially offset by the 1997 gain on the sale of the Clarksburg property. Income tax expense for 1998 was $6 million, compared to $16 million for the previous year. In the third quarter of 1998, the corporation favorably resolved a state tax audit and, accordingly, reversed previously accrued interest costs of $2 million and state income taxes of $2 million. In addition, events during the third quarter led the corporation to determine that previously accrued interest costs of $2 million and federal income taxes of $15 million related to certain federal tax matters were no longer required. See Note 14 to the financial statements. Excluding these tax benefits, the corporation's effective tax rate was higher than the previous year as a result of not being able to tax benefit the BelCom impairment loss and certain merger costs. Income tax expense in 1997 of $16 million was $13 million below 1996. This was primarily due to a decrease in income before taxes and an improved effective tax rate due principally to a reduction in state income tax expense. Income for 1998 from continuing operations before extraordinary item was $26 million, or $3 million below the previous year. Income from continuing operations before extraordinary item for 1997 was $29 million, as compared to $36 million in 1996. Basic earnings per share for continuing operations before extraordinary item for 1998 were $0.51, or $0.07 below 1997. For 1997, basic earnings per share were $0.58, as compared to $0.76 for 1996. Diluted earnings per share for continuing operations for 1998 were $0.50, a $0.07 decrease from 1997. Diluted earnings per share for continuing operations for 1997 and 1996 were $0.57 and $0.74, respectively. See Note 12 to the financial statements. Extraordinary loss from early extinguishment of debt, net of tax, for 1997 was $4 million ($0.08 per share). This represents the costs incurred in 1997 from the corporation's repurchase of $90 million of its 8.125% notes and $10 million of its 7.7% medium-term notes. See Note 8 to the financial statements. Discontinued Operations During the second quarter of 1997, the corporation began accounting for the operations of both Ascent Entertainment Group, Inc. (Ascent) and substantially all of CRSI as discontinued operations. In 1997, the corporation recorded a loss from discontinued operations, net of tax, of $89 million ($1.78 per share, fully diluted). This compares to losses of $28 million ($0.56 per share, fully diluted) for 1996. See Note 3 to the financial statements. 30 Consolidated Results On a consolidated basis, including discontinued operations and the extraordinary item, net income for 1998 was $26 million as compared to a net loss for 1997 of $64 million. For 1996, the consolidated net income was $8 million. Basic earnings per share for 1998 were $0.51 as compared to basic losses per share for 1997 of $1.32. Basic earnings per share for 1996 were $0.18. Diluted earnings per share for 1998 were $0.50 as compared to diluted losses per share for 1997 of $1.29. Diluted earnings per share for 1996 were $0.18. See Note 12 to the financial statements. Segment Operating Results In accordance with Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information," the corporation is reporting its operating results in four segments. The Satellite Services business unit consists of two segments -- CWS and CMC. The corporation's other business units, CI and Labs, are being reported as separate segments. The corporation evaluates the performance of its operating segments based on income (loss) before taxes and interest costs. See Note 16 to the financial statements. In the corporation's 1998 Form 10-Q reports and the 1997 Form 10-K, operating results were presented in two segments -- Satellite Services and Network Services. The Satellite Services segment included CWS and CMC. The Network Services segment included CI, Labs and Government Programs. Effective December 31, 1998, CI and Labs are reported as separate segments. The results of Government Programs are now included as part of the CWS segment. 31
In millions 1998 1997 1996 - ----------------------------------------------------------------------- REVENUES - -------- Satellite Services World Systems $303.1 $286.1 $297.8 Mobile Communications 169.1 167.9 160.9 ------- ------ ------ Total Satellite Services 472.2 454.0 458.7 ------- ------ ------ COMSAT International 113.3 89.7 58.1 COMSAT Laboratories 42.3 36.4 43.7 Eliminations and other (11.3) (17.5) (15.4) ------- ------ ----- Total $616.5 $562.6 $545.1 ======= ====== ====== INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES AND EXTRAORDINARY ITEMS - ------------------------------------------ Satellite Services World Systems $113.1 $102.7 $111.0 Mobile Communications 31.9 23.8 34.9 ------- ----- ----- Total Satellite Services 145.0 126.5 145.9 ------- ----- ----- COMSAT International (21.0) (8.9) (14.7) COMSAT Laboratories (3.5) (1.8) 7.3 ------- ----- ----- Total segment income before taxes 120.5 115.8 138.5 General and administrative expense (25.6) (23.2) (23.9) Merger costs (5.5) - - Other (57.2) (48.4) (49.5) ------- ----- ----- Total $ 32.2 $ 44.2 $ 65.1 ======= ====== ======
Satellite Services Satellite Services includes both the CWS and CMC operating segments. CWS provides satellite capacity for telephone, data, Internet, video and audio communications services between the United States and the rest of the world using the global satellite networks of the International Telecommunications Satellite Organization (INTELSAT) and New Skies Satellites N.V. (New Skies). CWS also includes the operating results of COMSAT Government Systems, Inc., COMSAT Digital Teleport, Inc. and COMSAT General Corporation, which provide various satellite and ground segment services to commercial and government customers. CMC provides satellite telecommunications services for maritime, aeronautical and land mobile applications, primarily using International Mobile Satellite Organization (Inmarsat) satellites. COMSAT is the statutorily designated U.S. participant in both the INTELSAT and Inmarsat satellite systems. Revenues in the Satellites Services business in 1998 were $472 million, an increase of 4% over 1997. For 1997, Satellite Services revenues were $454 million, or 1% below the previous year. Income before taxes for the Satellite Services business in 1998 was $145 million, which was 15% better than 32 1997. Income before taxes for Satellite Services in 1997 was $127 million, a decline of 13% as compared to 1996. World Systems Revenues in CWS for 1998 were $303 million, which was 6% higher than 1997. The improvement in revenues was primarily the result of increased demand for private data communication networks and Internet transmissions, partially offset by declines in voice and video revenues. CWS revenues for 1997 were $286 million, or 4% below 1996. The decline resulted from lower full-time voice and fiber optic restoration revenues, which were partially offset by increased revenues from private data communication network leases and Internet traffic. The lower voice revenues stemmed primarily from rate reductions provided to AT&T, MCI and Sprint, CWS's three largest international carrier customers. Income before taxes for CWS in 1998 was $113 million, or 10% higher than the previous year. The 1998 results include income of $4 million from a settlement with ICO pursuant to which the corporation will transfer operation of ICO's Satellite Access Node facility in the United States to ICO. See Note 6 to the financial statements. The balance of the improvement in income before taxes was primarily due to higher revenues offset, in part, by increased depreciation from placing new satellites in service. For 1997, CWS's income before taxes was $103 million, or 7% below 1996. The 1997 results reflect increased depreciation from placing new INTELSAT satellites in service. On November 30, 1998, INTELSAT transferred six satellites (five currently in orbit and one scheduled to be launched during 1999) to New Skies. New Skies is an independent company that was spun off from INTELSAT and is headquartered in the Netherlands. See Note 6 to the financial statements and Management's Discussion and Analysis (MD&A) -- Outlook. Mobile Communications Revenues in CMC for 1998 were $169 million, an increase of 1% compared to last year. In 1998, CMC recorded increased revenues from the contract with the Federal Aviation Administration (FAA) on the Wide Area Augmentation System (WAAS) and from traffic improvements in both digital telephone services and aeronautical services. Offsetting these improvements were lower sales of Planet 1 terminals and a decrease in telex revenues. For 1997, CMC's revenues were $168 million, an increase of 4% compared to the prior year. The higher revenues were primarily the result of sales of Planet 1 terminals and service, the start of the FAA WAAS contract and increased revenues from the Inmarsat system. CMC's income before taxes for 1998 was $32 million, which was 34% better than 1997. The improvement in income was primarily the result of lower operating costs offset, in part, by increased depreciation from the full-year impact of new Inmarsat satellites placed in service. Income before taxes for CMC in 1997 was $24 million, which was 32% below 1996. The decrease was primarily the result of increased depreciation associated with new Inmarsat-3 satellites placed in service during 1997 and increased costs related to Planet 1 service, which began commercial operation in 1997. 33 COMSAT International CI operates an integrated group of telecommunications companies that are engaged principally in providing individualized digital network solutions and value-added services to business clients and carriers in selected emerging markets. As of December 31, 1998, CI operated in 11 countries worldwide. CI's revenues in 1998 were $113 million, or 26% higher than in 1997. The higher revenues were principally due to growth in Argentina, Brazil and Colombia. In 1997, CI's revenues were $90 million, which was 54% better than the previous year. The 1997 increase in revenues in CI was driven primarily by improvements in CI's operations in Brazil, Argentina and Venezuela. CI's loss before taxes in 1998 was $21 million, as compared to losses of $9 million in 1997. In the third quarter of 1998, CI recorded a non-cash impairment loss of $14 million, which was related to the write-down of long-lived BelCom assets, namely goodwill and plant and equipment. See Note 7 to the financial statements. In addition, CI had a $15 million gain from the sale of Viatel stock. Exclusive of the BelCom impairment and the gain on the sale of stock, CI's losses increased $13 million as compared to 1997. The increased operating losses were primarily due to higher depreciation, fixed asset adjustments and contract losses in Brazil; increased losses in BelCom; and start-up costs in Mexico. In 1997, the loss before taxes was $9 million, a $6 million improvement over 1996. The 1997 improvement was primarily the result of a decrease in losses at BelCom. COMSAT Laboratories COMSAT Laboratories provides technical consulting services and develops advanced communications technologies and products for satellite access and networking applications. The Labs' revenues for 1998 were $42 million, which was 16% higher than 1997. This increase was due to improvements in technical consulting revenues. Revenues in 1997 were $36 million, as compared to $44 million for 1996. Included in 1996 revenues and income before taxes was $8 million related to a licensing agreement that resolved patent infringement disputes with certain manufacturers of television encryption and decryption equipment, which did not reoccur in 1997. Exclusive of the revenues related to this agreement, the Labs' 1997 revenues were at approximately the same level as 1996. The loss before taxes in 1998 for the Labs was $4 million, compared to $2 million in 1997. The 1998 loss included the first quarter 1998 non-cash $2 million write-off of the Labs' investment in Superconducting Core Technologies, Inc. The 1997 loss before taxes of $2 million compared to a $7 million profit before tax for 1996. The 1996 results included the $8 million of income related to the agreement on patent disputes. 34 Outlook Many of the statements that follow are forward looking and relate to anticipated future events and operating results. Statements that look forward in time are based on management's current expectations and assumptions, which may be affected by subsequent developments and business conditions, and necessarily involve risks and uncertainties. These statements and the corporation's future operating results may be affected by the timing and outcome of regulatory and other governmental proceedings, legislative actions, developments concerning the privatizations of INTELSAT and Inmarsat, the proposed acquisition of COMSAT by Lockheed Martin Corporation, international and domestic business conditions, increased competition from other satellite services providers, the disposition of assets and completion of contracts placed in discontinued operations, the effect of the year 2000 issue on COMSAT, litigation and other factors. Therefore, there can be no assurance that actual future results will not differ materially from anticipated results. Although the corporation has attempted to identify some of the important factors that may cause actual results to differ materially from those anticipated, those factors should not be viewed as the only factors that may affect future operating results. Business Combination with Lockheed Martin On September 18, 1998, COMSAT entered into an Agreement and Plan of Merger (the Merger Agreement) with Lockheed Martin Corporation (Lockheed Martin) and Deneb Corporation (Acquisition Sub), a wholly-owned subsidiary of Lockheed Martin. Under the terms of the Merger Agreement, Lockheed Martin will acquire all of the issued and outstanding common stock, no par value, of COMSAT (the COMSAT Common Stock) in a two-step transaction. On September 25, 1998, a wholly-owned subsidiary of Lockheed Martin, Regulus, LLC (Purchaser), initiated a tender offer to purchase up to 49% (subject to certain adjustments) of the COMSAT Common Stock at a price of $45.50 per share in cash. The tender offer is being made pursuant to the Merger Agreement upon the terms and subject to the conditions set forth in the Purchaser's Offer to Purchase, dated September 25, 1998 (the Offer to Purchase), and the related Letter of Transmittal (which, together with the Offer to Purchase, constitute the Offer). Certain significant conditions to the consummation of the Offer include: (i) there being validly tendered and not withdrawn prior to the expiration date of the Offer at least one-third of the COMSAT Common Stock; (ii) the approval by COMSAT shareholders of the Merger (described below) and the Merger Agreement; and (iii) the receipt of all required regulatory consents and approvals, including the Purchaser having been authorized by the FCC to acquire up to 49% of the then outstanding Shares, subject to certain adjustments (such authorization, and certain related FCC authorizations, the Authorized Carrier Conditions, and expiration of all waiting periods under applicable antitrust laws. The Purchaser's obligation to consummate the Offer also is subject to there not being any fact or circumstance that would reasonably be expected to have a Material Adverse Effect (as defined in the Merger Agreement) on COMSAT or a decline in the Standard & Poor's 500 Index of at least 27% from the date of the Merger Agreement through certain specified measurement dates. The Offer is currently scheduled to expire on May 3, 1999. Under the Merger Agreement, however, Lockheed Martin has agreed to extend the Offer, for periods of no more than 60 days, until the 35 earlier of (i) September 18, 1999, or (ii) 10 business days after the date on which the last of the Authorized Carrier Conditions shall have been obtained. At Lockheed Martin's request, the Merger and Merger Agreement will be considered for approval by COMSAT's shareholders at the corporation's annual meeting of shareholders scheduled for June 18, 1999. The Merger Agreement provides that as soon as practical after consummation of the Offer and the satisfaction or waiver of the conditions set forth therein, COMSAT will be merged with Acquisition Sub (the Merger). In the Merger, each share of COMSAT Common Stock that is issued and outstanding immediately prior to the effective time of the Merger (other than shares of COMSAT Common Stock held by COMSAT, Purchaser or Lockheed Martin and dissenting shares, if any) will be converted into the right to receive one share of common stock, par value $1.00 per share, of Lockheed Martin (the Lockheed Martin Common Stock), after adjustment to give effect to a 2 for 1 stock split by Lockheed Martin effective December 31, 1998 and subject to possible further adjustment as provided in the Merger Agreement. Certain significant conditions to the consummation of the Merger include: (i) the consummation of the Offer; (ii) the amendment of the Communications Satellite Act of 1962 (the Satellite Act); and (iii) the receipt of the approvals of the FCC and other governmental authorities required for the consummation of the Merger. In addition, the obligations of Lockheed Martin and Acquisition Sub to consummate the Merger are subject to there not being any fact or circumstance that would reasonably be expected to have a Significant Adverse Effect (as defined in the Merger Agreement) on COMSAT. On January 21, 1999, Representative Tom Bliley, Chairman of the House Committee on Commerce, and Senator Conrad Burns, Chairman of the Senate Commerce Subcommittee on Communications, sent a letter to William E. Kennard, Chairman of the FCC, urging the FCC not to take any action to permit any company (including Lockheed Martin and the Purchaser) to purchase more than 10 percent of COMSAT prior to Congress adopting satellite reform legislation. If the FCC, in deference to the position expressed in the letter, does not proceed with its review of Lockheed Martin's filings related to the Offer, or if the FCC's review does not otherwise proceed on the schedule Lockheed Martin anticipated, the Offer may not be completed in the first half of 1999, the time frame previously disclosed by Lockheed Martin and COMSAT as the time frame during which they expected the Offer to close. Further, if the FCC were to delay or slow its review, and if Congress does not make rapid progress on satellite reform legislation, the Offer may not be completed by September 18, 1999. If this occurs, under the terms of the Merger Agreement, either party may terminate the Merger Agreement. The parties may also elect not to avail themselves of that right or may elect to amend the Merger Agreement to extend this date. If Congress enacts legislation promptly, the Merger may be accelerated from the year-end date previously estimated by Lockheed Martin and COMSAT as the date by which they expected the Merger to close. Conversely, if the legislative process moves slowly, the Merger is unlikely to occur by year end. For information about recently introduced satellite reform legislation, see Legislative and Regulatory Developments below. No assurance can be given that the requisite legislation will be enacted. If legislation enabling the Merger is enacted, FCC approval of the Merger (in addition to the Authorized Carrier Conditions) will still be required. While it is expected that the FCC would act promptly on the matter following enactment of enabling legislation, the FCC's response time could affect the estimated time frame for closing the Merger. 36 In connection with the execution of the Merger Agreement, the parties entered into certain ancillary agreements, including a Shareholders Agreement, a Registration Rights Agreement and a Carrier Acquisition Agreement. See Note 2 to the financial statements for a description of those agreements. Restructuring of INTELSAT and Inmarsat Significant progress was made during 1998 and early 1999 with respect to the corporation's ongoing efforts to restructure INTELSAT and Inmarsat. On November 30, 1998, INTELSAT transferred six satellites (five currently in orbit and one scheduled to be launched during 1999) to New Skies Satellites N.V. (New Skies). New Skies, which is headquartered in the Netherlands, is an entirely separate, independent company spun off from INTELSAT. Prior to the transfer from INTELSAT to New Skies of the six satellites, the financial results related to those satellites were included in INTELSAT's financial statements. Since the corporation uses the proportionate method of accounting to account for its investment in INTELSAT, a portion of the financial results related to those satellites also was included in the corporation's financial results. COMSAT is using the cost method of accounting for its investment in New Skies. COMSAT's direct ownership of New Skies is approximately 16%. Under the cost method, COMSAT will recognize income only at the time dividends from New Skies are received. COMSAT does not anticipate that New Skies will declare dividends during 1999 and for some period of time thereafter. During 1998, the corporation's share of pre-tax earnings related to the satellites transferred to New Skies was approximately $3 million. As a result, CWS's 1999 pre-tax earnings will be lower by approximately this amount in the absence of other factors that may affect operating results in CWS. COMSAT continues to consolidate the remaining INTELSAT investment and recognizes its portion of INTELSAT's results of operations each reporting period. See Note 6 to the financial statements. In June 1998, the FCC issued a public notice requiring U.S. earth stations licensees using INTELSAT satellites that were scheduled to be transferred to New Skies to file license modification applications by July 17, 1998 in order to access the New Skies system. Several companies, including COMSAT, filed applications in response to this notice. In September 1998, a competitor of New Skies filed a petition asking the FCC to deny the applications or alternatively to grant the applicants special temporary authority to access New Skies for a limited period and to defer the question of permanent authority to a later date. COMSAT, New Skies, and several of the applicants opposed this petition. The FCC did grant special temporary authority to access New Skies following the November 30, 1998 asset transfer and indicated that it would act on the question of permanent authority once it had obtained a complete record. The corporation expects that such authority ultimately will be granted. At its meeting in December 1998, the INTELSAT Board of Governors continued its discussions on transforming the remaining portion of INTELSAT from a treaty- based, intergovernmental organization to a fully private company. The INTELSAT Board of Governors will continue this work at its meeting in March 1999. It is the corporation's objective to privatize the remaining portion of INTELSAT by the end of 2001. The corporation, as a minority shareholder and the U.S. Signatory to INTELSAT, lacks the ability to independently effect a restructuring of INTELSAT. The success of the corporation's efforts will depend on its ability to achieve a consensus among other signatories and participating member 37 governments. A two-thirds vote of the governments that are members of INTELSAT would be necessary for approval of any final privatization proposal. In September 1998, the Inmarsat Assembly of Parties approved a plan to transfer the operating assets of the current Inmarsat intergovernmental organization to a new company. Inmarsat is expected to become an independent commercial company, based in the United Kingdom, in April 1999. While the new company initially would not be publicly traded, it is expected that it would proceed with an initial public offering within approximately 24 months after its creation. Individual ownership in the new company would be capped at 15%, although COMSAT's ownership in Inmarsat at the time of privatization would be grandfathered. COMSAT's ownership of Inmarsat was 22.2% as of December 31, 1998. COMSAT's voting rights, however, would be capped at 15% with respect to votes against certain shareholder resolutions. Prior to the public offering, owners are expected to be able to trade shares, and strategic investors may invest up to $500 million in equity in the new company. COMSAT signed the relevant Inmarsat restructuring agreements in February 1999. As a result, upon the transfer of Inmarsat's assets to the new company, COMSAT will be able to exercise its shareholder rights, as described in the preceding paragraph, and will continue to provide its current mobile satellite communications services using the satellites of the Inmarsat successor company. As with INTELSAT, COMSAT currently consolidates its shares of the accounts of Inmarsat. At the time of Inmarsat's privatization, the corporation will begin using the equity method of accounting for its 22.2% investment in the new company. Under the equity method, the corporation would include its proportionate share of the new company's operating results as part of the corporation's operating results. Currently, Inmarsat does not recognize income taxes in its financial results. The successor company to Inmarsat will be subject to income taxation in the jurisdiction in which it operates, the United Kingdom. In 1998 and prior years, the corporation reported its proportionate share of Inmarsat's operating results in revenues, operating expenses and other income (expense). As a result of the privatization of Inmarsat, the corporation expects to report in 1999 its share of Inmarsat's operating results, net of U.K. taxes, in other income (expense). The corporation does not anticipate that its use of the equity method of accounting for Inmarsat's results will affect its net operating results. The following table illustrates the effect of adoption of the equity method of accounting for the corporation's investment in Inmarsat on the corporation's consolidated balance sheet. The "As Reported" column reflects summary historical financial information for the corporation as of December 31, 1998. The "Proforma" column reflects similar summary unaudited proforma financial information assuming the equity method had been adopted as of December 31, 1998. The proforma information reflected is based upon the historical portion of Inmarsat's financial information included in the corporation's consolidated balance sheet as of December 31, 1998. In preparing the proforma consolidated balance sheet, the corporation's share of Inmarsat's assets and liabilities were removed from the respective financial captions (e.g., property and equipment or long-term debt) and reclassified as an investment in Inmarsat in the consolidated balance sheet. The proforma financial data is intended for informational and illustrative purposes only and should not be viewed as indicative of the future financial condition of the corporation on a consolidated basis. 38
In millions (Unaudited) As of December 31, 1998 As Reported Proforma - ------------------------------------------------------------------------------- Assets Current assets $ 199 $ 199 Property and equipment 1,210 954 Investments 249 434 Other 133 133 --------- --------- Total $ 1,791 $ 1,720 ========= ========= Liabilities and Stockholders' Equity Current liabilities $ 141 $ 137 Long-term debt 447 380 Non-current liabilities 344 344 Preferred securities issued by subsidiary 200 200 Stockholders' equity 659 659 --------- --------- Total $ 1,791 $ 1,720 ========= =========
Regulatory and Legislative Developments On April 24, 1998, the FCC granted the corporation's petition for reclassification as a non-dominant common carrier in markets that currently represent over 90% of CWS's revenues for INTELSAT services. For those markets, rate-of-return regulation was lifted immediately. On February 9, 1999, the FCC eliminated COMSAT's remaining rate-of-return regulation along thin routes in favor of COMSAT's incentive-based pricing plan. That plan will lower prices for customers on thin routes and, at the same time, ease the regulatory burden on the corporation in connection with its INTELSAT business. The FCC also adopted a procedure for reclassifying thin routes as competition increases to make them eligible for non-dominant treatment. The FCC's April 24, 1998 non-dominant order also granted the corporation's request to file tariffs for thick-route services on one day's notice with a presumption of lawfulness; tariffs for thin-route services must be filed on 14 days' notice but require only minimal cost support. The non-dominant order also granted the corporation's request for the elimination of the CWS structural separation requirements and gave CWS authority to enter the earth station market on an unseparated and non-dominant basis. On October 28, 1998, the FCC issued a separate notice of proposed rulemaking that looks toward enabling users to have direct access to the INTELSAT system, which would end COMSAT's status as the exclusive provider of INTELSAT services in the United States. In the direct access notice, the FCC tentatively concluded, among other things, that it lacks the statutory authority to impose Level 4 direct access (by which users could invest and acquire an ownership interest in INTELSAT) but does have the authority to require Level 3 direct access (by which users could contract directly with INTELSAT for capacity and bypass COMSAT). The FCC sought comments on its tentative conclusion that it would serve the public interest to mandate Level 3 direct access. The corporation filed comments contesting the basis for the FCC's proposed action. The imposition of direct access could have a substantial adverse impact on the corporation's financial condition and results of operations. The corporation, however, does not believe that the FCC has the current authority to grant direct access under the Satellite Act and would vigorously contest the exercise of such authority by the FCC. 39 In October 1998, Congress passed, and the President subsequently signed, the International Anti-Bribery Act of 1998. The act provides that as of May 1, 1999, an international organization providing commercial satellite services will not be accorded immunity from suit or legal process in connection with its provision of such service, except as required by international agreements to which the United States is a party that are so designated by the President. The Act requires the President to designate those agreements which are subject to the exception and directs the President to take all appropriate actions to reduce or eliminate all privileges and immunities that are not preserved by designation. The corporation opposed prior versions of this legislation but supported it in the form ultimately passed by Congress. The corporation does not believe that enactment of this legislation will have a material effect on its business, because (i) Inmarsat is expected to be privatized before May 1, 1999, and (ii) the President is expected to designate the INTELSAT Headquarters Agreement an international agreement to which the United States is a party, thereby requiring the United States to continue to afford INTELSAT immunity from suit and legal process under the Act. The President has since delegated this designation authority to the Secretary of State. On February 4, 1999, Senator Conrad Burns, Chairman of the Senate Commerce Subcommittee on Communications, introduced the Open-market Reorganization for the Betterment of International Telecommunications (Orbit) Act (S. 376). COMSAT believes that S. 376, on the whole, represents a constructive approach to the privatization of INTELSAT and regulation of the corporation. Significantly, S. 376 would repeal the ownership restrictions on COMSAT stock upon enactment and eliminate other outdated provisions in the Satellite Act. The bill would not interfere with the ongoing privatization of Inmarsat, which is expected to be completed in April 1999. The corporation does have concerns with some provisions of the bill, including the 2002 target for full INTELSAT privatization and a requirement that the President withdraw the U.S. from this international organization if this privatization goal is not achieved. Although the corporation believes privatization of INTELSAT will be completed rapidly, United States withdrawal from INTELSAT in 2002, if privatization is not completed, would have a substantial adverse effect on the corporation's financial condition and results of operations. The House of Representatives is also expected to consider satellite privatization issues this year, most likely in the form of legislation being prepared by Representative Tom Bliley, Chairman of the House Committee on Commerce. At this time, Representative Bliley's timetable for revising and re- introducing his satellite bill passed by the House in the last Congress, which was entitled Communications Satellite Competition and Privatization Act of 1998 (H.R. 1872), is unclear. The corporation opposed H.R. 1872 because it contained provisions that, in the view of the corporation's management, would adversely affect the corporation's results of operations and the value of its shareholders' investments in the INTELSAT and Inmarsat satellite systems. The Clinton Administration opposed H.R. 1872 in testimony before the Senate Commerce Committee late last year. World Systems CWS continues to be well positioned through its long-term agreements with major international carriers to provide cost-competitive services for bulk usage beyond the year 2000. In addition, CWS expects revenue growth from the provision of services in emerging markets, including the Internet, international VSAT, Asynchronous Transfer Mode (ATM) and Link One technology. CWS also expects to face increasing competition over the longer term from existing competitors and new market entrants (including New Skies). 40 INTELSAT currently has five INTELSAT IX satellites on order. It is expected that they will be launched during 2000 to 2002. During 1998, INTELSAT successfully completed the placement in orbit of the remaining two INTELSAT VIII satellites. Two of the six INTELSAT VIII satellites were a part of the transfer of satellites to New Skies. The new INTELSAT VIII series satellites offer higher-power C-band capabilities to address various markets. Mobile Communications CMC plans to continue to expand its service offerings and value-added products to meet anticipated growth in customers' needs. The increasing numbers of digital terminals with improved operating efficiency and reduced service charges are expected to make possible traffic growth in land mobile, small commercial and pleasure boat, and business traveler markets. CMC expects to continue to face increasing competition from existing Inmarsat service providers, other wireless communications services (including C-band), low earth orbit satellite systems (such as Iridium) and other potential market entrants. COMSAT International CI operates an integrated group of telecommunications companies that are engaged principally in providing individualized digital network solutions to business clients and carriers in selected emerging markets. CI also plans to develop prospective international telecommunications opportunities that are consistent with its digital networking strategy. In this regard, CI will continue to target those rapidly growing markets where a significant number of CI's existing or targeted clients are located (or in which they intend to locate). On January 12, 1999, in response to increasing capital flight, the Brazilian government widened the controlled trading band on its currency, the Real. This created an initial devaluation of over 8% compared to the U.S. Dollar. As support for the currency continued to diminish, it was apparent that the Brazilian government needed to allow a "free-float," which occurred shortly thereafter. As a result, the Brazilian Real was devalued over 40% compared to the U.S. Dollar, and is no longer tied to a fixed trading range. It is expected that the continued instability of the Real, as well as the current economic climate within Brazil, will negatively impact growth and financial performance during 1999 in CI's operation in Brazil. In 1998, COMSAT Brazil was CI's largest operating company, accounting for approximately 40% of CI's revenues. In addition, Brazil's problems could have the potential for a "spill-over" effect into other Latin American markets in which CI has operations. CI faces certain operational risks inherent to the countries in which it operates. These risks are typical of emerging markets and include changes in government regulations and licensing requirements; tariffs, taxes, sanctions and other trade barriers; exchange controls; bureaucratic impediments; political, social and economic instability; inflation, devaluation, interest rate and exchange rate fluctuations. There can be no assurance that the current economic difficulties faced in Asia, Russia, Brazil and elsewhere, or any future economic difficulties, or any other risks enumerated above or otherwise, will not adversely impact CI's existing or prospective customers, thereby affecting CI's ability to generate revenues or otherwise having a material adverse affect on CI's financial results and condition. 41 Year 2000 Issue (Year 2000 Readiness Disclosure) The year 2000 issue is the result of existing computer programs that were written using two digits rather than four digits to define the applicable year (i.e., "98" for 1998). Certain of the corporation's computer programs that have - ----- date-sensitive software may not operate properly when the last two digits become "00," as will occur on January 1, 2000. To the extent that this situation exists, there is the potential for system failure or miscalculations, which could cause a disruption of operations. The problem is not limited to computer programs, as some of the corporation's computer and other operational equipment that have date-sensitive processors may not be able to process dates after December 31, 1999. In the second half of 1996, the corporation initiated a program to identify and properly address issues associated with the year 2000 problem in order to avoid interruption to the corporation's operations at the turn of the century. Each of the operating segments of the corporation, as well as the administrative functions, has completed the inventory and assessment phase of the year 2000 implementation plan and is currently implementing plans to remediate the non- compliant systems identified during these first two phases. The corporation presently believes that such changes to the corporation's key computer and other operational systems and equipment will be completed and tested by the end of the third quarter of 1999. The corporation's current estimate is that it will cost approximately $8 million prior to January 1, 2000 to modify its in-house management information systems, customer products and other systems and equipment affected by the year 2000 issue. Of this amount, the corporation has spent $2.3 million, or approximately 30% of the projected amount, through December 31, 1998. Year 2000 modifications and replacements are based on management's current expectations and assumptions, which were derived using assumptions of future events, including the continued availability of resources and the reliability of third- party modification plans. Future events that might cause material differences in management's current expectations and assumptions include, but are not limited to, the availability and cost of personnel with appropriate skills, the ability to locate and correct all relevant computer code, reliance on third parties and similar uncertainties. While the corporation is devoting substantial resources to its own year 2000 compliance effort, COMSAT, as well as other international telecommunications carriers, will be dependent, in part, on foreign and other third-party telecommunications carriers being year 2000 compliant. The financial impact on CWS and CMC of foreign or third-party telecommunications carriers failing to meet the year 2000 challenge would be realized in either of two ways: loss of revenue due to the inability to complete the up-link or down-link transmissions to or from a satellite and/or loss of the corporation's share of INTELSAT and Inmarsat revenues. In recognition of the financial exposure resulting from this dependency on foreign and third-party telecommunications carriers, the corporation has undertaken, as part of its year 2000 efforts, an analysis of the year 2000 compliance efforts of these telecommunications carriers. In addition to this analysis, the corporation is also utilizing the results of efforts undertaken by the International Telecommunication Union (ITU). The corporation plans to develop contingency plans to deal with this issue depending on the results of its analysis and the year 2000 readiness status of individual telecommunications carriers. CWS derives in excess of 90% of its revenues under long-term contracts. Almost all of these revenues are dependent upon termination with a foreign telecommunication carrier. Even though these long-term contracts are not subject to termination as a result of the year 2000 issue, a significant portion 42 of the expected future CWS revenues and COMSAT's share of INTELSAT revenues is generated from services between the United States and areas of the world that may be subject to service interruptions resulting from year 2000 readiness issues. In addition, CMC derives a significant portion of its revenues from services either originating or terminating outside of the United States. If the originating or terminating carrier is unable to initiate or terminate a call, CMC, directly and through its share of Inmarsat revenues, would be adversely affected by reduced revenues. It is not possible for the corporation to accurately quantify the amount, if any, of these exposures at this time. CI and the Labs rely on third-party vendor-provided and vendor-supported systems to provide products and services to their customers. CI and the Labs have sought, but have not yet received, final certification regarding year 2000 compliance from all of their third-party vendors. If it became necessary, a compliant product provided by a different supplier would be utilized to replace a non-compliant product. ANALYSIS OF CONSOLIDATED BALANCE SHEETS Assets The corporation's total assets at December 31, 1998 were $1.8 billion, as compared to $1.9 billion at December 31, 1997. Current assets at the end of 1998 were $199 million, $119 million lower than December 31, 1997. The declines in both current and total assets were primarily related to the decrease of $130 million associated with the net assets of discontinued operations, offset in part by the increase in cash and cash equivalents of $25 million. Property and equipment, net of depreciation, decreased $150 million during 1998, predominantly as the result of the transfer of satellites from INTELSAT to New Skies. See Note 6 to the financial statements. New Skies property has been reclassified to investments. Property and equipment additions amounted to $225 million for 1998. The increase in property and equipment was primarily related to additions related to CWS's share of INTELSAT's satellite program and investment in new communications property and equipment at CI. Investments increased $158 million during 1998, of which $143 million is related to the transfer of satellites from INTELSAT to New Skies. Liabilities The corporation's total liabilities decreased during 1998 by $177 million. This was primarily the result of a decrease in commercial paper of $150 million. The corporation used the proceeds from the sale of CRSI to reduce short-term debt. See Note 3 to the financial statements. 43 ANALYSIS OF CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES Cash Flows Cash from operating activities for 1998 was $323 million, compared to $169 million in 1997. In terms of continuing operations, cash from operating activities was $220 million, or $14 million better than 1997. CWS and CMC generated the majority of the corporation's cash from continuing operations. Cash provided from discontinued operations in 1998 was $103 million, which primarily reflects proceeds related to the sale of CRSI. During 1998, the corporation made interest payments, net of amounts capitalized, of $37 million and received income tax refunds of $2 million. During 1998, the corporation used $166 million in investing activities, a 25% decrease as compared to 1997. The 1998 purchases of property and equipment occurred primarily in CWS and CI, as the corporation continued to make capital investments equal to its share of INTELSAT's satellite programs and purchased communications property and equipment predominantly in CI's Latin American companies. The corporation expects to make additional investments in property and equipment in 1999 at approximately the same level as 1998. Net cash used in financing activities during 1998 was $132 million, as compared to net cash provided in 1997 of $50 million. During 1998, proceeds from the sale of CRSI contributed significantly to the $150 million reduction in short-term debt. The corporation paid dividends of $0.05 per share for each quarter of 1998. Liquidity and Capital Resources The corporation's working capital at December 31, 1998 was $58 million, an increase of $37 million from December 31, 1997. The increase in working capital during 1998 was primarily the result of a decrease in commercial paper of $150 million and an increase in cash of $25 million, partially offset by the reduction in net assets of discontinued operations of $130 million from the sale of CRSI. The corporation reduced short-term debt primarily with the proceeds from the sale of CRSI. See Note 3 to the financial statements. Cash from operating activities in 1999 will be used to fund growth and to finance working capital needs. The corporation has access to short-term and long-term financing at favorable rates. The corporation's current long-term debt ratings are A- from Standard and Poor's and A3 from Moody's. The corporation's current commercial paper ratings are A2 from Standard and Poor's and P2 from Moody's. Following the announcement of the Merger Agreement with Lockheed Martin, both Standard and Poor's and Moody's placed their ratings on the corporation's long-term debt under review for possible downgrades. The downgrades would take effect as a result of merging the corporation with a lower-rated parent company. The ratings for commercial paper are not under review at this time. The current ratings on the Monthly Income Preferred Securities issued by COMSAT Capital I, L.P. are BBB from Standard and Poor's and A3 from Moody's. The corporation's $200 million commercial paper program had no borrowings outstanding at December 31, 1998. A $200 million credit agreement, expiring at the end of 1999, backs up the corporation's commercial paper program. This credit agreement has a one-year option to extend its term 44 to December 31, 2000. The corporation had $36 million remaining under a $100 million medium-term note program at December 31, 1998. The medium-term note program is part of a $200 million debt securities shelf registration program initiated in 1994. The corporation's capital structure and debt-financing activities are regulated by the FCC. The corporation is required to submit a capitalization plan to the FCC for review annually. Under the currently approved FCC guidelines, the corporation is subject to a limit of $200 million in short-term debt, a maximum long-term debt to total capital ratio of 45% and an interest coverage ratio of 2.3 to 1. The corporation was in compliance with the guidelines at December 31, 1998, with a long-term debt to total capital ratio of 40.4%, no short-term debt outstanding other than $15 million of current maturities of long-term debt, and an interest coverage ratio of 2.7 to 1. If the corporation were to fail to satisfy one or more of the FCC guidelines, the corporation would be required to seek advance FCC approval of future financing activities on a case-by-case basis. 45 Item 7a: Quantitative and Qualitative Disclosures About Market Risk The corporation does not hold or issue derivative financial instruments. The corporation finances its operations and manages its interest rates through a combination of its short-term commercial paper, fixed-rate long-term debt and Monthly Income Preferred Securities (MIPS) issued by a subsidiary. The MIPS pay a fixed dividend. Borrowings under the corporation's short-term commercial paper program will expose the corporation's operating results to changes in short-term rates. At December 31, 1998, no commercial paper was outstanding. As of December 31, 1998, the fair value of the corporation's fixed-rate, long-term debt was $414,632,000. Assuming a 10% increase in interest rates, the fair value of the corporation's fixed-rate, long-term debt would be $407,016,000. Likewise, assuming a 10% decrease in interest rates, the fair value of the corporation's fixed-rate, long-term debt would be $422,452,000. Inmarsat has entered into interest rate and foreign currency swap arrangements to minimize the interest rate and foreign currency exchange fluctuations related to its satellite financing obligations. Inmarsat borrowed and is obligated to repay Pounds Sterling. The Pounds Sterling borrowed were swapped for U.S. Dollars with an agreement to exchange the Dollars for Pounds Sterling in order to meet the future lease payments. Inmarsat pays interest on the Dollars at an average rate of 8.8%, and Inmarsat receives variable interest on the Sterling amounts based on short-term LIBOR rates. At December 31, 1998, Inmarsat had $321,433,000 of swaps to be exchanged for L211,474,000 at various dates through 2007. The corporation's share of the estimated fair value of these swaps is an unrealized gain of $8,214,000 at December 31, 1998. The fair value was estimated by computing the present value of the Dollar obligation using current rates available for debt with similar terms and the current value of the Sterling at year-end exchange rates. Assuming a 10% increase in the interest rates, the estimated unrealized gain would increase by $1,797,000. Assuming a 10% decrease in the interest rates, the estimated unrealized gain would decrease by $1,869,000. CI conducts its operations primarily through majority-owned and wholly- owned subsidiaries. The corporation has financed CI's subsidiaries through capital contributions. CI's largest subsidiaries utilize the local currency as their functional currency. Therefore, fluctuations in exchange rates relative to the U.S. Dollar, primarily those related to the Brazilian Real, are recorded as cumulative translation adjustments as a component of stockholders' equity. Fluctuations in exchange rates relative to the U.S. Dollar have not had a material impact on the corporation's cash flows or results of operations. 46 Item 8: Financial Statements and Supplementary Data REPORT OF INDEPENDENT AUDITORS To the Shareholders of COMSAT Corporation: We have audited the accompanying consolidated balance sheets of COMSAT Corporation and its subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flow for each of the three years in the period ended December 31, 1998. Our audit also included the financial statement schedule listed in the index at Item 14(a)2. These financial statements and the financial statement schedule are the responsibility of the corporation's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion such consolidated financial statements present fairly, in all material respects, the financial position of the corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. Deloitte & Touche LLP Washington, D.C. February 18, 1999 47 COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS For the Years Ended December 31, 1998, 1997 and 1996
In thousands, except per share amounts 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Revenues $616,469 $562,651 $545,100 ---------- -------- -------- Operating expenses: Cost of services 284,053 263,934 247,120 Depreciation and amortization 219,883 184,206 155,296 Research and development 7,914 9,296 11,518 General and administrative 25,592 23,247 23,941 Impairment of long-lived assets 14,000 - - Merger costs 5,525 - - ---------- -------- -------- Total operating expenses 556,967 480,683 437,875 ---------- -------- -------- Operating income 59,502 81,968 107,225 Other income (expense), net 12,518 4,245 (7,409) Interest costs (44,502) (51,426) (50,455) Interest capitalized 4,690 9,394 15,760 ---------- -------- -------- Income from continuing operations before taxes and extraordinary item 32,208 44,181 65,121 Income tax expense 5,791 15,613 28,924 ---------- -------- -------- Income from continuing operations before extraordinary item 26,417 28,568 36,197 Discontinued operations, net of tax - (89,068) (27,575) ---------- -------- -------- Income (loss) before extraordinary item 26,417 (60,500) 8,622 Extraordinary loss from early extinguishment of debt, net of tax - (3,946) - ---------- -------- -------- Net income (loss) $ 26,417 $(64,446) $ 8,622 ========== ======== ======== Earnings (loss) per common share - basic: Income from continuing operations before extraordinary item $ 0.51 $ 0.58 $ 0.76 Discontinued operations - (1.82) (0.58) Extraordinary loss - (0.08) - ---------- -------- -------- Net income (loss) $ 0.51 $ (1.32) $ 0.18 ========== ======== ======== Earnings (loss) per common share - assuming dilution: Income from continuing operations before extraordinary item $ 0.50 $ 0.57 $ 0.74 Discontinued operations - (1.78) (0.56) Extraordinary loss - (0.08) - ---------- -------- -------- Net income (loss) $ 0.50 $ (1.29) $ 0.18 ========== ======== ========
The accompanying notes are an integral part of these financial statements. 48 COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
In thousands 1998 1997 - ------------------------------------------------------------------------------------------------------ ASSETS - ------ Current assets: Cash and cash equivalents $ 30,795 $ 5,757 Receivables 131,052 147,621 Deferred income taxes 7,911 7,469 Other 16,243 14,918 Net assets of discontinued operations 12,964 142,484 ---------- ------------ Total current assets 198,965 318,249 ---------- ------------ Property and equipment 1,209,462 1,359,293 Investments 249,064 91,543 Other assets 133,307 125,690 ---------- ------------ Total assets $1,790,798 $1,894,775 ========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current maturities of long-term debt $ 14,962 $ 13,785 Commercial paper - 149,506 Accounts payable and accrued liabilities 88,297 89,772 Due to related parties 30,424 34,664 Other 7,119 8,919 ---------- ------------ Total current liabilities 140,802 296,646 ---------- ------------ Long-term debt 446,832 461,960 Deferred income taxes 127,351 112,226 Deferred investment tax credits 6,158 9,523 Accrued post-retirement benefit costs 48,923 49,246 Other long-term liabilities 161,692 178,903 Commitments and contingencies (notes 10, 11 & 15) - - Preferred securities issued by subsidiary 200,000 200,000 Stockholders' equity: Common stock, without par value, 100,000 shares authorized, 52,713 shares issued in 1998 and 50,197 in 1997 430,537 366,901 Preferred stock, 5,000 shares authorized, no shares issued or outstanding Retained earnings 242,809 226,785 Treasury stock, at cost, 80 shares in 1998 and 141 in 1997 (3,109) (1,758) Unearned compensation (4,652) (4,739) Accumulated other comprehensive loss (6,545) (918) ---------- ------------ Total stockholders' equity 659,040 586,271 ---------- ------------ Total liabilities and stockholders' equity $1,790,798 $1,894,775 ========== ============
The accompanying notes are an integral part of these financial statements. 49 COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS For the Years Ended December 31, 1998, 1997 and 1996
In thousands 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- Operating activities: Net income (loss) $ 26,417 $ (64,446) $ 8,622 Adjustments to reconcile net income (loss) to net cash provided by continuing operations: Depreciation and amortization 219,883 184,206 155,296 Impairment of long-lived assets 14,000 - - Loss from discontinued operations - 89,068 27,575 Gain on sale of investments (14,635) (1,987) (2,722) Gain on sale of land - (7,261) - Extraordinary loss from early extinguishment of debt - 3,946 - Changes in assets and liabilities: Receivables and other current assets (6,890) 3,953 (12,539) Current liabilities 21,441 (4,709) 34,935 Non-current liabilities (38,516) 1,665 15,770 Other (1,749) 1,165 4,814 ----------- --------- --------- Net cash provided by continuing operations 219,951 205,600 231,751 Net cash provided (used) by discontinued operations 102,769 (36,865) (35,009) ----------- --------- --------- Net cash provided by operating activities 322,720 168,735 196,742 ----------- --------- --------- Investing activities: Purchase of property and equipment (187,838) (254,291) (267,279) Investments in unconsolidated businesses (6,202) (19,950) (59,923) Proceeds from sale of land - 9,293 - Proceeds from note on sale of investments - 19,097 - Proceeds from sale of investments 19,871 9,060 26,076 Satellite insurance proceeds 8,024 - 54,443 Decrease (increase) in INTELSAT ownership (689) 23,232 (1,238) Decrease in Inmarsat ownership 5,999 213 5,746 Other (5,113) (7,704) 8,328 ----------- --------- --------- Net cash used in investing activities (165,948) (221,050) (233,847) ----------- --------- --------- Financing activities: Net short-term borrowings (repayments) (149,506) 131,513 17,993 Repayments against company-owned life insurance policies (64) (3,962) (51,443) Common stock issued 46,453 20,398 13,837 Repayment of long-term debt (13,760) (114,903) (9,848) Payment of satellite performance incentives (4,464) - - Cash dividends paid (10,393) (16,975) (37,698) Proceeds from Clarksburg financing - 34,342 - ----------- --------- --------- Net cash provided (used) by financing activities (131,734) 50,413 (67,159) ----------- --------- --------- Net increase (decrease) in cash and cash equivalents 25,038 (1,902) (104,264) Cash and cash equivalents, January 1 5,757 7,659 111,923 ----------- --------- --------- Cash and cash equivalents, December 31 $ 30,795 $ 5,757 $ 7,659 =========== ========= ========= Supplemental cash flow information: Interest paid, net of amount capitalized $ 36,807 $ 39,732 $ 29,519 Income taxes paid (refunded) (1,676) 11,404 1,945 Non-cash property additions: Inmarsat satellites 2,493 5,403 5,602 Satellite performance incentives 34,397 - - Distribution of Ascent Entertainment Group, Inc. shares - 194,633 -
The accompanying notes are an integral part of these financial statements. 50 COMSAT CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
Accumulated Other Shares Shares Common Treasury Retained Unearned Comprehensive In thousands Issued Outstanding Stock Stock Earnings Compensation Income (loss) Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 48,612 47,755 $324,074 $(9,020) $ 533,238 $(5,484) $ (3,375) $839,433 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 8,622 8,622 Unrealized gain on securities (net of tax of $3,916) 7,118 7,118 Foreign currency translation (net of tax of $0) 924 924 Minimum pension liability (net of tax of $223) 383 383 --------- Total comprehensive income 17,047 Cash dividends (37,698) (37,698) Stock awards and options, 401(k) and employee stock purchase plan 398 986 12,862 6,014 468 19,344 Other 80 80 3,755 (1,323) 1,259 3,691 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 49,090 48,821 340,691 (3,006) 502,839 (3,757) 5,050 841,817 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive loss: Net loss (64,446) (64,446) Unrealized loss on securities (net of tax benefit of $2,997) (5,411) (5,411) Foreign currency translation (net of tax of $0) (1,515) (1,515) Minimum pension liability (net of tax of $553) 958 958 --------- Total comprehensive loss (70,414) Cash dividends (16,975) (16,975) Distribution of Ascent Entertainment Group Inc. shares (194,633) Stock awards and options, 401(k) and employee stock purchase plan 1,027 1,155 24,296 1,248 (982) 24,562 Other 80 80 1,914 1,914 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 50,197 50,056 366,901 (1,758) 226,785 (4,739) (918) 586,271 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 26,417 26,417 Unrealized gain on securities (net of tax of $5,985) 11,072 11,072 Foreign currency translation (net of tax of $3,158) (14,380) (14,380) Minimum pension liability (net of tax benefit of $1,414) (2,319) (2,319) --------- Total comprehensive income 20,790 Cash dividends (10,393) (10,393) Stock awards and options, 401(k) and employee stock purchase plan 2,474 2,535 62,232 (1,351) 87 60,968 Other 42 42 1,404 1,404 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 52,713 52,633 $430,537 $(3,109) $ 242,809 $(4,652) $ (6,545) $659,040 ===================================================================================================================================
The accompanying notes are an integral part of these financial statements. 51 COMSAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1998, 1997 and 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. Accounts of COMSAT Corporation and its majority-owned subsidiaries (COMSAT or the corporation) have been consolidated. Significant intercompany transactions have been eliminated. The corporation has consolidated its shares of the accounts of the International Telecommunications Satellite Organization (INTELSAT) and the International Mobile Satellite Organization (Inmarsat). The corporation's ownership interests in INTELSAT and Inmarsat are based primarily on the corporation's usage of these systems. As of December 31, 1998, the corporation owned 18.0% of INTELSAT and 22.2% of Inmarsat. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that directly affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used in determining the loss on disposal of discontinued operations and in accounting for long-term contracts, allowance for doubtful accounts, depreciation and amortization, employee benefit plans, taxes, litigation, and contingencies. Revenue Recognition. Revenue from satellite services is recognized over the period during which the satellite services are provided. Revenue from long-term product, system integration and related services contracts is accounted for using the percentage-of-completion (cost-to-cost) method. Revenue from other services is recorded as services are provided. Income Taxes and Investment Tax Credits. The provision for income taxes includes taxes currently payable and those deferred because of differences between the financial statement and tax bases of assets and liabilities. The corporation has earned investment tax credits on certain INTELSAT and Inmarsat satellite costs. These tax credits have been deferred and are being recognized as reductions to the tax provision over the estimated service lives of the related assets. Evaluation of Long-Lived Assets. In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the corporation evaluates the potential impairment of long-lived assets, including goodwill, based upon projections of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Management believes no material impairment of these assets exists at December 31, 1998. 52 Marketable Securities. The corporation's marketable securities are categorized as available-for-sale securities, as defined in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are reflected, net of tax, as a separate component of accumulated other comprehensive income (loss) until realized. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. Other Assets. The cash surrender values of life insurance policies (net of loans) totaling $97,529,000 and $86,597,000 at December 31, 1998 and 1997, respectively, are included in "Other assets." "Other income (expense), net" on the income statement includes $3,185,000, $3,379,000 and $3,351,000 from the increases in the cash surrender values of these policies in 1998, 1997 and 1996, respectively. Foreign Currency Translation. Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholders' equity. Where the U.S. dollar is the functional currency, translation adjustments are recorded in the income statement. Stock-Based Compensation. The corporation accounts for employee stock- based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation costs for stock options are measured as the excess, if any, of the quoted market price of the corporation's stock at the date of the grant over the amount an employee must pay to acquire the stock. Cash Flow Information. The corporation considers highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Statement Presentation. Certain prior period amounts have been reclassified to conform with the current year's presentation. New Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value and gains or losses depends on the intended use of the derivative and its resulting designation. The statement is effective for fiscal years beginning after June 15, 1999. The corporation will adopt SFAS No. 133 in the first quarter of 2000. The corporation is evaluating the effect that implementation of SFAS No. 133 will have on its consolidated financial statements. 53 2. AGREEMENT AND PLAN OF MERGER WITH LOCKHEED MARTIN CORPORATION On September 18, 1998, COMSAT entered into an Agreement and Plan of Merger (the Merger Agreement) with Lockheed Martin Corporation (Lockheed Martin) and Deneb Corporation (Acquisition Sub), a wholly-owned subsidiary of Lockheed Martin. Under the terms of the Merger Agreement, Lockheed Martin has agreed to acquire all of the outstanding common stock, no par value, of COMSAT (the COMSAT Common Stock) in a two-step transaction. On September 25, 1998, a wholly-owned subsidiary of Lockheed Martin, Regulus, LLC (Purchaser), initiated a tender offer to purchase up to 49% (subject to certain adjustments) of the COMSAT Common Stock at a price of $45.50 per share in cash. The tender offer is being made pursuant to the Merger Agreement upon the terms and subject to the conditions set forth in the Purchaser's Offer to Purchase, dated September 25, 1998 (the Offer to Purchase), and the related Letter of Transmittal (which, together with the Offer to Purchase, constitute the Offer). Certain significant conditions to the consummation of the Offer include: (i) there being validly tendered and not withdrawn prior to the expiration date of the Offer at least one-third of the outstanding shares of COMSAT Common Stock; (ii) the approval by COMSAT shareholders of the Merger and the Merger Agreement; and (iii) the receipt of all required regulatory consents and approvals, including the Purchaser having been authorized by the Federal Communications Commission (FCC) to acquire up to 49% of the COMSAT Common Stock and expiration of all waiting periods under applicable antitrust laws. The Purchaser's obligation to consummate the Offer also is subject to there not being any fact or circumstance that would reasonably be expected to have a Material Adverse Effect (as defined in the Merger Agreement) on COMSAT or a decline in the Standard & Poor's 500 Index of at least 27% from date of the Merger Agreement through specified measurement dates. The Merger Agreement also provides that, as soon as practical after consummation of the Offer and the satisfaction or waiver of the conditions set forth therein, COMSAT will be merged with Acquisition Sub (the Merger). In the Merger, each share of COMSAT Common Stock that is issued and outstanding immediately prior to the effective time of the Merger (other than shares of COMSAT Common Stock held by COMSAT, Purchaser or Lockheed Martin and dissenting shares, if any) will be converted into the right to receive, as adjusted, one share of common stock, par value $1.00 per share, of Lockheed Martin. The exchange ratio in the merger remains subject to further adjustment in the event of certain changes in the capitalization of Lockheed Martin. Certain significant conditions to the consummation of the Merger include: (i) the consummation of the Offer, (ii) the amendment of the Communications Satellite Act of 1962 (the Satellite Act), and (iii) the receipt of the approvals of the FCC and other governmental authorities required for the consummation of the Merger. In addition, the obligations of Lockheed Martin and Acquisition Sub to consummate the Merger are subject to there not being any fact or circumstance that would reasonably be expected to have a Significant Adverse Effect (as defined in the Merger Agreement). 54 In connection with the execution of the Merger Agreement, the parties entered into certain ancillary agreements dated as of September 18, 1998. COMSAT entered into a Shareholders Agreement with Lockheed Martin (the Shareholders Agreement), pursuant to which, upon the consummation of the Offer, COMSAT will take all actions necessary to cause the three individuals selected by Lockheed Martin to be elected to the Board of Directors of COMSAT and appointed to certain committees of the Board of Directors of COMSAT. Pursuant to the Shareholders Agreement, COMSAT agreed not to amend or repeal the provisions of its bylaws that permit any three directors to call a special meeting of the Board of Directors or otherwise amend its Articles of Incorporation or bylaws in a manner that would adversely affect the rights of Lockheed Martin under the Shareholders Agreement or the Registration Rights Agreement (described below). The Shareholders Agreement also provides that, in the event that the Merger is not consummated, COMSAT will cause its Board of Directors to amend COMSAT's Articles of Incorporation to eliminate the transfer restrictions contained in Section 5.03(c) thereof and to recommend such amendment to the shareholders of COMSAT for their approval. The Shareholders Agreement contains other restrictions on Lockheed Martin with respect to its ownership of COMSAT Common Stock. In addition, COMSAT and Lockheed Martin entered into the Registration Rights Agreement dated as of September 18, 1998 (the Registration Rights Agreement), pursuant to which, assuming that the Purchaser acquired shares of COMSAT Common Stock in the Offer and that the Merger is not consummated, Lockheed Martin has certain demand and piggy-back registration rights to cause COMSAT to prepare and file registration statements under the Securities Act of 1933, as amended, to register shares of COMSAT Common Stock held by Lockheed Martin. In order to facilitate consummation of the Offer and the Merger, COMSAT also entered into a Carrier Acquisition Agreement with Lockheed Martin, the Purchaser and COMSAT Government Systems, Inc. (CGSI), a wholly-owned subsidiary of COMSAT, pursuant to which CGSI will be merged with and into Purchaser as soon as practical following the satisfaction or waiver of the conditions set forth in the Carrier Acquisition Agreement, or on such other date as the parties may agree, but in all events prior to the consummation of the Offer. In the Carrier Acquisition, the Purchaser will acquire the common carrier telecommunications business of CGSI. In connection with the execution of the Merger Agreement, COMSAT adopted the Retention Bonus Plan. The Retention Bonus Plan generally provides retention bonuses to certain key employees who remain employed by COMSAT (or incur a termination of employment, as defined) through specified dates subsequent to September 18, 1998. Merger costs include compensation expense associated with the Retention Bonus Plan, investment banking fees and fees for other professional services incurred in 1998. 3. DISCONTINUED OPERATIONS The corporation began accounting for Ascent Entertainment Group, Inc. (Ascent), its former entertainment subsidiary, and substantially all of the assets and operations of COMSAT RSI, Inc. (CRSI), its former manufacturing subsidiary, as discontinued operations in the second quarter of 1997. 55 The income (loss) from discontinued operations, net of tax, for Ascent and CRSI for the two years ended December 31, 1997, is summarized below:
In thousands 1997 1996 ------------ --------- --------- Ascent $(29,068) $(28,148) CRSI (60,000) 573 --------- -------- Total $(89,068) $(27,575) ========= ========
Ascent Entertainment Group, Inc. -------------------------------- The corporation distributed its 80.67% interest in Ascent through a tax- free dividend to shareholders on June 27, 1997. COMSAT shareholders of record on June 19, 1997 received 0.4888 of a share of Ascent common stock for each share of COMSAT common stock owned. The tax-free dividend of $194,633,000 was recorded as a reduction of COMSAT's consolidated retained earnings. Prior to being accounted for as a discontinued operation, Ascent reported revenues of $177,481,000 and $258,120,000 in 1997 and 1996, respectively. Ascent's loss from operations was $17,779,000 (net of a $5,047,000 tax benefit) in 1997 and $28,148,000 (net of a $10,637,000 tax benefit) in 1996. The loss on disposal of Ascent in 1997 was $11,289,000 (including a tax expense of $2,194,000). COMSAT RSI, Inc. ---------------- On February 25, 1998, the corporation sold substantially all of the assets of CRSI Acquisition, Inc., d/b/a COMSAT RSI Jefa Wireless Systems (JEFA), a wholly-owned subsidiary of CRSI engaged in the wireless communications integration and intelligent transportation systems business, in a separate transaction. Pursuant to the sale agreement, the corporation assigned to the buyer its rights in certain contracts and made a payment of $4,663,000 to the purchaser, net of a working capital adjustment at closing. On June 25, 1998, the corporation completed the sale of substantially all of CRSI to a subsidiary of TBG Industries, Inc. for cash proceeds of $111,864,000, after adjusting for changes in inter-company loans and advances. In connection with the sale of CRSI and JEFA, the corporation and respective purchasers agreed to indemnify the other against certain losses. In the case of the CRSI sale, the corporation's indemnification obligations are generally limited to losses incurred in excess of an agreed threshold amount ($6,700,000) and are capped at a maximum agreed threshold amount ($28,000,000) in respect of claims made within an agreed survival period (generally, approximately two years). In certain instances, however, the corporation's indemnification obligations are not subject to those limitations. Certain of CRSI's assets were excluded from the sale, including Electromechanical Systems, Inc. (EMS) and CRSI's 53% ownership interest in Plexsys International Corporation (Plexsys). EMS's revenues and income were not material to the corporation's consolidated operating results. 56 Plexsys ceased doing business on July 1, 1998. The corporation has written- off its investment in Plexsys and certain amounts owed to it by Plexsys. Such amounts were included in the corporation's 1997 loss from discontinued operations. COMSAT also retained and is completing a long-term construction contract for a radio astronomy telescope in Green Bank, West Virginia (the Green Bank contract). The corporation also has retained a claim against the prime contractor to recover $29,000,000 in costs incurred in performing the Green Bank contract, which are in excess of the original contract value. The prime contractor has filed a counterclaim seeking $12,900,000 million in damages for delay. The claim and counterclaim are currently in arbitration. There can be no assurance that the corporation will be successful in collecting all or any portion of this claim. The loss upon disposition of discontinued operations is based upon management's best estimates of the estimated costs to complete the Green Bank contract, the amount to be realized from the $29,000,000 Green Bank contract arbitration claim, potential indemnification claims and other costs related to the discontinued operations. These estimates could change as additional costs are incurred to complete the Green Bank contract, upon resolution of the arbitration and upon resolution of other matters related to the CRSI discontinued operations. Prior to being accounted for as a discontinued operation, CRSI reported revenues of $121,291,000 in 1997 and $217,183,000 in 1996. CRSI's income was $207,000 (net of a $46,000 tax expense) and $573,000 (net of a $232,000 tax expense) in 1997 and 1996, respectively. The estimated loss on disposal of CRSI in 1997 was $60,207,000 (net of a $19,926,000 tax benefit). The net assets of the CRSI discontinued operations totaled $142,484,000 at December 31, 1997 and included the following components: current assets of $181,456,000, non-current assets of $46,860,000, current liabilities of $33,212,000, non-current liabilities of $3,116,000 and a reserve for estimated loss on disposal of $49,504,000. The net assets of CRSI remaining at December 31, 1998 amount to $15,016,000 and primarily consist of receivables on long-term contracts, fixed assets, current liabilities and the remaining reserve for estimated loss on disposal. In addition to the net assets reported as current of $12,964,000, $2,052,000 is included in "Other assets." 57 4. RECEIVABLES Receivables consisted of:
In thousands 1998 1997 ------------ ---------- --------- Commercial receivables $108,738 $120,320 Receivables under long-term contracts: U.S. Government: Amounts billed 7,375 5,991 Unbilled costs and accrued profits 9,505 9,577 Commercial customers: Amounts billed 5,177 4,197 Unbilled costs and accrued profits 2,675 239 Related party receivables 4,836 6,422 Other 9,869 15,610 -------- -------- Total 148,175 162,356 Less allowance for doubtful accounts (17,123) (14,735) -------- -------- Net $131,052 $147,621 ======== ========
Unbilled amounts represent accumulated costs and accrued profits that will be billed at future dates in accordance with contract terms and delivery schedules. The 1998 Unbilled receivables are expected to be billed within one year. In January 1997, the corporation sold its 19.66% interest in Philippine Global Communications, Inc. (PhilCom) for cash and a collaterized note receivable totaling $34,292,000. At December 31, 1997, the remaining note receivable balance of $12,731,000 was to have been paid in two payments during 1998 and is recorded above in other receivables. In the third quarter of 1998, the note was amended so that the balance would be paid in installments with interest through June 2000. The corporation received a $1,000,000 principal payment in August 1998 and a $1,000,000 payment of principal and interest in January 1999. At December 31, 1998, the note's current balance of $6,930,000 is included in "other receivables" in the table above, and the non-current portion of $4,524,000 is recorded in "Other assets." 58 5. PROPERTY AND EQUIPMENT Property and equipment includes the corporation's shares of INTELSAT and Inmarsat property and equipment.
In thousands 1998 1997 ------------ ----------- ----------- Property and equipment at cost: Satellites $ 1,601,832 $ 1,695,352 Furniture, fixtures and equipment 737,915 595,812 Buildings and improvements 107,772 108,635 Land 3,246 3,244 ----------- ----------- Total 2,450,765 2,403,043 Less accumulated depreciation (1,298,336) (1,161,242) ----------- ----------- Net property and equipment in service 1,152,429 1,241,801 Property and equipment under construction: INTELSAT satellites 37,393 88,540 Inmarsat third-generation satellites - 5,353 Other 19,640 23,599 ----------- ----------- Total $ 1,209,462 $ 1,359,293 =========== ===========
Satellites include construction costs, launch costs, direct development costs, insurance costs, satellite performance incentive payments and capitalized interest. Depreciation is calculated using the straight-line method over the estimated service life of each asset. The service lives for property and equipment generally are: satellites, 10 to 13 years; furniture, fixtures and equipment, 3 to 15 years; buildings and improvements, 3 to 40 years. Change in Satellite Accounting Policies. Effective January 1, 1998, the corporation changed its accounting policy with respect to the cost of satellites lost at launch or in orbit. Such costs will be expensed in the period in which the satellite is lost at launch or experiences a total failure in orbit. Previously, the cost of failed satellites was amortized over their original useful lives. Partial in-orbit failures will be evaluated for impairment according to the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets to be Disposed of." Also effective January 1, 1998, the corporation changed its accounting policy with respect to satellite performance incentive payments paid to manufacturers to capitalize the net present value of such costs as a component of the cost of the satellite. Previously, certain of these payments were expensed as paid. These changes did not have a material effect on the corporation's financial statements. Satellite Insurance Proceeds. The INTELSAT 801 satellite suffered damage during in-orbit testing following its launch in the first quarter of 1997. Although the satellite's operational capability has not been diminished, its depreciable life has been shortened from 10 years to 8 years. Under the terms of its satellite insurance policy, the corporation received insurance proceeds of $8,024,000 in the third quarter of 1998 and, correspondingly, reduced the book value of the satellite. 59 On February 14, 1996, the launch of the INTELSAT 708 satellite failed. The corporation's share of the satellite's cost was fully insured. Insurance proceeds totaling $54,443,000 were received in the second quarter of 1996. Sale of Land. In September 1997, COMSAT sold its Clarksburg, Maryland office building and the surrounding land for $45,750,000 in an all-cash transaction. A gain of $7,261,000 was recognized on the sale of land and is reported in "Other income (expense), net" on the income statement. The corporation also entered into a 10-year lease agreement with the new owner to continue occupying the office building, which principally houses COMSAT Laboratories. In addition to lease payments, the corporation is responsible for taxes, insurance and maintenance of the building. The sale-leaseback of the office building has been accounted for as a financing due to COMSAT's continuing involvement as the lessor of floor space in the building to non-COMSAT tenants. As a result, the historical cost of the building remains in property and will be depreciated over the 10-year lease term. A financing obligation of $36,219,000, representing the proceeds received for the building, was recorded at the time of sale. This obligation is being amortized as the lease payments are made. The net present value at December 31, 1998 totals $33,612,000, of which $2,078,000 is reflected in other current liabilities and the remainder in other long-term liabilities. At December 31, 1998, the future lease payments pursuant to the sale- leaseback are $4,707,000 in 1999, $5,273,000 in 2000, $5,418,000 in 2001, $5,567,000 in 2002, $5,720,000 in 2003 and $22,869,000 thereafter. 6. INVESTMENTS Investments as of December 31, 1998 and 1997 are as follows:
Unrealized Holding In thousands Cost Gain Total ----------------------------------------------------------------------- Available-for-sale equity securities: ICO $ 41,189 $ 1,239 $ 42,428 Other 6,376 18,444 24,820 -------- ------- -------- Total 47,565 19,683 67,248 -------- ------- -------- Cost investments: New Skies 142,587 - 142,587 ICO 29,484 - 29,484 Other 9,298 - 9,298 -------- ------- -------- Total 181,369 - 181,369 Equity investees 447 - 447 -------- ------- -------- Total $229,381 $19,683 $249,064 ======== ======= ========
60
In thousands Cost Gain Total ----------------------------------------------------------------------- 1997 ---- Available-for-sale equity securities: $ 10,583 $ 2,626 $ 13,209 -------- ------- -------- Cost investments: ICO 71,784 - 71,784 Other 6,481 - 6,481 -------- ------- -------- Total 78,265 - 78,265 Equity investees 69 - 69 -------- ------- -------- Total $ 88,917 $ 2,626 $ 91,543 ======== ======= ========
New Skies. Effective November 30, 1998, INTELSAT transferred five operational satellites, plus a sixth which is currently under construction, to New Skies Satellites N.V. (New Skies). New Skies is a commercial company which was created by INTELSAT in March 1998. As a result of INTELSAT's transfer of the satellites, plus working capital, the corporation has reclassified $146,826,000 from property and equipment and $4,239,000 from liabilities to establish its $142,587,000 investment in New Skies. The corporation owns 16.6% of New Skies and will account for this investment using the cost method. Had New Skies been formed as of January 1, 1998, and the satellites been transferred to New Skies at that time, the corporation's unaudited proforma consolidated revenues, operating income and net income for 1998 would have been $597,330,000, $56,713,000 and $24,868,000, respectively. ICO. During 1998, ICO Global Communications (Holdings) Limited (ICO) conducted an initial public offering. As a result, the corporation's direct investment in ICO is now treated as an available-for-sale equity security. In addition, the corporation has an indirect investment in ICO through its ownership of Inmarsat. Due to certain lock-up provisions associated with the initial public offering, 85% of the ICO shares held by Inmarsat did not qualify as a marketable security at December 31, 1998; therefore, 85% of the corporation's share of Inmarsat's investment in ICO is presented as a cost investment and the balance is classified as available-for-sale. In December 1998, ICO paid the corporation $4,500,000 to settle a dispute between the two companies. In exchange for this payment, the corporation transferred operation of ICO's Satellite Access Node facility in the United States back to ICO and waived the non-exclusive distribution rights it received under its 1995 stock subscription agreement with ICO. Net of costs associated with transferring the facility, the corporation recognized income of $4,303,000 from the settlement. This income is recorded in "Other income (expense), net" on the income statement. In December 1996, the corporation reduced its direct investment in ICO by selling 777,701 of its shares to other ICO shareholders for $29,941,000. The corporation recognized a gain of $2,722,000 that is included in "Other income (expense), net" on the income statement. Realized Gains (Losses). The corporation realized gains of $14,635,000 and $1,987,000 from the sale of marketable equity securities during 1998 and 1997, respectively. The corporation recognized losses of $1,008,000 and $1,105,000 during 1997 and 1996, respectively, for a decline in value of a marketable equity security that was deemed other than temporary. In 1998, 61 the corporation wrote-off a $1,950,000 investment that was included in the "cost investments-other" category in the table above. These amounts are reported in "Other income (expense), net" on the income statement. 7. IMPAIRMENT OF LONG-LIVED ASSETS In the third quarter of 1998, the corporation recorded a non-cash impairment loss of $14,000,000 related to the write-down of the goodwill ($9,434,000) and plant and equipment ($4,566,000) of BelCom, COMSAT International's company operating in Russia and the Commonwealth of Independent States (CIS). The impairment loss is reported in the International segment. In accordance with the corporation's accounting policy for evaluation of long-lived assets, the corporation evaluates its long-lived assets whenever events or circumstances indicate the carrying amount of an asset may not be fully recoverable. Due to the worsening economic conditions in Russia and the CIS and BelCom's deteriorating performance, management determined that the corporation's investment in BelCom should be reduced. The impairment loss was determined based on a discounted analysis of expected cash flows. 8. DEBT The corporation's capital and debt-financing activities are regulated by the FCC. The corporation is required to submit a capitalization plan to the FCC for review annually. Under existing FCC guidelines, the corporation is subject to a limit of $200,000,000 in short-term borrowings, a maximum long-term, debt-to-total-capital ratio of 45% and an interest coverage ratio, as defined, of 2.3 to 1. At December 31, 1998, the corporation was in compliance with those guidelines. Long-Term Debt. Long-term debt, including the corporation's share of INTELSAT and Inmarsat debt, at each year end consists of:
In thousands 1998 1997 -------------------------------------------------- ------------------- 8.125% notes due 2004 $ 70,475 $ 70,475 8.95% notes due 2001 75,000 75,000 6.75% INTELSAT Eurobonds due 2000 26,980 26,932 7.375% INTELSAT Eurobonds due 2002 35,973 35,910 8.375% INTELSAT Eurobonds due 2004 35,973 35,910 6.625% INTELSAT Asian bonds due 2004 35,973 35,910 8.125% INTELSAT Eurobonds due 2005 35,973 35,910 Inmarsat lease financing obligations 82,135 96,504 Medium-term notes, 7.7% - 8.66%, due 2006 - 2007 64,000 64,000 Discounts on notes payable (688) (806) ------------------- Total 461,794 475,745 Less current maturities (14,962) (13,785) ------------------- Total long-term debt $446,832 $461,960 ===================
62 The principal amount of debt (excluding the Inmarsat lease financing obligations) maturing over the next five years is $0 in 1999, $26,980,000 in 2000, $74,988,000 in 2001, $35,973,000 in 2002 and $0 in 2003. Commercial Paper. The corporation issues short-term commercial paper as needed with repayment terms of 90 days or less under a $200,000,000 program. The corporation had no borrowings at December 31, 1998. At December 31, 1997, outstanding borrowings were $149,506,000 with a weighted average interest rate of 6.51%. Credit Facilities. The corporation has a $200,000,000 revolving credit agreement, which expires in December 1999 and provides a backup source of credit to the commercial paper program. The corporation has an option to extend this credit agreement to December 31, 2000. There have been no borrowings under this agreement. Early Extinguishment of Debt. The corporation repurchased $89,525,000 of its 8.125% notes and also $10,000,000 of its 7.7% medium-term notes with short-term debt in 1997. The early extinguishment of debt resulted in an extraordinary loss of $6,231,000 ($3,946,000 net of tax). Inmarsat Lease Financing Obligations. Inmarsat entered into capital lease agreements to finance the construction of its second- and third-generation satellites. The corporation's share of these lease obligations is included in long-term debt. Inmarsat has hedged its obligations through various foreign exchange transactions to minimize the effect of fluctuating interest and exchange rates (see Note 15). The corporation's share of the payments under these lease obligations for each of the next five years is $18,998,000 in 1999, $19,689,000 in 2000, $19,985,000 in 2001, $11,043,000 in 2002, $6,267,000 in 2003 and $20,529,000 thereafter. These payments include interest totaling $14,376,000 and a current maturity of $14,962,000. 9. MONTHLY INCOME PREFERRED SECURITIES In July 1995, COMSAT Capital I, L.P. (COMSAT Capital) issued $200,000,000 of Monthly Income Preferred Securities (MIPS). COMSAT Capital is a limited partnership formed for the sole purpose of issuing the MIPS and loaning the proceeds to COMSAT, the managing general partner. The MIPS were issued at a par value of $25 per share, and dividends are payable monthly at an annual rate of 8.125%. The MIPS are callable by the issuer after July 2000 at par value. The proceeds of the MIPS were loaned to COMSAT under the terms of a 8.125%, 30-year subordinated debenture agreement. This agreement allows COMSAT to extend the maturity of the debentures until 2044, provided that COMSAT satisfies certain financial covenants. The loan between the partnership and COMSAT has been eliminated in consolidation. The $200,000,000 of MIPS is shown on the corporation's consolidated balance sheet as "preferred securities issued by subsidiary." The dividends on these securities are recorded as minority interest expense of $16,250,000, in "Other income (expense), net" on the income statement for each of the three years ended December 31, 1998. 63 10. COMMITMENTS AND CONTINGENCIES Property and Equipment. As of December 31, 1998, the corporation had commitments to acquire property and equipment totaling $187,431,000. Of this total, $169,527,000 is payable over the next three years. These commitments are related principally to the corporation's share of INTELSAT satellite acquisition programs. Leases. The corporation leases its headquarters building from a partnership in which the corporation owns a 50% interest. The initial term of the lease expires in 2008. In addition to lease payments, the corporation is responsible for taxes, insurance and maintenance of the building. The corporation also has leases of other property and equipment. Rental expense under operating leases was $7,579,000 in 1998, $5,367,000 in 1997 and $5,179,000 in 1996. The future rental payments under operating leases are $9,402,000 in 1999, $7,087,000 in 2000, $5,867,000 in 2001, $5,408,000 in 2002, $5,251,000 in 2003 and $21,679,000 thereafter. Space Segment. At December 31, 1998, the corporation's commitments for space segment capacity from New Skies and certain third parties are $26,608,000 in 1999, $19,468,000 in 2000, $18,516,000 in 2001, $15,942,000 in 2002, $10,654,000 in 2003, and $32,903,000 thereafter. Government Contracts and Investigations. The corporation and its subsidiaries are subject to, and are currently a party to, audits and investigations by various government agencies which oversee contract performance in connection with the corporation's contracts with the U.S. Government or which regulate the corporation's compliance with federal and state laws. If the corporation is found liable for wrongdoing as a result of such an audit or investigation, the corporation could be fined or subjected to other punitive actions. See Note 11 for a description of an investigation affecting Electromechanical Systems, Inc., a discontinued operations subsidiary of the corporation. In response to a communication from an agency of the federal government regarding the corporation's compliance with export control laws, the corporation made a disclosure with respect to certain of its export licensing activities. In addition, the corporation has received a subpoena from a separate agency of the federal government requesting certain information in connection with a possible criminal investigation of the same matter. The corporation cannot predict at this time whether or to what extent the government may seek sanctions for any possible violations of the export control laws and, therefore, cannot predict the ultimate outcome of this matter or estimate the amount of liability, if any, that could result from any civil or criminal sanctions the government may seek. There can be no assurances, however, that any such liability would not be material. 64 Environmental Issues. The corporation reviews, on a quarterly basis, its estimates of costs of compliance with environmental laws and the cleanup of various sites, including sites for which governmental agencies have designated the corporation as a potentially responsible party. When it is probable that obligations have been incurred and where a minimum cost or a reasonable estimate of the cost of compliance or remediation can be determined, the applicable amount is accrued. Because of the uncertainties associated with environmental assessment and remediation activities, future expense to remediate currently identified sites could be higher than the liability currently accrued. 11. REGULATORY ENVIRONMENT AND LITIGATION Regulatory Environment. Under the Satellite Act, the International Maritime Satellite Act of 1978 (the Inmarsat Act) and the Communications Act of 1934, as amended (the Communications Act), COMSAT is subject to regulation by the FCC with respect to its capital and organizational structure, and with respect to its COMSAT World Systems (CWS) and COMSAT Mobile Communications (CMC) businesses. FCC decisions and policies have had and will continue to have a significant impact on the corporation. In addition, the telecommunications companies which the corporation operates in various developing countries are subject to regulation by the local regulatory bodies in those countries. Because the regulatory environment in those countries is rapidly evolving as the local economies are developing, these companies face increasing business uncertainties that could have an adverse effect on their operations. In April 1998, the FCC granted the corporation's petition to be deregulated and reclassified CWS as a "non-dominant" telecommunications carrier in its major markets. The FCC's decision eliminates rate-of-return restrictions, structural separation regulation and 14-day advance tariff notification in regard to approximately 90% of COMSAT's INTELSAT business. It also allows CWS to integrate earth station and space segment services, requiring only that COMSAT list those offerings separately in tariff filings at the FCC. On February 9, 1999, the FCC further deregulated COMSAT by eliminating rate of return regulation on so-called "non-competitive thin routes" and occasional use "single carrier" markets. In its place, the FCC adopted an incentive-based price policy for COMSAT's provision of INTELSAT services in these markets. The FCC also adopted a procedure for reclassifying these markets as non-dominant as competition is introduced. On October 28, 1998, the FCC issued a separate notice of proposed rulemaking that looks toward enabling users to have direct access to the INTELSAT system, which would end COMSAT's status as the exclusive provider of INTELSAT services in the U.S. In the direct access notice, the FCC tentatively concluded, among other things, that it lacks the statutory authority to impose Level 4 direct access (by which users could invest and acquire an ownership interest in INTELSAT), but does have the authority to require Level 3 direct access (by which users could contract directly with INTELSAT for capacity and bypass COMSAT). The FCC sought comments on its tentative conclusion that it would serve the public interest to mandate Level 3 direct access. The corporation filed comments in this proceeding contesting the basis for the FCC's proposed action. 65 Litigation. The corporation and its subsidiaries are a party to various lawsuits and arbitration proceedings and are subject to various claims and inquiries, which generally are incidental to the ordinary course of its business. See Note 3 for a description of an arbitration proceeding related to the Green Bank contract to which the corporation is a party. The outcome of legal proceedings cannot be predicted with certainty. Based on currently available information, however, management does not believe that the outcome of any matter which is pending or threatened, either individually or in the aggregate, will have a material adverse effect on the long-term consolidated financial condition of the corporation. Nevertheless, the outcome of such matters could materially affect consolidated results of operations in a given year or quarter. In January 1999, the U.S. Department of Justice announced that it had joined a lawsuit filed by former employees of Electromechanical Systems, Inc. (EMS), a wholly-owned subsidiary of the corporation, under the qui tam provisions of the Civil False Claims Act. The corporation acquired EMS in 1994 as part of the corporation's acquisition of Radiation Systems, Inc. The corporation began accounting for COMSAT RSI as a discontinued operation in 1997 and retained EMS when the corporation sold COMSAT RSI in 1998 (see Note 3). The lawsuit names EMS, the corporation and several current and former EMS employees and seeks potential damages estimated at up to $40,000,000. The Department of Justice is expected to file its own complaint in this matter and may then seek to stay the lawsuit pending the outcome of a separate criminal investigation into the same allegations that is currently being conducted by the U.S. Attorney's office in Tampa, Florida. The corporation intends to vigorously defend this matter but cannot predict the ultimate outcome or estimate the amount of liability, if any, that could result from any civil or criminal sanctions the government may seek. There can be no assurances, however, that any such liability would not be material. 12. STOCKHOLDERS' EQUITY Comprehensive Income (Loss). In 1998, the corporation adopted SFAS No. 130, "Reporting Comprehensive Income." The statement established rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income (loss), unrealized gain (loss) on securities, foreign currency translation and minimum pension liability adjustments and is presented in the Statements of Changes in Consolidated Stockholders' Equity. The adoption of SFAS No. 130 had no impact on total stockholders' equity. Prior years' financial statements have been reclassified to conform to the SFAS No. 130 requirements. The balance of the components of accumulated other comprehensive income (loss), net of tax, at December 31, 1998 and 1997 are as follows:
In thousands 1998 1997 ------------ ---------- -------- Unrealized gain on securities $ 12,779 $ 1,707 Foreign currency translation (14,783) (403) Minimum pension liability (4,541) (2,222) --------- ------- Total $ (6,545) $ (918) ========= =======
66 Effective January 1, 1998, the corporation no longer accounts for its Brazil subsidiary as highly inflationary. Foreign currency translation adjustments are now recorded in "Accumulated other comprehensive loss." The unrealized gain on securities reported in the Statements of Changes in Consolidated Stockholders' Equity includes a reclassification adjustment of $9,513,000, net of tax, in 1998 related to a gain realized from the sale of marketable equity securities. Earnings Per Share. The following reconciliation presents the calculation of the corporation's basic and diluted earnings per share amounts:
In thousands, except per share amounts 1998 1997 1996 ---------------------------------------------------------------------- Income from continuing operations before extraordinary item $26,417 $28,568 $36,197 ======= ======= ======= Basic: Weighted average shares outstanding 51,673 48,924 47,870 ======= ======= ======= Per share $ 0.51 $ 0.58 $ 0.76 ======= ======= ======= Assuming dilution: Weighted average shares outstanding 51,673 48,924 47,870 Stock options 1,415 766 647 Restricted stock awards and unit 195 313 402 ------- ------- ------- Total 53,283 50,003 48,919 ======= ======= ======= Per share $ 0.50 $ 0.57 $ 0.74 ======= ======= =======
Stock Incentive Plans. The corporation has stock incentive plans that provide for the issuance of stock options, restricted stock awards, stock appreciation rights and restricted stock units. A total of 7,169,000 shares of common stock may be granted under the current plans. As of December 31, 1998, 71,000 shares of the corporation's treasury stock and 7,098,000 unissued common shares were reserved for these plans. As of December 31, 1998, no stock appreciation rights were outstanding. Adjustments were made in 1997 to equitably increase the number of shares and decrease the exercise price for all outstanding stock options as a result of the tax-free spinoff of Ascent. Vested stock options held by Ascent employees generally expired 90 days after the date of the spinoff. Unvested stock options held by Ascent employees continue to vest as long as the employee is employed by Ascent and then expire 90 days after vesting. Adjustments were also made to increase the number of restricted stock awards and restricted stock units outstanding for the effect of the Ascent spinoff. Stock Options. Under the current plans, the exercise price for stock options may not be less than the fair market value of the stock when granted. Options generally vest over three years and expire after 10 to 15 years. 67 Stock option activity was as follows:
Options in thousands 1998 1997 1996 -------------------- -------- -------- ------- Outstanding at January 1 5,152 4,478 4,415 Granted 997 655 899 Exercised (2,465) (848) (481) Canceled (253) (283) (355) Adjustment due to Ascent spinoff - 1,150 - -------- ------ ------ Outstanding at December 31 3,431 5,152 4,478 Exercisable at December 31 1,709 3,300 2,270 Average price Outstanding at January 1 $ 18.33 $22.20 $22.08 Granted 31.14 25.01 19.44 Exercised 18.91 18.26 17.24 Canceled 20.75 18.68 20.37 Adjustment due to Ascent spinoff - 17.84 - Outstanding at December 31 21.46 18.33 22.20 Exercisable at December 31 17.79 18.92 23.00
The weighted average fair value at date of grant for options granted during 1998, 1997 and 1996 was $12.72, $6.89 and $5.59, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model assuming an expected option life of seven years and the following weighted average assumptions:
Per share 1998 1997 1996 --------------------------------------- Dividend yield 0.84% 3.29% 3.37% Interest rate 5.35% 6.47% 5.70% Volatility 36.82% 37.21% 29.47%
Stock options outstanding at December 31, 1998, 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 - $ 8.59 143 2.25 $ 6.82 143 $ 6.82 10.94 - 18.85 1,101 6.63 15.58 720 15.67 20.06 - 29.09 1,262 6.35 21.10 846 21.46 30.13 - 38.78 925 9.18 31.23 - - ----------- ----------- 4.81 - 38.78 3,431 7.03 21.46 1,709 17.79 =========== ===========
Restricted Stock Awards. Restricted stock awards are shares of stock that are subject to restrictions on their sale or transfer. In 1998, 1997 and 1996, 30,800, 152,470 and 66,000 "performance-based" restricted stock awards were granted, respectively. The 1997 amount includes an adjustment of outstanding awards due to the Ascent spinoff. Grantees have record ownership of the underlying securities; however, all such securities are subject to forfeiture at the end of a two-year performance period. In addition to the two-year performance period, the awards are further subject to a three-year vesting schedule. The weighted average fair value at 68 date of grant for restricted stock awards granted during 1998, 1997 and 1996 was $30.81, $23.71 and $18.00 per share, respectively, which in each case was equal to the market value of the common stock at the date of grant. The expected cost of all grants is amortized over the performance and vesting period. The expense for all outstanding grants was $1,071,000 in 1998, $870,000 in 1997 and $1,296,000 in 1996. Restricted Stock Units. Restricted stock units entitle the holder to receive a combination of stock and cash equal to the market price of common stock for each unit, when vested. These units vest over three years. During 1998, 1997 and 1996, respectively, 36,850, 54,360 and 34,000 restricted stock units were granted . The 1997 amount includes an adjustment of outstanding units due to the Ascent spinoff. The weighted average fair value for the units granted during 1998, 1997 and 1996 was $32.32, $25.50 and $18.99 per unit, respectively, which in each case was equal to the market value of the common stock at the date of grant. Partially vested restricted stock units outstanding totaled 80,036 at December 31, 1998 and 110,200 at December 31, 1997. The cost of these awards is amortized to expense over the three-year vesting period. The expense in 1998, 1997 and 1996 was $1,012,000, $575,000 and $924,000, respectively. Employee Stock Purchase Plan. Employees may purchase stock at a discount through the corporation's Employee Stock Purchase Plan. The purchase price of the shares is the lower of 85% of the fair market value of the stock on the offering date, or 85% of the fair market value of the stock on the last business day of each month throughout the one-year offering period. The purchase price on the respective offering dates for calendar years 1998, 1997 and 1996, was $19.76, $21.36 (adjusted to $17.22 subsequent to the Ascent spinoff) and $16.04, respectively. There were 196,000 shares, 181,000 shares and 254,000 shares issued under this plan at weighted average prices of $19.76, $18.26 and $16.03 for the years ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, a total of 1,381,000 shares of the corporation's unissued common stock has been reserved for this plan. The weighted average fair value of the purchase rights granted pursuant to this plan in 1998, 1997 and 1996 was $5.66, $5.95 and $4.07, respectively. The fair value of each purchase right was estimated using the Black-Scholes model as of January 1 of each year assuming each plan year consisted of 12 one-month options and the following weighted average assumptions:
Per share 1998 1997 1996 --------------------------------------- Dividend yield 0.84% 3.30% 3.89% Interest rate 5.56% 5.39% 5.11% Volatility 36.52% 35.79% 27.33%
69 Proforma Disclosures. Had stock-based compensation cost for the corporation's stock incentive plans been determined based on the fair value at the grant dates consistent with SFAS No.123, the corporation's income from continuing operations before extraordinary item and per share amounts would have been as follows for each year:
In thousands, except per share amounts 1998 1997 1996 ------------------------------------------------------------------------- Income from continuing operations: before extraordinary item As reported $26,417 $28,568 $36,197 Proforma 23,380 26,024 34,269 Earnings per common share - basic: As reported $ 0.51 $ 0.58 $ 0.76 Proforma 0.45 0.53 0.72 Earnings per common share-assuming dilution: As reported $ 0.50 $ 0.57 $ 0.74 Proforma 0.44 0.52 0.70
The proforma effect on income from continuing operations before extraordinary item for such years is not representative of its effect for future years because it does not take into consideration proforma compensation expense related to grants made prior to 1995. 13. PENSION AND OTHER BENEFIT PLANS Effective December 31, 1998, the corporation adopted SFAS No. 132, "Employer's Disclosures about Pensions and Other Post-retirement Benefits." The provisions of SFAS No. 132 revise employer's disclosures about pension and other post-retirement benefit plans but do not change the measurement or recognition of these plans. The corporation has a non-contributory, defined benefit pension plan for qualifying employees. Pension benefits are based on years of service and compensation prior to retirement. The components of net pension expense (benefit) for each year are:
In thousands 1998 1997 1996 ---------------------------------------------------------------------- Service cost $ 2,401 $ 2,005 $ 2,590 Interest cost 8,400 7,690 7,213 Expected return on plan assets (10,158) (9,039) (8,520) Amortization of transition asset (1,195) (1,208) (1,208) Amortization of prior service costs 382 386 386 ---------- ------- ------- Net periodic pension expense (benefit) $ (170) $ (166) $ 461 ========== ======= =======
The following tables show a reconciliation of the changes in the pension plan's benefit obligation and fair value of the plan assets as well as the funded status of the plan as of December 31, 1998 and 1997: 70
In thousands 1998 1997 --------------------------------------------------------------------- Reconciliation of benefit obligation Benefit obligation at January 1 $119,826 $103,608 Service cost 2,401 2,005 Interest cost 8,400 7,690 Actuarial loss 8,654 10,618 Benefits paid from plan assets (4,498) (4,095) -------- -------- Benefit obligation at December 31 $134,783 $119,826 ======== ======== Reconciliation of fair value of plan assets Fair value of plan assets at January 1 $150,874 $126,936 Actual return on plan assets 21,229 28,033 Benefits paid from plan assets (4,498) (4,095) -------- -------- Fair value of plan assets at December 31 $167,605 $150,874 ======== ======== Funded status Funded status at December 31 $ 32,822 $ 31,048 Unrecognized gain (38,218) (35,802) Unrecognized prior service cost 1,146 1,529 Unrecognized transition asset - (1,195) -------- ------- Accrued pension liability $ (4,250) $ (4,420) ======== ======== Assumed discount rate 6.75% 7.00% Assumed rate of compensation increase 5.50% 5.00% Expected rate of return on pension plan assets 9.50% 9.00%
Supplemental Executive Retirement Plan. The corporation's supplemental executive retirement plan is an unfunded defined benefit plan. The components of net pension expense under this plan for each year are:
In thousands 1998 1997 1996 --------------------------------------------------------------- Service cost $ 324 $ 278 $ 491 Interest cost 1,703 1,409 1,454 Amortization of transition obligation 266 266 266 Amortization of losses 842 210 606 -------- ------ ------ Net periodic pension expense $3,135 $2,163 $2,817 ======== ====== ======
The following tables show a reconciliation of the changes in the supplemental plan's benefit obligation and fair value of the plan assets as well as the funded status of the plan as of December 31, 1998 and 1997:
In thousands 1998 1997 ---------------------------------------------------------------------- Reconciliation of benefit obligation Benefit obligation at January 1 $ 21,193 $ 22,136 Service cost 324 278 Interest cost 1,703 1,409 Actuarial (gain) loss 4,895 (1,272) Benefits paid (1,727) (1,358) -------- -------- Benefit obligation at December 31 $ 26,388 $ 21,193 ======== ========
71
In thousands 1998 1997 ----------------------------------------------------------------------- Reconciliation of fair value of plan assets Fair value of plan assets at January 1 $ 0 $ 0 Employer contributions 1,727 1,358 Benefits paid (1,727) (1,358) -------- -------- Fair value of plan assets at December 31 $ 0 $ 0 ======== ======== Funded status Funded (unfunded) status at December 31 $(26,388) $(21,193) Unrecognized loss 8,816 4,763 Unrecognized transition obligation 798 1,064 Additional minimum liability (8,042) (4,575) -------- -------- Total accrued liability $(24,816) $(19,941) ======== ======== Intangible asset $ 798 $ 1,064 Amount recognized in other comprehensive income $ 7,244 $ 3,510 Assumed discount rate 6.75% 7.00% Assumed rate of compensation increase 5.50% 5.00%
401(k) Plan. The corporation has a 401(k) plan for qualifying employees. A portion of employee contributions is matched by the corporation with shares of its common stock. The number of shares contributed to the plan and the respective market values each year were as follows: 1998 - 68,000 shares ($2,186,000), 1997 - 108,000 shares ($2,433,000) and 1996 -140,000 shares ($3,035,000). Post-retirement Benefits. The corporation provides health and life insurance benefits to qualifying retirees. The expected cost of these benefits is recognized during the years in which employees render service. The components of net post-retirement benefit expense for each year are:
In thousands 1998 1997 1996 ------------------------------------------------------------------ Service cost $ 895 $ 666 $ 1,019 Interest cost 2,252 1,877 2,496 Amortization of net gains (1,841) (2,360) (1,219) ------- ------- ------- Net post-retirement benefit expense $ 1,306 $ 183 $ 2,296 ======= ======= =======
The following tables show a reconciliation of the changes in the post- retirement plan's obligation and fair value of the plan assets as well as the funded status of the plan as of December 31 for both years:
In thousands 1998 1997 ------------------------------------------------------------------ Reconciliation of benefit obligation Benefit obligation at January 1 $ 28,890 $ 29,460 Service cost 895 666 Interest cost 2,252 1,877 Plan amendments (573) - Actuarial (gain) loss 5,373 (1,753) Benefits paid (1,628) (1,360) -------- -------- Benefit obligation at December 31 $ 35,209 $ 28,890 ======== ========
72
In thousands 1998 1997 ------------------------------------------------------------------- Reconciliation of fair value of plan assets Fair value of plan assets at January 1 $ 0 $ 0 Employer contributions 1,628 1,360 Benefits paid (1,628) (1,360) -------- -------- Fair value of plan assets at December 31 $ 0 $ 0 ======== ======== Funded status Funded (unfunded) status at December 31 $(35,209) $(28,890) Unrecognized (gain) loss (1,455) (6,829) Unrecognized gain from plan changes (12,259) (13,527) -------- -------- Accrued post-retirement benefit costs $(48,923) $(49,246) ======== ======== Assumed discount rate 6.75% 7.00% Assumed rate of compensation increase 5.50% 5.00%
An 8.0% increase in health care costs was assumed for 1998 with the rate decreasing 0.5% each year to an ultimate rate of 5.5%. A 1% change in the assumed health care cost trend rate would have the following impact on post-retirement benefit cost and obligation:
1% Change ------------------ In thousands Increase Decrease ---------------------------------------------------------------------------- Effect on total service and interest cost component of post-retirement benefit cost $ 431 $ (347) ====== ======= Effect on the post-retirement benefit obligation $4,376 $(3,484) ====== =======
14. INCOME TAXES Income (loss) from continuing operations before taxes and extraordinary item consisted of:
In thousands 1998 1997 1996 --------------------------------------------- United States $ 63,144 $47,927 $73,707 Foreign (30,936) (3,746) (8,586) -------- ------- ------- Total $ 32,208 $44,181 $65,121 ======== ======= =======
The components of income tax expense on continuing operations are:
In thousands 1998 1997 1996 ------------------------------------------------------------ Federal: Current $ 6,914 $15,783 $22,910 Deferred 1,962 (2,162) (1,076) Investment tax credits (net) (1,687) (1,837) (1,844) State and local (2,369) 1,487 6,779 Foreign 971 2,342 2,155 ------- ------- ------- Total $ 5,791 $15,613 $28,924 ======= ======= =======
73 The difference between income tax expense computed at the statutory Federal tax rate and the corporation's effective tax rate is:
In thousands 1998 1997 1996 ----------------------------------------------------------------------------------- Federal income taxes computed at the statutory rate $ 11,273 $15,463 $22,792 Foreign losses 5,389 3,654 4,335 Investment tax credits (net) (1,688) (1,837) (1,844) Adjustment to estimated income tax accruals (14,208) (839) (506) State income taxes, net of federal income taxes (1,569) 972 4,408 Life insurance (net) (1,115) (1,183) (1,173) Other non-deductible costs 1,403 433 156 Merger costs 1,467 - - Impairment loss 4,900 - - Other (61) (1,050) 756 -------- ------- ------- Income tax expense $ 5,791 $15,613 $28,924 ========== ======= =======
The current and net non-current components of deferred tax accounts as shown on the balance sheet at December 31, 1998 and 1997 are:
In thousands 1998 1997 ----------------------------------------------------------- Current deferred tax asset $ 7,911 $ 7,469 Non-current deferred tax liability (127,351) (112,226) --------- --------- Net liability $(119,440) $(104,757) ========= =========
The deferred tax assets and liabilities at December 31, 1998 and 1997 are:
In thousands 1998 1997 ---------------------------------------------------------- Assets: Post-retirement benefits $ 23,425 $ 22,042 Accrued expenses 42,787 45,803 NOL carryforward 9,818 - Long-term contract revenues 6,876 7,946 Foreign tax credit carryforward 3,159 - Alternative minimum tax credit 31,454 30,476 Other 4,954 3,181 --------- --------- Total deferred tax assets 122,473 109,448 --------- --------- Liabilities: Property and equipment (209,952) (214,025) Unrealized gain on securities (6,098) (180) Foreign currency translation (3,158) - Basis in cost investment (22,705) - --------- -------- Total deferred tax liabilities (241,913) (214,205) --------- -------- Net liability $(119,440) $(104,757) ========= =========
The corporation favorably resolved a state tax audit for the years 1992- 1996 that allowed the corporation to reverse previously accrued interest costs of $1,720,000 and state taxes of $2,238,000. After federal taxes, the interest and state tax benefit increased net income in 1998 by $2,573,000. 74 In addition, the corporation reversed previously accrued interest costs of $2,456,000 and taxes of $15,100,000 for the years 1990-1994 related to certain federal tax matters. Events during the third quarter of 1998 prompted the corporation to conclude that the amounts accrued were no longer required. The interest and tax benefit increased net income in 1998 by $16,633,000. The Internal Revenue Service (IRS) has completed examinations of the federal income tax returns of the corporation through 1994. The corporation is contesting adjustments proposed by the IRS on the 1990 through 1994 income tax returns. The corporation has also amended its returns and filed claims for refunds for 1979 through 1987, which the IRS has denied. In 1996, the corporation filed suit in a U.S. District Court seeking the refunds which the IRS denied. The suit remains pending. In the opinion of the corporation, adequate provision has been made for income taxes for all periods through 1998. 15. FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS Inmarsat has entered into foreign currency contracts designed to minimize exposure to exchange rate fluctuations on fixed operating expenses denominated in British pounds sterling. At December 31, 1998, Inmarsat had several contracts maturing primarily in 1999 to purchase foreign currency for a total of $116,616,000. The corporation's share of the estimated fair value of these contracts, as determined by a bank, is an unrealized gain of approximately $886,000 at December 31, 1998. Inmarsat has entered into interest rate and foreign currency swap arrangements to minimize the exposure to interest rate and foreign currency exchange fluctuations related to its satellite financing obligations. Inmarsat borrowed and is obligated to repay Pounds Sterling. The Pounds Sterling borrowed were swapped for U.S. Dollars with an agreement to exchange the Dollars for Pounds Sterling in order to meet the future lease payments. Inmarsat pays interest on the Dollars at an average fixed rate of 8.8%, and it receives variable interest on the Sterling amounts based on short-term LIBOR rates. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements. The currency swap arrangements have been designated as hedges, and any gains or losses are included in the measurement of the debt. The effect of these swaps is to change the sterling lease obligation into fixed-interest- rate Dollar debt. As of December 31, 1998, Inmarsat had $321,433,000 of swaps to be exchanged for (Pounds)211,474,000 at various dates through 2007. Inmarsat is exposed to loss if one or more of the counter parties defaults. However, Inmarsat does not anticipate non-performance by the counter parties as all are major financial institutions. The corporation's share of the estimated fair value of these swaps is an unrealized gain of $8,214,000 at December 31, 1998. The fair value was estimated by computing the present value of the Dollar obligations using current rates available for issuance of debt with similar terms and the current value of the Sterling at year-end exchange rates. The fair value of long-term debt (excluding capitalized leases) shown below was estimated by obtaining a yield-adjusted price for each obligation from an investment banker. The fair value of the Monthly Income Preferred Securities was determined by using the quoted market price. The fair values of the corporation's other financial instruments are approximately equal to their carrying amounts. The carrying amount and fair value at each year end are as follows: 75
1998 1997 ---------------------------------------- Carrying Fair Carrying Fair In thousands Amount Value Amount Value ----------------------------------------------------------------------------- 8.125% notes due 2004 $ 70,475 $ 77,971 $ 70,475 $ 74,971 8.95% notes due 2001 75,000 80,525 75,000 80,123 INTELSAT bonds 170,872 183,974 170,572 180,425 Medium-term notes 64,000 72,162 64,000 69,035 Monthly income preferred securities 200,000 203,000 200,000 204,000
16. BUSINESS SEGMENT INFORMATION The corporation adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," in 1998, which changes the way the corporation reports information about its operating segments. The information for 1997 and 1996 has been restated in order to conform to the 1998 presentation. The corporation reports operating results and financial data in four segments: COMSAT World Systems (CWS), COMSAT Mobile Communications (CMC), International and Laboratories. CWS provides voice, data, Internet, video and audio communications services between the U.S. and other countries using the global satellite networks of INTELSAT and New Skies. CWS also includes the operating results of COMSAT Government Systems, Inc., COMSAT Digital Teleport, Inc. and COMSAT General Corporation, which provide various satellite and ground segment services to commercial and government customers. CMC provides voice, data, fax, telex and information services for ships, aircraft and land mobile applications throughout the world using the Inmarsat satellite system. Together, the CWS and CMC operating segments represent the corporation's Satellite Services business unit. International consists of activities undertaken by the corporation in its COMSAT International (CI) business. CI operates an integrated group of telecommunications companies that are engaged principally in providing individualized digital network solutions to business clients and carriers in high-growth emerging markets overseas. Laboratories (Labs) consists of activities undertaken by the corporation in its COMSAT Laboratories business, which provides technical consulting services and develops advanced communications technologies and products for satellite access and networking applications. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The corporation evaluates the performance of its operating segments based on income (loss) before income taxes and interest costs. Summarized financial information concerning the corporation's reportable segments is shown in the following tables. The "Other" column includes the elimination of intersegment revenues, corporate related items, and interest costs, net of amounts capitalized. Corporate assets, primarily consisting of short-term investments, net assets of discontinued operations, property and cash surrender value of life insurance policies, are reported in the "Other" column. The operating segments' income (loss) and corporate related amounts total the amount presented as income before taxes and extraordinary item in the consolidated income statements. 76
SATELLITE SERVICES -------------------------------- In thousands CWS CMC TOTAL CI LABS OTHER TOTAL ----------------------------------------------------------------------------------------------------------- 1998 Revenues: External customers $301,781 $167,559 $ 469,340 $113,106 $34,023 $ - $ 616,469 Intersegment 1,326 1,508 2,834 162 8,299 (11,295) - ---------------------------------------------------------------------------- Total 303,107 169,067 472,174 113,268 42,322 (11,295) 616,469 Operating income (loss) 107,268 29,740 137,008 (39,789) (1,760) (35,957) 59,502 Segment income (loss) 113,110 31,864 144,974 (20,983) (3,508) (88,275) 32,208 Total assets 784,192 454,696 1,238,888 342,704 13,454 195,752 1,790,798 Capital expenditures 129,497 28,646 158,143 61,727 1,266 3,593 224,729 Depreciation and amortization 112,283 64,148 176,431 38,675 1,214 3,563 219,883 ----------------------------------------------------------------------------------------------------------- 1997 Revenues: External customers $285,179 $164,371 $ 449,550 $ 88,550 $24,551 $ - $ 562,651 Intersegment 1,002 3,479 4,481 1,111 11,820 (17,412) - ---------------------------------------------------------------------------- Total 286,181 167,850 454,031 89,661 36,371 (17,412) 562,651 Operating income (loss) 99,974 23,114 123,088 (13,975) (2,043) (25,102) 81,968 Segment income (loss) 102,646 23,854 126,500 (8,888) (1,780) (71,651) 44,181 Total assets 761,338 509,504 1,270,842 322,704 14,133 287,096 1,894,775 Capital expenditures 88,120 54,457 142,577 114,110 1,173 1,639 259,499 Depreciation and amortization 97,821 57,204 155,025 25,623 991 2,567 184,206 ----------------------------------------------------------------------------------------------------------- 1996 Revenues: External customers $296,624 $158,749 $ 455,373 $ 58,084 $31,643 $ - $ 545,100 Intersegment 1,130 2,173 3,303 - 12,043 (15,346) - ---------------------------------------------------------------------------- Total 297,754 160,922 458,676 58,084 43,686 (15,346) 545,100 Operating income (loss) 109,719 31,872 141,591 (17,281) 7,098 (24,183) 107,225 Segment income (loss) 111,023 34,861 145,884 (14,694) 7,335 (73,404) 65,121 Total assets 808,646 503,342 1,311,988 253,649 16,593 515,056 2,097,286 Capital expenditures 110,231 70,616 180,847 89,857 1,009 1,193 272,906 Depreciation and amortization 92,185 45,207 137,392 14,814 956 2,134 155,296 -----------------------------------------------------------------------------------------------------------
International's operating loss in 1998 includes a $14,000,000 non-cash impairment loss on long-lived assets (see Note 7) and its 1998 segment loss includes a realized gain of $14,635,000 from the sale of a marketable equity security (see Note 6). CWS's segment income in 1998 includes a $4,303,000 gain from a settlement with ICO (see Note 6). Labs' 1996 revenues includes $7,800,000 related to a licensing agreement that resolved patent infringement disputes. 77 Related Party Transactions. The corporation provides support services to INTELSAT and support services and satellite capacity to Inmarsat. The revenues from these services were $15,385,000 in 1998, $16,364,000 in 1997 and $17,996,000 in 1996. These revenues were recorded primarily in CWS, CMC and Labs. Major Customers. Revenues from three major customers contributed $235,637,000, $224,683,000 and $212,073,000 to the corporation's consolidated revenues in 1998, 1997 and 1996, respectively. Geographic Information. Revenues are attributed to geographic areas based on the location of the assets producing the revenues. Satellite services revenues generated through the INTELSAT, New Skies and Inmarsat satellites are ascribed to the United States. The foreign amounts primarily consist of CI's companies in Latin America. Financial information relating to the corporation's operations by geographic area is as follows:
Revenues ---------------------------------- In thousands 1998 1997 1996 --------------------------------------------------- United States $ 503,363 $ 474,101 $ 487,016 Foreign 113,106 88,550 58,084 ---------- ---------- ---------- Total $ 616,469 $ 562,651 $ 545,100 ========== ========== ========== Property and Equipment ---------------------------------- In thousands 1998 1997 1996 --------------------------------------------------- United States $ 954,953 $1,123,750 $1,177,135 Foreign 254,509 235,543 145,850 ---------- ---------- ---------- Total $1,209,462 $1,359,293 $1,322,985 ========== ========== ==========
78 17. QUARTERLY FINANCIAL INFORMATION (Unaudited)
In thousands, except per share amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year - ------------------------------------------------------------------------------------------------------------------------------ 1998: Revenues $144,717 $151,045 $158,415 $162,292 $616,469 Operating income 19,676 20,962 2,377 (2) 16,487 (4) 59,502 Net income 3,850 (1) 4,074 6,569 (3) 11,924 (5) 26,417 Earnings per share: Basic 0.08 0.08 0.13 0.23 0.51 Assuming dilution 0.07 0.08 0.12 0.22 0.50 Dividends per share 0.05 0.05 0.05 0.05 0.20 Stock price: High 36 42 3/4 36 7/8 39 5/8 42 3/4 Low 21 5/8 27 3/4 21 13/16 32 7/16 21 5/8 Close 34 7/16 28 5/16 35 1/4 36 36 Revenues $133,531 $142,437 $145,332 $141,351 $562,651 Operating income 23,151 23,412 17,653 17,752 81,968 Income from continuing operations before extraordinary item 8,099 9,098 (6) 9,395 (7) 1,976 (6) 28,568 Loss from discontinued (12,380) (16,481) (30,207) (30,000) (89,068) operations Extraordinary loss (1,010) (2,936) - - (3,946) Net loss (5,291) (10,319) (20,812) (28,024) (64,446) Earnings (loss) per share: Basic: Income from continuing operations before extraordinary item 0.17 0.19 0.19 0.04 0.58 Loss from discontinued operations (0.26) (0.34) (0.62) (0.61) (1.82) Extraordinary loss (0.02) (0.06) - - (0.08) Net loss (0.11) (0.21) (0.42) (0.57) (1.32) Assuming dilution: Income from continuing operations before extraordinary item 0.16 0.18 0.19 0.04 0.57 Loss from discontinued operations (0.25) (0.33) (0.60) (0.59) (1.78) Extraordinary loss (0.02) (0.06) - - (0.08) Net loss (0.11) (0.21) (0.41) (0.55) (1.29 Dividends per share 0.195 0.05 0.05 0.05 0.345 Stock price: High 28 1/2 26 11/16 24 5/16 25 3/4 28 1/2 Low 23 19 5/8 20 13/16 20 5/16 19 5/8 Close 24 3/8 23 13/16 23 13/16 24 1/4 24 1/4
(1) The first quarter of 1998 includes the $1,950,000 non-cash write-off of an investment. (2) The third quarter of 1998 includes $3,500,000 of merger costs and a $14,000,000 non-cash impairment loss related to the write-down of long- lived assets. (3) The third quarter of 1998 includes a reversal of previously accrued interest costs and taxes totaling $19,206,000 net of tax, relating to the resolution of certain state and federal income tax matters. (4) The fourth quarter of 1998 includes merger costs of $2,025,000. (5) The fourth quarter of 1998 includes a pre-tax gain of $13,960,000 from the sale of a marketable equity security and income of $4,303, 000 from a settlement with ICO. (6) The second and fourth quarters of 1997 includes a pre-tax gain of $1,987,000 from the sale of a marketable equity security and a pre-tax loss of $1,008,000 for a decline in value of a marketable equity security, respectively. (7) The third quarter of 1997 includes a pre-tax gain of $7,261,000 from the sale of land. 79 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 80 PART III Item 10: Directors and Executive Officers of the Registrant DIRECTORS OF THE REGISTRANT The Satellite Act provides that the Corporation's Board of Directors shall consist of 15 directors, of whom 12 are to be elected annually by the shareholders for terms of one year and three are to be appointed by the President of the United States, with the advice and consent of the U.S. Senate, for terms of three years or until their successors have been appointed and qualified. The Corporation's Board of Directors currently consists of 14 directors, pending Presidential appointment and Senate confirmation to fill an existing vacancy in one of the Presidentially-appointed director positions. The following sets forth certain information concerning the directors of the Corporation. Elected Directors Betty C. Alewine, 50, has been President and Chief Executive Officer of COMSAT since July 1996. She was President, COMSAT International Communications from January 1995 to July 1996, and was President, COMSAT World Systems from May 1991 to January 1995. She joined COMSAT from MCI Communications Corporation in 1986 and has been a director of the Corporation since July 1996. She also is a director of New York Life Insurance Co. and the Cancer Research Foundation of America, a not-for-profit corporation. She is a member of the Inter-American Development Bank Advisory Council, the Business-Higher Education Forum and the American Institute of Aeronautics and Astronautics. Marcus C. Bennett, 63, is a director of various organizations. He was Executive Vice President and Chief Financial Officer of Lockheed Martin Corporation from 1995 to January 1999 and is a director of Lockheed Martin Corporation. He has been a COMSAT director since August 1997. He also is a director of Carpenter Technology Corporation and Martin Marietta Materials, Inc. and a member of the board of directors of the Private Sector Council and the Georgia Tech Advisory Board. Lucy Wilson Benson, 71, has been a director of various business, educational and nonprofit organizations since 1980. She was Under Secretary of State for Security Assistance, Science and Technology from 1977 to 1980. She has been a COMSAT director since September 1987. She also is a director of Logistics Management Institute, a trustee of the Alfred P. Sloan Foundation and Vice Chairman of the Atlantic Council of the U.S., the Board of Trustees of Lafayette College and the Citizens Network for Foreign Affairs. She also is a director or trustee of funds of The Dreyfus Corporation. Edwin I. Colodny, 72, has been Chairman of the Board of COMSAT since April 1997 and a director since May 1992. He was Chairman of US Airways Group, Inc. and of its subsidiary, US Airways, Inc., a commercial airline company, from 1978 until July 1992 and was a director of both corporations until May 1997. He was Chief Executive Officer of US Airways Group from 1983 to June 1991 and of its subsidiary, US Airways, Inc., from 1975 to June 1991. He has served as counsel to the Washington, D.C. law firm of Paul, Hastings, Janofsky and Walker since September 1991. 81 Lawrence S. Eagleburger, 68, has been Senior Foreign Policy Advisor for Baker, Donelson, Bearman & Caldwell, a Washington, D.C. law firm, since January 1993. He previously served as United States Secretary of State from December 1992 through January 1993, Acting Secretary of State from August 1992 to December 1992, and Deputy Secretary of State from February 1989 to August 1992. He has been a COMSAT director since May 1995. He also is a director of Phillips Petroleum Company, Stimsonite Corporation, Universal Corporation and Halliburton Industries, and Chairman of the International Commission on Holocaust Era Insurance Claims. Neal B. Freeman, 58, has been Chairman and Chief Executive Officer of The Blackwell Corporation, a television production and distribution company, since 1981. He was a Presidentially-appointed COMSAT director from November 1983 to September 1988 and has been an elected director since May 1991. He also is Vice Chairman of The Ethics and Public Policy Center and a director of Forum Network, Inc. and National Review, Inc. Caleb B. Hurtt, 67, is a director or trustee of various organizations. He was President of Martin Marietta Aerospace from 1982 to 1987 and then President and Chief Operating Officer of Martin Marietta Corporation from 1987 through 1989. He has been a COMSAT director since May 1996. He also is a director of Lockheed Martin Corporation and has served as Chairman of the Board of Governors of the Aerospace Industries Association, as Chairman of the NASA Advisory Council, as Chairman of the Federal Reserve Bank, Denver Branch, and as Vice Chairman of the Board of Trustees of Stevens Institute of Technology. Peter W. Likins, 62, has been President of The University of Arizona since October 1997. He was President of Lehigh University from 1982 to September 1997, Provost of Columbia University from 1980 to 1982 and Professor and Dean of the Columbia University School of Engineering and Applied Science from 1976 to 1980. He has been a COMSAT director since September 1987. He also is a director of Parker Hannifin, Inc. and Safeguard Scientifics, Inc. and a trustee of Consolidated Edison Company of New York, Inc. and of the University Medical Center in Tucson, Arizona. Larry G. Schafran, 60, has been the Managing General Partner of L.G. Schafran & Associates, a real estate investment and development firm, since 1984. He was Chairman of the Executive Committee of Dart Group Corporation from 1994 to October 1997 and a director of Dart from 1993 to October 1997. He has been a COMSAT director since August 1997. He also is a director of PubliCARD, Inc., Tarragon Realty Investors, Inc., Discovery Zone, Inc. and Kasper A.S.L., Ltd. and Chairman of the Board of Directors of Delta-Omega Technologies, Inc. Robert G. Schwartz, 70, is a director or trustee of various business organizations. He was Chairman of the Board, President and Chief Executive Officer of Metropolitan Life Insurance Co. (MetLife) from September 1989 to March 1993 and remains a director of MetLife. He was Chairman of the Board of MetLife from February 1983 to September 1989. He has been a COMSAT director since May 1986. He also is a trustee of Consolidated Edison Company of New York, Inc. and a director of Lone Star Industries, Inc., Lowe's Companies, Inc., Mobil Oil Corporation, Potlatch Corporation and the Horatio Alger Association for Distinguished Americans. 82 Kathryn C. Turner, 51, is the Chairperson and Chief Executive Officer of Standard Technology, Inc., a high-technology, engineering and systems integration firm. She previously has been appointed by the President to serve on the President's Export Council, the Eximbank Advisory Committee, and the Commission on the Future of Worker-Management Relations and by the Secretary of Defense to the Defense Policy Advisory Committee on Trade. She has been a COMSAT director since August 1997. She also is a director of Phillips Petroleum Company and Carpenter Technology Corporation. Guy P. Wyser-Pratte, 58, is President of Wyser-Pratte & Co., Inc. and Wyser- Pratte Management Co., Inc. He has been a COMSAT director since August 1997. He also is a director of The Eureka (US$) Fund, The Eureka (DM) Fund and the International Rescue Committee, a non-governmental international refugee organization, a member of the Council on Foreign Relations and a trustee of the U.S. Marine Corps University Foundation. Presidentially-Appointed Directors Peter S. Knight, 49, has been a partner in the Washington, D.C. law firm of Wunder, Knight, Levine, Thelen & Forscey since 1991. In 1996, he took a leave of absence from his firm to serve as Campaign Manager for Clinton/Gore '96. From 1989 to 1991, he was General Counsel and Secretary of the Medicis Pharmaceutical Corporation. From 1977 to 1989, he served as the Chief of Staff to Congressman and later Senator Al Gore. He has been a Presidentially- appointed COMSAT director since September 1994. He also is a director of the Medicis Pharmaceutical Corporation, Whitman Education Group Inc., Healthworld and the Schroder Series Trust. His current term expires at the 1999 Annual Meeting. Charles T. Manatt, 62, is the Chairman of Manatt, Phelps & Phillips, a Washington, D.C. and Los Angeles law firm which he founded in 1965. He was Chairman of the Democratic National Committee from 1981 through 1985. He has been a Presidentially-appointed COMSAT director since May 1995. He also is a director of the Federal Express Corporation and ICN Pharmaceuticals, Inc. His current term expired at the 1997 Annual Meeting, and he continues to serve in accordance with the Satellite Act. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Title Age* - -------------------------------------------------------------------------------- Betty C. Alewine President and Chief Executive Officer 50 Edward E. Berger Treasurer 41 Allen E. Flower Vice President and Chief Financial Officer 55 Alan G. Korobov Controller 50 John H. Mattingly President, COMSAT Satellite Services 48 Benjamin A. Pontano President, COMSAT Laboratories 55 James J. Welch President and General Manager, COMSAT International 54 Warren Y. Zeger Vice President, General Counsel and Secretary 51
* As of February 1, 1999. Normally, the officers are elected annually by the Board of Directors at its first meeting following the Annual Meeting of Shareholders to serve until their successors are elected and qualified. 83 There is no family relationship between any director or executive officer and any other executive officer or director. There is no arrangement or understanding between any director or executive officer and any other person pursuant to which he or she was selected as a director or executive officer. The following is a brief account of each executive officer's experience for the past five years: Mrs. Alewine has been President and Chief Executive Officer since July 1996. She was President, COMSAT International Communications from January 1995 to July 1996, and was President, CWS, from May 1991 to January 1995. She is also a member of the Board of Directors of the Corporation. Mr. Berger has been Treasurer since September 1998. He previously worked for Sprint Corporation in various financial capacities, where in his last position he was responsible for all of Sprint's international treasury activities. Mr. Flower has been Vice President and Chief Financial Officer since November 1995. From November 1995 to September 1996, he was also Acting Treasurer. He was Controller and Acting Chief Financial Officer from April 1995 through November 1995 and Controller from June 1992 to May 1995. He is a director of Calian Technology Ltd., in which the Corporation holds a minority equity investment. Mr. Korobov has been Controller since November 1995. He was Vice President, Finance for CMC from January 1993 to September 1995. Mr. Mattingly has been President, COMSAT Satellite Services since September 1997. He was President, COMSAT World Systems from May 1997 to September 1997 and Vice President and General Manager, COMSAT World Systems from March 1995 to May 1997. He previously served as Vice President, Europe, COMSAT International Ventures. Before joining COMSAT in November 1994, he was Senior Vice President and General Manager of OrionNet, Inc. Dr. Pontano has been President, COMSAT Laboratories since March 1997, having served as Acting President, COMSAT Laboratories from August 1996. He was Vice President, Network Technology Division of COMSAT Laboratories from February 1995 to August 1996. He joined COMSAT Laboratories in 1984 and has held various management positions during that period. Mr. Welch has been President and General Manager, COMSAT International since November 1998. He previously worked for Global One, a joint venture of Sprint, France Telecom and Deutsche Telekom, where in his last position he was Vice President and Area Manager for Russia, India, Middle East and Africa. Mr. Zeger has been Vice President, General Counsel and Secretary since August 1994. He was Vice President and General Counsel from March 1992 to August 1994. 84 Compliance with Section 16(a) of the Exchange Act Two reports, each concerning one transaction, were filed late in 1998 by Mr. Wyser-Pratte, a director of the Corporation. Two transactions by Mr. Flower, an executive officer of the Corporation, that had been previously reported on a Form 144, were inadvertently omitted from a subsequent report concerning the same series of transactions. An amended report was subsequently filed to correct the omission. 85 Item 11: Executive Compensation DIRECTORS COMPENSATION Generally Directors, other than the Chairman of the Board and the President and Chief Executive Officer, currently receive an annual retainer of 1,000 shares of COMSAT's common stock payable at the first meeting of the Board after the Annual Meeting of Shareholders. Those directors also receive a fee of $1,000 per meeting for attending Board meetings, Board committee meetings or meetings held pursuant to a special assignment. For service as chair of a Board committee, a director receives an annual retainer of $3,000 paid in quarterly installments. The President and Chief Executive Officer does not receive separate compensation for service as a director. Executive compensation is described in the section entitled "Executive Compensation." Under the Non-Employee Directors Stock Plan, a non-employee director may elect to defer receipt of the annual stock retainer and instead receive phantom stock units (PSUs). PSUs are held in an account for each director pending retirement or termination of service on the Board. Upon payment of a dividend on COMSAT's common stock, an equivalent dollar amount is converted to PSUs, based on the fair market value of the stock on the dividend payment date, and credited to the director's account. The PSUs increase or decrease in value based on an equivalent number of shares of COMSAT's common stock. Upon retirement or termination of service, or in the event of a "Change in Control", a director receives payment in shares of COMSAT's common stock equal to the number of PSUs credited to the director's PSU account. See "Non-Employee Directors Stock Plan." Chairman of the Board The Chairman of the Board receives annual cash compensation for service as Chairman. Prior to August 1998, Mr. Colodny received $190,000 per year. Effective August 1, 1998, this amount was increased to $215,000. The Chairman may elect to receive all or a portion of this annual cash compensation in the form of COMSAT common stock or stock options, on the following terms: . the shares or stock options are granted on the date of the Annual Meeting of Shareholders; . the number of shares of stock granted is determined by dividing the amount which the Chairman elects to receive in shares by the fair market value of the stock on the date of the grant; . the number of stock options granted is determined by multiplying the amount which the Chairman elects to receive in options by three and then dividing by the fair market value of the stock on the date of grant; . the exercise price per share of options granted pursuant to the Chairman's election to receive options is the fair market value of a share of stock on the date of grant; and 86 . each option expires 10 years from the date of grant and is exercisable for half of the shares covered by the option six months after the date of grant and for the remaining half of the shares one year after such date. For 1998, Mr. Colodny elected to receive $90,000 of the annual cash compensation payable to him as Chairman in stock. Pursuant to his election, he was granted 2,341 shares of common stock determined in the manner described above. Directors and Executives Deferred Compensation Plan Under the Directors and Executives Deferred Compensation Plan, a non- employee director may elect to defer payment of all or part of the cash retainer and fees which the director is entitled to receive. Amounts deferred are credited with interest and are paid out after the director retires from the Board. The payment may take the form of a lump sum or up to 15 annual installments beginning not later than age 73. If the director dies, the accumulated deferrals are paid to the director's beneficiary. For 1998: . the interest crediting rate was prime plus 1% for amounts deferred after 1996, 12.25% for amounts deferred from February 1994 to December 1996 and 12.94% for amounts deferred prior to that period under the plan; and . the aggregate amount of interest accrued in respect of amounts deferred by participating directors (11 persons) was $380,272. In 1991, each director at that time serving on the Board and participating in the plan was given an election to receive his or her account balance as of March 31, 1991, together with interest accumulated on such balance to a date in 2000, in a lump sum in 2000 to the extent that such amounts were not previously distributed. This payment is made only if, in 2000, such director is an active director or a retiree receiving installment payments. If a director who has made such an election dies, the payment will be made to the beneficiary of such director if such beneficiary is then receiving such installment payments. The lump sum payment will be offset against the amounts otherwise payable to the director or beneficiary under the plan. In 1992, the plan was amended to provide for an additional lump sum payment election for any additional amounts deferred under the plan from April 1, 1991 through March 31, 1992, together with interest accumulated on such amounts to a date in 2001, with payment of the lump sum to be made in 2001. In September 1998, the plan was amended to provide that if the plan is terminated, each participant will be paid the full amount of his or her account in accordance with the terms of the plan and the participant's elections. 87 Split Dollar Life Insurance Plan for Directors Under the Split Dollar Life Insurance Plan for Directors, COMSAT provides death benefits through split dollar life insurance policies to non-employee directors as follows: . $50,000 for each year or partial year of his or her Board service until the benefit reaches $200,000; . payments increased by 5.5% for each additional year of Board service to age 72 (this increased coverage does not apply to Presidentially- appointed directors); and . coverage continues after retirement from the Board. For 1998, the aggregate value of split dollar life insurance premiums paid for the benefit of all covered directors was $112,891. Non-Employee Directors Stock Plan Under the Non-Employee Directors Stock Plan, in March of each year COMSAT grants to each non-employee director an option to purchase shares of common stock. These grants are only given to those non-employee directors who were also serving on the date of the Annual Meeting of Shareholders for the prior year. Certain options have specific terms, as follows: . for options granted before 1990, each option is for 2,480 shares, the exercise price per share is the fair market value of a share of common stock on the date of grant, and the option expires 10 years from the date of grant; . for options granted from 1990 to 1992, each option is for 2,480 shares, the exercise price per share is 50% of the fair market value on the date of grant, and the option expires 15 years from the date of grant; . for options granted after 1992, each option is for 4,961 shares, the exercise price per share is the fair market value of a share of common stock on the date of grant, and the option expires 15 years from the date of grant; . all options granted before 1996 under the plan are currently exercisable; and . for options granted after 1995, each option becomes exercisable for 2,481 shares one year after the date of grant and for the remaining 2,480 shares two years after the date of grant. All data related to shares of common stock, options to purchase shares of common stock and share prices prior to June 27, 1997 have been adjusted to reflect (1) the two-for-one split in COMSAT's common stock effective June 1, 1993, and (2) the spin-off of Ascent Entertainment Group, Inc. to COMSAT's shareholders on June 27, 1997. Pursuant to the Ascent spin-off, all outstanding options under the plan on June 27, 1997 were adjusted by multiplying the number of options held by an adjustment ratio of 1.2402, and the exercise price for such options was adjusted by dividing the exercise price by the same ratio. 88 Options become fully exercisable and continue in force for the duration of their terms in the following situations: . termination of service on the Board by reason of retirement at age 72; . expiration of a term as a Presidentially-appointed director; . failure to stand for election with the Board's consent; or . resignation with the Board's consent. Options that have not terminated become fully exercisable and continue in force for one year after the date of death of a director. Options terminate immediately if the director's service terminates under any other circumstance. Options also become fully exercisable and continue in force for the duration of their terms in the event of certain changes in control. A "Change in Control" includes: . the acquisition by any person (other than COMSAT or an employee benefit plan sponsored by COMSAT) of beneficial ownership of 50% or more of the outstanding voting securities of COMSAT; . any change in the composition of the Board of Directors such that the elected directors as of May 17, 1996 (referred to as the Incumbent Directors) cease to constitute a majority of the Board (provided that any individual whose nomination or election is approved by a vote of three-fourths of the then Incumbent Directors will be treated as an Incumbent Director); . approval by the shareholders of a merger, share exchange, swap, consolidation, recapitalization or other business combination which, if consummated, would result in COMSAT's shareholders holding less than 60% of the combined voting power of COMSAT, the surviving entity or its parent (as applicable); . approval by the shareholders of the liquidation or dissolution of COMSAT, or sale by COMSAT of all or substantially all of COMSAT's assets, other than to an entity 80% of the combined voting power of which would be beneficially owned by COMSAT's then existing shareholders; or . any event which would have to be reported as a "change of control" under the regulations governing the solicitation of proxies by the SEC. 89 In September 1998, the plan was amended to provide that only the closing of the Merger with Lockheed Martin Corporation, and not any of the other transactions contemplated by the Merger Agreement, would constitute a "Change in Control" for purposes of this plan. In 1998, options for a total of 64,493 shares of common stock were granted to non-employee directors at a purchase price per share of $38.1563, which was the fair market value of the common stock on the date of grant. In 1998, Mrs. Benson, Mr. Freeman, Dr. Likins and Mr. Schwartz each exercised 2,480 options granted previously under the plan, and realized net values (market value on exercise date less exercise price) of $52,130; $29,810; $47,325; and $27,950, respectively. Consulting Arrangements On August 26, 1997, COMSAT entered into agreements with Arthur Hauspurg and Howard M. Love, directors who retired at the 1997 Annual Meeting of Shareholders, to retain their advisory services to the Chairman of the Board and the President and Chief Executive Officer for a period of two years at a rate of $25,000 per year. 90 EXECUTIVE COMPENSATION The following table shows the compensation for the three fiscal years ended December 31, 1998 received by (i) the Chief Executive Officer; (ii) the other four most highly compensated executive officers of COMSAT who were serving as such at year end 1998; and (iii) Dwight E. Jasmann, who resigned as an executive officer on February 2, 1998, and whose compensation would have been reportable but for the fact that he was not an executive officer of COMSAT at year end 1998. These six individuals are referred to as the Named Executive Officers. The table shows the amounts received or earned by each Named Executive Officer for all three fiscal years, whether or not such Named Executive Officer was an executive officer of COMSAT for each of those three years. Summary Compensation Table
Annual Compensation Long-Term Compensation ---------------------------------------------------------------------------------------- Name and Restricted Securities Principal Other Annual Stock Underlying All Other Position Year Salary Bonus (1) Compensation (2) Award(s)(3) Options(#)(4) Compensation(5) - ----------------------------------------------------------------------------------------------------------------- Betty C. 1998 $533,173 $406,258 $ 665 $182,625 30,000 $22,736 Alewine, 1997 472,116 306,756 8,370 498,749 0 22,135 President and 1996 355,846 189,111 3,238 238,188 260,442 20,799 Chief Executive Officer - ----------------------------------------------------------------------------------------------------------------- Allen E. 1998 251,516 211,248 580 121,750 25,000 33,318 Flower, Vice 1997 209,770 83,627 5,622 174,554 49,608 36,855 President and 1996 180,000 73,301 60,122 90,000 43,407 31,578 Chief Financial Officer - ----------------------------------------------------------------------------------------------------------------- Dwight E. 1998 252,000 142,396 44 0 0 9,887 Jasmann, 1997 244,985 204,187 39,961 0 18,603 4,750 President and 1996 98,770 203,600 13,795 97,813 12,402 923 General Manager, COMSAT International(6) - ----------------------------------------------------------------------------------------------------------------- John H. 1998 270,539 173,146 0 91,313 20,000 4,800 Mattingly, 1997 190,308 75,029 0 74,820 24,804 4,750 President, 1996 162,039 57,274 0 35,994 12,402 4,498 COMSAT Satellite Services - ----------------------------------------------------------------------------------------------------------------- Benjamin A. 1998 197,667 60,000 0 60,875 15,000 5,545 Pontano, 1997 152,663 50,000 0 49,867 18,603 4,610 President, 1996 130,000 42,600 0 0 3,721 3,900 COMSAT Laboratories - ----------------------------------------------------------------------------------------------------------------- Warren Y. 1998 286,836 220,997 521 121,750 25,000 27,419 Zeger, 1997 229,808 94,348 5,466 174,554 49,608 26,938 Vice President, 1996 196,551 181,487 2,422 63,000 37,206 25,871 General Counsel and Secretary - -----------------------------------------------------------------------------------------------------------------
91 (1) Bonus for 1998 for each Named Executive Officer, as indicated below, includes unused credits under the Corporation's cafeteria plan that were paid in cash to the Named Executive Officers. The bonus reflected for Mrs. Alewine for 1997 includes an additional $85,000 over the amount reported last year, which was awarded in 1998 to Mrs. Alewine as a supplemental 1997 bonus. The bonuses reflected for Mr. Flower, Mr. Mattingly and Mr. Zeger for 1998 include special performance-based spot bonuses in the amounts of $100,000; $50,000; and $100,000, respectively. The bonus reflected for Mr. Zeger for 1996 includes a special performance-based spot bonus in the amount of $100,000.
Unused Name Credits ------------------------ Mrs. Alewine $ 6,258 ------------------------ Mr. Flower 10,448 ------------------------ Mr. Jasmann 12,396 ------------------------ Mr. Mattingly 8,146 ------------------------ Dr. Pontano 0 ------------------------ Mr. Zeger 5,997 ------------------------
(2) With the exception of Mr. Flower, Other Annual Compensation shown for 1996, 1997 and 1998 does not include perquisites and other personal benefits because the aggregate amount of such compensation does not exceed the lesser of (i) $50,000 or (ii) 10% of individual combined salary and bonus for the Named Executive Officer in each year. For Mr. Flower, Other Annual Compensation for 1996 includes $30,000 for club membership fees. (3) Includes restricted stock awards (RSAs), restricted stock units (RSUs) and phantom stock units (PSUs). Dividends are paid on RSAs. Dividend equivalents are paid on RSUs and PSUs. The number and value of the aggregate restricted stock holdings of each of the Named Executive Officers as of December 31, 1998 are as follows:
Value as Number of of Name RSAs/RSUs/PSUs 12/31/98 -------------------------------------------- Mrs. Alewine 67,639 $2,358,910 -------------------------------------------- Mr. Flower 20,618 719,053 -------------------------------------------- Mr. Jasmann 0 0 -------------------------------------------- Mr. Mattingly 9,201 320,885 -------------------------------------------- Dr. Pontano 9,441 329,255 -------------------------------------------- Mr. Zeger 29,300 1,021,838 --------------------------------------------
Awards granted prior to June 27, 1997 were adjusted to give effect to the Ascent spin-off to COMSAT shareholders. In lieu of receiving a distribution of Ascent stock, all outstanding RSAs, RSUs and PSUs held on that date were adjusted by multiplying the number of shares or units held by an adjustment ratio of 1.2402. Mr. Jasmann forfeited his restricted stock holdings when he resigned in February 1998. (4) Options granted prior to June 27, 1997 were adjusted to give effect to the Ascent spin-off to COMSAT shareholders. All outstanding options held on that date were adjusted by multiplying the number of options held by an adjustment ratio of 1.2402. (5) All Other Compensation for 1998 includes the following elements: (i) contributions by the Corporation to the Corporation's 401(k) Plan on behalf of the Named Executive Officers; (ii) above-market interest accrued for the Named Executive Officers under the Corporation's Deferred Compensation Plan; and (iii) life insurance premiums for the Named Executive Officers. The life insurance premiums shown for the Named Executive Officers represent split dollar premiums which include (i) the value of the premiums paid by the Corporation with respect to the term life insurance portion of the policy for each Named Executive Officer, determined under the P.S. 58 table published by the Internal Revenue Service, and (ii) the value of the benefit to each Named Executive Officer of the remainder of the premiums paid by the Corporation, determined by calculating the present value of the cumulative interest payments that would be made based on the assumption that the premiums were loaned to each Named Executive Officer at an interest rate of 7.5% until the Named Executive Officer reaches the normal retirement age of 65, at which time the policy splits and the premiums are refunded to the Corporation.
Above- Life 401(k) Plan Market Insurance Name Contributions Interest Premiums ------------------------------------------------------ Mrs. Alewine $4,800 $ 8,680 $ 9,256 ------------------------------------------------------ Mr. Flower 4,800 11,048 17,470 ------------------------------------------------------ Mr. Jasmann 4,800 5,087 0 ------------------------------------------------------ Mr. Mattingly 4,800 0 0 ------------------------------------------------------ Dr. Pontano 4,837 708 0 ------------------------------------------------------ Mr. Zeger 4,800 7,537 15,082 -----------------------------------------------------
(6) Mr. Jasmann became an executive officer when he joined the Corporation as President and General Manager, COMSAT International in August 1996. He resigned in February 1998. 92 Option Grants The following table sets forth information on options granted to the Named Executive Officers in 1998. Option Grants In Last Fiscal Year
--------------------------------------------------------------------------------------------------------------------------- Individual Grants --------------------------------------------------------------------------------------------------------------------------- Number of % of Total Options Securities Granted to Underlying Options Employees in Exercise Price Grant Date Present Name Granted (#)(1) Fiscal Year(2) ($/Sh) Expiration Date Value(3) - --------------------------------------------------------------------------------------------------------------------------- Mrs. Alewine 30,000 3.23% $30.4375 02/20/08 $375,300 - --------------------------------------------------------------------------------------------------------------------------- Mr. Flower 25,000 2.69 30.4375 02/20/08 312,750 - --------------------------------------------------------------------------------------------------------------------------- Mr. Jasmann 0 0.00 0.0000 --- 0 - --------------------------------------------------------------------------------------------------------------------------- Mr. Mattingly 20,000 2.15 30.4375 02/20/08 250,200 - --------------------------------------------------------------------------------------------------------------------------- Dr. Pontano 15,000 1.61 30.4375 02/20/08 187,650 - --------------------------------------------------------------------------------------------------------------------------- Mr. Zeger 25,000 2.69 30.4375 02/20/08 312,750 - --------------------------------------------------------------------------------------------------------------------------
(1) The options shown were granted on February 20, 1998 to acquire the Corporation's Common Stock. All options granted in 1998 vest as follows: 25% on the first anniversary of the date of grant; another 25% on the second anniversary of the date of grant; and the remaining 50% on the third anniversary of the date of grant. (2) The total number of COMSAT options granted to key employees in 1998 was 930,200. (3) The Corporation used the Black-Scholes option pricing model to determine grant date present values using the following assumptions: a dividend yield of 0.84%; stock price volatility of 0.34642; a 6-year option term; a risk-free rate of return of 5.36%; and the vesting schedule described in footnote 1 above. The use of this model is in accordance with SEC rules; however, the actual value of an option realized will be measured by the difference between the stock price and the exercise price on the date the option is exercised. Option Exercises and Fiscal Year-End Values The following table sets forth information on (1) options exercised by the Named Executive Officers in 1998, and (2) the number and value of their unexercised options as of December 31, 1998. Aggregated Option Exercises In 1998 And 12/31/98 Option Values
- ------------------------------------------------------------------------------------------------------------------------------ Number of Securities Underlying Value of Unexercised In-The-Money Unexercised Options at 12/31/98(1) Options at 12/31/98 - ------------------------------------------------------------------------------------------------------------------------------ Shares Underlying Options Unexercisable Name Exercised (#) Value Realized Exercisable (#) (#) Exercisable Unexercisable - ----------------------------------------------------------------------------------------------------------------------------- Mrs. Alewine 203,393 $2,615,608 229,726 160,221 $4,507,469 $2,451,773 - ----------------------------------------------------------------------------------------------------------------------------- Mr. Flower 16,371 306,763 58,910 83,910 1,178,565 1,102,292 - ----------------------------------------------------------------------------------------------------------------------------- Mr. Jasmann 7,750 103,664 3,101 20,154 59,233 324,497 - ----------------------------------------------------------------------------------------------------------------------------- Mr. Mattingly 0 0 16,122 44,804 289,640 489,728 - ----------------------------------------------------------------------------------------------------------------------------- Dr. Pontano 0 0 23,254 30,813 359,938 310,484 - ----------------------------------------------------------------------------------------------------------------------------- Mr. Zeger 111,618 1,909,430 111,797 80,809 1,805,076 1,039,153 - -----------------------------------------------------------------------------------------------------------------------------
(1) Options granted prior to June 27, 1997 were adjusted to give effect to the Ascent spin-off to COMSAT shareholders. All outstanding options held on that date were adjusted by multiplying the number of options held by an adjustment ratio of 1.2402. 93 Pension Plans The following table shows the estimated annual benefits payable upon retirement under the Corporation's Retirement Plan to persons in the salary and years-of-service classifications specified. The Internal Revenue Code limits the annual benefits payable under the Retirement Plan. Under this limitation, the maximum annual benefit for 1998 is $130,000. Estimated Annual Benefits - COMSAT Corporation Retirement Plan
- ---------------------------------------------------------------------------- Years of Service - ---------------------------------------------------------------------------- Average Annual Salary ($) 15 20 25 30 35 - ---------------------------------------------------------------------------- 100,000 $24,768 $ 33,633 $ 42,738 $ 51,362 $ 60,227 - ---------------------------------------------------------------------------- 150,000 38,543 52,408 66,272 80,137 94,002 - ---------------------------------------------------------------------------- 200,000 48,552 67,417 86,282 105,147 124,011 - ---------------------------------------------------------------------------- 250,000 55,340 79,205 103,070 126,934 130,000 - ---------------------------------------------------------------------------- 300,000 60,340 89,205 118,070 130,000 130,000 - ---------------------------------------------------------------------------- 350,000 65,340 99,205 130,000 130,000 130,000 - ---------------------------------------------------------------------------- 400,000 70,340 109,205 130,000 130,000 130,000 - ---------------------------------------------------------------------------- 450,000 75,340 119,205 130,000 130,000 130,000 - ---------------------------------------------------------------------------- 500,000 80,340 129,205 130,000 130,000 130,000 - ---------------------------------------------------------------------------- 550,000 85,340 130,000 130,000 130,000 130,000 - ---------------------------------------------------------------------------- 600,000 90,340 130,000 130,000 130,000 130,000 - ----------------------------------------------------------------------------
The compensation covered by the Retirement Plan includes only base salary. Benefits are determined on a straight life annuity basis under a formula based on length of service and average annual base salary for the highest five consecutive years during the final 10 years of employment. Prior to 1989, benefits were offset by a portion of each participant's estimated Social Security benefits. Beginning in 1989, each participant accrues a benefit at a specified percentage of salary up to the Social Security wage base, and at a higher percentage of salary above the Social Security wage base. The years of credited service for the Named Executive Officers as of December 31, 1998 are as follows: - ------------------- Mrs. Alewine 12 - ------------------- Mr. Flower 29 - ------------------- Mr. Jasmann 2 - ------------------- Mr. Mattingly 4 - ------------------- Dr. Pontano 14 - ------------------- Mr. Zeger 23 - -------------------
Insurance and Retirement Plan for Executives COMSAT also maintains the Insurance and Retirement Plan for Executives, which covers those executive officers and other key employees who are designated by the Board of Directors to participate. The plan provides an annuity for life equal to 60% (70% for the Chief Executive Officer) of the participant's average annual compensation (salary and incentive compensation) during the 48 consecutive months of highest compensation (or during all consecutive months of employment if the participant has been employed less than 48 months), offset by pension benefits payable under the Retirement Plan, the qualified retirement plans of former employers, Social Security, and government and military pensions. Payment begins upon the participant's normal retirement at age 65. However, a participant in the plan may retire as early as age 55. If a participant retires before age 62, the Board must consent to such 94 early retirement. A participant who retires early will receive an annuity reduced by 3% for each year that payment begins before age 62. For employees who became participants in the plan before January 1, 1993, benefits vest ratably over the first five years of the participant's service. For employees who become participants in the plan on or after January 1, 1993, benefits are 50% vested after five years of service and then vest an additional 10% per year over the following five years of service, provided that the sum of the participant's age and years of service equals 60. See "Agreements with Current Executive Officers." The annual benefits payable upon retirement at age 65 based upon the 48 consecutive months of highest compensation as of December 31, 1998 for each of the Named Executive Officers under the plan are: - ------------------------- Mrs. Alewine $400,520 - ------------------------- Mr. Flower 107,739 - ------------------------- Mr. Jasmann N/A - ------------------------- Mr. Mattingly N/A - ------------------------- Dr. Pontano N/A - ------------------------- Mr. Zeger 114,452 - -------------------------
Mrs. Alewine, Mr. Flower and Mr. Zeger are each 100% vested in the plan. Mr. Jasmann, Mr. Mattingly and Dr. Pontano do not participate in the plan. Change in Control Severance Plan On September 18, 1998, COMSAT adopted the Amended and Restated Change in Control Severance Plan. The plan amends and restates the Change in Control Severance Plan adopted by COMSAT on June 20, 1997. The plan generally provides severance payments and benefits to specified key employees, including certain executive officers, of COMSAT who incur a termination of employment under certain circumstances following a change in control of COMSAT. The plan covers Mr. Mattingly and Dr. Pontano but does not cover Mrs. Alewine, Mr. Flower or Mr. Zeger, who each have severance arrangements under their employment agreements, or Mr. Jasmann, who is no longer an executive officer. Participants under the plan are classified as either Group I Participants, Group II Participants or Group III Participants. For purposes of the plan, the definition of change in control is substantively identical to the definition of such term described under the caption "Agreements with Current Executive Officers." Under the plan, if a change in control of COMSAT occurs and a participant's employment is terminated during the period beginning on the date of the change in control and ending on the date which is eighteen months after the date of such change in control (a) by COMSAT other than for cause or disability, or (b) by the participant for good reason, then, in lieu of any other severance payments or severance benefits payable to the participant by the Company, the participant will be entitled to receive the following during the benefits continuation period: . base salary; . targeted annual bonus under COMSAT's Annual Incentive Plan; and 95 . the same group health and welfare benefits to which the participant would have been entitled had he or she remained continuously employed by COMSAT during the benefits continuation period. For purposes of the plan, benefits continuation period means with respect to each Group I, Group II and Group III Participant, respectively, the 24 month, 18 month and 15 month periods immediately following the participant's date of termination of employment. Mr. Mattingly and Dr. Pontano are Group I Participants. Retention Bonus Plan On September 18, 1998, COMSAT adopted the Retention Bonus Plan. The Retention Bonus Plan generally provides retention bonuses to specified key employees who remain employed by COMSAT, or whose employment is terminated under specific circumstances, through specified dates following the signing of the either Group I Participants or Group II Participants. The plan covers Mr. Mattingly and Dr. Pontano, who are Group I Participants, but does not cover Mrs. Alewine, Mr. Flower or Mr. Zeger, who each have similar bonus arrangements under their employment agreements, or Mr. Jasmann, who is no longer an executive officer. Under the Retention Bonus Plan, each Group I Participant will be entitled to receive the following retention bonuses, subject to such person's continued employment through a specified date: . a bonus on the earliest of: (a) the completion of the Merger; (b) the termination date of the Merger pursuant to the Merger Agreement; or (c) September 18, 2000, equal to 50% of the sum of the participant's highest base salary plus his or her highest targeted annual bonus under COMSAT's Annual Incentive Plan; and . a bonus on the 18-month anniversary of the closing of the Merger equal to 100% of the sum of the particpant's highest base salary plus his or her highest targeted annual bonus under COMSAT's Annual Incentive Plan. If, on or before the date on which a bonus would be paid, a Group I Participant's employment is terminated without cause or by reason of his or her death or disability, or, if a Group I Particpant elects to terminate his or her employment for good reason, such Group I Particpant will be entitled to receive a payment upon termination, instead of any bonuses which have not yet become payable to the participant under the Retention Bonus Plan, in an amount equal to the bonus to which he or she would have been entitled had he or she remained employed by COMSAT through the date on which the next bonus will be paid. If, however, the aggregate amount of any severance payments to which the participant is entitled under any severance plan of COMSAT is greater than or equal to the amount of the bonus payable upon such a termination under the Retention Bonus Plan, then the participant will forfeit all rights to receive such payment and any other bonus payments that have not yet become payable to the participant under the Retention Bonus Plan. In the event that the participant receives a payment upon 96 termination of employment under the Retention Bonus Plan, such plan of COMSAT to the extent that such severance payment is based on the participant's salary and/or bonus. Group II Participants are entitled to receive bonuses under the Retention Bonus Plan at the same times and, in general, on the same terms as the Group I Participants, except that the bonuses are based on a lower percentage of their base salary and targeted annual bonus. Agreements With Current Executive Officers COMSAT has entered into an employment agreement with Mrs. Alewine dated July 19, 1996, and has entered into employment agreements with Mr. Flower and Mr. Zeger dated April 18, 1997 (each an Executive and collectively the Executives). On September 18, 1998, COMSAT amended the employment agreements in connection with the Lockheed Martin Merger. The agreements include the following terms: . for Mrs. Alewine, successive three-year terms from each successive day after July 19, 1996 until July 19, 2003; for Mr. Flower, a three- year term; and for Mr. Zeger, a five-year term. The amendments extended the term of Mr. Flower's employment agreement for two years until April 17, 2002; . for Mrs. Alewine, base salary of $450,000 for the first year, with an increase to $500,000 in the second year; for Mr. Flower, base salary of $210,000 per year; for Mr. Zeger, base salary of $230,000 per year; for each Executive, further increases in base salary are subject to the discretion of COMSAT's Board; . eligibility for an annual bonus based on performance measures determined by the Board's Compensation Committee with a target bonus equal to 70% of Mrs. Alewine's base salary, 50% of Mr. Flower's base salary, and 50% of Mr. Zeger's base salary; . for termination without cause, or if the Executive elects to terminate his or her employment for good reason, the Executive will be entitled to receive: (a) his or her then current base salary; (b) an annual bonus equal to 70% of Mrs. Alewine's then current base salary, 50% of Mr. Flower's then current base salary, and 50% of Mr. Zeger's then current base salary; and (c) all other benefits provided for pursuant to the agreement, which will be deemed fully and immediately vested if subject to vesting. Mrs. Alewine will be entitled to receive these amounts for three years from her termination date or until July 19, 2003, whichever is earlier, but in no case for less than one year following termination. Mr. Flower will be entitled to receive these amounts until the later of one year from his termination date or April 17, 2002. Mr. Zeger will be entitled to receive these amounts until April 17, 2002. 97 . if Mrs. Alewine's employment is not renewed after July 19, 2003, or is terminated before then either by Mrs. Alewine for good reason or by COMSAT without cause, Mrs. Alewine will be entitled to begin receiving retirement benefits at age 55 under the Insurance and Retirement Plan for Executives at the actuarially reduced rate for early retirement, subject to the Board's discretion to waive such reduction; . if Mr. Flower's employment is not renewed after April 17, 2002, Mr. Flower will be entitled to receive (i) the benefits described above for one year thereafter and (ii) retirement benefits under the Insurance and Retirement Plan for Executives beginning on May 1, 2002 at the actuarially reduced rate for early retirement, subject to the Board's discretion to waive such reduction; . if Mr. Zeger's employment is not renewed after April 17, 2002, or is terminated before then either by Mr. Zeger for good reason or by COMSAT without cause, Mr. Zeger will be entitled to begin receiving retirement benefits at age 55 under the Insurance and Retirement Plan for Executives at the actuarially reduced rate for early retirement, subject to the Board's discretion to waive such reduction; and . in the event that either Mr. Flower or Mr. Zeger dies after his employment terminates but before his retirement benefits begin, under the Insurance and Retirement Plan for Executives, his spouse will receive the death benefits provided in the plan for participants who die while employed by COMSAT. On October 17, 1996, Mrs. Alewine was granted (i) an option to purchase 186,030 shares of COMSAT's common stock at a price equal to the market value of the stock on the grant date, which vests 25% after one year, another 25% after the second year and the remaining 50% after the third year; and (ii) 6,201 restricted stock units which vest after three years. On February 20, 1997, Mrs. Alewine was also granted 24,804 restricted stock awards which are subject to the same terms as restricted stock awards made to other executives of COMSAT on that date. Pursuant to the amendments, the employment agreements were amended to provide that, upon the occurrence of a change in control, the term of each employment agreement will automatically end on the third anniversary of the date of such change in control. As defined in the amendments, a change in control is deemed to have occurred upon the happening of any one of the following events: . the acquisition by any person of beneficial ownership of 50% or more of the combined voting power of the outstanding voting securities of COMSAT; . any change in the composition of the Board of COMSAT such that the incumbent directors elected as of May 17, 1996 cease to constitute a majority of the Board; however, any individual whose nomination or election is approved by a vote of three-fourths of the then incumbent directors will be treated as an incumbent director; 98 . approval by the shareholders of a merger, share exchange, swap, consolidation, recapitalization or other business combination which, if consummated, would result in COMSAT's shareholders holding less than 60% of the combined voting power of COMSAT, the surviving entity or its parent; . approval by the shareholders of the liquidation or dissolution of COMSAT, or sale by COMSAT of all or substantially all of COMSAT's assets, other than to an entity 80% of the combined voting power of which would be beneficially owned by COMSAT's then existing shareholders; or . any event which would have to be reported as a "change of control" under the regulations governing the solicitation of proxies by the SEC. However, if, prior to the occurrence of any of the above events, the Board adopts a resolution specifically providing that the event will not be deemed to constitute a change in control for purposes of the employment agreements, then such event will not constitute a change in control. The amendments provide that, with respect to the Lockheed Martin Merger, a change in control of COMSAT for purposes of the employment agreements will be triggered by the closing of the Merger, but not by the signing of the Merger Agreement, the approval by the Board or COMSAT's shareholders of the Merger or the Merger Agreement, the commencement or the closing of the Offer, or the acquisition by Lockheed Martin or Regulus, LLC of COMSAT Government Systems, Inc. The amendments also amended the employment agreements to provide that each of the Executives will be entitled to receive the following retention bonuses, subject to his or her continued employment through the applicable dates for such bonuses: . a bonus on the earliest of: (a) the closing date of the Merger; (b) the termination date of the Merger pursuant to the Merger Agreement; or (c) September 18, 2000, if the Merger has not closed by then. in an amount equal to 150% of the sum of the Executive's base salary plus the Executive's targeted annual bonus, assuming all performance targets are met to the maximum extent, under COMSAT's Annual Incentive Plan; and . a bonus on the eighteen month anniversary of the closing date of the Merger in an amount equal to 100% of the sum of the Executive's base salary plus the Executive's targeted annual bonus, assuming all performance targets are met to the maximum extent, under COMSAT's Annual Incentive Plan. In the following situations, the Executive will be entitled to receive, in lieu of the retention bonuses described above, a payment in an amount equal to the retention bonus to which the Executive would have been entitled had the Executive remained employed by COMSAT through the applicable date: 99 . for termination without cause on or before the applicable date for such bonuses; . by reason of the Executive's death or disability; or . if the Executive elects to terminate his or her employment for good reason. If the Executive and Lockheed Martin are unable to reach an agreement regarding the terms and conditions of the Executive's employment within 30 days following the closing of the Merger and the Executive's employment is terminated within such 30-day period, the Executive will: . forfeit all rights to receive the bonus which otherwise would have been payable to the Executive on the eighteen month anniversary of the closing date of the Merger; or . forfeit all rights to the payment in lieu of a bonus which would have been payable to the Executive in the event of a termination of the Executive's employment between the closing date of the Merger and the eighteen month anniversary of the closing date of the Merger. The amendments amended the employment agreements to provide that each of the Executives will be entitled to receive the severance benefits and payments to which he or she was entitled under his or her employment agreement prior to the amendments only in the event that the termination of his or her employment which gives rise to such payments occurs prior to a change in control of COMSAT. Pursuant to the amendments, each of the employment agreements was also amended to provide that, if a change in control of COMSAT occurs and the Executive's employment is terminated during the period beginning on the date of the change in control and ending on the last day of the Executive's employment term (a) by COMSAT other than for cause or disability, or (b) by the Executive for good reason, then, in lieu of any other severance payments or severance benefits payable to the Executive under the employment agreements, the Executive will be entitled to receive the following until the expiration of the Executive's employment term: . base salary; . targeted annual bonus under COMSAT's Annual Incentive Plan; and . continued group health and welfare plan benefits for the Executive and the Executive's dependents (subject to reduction under certain circumstances described in the amendments). The Executive also will be entitled to receive benefits under COMSAT's Insurance and Retirement Plan for Executives commencing as early as age 55 without any actuarial reduction for early commencement of benefits. In addition, the amendments modified the employment agreements to provide that if a change in control of COMSAT occurs and (i) if the Executive and Lockheed Martin have negotiated in good faith but have been unable to reach an agreement regarding the terms and conditions of the Executive's 100 employment within 30 days following the closing of the Merger and the Executive's employment is terminated within the 30 day period, or (ii) if the Executive continues to be employed until the expiration of the Executive's employment term, then the Executive will be entitled to receive the benefits under the Insurance and Retirement Plan for Executives noted above. Each of the Executives also would be entitled to receive a gross-up payment if any payment or benefit to the Executive would constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code. The share amounts discussed in this section have been adjusted to give effect to the Ascent spin-off to COMSAT shareholders on June 27, 1997 by multiplying the number of shares or units held on that date by an adjustment ratio of 1.2402. Agreement With Former Executive Officer COMSAT and Mr. Jasmann entered into a three-year employment agreement dated August 1, 1996 which includes the following terms: . base salary of $240,000 per year, subject to increases at the discretion of COMSAT's Board; and . guaranteed bonus of $130,000 for 1996 and annual bonuses thereafter based on performance measures determined by the Board's Compensation Committee with a target bonus equal to 40% of Mr. Jasmann's base salary. On August 1, 1996, Mr. Jasmann was granted (i) an option to purchase 12,402 shares of COMSAT's common stock at a price equal to the market value of the stock on the grant date, which vests 25% after one year, another 25% after the second year and the remaining 50% after the third year; and (ii) 6,201 restricted stock units which vest after three years. On February 2, 1998, Mr. Jasmann resigned pursuant to a provision of the agreement which permitted him to terminate his employment if COMSAT failed to do an initial public offering of COMSAT International by February 1, 1998. Pursuant to this provision, Mr. Jasmann will continue to receive salary and an annual bonus at the same rate as in effect on the date of his termination until August 1, 1999. His existing stock options, but not his restricted stock units, will continue to vest during that period. The share amounts discussed in this section have been adjusted to give effect to the Ascent spin-off to COMSAT shareholders on June 27, 1997 by multiplying the number of shares or units held on that date by an adjustment ratio of 1.2402. 101 CHANGE IN CONTROL ARRANGEMENTS Certain of COMSAT's benefit and compensation programs have provisions that are intended to assure the continuity and stability of management and the Board necessary to protect shareholders' interests, and to protect the rights of the participants under those programs, in the event of a change in control of COMSAT. A change in control for this purpose is defined in the same manner as described above under the caption "Directors Compensation - Non-Employee Directors Stock Plan." The following actions will take place upon the occurrence of a change in control: . the vesting of all stock options, RSAs, RSUs and PSUs will be accelerated under COMSAT's 1990 and 1995 Key Employee Stock Plans, Non-Employee Directors Stock Plan and Annual Incentive Plan; . the deferred compensation accounts under COMSAT's Directors and Executives Deferred Compensation Plan, Annual Incentive Plan and Non- Employee Directors Stock Plan will become immediately payable; . participants in the Split Dollar Life Insurance Plans for Directors and for Key Employees will receive fully-paid individual policies; . directors will receive an immediate lump sum payment of their accrued benefits under the Directors Retirement Plan using present value assumptions; and . participants in COMSAT's Insurance and Retirement Plan for Executives will become vested in their accrued benefits under the plan and will receive an immediate lump sum payment using present value assumptions. The Board of Directors retains the authority under the change in control provisions to determine that the provisions should not apply to a particular transaction. In the event of such a determination, the vesting of stock awards and the payment of various plan benefits would not be accelerated. This feature is intended to afford the Board of Directors flexibility in structuring transactions and to encourage negotiated transactions. Pursuant to such authority, the Board has adopted resolutions determining that, for purposes of the Insurance and Retirement Plan for Executives, the Deferred Compensation Plan, the Split Dollar Life Insurance Plan for Directors, the Split Dollar Life Insurance Plan for Key Employees and the Annual Incentive Plan, the Merger with Lockheed Martin Corporation and the transactions contemplated by the Merger Agreement will not constitute a change in control of COMSAT. For purposes of the 1990 Key Employee Stock Plan, the 1995 Key Employee Stock Plan, the Non-Employee Directors Stock Plan and the Amended and Restated Change in Control Severance Plan, only the closing of the Merger with Lockheed Martin Corporation, and not any of the other transactions contemplated by the Merger Agreement, will constitute a change in control of COMSAT. 102 COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND RELATED PARTY TRANSACTIONS The following directors of the Corporation, who are also members of the Compensation Committee of the Board of Directors, may be deemed to have a relationship with Lockheed Martin Corporation that may constitute an indirect material interest in the proposed merger between the Corporation and Lockheed Martin. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Combination with Lockheed Martin Corporation." Standard Technology, Inc., a technology, engineering and systems integration firm, has provided services to Lockheed Martin under various contracts, which resulted from arms's-length negotiations, in connection with a Department of Defense mentor-protege program to encourage large defense contractors to subcontract with minority-owned businesses. Kathryn C. Turner, a director of COMSAT since August 1997, is the Chairperson, Chief Executive Officer and sole shareholder of Standard Technology. Lockheed Martin paid Standard Technology $1,807,711, $2,008,766, $1,846,662 and $2,242,126 in 1998, 1997, 1996 and 1995, respectively, under those contracts. Pursuant to the mentor-protege program, Lockheed Martin agreed to award Standard Technology with a targeted amount of $1 million of contracts per year through 2001. Pursuant to the mentor-protege program, Lockheed Martin also participates on an ad hoc advisory board which provides guidance on business matters and has provided financial assistance to Standard Technology. Lockheed Martin has made an unsecured loan to Standard Technology, which is repayable over a fifteen year period commencing upon the earlier of 2007 or the year after Standard Technology achieves annual revenues in excess of $25 million. As of March 1, 1999, the outstanding balance of the loan was $2,632,166, which includes previously capitalized interest. Interest does not currently accrue on the loan but will accrue at 8% per annum on the unpaid principal amount once repayment is required. In addition, Lockheed Martin has guaranteed up to $2 million of Standard Technology's borrowings under a line of credit with a commercial bank, which also is secured by Standard Technology's accounts receivable and a personal guarantee by Ms. Turner. Pursuant to a continuing engagement, the law firm of Wunder, Knight, Levine, Thelen & Forscey has provided Lockheed Martin general legislative support. Peter S. Knight, a Presidentially-appointed director of the Corporation since September 1994 and partner in the law firm of Wunder, Knight, Levine, Thelen & Forscey, has rendered services to Lockheed Martin pursuant to such engagement. Lockheed Martin paid Wunder, Knight, Levine, Thelen & Forscey $161,669, $112,129, $135,325 and $151,370 for services rendered and expenses incurred during 1998, 1997, 1996 and 1995, respectively. Caleb B. Hurtt, a director of the Corporation since May 1996 and a director of Lockheed Martin, may be deemed to have beneficial ownership of 5,672 shares of Lockheed Martin common stock as of March 1, 1999. He also had 1,013 phantom stock units credited to an account in a Lockheed Martin deferred compensation plan as of March 1, 1999. 103 COMMITTEE ON COMPENSATION AND MANAGEMENT DEVELOPMENT REPORT ON EXECUTIVE COMPENSATION The Committee on Compensation and Management Development, which is composed of independent outside directors, is responsible for establishing and administering the Corporation's executive compensation philosophy. Set forth below is the Committee's report on the 1998 compensation of the executive officers of the Corporation, including Mrs. Alewine, the Chief Executive Officer, and the other executive officers named in the Summary Compensation Table (the Named Executive Officers). The Corporation's executive compensation philosophy is designed to attract, motivate and retain talented executives critical to the long-term success of the Corporation. One of the objectives of this philosophy is to align executive compensation more closely with the interests of shareholders through performance incentives. The main components of this philosophy are annual compensation, consisting of salary plus bonuses awarded under the Corporation's Annual Incentive Plan, and long-term compensation, consisting of stock-based incentives. The Committee reviews and recommends to the Board the annual compensation of all executive officers, and reviews and approves executive officers' long-term compensation. There are two groups of competitive companies that are used in the executive compensation analysis. The first group, consisting of the companies that make up the Peer Group Index discussed under the caption "Performance Graph," is used to compare executive compensation strategy and practices. The second group, consisting of companies in the telecommunications industry with revenues comparable to the Corporation's, is used to benchmark competitive compensation levels. Annual Compensation Mrs. Alewine has an employment agreement as Chief Executive Officer dated July 19, 1996 which is summarized under the caption "Agreements with Current Executive Officers." Pursuant to the agreement, Mrs. Alewine received a base salary of $450,000 for the first year and an increase to $500,000 beginning in the second year. In July 1998, the Committee recommended to the Board that Mrs. Alewine's base salary be increased to $575,000 based on market data for a comparable Chief Executive Officer position and her performance in the last year. The Board approved the Committee's recommendation. Mrs. Alewine's employment agreement specifies an annual bonus target of 70% of her base salary. In addition, the agreement provides for the Committee to determine the performance measures and other factors used to determine her bonus in consultation with Mrs. Alewine. These factors included the Corporation's financial results, Mrs. Alewine's success in meeting personal objectives for 1998 which she presented to the Committee and the Corporation's achievement of strategic objectives. These strategic objectives included the merger agreement with Lockheed Martin Corporation, deregulation of the Corporation's largest business unit, completion of the restructuring commenced in 1997 with the sale of the Corporation's manufacturing unit, avoidance of adverse proposed legislation in the 105/th/ Congress, and rapid progress in the privatizations of INTELSAT and Inmarsat, the two global satellite consortia in which the Corporation is the U.S. owner, including the spin-off of twenty five percent of INTELSAT's satellite fleet into a new commercial company named New Skies Satellites. The Committee considered all of these factors in arriving at a bonus recommendation for Mrs. Alewine. The Committee recommended, and the Board approved, payment of a 1998 cash bonus award of $400,000 for Mrs. Alewine. 104 Base salary ranges have been established for the other executive officers based on the average of the market for comparable positions in the revenue group of competitive companies. Individual salaries within each range are based on recommendations to the Committee by the Chief Executive Officer taking into account such factors as total professional experience, performance, and experience in the current assignment. The bonus opportunities for other executive officers for 1998 were based on a range of award percentages of base salary for each position determined by the Committee. A portion of each bonus award was tied to corporate performance criteria based on the achievement of financial measures as compared to planned performance, and individual performance criteria based on the Committee's evaluation of each individual executive officer's achievement of established performance goals for the year. The Committee recommended a bonus award for each executive officer based on a bonus range and the performance measures noted above. The Board had final approval authority for these awards. Mr. Jasmann, who resigned as an executive officer in February 1998, received the same bonus as he did the prior year in accordance with the terms of his employment agreement with the Corporation, which expires on August 1, 1999. Long-Term Compensation Long-term compensation is an integral element of the Corporation's executive compensation philosophy because the Committee believes that stock ownership by senior management and stock-based performance-compensation arrangements enhance shareholder value. The Corporation's long-term compensation strategy includes a blend of stock compensation. For 1998, awards by the Committee consisted of non-qualified stock options and restricted stock awards (RSAs). These awards were consistent with ranges in the revenue group of competitive companies approved by the Committee. The stock option ranges position the Corporation at the median of the market for these companies while the performance-based restricted stock awards allow for total long-term compensation to reach the 75th percentile for this market if the business achieves prescribed performance standards over the long term. At the Committee's request, an independent executive compensation consultant conducted a review of total compensation for Mrs. Alewine and the other Named Executive Officers which included stock award recommendations. The Committee endorsed the consultant's methodology for developing recommendations for 1998 stock grants whereby base salary, bonus and long-term compensation (stock option and restricted stock awards) would be measured against market data on total compensation for comparable positions. A portion of executive compensation is represented by stock options granted at fair market value, which the Committee believes provide a tie to shareholder interests. In 1998, Mrs. Alewine received a grant of 30,000 stock options in accordance with the methodology approved by the Committee. Stock options were granted to the other Named Executive Officers in February 1998 as reflected in the table above setting forth 1998 option grants. These stock option awards were determined on the basis of two factors. First, the Committee established target award guidelines for each executive officer based on a competitive analysis of total compensation for each executive officer. Second, the Committee approved the actual awards for each executive officer based on these guidelines and performance recommendations made by Mrs. Alewine based on her evaluation of each officer's performance for 1997. 105 RSAs are restricted shares of COMSAT stock which are granted to executive officers and selected key employees as a performance incentive and a retention device based on the vesting schedule established by the Committee for each grant. The vesting of RSAs is subject to both a length of service requirement and the achievement of objective performance-based criteria which have been approved by the Committee. The percent of the award earned is based on the level of achievement of the performance objectives over the performance period established by the Committee. The RSAs earned then become subject to vesting over an additional 1, 2 and 3 years at the rate of 20%, 40% and 40%, respectively. Mrs. Alewine received 6,000 RSAs in February 1998. The other Named Executive Officers also received RSAs in February 1998 as shown in the Summary Compensation Table, the number of which in each case was consistent with the guidelines approved by the Committee. The performance-based criteria applicable to RSAs are intended to ensure the Federal tax deductibility under Section 162(m) of the Internal Revenue Code of compensation paid to the Corporation's executive officers pursuant to RSAs. The Corporation intends to preserve the tax deductibility under Section 162(m) of all compensation paid to its executive officers. Committee on Compensation and Management Development Caleb B. Hurtt, Chairman Neal B. Freeman Peter S. Knight Robert G. Schwartz Kathryn C. Turner PERFORMANCE GRAPH The following graph compares the cumulative total shareholder return for the Corporation's Common Stock with the cumulative total return of the S&P 500 Stock Index and a Peer Group Index constructed by the Corporation for the five fiscal years beginning on January 1, 1994 and ending on December 31, 1998. The Peer Group consists of three long-distance telecommunications companies (AT&T, MCI WorldCom and Sprint), and the following satellite industry companies (the years for which the returns of such companies have been included in the five- year period are noted in parentheses): American Mobil Satellite Corporation (all years), Asia Satellite Telecom (American Depository Receipts (ADRS) (1996-98), British Sky Broadcasting Group (ADRS) (1995-98), Echostar Communications Corporation (1996-98), Globalstar Telecommunications Ltd. (1996-98), Iridium World Communications (1996-98), Loral Space and Communications Ltd. (1997-98), PanAmSat Corporation (1996-98), PT Pasifik Satelit Nusantara (ADRS) (1996-98) and U.S. Satellite Broadcasting Co. (1996-98). Returns for MCI WorldCom use WorldCom, Inc. data for all years and include MCI Corporation data for 1998. 106 Comparison of Five-Year Cumulative Total Return Among COMSAT, S & P 500 Index, & Peer Group Index (Assumes $100 Invested on December 31, 1993 & Dividends Reinvested) [PERFORMANCE GRAPH APPEARS HERE]
COMSAT S&P 500 Peer Group 1993 100 100 100 1994 65 101 95 1995 67 139 131 1996 92 171 140 1997 107 229 191 1998 160 294 277
107 Item 12: Security Ownership of Certain Beneficial Owners and Management Beneficial Owners COMSAT has reviewed the Schedules 13G or 13D filed with the Securities and Exchange Commission (SEC) as of March 1, 1999, the most recent practicable date for such information. COMSAT believes that the following table includes a complete list of the persons that beneficially owned more than 5% of COMSAT's common stock on that date.
- --------------------------------------------------------------------------- Amount and Nature of Beneficial Name and Address of Beneficial Owner Ownership(1) Percent of Class - --------------------------------------------------------------------------- FMR Corp.(2) 3,975,812 7.56 - --------------------------------------------------------------------------- Morgan Stanley Dean Witter & Co.(3) 3,355,632 6.38 - ---------------------------------------------------------------------------
(1) Each number in this column has been rounded to the nearest whole share. (2) FMR Corporation, a Massachusetts corporation, is located at 82 Devonshire Street, Boston, Massachusetts 02109. FMR Corporation filed an amendment to its Schedule 13-D on February 25, 1999 reporting on a voluntary basis that FMR and Fidelity International Limited, a Bermuda company, may be deemed to have jointly owned as of that date a total of 3,975,812 shares of COMSAT common stock. (3) Morgan Stanley Dean Witter & Co., a Delaware corporation, is located at 1585 Broadway, New York, New York 10036. Morgan Stanley Dean Witter Investment Management Limited, organized under the laws of England, is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. that is located at 25 Cabot Square, Canary Wharf, London E14 4QA, England. The two companies filed a joint amendment to Schedule 13-G on February 10, 1999 in which it was reported that the two companies together beneficially owned an aggregate of 3,355,632 shares of COMSAT common stock. Of this amount, Morgan Stanley Dean Witter Investment Management Limited beneficially owned an aggregate of 3,204,637 shares of COMSAT common stock. Management The following table sets forth information as of March 1, 1999, the most recent practicable date for such information, regarding the beneficial ownership of COMSAT's common stock by all directors, by each of the Named Executive Officers, and by all directors and executive officers as a group. Under the rules of the SEC, beneficial ownership includes any shares over which an individual has sole or shared voting or investment power, and also any shares that the individual has the right to acquire within 60 days through the exercise of any stock option or other right. 108
- -------------------------------------------------------------------------------- Amount and Nature of Name(1) Beneficial Ownership(2) - -------------------------------------------------------------------------------- Betty C. Alewine 393,138 (3) - -------------------------------------------------------------------------------- Marcus C. Bennett 2,480 - -------------------------------------------------------------------------------- Lucy Wilson Benson 40,485 - -------------------------------------------------------------------------------- Edwin I. Colodny 47,749 - -------------------------------------------------------------------------------- Lawrence S. Eagleburger 13,102 - -------------------------------------------------------------------------------- Allen E. Flower 123,818 (4) - -------------------------------------------------------------------------------- Neal B. Freeman 32,165 - -------------------------------------------------------------------------------- Caleb B. Hurtt 8,441 - -------------------------------------------------------------------------------- Dwight E. Jasmann 9,474 (5) - -------------------------------------------------------------------------------- Peter S. Knight 13,402 - -------------------------------------------------------------------------------- Peter W. Likins 38,335 (6) - -------------------------------------------------------------------------------- Charles T. Manatt 13,902 - -------------------------------------------------------------------------------- John H. Mattingly 47,689 (7) - -------------------------------------------------------------------------------- Benjamin A. Pontano 48,703 (8) - -------------------------------------------------------------------------------- Larry G. Schafran 7,480 (9) - -------------------------------------------------------------------------------- Robert G. Schwartz 44,285 - -------------------------------------------------------------------------------- Kathryn C. Turner 4,480 - -------------------------------------------------------------------------------- Guy P. Wyser-Pratte 2,020,780 (10) - -------------------------------------------------------------------------------- Warren Y. Zeger 171,781 (11) - -------------------------------------------------------------------------------- All directors and executive officers as a group 3,106,957 (12) (22 persons) - --------------------------------------------------------------------------------
(1) Unless otherwise indicated, each person has sole voting and investment power over the shares listed, and no director or executive officer beneficially owns more than 1.0% of the Corporation's Common Stock. (2) Each number in this column has been rounded to the nearest whole share. The following non-employee directors elected to defer receipt of their 1,000 share annual retainer for 1998 and instead received phantom stock units which are not included in their beneficial ownership of COMSAT Common Stock: Mr. Bennett; Mrs. Benson; Mr. Eagleburger; Mr. Hurtt; Mr. Knight; Mr. Manatt; and Mr. Schafran. Beneficial ownership of COMSAT Common Stock includes shares that may be acquired within 60 days after March 1, 1999 through the exercise of options as follows: Mrs. Alewine, 274,432 shares; Mr. Bennett, 2,480 shares; Mrs. Benson, 37,205 shares; Mr. Colodny, 43,408 shares; Mr. Eagleburger, 12,402 shares; Mr. Flower, 99,266 shares; Mr. Freeman, 29,765 shares; Mr. Hurtt, 7,441 shares; Mr. Jasmann, 7,752 shares; Mr. Knight, 12,402 shares; Dr. Likins, 31,005 shares; Mr. Manatt, 12,402 shares; Mr. Mattingly, 33,524 shares; Dr. Pontano, 33,515 shares; Mr. Schafran, 2,480 shares; Mr. Schwartz, 34,725 shares; Ms. Turner, 2,480 shares; Mr. Wyser-Pratte, 2,480 shares; Mr. Zeger, 149,052 shares; and all directors and executive officers as a group, 838,157 shares. The number of option shares and shares awarded under COMSAT benefit plans which are restricted against transfer that are included as beneficially owned have been adjusted to give effect to the Ascent spin-off to COMSAT shareholders on June 27, 1997. All outstanding options and restricted shares held on that date were adjusted by multiplying the number of options or shares held by an adjustment ratio of 1.2402. (3) Includes 23,666 shares which are restricted against transfer and 1,534 shares which are held in the Corporation's Savings and Profit-Sharing Plan as of March 1, 1999. (4) Includes 12,957 shares which are restricted against transfer and 1,275 shares which are held in the Corporation's Savings and Profit-Sharing Plan as of March 1, 1999. (5) Includes 23 shares which are held in the Corporation's Savings and Profit- Sharing Plan as of March 1, 1999. Mr. Jasmann resigned in February 1998. (6) Includes 2,850 shares over which Dr. Likins shares voting power and investment power with Mrs. Likins. (7) Includes 7,984 shares which are restricted against transfer and 1,080 shares which are held in the Corporation's Savings and Profit-Sharing Plan as of March 1, 1999. Includes 500 shares held by Mr. Mattingly's mother of which Mr. Mattingly disclaims beneficial ownership. (8) Includes 4,000 shares which are restricted against transfer and 597 shares which are held in the Corporation's Savings and Profit-Sharing Plan as of March 1, 1999. (9) Includes 5,000 shares held by Mrs. Schafran of which Mr. Schafran disclaims beneficial ownership. (10) Includes 1,961,300 shares owned by investment partnerships and other managed accounts for which Wyser-Pratte Management Co., Inc. and its affiliates are the general partner or investment manager. Mr. Wyser-Pratte beneficially owned 3.84% of the Corporation's outstanding Common Stock as of March 1, 1999. (11) Includes 13,453 shares which are restricted against transfer and 1,439 shares which are held in the Corporation's Savings and Profit-Sharing Plan as of March 1, 1999. (12) Includes 5,500 shares with respect to which beneficial ownership is disclaimed. Also includes an aggregate of 70,056 shares which are restricted against transfer and 6,379 shares which are held in the Corporation's Savings and Profit-Sharing Plan as of March 1, 1999. All directors and executive officers as a group beneficially owned 5.90% of the Corporation's outstanding Common Stock as of March 1, 1999. 109 Changes in Control The Corporation has entered into an Agreement and Plan of Merger, dated as of September 18, 1998, by and among the Corporation, Lockheed Martin Corporation, a Maryland corporation, and Deneb Corporation, a Delaware corporation which is a wholly-owned subsidiary of Lockheed Martin. For a description of the transaction see "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Combination with Lockheed Martin" and Note 2 to the financial statements. Item 13: Certain Relationships and Related Transactions The following directors of the Corporation may be deemed to have a relationship with Lockheed Martin Corporation that may constitute an indirect material interest in the proposed merger between the Corporation and Lockheed Martin Corporation. See "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Combination with Lockheed Martin." For a discussion of certain relationships between Lockheed Martin Corporation and each of Ms. Turner, Mr. Hurtt and Mr. Knight, see "Item 11: Executive Compensation - Compensation Committee Interlocks, Insider Participation and Related Party Transactions." Marcus C. Bennett, a director of the Corporation since August 1997, and the former Executive Vice President and Chief Financial Officer and a director of Lockheed Martin, may be deemed to have beneficial ownership of 197,092 shares of Lockheed Martin common stock as of March 1, 1999. He also had 861 phantom stock units credited to an account in a Lockheed Martin deferred compensation plan as of March 1, 1999. Edwin I. Colodny, the Chairman of the Board of COMSAT since April 1997 and a director of the Corporation since May 1992, may be deemed to have beneficial ownership of 4,204 shares of Lockheed Martin common stock as of March 1, 1999. Pursuant to a continuing engagement, the law firm of Manatt, Phelps & Phillips, LLP has provided Lockheed Martin general legal and legislative advocacy services in connection with government contracts and contracting opportunities in the state of California. Charles T. Manatt, a Presidentially- appointed director of the Corporation since May 1995 and chairman of the law firm of Manatt, Phelps & Phillips, LLP, has not had any personal involvement with the services rendered pursuant to the engagement. Lockheed Martin paid Manatt, Phelps & Phillips, LLP $65,414, $166,113, $153,126 and $66,686 for services rendered and expenses incurred during 1998, 1997, 1996 and 1995, respectively. 110 PART IV Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as part of this Report 1. Consolidated Financial Statements and Supplementary Data of Registrant a. Independent Auditors' Report b. Consolidated Financial Statements of COMSAT Corporation and Subsidiaries (i) Consolidated Income Statements for the Years Ended December 31, 1998, 1997 and 1996 (ii) Consolidated Balance Sheets as of December 31, 1998 and 1997 (iii) Consolidated Cash Flow Statements for the Years Ended December 31, 1998, 1997 and 1996 (iv) Statements of Changes in Consolidated Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 (v) Notes to Consolidated Financial Statements for the Years Ended December 31, 1998, 1997 and 1996 2. Financial Statement Schedule Relating to the Consolidated Financial Statements of COMSAT Corporation for Each of the Three Years in the Period Ended December 31, 1998 (a) Schedule II - Valuation and Qualifying Accounts All other Schedules have been omitted because they are not applicable or not required or because the required information is included elsewhere in the financial statements in this filing. 3. Exhibits (listed according to the number assigned in the table in Item 601 of Regulation S-K) Exhibit No. 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 2.1 Agreement and Plan of Merger, dated as of September 18, 1998, among COMSAT Corporation, Lockheed Martin Corporation and Deneb Corporation (Incorporated by reference to Exhibit 2 to Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 2.2 Carrier Acquisition Agreement, dated as of September 18, 1998, by and among COMSAT Corporation, Lockheed Martin Corporation, Regulus, LLC, and COMSAT Government Systems, Inc. (Incorporated by reference to Exhibit 5 to Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) Exhibit No. 3 - Articles of Incorporation and By-laws 3.1 Articles of Incorporation of Registrant, composite copy, as amended through June 1, 1993 (Incorporated by reference from Exhibit No. 4(a) to Registrant's Registration Statement on Form S-3 (No. 33-51661) filed on December 22, 1993) 111 3.2 By-laws of Registrant, as amended through April 21, 1997 (Incorporated by reference from Exhibit No. 3.2 to Registrant's Current Report on Form 8-K filed on April 21, 1997. 3.3 Regulations adopted by Registrant's Board of Directors pursuant to Section 5.02(c)f Registrant's Articles of Incorporation (Incorporated by reference from Exhibit No. 3(c) to Registrant's Report on Form 10-K for the fiscal year ended 1992) Exhibit No. 4 - Instruments defining the rights of security holders, including indentures 4.1 Specimen of a certificate representing Series I shares of COMSAT Common Stock, without par value, which are held by citizens of the United States (Incorporated by reference from Exhibit No. 4(a) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 4.2 Specimen of a certificate representing Series I shares of COMSAT Common Stock, without par value, which are held by aliens (Incorporated by reference from Exhibit No. 4(b) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1982) 4.3 Specimen of a certificate representing Series II shares of COMSAT Common Stock, without par value (Incorporated by reference from Exhibit No. 4(c) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1982) 4.4 Standard Multiple-Series Indenture Provisions dated March 15, 1991 (Incorporated by reference from Exhibit No. 4(a) to Registrant's Registration Statement on Form S-3 (No. 33-39472) filed on March 15, 1991) 4.5 Indenture dated as of March 15, 1991 between Registrant and The Chase Manhattan Bank, N.A. (Incorporated by reference from Exhibit No. 4(b) to Registrant's Registration Statement on Form S-3 (No. 33-39472) filed on March 15, 1991) 4.6 Supplemental Indenture, dated as of June 29, 1994, from the Registrant to The Chase Manhattan Bank, N. A. (Incorporated by reference from Exhibit No. 4(c) to Registrant's Registration Statement on Form S-3 (No. 33-54369) filed on June 30, 1994) 4.7 Officers' Certificate pursuant to Section 3.01 of the Indenture, dated as of March 15, 1991, from the Registrant to The Chase Manhattan Bank, N.A., as Trustee, relating to the authorization of $75,000,000 aggregate principal amount of Registrant's 8.95% Notes Due 2001 (with form of Note attached) (Incorporated by reference from Exhibit No. 4 to Registrant's Current Report on Form 8-K filed on May 15, 1991) 4.8 Officers' Certificate pursuant to Section 3.01 of the Indenture, dated as of March 15, 1991, from the Registrant to The Chase Manhattan Bank, N.A., as Trustee, relating to the authorization of $160,000,000 aggregate principal amount of Registrant's 8.125% Debentures Due 2004 (with form of Debenture attached) (Incorporated by reference from Exhibit No. 4 to Registrant's Current Report on Form 8-K filed on April 9, 1992) 112 4.9 Officers' Certificate pursuant to Section 3.01 of the Indenture, dated as of March 15, 1991, as supplemented by the Supplemental Indenture, dated as of June 29, 1994, from the Registrant to The Chase Manhattan Bank, N.A., as Trustee, relating to the authorization of $100,000,000 aggregate principal amount of Registrant's Medium Term Notes, Series A (with forms of Notes attached) (Incorporated by reference from Exhibit No. 4(I) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 4.10 Limited Partnership Agreement of COMSAT Capital I, L.P., dated as of July 18, 1995, relating to issuance of monthly income preferred securities (Incorporated by reference from Exhibit No. 4(a) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1995) 4.11 Guarantee Agreement for Preferred Securities of COMSAT Capital I, L.P., dated as of July 18, 1995 (Incorporated by reference from Exhibit No. 4(b) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1995) 4.12 Indenture between Registrant and the First National Bank of Chicago, as Trustee, dated as of July 18, 1995 (Incorporated by reference from Exhibit No. 4(c) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1995) Exhibit No. 10 - Material Contracts 10.1 Agreement relating to the International Telecommunications Satellite Organization (INTELSAT) by Governments, which entered into force on February 12, 1973 (Incorporated by reference from Exhibit No. 10(a) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980) 10.2 Operating Agreement relating to INTELSAT by Governments which entered into force on February 12, 1973 (Incorporated by reference from Exhibit No. 10(b) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980) 10.3 Agreement dated August 15, 1975, among COMSAT General Corporation, RCA Global Communications, Inc., Western Union International, Inc. and ITT World Communications, Inc. relating to the establishment of a joint venture for the purpose of participating in the ownership and operation of a maritime communications satellite system and Amendment Nos. 1-4 and Amendment No. 5 dated March 24, 1980 (Incorporated by reference from Exhibit No. 10(p) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1980) 10.4 Amendment No. 6 to Exhibit 10.3 dated September 1, 1981 (Incorporated by reference from Exhibit No. 10(p)(ii) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1981) 10.5 Convention on the International Maritime Satellite Organization (Inmarsat) dated September 3, 1976 (Incorporated by reference from Exhibit No. 11 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1978) 113 10.6 Operating Agreement on Inmarsat dated September 3, 1976 (Incorporated by reference from Exhibit No. 12 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1978) 10.7* Registrant's 1982 Stock Option Plan (Incorporated by reference from Exhibit No. 10(x) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1981) 10.8* Registrant's Insurance and Retirement Plan for Executives, as amended and restated effective January 1, 1997 (Incorporated by reference from Exhibit No. 10.10 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1997) 10.9* Registrant's Non-Employee Directors Stock Plan (Incorporated by reference from Exhibit No. 10.11 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996) 10.10 Agreement to Acquire and Lease (and Supplemental Agreements thereto) dated September 28 and October 10, 1988, respectively, among the International Maritime Satellite Organization (Inmarsat), the North Sea Marine Leasing Company, British Aerospace Public Limited Company, the European Investment Bank, Kreditanstalt Fuer Wiederaufbau, European Investment Bank (as Agent and as Trustee), Instituto Mobiliare Italiano, Credit National, Hellenic Industrial Development Bank, and Society Nationale de Credit a L'Industrie relating to the financing of three Inmarsat spacecraft (Incorporated by Reference from Exhibit No. 3(a) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1988) 10.11* Registrant's 1990 Key Employee Stock Plan (Incorporated by reference from Exhibit No. 10 (p) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989) 10.12 Amended and Restated Agreement, dated November 14, 1990, of Limited Partnership of Rock Spring II Limited Partnership (Incorporated by reference from Exhibit No. 10(a) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.13 Amended and Restated Lease Agreement, dated November 14, 1990, of Limited Partnership of Rock Spring II Limited Partnership (Incorporated by reference from Exhibit No. 10(b) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.14 Amended and Restated Ground Lease Indenture, dated November 14, 1990, between Anne D. Camalier (Landlord) and Rock Spring II Limited Partnership (Tenant) (Incorporated by reference from Exhibit No. 10(c) to Registrant's Current Report on Form 8-K filed on February 24, 1992) 10.15 Finance Facility Contract (and Supplemental Agreements thereto), dated December 20, 1991, among the International Maritime Satellite Organization (Inmarsat), Abbey National plc, General Electric Technical Services Company, Inc., European Investment Bank, Kreditanstalt Fuer Wiederaufbau, Instituto Mobiliare Italiano S.p.A., Credit National, Societe Nationale de Credit a L'Industrie, Finansieringsinstituttet for Industri OG Haandvaerk A/S, De Nationale Investeringsbank NV, and Osterreichische Investitionkredit Aktiengesellschaft relating to the financing of three Inmarsat spacecraft (Incorporated by reference from Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991) 114 10.16* Registrant's Directors and Executives Deferred Compensation Plan, as amended by the Board of Directors on July 15, 1993 (Incorporated by reference from Exhibit No. 10.24 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996) 10.17 Fiscal Agency Agreement, dated as of August 6, 1992, between International Telecommunications Satellite Organization and Morgan Guaranty Trust Company of New York (Incorporated by reference from Exhibit No. 10 (dd) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992) 10.18 Fiscal Agency Agreement, dated as of January 19, 1993, between International Telecommunications Satellite Organization and Morgan Guaranty Trust Company of New York (Incorporated by reference from Exhibit No. 10 (ee) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992) 10.19 Agreement dated July 1, 1993, between Registrant and AT&T Easylink Services relating to exchange of telex traffic (Incorporated by reference from Exhibit No. 10(bb) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.20 Agreement dated July 27, 1993, between the Registrant and American Telephone & Telegraph Company relating to utilization of space segment (Incorporated by reference from Exhibit No. 10(cc) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.21 Amendment to Exhibit 10.20 dated as of December 1, 1995 (Incorporated by reference from Exhibit No. 10.34 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995) 10.22 Amendment to Exhibit 10.20 dated as of January 8, 1997 (Incorporated by reference from Exhibit No. 10.32 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996) 10.23 Agreement dated November 6, 1998, between Registrant and MCI International, Inc. relating to exchange of traffic. 10.24 Agreement dated November 30, 1993, between the Registrant and Sprint Communications Company L.P. relating to utilization of space segment (Incorporated by reference from Exhibit No. 10(ee) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.25 Amendment to Exhibit 10.24 dated April 7, 1995 (Incorporated by reference from Exhibit No. 10(a)(i) to Registrant's Report on Form 10-Q/A Amendment No. 2 dated June 29, 1995 for the quarter ended March 31, 1995) 10.26 Agreement dated December 10, 1993, between Registrant and Sprint International relating to the exchange of traffic (Incorporated by reference from Exhibit No. 10(ff) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.27 Credit Agreement dated as of December 17, 1993 among Registrant, NationsBank of North Carolina, N.A., Bank of America National Trust and Savings Association, The First National 115 Bank of Chicago, The Chase Manhattan Bank, N.A., The Sumitomo Bank, Limited, New York Branch, Swiss Bank Corporation, New York Branch, as lenders, and NationsBank of North Carolina, N.A., as agent (Incorporated by reference from Exhibit No. 10(gg) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.28 Amendment No. 1 to Exhibit 10.27 dated as of December 17, 1994 (Incorporated by reference from Exhibit No. 10(cc)(i) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.29 Agreement dated January 24, 1994, between MCI International, Inc. and Registrant relating to utilization of space segment (Incorporated by reference from Exhibit No. 10(ii) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.30 Amendment to Exhibit 10.29 dated as of July 1, 1995 (Incorporated by reference from Exhibit No. 10.42 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995) 10.31 Amendment to Exhibit 10.29 dated as of September 17, 1996 (Incorporated by reference from Exhibit No. 10.41 to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996) 10.32 Agreement dated June 1, 1996, between Registrant and AT&T relating to exchange of traffic. 10.33 Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Bankers Trust Company, Fiscal Agent and Principal Paying Agent, dated as of March 22, 1994 (Incorporated by reference from Exhibit No. 10(kk) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993) 10.34 Distribution Agreement dated July 11, 1994 between Registrant and CS First Boston Corporation, Salomon Brothers Inc and Nationsbanc Capital Markets, Inc., as Distributors, of Registrant's Medium-Term Notes, Series A (Incorporated by reference from Exhibit No. 10(ff) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.35 Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Morgan Guaranty Trust Company, Fiscal Agent and Principal Paying Agent, dated as of October 14, 1994 (Incorporated by reference from Exhibit No. 10(gg) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.36* Registrant's Annual Incentive Plan (Incorporated by reference from Exhibit No. 10(hh) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 10.37 Fiscal Agency Agreement between International Telecommunications Satellite Organization, Issuer, and Morgan Guaranty Trust Company, Fiscal Agent and Principal Paying Agent, dated as of February 28, 1995 (Incorporated by reference from Exhibit No. 10(ii) to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994) 116 10.38* Registrant's 1995 Key Employee Stock Plan (Incorporated by reference from Exhibit No. 10.51 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996) 10.39 Distribution Agreement, dated as of June 3, 1997, between the Registrant and Ascent (Incorporated by reference from Exhibit 10.2 to the Registrant's Report on Form 8-K dated June 18, 1997) 10.40 Tax Disaffiliation Agreement, dated as of June 3, 1997, between the Registrant and Ascent (Incorporated by reference from Exhibit 10.3 to the Registrant's Report on Form 8-K dated June 18, 1997) 10.41 Amended and Restated Employment Agreement, dated as of July 18, 1997, between the Registrant and Betty C. Alewine (Incorporated by reference from Exhibit 9 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 10.42 Amended and Restated Employment Agreement, dated as of July 18, 1997, between the Registrant and Allen E. Flower (Incorporated by reference from Exhibit 11 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 10.43 Amended and Restated Employment Agreement, dated as of July 18, 1997, between the Registrant and Warren Y. Zeger (Incorporated by reference from Exhibit 13 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 10.44 Shareholders' Agreement, dated as of September 18, 1998, between COMSAT Corporation and Lockheed Martin Corporation (Incorporated by reference to Exhibit 3 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 10.45 Registration Rights Agreement, dated as of September 18, 1998, between COMSAT Corporation and Lockheed Martin Corporation (Incorporated by reference to Exhibit 4 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 10.46 Amendment to Amended and Restated Employment Agreement, between COMSAT Corporation and Betty C. Alewine, dated as of September 18, 1998 (Incorporated by reference to Exhibit 10 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 10.47 Amendment to Amended and Restated Employment Agreement, between COMSAT Corporation and Allen E. Flower, dated as of September 18, 1998 (Incorporated by reference to Exhibit 12 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 10.48 Amendment to Amended and Restated Employment Agreement, between COMSAT Corporation and Warren Y. Zeger, dated as of September 18, 1998 (Incorporated by reference to Exhibit 14 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 25, 1998) 117 10.49 Stock Purchase and Sale Agreement, dated as of March 16, 1998 among COMSAT Corporation, TBG Industries, Inc. and Prodelin Holding Corporation (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1998) 10.50 Master Lease Agreement by and between LCOR Clarksburg L.L.C., as Landlord, and COMSAT Corporation, as Tenant, dated as of September 12, 1997. 10.51 Facilities Lease Agreement by and between LCOR Clarksburg L.L.C., as Landlord, and COMSAT Corporation, as Tenant, dated as of September 12, 1997. 10.52 Agreement among COMSAT Corporation, COMSAT Argentina, S.A. and ICO Global Communications (Holdings) Limited, ICO Global Communications Holdings B.V. and ICO Global Communications Services Inc., dated as of September 30, 1998. 10.53* COMSAT Corporation Retention Bonus Plan, effective as of September 18, 1998 (Incorporated by reference to Exhibit 15 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 18, 1998) 10.54* COMSAT Corporation Amended and Restated Change of Control Severance Plan, effective as of September 18, 1998 (Incorporated by reference to Exhibit 16 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 18, 1998) 10.55* Amendment to COMSAT Corporation 1995 Key Employee Stock Plan, dated as of September 18, 1998 (Incorporated by reference to Exhibit 17 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 18, 1998 10.56* Amendment to COMSAT Corporation 1990 Key Employee Stock Plan, dated as of September 18, 1998 (Incorporated by reference to Exhibit 18 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 18, 1998 10.57* Amendment to COMSAT Corporation Non-Employee Directors Stock Plan, dated as of September 18, 1998 (Incorporated by reference to Exhibit 19 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 18, 1998 10.58* Amendment to COMSAT Corporation Directors and Executives Deferred Compensation Plan, dated as of September 18, 1998 (Incorporated by reference to Exhibit 20 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on September 18, 1998 Exhibit No. 21 - Subsidiaries of the Registrant as of December 31, 1998 Exhibit No. 23 - Consents of experts and counsel Consent of Independent Auditors dated March 24, 1999. 118 Exhibit No. 27 - Financial Data Schedule (b) Reports on Form 8-K The Corporation filed a Report on Form 8-K dated December 23, 1998, related to the amicable resolution of a dispute between the Corporation and ICO Global Communications (Holdings) Ltd. *Compensatory plan or arrangement. 119 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMSAT CORPORATION (Registrant) Date: March 25, 1999 By /s/ Alan G. Korobov ----------------------------- (Alan G. Korobov, Controller) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by each of the following persons on behalf of the Registrant and in the capacity and as of March 25, 1999. Each person whose signature appears below constitutes and appoints the Registrant's Vice President and Chief Financial Officer, Vice President and General Counsel or Controller his or her true and lawful attorney-in-fact, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute, may lawfully do or cause to be done by virtue hereof. (1) Principal executive officer By /s/ Betty C. Alewine -------------------------------------- (Betty C. Alewine, President and Chief Executive Officer and Director) (2) Principal financial officer By /s/ Allen E. Flower -------------------------------------- (Allen E. Flower, Vice President and Chief Financial Officer) (3) Principal accounting officer By /s/ Alan G. Korobov -------------------------------------- (Alan G. Korobov, Controller) 120 (4) Board of Directors By /s/ Edwin I. Colodny -------------------------------------- (Edwin I. Colodny, Chairman and Director) By /s/ Marcus C. Bennett -------------------------------------- (Marcus C. Bennett, Director) By /s/ Lucy Wilson Benson -------------------------------------- (Lucy Wilson Benson, Director) By /s/ Lawrence S. Eagleburger -------------------------------------- (Lawrence S. Eagleburger, Director) By /s/ Neal B. Freeman -------------------------------------- (Neal B. Freeman, Director) By /s/ Caleb B. Hurtt -------------------------------------- (Caleb B. Hurtt, Director) By /s/ Peter S. Knight -------------------------------------- (Peter S. Knight, Director) By /s/ Peter W. Likins -------------------------------------- (Peter W. Likins, Director) By /s/ Charles T. Manatt -------------------------------------- (Charles T. Manatt, Director) 121 By /s/ Larry G. Schafran -------------------------------------- (Larry G. Schafran, Director) By /s/ Robert G. Schwartz -------------------------------------- (Robert G. Schwartz, Director) By /s/ Kathryn C. Turner -------------------------------------- (Kathryn C. Turner, Director) By /s/ Guy P. Wyser-Pratte -------------------------------------- (Guy P. Wyser-Pratte, Director) 122 COMSAT CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1998, 1997 and 1996
Balance at Beginning of Charged to Balance at In thousands Year Expenses Deductions(a) End of Year - --------------------------------------------------------------------------------------------------- 1996: Allowance for loss on accounts receivable $ 8,251 $3,847 $ 939 $11,159 Allowance for loss on investments - $1,105 - $ 1,105 1997: Allowance for loss on accounts receivable $11,159 $6,306 $2,730 $14,735 Allowance for loss on investments $ 1,105 $1,008 - $ 2,113 1998: Allowance for loss on accounts receivable $14,735 $4,749 $2,361 $17,123 Allowance for loss on investments $ 2,113 $1,950 - $ 4,063
(a) Uncollectible amounts written off, recoveries of amounts previously reserved, and other adjustments. 123 EX-10.23 2 SERVICE AGREEMENT EXHIBIT 10.23 SERVICE AGREEMENT This Service Agreement (the "Agreement") is made and entered into this 6th day of November 1998, by and between COMSAT Mobile Communications, a business unit of COMSAT Corporation, a corporation organized and existing under the laws of the District of Columbia, with offices located at 6560 Rock Spring Drive, Bethesda, Maryland 20871 ("COMSAT"), and MCI International, Inc., a corporation organized and existing under the laws of Delaware, with offices at 2 International Drive, Rye Brook, New York 10573 ("MCI"). COMSAT and MCI are hereinafter collectively referred to as the "Parties" and individually referred to as a "Party". WHEREAS, COMSAT provides mobile satellite communications services to and from mobile earth stations via the International Mobile Satellite Organization ("Inmarsat") satellite system through COMSAT's land earth stations and switching facilities; and WHEREAS, MCI maintains a terrestrial telecommunications network and provides telecommunication services, including telex services, within the United States and abroad; and WHEREAS, both Parties desire to obtain the services of the other Party and are willing to interconnect facilities for the purpose of facilitating the mutual provision of services in accordance with the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein expressed, COMSAT and MCI agree as follows: 1. DEFINITIONS 1.1 "COMSAT Facilities" shall mean land earth stations ("LES") and switching facilities provided by COMSAT. 1.2 "COMSAT Services" shall mean Standard-A, -M, -B, Mini-M and Aero mobile satellite communication services to and from mobile earth stations via the Inmarsat satellite system through COMSAT Facilities. 1.3 "Effective Date" shall mean November 1, 1998. 1.4 "Fixed-to-Mobile Traffic" shall mean U.S. traffic originating on MCI Facilities in a fixed location and destined to terminate at a mobile earth station via the Inmarsat satellite system. 1.5 "Inmarsat Ocean Regions" shall mean the Pacific Ocean Region ("POR"), the Atlantic Ocean Region-West ("AOR-W"), the Atlantic Ocean Region-East ("AOR-E") and the Indian Ocean Region ("IOR"). 1.6 "MCI Facilities" shall mean MCI's international switching centers and other terrestrial facilities owned or controlled by MCI or, as the case may be, the facilities of any local exchange carriers selected by MCI for the termination of Mobile-to-Fixed Traffic. MCI's Facilities shall not include facilites owned and operated by Worldcom, Inc. or its affiliates prior to the merger of Worldcom, Inc. and MCI Communications Corporation. 1.7 "MCI Services" shall mean terrestrial communications services to and from fixed international or domestic land points via MCI Facilities. 1.8 "MES" shall mean mobile earth station. 1.9 "Mobile-to-Fixed Traffic" shall mean traffic originating from a mobile earth station via the Inmarsat satellite system and COMSAT's Facilities and destined to terminate at a fixed international or domestic land point. 1.10 "Transit Traffic" shall mean traffic to an Inmarsat MES originating from a fixed location in a country in which no Inmarsat land earth station exists to provide service to such MES and which traffic is routed over MCI Facilities to COMSAT Facilities for delivery to its final destination. 2. TERM OF AGREEMENT. Unless otherwise terminated pursuant to Article 7 hereof, this Agreement shall be effective for a period of one year, commencing on the Effective Date ("Initial Term"). 3 SERVICE PROVISION AND RATES 3.1 COMSAT shall provide COMSAT Services to MCI at the rates set forth in Attachment A hereto in order to allow MCI to terminate U.S. originated Fixed-to-Mobile Traffic. Notwithstanding the foregoing, COMSAT shall provide a discount to its rates for Standard -A services in consideration of MCI's commitment to program its switches and undertake any other measures necessary to direct to COMSAT a minimum of seventy-five (75%) of MCI's U.S.-originated Inmarsat -A, -M, -B, Mini-M and Aero Fixed-to-Mobile Traffic destined to the AOR-E, AOR-W and POR. The discount rate shall be as set forth in Attachment A. In order to receive the discount, internal monthly reviews shall be conducted by COMSAT to measure actual Fixed-to-Mobile traffic delivered by MCI to COMSAT. The rates set forth in Attachment A shall be inclusive of all space and ground segment charges. COMSAT shall be solely responsible for such charges and MCI shall have no responsibility therefor. 3.2 MCI shall provide MCI Services to COMSAT to allow COMSAT to terminate Mobile-to-Fixed Traffic at the rates set forth in Attachment B hereto. COMSAT shall be eligible for discounts as described in Attachment B. The rates set forth in Attachment B shall be inclusive of all pay-outs and other amounts payable to any local, long distance or other carrier or administration and/or other operating entities with respect to MCI Service terminating in or transiting through their jurisdictions. MCI shall be solely responsible for settlements with and payments to such carriers and COMSAT shall have no responsibility therefor. 3.3 The rates set forth in Attachments A and B shall be effective as of November 1, 1998. 3.4 Transit Traffic 3.4.1 For Transit Traffic, COMSAT will establish transit rates with the foreign administrations for the LES component of the charge and MCI will establish the international land line charges. 3.4.2 For Transit Traffic where the foreign administration accounts and settles with COMSAT for the LES component ("Direct Settlement"), the foreign telephone administration shall account and settle with MCI for the international land line charges. In the event that cascade accounting is utilized, MCI shall credit COMSAT the amount due COMSAT and settlement shall be in accordance with Section 6.1.2. MCI shall provide sufficient detail on a monthly basis to enable COMSAT to determine the foreign administration from which the call originated, volume and ocean region destinations of the Transit Traffic. 4. INTERCONNECTION OF FACILITIES. 4.1 COMSAT and MCI agree to interconnect COMSAT Facilities and MCI Facilities to permit the exchange of Fixed-to-Mobile and Mobile-to-Fixed Traffic. The points of interconnections shall be at COMSAT's Main Distribution Frame ("MDF") at COMSAT's Facilities at Santa Paula, California and Southbury, Connecticut. 4.2 Each Party shall be responsible for providing and maintaining, at its own expense and liability, the equipment and circuits located on its side of the MDF. The Parties shall cooperate in the detection and correction of problems which can not be immediately isolated to a specific side of the MDF or segment of a circuit. 4.3 Except as otherwise agreed by the Parties, the technical standards and methods of operation applied by the Parties in the exchange of traffic hereunder shall conform to the applicable recommendations of the International Telecommunications Union - Telecommunications Standardization Sector ("ITU-T") and to any revisions of same. The Parties agree that the signaling standard shall continue to be Signaling System No. 5. Such signaling standard may be upgraded to Signaling System No. 7 upon availability and mutual agreement of the Parties. 5. APPLICABLE SERVICE STANDARDS 5.1 COMSAT Services. COMSAT shall provide COMSAT Services through COMSAT Facilities which satisfy the applicable Inmarsat specifications for such services. COMSAT's failure to comply with non-mandatory specifications shall not be deemed to be in conflict with this Agreement. 5.2 MCI Services. MCI shall provide services through its facilities which satisfy ITU Recommendations Q. 140 through Q. 157 for Signaling System No. 5. 6. PAYMENT FOR SERVICE 6.1 Accounting and Settlement Procedures. 6.1.1 Each Party shall be responsible for establishing end-user rates for services rendered to its respective customers. In addition, each Party shall be responsible to bill and collect service charges from its respective customers. 6.1.2 No later than sixty (60) days after the end of a service month, the Parties shall exchange accounting statements for services provided to each other during the preceding calendar month. Each Party shall provide to the other Party such detail as each Party may reasonably require to determine the appropriate settlement between the Parties. At a minimum, the monthly statement shall contain the type of service, the Inmarsat Ocean Region, the number of calls, the minutes carried and the rates applicable to each minute. Such monthly statement shall be provided via a printed statement until implementation of settlement disk processing. The Parties shall reduce to a net balance the sum due in U.S. Dollars each month from each Party to the other Party. Net balances due from one Party ("Debtor Party") to the other Party ("Creditor Party") shall be paid by the Debtor Party to the Creditor Party. Settlement of net balances shall be made within forty-five (45) days of receipt of invoice from the Creditor Party. The inability of a Party to collect from its end users shall not relieve such Party's obligation to make payment to the other Party for services rendered hereunder. 6.2 Billing Disputes. Each Party is responsible for the accuracy of any accounting statement or invoice that it submits to the other Party. An accounting statement shall be deemed to have been accepted by the Party to whom it is rendered if such Party does not object in writing thereto before the end of the second calendar month following the month in which the account is transmitted by the Party rendering it. Agreed adjustments shall be included in the following monthly accounting statement. Objections to an invoice that are not raised within twelve (12) months of the date on which an invoice is received by a Party shall be deemed waived by such Party and such invoice shall be deemed final. 6.3.1 Taxes. Each Party shall be responsible for its own tax or tax related surcharges determined by reference to income, net worth, franchise or property and any other tax imposed directly on the Party. 6.3.2 With regard to services originated and billed to a purchaser by MCI, MCI agrees to be responsible for the determination, collection and remittance of all appropriate taxes imposed thereon including but not limited to United States federal excise, state and local sales, gross receipts and similar taxes. With regard to services originated and billed to a purchaser by COMSAT, COMSAT agrees to be responsible for the determination, collection and remittance of all appropriate taxes imposed thereon including but not limited to United States federal excise, state and local sales, gross receipts and similar taxes. In the event that an exemption certificate is required by either Party, all efforts will be made to provide such certificate to the requesting Party. 7. TERMINATION. 7.1 Termination . This Agreement may be terminated by either Party ("Terminating Party") to the other Party (the "Defaulting Party") in the event that one (1) or more of the following events shall occur and which event(s) shall not have been cured within the thirty (30) day period from the date of written notice thereof from the Terminating Party to the Defaulting Party: (a) failure of the Defaulting Party to pay any sum due and owing to the Terminating Party within the payment period specified in Section 6 hereof; or (b) failure of the Defaulting Party to perform any material obligation contained in this Agreement. 7.1.1 Consequence of Termination. Termination or expiration of this Agreement in accordance with its terms shall not release the Parties hereto from any liability which at the time of termination or expiration has already accrued or which thereafter may accrue in respect of any act or omission of a Party prior to such termination or expiration, or from any obligation which is expressly stated in this Agreement to survive termination or expiration. 7.1.2 Upon expiration or termination of this Agreement: a. Neither Party shall be obligated to provide its services to the other Party; b. Each Party shall return or destroy all Confidential Information of the other Party in its possession no later than five (5) business days following the termination or expiration date; and c. All mutual indebtedness of the Parties that shall have accrued as of the date of termination or expiration shall become due and payable within thirty (30) days thereof. 8. LIABILITY; GENERAL INDEMNITY 8.1 In no event shall either Party be liable to the other Party for any special, indirect, incidental, punitive, consequential or exemplary damages, including without limitation loss of revenue, loss of profits, loss of clients or goodwill arising in any manner from this Agreement and the performance or nonperformance of business hereunder. 8.2 With respect to the service that each Party provides to the other Party hereunder, neither Party shall be liable for, and expressly disclaims any liability to the other Party, its customers, assigns or any other person or entity for any damages, claims, liability, expenses, or loss, regardless of the degree of fault or failure, including but not limited to damage to property and claims for personal injury or death, sustained by the other Party, its customers, assigns or any other person or entity for any reason relating to the unavailability, delay, outage, interruption, disruption, break-down, degradation, error in transmission, or failure arising out of, relating to, or in any way associated with the Services, satellites, land earth stations, equipment, operations, or facilities that are involved in the performance of this Agreement, regardless of the cause or causes thereof, and regardless of whether or not attributable to any negligent act or omission or whether or not such act or omission constitutes, with respect to any person or entity, failure to meet any of its obligations. 8.3 With respect to the COMSAT Services provided hereunder, MCI agrees that Inmarsat shall not be liable to the same extent as the disclaimers of liability in this Article. 8.4 Each Party agrees to include, in any contract, agreement, tariff or other undertaking between it and any customer or assign relating to the services, operations, equipment or facilities involved in the performance of this Agreement, a provision stating that the disclaimers of liability as set forth above shall apply in full to said contract, agreement, tariff or other undertaking. 9. FORCE MAJEURE 9.1 Except for payment obligations, neither Party shall be liable for failure to perform under this Agreement due to any act, event or cause beyond its reasonable control ("Force Majeure Event") including, but not limited to: Acts of God, peril of the sea, accident of navigation, war, sabotage, riot, insurrection, civil commotion, national emergency (whether in fact or by law), martial law, fire, lightning, flood, cyclone, earthquake, landslide, storm or other adverse weather conditions, explosion, power shortage, strike or other labor difficulty (whether or not involving COMSAT employees), epidemic, quarantine, radiation or radioactive contamination; Action or inaction of any government or other competent authority, (including any court of competent jurisdiction), including expropriation, restraint, prohibition, intervention, requisition, requirement, direction or embargo by legislation regulation, decree or other legally enforceable order; and Breakdown of plant, machinery or equipment, externally caused transmission interference or satellite failure, or satellite launch failure or delay, or satellite malfunction, or shortages of labor, transportation, fuel, power or plant, machinery, equipment or material. 9.2 In the event that a Force Majeure Event exceeds thirty (30) consecutive days, then following such thirty-day period, the Parties shall meet and negotiate the continuation, suspension, termination, restructuring or other disposition of this Agreement. Upon removal or cessation of the Force Majeure Event, all obligations under this Agreement shall resume, unless the Parties determine to terminate or restructure the Agreement. 10. ASSIGNMENT This Agreement shall not be assigned or transferred by either Party without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, either Party may, without the other's consent, make an assignment to a successor, affiliate, subsidiary, or to any entity controlling or under the same control as such a Party. 11. GOVERNMENT APPROVALS 11.1 All agreements covenants, undertakings and obligations herein made or assumed by the Parties hereto are subject to the obtaining of all necessary governmental licenses, consents, permits, authorizations, and approvals. Each Party shall obtain and continue to maintain such licenses, consents, permits, authorizations, and approvals. 11.2 Both Parties represent and warrant that they have been authorized as common carriers by the FCC pursuant to Section 214 of the Communication Act of 1934, as amended. A copy of this Agreement shall be filed with the FCC pursuant to Section 211 of such Act and shall seek confidential treatment of such filing. 12. CONFIDENTIALITY 12.1 The Parties hereby agree that it may be necessary to the performance of this Agreement for a Party (the "Disclosing Party") to disclose to the other Party (the "Receiving Party") certain information that each Party deems to be confidential and proprietary. The Receiving Party shall maintain the security and confidentiality of all Confidential Information received from the Disclosing Party hereunder. 12.2 For purposes hereof, "Confidential Information" shall include business and technical information or data relating to the Disclosing Party and its representatives that is reduced to writing and marked "Confidential" by the Disclosing party. Notwithstanding anything contained herein to the contrary, Confidential Information shall not include (i) information developed independently by the Receiving Party or lawfully received from a third party not under an obligation of confidentiality; or (ii) information in the public domain; or (iii) information known by Receiving Party prior to the execution of this Agreement; or information disclosed pursuant to law; (iv) judicial order or governmental regulation. 12.3 The Receiving Party shall not use nor communicate, directly or indirectly, any of the Confidential Information to any third party without the prior written consent of the Disclosing Party. The Receiving Party shall use its best efforts to prevent inadvertent disclosure of all or any part of the Confidential Information to any third party. 12.4 The Receiving Party's obligations under this Article shall continue for a period of two (2) years after the termination or expiration of this Agreement with respect to each item of Confidential Information disclosed hereunder. Upon such expiration or termination, the Receiving Party shall return or destroy all Confidential Information of the other Party in its possession. 13. INTELLECTUAL PROPERTY RIGHTS The Parties agree that trademarks, inventions, patents, copyrights, registered designs, service marks, trade names and all other intellectual property shall remain in the ownership of the person or party originating the same and nothing herein shall confer or be deemed to confer on either Party expressly, implied or otherwise, any rights or licenses in the intellectual property of the other. 14. AMENDMENT This Agreement together with all Attachments and Exhibits, may be amended, modified or amplified only by written agreement signed by authorized representatives of both Parties. 15. WAIVER OF TERMS No waiver by either Party of any provision of this Agreement shall be binding unless expressly confirmed in writing. Further, any such waiver shall relate only to such particular matter, non-compliance or breach as it expressly relates to and shall not apply to any subsequent or other matter, non-compliance or breach. 16. GOVERNING LAW AND FORUM 16.1 The existence, validity, construction, operation and effect of this Agreement shall be determined in accordance with and be governed by the laws of the State of New York. 16.2 Any dispute arising out of or related to this Agreement, which cannot be resolved by negotiation within thirty (30) days following the date on which written notice of a dispute has been given to the other Party, shall be settled by binding arbitration in accordance with the J.A.M.S./ENDISPUTE Arbitration Rules and Procedures, as amended by this Agreement. The number of neutral arbitrators shall be three (3), one appointed by each Party, and the third appointed by the other two arbitrators. The place of arbitration shall be Washington, D.C. The costs or arbitration, including the fees and expenses of the arbitrators, shall be shared equally by the parties unless the arbitration award provides otherwise. Each party shall bear the cost of preparing and presenting its case. The parties agree that this provision and the arbitrator's authority to grant relief shall be subject to the United States Arbitration Act, 9 U.S.C. 1-16 et seq. ("USAA") and the provisions of this Agreement. The arbitrators shall comply with the ABA-AAA Code of Ethics for Arbitrators in Commercial Disputes. The parties agree that the arbitrators shall have no power or authority to make awards or issue orders of any kind except as expressly permitted by this Agreement, and in no event shall the arbitrators have the authority to make any award that provides for punitive or exemplary damages. The arbitrators' decision shall be final and binding. The award may be confirmed and enforced in any court of competent jurisdiction. All post-award proceedings shall be government by the USAA. 17. NOTICES 17.1 All notices, invoices and other communications made hereunder shall be given in writing and shall be deemed to have been duly given and effective (i) upon receipt, if delivered in person or by telecopy, with confirmation; or (ii) one (1) day after deposit prepaid with a U.S. domestic overnight express service for domestic delivery; or (iii) three (3) days after deposit in the United States mail, certified, postage prepaid, return receipt requested; or (iv) five (5) days after deposit with an overnight express service for international delivery service. Notices to COMSAT of a contractual nature shall be directed to the following address: COMSAT Mobile Communications 6560 Rock Spring Drive Bethesda, Maryland 20817 Attention: Contracts Department Telephone Number: (301) 214-3450 Facsimile Number: (301) 214-7113 Notices to COMSAT related to invoices and collections shall be directed to the following addresses: COMSAT Mobile Communications 6560 Rock Spring Drive Bethesda, Maryland 20817 Attention: Revenue Accounting Department Telephone Number: (301) 214-3000 Facsimile Number: (301) 214-7113 Notices to MCI of a contractual nature shall be directed to the following address: MCI International, Inc. MCI Worldcom, Inc. 2 International Drive 1717 Pennsylvania Avenue, N.W. Rye Brook, New York 10573 Washington, D.C. 20006 Attention: Attention: International Commercial Affairs Law and Public Policy Telephone Number: Facsimile Number: Facsimile Number: (202) 721-2549 Notices to MCI related to invoices and collections shall be directed to the following address: MCI International, Inc. 2 International Drive Rye Brook, New York 10573 Attention: Telephone Number: Facsimile Number: 18. MISCELLANEOUS 18.1 No Third Party Beneficiary. The provisions of this Agreement are for the benefit only of the Parties hereto, and no third party may seek to enforce or benefit from those provisions. 18.2 No Partnership Or Agency Relationship. The relationship between COMSAT and MCI shall not be that of partners or agents of one another, and nothing contained in this Agreement shall be deemed to constitute a partnership or agency agreement between them. 18.3 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of each Party's successors and permitted assignees. 18.4 Headings. The titles in the headings of paragraphs are intended for organization and convenience only and do not apply in the interpretation of any of the Agreement terms. 18.5 Survival of Terms. The terms and provisions contained in this Agreement that by their sense and context are intended to survive the performance thereof by the Parties hereto shall so survive the completion of 18.6 Rule of Construction. No rule of construction requiring interpretation against the drafting party hereof shall apply in the interpretation of this Agreement. 19. ENTIRE AGREEMENT This Agreement, together with all attachments incorporated herein specifically by reference, represents the entire understanding of the Parties with respect to the subject matter hereof and all other agreements (written or oral) between the Parties relating to the Service shall be superseded by this Agreement. 20. SEVERABILITY If any one or more of the provisions contained in this Agreement or any document executed in connection herewith shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired; provided, however, that in such case the Parties agree to use their best efforts to achieve the purpose of the invalid provision by a new legally valid stipulation. 21. SUPERSEDES OTHER AGREEMENTS This Agreement specifically supersedes and cancels the Agreement dated 1 September 1993, entered into by COMSAT and MCI International, Inc., which Agreement shall be null and void, except for any liabilities of the Parties that arise thereunder prior to the date of such cancellation and which remain outstanding. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in counterparts on the day and year first above written. COMSAT Mobile Communications, MCI International, Inc. a business unit of COMSAT Corporation /s/ Carol M. Schoonhoven /s/ Anthony Cirieco CAROL M. SCHOONHOVEN ANTHONY CIRIECO 20 NOVEMBER 1998 11/6/98 EX-10.32 3 INTERCONNECTION & SERVICE AGREEMENT EXHIBIT 10.32 INTERCONNECTION AND SERVICES AGREEMENT between AT&T Maritime Services and COMSAT Mobile Communications June 1, 1996 TABLE OF CONTENTS 1. Interconnection of Facilities........................................2 2. Circuit Restoration and Rerouting....................................2 3. Service Offerings................................................... 3 4. Service Modification.................................................4 5. Traffic Volumes and Rates............................................4 6. Accounting and Settlement Procedures.................................5 7. Failure to Pay.......................................................7 8. Technical Standards and Methods of Operation.........................7 9. Exchange of Proprietary Information..................................7 10. Governmental Approvals...............................................8 11. Prior Agreements.....................................................9 12. Notices..............................................................9 13. Duration and Termination of Agreement................................9 14. Change in Circumstances..............................................9 15. Limitation of Liability.............................................10 16. Assignment..........................................................10 17. Governing Law.......................................................10 18. Severability........................................................10 19. Waiver..............................................................11 20. Execution and Amendment.............................................11 INTERCONNECTION AND SERVICES AGREEMENT THIS AGREEMENT, entered into this 1st day of June 1996, by and between COMSAT Corporation, acting through its business unit COMSAT Mobile Communications, a corporation organized and existing under the laws of the District of Columbia, with offices located at 6560 Rock Spring Drive, Bethesda, Maryland 20817 (hereinafter referred to as "COMSAT," which expression shall include its successors and permitted assignees) and AT&T Corp., acting through its business unit AT&T Mobile Satellite Services, a corporation organized and existing under the laws of the State of New York, with offices located at 101 JFK Parkway, Short Hills, New Jersey 07078 (hereinafter called "AT&T," which expression shall include its successors and permitted assignees). W I T N E S S E T H: WHEREAS, COMSAT and AT&T are both communications common carriers subject to the jurisdiction of the Federal Communications Commission ("FCC"); and WHEREAS, COMSAT offers mobile satellite communications services to and from mobile stations and COMSAT's Land Earth Station ("LES") facilities, with associated Mobile Satellite Switching Center ("MSSC") facilities, using satellite capacity obtained from the International Mobile Satellite Organization ("Inmarsat"); and WHEREAS, AT&T provides telecommunications services to and from customers in the United States and operates international telecommunications channels jointly with various foreign administrations and carriers (hereinafter "international correspondents") for the furnishing of its authorized services between points in or served via the United States and other points outside the United States (hereinafter referred to as "international" or "overseas" points); and WHEREAS, COMSAT and AT&T have previously interconnected their facilities and exchanged traffic so as to permit the provision of telecommunications services between mobile earth stations located outside the United States and points in the United States served by AT&T, and international points served by AT&T with its correspondents; and WHEREAS, it is the desire of AT&T and COMSAT to enter into a new inter-carrier agreement, and to establish terms and conditions for the exchange of traffic as each may choose to deliver to the facilities of the other; NOW, THEREFORE, in consideration of the mutual covenants contained herein, COMSAT and AT&T agree as follows: 1. Interconnection of Facilities a. COMSAT and AT&T agree to continue to interconnect COMSAT's LES/MSSC facilities and AT&T's switched network facilities to provide voice and data telecommunications services between the geographic and ocean regions covered by the Inmarsat system served by COMSAT and points in the United States and international points served by AT&T. b. The interconnecting circuits to be used in providing the services set forth in this Agreement shall be such circuits between COMSAT's MSSC facilities and AT&T's International Switching Centers ("ISC facilities") as may presently exist and such additional or replacement circuits as the parties may from time to time agree upon. c. Each party shall be responsible for providing and maintaining, at its own expense and liability, the circuits located on its side of the interconnecting circuits. COMSAT shall reimburse AT&T for half of AT&T's direct cost of terrestrial circuits connecting AT&T's ISC facilities and COMSAT's MSSC facilities. The number of circuits necessary for the provision of services hereunder shall be mutually agreed between the parties, based on the amount of traffic to be exchanged between the parties. d. COMSAT and AT&T agree that this Agreement is not exclusive. Accordingly, each party shall have the right to interconnect with other telecommunications and satellite service providers to exchange traffic including, but not limited to, the services set forth in this Agreement, consistent with applicable laws. 2. Circuit Restoration and Rerouting a. Each party shall advise the other party in writing as soon as practicable, and in any event no later than twenty-four (24) hours after it becomes aware of the occurrence, of any facility failure in its network that is causing any significant impairment or interruption of service provided under this Agreement, and the party experiencing the failure shall make all reasonable efforts to implement prompt restoration of service. b. COMSAT shall make arrangements, as commercially practicable, with foreign telephone administrations for rerouting and restoration of service in the event of disruption of mobile satellite communications service through COMSAT's LES facilities, and in such cases shall make such alternative facilities available to route AT&T mobile satellite traffic. c. For maintenance and operational purposes, both AT&T and COMSAT agree that the mobile satellite telephony services provided hereunder shall be treated with no less diligence than either party treats its other telephony services. 3. Service Offerings a. Voice Message Telecommunications Services AT&T and COMSAT hereby agree to make the following voice message telecommunications services available to end users to the extent practicable: (i) Directory Assistance. COMSAT will make available mobile directory assistance, including but not limited to mobile station listings. AT&T will make available directory assistance for U.S. shore points. (ii) Conference Calling Capabilities. (iii) Mobile Terminal to Mobile Terminal Calling. (iv) Person/Station Calling. Both person-to-person and station-to-station calls will be permitted by COMSAT and AT&T for maritime and international land mobile satellite service. Only station-to- station calls will be provided by COMSAT and AT&T for aeronautical satellite telephone service. (v) Calling Card Calls. To the extent AT&T is able to bill COMSAT's mobile-to-fixed tariffed rates, COMSAT shall have the right to accept AT&T's Calling Cards on calls from mobile stations outside the U.S. to the U.S. and international points as long as the Calling Card is validated (i.e., a positive or indeterminate response is received from the validator system). To the extent changes to COMSAT's tariff require modifications to AT&T billing systems or billing rates in connection with Calling Card calls, AT&T shall use its reasonable efforts to make such modifications. AT&T shall notify COMSAT promptly and in writing as to whether such modifications can be made by AT&T. Notwithstanding the foregoing, COMSAT shall not route any mobile-to-fixed 800 calls to AT&T until AT&T notifies COMSAT otherwise, and until such time COMSAT shall not bill AT&T in connection with any such calls. (vi) Collect Calls. Except for collect calls to coin telephones, collect calls shall be permitted by COMSAT and AT&T in both directions between mobile stations and fixed locations within the United States, excluding Alaska. (vii) Distress and Safety. Messages and replies in connection with situations involving maritime and aeronautical safety will be handled in compliance with national and international regulations. b. Data, Facsimile and Other Digital Network Services Transmission of data, facsimile and other digital services will be permitted over the network facilities of AT&T and COMSAT to the extent practicable. 4. Service Modification The services listed in Article 3 above may be modified and other services added by written agreement of the parties. Each party reserves the right (subject to any FCC requirements) to discontinue any individual customer service set forth in Article 3 upon ninety (90) days prior written notice to the other party. The decision by either party to discontinue any individual service shall not constitute a termination of any other service, nor can the procedure established by this Article for individual service modification be utilized to terminate this Agreement substantially or in its entirety. 5. Traffic Volumes and Rates a. AT&T will pay COMSAT $6.50 per minute for the space and earth station segments of fixed-to-mobile traffic to Inmarsat Standard A terminals for traffic up to one million minutes per year. For Inmarsat A traffic volumes exceeding that amount, COMSAT agrees to reduce the foregoing rate in accordance with Attachment I hereto. For all fixed-to-mobile traffic to Standard M and Standard B terminals, AT&T will pay COMSAT $3.30 per minute for calls destined to the Atlantic and Pacific Ocean regions, and $2.95 per minute for calls destined to the Indian Ocean Region. b. COMSAT will pay AT&T $.20 per minute for all mobile-to-fixed calls terminating in the United States and for all Inmarsat mobile-to-mobile calls routed via AT&T for the terrestrial segment of that traffic and associated services. For mobile-to-fixed calls terminating outside the United States, COMSAT will pay AT&T's tariffed international long distance rates minus ten percent (10%). c. Inmarsat aeronautical calls shall be settled as follows: (i) For air-to-ground calls, COMSAT shall pay AT&T $.20 per minute. (ii) For ground-to-air calls, AT&T shall pay COMSAT $6.50 per minute. d. Notwithstanding anything to the contrary in this Agreement, except in regards to the proportion of traffic described in Article 6.a.(6), neither AT&T nor COMSAT commits to send the other party any traffic, nor does either party commit to any particular volume or type of traffic, by reason of this Agreement. Each party reserves the absolute right to adjust or change the volume of traffic it sends to the other party. In this connection, and without limitation, COMSAT and AT&T agree that there will be no shortfall obligation, charge or penalty for a party's failure to deliver any traffic volumes, even if the reason for such action is within the control of such party. e. Any tariff changes affecting services provided in conjunction with this Agreement shall be provided by written notice in the manner set forth in Article 12 by the party making the changes to the other party on or before the date the tariff changes are submitted to the FCC, provided, in any event, that COMSAT shall notify AT&T of Calling Card tariff changes no less than fifteen (15) days before the tariff is to become effective. 6. Accounting and Settlement Procedures a. Monthly Statements (1) Each party shall be responsible for the billing and collection of charges to its respective customers. (2) Each party shall render to the other a monthly statement of the messages provided during the month to which the statement relates, expressed in seconds, but with totals rounded to the next full minute and showing the portion of revenues due to the other party calculated on the basis of the rates set forth in Article 5. Each line item total shall be rounded up to the next full minute. Such statements shall be forwarded to the other party as soon as practicable after the calendar month to which the statement relates, but in no event later than the end of the second calendar month following the month to which the statement relates. The monthly statements shall include any accounting information received through international settlements. This traffic will be reported and included in the monthly statements no later than one (1) month following the date it is reported to the party. Both parties acknowledge that international traffic may be reported over time (in some instances in excess of one (1) year after service was provided). (3) Each party shall have the right to make credit adjustments to its customers with respect to periods in which transmission is interrupted or defective, and to reflect, in its monthly statements to the other party, deductions for such interrupted or defective transmissions, provided that such deductions or adjustments are reasonable and are made before the monthly statement is forwarded to the other party. COMSAT shall validate all AT&T Calling Card calls. Without prejudice to the foregoing and in addition to any other remedies AT&T may have at law or in equity, AT&T specifically reserves the right to block calls billed to any unvalidated AT&T Calling Card or deduct the value of such calls from its settlement payments to COMSAT in the event of nonpayment for the unvalidated call. (4) A statement shall be deemed to have been irrevocably accepted as free of discrepancies and errors by the party to whom it is rendered if that party does not object in writing within one year from the date the monthly statement is received. If an objection is made, the parties shall use their best efforts to settle promptly the disputed item or items. Adjustments that have been agreed upon by both parties shall be included in the next monthly statement. (5) The parties agree to exchange billing data only to the extent it is strictly necessary to respond to a specific customer inquiry. This exchange shall be made in a timely manner (per recommendations of the International Telegraph and Telephone Consultation Committee ("CCITT")), in a format to which both parties agree, and in accordance with all applicable legal requirements. (6) Where COMSAT and a foreign telephone administration have entered into an agreement providing for that telephone administration's routing of traffic originating in its territory and terminating via COMSAT's Inmarsat facilities, and AT&T provides connecting service to that administration with respect to such traffic, AT&T hereby agrees to route to COMSAT such traffic equal to the share of all traffic such telephone administration has agreed to so route to COMSAT. Where AT&T provides connecting service with respect to such traffic, AT&T agrees to accept payment from such foreign telephone administrations through the settlement process on behalf of COMSAT, but shall not be required to bill, collect from, or determine the method of payment of end users and shall not be responsible for late or non-payment from such telephone administrations. Any payments received by AT&T from such administrations on COMSAT's behalf shall be paid in accordance with Article 6.b. below. b. Payment of Net Balance The sums due each month from each party to the other as covered by each monthly statement shall be reduced to a net balance by each party. Net balances due from one party to the other shall be paid monthly by the debtor party to the creditor party. Payment will be made as soon as practicable, but in no event later than forty-five (45) days after the monthly statement has been received from the creditor party. The payment of the net balance due with respect to undisputed amounts on a statement, except to the extent that such amounts are uncollected settlement payments from a foreign telephone administration, shall not be delayed pending agreement to the adjustment of disputed items of that statement. c. Other Matters Payments made and statements rendered under this Agreement from one party to the other shall be in U.S. currency. AT&T hereby commits to work with COMSAT on a regular basis to review and streamline the accounting and settlement process in an effort to improve the timeliness of payments. 7. Failure to Pay Subject to the terms of Article 6.a. and Article 6.b. of this Agreement, upon failure of a party to pay a net balance in accordance with Article 6.b., the party to whom such balance is owed may, ninety (90) days after delivering notice in writing to the other party, and subject to FCC requirements, suspend its participation in the services covered hereby, and said party shall be deemed released from its obligations under this Agreement for so long as any balance due shall remain unpaid. This provision does not limit any other legal or equitable remedies available under this Agreement. 8. Technical Standards and Methods of Operation Except as otherwise agreed by the parties, the technical standards and methods of operation applied by the parties to the exchange of traffic hereunder shall conform to the applicable recommendations of the CCITT and to any revisions of same. 9. Exchange of Proprietary Information a. In connection with the provision of services pursuant to this Agreement, COMSAT and AT&T may each disclose to the other certain marketing, financial, billing, technical, and other information which is proprietary or confidential to the disclosing party or its affiliated companies (hereinafter referred to as "Information"). For purposes of this Agreement, such Information shall include, but not be limited to, engineering information, hardware, software, drawings, models, samples, tools, technical specifications, and documentation, in whatever form recorded or orally provided. b. The receiving party shall hold Information in confidence, shall use such Information only for the purpose of performing this Agreement, shall reproduce such Information only to the extent necessary for such purpose, shall restrict disclosure of such Information to its employees and employees of its affiliated companies with a need to know (and inform such employees of the obligations assumed herein), and shall not disclose such Information to any third party without prior written approval of the other party. These restrictions on the use or disclosure of information shall not apply to any Information: (i) that is independently developed by the receiving party or its affiliated companies or lawfully received free of restriction from another source having the right to so furnish such Information; (ii) that has become generally available to the public without breach of this Agreement by the receiving party or its affiliated companies; (iii) that at the time of disclosure to the receiving party was known to such party or its affiliated companies free of restriction and evidenced by documentation in such party's possession; (iv) that the disclosing party agrees in writing is free of such restrictions; or (v) that is required to be made public by the FCC or other due legal process, provided the disclosing party is notified promptly by the receiving party of any such requirement to make the Information public. c. Information shall be subject to the restrictions above, if it is in writing or other tangible form, only if clearly marked as proprietary or confidential when disclosed to the receiving party or, if it is not in tangible form, only if identified as proprietary or confidential at the time of disclosure and confirmed in writing within thirty (30) days of such disclosure. d. No license to a party, under any trademark, patent, copyright, mask work protection right or any other intellectual property right, is either granted or implied by the conveying of Information to such party. None of the Information which may be disclosed or exchanged by the parties shall constitute any representation, warranty, assurance, guarantee or inducement by either party to the other of any kind, and, in particular, with respect to the non- infringement of trademarks, patents, copyrights, mask work protection rights or any other intellectual property rights, or other rights of third persons. e. All Information shall remain the property of the transmitting party and shall be returned upon written request or upon the receiving party's determination that it no longer has a need for such Information. f. Each party agrees that all of its obligations undertaken in Article 9 herein as a party receiving Information shall survive and continue after termination of this Agreement. 10. Governmental Approvals All undertakings, obligations and rights of the parties hereto are subject to all necessary governmental licenses and approvals, and to all other applicable legal requirements. This Agreement shall not be construed or interpreted to prejudice the rights either party may have to provide any services it is or becomes lawfully authorized to provide, or in any way limit the ability of each party to present any regulatory or other legal position, or to request or oppose any grant of authority, in any appropriate legal forum. 11. Prior Agreements This Agreement supersedes all previous agreements (including all amendments thereto) between COMSAT and AT&T regarding the provision of mobile satellite telephone services using the Inmarsat system. 12. Notices Any notice under this Agreement shall be in writing and shall be deemed sufficient if sent by first class mail, facsimile or telex to the following address, or any superseding address so notified hereunder, and shall be effective upon receipt. To COMSAT: COMSAT Mobile Communications 6560 Rock Spring Drive Bethesda, Maryland 20817 Attention: Director-Contracts To AT&T: AT&T Corp. 101 JFK Parkway Short Hills, New Jersey 07078 Attention: District Manager Maritime Services 13. Duration and Termination of Agreement This Agreement will be effective as of June 1, 1996, and subject to the provisions contained herein, shall continue in full force and effect until December 31, 1997. Subsequent to the initial term, the Agreement shall continue in full force and effect unless terminated by either party upon ninety (90) days prior notice in writing. 14. Change in Circumstances If, during the term of this Agreement, any U.S. governmental action or other significant change in circumstances renders either party unable to perform or results in significant economic detriment or competitive disadvantage to a party, such party may request in writing that the terms of this Agreement be renegotiated. Upon such request, the parties agree to negotiate, promptly and in good faith, methods to resolve the competitive disadvantage, economic detriment or inability to perform. However, if no such mutual agreement can be reached within a period of ninety (90) days with respect to a party's inability to perform under this Agreement, either party may terminate this Agreement without further cost or liability, except for any unpaid amounts owed by a party hereunder at the time of such termination. 15. Limitation of Liability Neither party nor its parent, subsidiaries, or affiliates shall be liable to the other for any failure in or breakdown of the communications facilities or interruption to same associated with the functioning of the services set forth in this Agreement no matter what the cause. Each party's liability to the other for any loss, cost, claim, injury, liability, or expense, including reasonable attorneys' fees, relating to or arising out of any negligent act or omission in its performance of this Agreement (not involving knowing or willful misconduct or a failure, breakdown or interruption of communication facilities or services provided hereunder) shall be limited to the amount of direct damage actually incurred. NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER, INCLUDING LOSS OF PROFITS OR REVENUES. EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER PARTY MAKES ANY WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED. 16. Assignment Neither party may assign this Agreement except to a parent or wholly-owned subsidiary in connection with the transfer of responsibility for the services provided under this Agreement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. 17. Governing Law This Agreement shall be governed by the laws of the State of Maryland, United States of America, without regard to the conflict of law principles thereof. This Agreement shall also be subject to all applicable laws of the United States, including without limitation the Communications Act of 1934, as amended and U.S. Export Control laws. 18. Severability If any term or provision of this Agreement shall be found to be illegal or unenforceable, then such term or provision shall be deemed stricken, and the remainder of this Agreement shall continue in full force and effect. 19. Waiver No term or provision of this Agreement shall be deemed waived by either party unless such waiver is in writing and signed by that party. 20. Execution and Amendment This Agreement is executed in two copies, both of which shall be considered originals with identical legal effect. This Agreement may be modified or amended only by written agreement of the Parties. IN WITNESS WHEREOF, the parties hereto have severally subscribed these presents or caused them to be subscribed, in their name and behalf by their respective officers thereunto duly authorized. AT&T Maritime Services AT&T CORP. By: /s/ Mario Persico Name: Mario Persico Title: District Manager Date: June 25, 1996 COMSAT Mobile Communications COMSAT Corporation By: /s/ Thomas Collins Name: Thomas Collins Title: VP & GM, CMC Date: 6/20/96 EX-10.50 4 MASTER LEASE AGREEMENT EXHIBIT 10.50 MASTER LEASE AGREEMENT BY AND BETWEEN LCOR CLARKSBURG L.L.C., AS LANDLORD AND COMSAT CORPORATION, AS TENANT CLARKSBURG, MONTGOMERY COUNTY, MARYLAND Version 10 TABLE OF CONTENTS INTRODUCTION Section 1. DEFINITIONS......................................................1 Section 2. LEASE OF MASTER LEASE PROPERTY...................................2 Section 3. TERM.............................................................2 Section 4. RENT.............................................................4 Section 5. USE OF THE MASTER LEASE PROPERTY.................................7 Section 6. DEVELOPMENT; DESIGNATION OF THE EXCLUDED AREAS...................9 Section 7. TAXES AND IMPOSITIONS...........................................11 Section 8. UTILITIES.......................................................15 Section 9. SIGNS...........................................................15 Section 10. AS-IS CONDITION OF MASTER LEASE PROPERTY........................16 Section 11. REPAIRS, MAINTENANCE AND MANAGEMENT.............................16 Section 12. ACCESS TO MASTER LEASE PROPERTY.................................18 Section 13. ALTERATIONS AND PERSONAL PROPERTY...............................19 Section 14. INSURANCE.......................................................22 Section 15. DAMAGE OR DESTRUCTION...........................................25 Section 16. INDEMNIFICATION.................................................31 Section 17. CONDEMNATION....................................................35 Section 18. LIENS...........................................................36 Section 19. EXISTING SPACE LEASES; ASSIGNMENT AND SUBLETTING................37 Section 20. SUBORDINATION OR SUPERIORITY OF LEASE...........................40 Section 21. DEFAULTS AND REMEDIES...........................................40 Section 22. BANKRUPTCY OR INSOLVENCY........................................45 Section 23. SURRENDER OF MASTER LEASE PROPERTY..............................47 Section 24. NON-CONSENSUAL HOLDING OVER.....................................48 Section 25. QUIET ENJOYMENT.................................................48 Section 26. NOTICES.........................................................48 Section 27. HAZARDOUS MATERIALS.............................................49 Section 28. RIGHT TO RENEW TERM.............................................52 Section 29. SECURITY DEPOSIT................................................54 Section 30. MISCELLANEOUS GENERAL PROVISIONS................................54 SCHEDULE I Defined Terms SCHEDULE II Deductibles SCHEDULE OF EXHIBITS Version 10 MASTER LEASE AGREEMENT THIS LEASE AGREEMENT (this "Lease") is entered into and made effective as of the 12th day of September, 1997 (the "Effective Date"), by and between LCOR CLARKSBURG L.L.C., a Delaware limited liability company ("Landlord") and COMSAT Corporation, a District of Columbia corporation ("Tenant"). WITNESSETH: (a) Prior to but contemporaneously with the execution and delivery of this Lease, Tenant sold and transferred the Master Lease Property to Landlord pursuant to that certain Agreement of Sale dated the Effective Date, by and between Tenant, as seller, and Landlord, as purchaser (the "Purchase and Sale Agreement"). (b) Landlord desires to lease to Tenant, and Tenant desires to lease back from Landlord, the Master Lease Property, all as set forth and on the terms and conditions contained in this Lease. NOW THEREFORE, in consideration of the mutual promises set forth in this Lease and other good and valuable consideration, the receipt and sufficiency of which are acknowledged by each party, Landlord and Tenant agree as follows: SECTION 1. DEFINITIONS (a) The following terms shall have the meanings ascribed thereto below: Agents: The agents, employees, contractors, subcontractors, affiliates, licensees and invitees of each party (and in the case of Tenant, subtenants). Excluded Areas: Any areas of the Master Lease Property excluded by Landlord pursuant to Section 6. Expiration Date: The ending date of the Term. Installations Premises: Certain portions of the Land as described or shown on Exhibit C attached hereto and made a part hereof, together with all improvements located thereon. Land: Approximately 227 acres of land located in Clarksburg, Montgomery County, Maryland, as described or shown on Exhibit A attached hereto and made a part hereof. Main Building: A building complex consisting of three buildings (the "Component Buildings") which, for the purposes of this Lease, Landlord and Tenant agree contain, in the aggregate, 496,000 gross square feet of space (the "Main Building Space"), located on the Land and commonly known as 22250, 22300, and 22240 Version 10 COMSAT Drive, Clarksburg, Maryland. Further, for the purposes of this Lease, Landlord and Tenant agree that the Component Buildings are designated as, and contain amounts of Main Building Space, as follows: Building A: The largest of the Component Buildings, commonly known as the primary building; 446,000 gross square feet; Building B: The second largest of the Component Buildings, commonly known as the Spectra building; 40,000 gross square feet; Building C: The smallest of the Component Buildings, commonly known as the etching and plating building; 10,000 gross square feet. Main Building Area: The Main Building and the Parking Areas, access drives, and other appurtenant areas serving the Main Building, as described or shown on Exhibit B attached hereto and made a part hereof. Master Lease Property: The Land, together with all improvements located thereon, less the Installations Premises and the Excluded Areas. The Master Lease Property includes, without limitation, the Main Building Area. Parking Areas: Those certain areas located in the Main Building Area and designated for use for parking of motor vehicles as of the Effective Date. Unimproved Area: The Master Lease Property, less the Main Building Area. (b) Other terms shall have meanings ascribed to such terms in this Lease and as shown on Schedule I attached hereto and made a part hereof. SECTION 2. LEASE OF MASTER LEASE PROPERTY Landlord, for and in consideration of the rents, covenants and agreements hereinafter reserved, mentioned and contained on the part of Tenant and its successors and assigns, to be paid, kept and performed, has leased, rented, let and demised, and by these presents does lease, rent, let and demise unto Tenant, and Tenant does hereby take and hire, upon and subject to the covenants, agreements, provisions, limitations and conditions herein expressed, the Master Lease Property. SECTION 3. TERM (a) The initial term of this Lease (the "Initial Term") shall be for a period of ten (10) years commencing on the Effective Date and ending at 11:59 p.m. local time on the day preceding the tenth anniversary of the Effective Date, unless Version 10 this Lease shall be sooner terminated as hereinafter provided or as provided by law. Notwithstanding the foregoing, if the Term ends on any day other than the last day of any calendar month, the Term shall be extended so that the last day of the Term is the last day of such calendar month. The Initial Term, as may be extended by exercise of the provisions of Subsection 3(b) or Section 28, may sometimes be collectively referred to in this Lease as the "Term". (b) Provided that no Event of Default exists on the date of the Holdover Notice or the date of commencement of the Holdover Period, Tenant may holdover under the terms of this Lease with respect to the Main Building Area for up to six (6) months immediately after the Initial Term, provided that: (i) Tenant provides Landlord with written notice (the "Holdover Notice") at least six (6) months prior to the Expiration Date of the Initial Term stating the number of months up to six (6) that Tenant will holdover under the terms of this Lease (the "Holdover Period"); and (ii) Tenant pays as Base Rent for each month during the Holdover Period, in addition to all other amounts payable under this Lease, one hundred twelve and 75/100ths percent (112.75%) of the full monthly installment of Base Rent due in the last year of the Initial Term. If Tenant exercises this holdover right, then, upon commencement of the Holdover Period, any portions of the Unimproved Area remaining subject to this Lease at the expiration of the Initial Term shall automatically be released from this Lease as Excluded Area as if released under Section 6; provided, however, that after the commencement of the Holdover Period, Tenant shall not record any instrument confirming the grant of easements described in Section 6(d). At its sole election, Tenant may exercise its right to the Holdover Period with respect to less than all of the Main Building Area. If Tenant desires to so holdover with respect to less than all of the Main Building Area, Tenant shall designate in the Holdover Notice the space in which it desires to holdover in the Main Building, but in no event less than two hundred fifty thousand (250,000) gross square feet (including the aggregate gross square footage of the area of the Main Building then leased under Existing Space Leases and Subleases, the terms of which have been extended beyond the Expiration Date of the Initial Term with Landlord's approval) (the "Holdover Space"). Tenant's payments of Base Rent and payments of Additional Rent during the Holdover Period shall be reduced to the proportion that the Holdover Space bears to the Main Building Space and Tenant shall have the nonexclusive right during the Holdover Period to use the Parking Areas, access drives, and all other common areas within the Main Building Area. If Tenant designates a part of the Holdover Space in Building B in the Holdover Notice, Tenant shall be required to holdover in the entirety of Building B. If Tenant designates a part of the Holdover Space in Building C in the Holdover Notice, Tenant Version 10 shall be required to holdover in the entirety of Building C. The amount of square footage comprising the Holdover Space designated in Building A shall be determined in accordance with the applicable standard of the Greater Washington Association of Commercial Realtors and such Holdover Space shall be so configured as to leave remaining space in Building A reasonably marketable to third party tenants; provided, however, this obligation shall not require Tenant to construct Alterations in order to leave such a marketable space. (c). As used in this Lease, the term "Lease Year" means each consecutive period of twelve (12) calendar months during the Term, commencing on the Effective Date. If, however, the Effective Date is other than the first day of a calendar month, the first Lease Year shall begin on the Effective Date and end on the first anniversary of the last day of the calendar month in which the Effective Date falls, and each succeeding Lease Year shall be each succeeding consecutive period of twelve (12) calendar months thereafter during the Term. SECTION 4. RENT (a) Tenant covenants and agrees to pay Landlord in lawful money of the United States, annual base rent for the Master Lease Property ("Base Rent") in twelve (12) equal monthly installments, in advance, on or before the first day of each and every month throughout the Term, as follows: (i) FOUR MILLION NINE HUNDRED SIXTY THOUSAND AND NO/100 DOLLARS ($4,960,000.00) during the first Lease Year. (ii) FIVE MILLION NINETY-SIX THOUSAND AND FOUR HUNDRED AND NO/100 DOLLARS ($5,096,400.00), during the second Lease Year. (iii) FIVE MILLION TWO HUNDRED THIRTY-SIX THOUSAND FIVE HUNDRED FIFTY-ONE AND NO/100 DOLLARS ($5,236,551.00), during the third Lease Year. (iv) FIVE MILLION THREE HUNDRED EIGHTY THOUSAND FIVE HUNDRED FIFTY-SIX AND 15/100 DOLLARS ($5,380,556.15), during the fourth Lease Year. (v) FIVE MILLION FIVE HUNDRED TWENTY-EIGHT THOUSAND FIVE HUNDRED TWENTY-ONE AND 45/100 DOLLARS ($5,528,521.45), during the fifth Lease Year. (vi) FIVE MILLION SIX HUNDRED EIGHTY THOUSAND FIVE HUNDRED FIFTY-FIVE AND 79/100 DOLLARS ($5,680,555.79), during the sixth Lease Year. (vii) FIVE MILLION EIGHT HUNDRED THIRTY-SIX THOUSAND SEVEN HUNDRED SEVENTY-ONE AND 07/100 DOLLARS ($5,836,771.07), during the seventh Lease Year. Version 10 (viii) FIVE MILLION NINE HUNDRED NINETY-SEVEN THOUSAND TWO HUNDRED EIGHTY-TWO AND 27/00 DOLLARS ($5,997,282.27), during the eighth Lease Year. (ix) SIX MILLION ONE HUNDRED SIXTY-TWO THOUSAND TWO HUNDRED SEVEN AND 54/100 DOLLARS ($6,162,207.54), during the ninth Lease Year. (x) SIX MILLION THREE HUNDRED THIRTY-ONE THOUSAND SIX HUNDRED SIXTY-EIGHT AND 24/100 DOLLARS ($6,331,668.24), during the tenth Lease Year. Notwithstanding the foregoing, if the Effective Date shall be a day other than the first day of a calendar month, there shall be due and payable on the Effective Date, as the installment of Base Rent for such fractional month, an amount determined by dividing the Base Rent for the first Lease Year by 365 and multiplying the result by the number of days from the Effective Date through the end of such month. (b) Tenant also covenants and agrees to pay, as additional rent (the "Additional Rent"), all sums, Impositions, costs, expenses and other payments which Tenant in any of the provisions of this Lease assumes, agrees or is obligated to pay, or which shall become otherwise due and payable from Tenant to Landlord under this Lease (other than Base Rent). Base Rent and Additional Rent may sometimes be collectively referred to herein as "Rent". (c) It is the purpose and intent of Landlord and Tenant that, except as explicitly set forth herein, the Base Rent shall be absolutely net to Landlord, so that this Lease shall yield, net to Landlord, the net annual rent specified in Subsection (a) of this Section 4 in each Lease Year during the Term and that all costs, expenses and obligations of every kind and nature whatsoever, in connection with or relating to the Master Lease Property shall be the obligation of Tenant and shall be paid by Tenant. (d) The Base Rent shall be paid to Landlord promptly when due without notice or demand therefor, and without any abatement (except as explicitly stated to the contrary in Section 8, Section 15 and Section 17), deduction or set-off for any reason whatsoever. (e) No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct Rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or as provided by law or in equity. Version 10 (f) If any of the Rent payable under the terms and provisions of this Lease shall be or become uncollectible, reduced or required to be refunded because of any rent control or similar act or law enacted by a valid governmental authority, Tenant shall enter into such agreements and take such other steps that Landlord may request and as may be legally permissible to permit Landlord to collect the maximum rents which, from time to time during the continuance of such legal rent restriction, may be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (i) the Rent shall become and thereafter be payable in accordance with the amounts reserved herein for the periods following such termination, and (ii) Tenant shall promptly pay to Landlord, to the maximum extent legally permissible, an amount equal to (a) the Rent which would have been paid pursuant to this Lease but for such legal rent restriction, less (b) the Rent paid by Tenant during the period such rent restriction was in effect. (g) All Rent and other payments required to be made by Tenant to Landlord shall be delivered to Landlord by wire transfer pursuant to the wire transfer instructions as shown on Exhibit D attached hereto and made a part hereof or to any other single party that Landlord may specify from time to time by written notice given to Tenant. (h) In recognition of the extra costs to Landlord resulting from Tenant's failure to make timely payment of any installment of Base Rent, if any such installment is not paid within nine (9) days after its due date, the delinquent amount shall be subject to a service charge of five percent (5%) of such delinquent amount, or such lesser charge as may be the maximum charge permitted by law. In addition, if any installment of Base Rent or any other sum due Landlord under this Lease remains unpaid seventy-five (75) days after its due date, the outstanding amount shall bear interest at an annual rate of two percent (2%) over the "Prime Rate" then prevailing or such lesser rate as may be the maximum rate permitted by law (the "Stipulated Rate"), and calculated from the due date of such sum and continuing through the date such sum is paid in full. As used in this Lease, the term "Prime Rate" means the prime rate of interest for large money center banks as published in the Money Rates section of the Wall Street Journal or if the Wall Street Journal ceases to publish such rate, as established by reference to such other authority as is generally accepted in the business community as a source for determining the "Prime Rate". SECTION 5. USE OF THE MASTER LEASE PROPERTY (a) The Main Building may be occupied and used for any lawful purpose and shall not be used for any other purpose. The remainder of the Main Building Area may be occupied and used for parking for, access to, Version 10 and other reasonable purposes incidental to use of the Main Building and shall not be used for any other purpose. The Unimproved Area shall not be occupied by Tenant but may be used by Tenant for (i) access to the Main Building Area via roads existing in the Unimproved Area as of the Effective Date, or as may be relocated as expressly provided for in this Lease, (ii) purposes which are incidental to use of the Main Building Area, such as use, maintenance, repair, and replacement of utilities, storm drainage facilities, and signage serving or used in connection with the Main Building Area, (iii) use, maintenance, repair, and replacement of antennae, satellite dishes, and other communications equipment located in the Unimproved Area as of the Effective Date (but such facilities, excluding footings, foundations, and concrete bases, shall be removed by Tenant at its own expense promptly after such Unimproved Area is excluded from this Lease under Section 6), (iv)reasonable recreation uses, such as use of the existing recreational facilities, (v) temporary activities and uses that Tenant reasonably deems desirable, and (vi) such limited purposes as are reasonably necessary in order for Tenant to fulfill its obligations under this Lease to Care for the Unimproved Area. Notwithstanding anything to the contrary contained in this Lease, with respect to the uses described in clauses (iv) and (v) above, (y) the Tenant shall ensure that such uses do not interfere with the Development, and (z) no action or omission of Landlord, or its Agents, successors and assigns that interferes with such uses shall be a default of Landlord under this Lease. (b) Tenant further agrees as follows: (i) Tenant and its Agents shall use the Master Lease Property and conduct its business thereon in a safe, careful, reputable and lawful manner. (ii) Tenant shall obtain, or cause to be obtained, all certificates, licenses and permits necessary for its, or its subtenants', occupancy, use, operation and maintenance of the Master Lease Property. Upon reasonable advance request by Tenant, Landlord shall reasonably cooperate with Tenant in Tenant's obtaining such necessary certificates, licenses or permits, including, without limitation, signing applications for the same within ten (10) business days after Tenant's request if Landlord's signing is required by Applicable Law or requested by a governmental authority; provided, that Landlord shall not be required to incur any out-of-pocket costs to third parties in connection therewith. Tenant shall promptly reimburse Landlord for any of its reasonable out-of-pocket costs to third parties for review or advice about such certificates, licenses or permits. (iii) Tenant shall not commit, nor allow to be committed, in, on or about the Master Lease Property, any act of waste, including any act which might deface, damage or destroy any improvement thereon, or any part thereof. Further, Tenant shall not permit any noise or odor to be emitted from the Master Lease Property which is unlawful or which constitutes a legal nuisance. Notwithstanding the foregoing, Tenant Version 10 shall not have any responsibility for any waste, noise, or odor caused by Landlord or its Agents. (iv) Tenant shall promptly comply in all material respects with all present and future laws, statutes, ordinances, rules, regulations and orders of any federal, state, municipal or other government or agency thereof having jurisdiction over and relating to the use, condition and occupancy of the Master Lease Property, and any covenants, conditions and restrictions of record existing as of the Effective Date and governing the Master Lease Property (collectively, the "Applicable Laws"). Tenant acknowledges that the Applicable Laws are of public record and that Tenant knows the character of its operation on the Master Lease Property. Tenant shall have sole responsibility for its compliance with the Applicable Laws in all material respects, and Tenant's inability to so comply shall not be cause for Tenant to terminate this Lease. Notwithstanding the foregoing: (A) Tenant shall not be required to comply with any Applicable Laws to the extent that Tenant or the Master Lease Property are legally grandfathered or exempt from the application of such Applicable Laws or Tenant may obtain from the appropriate authorities a waiver or variance with respect to compliance. (B) Tenant shall not be required to comply with any legal requirements in connection with the Master Lease Property arising out of or relating to the Development or arising out of other acts or omissions of Landlord or its Agents on or with respect to the Master Lease Property. All of such requirements on the Master Lease Property shall be promptly complied with by Landlord in all material respects, at its own expense. (C) Tenant shall not be obligated to correct any violations of Applicable Laws which may exist on the Master Lease Property as of the Effective Date, except to the extent specifically required to do so by written notice from the governmental authority having jurisdiction. (D) Tenant shall have the right to contest by appropriate legal proceedings, conducted diligently and in good faith, without expense to Landlord, the validity or application of any Applicable Laws. If compliance with the Applicable Law being contested may legally be delayed pending the prosecution of the proceeding, Tenant may delay compliance until the final determination of the proceeding. Landlord shall execute and deliver, within ten (10) business days after request by Tenant, any appropriate papers and/or other instruments that may be necessary to permit Tenant to contest the validity or application of the Applicable Law. Landlord shall otherwise reasonably cooperate with Tenant in the contest, provided that Landlord shall not be required to incur any out-of-pocket costs to third parties in connection therewith. Notwithstanding the Version 10 foregoing, Tenant shall ensure that any such contest does not cause any lien to be filed against the Master Lease Property or any portion thereof. SECTION 6. DEVELOPMENT; DESIGNATION OF THE EXCLUDED AREAS (a) Tenant acknowledges that, among other purposes, Landlord purchased the Master Lease Property for possible development and/or sale of all or portions of the Unimproved Area. Although Landlord is not required to develop or sell any of the Unimproved Area, Landlord is contemplating a mixed-use development thereon, consisting of, among other things, uses of varying densities, sizes and natures, and infrastructure in order to serve same (all or any portion thereof, the "Development"). The Development shall be at Landlord's sole cost. Tenant acknowledges that the Development may require Landlord to change the zoning classification as well as take other actions to change the land use and character of the Master Lease Property. Tenant covenants and agrees that during the Term it shall not object to, and shall reasonably cooperate with Landlord with respect to, Development by Landlord or its successors of any of the Unimproved Area and shall reasonably cooperate so as to avoid interference with the Development. Notwithstanding the foregoing: (i) The Development by Landlord shall not interfere with Tenant's or its subtenants' use of the Master Lease Property. (ii) No rezoning or other development approvals sought by Landlord for all or any part of the Master Lease Property shall prohibit, restrict, or make non-conforming any of the uses which may be conducted on the Main Building Area or Installations Premises under the I-3 zoning applicable to such property as of the Effective Date. (iii) Landlord acknowledges that the uninterrupted operation of antennae, satellite dishes, and other communications equipment now or in the future installed on the Main Building Area (the "Communications Facilities") is of critical importance to Tenant. Landlord shall not oppose the installation or continued operation of the Communications Facilities. (iv) Tenant shall not be required to incur any liability or out of pocket expense to third parties in providing cooperation to Landlord or its successors with respect to the Development. (b) At any time during the Term, without any consent of Tenant whatsoever, a portion of the Unimproved Area shall be excluded from the Master Lease Property immediately upon the occurrence of any of the following (each a "Triggering Event"): Version 10 (i) A written notice from Landlord to Tenant designating such portion of the Unimproved Area as an Excluded Area. The notice shall be accompanied by a legal description and drawing of the Excluded Area. (ii) The transfer of record title to or the ground lease of such portion of the Unimproved Area by Landlord to another party, including entities related to Landlord. (iii) The commencement of clearing or grading work for such portion of the Unimproved Area (in which event the Excluded Area shall include the land to be disturbed by the work, any borrow, fill, or stockpile areas, any areas for staging of equipment or materials, any areas upon which sediment control measures are to be implemented). Landlord may cause Triggering Events with respect to as many portions of the Unimproved Area, and as often, as Landlord may determine in its sole and absolute discretion. Landlord shall give Tenant written notice of the occurrence of the Triggering Events described in (ii) and (iii) above at least thirty (30) days before their anticipated dates of occurrence. The notice shall be accompanied by a legal description and plat of the Excluded Area. It is the intention of (iii) that no development work whatsoever shall be performed to any portion of the Unimproved Area while it remains subject to this Lease and that each such portion of the Unimproved Area must be excluded from the Master Lease Property before work begins. (c) Upon exclusion of an Excluded Area from the Master Lease Property, Tenant shall have no further rights or obligations under this Lease with respect to such Excluded Area. There shall be no reduction in Base Rent with respect to an Excluded Area, but Landlord and Tenant shall equitably apportion any Additional Rent with respect to such Excluded Area as of the date of exclusion and Landlord shall reimburse Tenant at the time of such exclusion in an amount equal to (i) any Impositions paid by Tenant, and (ii) any other expenses paid by Tenant (provided that such expenses are required to be paid by Tenant under this Lease) with respect to such Excluded Area and attributable to the period of time beginning with and following the date of exclusion. Such reimbursement shall be a condition precedent to exclusions of any property. In addition, Landlord, at its sole expense and as a condition precedent to exclusions of any property, shall cause such Excluded Area to be established as a separate tax parcel for the purposes of Impositions at the time such parcel is excluded. (d) In the event that an Excluded Area contains any road, utility line, drainage line, storm water management facility, sign, or other improvement or amenity then being used by Tenant in connection with the Main Building Area (collectively, "Appurtenances"), then, automatically upon exclusion of the Excluded Area, Tenant shall be deemed to have easements for the continued uninterrupted use of the Version 10 Appurtenances for so long as this Lease remains in effect. The easements provided for in this subsection shall include the right of Tenant to enter upon the Excluded Area to inspect, maintain, repair, and replace the Appurtenances. Notwithstanding the foregoing, Landlord may temporarily discontinue any of the Appurtenances for a period of not more than forty-eight (48) hours if Landlord provides Tenant with temporary Appurtenances, provided such temporary Appurtenances allow Tenant and its Agents to use the Master Lease Property without any material diminishment of Tenant's or its Agents' use of the Master Lease Property or any material interference with the business operations of Tenant or its subtenants on the Main Building Area. (e) Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to pay for any incremental, additional or increased Insurance or any increased costs of Care of the Master Lease Property which are attributable to Development or any other acts or omissions of Landlord or its Agents with respect to the Master Lease Property. (f) In addition to the easements for existing Appurtenances provided for in Subsection 6(d), Landlord shall grant to Tenant, or to any utility company or governmental authority designated by Tenant, such other easements for utilities, drainage, stormwater management, and other similar matters on, under, and across the Unimproved Area as may be reasonably required in connection with the use or occupancy of the Main Building Area and in accordance with this Lease ("Additional Easements"). No Additional Easements shall materially and adversely affect the Development or materially increase the cost of Development. Landlord shall have a reasonable right of approval of the location of all Additional Easements. All Additional Easements shall be granted without charge within ten (10) business days after written request by Tenant, accompanied by the instrument to be executed and a plat showing the location of the Additional Easement. Landlord shall make good faith and commercially reasonable efforts to cause its mortgagees to subordinate their liens against the Master Lease Property to any Additional Easements. SECTION 7. TAXES AND IMPOSITIONS (a) Tenant covenants and agrees to pay, not later than the first day on which any interest or penalty will accrue or be assessed for the non-payment thereof, all of the following items applicable to or affecting the Master Lease Property or any part thereof accruing or payable from and after the Effective Date and during the Term or applicable thereto: (i) all real estate taxes and assessments (including, without limitation, assessments for special business improvement or assessment districts), (ii) personal property taxes, (iii) occupancy and rent taxes specifically imposed on tenants in Montgomery County or attributable to the subtenants of Tenant, (iv) water and sewer rents, rates and charges, (v) vault taxes and charges, (vi) certificate, license and permit fees, (vii) any taxes, assessments or governmental levies, general and special, Version 10 ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever which at any time prior to or during or applicable to the Term or any part thereof may be assessed, levied, confirmed, imposed upon, or grow or accrue or become due and payable out of, or charged with respect to, or become a lien on, the Master Lease Property or any part thereof, or the sidewalks or streets in front of or adjoining the Master Lease Property, or any vault, passageway or space in, over or under such sidewalk or street, or any other appurtenances to the Master Lease Property, or any personal property, equipment or other facility used in the operation thereof, or any use or occupation of the Master Lease Property, or any document by which Tenant creates or transfers an interest or estate in the Master Lease Property (except any document releasing an Excluded Area from the Master Lease Property), and (vii) any fines or penalties or similar governmental charges applicable with respect to any of the foregoing, together with interest and costs thereon (all such items aforesaid may sometimes be collectively referred to herein as "Impositions"). (b) If, by law, any Imposition imposed during the Term, which is an assessment not related to general real estate taxes, may at the option of the taxpayer be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Tenant may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and, in such event, shall pay such installments plus interest as may become due during the Term of this Lease; provided, that all such payments shall be made before any fine, penalty or other charge for non-payment of any installment may be added thereto. (c) Any Imposition (including, without limitation, those Impositions which have been converted into installment payments by Tenant as referred to in Subsection (b) above) relating to a period of time which is partially within the Term and partially beyond the Expiration Date shall be adjusted between Landlord and Tenant as of the Expiration Date so that Landlord shall pay that portion of such Imposition which is attributable to any period of time after the Expiration Date and Tenant shall pay the remainder thereof. This subsection shall survive termination of the Lease. (d) Notwithstanding the foregoing, Tenant shall not be required to pay municipal, state or federal income, excess profits, capital levy, rental (except as set forth in clause (iii) of Subsection (a)), estate, succession, inheritance, transfer, recordation (except to the extent described in Section 30(v)) or gift taxes of Landlord, any corporate franchise tax imposed upon Landlord or any tax imposed because of the nature of the business entity of Landlord; provided, however, that if at any time during the Term, the method of taxation prevailing at the Effective Date shall be altered so that, in substitution for ad valorem real estate taxes, any new Imposition or charge, or any part thereof, shall be Version 10 measured by or be based in whole or in part upon the Master Lease Property and shall be imposed upon Landlord, then all such new Impositions or charges, or any part thereof, shall be deemed to be included within the term "Impositions", and Tenant shall pay and discharge the same as herein provided in respect of the payment of Impositions. (e) (i) If permitted by Applicable Law, and provided no Event of Default is then in existence, Tenant shall have the right, at its own expense, to contest the amount or validity, in whole or in part, of any Imposition by appropriate proceedings diligently conducted in good faith. If, under Applicable Law, the contested Imposition must be paid before undertaking the contest, Tenant shall pay such Imposition (which payment may be made under protest, at Tenant's option) or, if permitted by Landlord and any mortgagee of Landlord (including trustees or beneficiaries of deeds of trust) ("Mortgagee"), either deposit with Landlord, Mortgagee or the assessing body, as Landlord, Mortgagee or the assessing body may require, an amount sufficient to pay all amounts referred to in Subsection (ii) below, or undertake such other method of securing payment of such amounts as is satisfactory to Landlord, Mortgagee and the assessing body. (ii) Upon the termination of any such proceeding, Tenant shall pay the amount of such Imposition or part thereof as finally determined as due in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees, interest, penalties or other liabilities in connection therewith, and, upon such payment, Landlord shall, provided an Event of Default is not then in existence, return or request Mortgagee to return any amount still on deposit with it or with Mortgagee with respect to such paid Imposition. If at any time during the continuance of such proceedings Landlord, Mortgagee or the assessing body shall deem the amount deposited or the undertaking insufficient, Tenant shall, upon thirty (30) days prior written notice, make an additional undertaking or deposit with Landlord, Mortgagee or the assessing body, as Landlord or Mortgagee reasonably may request, or as the assessing body may require, and upon failure of Tenant to do so, the amount theretofore deposited shall be applied by Landlord, Mortgagee or the assessing body to the payment, removal and discharge of such Imposition and the interest and penalties in connection therewith and any costs, fees (including, without limitation, reasonable attorneys' fees and disbursements) or other liabilities accruing in any such proceedings, and the balance, if any, shall be returned to Tenant, or the deficiency, if any, shall be paid by Tenant immediately on demand of Landlord or Mortgagee to the taxing authority to which such Imposition is payable. This subsection shall survive termination of this Lease. (f) Landlord or Tenant may, if it shall so desire, endeavor at any time or times to obtain a lowering of the assessed valuation upon the Master Lease Property, or any part thereof, for the purpose of reducing Impositions thereon, and in such event, the other party Version 10 will reasonably cooperate in effecting such reduction, but shall not be required to incur any out-of-pocket costs in so cooperating. (g) Landlord shall not be required to join in any proceedings referred to in Subsection (e) above unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by or in the name of Landlord or any owner of the Master Lease Property, in which event, Landlord shall join in such proceedings or permit the same to be brought in its name and shall sign all documents reasonably necessary to prosecute the proceedings. Landlord shall not be subject to any liability for the payment of any costs or expenses in connection with any such proceedings, and Tenant will indemnify and save harmless Landlord from and against any such costs and expenses, including, but not limited to, reasonable attorneys' fees and disbursements, and from any liability resulting from such proceeding. After reimbursing and indemnifying Landlord for the items referred to in the preceding sentence, Tenant shall be entitled to any refund with respect to any Imposition and penalties or interest thereon which have been paid by Tenant (whether directly or through escrowed funds), or which have been paid by Landlord but previously reimbursed in full to Landlord by Tenant. Tenant's right to the refund shall survive termination of this Lease. (h) The certificate, advice, statements, or bill of the appropriate official designated by law to make or issue the same or to receive payment of any Imposition shall be prima facie evidence that the Imposition is due and unpaid at the time of the making or issuance of such certificate, advice statement or bill. (i) Tenant shall make all payments of Impositions directly to the appropriate governmental authorities, and Landlord appoints Tenant the attorney-in-fact of Landlord for the purpose of making all payments to be made by Tenant pursuant to any of the provisions of this Lease to persons or entities other than Landlord. In case any person or entity to whom any sum is directly payable by Tenant under any of the provisions of this Section 7 shall refuse to accept payment of such sum from Tenant, Tenant shall thereupon give written notice of such fact to Landlord and shall pay such sum directly to Landlord and Landlord shall promptly pay such sum to such person or entity. (j) Tenant shall deliver to Landlord duplicate receipts or photostatic copies thereof, or other evidence reasonably satisfactory to Landlord (followed by such duplicate receipts or copies, when available) showing the payment of all Impositions, within ten (10) business days after the respective payments are required to be made by Tenant and Landlord requests such evidence in writing. (k) Landlord shall furnish to Tenant copies of all notices of assessment and bills relating to Impositions within ten (10) business days after Landlord receives any of the same from the governmental authorities. Version 10 SECTION 8. UTILITIES (a) Tenant agrees to pay all charges made against the Master Lease Property for gas, heat, water, electricity, sewage disposition, telephone and all other utilities and services related to the Master Lease Property during the Term (collectively, the "Utilities"). (b) Tenant understands, acknowledges and agrees that any one or more of the Utilities may be interrupted or diminished by reason of causes beyond Landlord's reasonable control; that Landlord does not represent or warrant the uninterrupted avail ability of the Utilities; that Tenant shall be solely responsible for obtaining and maintaining the use of the Utilities; and that, unless caused by Landlord or its Agents, any such interruption or diminishment shall not (i) be deemed an eviction or disturbance of Tenant's right to possession, occupancy and use of the Master Lease Property or any part thereof, or (ii) render Landlord liable to Tenant in damages by abatement of Rent or otherwise, or relieve Tenant from the obligation to perform its covenants under this Lease. In pursuing the Development, Landlord shall take and cause its Agents to take best efforts to avoid the interruption or diminishment of the Utilities. SECTION 9. SIGNS (a) Tenant shall not inscribe, paint, affix or display any sign, advertisement or notice (collectively "Signs") on any portion of the Main Building Area (or on any interior portion of the Main Building that is visible from the exterior) not presently located thereon without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. (b) Tenant shall not inscribe, paint, affix or display any Sign on any portion of the Unimproved Area not presently located thereon without the prior written consent of Landlord, which consent shall be in Landlord's sole and absolute discretion. After a Triggering Event with respect to an Excluded Area on which any Sign then exists, Landlord shall have the right, at its sole expense, to remove such Sign. If any Sign is to be removed pursuant to the preceding sentence, Landlord, if requested by Tenant, shall relocate the Sign, and any lighting and electrical service related to the Sign, to another location reasonably agreed upon by the parties and providing substantially similar visibility to that afforded by the prior location. (c) Despite the foregoing, Tenant shall not require Landlord's consent to replace any Sign existing as of the Effective Date provided that the dimensions and location of the new Sign are substantially the same as those of the existing Sign. Version 10 SECTION 10. AS-IS CONDITION OF MASTER LEASE PROPERTY PRIOR TO THE EFFECTIVE DATE, TENANT OWNED THE LAND FOR APPROXIMATELY THIRTY (30) YEARS, DEVELOPED THE IMPROVEMENTS THEREON, INCLUDING BUT NOT LIMITED TO THE MAIN BUILDING, AND OCCUPIED THE MAIN BUILDING. CONSEQUENTLY, UPON THE EFFECTIVE DATE, TENANT SHALL ACCEPT THE MASTER LEASE PROPERTY IN "AS IS" CONDITION. TENANT AGREES AND ACKNOWLEDGES THAT LANDLORD HAS NOT MADE ANY REPRESENTATION RESPECTING OR ANY WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, REGARDING THE MASTER LEASE PROPERTY, INCLUDING, WITHOUT LIMITATION, REPRESENTATIONS OR WARRANTIES REGARDING THE PHYSICAL NATURE OR CONDITION OF THE MASTER LEASE PROPERTY. TENANT ACKNOWLEDGES THAT IT IS COGNIZANT OF AND SATISFIED WITH ALL ASPECTS OF THE MASTER LEASE PROPERTY, AND THAT AS PROVIDED HEREIN THIS TRANSACTION IS AN "AS IS" TRANSACTION. SECTION 11. REPAIRS, MAINTENANCE AND MANAGEMENT (a) Tenant shall, at its sole expense, keep, maintain, manage and operate (collectively, "Care" or "Care for" or "Care of" as the context may require) the Main Building Area in good condition and repair in a manner consistent with Care for Class B suburban buildings of similar age and character and used for similar purposes in Montgomery County, Maryland ("Comparable Buildings"), and in compliance with all Applicable Laws in all material respects. Except as otherwise provided in Subsection 5(b)(iii), Subsection 5(b)(iv)(A), Subsection 5(b)(iv)(B), Subsection 5(b)(iv)(C), Subsection 5(b)(iv)(D), Subsection 8(b), Section 10, Subsection 11(a), Subsection 11(c), Subsection 11(d), Subsection 12(a), Subsection 15, Subsection 16(b), Subsection 17(a)(i), Subsection 17(a)(iii), Subsection 17(b), Section 23, Subsection 27(b), Subsection 27(f) of this Lease to the contrary, Tenant shall make and perform all necessary maintenance and repairs to the Main Building Area, whether structural and non-structural, ordinary and extraordinary, foreseen and unforeseen, of every nature, kind and description. All repairs made by Ten ant shall be reasonably suited to accomplish their intended purposes and shall be in compliance with Applicable Laws in all material respects. The necessity for or adequacy of Care shall be measured by the standards which are appropriate for Comparable Buildings; provided, that Tenant shall in any event make all repairs necessary to avoid structural damage to the Main Building or other damage or injury to persons, property and other portions of the Master Lease Property. However, Landlord shall be responsible for any repairs necessitated by Landlord or its Agents. (b) Tenant shall further Care for the remainder of the Master Lease Property and keep the same in good condition and repair in a manner consistent with other similar properties in Montgomery County, Maryland (the "Comparable Properties") and in material compliance with all Applicable Laws. All repairs made by Tenant shall be reasonably suitable to accomplish their purposes and shall be in material compliance with Applicable Laws. Tenant shall in any event make all repairs necessary to Version 10 avoid structural damage to the improvements or other damage or injury to persons, property and other portions of the Master Lease Property. However, Landlord shall be responsible for any repairs necessitated by Landlord or its Agents. Further, Tenant, while it was owner of the Property, recorded a Declaration of Easements, Covenants, and Restrictions (the "Declaration") which, among other things, sets forth a standard of Care for the Master Lease Property. Landlord hereby delegates to Tenant, and Tenant hereby accepts from Landlord, the maintenance and repair obligations applicable to the Master Lease Property and described in Section 6 of the Declaration. (c) If any dispute shall arise between Landlord and Tenant as to the standard of Care required under Subsection (a) or (b) above, the matter shall be resolved by binding arbitration in accordance with the then prevailing Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). Upon demand for arbitration by either party in accordance with such rules, the matter shall be decided by a single arbitrator in Montgomery County, Maryland, selected in accordance with the prevailing Commercial Arbitration Rules of the AAA. In deciding any matter relating to the Main Building Area, the arbitrator shall take into account the age and character of the Main Building, the standards of Care set forth in this Section 11, and the remaining Term of this Lease. The arbitrator shall hold a hearing on the matter within forty-five (45) days after he or she is appointed. At least twenty (20) days before the hearing, each party shall submit to the other party a written statement of its case, copies of all documents upon which it intends to rely at the hearing, and a list of the witnesses it intends to call to testify at the hearing. The hearing shall be concluded within fifteen (15) days after the initial hearing date and the arbitrator shall decide the matter within fifteen (15) days after the hearing is concluded. The arbitrator shall render his or her decision in writing, setting forth the reasons for the decision. Each party shall bear its own costs related to the arbitration, except that the parties shall share equally all filing fees and other costs imposed by the AAA in connection with the arbitration and the fees of the arbitrator. The decision of the arbitrator shall be final and non-appealable and judgment on the decision may be entered in any court of competent jurisdiction. (d) Notwithstanding Subsections (a) and (b), unless required by Applicable Laws, Tenant shall not be required to (i) improve, upgrade, re-model, retrofit, or renovate all or any part of the Main Building Area or (ii) make any replacement or major repair of any component, element or system of the Main Building Area where a more minor repair may be sufficient to allow the ordinary use and occupancy of the Main Building Area. (e) In addition to the Care required by this Section 11, Tenant, at its sole expense, within five (5) years after the Effective Date (subject to extension for Unavoidable Delays), shall complete the work (the "Roof Work") described in Exhibit F attached hereto and made a part hereof. Version 10 (f) Landlord agrees that during the Term, Tenant shall have the right, after providing prior written notice to Landlord, to enforce any rights of Landlord under applicable warranties, guarantees, licenses and permits applicable to the Main Building Area. Landlord shall sign such documents and otherwise reasonably cooperate with Tenant to facilitate such enforcement, provided that Landlord shall not be required to incur any out of pocket expense to third parties in so doing. SECTION 12. ACCESS TO MASTER LEASE PROPERTY (a) Tenant acknowledges that Landlord has a significant economic interest in the Care of the Main Building Area and that Landlord, pursuant thereto, has a need, from time to time, to inspect the Main Building Area to insure Tenant's conformity with the covenants of this Lease. Tenant, therefore, hereby authorizes Landlord and any parties authorized by Landlord to perform such inspections of the Main Building Area as Landlord from time to time may reasonably deem appropriate. Landlord shall have the right to enter any part of the Main Building Area at all reasonable times, upon reasonable advance notice to Tenant and accompanied by a representative of Tenant, for the purposes of making such inspections, showing the Main Building Area to prospective purchasers, investors, mortgagees and tenants, and making such repairs, alterations or improvements to the Main Building Area as Landlord may deem necessary or desirable if Tenant fails to properly Care for same after notice and opportunity to cure as provided for in Section 21(a). No such entry shall materially interfere with the use and occupancy of the Main Building Area by Tenant, its subtenants and licensees. Landlord shall incur no liability to Tenant for such entry except in the case of death, bodily injury, or property damage caused by Landlord or its Agents. Notwithstanding the foregoing, Landlord shall have no right to enter upon those portions of the Main Building which are secured or confidential areas pursuant to Applicable Laws or agreements to which Tenant is subject ("Restricted Areas"). Further, no person who is a foreign national may enter into the Main Building on behalf of Landlord, unless approval of such person is obtained from Tenant in advance. Such approval may be withheld only to the extent entry by such person would violate Applicable Laws or agreements to which Tenant is subject. (b) Tenant also acknowledges that Landlord has a significant economic interest in the Care of the Unimproved Area, and an on-going need to access the Unimproved Area in connection with Development. Tenant, therefore, hereby authorizes Landlord and any parties authorized by Landlord to enter upon the Unimproved Area at any time without notice and without being accompanied by a representative of Tenant, to perform such inspections of the Unimproved Area as Landlord from time to time may reasonably deem appropriate, and further to perform whatever activities Landlord deems necessary or desirable, in its sole discretion, to aid Development, provided that such activities do not amount to a Triggering Event. Additionally, Tenant Version 10 authorizes Landlord and any parties authorized by Landlord to use and maintain such then existing roads and other infrastructure in the Unimproved Area, and to grant such easements and rights of way with respect to the Unimproved Area as Landlord deems necessary or desirable, in its sole discretion. However, Landlord's exercise of its rights under this Subsection 12(b) shall not materially interfere with the use of, or access to, the Unimproved Area or the Main Building Area by Tenant or its Agents. No development or construction work shall take place in the Unimproved Area unless such Unimproved Area is first excluded from this Lease in accordance with Section 6. SECTION 13. ALTERATIONS AND PERSONAL PROPERTY (a) Except as required by Tenant's repair and maintenance obligations under this Lease, Tenant shall not make any alterations, additions, installations or other improvements ("Alterations") to the Master Lease Property or any part thereof without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed with respect to the Main Building Areas but which may be withheld in Landlord's sole discretion with respect to the Unimproved Area. However, nothing in this Section shall be deemed to diminish Landlord's obligation to grant easements under Section 6(e) or Tenant's right to replace Signs under Section 9(d). Moreover, Tenant need not seek the consent of Landlord to (i) install any Alteration in the Main Building Area costing One Hundred Seventy Thousand Dollars ($170,000.00) or less, (ii) install any tenant improvement work for subleased space in the Main Building, (iii) install communications equipment on the roof of the Main Building (the "Roof Based Facilities") (provided any such piece of the Roof Based Facilities does not exceed twenty (20) feet in diameter), or (iv) dismantle and remove any clean room contained in the Main Building (collectively, "Preapproved Alterations"). Notwithstanding anything to the contrary herein, in no event shall Tenant make any Alterations which would affect the structure or structural integrity of the Main Building or the facade of the Main Building or construct or place any communications equipment on the exterior of the Main Building or other exterior portions of the Main Building Area (except the Roof Based Facilities described in clause (iii) above) without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Any Alteration in or to the Master Lease Property, whether or not requiring the approval of Landlord, shall be subject, however, in all cases to the following: (i) Except to the extent that any Alteration is a Preapproved Alteration, no Alteration shall be made without at least 30 days prior notice to Landlord (unless Applicable Laws require otherwise or except in the case of an emergency, in which case, Tenant shall give Landlord as much notice as is practicable), accompanied by a copy of the proposed plans and specifications in detail reasonably sufficient for Landlord to review same, the identity of the contractor and any Version 10 subcontractors, and a copy of all contracts with respect to the Alteration. All Alterations shall be made promptly at the sole cost and expense of Tenant and in a good and workmanlike manner and in material compliance with all Applicable Laws. Tenant shall promptly reimburse Landlord upon demand, up to One Thousand Dollars ($1,000) in each instance, for any reasonable costs and expenses incurred by Landlord to third parties in connection with Landlord's review of Tenant's proposed plans and specifications, or revisions thereof (collectively, the "Plans"); provided, however, that Tenant shall not be obligated to reimburse Landlord for Landlord's review of any Plans in connection with Restoration (except as provided in Section 15). Upon the request of Landlord, but not more than once each Lease Year, Tenant shall provide Landlord with a written description of Alterations made to the Master Lease Property since the later of (i) the Commencement Date, and (ii) the date of the last such report. In addition, Tenant shall provide "CAD" drawings to Landlord showing the current configuration of the Main Building, including, without limitation, any Alterations made to the Master Lease Property. Such drawings shall be delivered to Landlord approximately twenty-four (24) months before the Expiration Date and within thirty (30) days after the expiration or earlier termination of this Lease. (ii) The Master Lease Property at all times shall be kept by Tenant free of liens for labor and materials supplied or claimed to have been supplied to the Master Lease Property in connection with the Alterations. (iii) Notice is hereby given that Landlord shall not be liable for any labor or materials furnished to or for Tenant. Furthermore, notice is hereby given to Tenant and Tenant's mechanics, laborers and materialmen with respect to the Master Lease Property that no mechanic's, materialman's or laborer's lien shall attach to or affect the reversion or other interest of Landlord in or to the Master Lease Property. (iv) No Alteration shall, when completed, be of such a character as to render any part of the Master Lease Property anything other than a complete, self-contained structural unit. (v) Worker's compensation, builder's risk and general liability insurance with respect to the Alteration as required by Section 14 shall be maintained by Tenant. (vi) All Alterations, other than roof-top communications equipment, shall be the property of Landlord. Tenant shall have no obligation to remove, or to pay for the removal of, any Alterations, other than roof-top communications equipment, upon termination of this Lease. (b) All personal property, including, but not limited to, trade fixtures, furniture, furnishings, telephone switching equipment, roof-top communications equipment, generators and Version 10 uninterrupted power supply equipment, and moveable equipment ("Personal Property") owned by Tenant, and all Restricted Property, upon or in the Master Lease Property shall remain the property of Tenant, or remain under Tenant's control, and shall be removed by Tenant, at its sole cost and expense, upon termination of this Lease or surrender by Tenant of the Master Lease Property to Landlord. (The term "Personal Property" does not include Fixtures and Limited Personal Property as defined in the Purchase and Sale Agreement.) If such removal shall injure or damage the Master Lease Property, Tenant shall repair the damage at its sole cost and expense, reasonable wear and tear excepted. If Tenant fails to so remove and repair, Landlord shall have the right to remove the Personal Property and Restricted Property and to dispose of the same and to repair the Master Lease Property without accountability to Tenant, and at the sole cost and expense of Tenant. The "Restricted Property" shall mean all personal property, including, but not limited to documents and equipment, which are required to be secured or kept confidential pursuant to Applicable Laws or agreements to which Tenant is subject. The Restricted Property shall at all times, both during and after the Term, be the sole responsibility of Tenant. Tenant covenants and agrees that no Restricted Property shall be left in or upon the Master Lease Property after termination of this Lease or surrender by Tenant of the Master Lease Property to Landlord. Upon the expiration or earlier termination of this Lease (or, in the case of Excluded Areas, at the time such areas are excluded from the Master Lease Property) all right, title and interest to any underground storage tanks located in the Master Lease Property (or, in the case of Excluded Areas, located in such Excluded Areas) shall automatically convey to Landlord without the requirement that either party execute any other documents to effectuate the conveyance and shall become part of Landlord's property. SECTION 14. INSURANCE (a) At all times during the Term, Tenant, at its own cost and expense, shall carry and maintain the insurance coverage set forth below (the "Insurance"): (i) Hazard insurance covering the Master Lease Property (including, without limitation, all Alterations now or hereafter made to the Master Lease Property) under an "All Risks of Physical Loss" policy (an "All Risks Policy") written with full replacement coverage ("Replacement Value"), i.e., in an amount equal to 100% of the full costs of replacement of the insurable portions of the Master Lease Property, excluding foundation and excavation costs and subject to such reasonable deductibles as Tenant may see fit to carry and as Landlord reasonably approves. For the purposes of this Section 14, deductibles up to the amounts stated on Schedule II attached hereto shall automatically be deemed reasonable deductibles without any need for Landlord's approval. The insurer's determination of Replacement Value shall be binding and conclusive on Landlord and Tenant. A stipulated value or agreed Version 10 amount endorsement deleting the co-insurance provision of the policy shall be provided with such insurance. If not otherwise included within the All Risks Policy specified above, Tenant shall carry or cause to be carried, by endorsement to such All Risks Policy, coverage against (i) damage due to water and sprinkler leakage, with limits of coverage reasonably required by Landlord, and (ii) building ordinance covering increased costs of construction with a limit of not less than twenty-five percent (25%) of the value of the Main Building Area and demolition with a limit of not less than ten percent (10%) of the value of the Main Building Area. The Replacement Value shall include the cost of debris removal and the value of grading, paving and landscaping, and architects', engineers' and development fees. During the course of any Alteration, Tenant shall carry insurance in the form of a "Builder's Risk" policy with respect thereto in such amount as reasonably required by Landlord. (ii) Commercial liability insurance with respect to the Master Lease Property and the operations related thereto, whether conducted on or off the Master Lease Property, against liability for death, bodily injury, and property damage (the "Liability Policy"). The Liability Policy shall be on an occurrence basis and specifically shall include: (A) Contractual liability to cover Tenant's obligations to indemnify Landlord as required under this Lease; and (B) Water damage and sprinkler leakage legal liability. The Liability Policy shall be written for a combined single limit of not less than Ten Million Dollars ($10,000,000). Such limit shall be subject to reasonable increase from time to time (but not more than once every twenty-four (24) months) in accordance with the limits then being customarily carried with respect to Comparable Buildings and Comparable Properties, or operations similar to those being conducted on the Master Lease Property. Tenant may satisfy the required coverage limits for the Liability Policy by carrying a combination of primary and excess liability policies providing aggregate coverage in at least the limits stated herein for such policy. (iii) Boiler and machinery insurance with limits as from time to time customary for Comparable Buildings and appropriate in the light of the cost of repairing potential damage. (iv) Rent loss insurance ("Rent Insurance") on the "All Risks of Physical Loss" basis in an amount equal to twenty-four (24) months of the then current Base Rent. (b) Tenant further covenants and agrees, at its sole cost and expense, to procure and maintain or cause to be procured and maintained at all times all necessary worker's compensation Version 10 insurance covering all persons employed by Tenant, Existing Tenants and Subtenants in and about the Master Lease Property. (c) Tenant further covenants and agrees, at its sole cost and expense, to procure and maintain or cause to be procured and maintained at all times Comprehensive Automobile Insurance covering all owned, non-owned, and hired automobiles of tenant in limits of not less than One Million Dollars ($1,000,000). (d) In addition to the insurance carried by Tenant, during the course of any Alteration or Care work undertaken by a contractor hired by or for Tenant, Tenant shall require such contractor to carry public liability insurance in limits of not less than Two Million Dollars ($2,000,000). (e) Tenant may at its option provide any Insurance coverage under a blanket insurance policy instead of a separate policy or policies, provided that the certificate or certificates issued under such blanket insurance policy, and the coverage afforded thereby, conforms in all respects to the requirements hereof (a "Blanket Policy"). (f) Tenant acknowledges that it currently carries flood and earthquake coverage ("Flood and Earthquake Insurance"). Tenant not shall not be required to maintain the Flood and Earthquake Insurance during the Term; provided, however, Tenant shall give Landlord at least thirty (30) days written notice prior to any discontinuance of the Flood and Earthquake Insurance. Notwithstanding the foregoing, (i) in the event that any portion of the Property is classified as being located in (A) a Class A flood zone or any other flood zone indicating a higher frequency of predicted flooding than a Class A flood zone as indicated by the Federal Emergency Management Agency (a "Flood Zone"), or (B) a B3 seismic activity zone or any other seismic activity zone indicating a higher frequency of predicted seismic activity than B3 seismic activity zone as indicated by a consensus of insurance underwriters that underwrite such policies for earthquake coverage (a "Seismic Activity Zone"), Tenant shall procure Flood and Earthquake Insurance if such coverage is customary for Comparable Buildings and Comparable Properties, or (ii) to the extent the Master Lease Property is insured under a Blanket Policy and such Blanket Policy contains Flood and Earthquake Insurance for any other property under such Blanket Policy, Tenant shall maintain Flood and Earthquake Coverage on the Master Lease Property. (g) All Insurance, except for Flood and Earthquake Insurance if the Property is not in Flood Zone or Seismic Activity Zone, shall be in such form and shall be issued by such responsible insurance companies licensed to do business in the State of Maryland as are reasonably approved by Landlord. Any insurance company rated by Bests Insurance Reports (or any successor publication of comparable standing) as "A-, VIII" or better and by Standard & Poor's (or any successor of comparable standing) as "A" or better (or the equivalent of such rating) Version 10 (collectively, the "Standard Rating") shall be deemed a responsible company and acceptable to Landlord. Notwithstanding the foregoing, in the event that the rating of such insurance falls below the Standard Rating during the term of the policy of such insurance, Tenant shall not be required to procure replacement coverage until the scheduled expiration or earlier termination of such policy; provided, however, in no event shall such period exceed twelve (12) months. Upon the Effective Date, and thereafter, not less than five (5) days prior to the expiration dates of the expiring policies of Insurance, originals of replacement policies or renewal certificates, as the case may be, bearing notations evidencing the payment of premiums or accompanied by other evidence reasonably satisfactory to Landlord of each payment, shall be delivered by Tenant to Landlord ("Insurance Notice"). If Tenant does not provide Landlord with the Insurance Notice or if Tenant lets any Insurance lapse, Landlord shall have the right, without providing any notice to Tenant, to procure replacement coverage that is effective upon such lapse and Tenant shall promptly reimburse Landlord for the reasonable cost thereof. (h) All policies of Insurance shall name Landlord, Tenant, and, if requested by Landlord in writing, any Mortgagee as insureds, as their respective interests may appear. All policies of Insurance other than the Liability Policy shall, if requested in writing by Landlord, name the Mortgagee as a loss payee, as the interest of such Mortgagee may appear, but subject to the provisions of Section 15. Any request of coverage as to a Mortgagee shall set forth the name and address of the Mortgagee. (i) Tenant shall not violate or permit to be violated any of the conditions, provisions or requirements of any Insurance policy, and Tenant shall perform, satisfy and comply with, or cause to be performed, satisfied and complied with, the conditions, provisions and requirements of all Insurance policies and the companies writing such policies so that, at all times, the Insurance shall be provided by companies reasonably acceptable to Landlord, except as otherwise provided in Subsection 14(g). (j) Each policy or certificate of Insurance shall contain (i) an agreement by the insurer that such policy shall not be canceled, modified or denied renewal without at least thirty (30) days prior written notice to Landlord and any Mortgagee named as an insured or loss payee, except that if the reason for cancellation or denial of renewal is nonpayment of premiums, the notice will be at least ten (10) days, and (ii) a waiver of subrogation by the insurer. (k) If by reason of changed economic conditions the Insurance amounts referred to in this Lease become inadequate, upon Landlord's request, the limits shall be reasonably increased by Tenant from time to time (but not more often than once every twenty-four (24) months) to meet the changed conditions, but any changes in limits shall be consistent with what is customary for Version 10 Comparable Buildings and Comparable Properties or for operations similar to those conducted on the Master Lease Property. Upon the reasonable request of Landlord, Tenant shall procure and obtain such types of insurance in lieu of the current insurance then required under this Lease; provided that such replacement coverage is of a substantially similar scope and nature as the Insurance then required under this Lease and is the type of insurance that is customary for Comparable Buildings and Comparable Properties or for operations similar to those conducted on the Master Lease Property. Notwithstanding the foregoing, in the event that Landlord makes such request during the term of the policy of the insurance that is being replaced, Tenant shall not be required to procure replacement coverage until the scheduled expiration or earlier termination of such policy; provided, however, in no event shall such period exceed twelve (12) months. (l) Notwithstanding any provisions in this Section 14 or elsewhere in this Lease to the contrary, any deductible to the All Risk Policy shall be deemed an amount covered by Insurance and shall be promptly paid by Tenant in the event of an Insurable Casualty. SECTION 15. DAMAGE OR DESTRUCTION (a) In case of damage to or destruction of the Master Lease Property or any part thereof by fire or other casualty ("Damage"), Tenant will promptly give written notice thereof to Landlord. If the Damage is caused by an Insurable Casualty, Tenant shall, in accordance with the provisions of this Section and all other provisions of this Lease, restore the same as nearly as possible to its condition and character immediately prior to such Damage, subject to Tenant's right to make Alterations in substantial conformity with and subject to the conditions of Section 13 hereof, and in conformity with the plans and specifications required to be prepared pursuant to Section 13 and subject to any restrictions imposed by Applicable Laws ("Restoration"), whether or not insurance proceeds are sufficient to pay in full the cost of the work. The Restoration shall be commenced within sixty (60) days after the loss is finally adjusted with the insurer, the plans, specifications and contract for the Restoration have been approved by Landlord under Section 15(b)(i) and (ii), and all necessary permits for the Restoration have been issued. Tenant shall pursue such adjustment of the loss, approvals of Landlord, and issuance of permits with reasonable diligence after the Damage. The Restoration shall be prosecuted and completed with reasonable diligence after its commencement, Unavoidable Delays excepted. Landlord shall cooperate fully with Tenant in order to obtain the largest possible insurance recovery and shall execute any and all consents and other instruments and take all other actions reasonably necessary to accomplish the same and to cause the insurance proceeds to be paid as provided in Subsection (c) below. Version 10 (b) In the event that the cost of Restoration exceeds One Hundred Seventy Thousand Dollars ($170,000), Tenant agrees to furnish to Landlord at least twenty (20) days before the commencement of Restoration, the following: (i) Complete plans and specifications for Restoration prepared by a licensed and reputable architect reasonably satisfactory to Landlord (the "Architect"), which plans and specifications shall meet with the reasonable approval of Landlord, together with the approval thereof by all governmental authorities then exercising jurisdiction with regard to such work, and which plans and specifications shall be and become the sole and absolute property of Landlord in the event that, for any reason, this Lease shall be terminated. (ii) A contract then customary in the trade with (A) the Architect, and (B) a reputable and responsible general contractor reasonably approved by Landlord, providing for the completion of Restoration in accordance with said plans and specifications, which contract shall meet with the reasonable approval of Landlord. (iii) Assignment of the contract with the Architect and the general contractor so furnished, duly executed and acknowledged by Tenant, the Architect and the general contractor, by their terms to be effective upon any termination of this Lease or upon Landlord's re-entry upon the Master Lease Property prior to the complete performance of such contracts. (c) All insurance proceeds payable on account of Damage shall be paid to Mortgagee (provided such Mortgagee is an Institutional Mortgagee) or to a trustee designated by Mortgagee ("Insurance Trustee") and applied to the payment of the cost of Restoration, including the cost of temporary repairs or for the protection of the Master Lease Property pending the completion of permanent work pursuant to the plans, specifications and contracts (all of which temporary repairs, protection of Master Lease Property and permanent work shall be deemed to be part of the Restoration). In the event of Damage in which the proceeds of insurance are Five Hundred Thousand Dollars ($500,000.00) or less, such proceeds shall be payable directly to Tenant, in trust, to be applied to the Restoration. Such funds shall be used only for such purposes until the Restoration is completed and any excess proceeds shall be retained by Tenant for its own account. In the event of Damage in which the proceeds of insurance exceed Five Hundred Thousand Dollars ($500,000.00), such proceeds shall be deposited with Mortgagee or with the Insurance Trustee in a bank in the Washington D.C. metropolitan area as designated by Landlord and, upon written request of Tenant, shall be paid out to Tenant from time to time (but no more often than once per month) as Restoration progresses, in trust, for the purposes of paying the cost of Restoration. The receipt by Landlord and its Mortgagee of the following are conditions precedent to each payment of insurance proceeds by the Mortgagee or Insurance Trustee to Tenant: Version 10 (i) A requisition ("Requisition") signed by Tenant, dated not more than 30 days prior to such request, certifying the following: (A) that the sum then requested either has been paid by Tenant or is justly due to contractors, subcontractors, materialmen, engineers, architects or other persons who have rendered services or furnished materials for the portion of the Restoration therein specified, and giving a brief description of such services and material and the several amounts so paid or due to each of said persons in respect thereof, and stating that such amounts have not been the subject of any previous Requisition and do not exceed the value of the services and materials described in the Requisition, and stating, in reasonable detail, the progress of the work in connection with Restoration up to the date of the Requisition; (B) that, to the best of Tenant's knowledge, except for the amount set forth in the Requisition and except for any amount related to services or materials furnished after the date of the Requisition, there is no other amount then due for services or materials in connection with Restoration which, if unpaid, might become the basis of a mechanic's, materialmen's, or similar lien upon the Master Lease Property or any part thereof; and (C) that, to the best of Tenant's knowledge, the materials, fixtures and equipment for which payment is being requested pursuant to this Section are substantially in accordance with the plans and specifications approved by Landlord. For the purposes of this Subsection 15(c)(i), (i) "Institutional Mortgagee" shall mean Nomura Asset Capital Corporation and its successors and assigns or any federally insured savings bank, federally insured commercial bank, trust company, life insurance company, casualty insurance company, pension fund, real estate investment trust, mortgage company, credit union, college or university, charitable institution, or government agency or fund with tangible net worth in excess of Two Hundred Fifty Million Dollars ($250,000,000), and (ii) "Tenant's knowledge" shall mean the then current knowledge of the General Manager of Corporate Services of Tenant or such other authorized representative of Tenant overseeing the Restoration. (ii) A certificate or report of a title insurance company reasonably satisfactory to Landlord and such Mortgagee, or other evidence reasonably satisfactory to Landlord and such Mortgagee, to the effect that there has not been filed with respect to the Master Lease Property or any part thereof or upon Tenant's leasehold interest therein any mechanic's, materialman's or other lien in respect of such services rendered or materials furnished which has not been discharged of record. Version 10 (iii) A certificate from Tenant stating that, to the best of Tenant's knowledge, no Event of Default then exists. Simultaneously with receipt of the insurance proceeds, Tenant shall deliver to Landlord and such Mortgagee acknowledgments of payment and waivers of lien from all vendors, mechanics and laborers receiving payment, to the extent of the work performed through the date of the previous Requisition. (d) If the insurance proceeds shall be insufficient to pay the entire cost of Restoration, Tenant will pay the deficiency. (e) Upon receipt by Landlord or any such Mortgagee of satisfactory evidence of the character required by Subsection (c) above that Restoration has been completed and paid for in full (including, without limitation, a copy of the permanent or temporary certificate of occupancy for the Main Building, if a new certificate is issued or if the then existing certificate is modified, and a then current, complete set of "as built" plans for the Restoration, if the cost of such plans is covered by Insurance) and that there are no Events of Default then in existence, any balance of the insurance proceeds at the time held by Mortgagee or the Insurance Trustee shall be paid to and may be retained by Tenant for its own account. (f) Notwithstanding the foregoing, if at the time of any Damage, Tenant fails to maintain a credit rating for Tenant's corporate debt of at least BB as rated by an "Approved Credit Rating Agency", the following provisions shall apply: (i) All references in Subsection 15(c) to "Five Hundred Thousand Dollars ($500,000)" shall be deemed references to "One Hundred Thousand Dollars ($100,000)"; (ii) The following shall be additional conditions precedent to those set forth in Subsection 15(c) in order for Tenant to receive insurance proceeds held by the Mortgagee or Insurance Trustee: (A) A Certificate from the Architect stating that the materials, fixtures and equipment for which payment is being requested pursuant to this Section are substantially in accordance with the plans and specifications approved by the Landlord. (B) Upon occurrence of Damage, Tenant shall deposit with Mortgagee or the Insurance Trustee any deductible under the Insurance. In addition, Tenant shall deposit with the Mortgagee and Insurance Trustee any excess cost of the Restoration over the Insurance Proceeds and Deductible held by Landlord at the time of final adjustment of the loss or at the time of any Requisition. Version 10 (C) Ten percent (10%) of the cost of the Restoration shall be held back by Mortgagee or the Insurance Trustee until Tenant has complied with all of the provisions of this Section 15. For purposes of this Subsection 15(f), an "Approved Credit Rating Agency" shall mean Standard & Poor's, Moody's or any other nationally recognized rating agency. (g) If any Damage shall occur, then, to the extent Landlord is compensated by the Rent Insurance required by Section 14(a)(iv), Base Rent shall abate from the date of the Damage, until the date the Restoration is completed, to the extent that the Main Building is rendered unusable by the Damage. (h) Despite the foregoing, if (i) Damage in excess of TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($2,500,000) or in excess of an amount equal to the remaining payments of Base Rent due under this Lease, whichever is less, is caused by a casualty which is not an Insurable Casualty, or (ii) during the last two (2) Lease Years of the Term, Damage is caused by an Insurable Casualty and the loss amounts to twenty-five percent (25%) or more of the Replacement Value of the Main Building, then, in either event, Tenant shall have the right to terminate this Lease by giving written notice of termination to Landlord within ninety (90) days after the occurrence of such Damage provided that the Rent Insurance required by Section 14(a)(iv) is then in effect. In the event of such termination, the Term of this Lease shall expire and come to an end thirty (30) days after the day that the notice is given with the same force and effect as if that day had been the Expiration Date and any insurance proceeds payable for the Damage shall exclusively belong to Landlord. Thereafter, neither party shall have any further rights or liabilities under this Lease, except with respect to any obligations which arose or accrued before the termination or with respect to any rights or liabilities which expressly survive termination under the terms of this Lease. As used in this Lease "Insurable Casualty" means any casualty, regardless of the degree of the Damage, covered by Insurance which Tenant is required to maintain under Section 14, whether or not Tenant maintains such insurance. Notwithstanding any other provision contained in this Section, Tenant shall not be entitled to terminate this Lease (A) if the Damage is caused by (i) any fraudulent or dishonest act or acts committed by the Tenant or any of the Tenant's employees with the manifest intent to (a) cause the Tenant to sustain such loss and (b) obtain financial benefit for the Tenant, Tenant's employee, or for any other person or organization intended by the Tenant or the Tenant's employee to receive such benefit (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions, or other employee benefits earned in the normal course of employment), or (ii) the risks of contraband or illegal trade, or (iii) any of the following: (1) defective design or specifications, faulty material, or faulty workmanship; (2) mechanical breakdown; (3) ordinary wear and tear, gradual deterioration, insect, vermin, inherent vice and loss of use; (4) Version 10 normal settling or shrinkage of walls, floors, or ceilings; or (5) loss of market, business interruption, or extra expense loss due to delay with respect to property in transit; or (B) in the case of clause (i) of the first sentence of this Subsection 15(h), if Landlord provides the funds, in excess of the applicable amount set forth in such clause (i), necessary to cause Restoration of the Main Building, in which event such funds will be applied in the manner provided in Subsection 15(c), as if such funds were insurance proceeds. (i) Notwithstanding any other provision contained in this Section, all insurance proceeds payable for loss or damage to Tenant's Personal Property shall be the exclusive property of and be paid directly to Tenant. (j) Tenant hereby releases Landlord and Landlord hereby releases Tenant from any and all liability for any loss, damage or injury to person or property occurring in, on, about or to the Master Lease Property, the Main Building Area or personal property within the Main Building Area, by reason of fire or other casualty, to the extent proceeds of Insurance are received for such loss, damage, or injury or to the extent such proceeds should have been received under Insurance required to be carried by this Lease. Because the provisions of this Subsection will preclude the assignment of any claim mentioned herein by way of subrogation or otherwise to an insurance company or any other person, Tenant shall give to each insurance company which has issued to it one or more policies of insurance, notice of the terms of the release contained in this Subsection, and have such insurance policies properly endorsed, if necessary, to prevent the invalidation of insurance coverages by reason of the release contained in this Subsection. SECTION 16. INDEMNIFICATION (a) Tenant will protect, indemnify and save harmless Landlord from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Land lord by reason of (i) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Master Lease Property or any part thereof caused by the negligence or intentional misconduct of Tenant or its Agents; (ii) any failure on the part of Tenant to perform or comply with any of the terms of this Lease; or (iii) performance of any labor or services or the furnishing of any materials or other property in respect of the Master Lease Property or any part thereof at the direction of Tenant. Tenant hereby releases Landlord from any and all liability for the same. (b) Landlord will protect, indemnify and save harmless Tenant from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including without limitation, reasonable attorneys' fees and Version 10 expenses) imposed upon or incurred by or asserted against Tenant by reason of (i) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Master Lease Property or any part thereof, caused by the negligence or intentional misconduct of Landlord or its Agents; (ii) any failure on the part of Landlord to perform or comply with any of the terms of this Lease; or (iii) performance of any labor or services or the furnishing of any materials or other property in respect of the Master Lease Property or any part thereof at the direction of Landlord. Landlord hereby releases Tenant from any and all liability for the same. (c) The amount which any party (an "Indemnifying Party") is or may be required to pay to any other party (an "Indemnitee") pursuant to this Section 16 shall be reduced (including, without limitation, retroactively) by any insurance proceeds (or the amount of insurance proceeds that would have been recovered had insurance required by this Lease been obtained) or other amounts actually recovered by or on behalf of such Indemnitee, in reduction of the related loss. If an Indemnitee shall have received payment (an "Indemnity Payment") required by this Lease from an Indemnifying Party in respect of any loss and shall subsequently actually receive insurance proceeds or other amounts in respect to such loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount of such insurance proceeds or other amounts actually received (up to but not in excess of the amount of any Indemnity Payment made hereunder). An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. (d) Procedures for indemnification of Third Party Claims shall be as follows: (i) If an Indemnitee shall receive notice or otherwise learn of the assertion by a person (including, without limitation, any governmental entity) who is not a party to this Lease (or a subsidiary an affiliate of either party) of a claim or of the commencement by any such person of any action (a "Third Party Claim") with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to this Section 16 or any other Section of this Lease, such Indemnitee shall give such Indemnifying Party written notice thereof promptly after becoming aware of such Third Party Claim; provided that the failure of any Indemnitee to give notice as provided in this Section 16(d) shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give Version 10 notice. Such notice shall describe the Third Party Claim in reasonable detail. (ii) An Indemnifying Party may elect to defend or to seek to settle or compromise, at such Indemnifying Party's own expense and such Indemnifying Party's own counsel, any Third Party Claim, as provided hereafter. Within thirty (30) days after receipt of notice from an Indemnitee in accordance with Subsection 16(d)(i) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnifying Party shall not be liable to such Indemnitee under this Section 16 for any legal or other expenses (except expenses approved in advance by the Indemnifying Party) subsequently incurred by such Indemnitee in connection with the defense thereof; provided that if the defendants with respect to any such Third Party Claim include both the Indemnifying Party and one or more Indemnitees and in any Indemnitee's reasonable judgment a conflict of interest between one or more of such Indemnitees and such Indemnifying Party exists in respect to such claim, such Indemnitees shall have the right to employ separate counsel to represent such Indemnitees and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party. If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim, or fails to notify an Indemnitee of its election as provided in this Subsection 16(d)(ii), such Indemnitee may defend or, subject to the remainder of this Subsection 16(d)(ii), seek to compromise or settle such Third Party Claim without prejudice to such Indemnitee's rights, if any, to continue to seek indemnification hereunder. Notwithstanding the foregoing, neither an Indemnifying Party nor an Indemnitee may settle or compromise any claim over the objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld or delayed. Neither an Indemnifying Party nor an Indemnitee shall consent to entry of any judgment or enter into any settlement of any Third Party Claim which does not include as an unconditional term thereof the giving by a claimant or plaintiff to such Indemnitee, in the case of a consent or settlement by an Indemnifying Party, or to the Indemnifying Party, in the case of a consent or settlement by an Indemnitee, of a written release from all liability in respect to such Third Party Claim. (iii) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the related Indemnitee shall make reasonably available to such Indemnifying Party any personnel or any books, records or other documents within its control or which it otherwise has the ability to make available that are necessary or appropriate for such defense, settlement or compromise of such Third Party Version 10 Claims, subject to the establishment of reasonably appropriate confidentiality arrangements and arrangements to preserve any applicable privilege (including, the attorney-client privilege) and shall cooperate in such defense, compromise or settlement. If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the related Indemnitee shall be entitled to attend and participate in any such proceeding, discussion or negotiation at its own expense. (iv) Notwithstanding anything else in this Section 16 to the contrary, if an Indemnifying Party notifies the related Indemnitee in writing of such Indemnifying Party's desire to settle or compromise a Third Party Claim on the basis set forth in such notice (provided that such settlement or compromise includes as an unconditional term thereof the giving by the claimant or plaintiff of a written release of the Indemnitee from all liability in respect thereof and does not include any non-monetary remedy) and provides the Indemnitee a copy of a written proposal of the applicable claimant to settle on such terms, and the Indemnitee notifies the Indemnifying Party in writing within ten (10) business days of such notice that such Indemnitee declines to accept any such settlement or compromise, such Indemnitee may continue to contest such Third Party Claim, free of any participation by such Indemnifying Party, at such Indemnitee's sole expense. In such event, the obligation of such Indemnifying Party to such Indemnitee with respect to such Third Party Claim shall be equal to (i) the costs and expenses of such Indemnitee prior to the date such Indemnifying Party notifies such Indemnitee of the offer to settle or compromise (to the extent such costs and expenses are otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the amount of any offer of settlement or compromise which such Indemnitee declined to accept and (B) the actual out-of-pocket amount such Indemnitee is obligated to pay subsequent to such date as a result of such Indemnitee's continuing to defend such Third Party Claim (including attorneys fees and expenses). (v) Any claim on account of a loss which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such thirty (30) day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such thirty (30) day period or rejects such claim in whole or in part, such Indemnitee shall follow the dispute resolution procedures set forth in Subsection 11(c). (vi) In addition to any adjustments required pursuant to Subsection 16(c), if the amount of any loss shall, at any time subsequent to the payment required by this Lease, be reduced by recovery, settlement or otherwise, the amount of such reduction, less any expenses incurred in connection therewith, Version 10 shall promptly be repaid by the Indemnitee to the Indemnifying Party. (vii) In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place and the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. (vii) If any indemnity payment required to be made hereunder is denominated in a currency other than United States dollars, such payment shall be made in United States dollars and the amount thereof shall be computed using the foreign exchange rate for such currency determined as of the date that notice of the claim with respect to which such indemnity payment is made or given by, or on behalf of, the Indemnitee to the Indemnifying Party. (e) The provisions of this Section 16 shall survive any termination of this Lease. SECTION 17. CONDEMNATION (a) (i) If any part of the Master Lease Property is taken or condemned for a public or quasi-public use (a sale in lieu of condemnation to be deemed a taking or condemnation) ("Taken" or a "Taking", as the context shall require), this Lease shall, as to the part Taken, terminate as of the date title shall vest in the condemnor and continue in full force as to the remainder. In the event of such a partial Taking, Rent shall be equitably adjusted by Landlord and Tenant taking into account the portion of the Master Lease Property so Taken; provided, that there shall be no adjustment in Base Rent unless, and only to the extent that, a portion of the Main Building is Taken. With respect to any other portions of the Master Lease Property Taken, adjustment shall be made only to the Additional Rent applicable to and the obligation to Care for such portion. Tenant, at its cost and expense, shall proceed with Restoration, subject to Unavoidable Delays, of the remaining portion of the Master Lease Property to a complete architectural unit, to the extent practicable and economically feasible and to the extent the net condemnation award is sufficient to pay in full the cost of such Restoration. Such Restoration shall be performed in the same manner and pursuant to the same conditions as set forth in Section 15 hereof with respect to Restoration as a result of Damage. If the parties cannot agree upon such Rent adjustment or Restoration requirements, such dispute shall be decided by binding arbitration comparable to that provided for in Section 11(c). Version 10 (ii) Tenant waives all claims against Landlord and any Mortgagee by reason of any partial Taking, and Tenant covenants and agrees that Tenant will make no claim against the condemning authority by reason of the partial Taking, except for damages payable for injury to Personal Property or any Alterations that Tenant is entitled to remove upon the expiration of this Lease, for loss of use of the Main Building Area, or for relocation expenses; provided, however, that Tenant's claims do not reduce Landlord's award for its fee interest subject to Tenant's leasehold interest. In such event, Tenant shall be entitled to receive such amounts. Landlord or any Mortgagee having a right thereto shall be entitled to receive any and all awards paid by the condemning authority in connection with such partial Taking, provided that such condemnation award received by Landlord or such Mortgagee, less the reasonable costs incurred by Landlord and such Mortgagee in connection with the collection of such award shall be applied to the cost of such Restoration, subject to the same conditions to release set forth in Section 15 hereof. Any balance of the award remaining after completion of such Restoration and not used for such Restoration, may be retained by Landlord or such Mortgagee. (iii) Notwithstanding the foregoing provisions of this Subsection (a), in the case of partial Taking of the Main Building, if Landlord or Tenant shall reasonably determine that the remaining portion of the Main Building cannot practicably be so restored to a complete architectural unit or that such Restoration is not economically feasible or that after the Restoration, the remainder of the Main Building would not be suitable for the uses permitted hereunder, then either Landlord or Tenant may terminate this Lease by notice to the other party, and, upon such termination, Tenant and Landlord shall have no further obligations hereunder, except with respect to any obligations which arose or accrued before the termination of this Lease or to the extent obligations are to survive the termination of this Lease as otherwise provided in this Lease. Any dispute as to the right of Landlord or Tenant to terminate this Lease under this Subsection (iii) shall be determined by arbitration in accordance with Section 11(c). In the event of a Taking that does not result in the termination of this Lease, but results in a Taking of any portion of the Main Building Area, Landlord shall provide Tenant with a portion of the Unimproved Area for use for replacement parking adjacent to the remaining Main Building Area and access and utilities to the Main Building to the extent such items are affected by the Taking. Nothing herein shall be construed to require Landlord to incur any material expense in connection therewith. (b) In the event of a total Taking of the Main Building Area, this Lease shall terminate as of the date title shall vest in the condemnor and, upon such termination, Landlord and Tenant shall have no further obligations hereunder, except with respect to any breaches which occurred before the termination of this Lease or to the extent obligations are to survive the termination of this Lease as otherwise provided in Version 10 this Lease. Landlord shall be entitled to receive any and all awards paid by the condemning authority in connection with such Taking, except to the extent Tenant is entitled to recovery under Subsection 17(a)(ii). SECTION 18. LIENS If, because of any act or omission of Tenant or anyone claiming by, through, or under Tenant, any mechanic's lien or other lien shall be filed against the Master Lease Property or any portion thereof, or against other property of Landlord, whether or not such lien is valid or enforceable as such, Tenant shall, at its own expense, cause the same to be discharged of record within a reasonable time, not to exceed 30 days, after the date of filing thereof, and shall also defend and indemnify Landlord and any Mortgagee and hold them harmless from any and all claims, losses, damages, judgments, settlements, costs and expenses, including reasonable attorneys' fees, resulting therefrom or incurred in connection therewith. Tenant shall not mortgage, pledge, hypothecate or assign as security its interest in the Master Lease Property or under this Lease. SECTION 19. EXISTING SPACE LEASES; ASSIGNMENT AND SUBLETTING (a) On the Effective Date, the Main Building is subject to those certain leases listed in Exhibit G attached hereto and made a part hereof (the "Existing Space Leases"), which were entered into by Tenant, as lessor thereunder, prior to closing under the Sales Agreement. Landlord has not assumed any of Tenant's obligations thereunder. For so long as this Lease remains in effect, Tenant covenants and agrees to continue to discharge all of the lessor's obligations under the Existing Space Leases, whether accrued or accruing before or during the Term. Tenant shall indemnify, defend, and hold harmless Landlord against any obligation of Landlord under the Existing Space Leases arising or accruing during the Term, except to the extent Tenant is unable to perform such obligations as a result of Landlord's breach of its obligations under this Lease. During the Term, Tenant shall have the right to (i) collect and retain for its own account (subject to Subsection (c) below) all rents and other payments due from tenants under Existing Space Leases ("Existing Tenants"), (ii) hold and apply any security deposits of Existing Tenants in accordance with the Existing Space Leases (provided, however, that Tenant shall deliver such security deposits to Landlord at the expiration or earlier termination of this Lease to the extent such security deposits have not been applied by Tenant pursuant to the applicable Existing Space Lease or returned to the applicable Existing Tenant, and the term of the applicable Existing Space Lease extends beyond the Term), and (iii) terminate, modify or otherwise deal with the Existing Space Leases as Tenant, in its sole discretion, deems appropriate; provided, however, (A) such right shall automatically end upon the termination of this Lease for any reason, (B) none of the Existing Space Leases shall be modified to provide for a term Version 10 which extends beyond the Term, unless Landlord gives its prior written consent to such extended term, which consent may be granted or withheld in Landlord's sole discretion, (C) each modification of an Existing Space Lease shall be subject and subordinate to this Lease, and in the event of the expiration or termination of this Lease, Landlord shall not be required to recognize such modification without its express written agreement to be bound by same, which may be given or not in Landlord's sole discretion, and (D) Tenant shall promptly provide to Landlord copies of all documents terminating or modifying any Existing Space Lease. (b) Tenant may assign its interest in this Lease (an "Assignment") or sublet all or any portion of the Main Building (a "Sublease"), without the consent of Landlord. The term of any such Sublease shall not exceed the Term, unless Landlord gives its prior written consent to such extended term, which consent may be granted or withheld in Landlord's sole discretion. In the event of any Assignment or Sublease, Tenant shall nevertheless at all times remain fully responsible and liable for the payment of Rent and the performance and observance of all of Tenant's other obligations under this Lease. Each Sublease shall be subject and subordinate to this Lease. If requested by Tenant, Landlord shall enter into a nondisturbance agreement with respect to any Sublease on substantially the same terms as are contained in the nondisturbance agreement attached hereto as Exhibit H (the "Landlord Approved SNDA"), provided that (i) the Sublease does not, in any material respect, impose greater obligations on the sublandlord or grant greater rights to the subtenant than those existing as of the Effective Date under the Existing Space Leases, (ii) term of the Sublease does not extend past the Term (unless expressly approved by Landlord as provided above), and (iii) the Sublease (y) is an arms-length transaction and such subtenant was obtained, and the economic terms of such Sublease were negotiated by, a third party leasing agent using marketing efforts customarily used for Comparable Properties, or (z) requires the subtenant to pay basic rent at Fair Market Sublease Rent and a pro rata share of increases in operating expenses, taxes and insurance (a "Non-Broker Sublease"). Landlord agrees at any time hereafter, upon ten (10) business days prior written notice, to execute and deliver, and cause its Mortgagee to recognize, the Landlord Approved SNDA, provided the Landlord Approved SNDA has been duly executed by Tenant and such subtenant. Promptly upon entering into any Assignment or Sublease, Tenant shall provide Landlord with copies of all documents effecting such Assignment or Sublease. (c) In the event of a Non-Broker Sublease, Landlord and Tenant shall attempt in good faith to agree as to the Fair Market Sublease Rent, and if Landlord and Tenant fail to promptly agree as to the Fair Market Sublease Rent (the "Sublease Arbitration Deadline"), Fair Market Sublease Rent shall be determined as follows: Version 10 (i) Fair Market Sublease Rent shall be the rent which would be asked of subtenants as of the anticipated date of execution of the Sublease for space comparable to the subject space of the Sublease in the Germantown/Clarksburg areas of Montgomery County, Maryland, taking into account the term of the Sublease, the size of the premises being subleased and the value of brokerage commissions, rental abatements, rental credits, and tenant allowances, if any, being offered or paid under such subleases. (ii) Landlord and Tenant shall use the same methodology of the arbitration proceedings described in Subsections 28(d)(ii) and (iii). (d) As a part of Additional Rent, Tenant shall pay to Landlord one-half of any Profit derived from any renewal of an Existing Lease (a "Lease Renewal") or from any Assignment or Sublease during the Term. As to each Lease Renewal, Assignment, and Sublease, "Profit" shall mean the excess, if any, of the following: the gross amount collected by Tenant under or with respect to the Lease Renewal, Assignment, or Sublease over a specific period of time (the "Measuring Period"), less (i) the Base Rent paid by Tenant to Landlord over the Measuring Period for the same space as is the subject of the Lease Renewal, Assignment, or Sublease (the "Subject Space"), (ii) all other amounts paid by Tenant with respect to the Measuring Period and relating to the Master Lease Property as required by this Lease, pro-rated based upon the rentable area of the Subject Space compared to the rentable area of the Main Building, (iii) a management fee to Tenant equal to three percent (3%) of the amount collected by Tenant under or with respect to the Lease Renewal, Assignment, or Sublease over the Measuring Period, (iv) all reasonable costs of collection paid by Tenant to collect the sums payable under the Lease Renewal, Assignment, or Sublease, and (v) reasonable and customary brokerage fees, the cost of tenant improvements, reasonable attorneys' fees and all other out of pocket costs paid by Tenant to third parties in connection with the Lease Renewal, Assignment, or Sublease. Tenant shall provide to Landlord on or before the sixtieth (60th) day following each Lease Year in which Profit is received by Tenant a calculation and payment of Profit for the preceding Lease Year. The calculation shall be certified by Tenant as being accurate and complete, to the best of its knowledge, along with such information and materials (including, but not limited to, copies of invoices, calculations and allocations) in support thereof, as Landlord may reasonably request. Despite the foregoing, no calculation or payment of Profit shall be required with respect to any Assignment or Sublease to a subsidiary of Tenant or arising from a sale of any division or subsidiary of Tenant, a sale of all or substantially all of the assets or capital stock of Tenant, or any merger or consolidation of Tenant. (e) If there is an Event of Default, in addition to any other remedies provided by this Lease or by law or in equity, at its option, Landlord may collect directly from any Existing Version 10 Tenant, Assignee or lessee under a Sublease ("Subtenant") all rent becoming due to Tenant by reason of the applicable Existing Lease, Assignment or Sublease. Any collection by Landlord from the Existing Tenant, Assignee or Subtenant shall not be construed to constitute a novation or release of Tenant from the further performance of its obligations under this Lease or an acceptance of the terms of such Existing Lease, Assignment or Sublease. (f) Any amounts collected by Landlord pursuant to Section 19(e) or otherwise from an Existing Tenant, Assignee or Subtenant which are applicable to any period preceding the Expiration Date (had this Lease run its full Initial Term as may have been extended), less Landlord's share of any Profit attributable to such amounts and less Landlord's reasonable costs of collection, shall be applied by Landlord to the reduction of Tenant's remaining liability, if any, under this Lease. SECTION 20. SUBORDINATION OR SUPERIORITY OF LEASE (a) Except as otherwise provided in this Section, the rights and interest of Tenant under this Lease shall be subject and subordinate to any mortgages that may be placed upon the Master Lease Property and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements, extensions, bifurcations and splits thereof, if the Mortgagee named in said mortgage shall elect to subject and subordinate the rights and interest of Tenant under this Lease to the lien of its mortgage. Any Mortgagee may elect to give the rights and interest of Tenant under this Lease priority over the lien of its mortgage. In the event of either such election and upon notification by such Mortgagee to Tenant to that effect, the rights and interest of Tenant under this Lease shall be deemed to be subordinate to, or to have priority over, as the case may be, the lien of said mortgage, whether this Lease is dated prior to or subsequent to the date of said mortgage without any further action required by Landlord or Mortgagee; provided, however, that as a condition precedent to any subordination of this Lease, Landlord delivers in advance a non-disturbance agreement duly executed by Mortgagee and Landlord. The non-disturbance agreement shall be substantially in the form attached to and made a part of this Lease as Exhibit I (the "Tenant Approved SNDA") or in a commercially reasonable form and subject to the approval of Tenant, not to be unreasonably withheld. Tenant agrees at any time hereafter, upon ten (10) business days prior written notice, to execute and deliver the Tenant Approved SNDA. (b) Nothing contained in this Lease shall limit or curtail Landlord's right to sell, mortgage or otherwise transfer its fee interest in the Master Lease Property, or affect Landlord's right to assign the Rent payable under this Lease either as collateral security under a mortgage or otherwise. Any such sale, mortgage, transfer or assignment shall be binding on Tenant but shall be subject to this Lease. Version 10 SECTION 21. DEFAULTS AND REMEDIES (a) The occurrence of any one or more of the following events shall be a default and breach of this Lease by Tenant (collectively, "Events of Default"): (i) Tenant shall fail to pay any installment of Rent when the same shall be due and payable and fail to cure such default within nine (9) days after receiving written notice from Landlord specifying the default. For the purposes of this Subparagraph 21(a)(i), Tenant agrees notice by Mortgagee, or Landlord's loan service provider, given according to the terms of Section 26, shall be deemed sufficient notice. (ii) Tenant shall fail to perform or observe any other term, condition, covenant or obligation required to be performed or observed by it under this Lease for a period of thirty (30) days after written notice from Landlord specifying such default; provided, however, that if the term, condition, covenant or obligation to be performed by Tenant is of such nature that the same cannot reasonably be performed within such thirty (30) day period, such default shall be deemed to have been cured if Tenant commences such performance within the thirty (30) day period and thereafter diligently undertakes to complete the cure and in all events cures the default within one hundred twenty (120) days of Landlord's notice, subject to extension for Unavoidable Delays. (iii) An Event of Default, as defined therein, shall occur under that certain lease agreement, dated of even date herewith, between Landlord and Tenant with respect to the Installations Premises (the "Facilities Lease"). (iv) Termination or rejection of this Lease pursuant to Section 22. (v) Assumption or assignment of this Lease, under the conditions referred to in Section 22, unless the requirements of Section 22 applicable to such assumption or assignment are satisfied. (b) Upon the occurrence of any Event of Default, Landlord shall have the following rights and remedies, in addition to those allowed by law or equity, any one or more of which may be exercised concurrently and without further notice to or demand upon Tenant: (i) Landlord may re-enter the Master Lease Property and cure any default of Tenant, in which event Tenant shall reimburse Landlord as Additional Rent for any reasonable costs and expenses which Landlord may incur to cure such default; and Landlord shall not be liable to Tenant for any loss or damage which Tenant may sustain by reason of Landlord's action, except loss or damage caused by Landlord's negligence or intentional misconduct. Version 10 (ii) Landlord may terminate this Lease, in which event: (A) Tenant shall not thereafter be entitled to possession of the Master Lease Property and Tenant shall immediately thereafter surrender, or cause to be surrendered, the Master Lease Property to Landlord; (B) Landlord may re-enter the Master Lease Property and dispossess Tenant by summary proceedings, ejectment or other legal process and may remove its effects, without prejudice to any other remedy which Landlord may have for possession or arrearages in Rent; and (C) Tenant shall be liable for all loss or damage which Landlord may sustain by reason of such termination and re-entry; and Landlord may re-let all or any part of the Master Lease Property for a term different from that which would otherwise have constituted the balance of the Term and for Rent and on terms and conditions different from those contained herein, whereupon Tenant shall be obligated to pay to Landlord the deficiency, if any, between the Rent provided for herein and that provided for in any lease covering a subsequent re-letting of the Master Lease Property, for the period which would otherwise have constituted the balance of the Term, together with all of Landlord's reasonable costs and expenses of preparing the Master Lease Property for re-letting, including all repairs, tenant finish improvements, brokers' and attorneys' fees, and all loss or damage which Landlord may sustain by reason of such re-letting, it being expressly understood and agreed that the liabilities and remedies specified above shall survive the termination of this Lease. Landlord shall make diligent efforts to mitigate its damages in the event of an Event of Default. (iii) (A) Notwithstanding the termination of this Lease, Landlord may declare all Base Rent which would have been due under this Lease for the balance of the Term to be immedi ately due and payable. In that event, Tenant shall be obligated to pay an amount in cash that would be necessary to purchase U.S. Obligations in such amounts and having such maturities that the principal and interest of such U.S. Obligations would be sufficient to provide funds as close as possible but in no event less or later than the payments due under this Lease as Base Rent as and when such payments would be due if no acceleration of the Base Rent had occurred (the "Accelerated Payment"). U.S. Obligations are obligations or securities not subject to prepayment, call or early redemption which are direct obligations of, or obligations fully guaranteed as to timely payment by, the United States of America or any agency or instrumentality thereof, the obligations of which are backed by the full faith and credit of the United States of America. (B) Upon receipt of the Accelerated Payment, Landlord shall use commercially reasonable efforts to lease the vacant areas of the Main Building at the then currently existing fair market rental rate for Comparable Buildings. From and after the Event of Default all rent and other payments, except for security deposits, collected under leases entered into after the Event of Default ("Post Default Leases") and under any Existing Space Leases, Subleases, or occupancy or concession agreements in effect as of the Event of Default shall be placed in a separate Version 10 escrow account (the "Escrow Account") held by a mutually acceptable escrowee (the "Escrowee"). Also, any refunds of Impositions paid by Tenant and received by Landlord shall be placed in the Escrow Account. The Escrow Account shall be interest bearing and earn at least a money market rate of interest. All interest earned shall become part of the escrow fund and be treated in the same manner as the principal in the Escrow Account. The Post Default Leases and all Existing Space Leases, Subleases, and occupancy and concession agreements in effect as of the Event of Default are collectively referred to as the "Mitigation Leases". The funds contained in the Escrow Account shall be disbursed in the following manner and with the following priority: (i) all direct and reasonable operating expenses ("Operating Expenses") paid by Landlord relating to the Master Lease Property during the "Default Measuring Period" (defined below) shall be paid to Landlord, (ii) a management fee equal to three percent (3%) of the amount collected by Landlord from the Mitigation Leases during the Default Measuring Period shall be paid to Landlord, (iii) all direct and reasonable costs of collection paid by Landlord to collect the sums payable under the Mitigation Leases shall be paid to Landlord, (iv) reasonable and customary brokerage fees, the reasonable cost of designing, constructing and installing tenant improvements, reasonable attorneys' fees and all other reasonable out of pocket costs paid by Landlord during the Default Measuring Period to third parties in connection with the Mitigation Leases (including the fees of the Escrowee and the Escrow Account) shall be paid to Landlord, (v) Tenant shall be paid up to the amount that Tenant was scheduled to pay as Base Rent during the Default Measuring Period, and (vi) the remainder shall be shared equally by Landlord and Tenant. As used in this Section, the term "Default Measuring Period" shall mean (1) as to the payments contemplated in (i) through (iv) above, each consecutive one (1) month period after the establishment of the Escrow Account until the date the Term would have expired but for the early termination of this Lease, and (2) as to the payments contemplated in (v) and (vi) above, each consecutive three (3) month period after the establishment of the Escrow Account until the date the Term would have expired but for the early termination of this Lease. The first Default Measuring Period, however, shall also include the period from the date of the Event of Default to the date the Escrow Account was established. Escrowee shall make disbursements to the parties in the priority described above on or about the fifteenth (15th) day after the end of each Default Measuring Period. Within ten (10) days after the end of each Default Measuring Period relating to the payments contemplated in (i) through (iv) above, Landlord shall furnish to Escrowee and Tenant a written statement setting forth in reasonable detail all amounts paid into the Escrow Account and all amounts for which Landlord is claiming payment with respect to the immediately preceding Default Measuring Period. The statement shall be certified by Landlord as being accurate and shall be accompanied by invoices and other documentation reasonably evidencing the amounts claimed for payment. Escrowee shall withhold from the payments made under (v) and (vi) above one-fourth of the Version 10 reasonably estimated real estate taxes and Insurance premiums which are next due with respect to the Master Lease Property, less the amounts of any real estate taxes or Insurance premiums required to be directly paid by tenants under the Mitigation Leases (the "Tax and Insurance Holdbacks"). Escrowee shall release Tax and Insurance Holdbacks to Landlord when and to the extent that real estate taxes and Insurance premiums are payable by Landlord with respect to the Master Lease Property. At the time of each such disbursement to Landlord, Escrowee shall also disburse to Tenant the amount, if any, by which the Tax and Insurance Holdbacks held by Escrowee exceed the tax bill or Insurance premiums paid with such Tax and Insurance Holdbacks. Although the last Default Measuring Period shall end on the date the Term would have expired but for the early termination of this Lease, any amounts collected by Landlord under the Mitigation Leases after that date and attributable to any period which occurred prior to that date shall be paid directly by Landlord to Tenant. No party shall be paid for any amount described in this Subsection (B) to the extent such party was otherwise reimbursed for such amount, including, without limitation, previous payment by the Escrowee or previous reimbursement under the Mitigation Leases. For the purposes of this Section, "Operating Expenses" includes the amortized cost of capital improvements properly allocable to the Default Measuring Period but excludes (1) debt service and other costs of Landlord's financing, (2) capital expenditures (except for the amortized portion properly allocable to the Default Measuring Period), (3) management fees, (4) overhead, (5) depreciation, (6) accountants' fees, (7) any losses or expenses covered by Insurance, whether or not such Insurance is in fact maintained, or compensable by condemnation proceeds, (8) any amount incurred by reason of the negligence or intentional misconduct of Landlord or its Agents, (9) fines or penalties, and (10) any amounts paid by specific tenants. Any refunds, discounts, or recoupments of Operating Expenses received by Landlord shall be accounted for by Landlord and credited back to Tenant. Tenant, at reasonable times and upon reasonable notice, shall have the right to audit Landlord's books and records relating to Operating Expenses; provided, however, in no event shall Landlord be required to keep such underlying receipts for Operating Expenses beyond a date which is three (3) years after Escrowee makes a disbursement for such Operating Expenses. The cost of capital expenditures shall be amortized over the useful life of each such capital expenditure as determined for federal income tax purposes. Notwithstanding the foregoing, Landlord shall not be entitled to payment from the Escrow Account for any costs of capital improvements, repairs, or maintenance that Tenant would not have been obligated to undertake under the standard of Care set forth in Section 11 of this Lease or for any other Operating Costs which Tenant would not have been obligated to pay under this Lease. Notwithstanding anything to the contrary contained herein, until the expiration of 91 days after Landlord's receipt of the Accelerated Payment, Tenant shall not make any claim against Landlord that Landlord has failed to use diligent efforts to mitigate its damages after the Event of Version 10 Default which gave rise to the Accelerated Payment. This provision shall survive the termination of this Lease. (C) In the event that Landlord exercises its remedy under Subsection (iii)(A) of this Section, performance of Landlord's obligations under Subsection (iii)(B) of this Subsection shall be deemed satisfaction of Landlord's duty to mitigate its damages. (iv) Landlord may sue for injunctive relief or to recover damages for any loss resulting from the breach. (c) Any agreement for an extension of the Term or for any other additional period after the Term shall not thereby prevent Landlord from terminating this Lease for any reason specified in this Lease. If any such right of termination is exercised by Landlord during the Term or any extension thereof, Tenant's right to any extension or additional period shall thereby be automatically canceled. Any such right of termination of Landlord contained herein shall continue during the Term and any subsequent extension hereof. (d) The failure or delay by either party to enforce or exercise at any time any of the rights or remedies or other provisions of this Lease shall not be construed to be a waiver thereof, nor affect the validity of any part of this Lease or the right of that party thereafter to enforce each and every such right or remedy or other provisions. No waiver of any default or breach of this Lease shall be held to be a waiver of any other default or breach. No act or omission by Landlord during the Term shall be deemed an acceptance of a surrender of the Master Lease Property and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. (e) If either party defaults under this Lease and the other party places the enforcement of all or any part of this Lease or the collection of any sum due or to become due under this Lease or the recovery of possession of the Master Lease Property in the hands of an attorney, and such party prevails in litigation concerning such issue, the defaulting party agrees to reimburse the prevailing party for the reasonable attorney's fees incurred thereby. SECTION 22. BANKRUPTCY OR INSOLVENCY Landlord and Tenant agree that the following shall apply in the event of the bankruptcy or insolvency of Tenant: (a) If a petition is filed by, or an order for relief is entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of Tenant elects to assume this Lease for the purpose of assigning it, such assumption and assignment may be made only if all of the terms and conditions of Subsections (b) and (d) below are satisfied. To be effective, an election to assume this Lease must be in writing, addressed to Landlord, and Version 10 all of the conditions herein stated, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied. If the trustee fails so to elect to assume this Lease within sixty (60) days after such filing or order or such additional time as the Bankruptcy Court, for cause, may fix, this Lease will be deemed to have been rejected, and Landlord shall then immediately be entitled to possession of the Master Lease Property without further obligation to Tenant or the trustee, and this Lease shall be terminated. Landlord's right to be compensated for damages in the bankruptcy proceeding, however, shall survive such termination. (b) If Tenant files a petition for reorganization under Chapters 11 or 13 of the Bankruptcy Code, or if a pro ceeding filed by or against Tenant under any other chapter of the Bankruptcy Code is converted to a chapter 11 or 13 proceeding and Tenant's trustee or Tenant as debtor-in-possession fails to assume this Lease within 60 days from the date of the filing of such petition or conversion or such additional time as the Bankruptcy Court, for cause, may fix, then the trustee or the debtor-in-possession shall be deemed to have rejected this Lease. To be effective, any election to assume this Lease must be in writing, addressed to Landlord and, if there has been a default under the Lease, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied: (i) The trustee or the debtor-in-possession has cured or has provided to Landlord adequate assurance that: (A) It will cure all monetary defaults under this Lease within the number of days specified in Section 21(a)(I) of this Lease from the date of assumption; and (B) It will cure all nonmonetary defaults under this Lease within the number of days specified in Section 21(a)(ii) of this Lease from the date of assumption. (ii) The trustee or the debtor-in-possession has compensated Landlord, or has provided Landlord with adequate assurance that Landlord will be compensated promptly for any pecuniary loss it has incurred arising from the default of Tenant, the trustee, or the debtor-in-possession. (iii) The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the future performance of each of Tenant's obligations under this Lease; provided, however, that: Version 10 (A) From and after the date of assumption of this Lease, until the date of the assignment of this Lease, it shall pay all monetary obligations, including, without limitation, the Rent payable under this Lease, in advance on each date that such amounts are payable. (B) It shall also deposit with Landlord, as security for the timely payment of Rent, an amount equal to three months' Base Rent and other monetary charges accruing under this Lease; (C) If not otherwise required by the terms of this Lease, it shall also pay in advance, on each day that any installment of Base Rent is payable, one-twelfth (1/12) of Tenant's Imposition, Insurance and other obligations under this Lease. (c) If the trustee or the debtor-in-possession has assumed this Lease, pursuant to Subsection (a) or (b) above, and elects to assign Tenant's interest under this Lease or the estate created by that interest to any other person, such interest or estate may be assigned only if the intended assignee has provided adequate assurance of future performance of all of the terms, covenants, and conditions of this Lease. For the purposes of this Subsection (d), "adequate assurance of future performance" means that Landlord has ascertained that each of the following condition has been satisfied: The assignee has submitted a current financial statement which shows a net worth and working capital in amounts sufficient to assure the future performance by the assignee of Tenant's obliga tions under this Lease. (d) When, pursuant to the Bankruptcy Code, the trustee or the debtor-in-possession is obligated to pay reasonable use and occupancy charges for the use of all or part of the Master Lease Property, it is agreed that such charges will not be less than the Base Rent as defined in this Lease, plus Additional Rent and other monetary obligations of Tenant included herein. (e) Except to the extent provided by law, neither Tenant's interest in this Lease nor any estate of Tenant created in this Lease shall pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, nor otherwise by operation of law under the laws of any state having jurisdiction of the person or property of Tenant, unless Landlord consents in writing to such transfer. Landlord's acceptance of Rent or any other payments from any trustee, receiver, Version 10 assignee, person, or other entity will not be deemed to have waived, or waive, either the requirement of Landlord's consent or Landlord's right to terminate this Lease for any transfer of Tenant's inter est under this Lease without such consent. SECTION 23. SURRENDER OF MASTER LEASE PROPERTY Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Master Lease Property to Landlord, broom-clean, in good order, condition and repair (except for ordinary wear and tear and conditions which existed on the Master Lease Property prior to the Effective Date and subject to Sections 15 and 17), free of all Personal Property and Restricted Property (except for Restricted Property belonging to any Existing Tenant or Subtenant whose Existing Lease or Sublease Landlord has expressly agreed in writing may continue), and free of violation of Applicable Laws in all material respects subject to Section 5(b)(iv). To the extent Tenant fails to comply with the requirements of this Section, Landlord may restore the Master Lease Property to such condition at Tenant's expense. SECTION 24. NON-CONSENSUAL HOLDING OVER In the event Tenant remains in possession of the Master Lease Property or any part thereof without the consent of Landlord after the expiration or earlier termination of this Lease, Tenant shall be deemed, at Landlord's election, to hold the Master Lease Property as a tenant at sufferance subject to all of the terms, conditions, covenants and provisions of this Lease which shall be applicable during such time (the "Non- Consensual Holdover Period"), except that, for each month during the Non-Consensual Holdover Period, Tenant shall pay to Landlord one hundred fifty percent (150%) of the sum of the last current full monthly installment of Base Rent plus Additional Rent, which shall be payable to Landlord within five (5) business days of notice from Landlord. In addition, such election shall not preclude Landlord from seeking, and shall be cumulative with, any other remedy under this Lease or granted by law or in equity. No holding over by Tenant, as described in this Section 24, whether with or without the consent of Landlord, shall operate to extend this Lease. SECTION 25. QUIET ENJOYMENT If and for so long as Tenant pays the prescribed Rent and performs or observes all of the terms, conditions, covenants and obligations of this Lease required to be performed or observed by it hereunder, Tenant shall at all times during the Term have the peaceable and quiet enjoyment, possession, occupancy and use of the Master Lease Property without any inter ference from Landlord, or anyone claiming through or under Landlord, subject to any matters of record as of the Effective Date to which this Lease is subject. Version 10 SECTION 26. NOTICES Any notice, demand or request required or permitted to be given under this Lease or by law shall be deemed to have been given if in writing and delivered addressed to the party who is to receive such notice, demand or request at the address set forth below or at such other address as Landlord or Tenant may specify from time to time by notice. Delivery hereunder shall be deemed to include pre-paid courier delivery (by a reputable courier delivery service), pre-paid overnight delivery (by a reputable overnight delivery service), postage and fees paid U.S. Postal Service express mail or certified mail, return receipt requested, or facsimile transmission with electronic verification during normal business hours, if sent to the address of the parties designated hereunder, and shall be deemed received on the next business day such notice is delivered or refused at such address except notices sent by fax shall be deemed received upon electronic verification. Landlord: LCOR Incorporated 6701 Democracy Boulevard Bethesda, MD 20817 Attn: Mr. R. William Hard Facsimile: (301) 897-3713 with copies to: Jones, Day, Reavis & Pogue 1450 G Street, N.W. Washington, DC 20005-2088 Attn: Sigmund T. Weiner, Esq. Facsimile: (202) 737-2832 LCOR Incorporated 300 Berwyn Park, Suite 104 Berwyn, PA 19312 Attention: Mr. Peter DiLullo Facsimile: (610) 408-4420 Tenant: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: General Manager Corporate Services Facsimile: (301) 214-7147 with a copy to: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: General Counsel Facsimile: (301) 214-7128 Any copies required to be sent as above provided are for the convenience of the parties and no such copy shall constitute adequate notice for the purposes of this Section. Version 10 SECTION 27. HAZARDOUS MATERIALS Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Material" on the Master Lease Property or in the Main Building. (a) If the use, storage, handling, generation, or disposal of Hazardous Material on or in the Master Lease Property during the Term results in the release or threatened release of Hazardous Materials at, on or under the Master Lease Property in violation of Applicable Law, or otherwise necessitates investigation or cleanup of Hazardous Material as required under Applicable Law ("Environmental Conditions"), Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees but excluding consequential damages and any injury to the value of the Property, provided that this clause shall not be construed as reducing the Remediation Obligation) which arise during or after the Term as a direct result thereof. This indemnification of Landlord by Tenant includes, without limitation, reasonable costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency because of Hazardous Material present in the soil or groundwater on or under the Master Lease Property or in any improvements on the Master Lease Property. This indemnification, however, shall not apply to any Environmental Conditions caused by the acts or omissions of Landlord or its Agents. The indemnification and hold harmless obligations of Tenant under this Section 27 shall survive any termination of this Lease for a period of twenty-four (24) months after the termination. At the end of the twenty-four (24) month period, this indemnification and all of Tenant's obligations under this Section shall expire, except as to matters specifically made the subject of a lawsuit filed against Tenant before the expiration of the twenty-four (24) month period. Without limiting the foregoing, if the use, storage, handling, generation, or disposal of Hazardous Material on or in the Master Lease Property during the Term results in any Environmental Conditions, then, provided that the Environmental Condition is not caused by the acts or omissions of Landlord or its Agents, Tenant shall promptly take all actions, at its sole expense, as are necessary to return the Master Lease Property to substantially the condition existing prior to thereto or to such other condition as may satisfy the applicable governmental authorities (the "Remediation Obligation"). Landlord's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld. Nothing in this Section shall be deemed to prohibit or limit any action by Tenant against any party or parties responsible for the contamination. (b) Landlord and Tenant acknowledge that asbestos containing materials ("ACM") are located in certain portions of the Main Building. Except for the ACM to be removed by Tenant as part of the Roof Work, and so long as not required by Applicable Laws, Tenant shall not be required to Version 10 remove or otherwise treat or abate the other ACM located in the Main Building; provided, that during the Term Tenant covenants and agrees (i) to continue implementation of the Operations and Maintenance Plan described in Exhibit J attached hereto and made a part hereof at all times in compliance with Applicable Laws in all material respects; (ii) to take such actions with respect to the ACM as may be necessary to comply with Applicable Laws and to maintain the habitability of the Main Building; and (iii) to indemnify and hold Landlord harmless (except to the extent caused by Landlord) from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, reasonable attorneys' fees and costs) arising out of or relating to claims for tort liability brought by Tenant or its Agents for events occurring or accruing during the Term as a result of the existence of the ACM in the Main Building. (c) Landlord shall have the right, at any time, to cause the groundwater, soil, improvements and air at the Master Lease Property to be investigated to detect the presence of Hazardous Material during the Term, including, but not limited to, the installation of testing wells and other devices in locations selected by Landlord at Landlord's sole discretion. Landlord shall supply Tenant with copies of final investigation reports. The cost of such investigations and of the maintenance, repair and replacement of such wells and other devices shall be fully paid for by Landlord, unless Landlord's investigations reveal Environmental Conditions which Tenant is obligated to remediate under this Section. In that event, Tenant, within 30 days after receiving a copy of such investigation report and a statement of charges from Landlord, shall pay for the cost of the investigation. Any dispute under this Subsection shall be resolved under the arbitration proceedings set forth in Subsection 11(c). (d) As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of Maryland or the United States Government or other Applicable Law. The term "Hazardous Material" includes, without limitation, any material or substance which is (i) designated as a "hazardous substance" pursuant to Section 307 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq. (33 U.S.C. Section 1317), (ii) defined as a "hazardous waste" pursuant to Section 3001 of the Federal Solid Waste Disposal Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6921), or (iii) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601), or (iv) petroleum, petroleum product, polychlorinated biphenyls or urea formaldehyde. (e) Within 30 days of the Expiration Date, if requested by Landlord, Tenant shall remove all fuel oil and other liquid contents and Hazardous Materials (collectively, the "Contents") from all now or hereafter active underground storage tanks located on the Master Lease Property Version 10 and dispose of such contents off of the Master Lease Property and in accordance with Applicable Laws. Tenant shall not be obligated to remove, close or take any other action to de-commission the tanks during or after the Term. If, however, during the Term governmental authorities require such removal, closure or other action and the requirement is not prompted by Landlord's request to remove the Contents or any Development by Landlord or its Agents, Tenant shall comply with such request subject to Subsection 5(B)(iv)(d). (f) Notwithstanding anything contained in this Lease, Tenant shall have no obligation or liability to Landlord with respect to: (i) Any Hazardous Material which may exist on the Master Lease Property as of the Effective Date, except to the extent that Tenant is specifically required to take action regarding such Hazardous Material by the governmental authority having jurisdiction. (ii) Hazardous Material that migrates, flows, percolates, diffuses or in any way moves on to or under the Master Lease Property from sources outside the Master Lease Property. (iii) Hazardous Material present on or in the Master Lease Property as a result of any discharge, dumping or spilling (whether accidental or otherwise) on areas of the Master Lease Property, except the Main Building Area, by persons other than Tenant or its Agents. SECTION 28. RIGHT TO RENEW TERM (a) Provided that this Lease is then in full force and effect, and provided that no Event of Default exists at the time of the Renewal Notice or the date of commencement of the Renewal Term, Landlord hereby grants to the Tenant an option (the "Renewal Option") to renew the Initial Term of this Lease on the same terms, conditions and provisions as contained in this Lease, except as noted herein, for a period of five (5) years after the Expiration Date of the Initial Term (the "Renewal Term"), which Renewal Option period shall, except as provided below, commence immediately following the expiration of the Initial Term and end at 11:59 p.m. of the fifth anniversary of such date. (b) The Renewal Option shall be exercised, if at all, by written notice (the "Renewal Notice") from Tenant to Landlord of its election, said notice to be given no later than the twenty-four (24) months prior to the Expiration Date of the Initial Term. If the Renewal Notice is not so given by Tenant to Landlord, the Renewal Option shall be deemed waived. (c) The Renewal Term shall be upon the same terms, covenants and conditions as provided in this Lease except as follows: Version 10 (i) Tenant shall not have any further right to extend the Term or holdover after the end of the Term. (ii) The annual Base Rent for the first year of the Renewal Term shall be equal to the lesser of (i) the Fair Market Rent, and (ii) one hundred two and 75/100ths percent (102.75%) of the Base Rent rate in effect under this Lease immediately prior to commencement of the Renewal Term; but in no event less than the annual Base Rent rate in effect during the sixth Lease Year of the Initial Term (as reflected in Subsection 4(a)(vi)). (iii) The annual Base Rent shall be increased during the Renewal Term by two and 75/100ths percent (2.75%) per year on a cumulative compounded basis. (d) Landlord and Tenant shall attempt in good faith to agree as to the Fair Market Rent, and if Landlord and Tenant fail to agree as to the Fair Market Rent at least six (6) months prior to the Expiration Date of the Initial Term (the "Arbitration Deadline"), Fair Market Rent shall be determined as follows: (i) Fair Market Rent shall be the triple net rent which would be asked of tenants as of the date of commencement of the Renewal Term for space comparable to the Main Building under five (5) year leases in the Germantown/Clarksburg areas of Montgomery County, Maryland, taking into account the size of the premises being leased by Tenant and the value of brokerage commissions, rental abatements, rental credits, and tenant allowances, if any, being offered or paid under such leases. (ii) Tenant shall initiate the process to determine Fair Market Rent by giving written notice to Landlord setting forth the name and address of a leasing broker selected by Tenant to determine the Fair Market Rent. Within five (5) days after receipt of Tenant's notice, Landlord shall notify Tenant in writing of the name and address of a leasing broker selected by Landlord to determine the Fair Market Rent. Each broker shall independently make his or her determination of the Fair Market Rent within twenty (20) days after the appointment of Landlord's broker. The Fair Market Rent shall be deemed to be the average of the two determinations unless the higher of such determinations is greater than one hundred five percent (105%) of the lower of the determinations. If the higher determination is greater than one hundred five (105%) of the lower determination, the brokers selected by Landlord and Tenant shall together select a third broker within five (5) days after rendering their determinations. The third broker shall have ten (10) days to make his or her determination of the Fair Market Rent and upon such determination, the Fair Market Rent shall be deemed to be the median determination made by the three (3) brokers. If Landlord fails to give Tenant timely notice of Landlord's selection of a broker, the broker selected by Tenant shall solely determine Fair Market Rent. Version 10 (iii) Each broker appointed pursuant to this Subsection shall be a disinterested broker licensed in the State of Maryland having recognized competence in the field of commercial leasing and a minimum of ten (10) years experience as a commercial leasing broker or agent in the Montgomery County area. Each party shall pay for the cost of the broker which it selects and the parties shall share equally the cost of the third broker, if any. (e) Upon the valid exercise by Tenant of the Renewal Option, at the request of either party hereto and within thirty (30) days after such request, Landlord and Tenant shall enter into a written supplement to this Lease incorporating the terms, conditions and provisions applicable to the Renewal Term as determined in accordance with the provisions of this Section; provided, that if the amount of Base Rent for the first year of the Renewal Term has not then been set, such amount shall be entered into such supplement when determined. SECTION 29. SECURITY DEPOSIT If at any time during the Term, the credit rating of Tenant's corporate debt drops below BBB as rated by Standard & Poor's (or the equivalent rating by any other national rating agency designated by Landlord), upon notice from Landlord, Tenant shall deposit a sum with Landlord equal to one month's installment of the then applicable annual Base Rent ("Security Deposit"), as security for the full and faithful performance by Tenant, of each and every term, covenant, and condition of this Lease. If there an event of Default, Landlord may use the Security Deposit as payment of any Rent or other payment due from Tenant to Landlord or to otherwise cure any default of Tenant hereunder. To the extent that any of the Security Deposit is used for this purpose, Tenant shall pay such amount to Landlord along with the next month's Rent in order to replenish the Security Deposit to the original amount stated herein. The Security Deposit shall be returned to Tenant within thirty (30) days of the Expiration Date or earlier termination of this Lease to the extent that such amount is not depleted in order to remedy any default by Tenant hereunder. SECTION 30. MISCELLANEOUS GENERAL PROVISIONS (a) Payments Deemed Rent. Any amounts of money to be paid by Tenant to Landlord pursuant to the provisions of this Lease, whether or not such payments are denominated Rent or Additional Rent and whether or not they are to be periodic or recurring, shall be deemed Rent or Additional Rent for purposes of this Lease; and any failure to pay any of same shall entitle Landlord to exercise all of the rights and remedies afforded hereby or by law or in equity for the collection and enforcement of Tenant's obligation to pay Rent. Tenant's obligation to pay any such Rent or Additional Rent pursuant to the provisions of this Lease shall survive the expiration or other termination of Version 10 this Lease and the surrender of possession of the Master Lease Property. (b) Interest on Deposits. Any amount deposited with Landlord under this Lease shall be held by Landlord in a federally insured, interest bearing account. Any interest earned on such deposit shall accrue to Tenant and shall be transferred to Tenant promptly after the Expiration Date or such earlier time as may be specified in this Lease unless Landlord is required by Applicable Laws to return such interest to Tenant sooner than stated herein. Any amount deposited with Mortgagee by Tenant (or by Landlord on Tenant's behalf) shall be held by Mortgagee pursuant to Applicable Laws and pursuant to the security documents between Landlord and Mortgagee. No interest shall accrue unless required by Applicable Laws or such security documents. Notwithstanding the foregoing, any amounts placed in the Escrow Account shall be governed by the provisions of Subsection 21(b)(iii)(B). (c) Landlord Cross Default. Any default by Landlord under the Facilities Lease shall be a default by Landlord under this Lease. (d) Estoppel Letters. Tenant shall, within ten (10) business days following written request from Landlord, execute, acknowledge and deliver to Landlord or to any then existing or prospective lender, investor or purchaser, with respect to the Master Lease Property or any part thereof, designated by Landlord, a written statement certifying (i) that this Lease is in full force and effect (if such is the case) and unmodified (or, if modified, stating the nature of such modification), (ii) the date to which Rent has been paid, (iii) that there are not, to Tenant's actual knowledge, any uncured defaults by Landlord or Tenant (or specifying such defaults if any are claimed), and (iv) such other matters as Landlord may reasonably request. Any such statement may be relied upon by any such then existing or prospective lender, investor or purchaser. If Tenant fails to deliver such statement within the ten (10) business day period and if following the expiration of that period Landlord gives a second written request for the statement and Tenant fails to deliver the statement within five (5) business days after the second request, Tenant shall conclusively be deemed to have responded that this Lease is in full force and effect and unmodified and that there are no uncured defaults in Landlord's performance hereunder. (e) Brokers. Each party represents and warrants to the other that no broker procured this Lease on its behalf and that such party had no conversations or negotiations with any broker concerning the leasing of the Master Lease Property, other than Barnes, Morris, Pardoe and Foster, which firm is receiving a commission from Tenant in connection with the Purchase and Sale Agreement and is not entitled to a commission in connection with this Lease. Each party shall indemnify the other against liability in connection with a breach of its representation and Version 10 warranty in this Subsection and in connection with any claim for a brokerage or finder's commission or fee arising out of its acts. This indemnification shall survive any termination of this Lease. (f) Applicable Law. This Lease and all matters pertinent thereto shall be construed and enforced in accordance with the Applicable Laws of the State of Maryland, excluding choice of laws principles. (g) Entire Agreement. This Lease, including all exhibits hereto, constitutes the entire agreement between the parties hereto with respect to the leasing of the Master Lease Property and may not be modified except by an instrument in writing executed by the parties hereto. (h) Binding Effect. This Lease and the respective rights and obligations of the parties hereto shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto as well as the parties themselves; subject, however, to Subsection (o) below. (i) Survival. All provisions of this Lease which by their express terms survive termination of this Lease or which by the operation of their terms are intended to be performed, in whole or in part, after termination of this Lease, shall survive any termination of this Lease. (j) Severability. If any provision of this Lease shall be held to be invalid, void or unenforceable, such provision shall be deemed reformed to be valid, in effect and enforceable, and to be as close in meaning and intent as the defective provision and still the remaining provisions hereof shall not be affected or impaired, and such remaining provisions shall remain in full force and effect. (k) Headings, Gender, etc. As used in this Lease, the word "person" shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate; and words of any gender shall include any other gender. The topical headings of the several paragraphs of this Lease are inserted only as a matter of convenience and reference, and do not affect, define, limit or describe the scope or intent of this Lease. References in this Lease to Sections and Subsections are references to Sections and Subsections of this Lease. (l) Waiver of Jury. To the extent permitted by Applicable Laws, each of Landlord and Tenant hereby waives any right it may have to a jury trial in the event of litigation between Landlord and Tenant pertaining to this Lease. (m) Landlord's Right to Cure. Landlord may, but shall not be obligated to, cure any default by Tenant, specifically including, but Version 10 not by way of limitation, Tenant's failure to pay Impositions, obtain Insurance, Care for the Master Lease Property, or satisfy lien claims, after complying with any applicable notice and cure provisions established under this Lease; and whenever Landlord so elects, all reasonable out of pocket costs and expenses paid by Landlord in curing such default, including, without limitation, reasonable attorneys' fees, shall be Additional Rent due on the next scheduled Rent payment date. (n) Relationship of Parties. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any act of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. (o) Landlord Means Owner. The term "Landlord" as used in this lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the Master Lease Property and, in the event of any transfer or transfers of the title to all of the Master Lease Property, Landlord herein named (and in case of any subsequent transfer or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed (but not any liabilities accrued prior to the date of transfer); provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease, shall be paid to Tenant and further provided that the transferee assumes in writing all of the covenants and obligations of Landlord to observed and performed on and after the date of transfer. (p) References to Size. Landlord and Tenant acknowledge and agree that any references in this Lease to the size of the Property, the Main Building Area, the Main Building or any portion thereof are for convenience only and regardless of whether the actual size of such areas is greater or less than the size stated in this Lease, all obligations of the parties hereunder, including without limitation, the obligation to pay Rent shall remain the same and shall not be affected by any errors in references to size. (q) Unavoidable Delays. For purposes of this Lease, the term "Unavoidable Delays" shall mean delays caused by strikes, lockouts, acts of God, inability to obtain labor or materials, governmental restrictions or inaction, enemy action, civil commotion, fire, terrorist action, epidemic, public utility failure, unavoidable casualty, moratorium Version 10 or similar laws prohibiting performance, weather conditions or any other similar matter which shall be beyond the reasonable control of Landlord or Tenant, as the case way be; but the lack or insufficiency of funds shall not constitute an Unavoidable Delay. (r) Landlord's Approvals. Wherever Landlord's consent or approval are required under this Lease, Landlord shall approve or disapprove the matter within ten (10) business days after Tenant requests the consent or approval in writing. If Landlord fails to do so and if, following the expiration of the ten (10) business day period, Tenant gives a second written request for the consent or approval and Landlord fails to approve or disapprove the matter within five (5) business days after the second request, Landlord shall conclusively be deemed to have consented to or approved the matter, as the case may be. (s) Rate of Interest. If any amount owed by Landlord to Tenant under this Lease remains unpaid after such amount is due and notice thereof has been given to Landlord, the outstanding amount shall bear interest at the Stipulated Rate from the date such amount is due and such notice is given to the date such amount is paid. (t) Cooperation of Parties. Whenever the parties are required to cooperate with each other under this Lease but are entitled to reimbursement for their out-of-pocket costs to third parties, the party that is obligated to cooperate shall provide an estimate of such third party costs to the party requesting such cooperation and obtain the prior written approval from such other party not to be unreasonably withheld or delayed before such costs are incurred. (u) Reconciliation. Nothing in this Lease shall prevent or impair Tenant from performing its obligations or observing its covenants under the Existing Space Leases. Further, nothing in this Lease shall prevent or impair any of the Existing Tenants from exercising their rights and privileges under the Existing Space Leases. No such action by Tenant or the Existing Tenants in accordance with the Existing Space Leases shall be deemed to be a breach or default by Tenant under this Lease. (v) Memorandum of Lease. Upon request of either party the other party shall promptly execute and deliver a memorandum or other short form version of this Lease setting forth the basic terms of this Lease excluding Rent. The party recording such memorandum, short form version, or other document giving notice of this Lease shall pay any and all recordation and transfer taxes due in connection with such recordation. (w) Financial Reports. In the event that Tenant is no longer a publicly traded company with common stock trading on either the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Exchange (or, in the event the Tenant's stock is no longer traded on such Version 10 exchanges, or a successor or reasonably equivalent exchange), Tenant shall supply Landlord, within ten (10) business days of Landlord's request therefor (to be no more frequent than once per year), copies of Tenant's most recent financial reports. Such reports shall (i) include an income statement, balance sheet, statement owner's equity and statement of cash flows, (ii) shall be audited by a certified public accountant or, to the extent audited Financial Reports are not otherwise obtained by Tenant for other purposes, certified by the chief financial officer of Tenant, to his/her knowledge, as being true, correct and complete financial reports, and (iii) shall be dated no later than twelve months prior to Landlord's request. Notwithstanding the foregoing, in the event that Landlord requests such financial reports within one hundred twenty (120) days after Tenant's fiscal year end, Tenant shall have up to one hundred twenty (120) days from such fiscal year end to supply such reports to Landlord; provided Tenant has given Landlord its most recent financial reports and such reports are not dated earlier than twelve (12) months prior to Tenant's fiscal year end. (x) Landlord's Affiliates. Notwithstanding anything contained in this Lease to the contrary, any act or omission of an affiliate of Landlord on any Excluded Areas shall not be a default of Landlord under this Lease. In no event shall this provision be construed in any manner as a waiver of any right that Tenant has at law or in equity against such affiliate as a result of such act or occurrence. [SIGNATURE PAGE FOLLOWS] Version 10 IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed as of the day and year stated herein. LANDLORD: LCOR CLARKSBURG L.L.C. By: Clarksburg Management, Inc. By:/s/ Michael T. Goulder Name: Michael T. Goulder Title: Vice President TENANT: COMSAT CORPORATION By: /s/ Allen E. Flower Name: Allen E. Flower Title: Vice President and Chief Financial Officer Version 10 SCHEDULE I Defined Terms AAA: Section 11(c) ACM: Section 27(b) Accelerated Payment: Section 21(b)(iii)(A) Additional Easements: Section 6(f) Additional Rent: Section 4(b) Adequate Assurance of Future Performance: Section 22(d) All Risks Policy: Section 14(a)(i) Alterations: Section 13(a) Applicable Laws: Section 5(b)(iv) Appurtenances: Section 6(d) Arbitration Deadline: Section 28(d) Architect: Section 15(b)(i) Assignment: Section 19(b) Base Rent: Section 4(a) Blanket Policy: Section 14(e) Building A, B or C: Definitions of Main Building Care, Care for, Care of: Section 11(a) Communication Facilities: Section 6(a)(iii) Comparable Buildings: Section 11(a) Comparable Properties: Section 11(b) Contents: Section 27(e) Damage: Section 15(a) Declaration: Section 11(b) Default Measuring Period: Section 21(b)(iii)(B) Development: Section 6(a) Effective Date: Preamble Environmental Conditions: Section 27(a) Escrow Account: Section 21(b)(iii)(B) Escrowee: Section 21(b)(iii)(B) Events of Default: Section 21(a) Existing Space Leases: Section 19(a) Existing Tenants: Section 19(a) Facilities Lease: Section 21(a)(iii) Flood and Earthquake Insurance: Section 14(f) Flood Zone: Section 14(f) Hazardous Material: Section 27 and 27(d) Holdover Notice: Section 3(b)(i) Holdover Period: Section 3(b)(i) Holdover Space: Section 3(b)(ii) Impositions: Section 7(a) and (d) Indemnifying Party: Section 16(c) Indemnitee: Section 16(c) Indemnity Payment: Section 16(c) Initial Term: Section 3(a) Institutional Mortgagee: Section 15(c)(i) Insurable Casualty: Section 15(h) Insurance: Section 14(a) Insurance Notice: Section 14(g) Version 10 SCHEDULE I (cont'd) Insurance Trustee: Section 15(c) Landlord: Preamble; Section 30(o) Landlord Approved SNDA: Section 19(b) Lease: Preamble Lease Renewal: Section 19(d) Lease Year: Section 3(c) Liability Policy: Section 14(a)(ii) Measuring Period: Section 19(d) Mitigation Leases: Section 21(b)(iii)(B) Mortgagee: Section 7(e)(i) Non-Broker Sublease: Section 19(b) Non-Consensual Holdover Period: Section 24 Operating Expenses: Section 21(b)(iii)(B) Personal Property: Section 13(b) Plans: Section 13(a)(i) Post Default Leases: Section 21(b)(iii)(B) Preapproved Alterations: Section 13(a) Prime Rate: Section 4(h) Profit: Section 19(d) Purchase and Sale Agreement: Recital (a) Remediation Obligation: Section 27(a) Renewal Notice: Section 28(b) Renewal Option, Renewal Term: Section 28(a) Rent: Section 4(b) Rent Insurance: Section 14(a)(iv) Replacement Value: Section 14(a)(i) Requisition: Section 15(c)(i) Restoration: Section 15(a) Restricted Areas: Section 12(a) Restricted Property: Section 13(b) Roof Based Facilities: Section 13(a) Roof Work: Section 11(e) Security Deposit: Section 29 Seismic Activity Zone: Section 14(f) Signs: Section 9(a) Standard Rating: Section 14(g) Stipulated Rate: Section 4(h) Sublease: Section 19(b) Sublease Arbitration Deadline: Section 19(c) Subject Space: Section 19(d) Subtenant: Section 19(e) Taken, Taking: Section 17(a)(i) Tax and Insurance Holdbacks: Section 21(b)(iii)(B) Tenant: Preamble Tenant Approved SNDA: Section 20(a) Tenant's Knowledge: Section 15(c)(ii) Term: Section 3(a) Third Party Claim: Section 16(d)(i) Version 10 Triggering Event: Section 6(b) Unavoidable Delays: Section 30(q) Utilities: Section 8(a) Version 10 Schedule II Deductibles I. All Risk Policy $100,000 Flood and Earthquake Insurance $150,000 II. In the event that Tenant's corporate debt drops below BB, as rated by an Approved Credit Rating Agency, the following deductibles shall apply: All Risk Policy $25,000 Flood and Earthquake Insurance $50,000 Version 10 SCHEDULE OF EXHIBITS EXHIBIT SECTION Exhibit A (Description of Land) 1(a) Exhibit B (Description of Main 1(a) Building Area) Exhibit C (Description of 1(a) Installations Premises) Exhibit D Intentionally Omitted Exhibit E (Wire Instructions) 4(g) Exhibit F (Roof Work) 11(e) Exhibit G (Existing Space Leases) 19(a) Exhibit H (Landlord Approved SNDA) 19(b) Exhibit I (Tenant Approved SNDA) 20(a) Exhibit J (Operations and 27(b) Maintenance Plan) Version 10 EX-10.51 5 FACILITIES LEASE AGREEMENT EXHIBIT 10.51 FACILITIES LEASE AGREEMENT BY AND BETWEEN LCOR CLARKSBURG L.L.C., AS LANDLORD AND COMSAT CORPORATION, AS TENANT CLARKSBURG, MONTGOMERY COUNTY, MARYLAND TABLE OF CONTENTS INTRODUCTION Section 1. DEFINITIONS........................................1 Section 2. LEASE OF INSTALLATIONS PREMISES....................2 Section 3. TERM...............................................2 Section 4. RENT...............................................3 Section 5. USE OF THE INSTALLATIONS PREMISES..................5 Section 6. DEVELOPMENT; DESIGNATION OF THE EXCLUDED AREAS.........................................7 Section 7. TAXES AND IMPOSITIONS..............................9 Section 8. UTILITIES.........................................12 Section 9. SIGNS.............................................13 Section 10. AS-IS CONDITION OF INSTALLATIONS PREMISES.....................................13 Section 11. REPAIRS, MAINTENANCE AND MANAGEMENT...............14 Section 12. ACCESS TO INSTALLATIONS PREMISES..................15 Section 13. ALTERATIONS AND PERSONAL PROPERTY.................16 Section 14. INSURANCE.........................................17 Section 15. DAMAGE OR DESTRUCTION.............................20 Section 16. INDEMNIFICATION...................................21 Section 17. CONDEMNATION......................................25 Section 18. LIENS.............................................26 Section 19. EXISTING SPACE LEASES; ASSIGNMENT AND SUBLETTING...................................27 Section 20. SUBORDINATION OR SUPERIORITY OF LEASE.............28 Section 21. DEFAULTS AND REMEDIES.............................29 Section 22. BANKRUPTCY OR INSOLVENCY..........................34 Section 23. SURRENDER OF INSTALLATIONS PREMISES...............36 Section 24. NON-CONSENSUAL HOLDING OVER.......................36 Section 25. QUIET ENJOYMENT...................................37 Section 26. NOTICES...........................................37 Section 27. HAZARDOUS MATERIALS...............................38 Section 28. RIGHT TO RENEW TERM...............................40 Section 29. SECURITY DEPOSIT..................................41 Section 30. MISCELLANEOUS GENERAL PROVISIONS..................41 SCHEDULE I SCHEDULE OF EXHIBITS FACILITIES LEASE AGREEMENT THIS FACILITIES LEASE AGREEMENT (this "Lease") is entered into and made effective as of the 12th day of September, 1997 (the "Effective Date"), by and between LCOR CLARKSBURG L.L.C., a Delaware limited liability company ("Landlord") and COMSAT Corporation, a District of Columbia corporation ("Tenant"). WITNESSETH: (a) Prior to but contemporaneously with the execution and delivery of this Lease, Tenant sold and transferred the Installations Premises to Landlord pursuant to that certain Agreement of Sale dated the Effective Date, by and between Tenant, as seller, and Landlord, as purchaser (the "Purchase and Sale Agreement"). (b) Landlord desires to lease to Tenant, and Tenant desires to lease back from Landlord, the Installations Premises, all as set forth and on the terms and conditions contained in this Lease. NOW THEREFORE, in consideration of the mutual promises set forth in this Lease and other good and valuable consideration, the receipt and sufficiency of which are acknowledged by each party, Landlord and Tenant agree as follows: SECTION 1. DEFINITIONS (a) The following terms shall have the meanings ascribed thereto below: Agents: The agents, employees, contractors, subcontractors, affiliates, licensees and invitees of each party (and in the case of Tenant, subtenants). Auxiliary Buildings: All buildings now or hereafter located on the Installations Premises and currently consisting of three buildings which, for the purposes of this Lease, Landlord and Tenant agree contain, in the aggregate, 36,000 gross square feet of space. Communications Facilities: The satellite dishes, antennae, or similar structures or equipment now or hereafter located on the Installation Premises. Expiration Date: The ending date of the Term. Installations Premises: Certain portions of the Land as described and shown on Exhibit C attached hereto and made a part hereof, and containing the Auxiliary Buildings and the Communications Facilities. Land: Approximately 227 acres of land located in Clarksburg, Montgomery County, Maryland, as described or shown on Exhibit A attached hereto and made a part hereof. Master Lease Property: The Land, together with all improvements located thereon, less the Installations Premises and the Excluded Areas. Main Building Area: The Main Building and the Parking Areas, access drives, and other appurtenant areas serving the Buildings on such area, as described or shown on Exhibit B attached hereto and made a part hereof. Parking Areas: Those certain areas located on the Installations Premises and designated for use for parking of motor vehicles as of the Effective Date. Unimproved Area: The Master Lease Property, less the Main Building Area. (b) Other terms shall have meanings ascribed to such terms in this Lease and as shown on Schedule I attached hereto and made a part hereof. SECTION 2. LEASE OF INSTALLATIONS PREMISES Landlord, for and in consideration of the rents, covenants and agreements hereinafter reserved, mentioned and contained on the part of Tenant and its successors and assigns, to be paid, kept and performed, has leased, rented, let and demised, and by these presents does lease, rent, let and demise unto Tenant, and Tenant does hereby take and hire, upon and subject to the covenants, agreements, provisions, limitations and conditions herein expressed, the Installations Premises. SECTION 3. TERM (a) The initial term of this Lease (the "Initial Term") shall be for a period of ten (10) years commencing on the Effective Date and ending at 11:59 p.m. local time on the day preceding the tenth anniversary of the Effective Date, unless this Lease shall be sooner terminated as hereinafter provided or as provided by law. Notwithstanding the foregoing, if the Term ends on any day other than the last day of any calendar month, the Term shall be extended so that the last day of the Term is the last day of such calendar month. The Initial Term, as may be extended by exercise of Section 28, may sometimes be collectively referred to in this Lease as the "Term". (b) As used in this Lease, the term "Lease Year" means each consecutive period of twelve (12) calendar months during the Term, commencing on the Effective Date. If, however, the Effective Date is other than the first day of a calendar month, the first Lease Year shall begin on the Effective Date and end on the first anniversary of the last day of the calendar month in which the Effective Date falls, and each succeeding Lease Year shall be each succeeding consecutive period of twelve (12) calendar months thereafter during the Term. SECTION 4. RENT (a) Tenant covenants and agrees to pay Landlord in lawful money of the United States, annual base rent for the Installations Premises ("Base Rent") in twelve (12) equal monthly installments, in advance, on or before the first day of each and every month throughout the Term, as follows: (i) FOUR HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($425,000.00) during the first Lease Year. (ii) FOUR HUNDRED THIRTY-SIX THOUSAND SIX HUNDRED EIGHTY-SEVEN AND 50/100 DOLLARS ($436,687.50), during the second Lease Year. (iii) FOUR HUNDRED FORTY-EIGHT THOUSAND SIX HUNDRED NINETY-SIX AND 41/100 DOLLARS ($448,696.41), during the third Lease Year. (iv) FOUR HUNDRED SIXTY-ONE THOUSAND THIRTY-FIVE AND 56/100 DOLLARS ($461,035.56), during the fourth Lease Year. (v) FOUR HUNDRED SEVENTY-THREE THOUSAND SEVEN HUNDRED FOURTEEN AND 04/100 DOLLARS ($473,714.04), during the fifth Lease Year. (vi) FOUR HUNDRED EIGHTY-SIX THOUSAND SEVEN HUNDRED FORTY-ONE AND 18/100 DOLLARS ($486,741.18), during the sixth Lease Year. (vii) FIVE HUNDRED THOUSAND ONE-HUNDRED TWENTY-SIX AND 56/100 DOLLARS ($500,126.56), during the seventh Lease Year. (viii) FIVE HUNDRED THIRTEEN THOUSAND EIGHT HUNDRED EIGHTY AND 04/00 DOLLARS ($513,880.04), during the eighth Lease Year. (ix) FIVE HUNDRED TWENTY-EIGHT THOUSAND TWELVE AND 10/100 DOLLARS ($528,012.10), during the ninth Lease Year. (x) FIVE HUNDRED FORTY-TWO THOUSAND FIVE HUNDRED THIRTY-TWO AND 43/100 DOLLARS ($542,532.43), during the tenth Lease Year. Notwithstanding the foregoing, if the Effective Date shall be a day other than the first day of a calendar month, there shall be due and payable on the Effective Date, as the installment of Base Rent for such fractional month, an amount determined by dividing the Base Rent for the first Lease Year by 365 and multiplying the result by the number of days from the Effective Date through the end of such month. (b) Tenant also covenants and agrees to pay, as additional rent (the "Additional Rent"), all sums, Impositions, costs, expenses and other payments which Tenant in any of the provisions of this Lease assumes, agrees or is obligated to pay, or which shall become otherwise due and payable from Tenant to Landlord under this Lease (other than Base Rent). Base Rent and Additional Rent may sometimes be collectively referred to herein as "Rent". (c) It is the purpose and intent of Landlord and Tenant that, except as explicitly set forth herein, the Base Rent shall be absolutely net to Landlord, so that this Lease shall yield, net to Landlord, the net annual rent specified in Subsection (a) of this Section 4 in each Lease Year during the Term and that all costs, expenses and obligations of every kind and nature whatsoever, in connection with or relating to the Installations Premises shall be the obligation of Tenant and shall be paid by Tenant. (d) The Base Rent shall be paid to Landlord promptly when due without notice or demand therefor, and without any abatement (except as explicitly stated to the contrary in Section 8), deduction or set-off for any reason whatsoever. (e) No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct Rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or as provided by law or in equity. (f) If any of the Rent payable under the terms and provisions of this Lease shall be or become uncollectible, reduced or required to be refunded because of any rent control or similar act or law enacted by a valid governmental authority, Tenant shall enter into such agreements and take such other steps that Landlord may request and as may be legally permissible to permit Landlord to collect the maximum rents which, from time to time during the continuance of such legal rent restriction, may be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (i) the Rent shall become and thereafter be payable in accordance with the amounts reserved herein for the periods following such termination, and (ii) Tenant shall promptly pay to Landlord, to the maximum extent legally permissible, an amount equal to (a) the Rent which would have been paid pursuant to this Lease but for such legal rent restriction, less (b) the Rent paid by Tenant during the period such rent restriction was in effect. (g) All Rent and other payments required to be made by Tenant to Landlord shall be delivered to Landlord by wire transfer pursuant to the wire transfer instructions as shown on Exhibit E attached hereto and made a part hereof or to any other single party that Landlord may specify from time to time by written notice given to Tenant. (h) In recognition of the extra costs to Landlord resulting from Tenant's failure to make timely payment of any installment of Base Rent, if any such installment is not paid within nine (9) days after its due date, the delinquent amount shall be subject to a service charge of five percent (5%) of such delinquent amount, or such lesser charge as may be the maximum charge permitted by law. In addition, if any installment of Base Rent or any other sum due Landlord under this Lease remains unpaid seventy-five (75) days after its due date, the outstanding amount shall bear interest at an annual rate of two percent (2%) over the "Prime Rate" then prevailing or such lesser rate as may be the maximum rate permitted by law (the "Stipulated Rate"), and calculated from the due date of such sum and continuing through the date such sum is paid in full. As used in this Lease, the term "Prime Rate" means the prime rate of interest for large money center banks as published in the Money Rates section of the Wall Street Journal or if the Wall Street Journal ceases to publish such rate, as established by reference to such other authority as is generally accepted in the business community as a source for determining the "Prime Rate". SECTION 5. USE OF THE INSTALLATIONS PREMISES (a) The Installations Premises may be occupied and used for any lawful purpose and shall not be used for any other purpose. In addition, Tenant shall have easements on, over, across and through the Main Building Area and the Unimproved Area for (i) access to the Installations Premises via roads existing in the Unimproved Area and the Main Building Area as of the Effective Date, or as may be relocated as expressly provided for in this Lease, (ii) purposes which are incidental to use of the Installation Premises, such as use, maintenance, repair, and replacement of utilities, storm drainage facilities, and signage serving or used in connection with the Installation Premises, (iii) reasonable recreation uses, such as use of the existing recreational facilities, and (iv) temporary activities and uses that Tenant reasonably deems desirable. Notwithstanding anything to the contrary contained in this Lease, with respect to the uses described in clauses (iii) and (iv) above, (y) the Tenant shall ensure that such uses do not interfere with the Development, and (z) no action or omission of Landlord, or its Agents, successors and assigns that interferes with such uses shall be a default of Landlord under this Lease. (b) Tenant further agrees as follows: (i) Tenant and its Agents shall use the Installations Premises and conduct their business thereon in a safe, careful, reputable and lawful manner. (ii) Tenant shall obtain, or cause to be obtained, all certificates, licenses and permits necessary for its, or its subtenants', occupancy, use, operation and maintenance of the Installations Premises. Upon reasonable advance request by Tenant, Landlord shall reasonably cooperate with Tenant in Tenant's obtaining such necessary certificates, licenses or permits, including, without limitation, signing applications for the same within ten (10) business days after Tenant's request if Landlord's signing is required by Applicable Law or requested by a governmental authority; provided, that Landlord shall not be required to incur any out-of-pocket costs to third parties in connection therewith. Tenant shall promptly reimburse Landlord for any of its reasonable out-of-pocket costs to third parties for review or advice about such certificates, licenses or permits. (iii) Tenant shall not commit, nor allow to be committed, in, on or about the Installations Premises, any act of waste, including any act which might deface, damage or destroy any improvement thereon, or any part thereof. Further, Tenant shall not permit any noise or odor to be emitted from the Installations Premises which is unlawful or which constitutes a legal nuisance. Notwithstanding the foregoing, Tenant shall not have any responsibility for any waste, noise, or odor caused by Landlord or its Agents. (iv) Tenant shall promptly comply in all material respects with all present and future laws, statutes, ordinances, rules, regulations and orders of any federal, state, municipal or other government or agency thereof having jurisdiction over and relating to the use, condition and occupancy of the Installations Premises, and any covenants, conditions and restrictions of record existing as of the Effective Date and governing the Installations Premises (collectively, the "Applicable Laws"). Tenant acknowledges that the Applicable Laws are of public record and that Tenant knows the character of its operation on the Installations Premises. Tenant shall have sole responsibility for its compliance with the Applicable Laws in all material respects, and Tenant's inability to so comply shall not be cause for Tenant to terminate this Lease. Notwithstanding the foregoing: (A) Tenant shall not be required to comply with any Applicable Laws to the extent that Tenant or the Installations Premises are legally "grandfathered" or exempt from the application of such Applicable Laws or Tenant may obtain from the appropriate authorities a waiver or variance with respect to compliance. (B) Tenant shall not be required to comply with any legal requirements in connection with the Installations Premises arising out of or relating to the Development or arising out of other acts or omissions of Landlord or its Agents on or with respect to the Installations Premises. All of such requirements on the Installations Premises shall be promptly complied with by Landlord in all material respects, at its own expense. (C) Tenant shall not be obligated to correct any violations of Applicable Laws which may exist on the Installations Premises as of the Effective Date, except to the extent specifically required to do so by written notice from the governmental authority having jurisdiction. (D) Tenant shall have the right to contest by appropriate legal proceedings, conducted diligently and in good faith, without expense to Landlord, the validity or application of any Applicable Laws. If compliance with the Applicable Law being contested may legally be delayed pending the prosecution of the proceeding, Tenant may delay compliance until the final determination of the proceeding. Landlord shall execute and deliver, within ten (10) business days after request by Tenant, any appropriate papers and/or other instruments that may be necessary to permit Tenant to contest the validity or application of the Applicable Law. Landlord shall otherwise reasonably cooperate with Tenant in the contest, provided that Landlord shall not be required to incur any out-of-pocket costs to third parties in connection therewith. Notwithstanding the foregoing, Tenant shall ensure that any such contest does not cause any lien to be filed against the Installations Premises or any portion thereof. SECTION 6. DEVELOPMENT; DESIGNATION OF THE EXCLUDED AREAS (a) Tenant acknowledges that, among other purposes, Landlord purchased the Land for possible development and/or sale of all or portions of the Unimproved Area. Although Landlord is not required to develop or sell any of the Unimproved Area, Landlord is contemplating a "mixed-use" development thereon, consisting of, among other things, uses of varying densities, sizes and natures, and infrastructure in order to serve same (all or any portion thereof, the "Development"). The Development shall be at Landlord's sole cost. Tenant acknowledges that the Development may require Landlord to change the zoning classification of the Installations Premises. Tenant covenants and agrees that during the Term it shall not object to, and shall reasonably cooperate with Landlord with respect to, Development by Landlord or its successors of any of the Unimproved Area and shall reasonably cooperate so as to avoid interference with the Development. Notwithstanding the foregoing: (i) The Development by Landlord shall not interfere with Tenant's or its subtenants' use of the Installations Premises. (ii) No rezoning or other development approvals sought by Landlord for all or any part of the Installations Premises shall prohibit, restrict, or make non-conforming any of the uses which may be conducted on the Installations Premises under the I-3 zoning applicable to such property as of the Effective Date. (iii) Landlord acknowledges that the uninterrupted operation of the Communications Facilities is of critical importance to Tenant. Landlord shall not oppose the installation or continued operation of the Communications Facilities. (iv) Tenant shall not be required to incur any liability or out of pocket expense to third parties in providing cooperation to Landlord or its successors with respect to Development. (b) Intentionally Omitted. (c) Intentionally Omitted. (d) In the event that ownership of any portion of the Main Building Area or Unimproved Area is transferred to another party (an "Excluded Area") and such Excluded Area contains any road, utility line, drainage line, storm water management facility, sign, or other improvement or amenity then being used by Tenant in connection with the Auxiliary Buildings or the Communications Facilities (collectively, "Appurtenances"), then, automatically upon such transfer of the Excluded Area, Tenant shall be deemed to have easements for the continued uninterrupted use of the Appurtenances for so long as this Lease remains in effect. The easements provided for in this subsection shall include the right of Tenant to enter upon the Excluded Area to inspect, maintain, repair, and replace the Appurtenances. Notwithstanding the foregoing, Landlord may temporarily discontinue any of the Appurtenances for a period of not more than forty-eight (48) hours if Landlord provides Tenant with temporary Appurtenances, provided such temporary Appurtenances allow Tenant and its Agents to use the Installations Premises without any material diminishment of Tenant's or its Agents' use of the Installations Premises or any material interference with the business operations of Tenant or its subtenants on the Installations Premises. (e) Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to pay for any incremental, additional or increased cost of Insurance or any increased costs of Care of the Installations Premises which are attributable to Development or any other acts or omissions of Landlord or its Agents with respect to the Installations Premises or the Unimproved Area. (f) In addition to the easements for existing Appurtenances provided for in Subsection 6(d), Landlord shall grant to Tenant, or to any utility company or governmental authority designated by Tenant, such other easements for utilities, drainage, stormwater management, and other similar matters on, under, and across the Main Building Area or Unimproved Area as may be reasonably required in connection with the use or occupancy of the Installations Premises and in accordance with this Lease ("Additional Easements"). No Additional Easements shall materially and adversely affect the Development or materially increase the cost of Development. Landlord shall have a reasonable right of approval of the location of all Additional Easements. All Additional Easements shall be granted without charge within ten (10) business days after written request by Tenant, accompanied by the instrument to be executed and a plat showing the location of the Additional Easement. Landlord shall make good faith and commercially reasonable efforts to cause its mortgagees to subordinate their liens against the Main Building Area or Unimproved Area to any Additional Easements. SECTION 7. TAXES AND IMPOSITIONS (a) Tenant covenants and agrees to pay, not later than the first day on which any interest or penalty will accrue or be assessed for the non-payment thereof, all of the following items applicable to or affecting the Installations Premises or any part thereof accruing or payable from and after the Effective Date and during the Term or applicable thereto: (i) all real estate taxes and assessments (including, without limitation, assessments for special business improvement or assessment districts), (ii) personal property taxes, (iii) occupancy and rent taxes specifically imposed on tenants in Montgomery County or attributable to subtenants of Tenant, (iv) water and sewer rents, rates and charges, (v) vault taxes and charges, (vi) certificate, license and permit fees, (vii) any taxes, assessments or governmental levies, general and special, ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever which at any time prior to or during or applicable to the Term or any part thereof may be assessed, levied, confirmed, imposed upon, or grow or accrue or become due and payable out of, or charged with respect to, or become a lien on, the Installations Premises or any part thereof, or the sidewalks or streets in front of or adjoining the Installations Premises, or any vault, passageway or space in, over or under such sidewalk or street, or any other appurtenances to the Installations Premises, or any personal property, equipment or other facility used in the operation thereof, or any use or occupation of the Installations Premises, or any document by which Tenant creates or transfers an interest or estate in the Installations Premises, and (vii) any fines or penalties or similar governmental charges applicable with respect to any of the foregoing, together with interest and costs thereon (all such items aforesaid may sometimes be collectively referred to herein as "Impositions"). (b) If, by law, any Imposition imposed during the Term, which is an assessment not related to general real estate taxes, may at the option of the taxpayer be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Tenant may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and, in such event, shall pay such installments plus interest as may become due during the Term of this Lease; provided, that all such payments shall be made before any fine, penalty, or other charge for non-payment of any installment may be added thereto. (c) Any Imposition (including, without limitation, those Impositions which have been converted into installment payments by Tenant as referred to in Subsection (b) above) relating to a period of time which is partially within the Term and partially beyond the Expiration Date shall be adjusted between Landlord and Tenant as of the Expiration Date so that Landlord shall pay that portion of such Imposition which is attributable to any period of time after the Expiration Date and Tenant shall pay the remainder thereof. This subsection shall survive termination of the Lease. (d) Notwithstanding the foregoing, Tenant shall not be required to pay municipal, state or federal income, excess profits, capital levy, rental (except as set forth in clause (iii) of Subsection (a)), estate, succession, inheritance, transfer, recordation (except to the extent described in Section 30(v)) or gift taxes of Landlord, any corporate franchise tax imposed upon Landlord or any tax imposed because of the nature of the business entity of Landlord; provided, however, that if at any time during the Term, the method of taxation prevailing at the Effective Date shall be altered so that, in substitution for ad valorem real estate taxes, any new Imposition or charge, or any part thereof, shall be measured by or be based in whole or in part upon the Installations Premises and shall be imposed upon Landlord, then all such new Impositions or charges, or any part thereof, shall be deemed to be included within the term "Impositions", and Tenant shall pay and discharge the same as herein provided in respect of the payment of Impositions. (e) (i) If permitted by Applicable Law, and provided no Event of Default is then in existence, Tenant shall have the right, at its own expense, to contest the amount or validity, in whole or in part, of any Imposition by appropriate proceedings diligently conducted in good faith. If, under Applicable Law, the contested Imposition must be paid before undertaking the contest, Tenant shall pay such Imposition (which payment may be made under protest, at Tenant's option) or, if permitted by Landlord and any mortgagee of Landlord (including trustees or beneficiaries of deeds of trust) ("Mortgagee"), either deposit with Landlord, Mortgagee or the assessing body, as Landlord, Mortgagee or the assessing body may require, an amount sufficient to pay all amounts referred to in Subsection (ii) below, or undertake such other method of securing payment of such amounts as is satisfactory to Landlord, Mortgagee and the assessing body. (ii) Upon the termination of any such proceeding, Tenant shall pay the amount of such Imposition or part thereof as finally determined as due in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees, interest, penalties or other liabilities in connection therewith, and, upon such payment, Landlord shall, provided an Event of Default is not then in existence, return or request Mortgagee to return any amount still on deposit with it or with Mortgagee with respect to such paid Imposition. If at any time during the continuance of such proceedings Landlord, Mortgagee or the assessing body shall deem the amount deposited or the undertaking insufficient, Tenant shall, upon thirty (30) days prior written notice, make an additional undertaking or deposit with Landlord, Mortgagee or the assessing body, as Landlord or Mortgagee reasonably may request, or as the assessing body may require, and upon failure of Tenant to do so, the amount theretofore deposited shall be applied by Landlord, Mortgagee or the assessing body to the payment, removal and discharge of such Imposition and the interest and penalties in connection therewith and any costs, fees (including, without limitation, reasonable attorneys' fees and disbursements) or other liabilities accruing in any such proceedings, and the balance, if any, shall be returned to Tenant, or the deficiency, if any, shall be paid by Tenant immediately on demand of Landlord or Mortgagee to the taxing authority to which such Imposition is payable. This subsection shall survive termination of this Lease. (f) Landlord or Tenant may, if it shall so desire, endeavor at any time or times to obtain a lowering of the assessed valuation upon the Installations Premises, or any part thereof, for the purpose of reducing Impositions thereon, and in such event, the other party will reasonably cooperate in effecting such reduction, but shall not be required to incur any out-of-pocket costs in so cooperating. (g) Landlord shall not be required to join in any proceedings referred to in Subsection (e) above unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by or in the name of Landlord or any owner of the Installations Premises, in which event, Landlord shall join in such proceedings or permit the same to be brought in its name and shall sign all documents reasonably necessary to prosecute the proceedings. Landlord shall not be subject to any liability for the payment of any costs or expenses in connection with any such proceedings, and Tenant will indemnify and save harmless Landlord from and against any such costs and expenses, including, but not limited to, reasonable attorneys' fees and disbursements, and from any liability resulting from such proceeding. After reimbursing and indemnifying Landlord for the items referred to in the preceding sentence, Tenant shall be entitled to any refund with respect to any Imposition and penalties or interest thereon which have been paid by Tenant (whether directly or through escrowed funds), or which have been paid by Landlord but previously reimbursed in full to Landlord by Tenant. Tenant's right to the refund shall survive termination of this Lease. (h) The certificate, advice, statements, or bill of the appropriate official designated by law to make or issue the same or to receive payment of any Imposition shall be prima facie evidence that the Imposition is due and unpaid at the time of the making or issuance of such certificate, advice statement or bill. (i) Tenant shall make all payments of Impositions directly to the appropriate governmental authorities, and Landlord appoints Tenant the attorney-in-fact of Landlord for the purpose of making all payments to be made by Tenant pursuant to any of the provisions of this Lease to persons or entities other than Landlord. In case any person or entity to whom any sum is directly payable by Tenant under any of the provisions of this Section 7 shall refuse to accept payment of such sum from Tenant, Tenant shall thereupon give written notice of such fact to Landlord and shall pay such sum directly to Landlord and Landlord shall promptly pay such sum to such person or entity. (j) Tenant shall deliver to Landlord duplicate receipts or photostatic copies thereof, or other evidence reasonably satisfactory to Landlord (followed by such duplicate receipts or copies, when available) showing the payment of all Impositions, within ten (10) business days after the respective payments are required to be made by Tenant and Landlord requests such evidence in writing. (k) Landlord shall furnish to Tenant copies of all notices of assessment and bills relating to Impositions within ten (10) business days after Landlord receives any of the same from the governmental authorities. SECTION 8. UTILITIES (a) Tenant agrees to pay all charges made against the Installations Premises for gas, heat, water, electricity, sewage disposition, telephone and all other utilities and services related to the Installations Premises during the Term (collectively, the "Utilities"). (b) Tenant understands, acknowledges and agrees that any one or more of the Utilities may be interrupted or diminished by reason of causes beyond Landlord's reasonable control; that Landlord does not represent or warrant the uninterrupted avail ability of the Utilities; that Tenant shall be solely responsible for obtaining and maintaining the use of the Utilities; and that, unless caused by Landlord or its Agents, any such interruption or diminishment shall not (i) be deemed an eviction or disturbance of Tenant's right to possession, occupancy and use of the Installations Premises or any part thereof, or (ii) render Landlord liable to Tenant in damages by abatement of Rent or otherwise, or relieve Tenant from the obligation to perform its covenants under this Lease. In pursuing the Development, Landlord shall take and cause its Agents to take best efforts to avoid the interruption or diminishment of the Utilities. SECTION 9. SIGNS (a) Tenant shall not inscribe, paint, affix or display any sign, advertisement or notice (collectively "Signs") on any portion of the Installations Premises (or on any interior portion of the Auxiliary Buildings that is visible from the exterior) not presently located thereon without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. (b) Tenant shall not inscribe, paint, affix or display any Sign on any portion of the Unimproved Area not presently located thereon without the prior written consent of Landlord, which consent shall be in Landlord's sole and absolute discretion. (c) Despite the foregoing, Tenant shall not require Landlord's consent to replace any Sign existing as of the Effective Date provided that the dimensions and location of the new Sign are substantially the same as those of the existing Sign. SECTION 10. AS-IS CONDITION OF INSTALLATIONS PREMISES PRIOR TO THE EFFECTIVE DATE, TENANT OWNED THE LAND FOR APPROXIMATELY THIRTY (30) YEARS, DEVELOPED THE IMPROVEMENTS THEREON, INCLUDING BUT NOT LIMITED TO THE AUXILIARY BUILDINGS AND COMMUNICATIONS FACILITIES, AND OCCUPIED THE AUXILIARY BUILDINGS. CONSEQUENTLY, UPON THE EFFECTIVE DATE, TENANT SHALL ACCEPT THE INSTALLATIONS PREMISES IN "AS IS" CONDITION. TENANT AGREES AND ACKNOWLEDGES THAT LANDLORD HAS NOT MADE ANY REPRESENTATION RESPECTING OR ANY WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, REGARDING THE INSTALLATIONS PREMISES, INCLUDING, WITHOUT LIMITATION, REPRESENTATIONS OR WARRANTIES REGARDING THE PHYSICAL NATURE OR CONDITION OF THE INSTALLATIONS PREMISES. TENANT ACKNOWLEDGES THAT IT IS COGNIZANT OF AND SATISFIED WITH ALL ASPECTS OF THE INSTALLATIONS PREMISES, AND THAT AS PROVIDED HEREIN THIS TRANSACTION IS AN "AS IS" TRANSACTION. SECTION 11. REPAIRS, MAINTENANCE AND MANAGEMENT (a) Tenant shall, at its sole expense, keep, maintain, manage and operate (collectively, "Care" or "Care for" or "Care of" as the context may require) the Installations Premises in a neat, orderly and safe condition, in substantially the same manner as Tenant has been maintaining the Installations Premises as of the Effective Date, and in compliance with all Applicable Laws in all material respects. In addition, all repairs made by Tenant shall be reasonably suited to accomplish their intended purposes and shall be in compliance with Applicable Laws in all material respects. Tenant shall in any event make all repairs necessary to avoid damage or injury to persons or property. Landlord shall have no obligation whatsoever to Care for the Installations Premises except that Landlord shall be responsible for any repairs necessitated by Landlord or its Agents. Further, Tenant, while it was owner of the Property, recorded a Declaration of Easements, Covenants, and Restrictions (the "Declaration"). Landlord hereby delegates to Tenant, and Tenant hereby accepts from Landlord, the maintenance and repair obligations applicable to the owner of the Installations Premises and described in Section 6 of the Declaration. (b) If any dispute shall arise between Landlord and Tenant as to the standard of Care required under Subsection (a) above, the matter shall be resolved by binding arbitration in accordance with the then prevailing Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). Upon demand for arbitration by either party in accordance with such rules, the matter shall be decided by a single arbitrator in Montgomery County, Maryland, selected in accordance with the prevailing Commercial Arbitration Rules of the AAA. In deciding any matter relating to the Installations Premises, the arbitrator shall take into account the age and character of the improvements on the Installation Premises, the standards of Care set forth in this Section 11, and the remaining Term of this Lease. The arbitrator shall hold a hearing on the matter within forty-five (45) days after he or she is appointed. At least twenty (20) days before the hearing, each party shall submit to the other party a written statement of its case, copies of all documents upon which it intends to rely at the hearing, and a list of the witnesses it intends to call to testify at the hearing. The hearing shall be concluded within fifteen (15) days after the initial hearing date and the arbitrator shall decide the matter within fifteen (15) days after the hearing is concluded. The arbitrator shall render his or her decision in writing, setting forth the reasons for the decision. Each party shall bear its own costs related to the arbitration, except that the parties shall share equally all filing fees and other costs imposed by the AAA in connection with the arbitration and the fees of the arbitrator. The decision of the arbitrator shall be final and non-appealable and judgment on the decision may be entered in any court of competent jurisdiction. (c) Unless required by Applicable Laws, Tenant shall not be required to (i) improve, upgrade, re-model, retrofit, or renovate all or any part of the Installations Premises or (ii) subject to Subsection 11(a) (excluding the requirement that Care be in substantially the same manner as Tenant has been maintaining the Installations Premises as of the Effective Date), make any replacement or major repair of any component, element or system of the Installations Premises. (d) Landlord agrees that during the Term, Tenant shall have the right, after providing prior written notice to Landlord, to enforce any rights of Landlord under applicable warranties, guarantees, licenses and permits applicable to the Installations Premises. Landlord shall sign such documents and otherwise reasonably cooperate with Tenant to facilitate such enforcement, provided that Landlord shall not be required to incur any out of pocket expense to third parties in so doing. SECTION 12. ACCESS TO INSTALLATIONS PREMISES Tenant acknowledges that Landlord has a significant economic interest in the Care of the safety and condition of persons and property located on and near the Installations Premises and that Landlord, pursuant thereto, has a need, from time to time, to inspect the Installations Premises to insure Tenant's conformity with the covenants of this Lease. Tenant, therefore, hereby authorizes Landlord and any parties authorized by Landlord to perform such inspections of the Installations Premises as Landlord from time to time may reasonably deem appropriate. Landlord shall have the right to enter any part of the Installations Premises at all reasonable times, upon reasonable advance notice to Tenant and accompanied by a representative of Tenant, for the purposes of making such inspections, showing the Installations Premises to prospective purchasers, investors, mortgagees and tenants, and making such repairs, alterations or improvements to the Installations Premises as Landlord may deem necessary or desirable if Tenant fails to properly Care for same after notice and opportunity to cure as provided for in Section 21(a). No such entry shall materially interfere with the use and occupancy of the Installations Premises by Tenant, its subtenants and licensees. Landlord shall incur no liability to Tenant for such entry except in the case of death, bodily injury, or property damage caused by Landlord or its Agents. Notwithstanding the foregoing, Landlord shall have no right to enter upon those portions of the Installations Premises which are secured or confidential areas pursuant to Applicable Laws or agreements to which Tenant is subject ("Restricted Areas"). Further, no person who is a foreign national may enter into the Auxiliary Buildings or Antenna Ranges on behalf of Landlord, unless approval of such person is obtained from Tenant in advance. Such approval may be withheld only to the extent entry by such person would violate Applicable Laws or agreements to which Tenant is subject. SECTION 13. ALTERATIONS AND PERSONAL PROPERTY (a) Tenant, at its sole expense and without Landlord's approval, shall have the right to make any alterations, additions, installations or other improvements ("Alterations") to the Installations Premises, including, but not limited to, constructing or installing additional Auxiliary Buildings and Communications Facilities on the Installations Premises. In addition, Tenant, at its sole expense and without Landlord's approval, may remove or demolish all or any portion of the Auxiliary Buildings or Communications Facilities. All buildings constructed on the Installations Premises after the Effective Date shall be of a similar or better quality of construction as the Auxiliary Buildings located on the Installations Premises as of the Effective Date. (b) Any Alteration shall be subject, however, in all cases to the following: (i) All Alterations shall be made at the sole cost and expense of Tenant and in a good and workmanlike manner and in compliance with all Applicable Laws in all material respects. (ii) The Installations Premises at all times shall be kept by Tenant free of liens for labor and materials supplied or claimed to have been supplied to the Installations Premises in connection with the Alterations. (iii) Notice is hereby given that Landlord shall not be liable for any labor or materials furnished to or for Tenant. Furthermore, notice is hereby given to Tenant and Tenant's mechanics, laborers and materialmen with respect to the Installations Premises that no mechanic's, materialman's or laborer's lien shall attach to or affect the reversion or other interest of Landlord in or to the Installations Premises. (iv) Worker's compensation, builder's risk and general liability insurance with respect to the Alteration as required by Section 14 shall be maintained by Tenant. (c) All Communication Facilities and personal property, including, but not limited to, trade fixtures, furniture, furnishings, telephone switching equipment, generators and uninterrupted power supply equipment, Restricted Property and moveable equipment ("Tenant's Property"), upon or in the Installations Premises shall remain the property of Tenant or its Agents, as the case may be, or remain under Tenant's control, and shall be removed by Tenant, or caused to be removed by Tenant, at its sole cost and expense, upon termination of this Lease or surrender by Tenant of the Installations Premises to Landlord; provided, however, that Tenant shall not be required to remove the footings, foundations, concrete bases or underground bases, or underground cabling or conduits and such items shall become the property of Landlord upon the expiration or earlier termination of this Lease. (The term "Tenant's Property" does not include Fixtures and Limited Personal Property as defined in the Purchase and Sale Agreement.) Further, Tenant shall not be required to remove, or cause to be removed, the property of International Telecommunications Satellite Organization ("Intelsat") in the portion of the Installations Premises described in that certain Agreement of Lease between Tenant and Intelsat dated October 25, 1990. If Tenant's removal of Tenant's Property shall create an unsafe or unsightly condition, Tenant shall repair the condition at its sole cost and expense, reasonable wear and tear excepted, but such obligation shall in no event be deemed to require Tenant to remove the items which Tenant may leave on the Installations Premises pursuant to the preceding provisions of this Subsection (c). If Tenant fails to so remove and repair, Landlord shall have the right to remove the Tenant's Property and to dispose of the same and to repair the Installations Premises without accountability to Tenant, and at the sole cost and expense of Tenant. The "Restricted Property" shall mean all personal property, including, but not limited to documents and equipment, which are required to be secured or kept confidential pursuant to Applicable Laws or agreements to which Tenant is subject. The Restricted Property shall at all times, both during and after the Term, be the sole responsibility of Tenant. Tenant covenants and agrees that no Restricted Property shall be left in or upon the Installations Premises after termination of this Lease or surrender by Tenant of the Installations Premises to Landlord. Upon the expiration or earlier termination of this Lease all right, title and interest to any underground storage tanks located in the Installations Premises shall automatically convey to Landlord without the requirement that either party execute any other documents to effectuate the conveyance and shall become part of Landlord's property. SECTION 14. INSURANCE (a) At all times during the Term, Tenant, at its own cost and expense, shall carry and maintain the insurance coverage set forth below (the "Insurance"): (i) Hazard insurance covering the Installations Premises (including, without limitation, all Alterations now or hereafter made to the Installations Premises) under an "All Risks of Physical Loss" policy (an "All Risks Policy") written in an amount equal to an amount necessary to satisfy Tenant's obligations as lessor, in the event of a casualty, under the Existing Leases or Subleases and the cost of debris removal and the value of grading, paving and landscaping in the event of damage caused by casualty to improvements covered by such insurance. (ii) Commercial liability insurance with respect to the Installations Premises and the operations related thereto, whether conducted on or off the Installations Premises, against liability for death, bodily injury, and property damage (the "Liability Policy"). The Liability Policy shall be on an occurrence basis and specifically shall include: (A) Contractual liability to cover Tenant's obligations to indemnify Landlord as required under this Lease; and (B) Water damage and sprinkler leakage legal liability. The Liability Policy shall be written for a combined single limit of not less than Ten Million Dollars ($10,000,000). Such limit shall be subject to reasonable increase from time to time (but not more than once every twenty-four (24) months) in accordance with the limits then being customarily carried with respect to similar properties in Montgomery County, Maryland ("Comparable Properties"), or operations similar to those being conducted on the Installations Premises. Tenant may satisfy the required coverage limits for the Liability Policy by carrying a combination of primary and excess liability policies providing aggregate coverage in at least the limits stated herein for such policy. (b) Tenant further covenants and agrees, at its sole cost and expense, to procure and maintain or cause to be procured and maintained at all times all necessary worker's compensation insurance covering all persons employed by Tenant, Existing Tenants and Subtenants in and about the Installations Premises. (c) Tenant further covenants and agrees, at its sole cost and expense, to procure and maintain or cause to be procured and maintained at all times Comprehensive Automobile Insurance covering all owned, non-owned, and hired automobiles of tenant in limits of not less than One Million Dollars ($1,000,000). (d) In addition to the insurance carried by Tenant, during the course of any Alteration or Care work undertaken by a contractor hired by or for Tenant, Tenant shall require such contractor to carry public liability insurance in limits of not less than Two Million Dollars ($2,000,000). (e) Tenant may at its option provide any Insurance coverage under a blanket insurance policy instead of a separate policy or policies, provided that the certificate or certificates issued under such blanket insurance policy, and the coverage afforded thereby, conforms in all respects to the requirements hereof. (f) Intentionally Omitted. (g) All Insurance shall be in such form and shall be issued by such responsible insurance companies licensed to do business in the State of Maryland as are reasonably approved by Landlord. Any insurance company rated by Bests Insurance Reports (or any successor publication of comparable standing) as A-, VIII or better and by Standard & Poor's (or any successor of comparable standing) as "A" or better (or the equivalent of such rating) shall be deemed a responsible company and acceptable to Landlord. Upon the Effective Date, and thereafter, not less than five (5) days prior to the expiration dates of the expiring policies of Insurance originals of replacement policies or renewal certificates, as the case may be, bearing notations evidencing the payment of premiums or accompanied by other evidence reasonably satisfactory to Landlord of each payment, shall be delivered by Tenant to Landlord ("Insurance Notice"). If Tenant does not provide Landlord with the Insurance Notice or if Tenant lets any Insurance lapse, Landlord shall have the right, without providing any notice to Tenant, to procure replacement coverage that is effective upon such lapse and Tenant shall promptly reimburse Landlord for the reasonable cost thereof. (h) All policies of Insurance shall name Landlord, Tenant, and, if requested by Landlord in writing, any Mortgagee as insureds, as their respective interests may appear. All policies of Insurance other than the Liability Policy shall, if requested in writing by Landlord, name the Mortgagee as a loss payee, as the interest of such Mortgagee may appear, but subject to the provisions of Section 15. Any request of coverage as to a Mortgagee shall set forth the name and address of the Mortgagee. (i) Tenant shall not violate or permit to be violated any of the conditions, provisions or requirements of any Insurance policy, and Tenant shall perform, satisfy and comply with, or cause to be performed, satisfied and complied with, the conditions, provisions and requirements of all Insurance policies and the companies writing such policies so that, at all times, the Insurance shall be provided by companies reasonably acceptable to Landlord, except as otherwise provided in Subsection 14(g). (j) Each policy or certificate of Insurance shall contain (i) an agreement by the insurer that such policy shall not be canceled, modified or denied renewal without at least thirty (30) days prior written notice to Landlord and any Mortgagee named as an insured or loss payee, except that if the reason for cancellation or denial of renewal is nonpayment of premiums, the notice will be at least ten (10) days, and (ii) a waiver of subrogation by the insurer. (k) If by reason of changed economic conditions the Insurance amounts referred to in this Lease become inadequate, upon Landlord's request, the limits shall be reasonably increased by Tenant from time to time (but not more often than once every twenty-four (24) months) to meet the changed conditions, but any changes in limits shall be consistent with what is customary for Comparable Properties or for operations similar to those conducted on the Installations Premises. Upon the reasonable request of Landlord, Tenant shall procure and obtain such types of insurance in lieu of the current insurance then required under this Lease; provided that such replacement coverage is substantially similar in scope and nature as the Insurance then required under this Lease and is the type of insurance that is customary for Comparable Properties or for operations similar to those conducted on the Installations Premises. Notwithstanding the foregoing, in the event that Landlord makes such request during the term of the policy of the insurance that is being replaced, Tenant shall not be required to procure replacement coverage until the scheduled expiration or earlier termination of such policy; provided, however, in no event shall such period exceed twelve (12) months. (l) Notwithstanding any provisions in this Section 14 or elsewhere in this Lease to the contrary, any deductible to the All Risk Policy shall be deemed an amount covered by Insurance and shall be promptly paid by Tenant in the event of damage required to be covered by Insurance. SECTION 15. DAMAGE OR DESTRUCTION (a) In case of damage to or destruction of the Installations Premises or any part thereof by fire or other casualty ("Damage"), Tenant will promptly give written notice thereof to Landlord. In the case of Damage, whether or not covered by Insurance, Tenant shall continue to pay Rent without any abatement, deduction or set-off and this Lease shall not terminate. (b) All insurance proceeds payable for Damage or for loss or damage to Tenant's Property shall be the exclusive property of and be paid directly to Tenant. Subject to Subsection 11(a) (excluding the requirement that Care be in substantially the same manner as Tenant has been maintaining the Installations Premises as of the Effective Date), Tenant shall have no obligation to restore the Installations Premises after Damage. (c) Tenant hereby releases Landlord and Landlord hereby releases Tenant from any and all liability for any loss, damage or injury to person or property occurring in, on, about or to the Installations Properties or personal property by reason of fire or other casualty, to the extent proceeds of Insurance are received for such loss, damage, or injury or to the extent such proceeds should have been received under Insurance required to be carried by this Lease. Because the provisions of this Subsection will preclude the assignment of any claim mentioned herein by way of subrogation or otherwise to an insurance company or any other person, Tenant shall give to each insurance company which has issued to it one or more policies of insurance, notice of the terms of the release contained in this Subsection, and have such insurance policies properly endorsed, if necessary, to prevent the invalidation of insurance coverages by reason of the release contained in this Subsection. SECTION 16. INDEMNIFICATION (a) Tenant will protect, indemnify and save harmless Landlord from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Land lord by reason of (i) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Installations Premises or any part thereof caused by the negligence or intentional misconduct of Tenant or its Agents; (ii) any failure on the part of Tenant to perform or comply with any of the terms of this Lease; or (iii) performance of any labor or services or the furnishing of any materials or other property in respect of the Installations Premises or any part thereof at the direction of Tenant. Tenant hereby releases Landlord from any and all liability for the same. (b) Landlord will protect, indemnify and save harmless Tenant from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Tenant by reason of (i) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Installations Premises or any part thereof, caused by the negligence or intentional misconduct of Landlord or its Agents; (ii) any failure on the part of Landlord to perform or comply with any of the terms of this Lease; or (iii) performance of any labor or services or the furnishing of any materials or other property in respect of the Installations Premises or any part thereof at the direction of Landlord. Landlord hereby releases Tenant from any and all liability for the same. (c) The amount which any party (an "Indemnifying Party") is or may be required to pay to any other party (an "Indemnitee") pursuant to this Section 16 shall be reduced (including, without limitation, retroactively) by any insurance proceeds (or the amount of insurance proceeds that would have been recovered had insurance required by this Lease been obtained) or other amounts actually recovered by or on behalf of such Indemnitee, in reduction of the related loss. If an Indemnitee shall have received payment (an "Indemnity Payment") required by this Lease from an Indemnifying Party in respect of any loss and shall subsequently actually receive insurance proceeds or other amounts in respect to such loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount of such insurance proceeds or other amounts actually received (up to but not in excess of the amount of any Indemnity Payment made hereunder). An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. (d) Procedures for indemnification of Third Party Claims shall be as follows: (i) If an Indemnitee shall receive notice or otherwise learn of the assertion by a person (including, without limitation, any governmental entity) who is not a party to this Lease (or a subsidiary an affiliate of either party) of a claim or of the commencement by any such person of any action (a "Third Party Claim") with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to this Section 16 or any other Section of this Lease, such Indemnitee shall give such Indemnifying Party written notice thereof promptly after becoming aware of such Third Party Claim; provided that the failure of any Indemnitee to give notice as provided in this Section 16(d) shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice. Such notice shall describe the Third Party Claim in reasonable detail. (ii) An Indemnifying Party may elect to defend or to seek to settle or compromise, at such Indemnifying Party's own expense and such Indemnifying Party's own counsel, any Third Party Claim, as provided hereafter. Within thirty (30) days after receipt of notice from an Indemnitee in accordance with Subsection 16(d)(i) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnifying Party shall not be liable to such Indemnitee under this Section 16 for any legal or other expenses (except expenses approved in advance by the Indemnifying Party) subsequently incurred by such Indemnitee in connection with the defense thereof; provided that if the defendants with respect to any such Third Party Claim include both the Indemnifying Party and one or more Indemnitees and in any Indemnitee's reasonable judgment a conflict of interest between one or more of such Indemnitees and such Indemnifying Party exists in respect to such claim, such Indemnitees shall have the right to employ separate counsel to represent such Indemnitees and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party. If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim, or fails to notify an Indemnitee of its election as provided in this Subsection 16(d)(ii), such Indemnitee may defend or, subject to the remainder of this Subsection 16(d)(ii), seek to compromise or settle such Third Party Claim without prejudice to such Indemnitee's rights, if any, to continue to seek indemnification hereunder. Notwithstanding the foregoing, neither an Indemnifying Party nor an Indemnitee may settle or compromise any claim over the objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld or delayed. Neither an Indemnifying Party nor an Indemnitee shall consent to entry of any judgment or enter into any settlement of any Third Party Claim which does not include as an unconditional term thereof the giving by a claimant or plaintiff to such Indemnitee, in the case of a consent or settlement by an Indemnifying Party, or to the Indemnifying Party, in the case of a consent or settlement by an Indemnitee, of a written release from all liability in respect to such Third Party Claim. (iii) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the related Indemnitee shall make reasonably available to such Indemnifying Party any personnel or any books, records or other documents within its control or which it otherwise has the ability to make available that are necessary or appropriate for such defense, settlement or compromise of such Third Party Claims, subject to the establishment of reasonably appropriate confidentiality arrangements and arrangements to preserve any applicable privilege (including, the attorney-client privilege) and shall cooperate in such defense, compromise or settlement. If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the related Indemnitee shall be entitled to attend and participate in any such proceeding, discussion or negotiation at its own expense. (iv) Notwithstanding anything else in this Section 16 to the contrary, if an Indemnifying Party notifies the related Indemnitee in writing of such Indemnifying Party's desire to settle or compromise a Third Party Claim on the basis set forth in such notice (provided that such settlement or compromise includes as an unconditional term thereof the giving by the claimant or plaintiff of a written release of the Indemnitee from all liability in respect thereof and does not include any non-monetary remedy) and provides the Indemnitee a copy of a written proposal of the applicable claimant to settle on such terms, and the Indemnitee notifies the Indemnifying Party in writing within ten (10) business days of such notice that such Indemnitee declines to accept any such settlement or compromise, such Indemnitee may continue to contest such Third Party Claim, free of any participation by such Indemnifying Party, at such Indemnitee's sole expense. In such event, the obligation of such Indemnifying Party to such Indemnitee with respect to such Third Party Claim shall be equal to (i) the costs and expenses of such Indemnitee prior to the date such Indemnifying Party notifies such Indemnitee of the offer to settle or compromise (to the extent such costs and expenses are otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the amount of any offer of settlement or compromise which such Indemnitee declined to accept and (B) the actual out-of-pocket amount such Indemnitee is obligated to pay subsequent to such date as a result of such Indemnitee's continuing to defend such Third Party Claim (including attorneys fees and expenses). (v) Any claim on account of a loss which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such thirty (30) day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such thirty (30) day period or rejects such claim in whole or in part, such Indemnitee shall follow the dispute resolution procedures set forth in Subsection 11(c). (vi) In addition to any adjustments required pursuant to Subsection 16(c), if the amount of any loss shall, at any time subsequent to the payment required by this Lease, be reduced by recovery, settlement or otherwise, the amount of such reduction, less any expenses incurred in connection therewith, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (vii) In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place and the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. (vii) If any indemnity payment required to be made hereunder is denominated in a currency other than United States dollars, such payment shall be made in United States dollars and the amount thereof shall be computed using the foreign exchange rate for such currency determined as of the date that notice of the claim with respect to which such indemnity payment is made or given by, or on behalf of, the Indemnitee to the Indemnifying Party. (e) The provisions of this Section 16 shall survive any termination of this Lease. SECTION 17. CONDEMNATION (a) If any portion of the Installations Premises is taken or condemned for a public or quasi-public use or is sold to a governmental or quasi-governmental authority in lieu of condemnation ("Taken" or a "Taking", as the context shall require), this Lease shall, as to the part Taken, terminate as of the date that title shall vest in the condemning authority and continue in full force and effect as to the remainder. In the event of such a Taking, Rent shall not be adjusted and Tenant shall continue to pay Base Rent with respect to the portion of the Installations Premises which has been Taken and Landlord shall retain its remedies under this Lease with respect to Tenant's obligation to pay such Base Rent. (b) Landlord and Tenant shall cooperate in applying for and obtaining the maximum payment or award on account of a Taking. After deducting all expenses incurred in connection with obtaining the payment or award (including reasonable attorneys' fees), the net payment or award (the "Net Award") shall be distributed as follows. Tenant shall be entitled to claim and receive from the Net Award: (i) all amounts designated as being payable for relocation or similar expenses, (ii) the amount attributable to the fair market value of Tenant's leasehold interest in the portion of the Installations Premises so Taken, (iii) the amount attributable to the fair market value of all of Tenant's Property so Taken or damaged by the Taking and (iv) the amount attributable to the fair market value of all buildings and improvements so Taken or damaged by the Taking, to the extent that Tenant actually replaces or repairs same. Landlord shall be entitled to claim and receive from the Net Award (i) the amount attributable to the fair market value of Landlord's fee simple interest, as such interest is subject to this Lease, in the portion of the Installations Premises so Taken, as such interest is subject to this Lease, and (ii) the amount attributable to the fair market value of Landlord's fee simple interest, as such interest is subject to this Lease, in all of the buildings and improvements so Taken or damaged by the Taking, to the extent that Tenant does not replace or repair same. Any dispute between Landlord and Tenant with respect to the distribution and apportionment of the Net Award under the foregoing provisions shall be decided by arbitration pursuant to the provisions of Subsection 11(b), with the arbitrator to be a disinterested appraiser holding the designation "MAI" or other equivalent professional designation and having at least ten (10) years experience appraising commercial properties in Montgomery County, Maryland. Any portion of the Net Award remaining after distribution to Tenant and Landlord, as aforesaid, shall belong to Landlord. (c) In the event, however, that the area of the Installations Premises shown on Exhibit F or any portion thereof is Taken, Tenant will not be entitled to make any claim to the condemning authority with respect to that Taking, except for relocation expenses and the fair market value of Tenant's Property so Taken or damaged by the Taking. (d) Notwithstanding the foregoing provisions of this Section 17, in the case of a Taking of the entire Installations Premises, this Lease shall terminate as of the date that title shall vest in the condemning authority. Further, in the case that the Taking involves such a material portion of the Installations Premises that it is not economically or technologically practical for Tenant or Subtenants to use the remaining portion of the Installations Premises for a satellite earth station, Tenant may terminate this Lease by written notice to Landlord and this Lease shall terminate as of the date that title shall vest in the condemning authority. Upon termination under this Subsection 17(d), Rent shall be adjusted to the date of termination and Landlord and Tenant shall have no further obligations hereunder, except with respect to any obligations which arose or accrued before the termination of this Lease or to the extent obligations are to survive the termination of this Lease as otherwise expressly provided in this Lease. Any dispute as to the right of Tenant to terminate this Lease under this Subsection 17(d) shall be decided by arbitration in accordance with Subsection 11(b). (e) In no event shall Tenant be obligated to restore the Auxiliary Buildings or any other part of the Installations Premises which are damaged by a Taking. If, however, this Lease does not terminate under Subsection 17(d), Tenant shall take such actions with respect to any damaged portion of the Installations Premises as are reasonably necessary to comply with Tenant's obligations of Care under Subsection 11(a). SECTION 18. LIENS If, because of any act or omission of Tenant or anyone claiming by, through, or under Tenant, any mechanic's lien or other lien shall be filed against the Installations Premises or any portion thereof, or against other property of Landlord, whether or not such lien is valid or enforceable as such, Tenant shall, at its own expense, cause the same to be discharged of record within a reasonable time, not to exceed thirty (30) days, after the date of filing thereof, and shall also defend and indemnify Landlord and any Mortgagee and hold them harmless from any and all claims, losses, damages, judgments, settlements, costs and expenses, including reasonable attorneys' fees, resulting therefrom or incurred in connection therewith. Tenant shall not mortgage, pledge, hypothecate or assign as security its interest in the Installations Premises or under this Lease. SECTION 19. EXISTING SPACE LEASES; ASSIGNMENT AND SUBLETTING (a) On the Effective Date, the Installations Premises is subject to those certain leases listed in Exhibit G attached hereto and made a part hereof (the "Existing Space Leases"), which were entered into by Tenant, as lessor thereunder, prior to closing under the Sales Agreement. Landlord has not assumed any of Tenant's obligations thereunder. For so long as this Lease remains in effect, Tenant covenants and agrees to continue to discharge all of the lessor's obligations under the Existing Space Leases, whether accrued or accruing before or during the Term. Tenant shall indemnify, defend, and hold harmless Landlord against any obligation of Landlord under the Existing Space Leases arising or accruing during the Term, except to the extent Tenant is unable to perform such obligations as a result of Landlord's breach of its obligations under this Lease. During the Term, Tenant shall have the right to (i) collect and retain for its own account (subject to Subsection (c) below) all rents and other payments due from tenants under Existing Space Leases ("Existing Tenants"), (ii) hold and apply any security deposits of Existing Tenants in accordance with the Existing Space Leases (provided, however, that Tenant shall deliver such security deposits to Landlord at the expiration or earlier termination of this Lease to the extent such security deposits have not been applied by Tenant pursuant to the applicable Existing Space Lease or returned to the applicable Existing Tenant, and the term of the applicable Existing Space Lease extends beyond the Term), and (iii) terminate, modify or otherwise deal with the Existing Space Leases as Tenant, in its sole discretion, deems appropriate; provided, however, (A) such right shall automatically end upon the termination of this Lease for any reason, (B) none of the Existing Space Leases shall be modified to provide for a term which extends beyond the Term, unless Landlord gives its prior written consent to such extended term, which consent may be granted or withheld in Landlord's sole discretion, (C) each modification of an Existing Space Lease shall be subject and subordinate to this Lease, and in the event of the expiration or termination of this Lease, Landlord shall not be required to recognize such modification without its express written agreement to be bound by same, which may be given or not in Landlord's sole discretion, and (D) Tenant shall promptly provide to Landlord copies of all documents terminating or modifying any Existing Space Lease. (b) Tenant may assign its interest in this Lease (an "Assignment") or sublet all or any portion of the Installations Premises (a "Sublease"), without the consent of Landlord. The term of any such Sublease shall not exceed the Term, unless Landlord gives its prior written consent to such extended term, which consent may be granted or withheld in Landlord's sole discretion. In the event of any Assignment or Sublease, Tenant shall nevertheless at all times remain fully responsible and liable for the payment of Rent and the performance and observance of all of Tenant's other obligations under this Lease. Each Sublease shall be subject and subordinate to this Lease. If requested by Tenant, Landlord shall enter into a nondisturbance agreement with respect to any Sublease on substantially the same terms as are contained in the nondisturbance agreement attached hereto as Exhibit H (the "Landlord Approved SNDA"), provided that (i) the Sublease does not, in any material respect, impose greater obligations on the sublandlord or grant greater rights to the subtenant than those existing as of the Effective Date under the Existing Space Leases, (ii) term of the Sublease does not extend past the Term (unless expressly approved by Landlord as aforesaid), and (iii) the Sublease (y) is an arms-length transaction and such subtenant was obtained, and the economic terms of such Sublease were negotiated by, a third party leasing agent using marketing efforts customarily used for Comparable Properties, or (z) requires the subtenant to pay basic rent at the then current Base Rent rate per square foot under this Lease and a pro rata share of increases in operating expenses, Impositions and insurance. Landlord agrees at any time hereafter, upon ten (10) business days prior written notice, to execute and deliver, and cause its Mortgagee to recognize, the Landlord Approved SNDA, provided the Landlord Approved SNDA has been duly executed by Tenant and such subtenant. Promptly upon entering into any Assignment or Sublease, Tenant shall provide Landlord with copies of all documents effecting such Assignment or Sublease. (c) If there is an Event of Default, in addition to any other remedies provided by this Lease or by law or in equity, at its option, Landlord may collect directly from any Existing Tenant, Assignee or lessee under a Sublease ("Subtenant") all rent becoming due to Tenant by reason of the applicable Existing Lease, Assignment or Sublease. Any collection by Landlord from the Existing Tenant, Assignee or Subtenant shall not be construed to constitute a novation or release of Tenant from the further performance of its obligations under this Lease or an acceptance of the terms of such Existing Lease, Assignment or Sublease. (d) Any amounts collected by Landlord pursuant to Section 19(c) or otherwise from an Existing Tenant, Assignee or Subtenant which are applicable to any period preceding the Expiration Date (had this Lease run its full Initial Term as may have been extended), shall be applied by Landlord to the reduction of Tenant's remaining liability, if any, under this Lease. SECTION 20. SUBORDINATION OR SUPERIORITY OF LEASE (a) Except as otherwise provided in this Section, the rights and interest of Tenant under this Lease shall be subject and subordinate to any mortgages that may be placed upon the Installations Premises and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements, extensions, bifurcations and splits thereof, if the Mortgagee named in said mortgage shall elect to subject and subordinate the rights and interest of Tenant under this Lease to the lien of its mortgage. Any Mortgagee may elect to give the rights and interest of Tenant under this Lease priority over the lien of its mortgage. In the event of either such election and upon notification by such Mortgagee to Tenant to that effect, the rights and interest of Tenant under this Lease shall be deemed to be subordinate to, or to have priority over, as the case may be, the lien of said mortgage, whether this Lease is dated prior to or subsequent to the date of said mortgage without any further action required by Landlord or Mortgagee; provided, however, that as a condition precedent to any subordination of this Lease, Landlord delivers in advance a non-disturbance agreement duly executed by Mortgagee and Landlord. The non-disturbance agreement shall be substantially in the form attached to and made a part of this Lease as Exhibit I (the "Tenant Approved SNDA") or in a commercially reasonable form and subject to the approval of Tenant, not to be unreasonably withheld. Tenant agrees at any time hereafter, upon ten (10) business days prior written notice, to execute and deliver the Tenant Approved SNDA. (b) Nothing contained in this Lease shall limit or curtail Landlord's right to sell, mortgage or otherwise transfer its fee interest in the Installations Premises, or affect Landlord's right to assign the Rent payable under this Lease either as collateral security under a mortgage or otherwise. Any such sale, mortgage, transfer or assignment shall be binding on Tenant but shall be subject to this Lease. (c) Landlord acknowledges that the term of the Intelsat Lease extends beyond the Expiration Date. SECTION 21. DEFAULTS AND REMEDIES (a) The occurrence of any one or more of the following events shall be a default and breach of this Lease by Tenant (collectively, "Events of Default"): (i) Tenant shall fail to pay any installment of Rent when the same shall be due and payable and fail to cure such default within nine (9) days after receiving written notice from Landlord specifying the default. For the purposes of this Subparagraph 21(a)(i), Tenant agrees notice by Mortgagee, or Landlord's loan service provider, given according to the terms of Section 26, shall be deemed sufficient notice. (ii) Tenant shall fail to perform or observe any other term, condition, covenant or obligation required to be performed or observed by it under this Lease for a period of thirty (30) days after written notice from Landlord specifying such default; provided, however, that if the term, condition, covenant or obligation to be performed by Tenant is of such nature that the same cannot reasonably be performed within such thirty (30) day period, such default shall be deemed to have been cured if Tenant commences such performance within the 30 day period and thereafter diligently undertakes to complete the cure and in all events cures the default within one hundred twenty (120) days of Landlord's notice, subject to extension for Unavoidable Delays. (iii) An Event of Default, as defined therein, shall occur under that certain lease agreement, dated of even date herewith, between Landlord and Tenant with respect to the Master Lease Property (the "Master Lease"). (iv) Termination or rejection of this Lease pursuant to Section 22. (v) Assumption or assignment of this Lease, under the conditions referred to in Section 22, unless the requirements of Section 22 applicable to such assumption or assignment are satisfied. (b) Upon the occurrence of any Event of Default, Landlord shall have the following rights and remedies, in addition to those allowed by law or equity, any one or more of which may be exercised concurrently and without further notice to or demand upon Tenant: (i) Landlord may re-enter the Installations Premises and cure any default of Tenant, in which event Tenant shall reimburse Landlord as Additional Rent for any reasonable costs and expenses which Landlord may incur to cure such default; and Landlord shall not be liable to Tenant for any loss or damage which Tenant may sustain by reason of Landlord's action, except loss or damage caused by Landlord's negligence or intentional misconduct. (ii) Landlord may terminate this Lease, in which event: (A) Tenant shall not thereafter be entitled to possession of the Installations Premises and Tenant shall immediately thereafter surrender, or cause to be surrendered, the Installations Premises to Landlord; (B) Landlord may re-enter the Installations Premises and dispossess Tenant by summary proceedings, ejectment or other legal process and may remove its effects, without prejudice to any other remedy which Landlord may have for possession or arrearages in Rent; and (C) Tenant shall be liable for all loss or damage which Landlord may sustain by reason of such termination and re-entry; and Landlord may re-let all or any part of the Installations Premises for a term different from that which would otherwise have constituted the balance of the Term and for Rent and on terms and conditions different from those contained herein, whereupon Tenant shall be obligated to pay to Landlord the deficiency, if any, between the Rent provided for herein and that provided for in any lease covering a subsequent re-letting of the Installations Premises, for the period which would otherwise have constituted the balance of the Term, together with all of Landlord's reasonable costs and expenses of preparing the Installations Premises for re- letting, including all repairs, tenant finish improvements, brokers' and attorneys' fees, and all loss or damage which Landlord may sustain by reason of such re-letting, it being expressly understood and agreed that the liabilities and remedies specified above shall survive the termination of this Lease. Landlord shall make diligent efforts to mitigate its damages in the event of an Event of Default. (iii) (A) Notwithstanding the termination of this Lease, Landlord may declare all Base Rent which would have been due under this Lease for the balance of the Term to be immediately due and payable. In that event, Tenant shall be obligated to pay an amount in cash that would be necessary to purchase U.S. Obligations in such amounts and having such maturities that the principal and interest of such U.S. Obligations would be sufficient to provide funds as close as possible but in no event less or later than the payments due under this Lease as Base Rent as and when such payments would be due if no acceleration of the Base Rent had occurred (the "Accelerated Payment"). U.S. Obligations are obligations or securities not subject to prepayment, call or early redemption which are direct obligations of, or obligations fully guaranteed as to timely payment by, the United States of America or any agency or instrumentality thereof, the obligations of which are backed by the full faith and credit of the United States of America. (B) Upon receipt of the Accelerated Payment, Landlord shall use commercially reasonable efforts to lease the portions of the Installations Premises not subject of other leases at the then currently existing fair market rate for Comparable Properties. From and after the Event of Default all rent and other payments, except for security deposits, collected under leases entered into after the Event of Default ("Post Default Leases") and under any Existing Space Leases, Subleases, or occupancy or concession agreements in effect as of the Event of Default shall be placed in a separate escrow account (the "Escrow Account") held by a mutually acceptable escrowee (the "Escrowee"). Also, any refunds of Impositions paid by Tenant and received by Landlord shall be placed in the Escrow Account. The Escrow Account shall be interest bearing and earn at least a money market rate of interest. All interest earned shall become part of the escrow fund and be treated in the same manner as the principal in the Escrow Account. The Post Default Leases and all Existing Space Leases, Subleases, and occupancy and concession agreements in effect as of the Event of Default are collectively referred to as the "Mitigation Leases". The funds contained in the Escrow Account shall be disbursed in the following manner and with the following priority: (i) all direct and reasonable operating expenses ("Operating Expenses") paid by Landlord relating to the Installations Premises during the "Default Measuring Period" (defined below) shall be paid to Landlord, (ii) a management fee equal to three percent (3%) of the amount collected by Landlord from the Mitigation Leases during the Default Measuring Period shall be paid to Landlord, (iii) all direct and reasonable costs of collection paid by Landlord to collect the sums payable under the Mitigation Leases shall be paid to Landlord, (iv) reasonable and customary brokerage fees, reasonable attorneys' fees and all other reasonable out of pocket costs paid by Landlord during the Default Measuring Period to third parties in connection with the Mitigation Leases (including the fees of the Escrowee and the Escrow Account) shall be paid to Landlord, (v) Tenant shall be paid up to the amount that Tenant was scheduled to pay as Base Rent during the Default Measuring Period, and (vi) the remainder shall be shared equally by Landlord and Tenant. As used in this Section, the term "Default Measuring Period" shall mean (1) as to the payments contemplated in (i) through (iv) above, each consecutive one (1) month period after the establishment of the Escrow Account until the date the Term would have expired but for the early termination of this Lease, and (2) as to the payments contemplated in (v) and (vi) above, each consecutive three (3) month period after the establishment of the Escrow Account until the date the Term would have expired but for the early termination of this Lease. The first Default Measuring Period, however, shall also include the period from the date of the Event of Default to the date the Escrow Account was established. Escrowee shall make disbursements to the parties in the priority described above on or about the fifteenth (15th) day after the end of each Default Measuring Period. Within ten (10) days after the end of each Default Measuring Period relating to the payments contemplated in (i) through (iv) above, Landlord shall furnish to Escrowee and Tenant a written statement setting forth in reasonable detail all amounts paid into the Escrow Account and all amounts for which Landlord is claiming payment with respect to the immediately preceding Default Measuring Period. The statement shall be certified by Landlord as being accurate and shall be accompanied by invoices and other documentation reasonably evidencing the amounts claimed for payment. Escrowee shall withhold from the payments made under (v) and (vi) above one-fourth of the reasonably estimated real estate taxes and Insurance premiums which are next due respect to the Installations Premises, less the amounts of any real estate taxes or Insurance premiums required to be directly paid by tenants under the Mitigation Leases (the "Tax and Insurance Holdbacks"). Escrowee shall release the Tax and Insurance Holdbacks to Landlord when and to the extent that real estate taxes and Insurance premiums are payable by Landlord with respect to the Installations Premises. At the time of each such disbursement to Landlord, Escrowee shall also disburse to Tenant the amount, if any, by which the Tax and Insurance Holdbacks held by Escrowee exceed the tax bill or Insurance premiums paid with such Tax and Insurance Holdbacks. Although the last Default Measuring Period shall end on the date the Initial Term would have expired but for the early termination of this Lease, any amounts collected by Landlord under the Mitigation Leases after that date and attributable to any period which occurred prior to that date shall be paid directly by Landlord to Tenant. No party shall be paid for any amount described in this Subsection (B) to the extent such party was otherwise reimbursed for such amount, including, without limitation, previous payment by the Escrowee or previous reimbursement under the Mitigation Leases. For the purposes of this Section, "Operating Expenses" excludes (1) debt service and other costs of Landlord's financing, (2) capital expenditures, except to the extent that Landlord is obligated to make capital improvements under the terms of Existing Space Leases and Subleases in effect as of the Event of Default, and then only to the extent that the amortized cost of such capital improvements is properly allocable to the Default Measuring Period, (3) management fees, (4) overhead, (5) depreciation, (6) accountants' fees, (7) any losses or expenses covered by Insurance, whether or not such Insurance is in fact maintained, or compensable by condemnation proceeds, (8) any amount incurred by reason of the negligence or intentional misconduct of Landlord or its Agents, (9) fines or penalties, and (10) any amounts paid by specific tenants. Any refunds, discounts, or recoupments of Operating Expenses received by Landlord shall be accounted for by Landlord and credited back to Tenant. Tenant, at reasonable times and upon reasonable notice shall have the right to audit Landlord's books and records relating to Operating Expenses; provided, however, in no event shall Landlord be required to keep such underlying receipts for Operating Expenses beyond a date which is three (3) years after Escrowee makes a disbursement for such Operating Expenses. The cost of capital expenditures which may be included as Operating Expenses as provided above shall be amortized over the useful life of each such capital expenditure as determined for federal income tax purposes. Notwithstanding the foregoing, Landlord shall not be entitled to payment from the Escrow Account for any costs of repairs or maintenance that Tenant would not have been obligated to undertake under the standard of Care set forth in Section 11 of this Lease or for any other Operating Costs which Tenant would not have been obligated to pay under this lease. Notwithstanding anything to the contrary contained herein, until the expiration of 91 days after the receipt of the Accelerated Payment, Tenant shall not make any claim against Landlord that Landlord has failed to use diligent efforts to mitigate its damages after the Event of Default which gave rise to the Accelerated Payment. This provision shall survive the termination of this Lease. (iv) Landlord may sue for injunctive relief or to recover damages for any loss resulting from the breach. (c) Any agreement for an extension of the Term or for any other additional period after the Term shall not thereby prevent Landlord from terminating this Lease for any reason specified in this Lease. If any such right of termination is exercised by Landlord during the Term or any extension thereof, Tenant's right to any extension or additional period shall thereby be automatically canceled. Any such right of termination of Landlord contained herein shall continue during the Term and any subsequent extension hereof. (d) The failure or delay by either party to enforce or exercise at any time any of the rights or remedies or other provisions of this Lease shall not be construed to be a waiver thereof, nor affect the validity of any part of this Lease or the right of that party thereafter to enforce each and every such right or remedy or other provisions. No waiver of any default or breach of this Lease shall be held to be a waiver of any other default or breach. No act or omission by Landlord during the Term shall be deemed an acceptance of a surrender of the Installations Premisesand no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. (e) If either party defaults under this Lease and the other party places the enforcement of all or any part of this Lease or the collection of any sum due or to become due under this Lease or the recovery of possession of the Installations Premises in the hands of an attorney, and such party prevails in litigation concerning such issue, the defaulting party agrees to reimburse the prevailing party for the reasonable attorney's fees incurred thereby. SECTION 22. BANKRUPTCY OR INSOLVENCY Landlord and Tenant agree that the following shall apply in the event of the bankruptcy or insolvency of Tenant: (a) If a petition is filed by, or an order for relief is entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of Tenant elects to assume this Lease for the purpose of assigning it, such assumption and assignment may be made only if all of the terms and conditions of Subsections (b) and (d) below are satisfied. To be effective, an election to assume this Lease must be in writing, addressed to Landlord, and all of the conditions herein stated, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied. If the trustee fails so to elect to assume this Lease within 60 days after such filing or order or such additional time as the Bankruptcy Court, for cause, may fix, this Lease will be deemed to have been rejected, and Landlord shall then immediately be entitled to possession of the Installations Premises without further obligation to Tenant or the trustee, and this Lease shall be terminated. Landlord's right to be compensated for damages in the bankruptcy proceeding, however, shall survive such termination. (b) If Tenant files a petition for reorganization under Chapters 11 or 13 of the Bankruptcy Code, or if a proceeding filed by or against Tenant under any other chapter of the Bankruptcy Code is converted to a chapter 11 or 13 proceeding and Tenant's trustee or Tenant as debtor-in-possession fails to assume this Lease within 60 days from the date of the filing of such petition or conversion or such additional time as the Bankruptcy Court, for cause, may fix, then the trustee or the debtor-in-possession shall be deemed to have rejected this Lease. To be effective, any election to assume this Lease must be in writing, addressed to Landlord and, if there has been a default under the Lease, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied: (i) The trustee or the debtor-in-possession has cured or has provided to Landlord adequate assurance that: (A) It will cure all monetary defaults under this Lease within the number of days specified in Section 21(a)(I) of this Lease from the date of assumption; and (B) It will cure all nonmonetary defaults under this Lease within the number of days specified in Section 21(a)(ii) of this Lease from the date of assumption. (ii) The trustee or the debtor-in-possession has compensated Landlord, or has provided Landlord with adequate assurance that Landlord will be compensated promptly for any pecuniary loss it has incurred arising from the default of Tenant, the trustee, or the debtor-in- possession. (iii) The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the future performance of each of Tenant's obligations under this Lease; provided, however, that: (A) From and after the date of assumption of this Lease, until the date of the assignment of this Lease, it shall pay all monetary obligations, including, without limitation, the Rent payable under this Lease, in advance on each date that such amounts are payable. (B) It shall also deposit with Landlord, as security for the timely payment of Rent, an amount equal to three months' Base Rent and other monetary charges accruing under this Lease; (C) If not otherwise required by the terms of this Lease, it shall also pay in advance, on each day that any installment of Base Rent is payable, one- twelfth of Tenant's Imposition, Insurance and other obligations under this Lease. (c) If the trustee or the debtor-in-possession has assumed this Lease, pursuant to Subsection (a) or (b) above, and elects to assign Tenant's interest under this Lease or the estate created by that interest to any other person, such interest or estate may be assigned only if the intended assignee has provided adequate assurance of future performance of all of the terms, covenants, and conditions of this Lease. For the purposes of this Subsection (d), "adequate assurance of future performance" means that Landlord has ascertained that each of the following condition has been satisfied: The assignee has submitted a current financial statement which shows a net worth and working capital in amounts sufficient to assure the future performance by the assignee of Tenant's obligations under this Lease. (d) When, pursuant to the Bankruptcy Code, the trustee or the debtor-in-possession is obligated to pay reasonable use and occupancy charges for the use of all or part of the Installations Premises, it is agreed that such charges will not be less than the Base Rent as defined in this Lease, plus Additional Rent and other monetary obligations of Tenant included herein. (e) Except to the extent provided by law, neither Tenant's interest in this Lease nor any estate of Tenant created in this Lease shall pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, nor otherwise by operation of law under the laws of any state having jurisdiction of the person or property of Tenant, unless Landlord consents in writing to such transfer. Landlord's acceptance of Rent or any other payments from any trustee, receiver, assignee, person, or other entity will not be deemed to have waived, or waive, either the requirement of Landlord's consent or Landlord's right to terminate this Lease for any transfer of Tenant's interest under this Lease without such consent. SECTION 23. SURRENDER OF INSTALLATIONS PREMISES Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Installations Premises to Landlord, broom-clean, in good order, condition and repair (except for ordinary wear and tear and conditions which existed on the Installations Premises prior to the Effective Date and subject to Sections 15 and 17), free of all Tenant's Property (except as otherwise provided in Subsection 13(c), Personal Property and Restricted Property (except for Restricted Property belonging to any Existing Tenant or Subtenant whose Existing Lease or Sublease Landlord has expressly agreed in writing may continue), and free of violation of Applicable Laws in all material respects subject to Section 5(b)(iv). To the extent Tenant fails to comply with the requirements of this Section, Landlord may restore the Installations Premises to such condition at Tenant's expense. SECTION 24. NON-CONSENSUAL HOLDING OVER In the event Tenant remains in possession of the Installations Premises or any part thereof without the consent of Landlord after the expiration or earlier termination of this Lease, Tenant shall be deemed, at Landlord's election, to hold the Installations Premises as a tenant at sufferance subject to all of the terms, conditions, covenants and provisions of this Lease which shall be applicable during such time (the "Holdover Period"), except that, for each month during the Holdover Period, Tenant shall pay to Landlord 150% of the sum of the last current full monthly installment of Base Rent plus Additional Rent, which shall be payable to Landlord within five (5) business days of notice from Landlord. In addition, such election shall not preclude Landlord from seeking, and shall be cumulative with, any other remedy under this Lease or granted by law or in equity. No holding over by Tenant, as described in this Section 24, whether with or without the consent of Landlord, shall operate to extend this Lease. SECTION 25. QUIET ENJOYMENT If and for so long as Tenant pays the prescribed Rent and performs or observes all of the terms, conditions, covenants and obligations of this Lease required to be performed or observed by it hereunder, Tenant shall at all times during the Term have the peaceable and quiet enjoyment, possession, occupancy and use of the Installations Premises without any interference from Landlord, or anyone claiming through or under Landlord, subject to any matters of record as of the Effective Date to which this Lease is subject. SECTION 26. NOTICES Any notice, demand or request required or permitted to be given under this Lease or by law shall be deemed to have been given if in writing and delivered addressed to the party who is to receive such notice, demand or request at the address set forth below or at such other address as Landlord or Tenant may specify from time to time by notice. Delivery hereunder shall be deemed to include pre-paid courier delivery (by a reputable courier delivery service), pre-paid overnight delivery (by a reputable overnight delivery service), postage and fees paid U.S. Postal Service express mail or certified mail, return receipt requested, or facsimile transmission with electronic verification during normal business hours, if sent to the address of the parties designated hereunder, and shall be deemed received on the next business day such notice is delivered or refused at such address except notices sent by fax shall be deemed received upon electronic verification. Landlord: LCOR Incorporated 6701 Democracy Boulevard Bethesda, MD 20817 Attn: Mr. R. William Hard Facsimile: (301) 897-3713 with copies to: Jones, Day, Reavis & Pogue 1450 G Street, N.W. Washington, DC 20005-2088 Attn: Sigmund T. Weiner, Esq. Facsimile: (202) 737-2832 LCOR Incorporated 300 Berwyn Park, Suite 104 Berwyn, PA 19312 Attention: Mr. Peter DiLullo Facsimile: (610) 408-4420 Tenant: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: General Manager Corporate Services Facsimile: (301) 214-7147 with a copy to: COMSAT Corporation 6560 Rock Spring Drive Bethesda, MD 20817 Attention: General Counsel Facsimile: (301) 214-7128 Any copies required to be sent as above provided are for the convenience of the parties and no such copy shall constitute adequate notice for the purposes of this Section. SECTION 27. HAZARDOUS MATERIALS Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Material" on the Installations Premises. (a) If the use, storage, handling, generation, or disposal of Hazardous Material on or in the Installations Premises during the Term results in the release or threatened release of Hazardous Materials at, on or under the Installations Premises in violation of Applicable Law, or otherwise necessitates investigation or cleanup of Hazardous Material as required under Applicable Law ("Environmental Conditions"), Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees but excluding consequential damages and any injury to the value of the Property, provided that this clause shall not be construed as reducing the Remediation Obligation) which arise during or after the Term as a direct result thereof. This indemnification of Landlord by Tenant includes, without limitation, reasonable costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency because of Hazardous Material present in the soil or groundwater on or under the Installations Premises or in any improvements on the Installations Premises. This indemnification, however, shall not apply to any Environmental Conditions caused by the acts or omissions of Landlord or its Agents. The indemnification and hold harmless obligations of Tenant under this Section 27 shall survive any termination of this Lease for a period of twenty-four (24) months after the termination. At the end of the twenty-four (24) month period, this indemnification and all of Tenant's obligations under this Section shall expire, except as to matters specifically made the subject of a lawsuit filed against Tenant before the expiration of the twenty-four (24) month period. Without limiting the foregoing, if the use, storage, handling, generation, or disposal of Hazardous Material on or in the Installations Premises during the Term results in any Environmental Conditions, then, provided that the Environmental Condition is not caused by the acts or omissions of Landlord or its Agents, Tenant shall promptly take all actions, at its sole expense, as are necessary to return the Installations Premises to substantially the condition existing prior to thereto or to such other condition as may satisfy the applicable governmental authorities (the "Remediation Obligation"). Landlord's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld. Nothing in this Section shall be deemed to prohibit or limit any action by Tenant against any party or parties responsible for the contamination. (b) Tenant covenants and agrees that during the Term it shall continue implementation of the Operations and Maintenance Plan described in Exhibit J attached hereto and made a part hereof at all times in compliance with Applicable Laws in all material respects. (c) Landlord shall have the right, at any time, to cause the groundwater, soil, improvements and air at the Installations Premises to be investigated to detect the presence of Hazardous Material during the Term, including, but not limited to, the installation of testing wells and other devices in locations selected by Landlord at Landlord's sole discretion. Landlord shall supply Tenant with copies of final investigation reports. The cost of such investigations and of the maintenance, repair and replacement of such wells and other devices shall be fully paid for by Landlord, unless Landlord's investigations reveal Environmental Conditions which Tenant is obligated to remediate under this Section. In that event, Tenant, within thirty (30) days after receiving a copy of such investigation report and a statement of charges from Landlord, shall pay for the cost of the investigation. Any dispute under this Subsection shall be resolved under the arbitration proceedings set forth in Subsection 11(b). (d) As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of Maryland or the United States Government or other Applicable Law. The term "Hazardous Material" includes, without limitation, any material or substance which is (i) designated as a "hazardous substance" pursuant to Section 307 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq. (33 U.S.C. Section 1317), (ii) defined as a "hazardous waste" pursuant to Section 3001 of the Federal Solid Waste Disposal Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6921), or (iii) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601), or (iv) petroleum, petroleum product, polychlorinated biphenyls or urea formaldehyde. (e) Within 30 days of the Expiration Date, if requested by Landlord, Tenant shall remove all fuel oil and other liquid contents and Hazardous Materials (collectively, the "Contents") from all now or hereafter active underground storage tanks located on the Installations Premises and dispose of such contents off of the Installations Premises and in accordance with Applicable Laws. Tenant shall not be obligated to remove, close or take any other action to de-commission the tanks during or after the Term. If, however, during the Term governmental authorities require such removal, closure or other action and the requirement is not prompted by Landlord's request to remove the Contents or any Development by Landlord or its Agents, Tenant shall comply with such request subject to Subsection 5(b)(iv)(d). (f) Notwithstanding anything contained in this Lease, Tenant shall have no obligation or liability to Landlord with respect to: (i) Any Hazardous Material which may exist on the Installations Premises as of the Effective Date, except to the extent that Tenant is specifically required to take action regarding such Hazardous Material by the governmental authority having jurisdiction. (ii) Hazardous Material that migrates, flows, percolates, diffuses or in any way moves on to or under the Installations Premises from sources outside the Installations Premises. SECTION 28. RIGHT TO RENEW TERM (a) Provided that this Lease is then in full force and effect, and provided that no Event of Default exists at the time of the Renewal Notice or the date of commencement of the Renewal Term, Landlord hereby grants to the Tenant an option (the "Renewal Option") to renew the Initial Term of this Lease on the same terms, conditions and provisions as contained in this Lease, except as noted herein, for a period of five years after the Expiration Date of the Initial Term (the "Renewal Term"), which Renewal Option period shall, except as provided below, commence immediately following the expiration of the Initial Term and end at 11:59 p.m. of the fifth anniversary of such date. (b) The Renewal Option shall be exercised, if at all, by written notice (the "Renewal Notice") from Tenant to Landlord of its election, said notice to be given no later than the eighteen (18) months prior to the Expiration Date of the Initial Term. If the Renewal Notice is not so given by Tenant to Landlord, the Renewal Option shall be deemed waived. (c) The Renewal Term shall be upon the same terms, covenants and conditions as provided in this Lease except as follows: (i) Tenant shall not have any further right to extend the Term or holdover after the end of the Term. (ii) The annual Base Rent for the first year of the Renewal Term shall be equal to 102.75% of the Base Rent rate in effect under this Lease immediately prior to commencement of the Renewal Term. (iii) The annual Base Rent shall be increased during the Renewal Term by 2.75% per year on a cumulative compounded basis. SECTION 29. SECURITY DEPOSIT If at any time during the Term, the credit rating of Tenant's corporate debt drops below BBB as rated by Standard & Poor's (or the equivalent rating by any other national rating agency designated by Landlord), upon notice from Landlord, Tenant shall deposit a sum with Landlord equal to one month's installment of the then applicable annual Base Rent ("Security Deposit"), as security for the full and faithful performance by Tenant, of each and every term, covenant, and condition of this Lease. If there an event of Default, Landlord may use the Security Deposit as payment of any Rent or other payment due from Tenant to Landlord or to otherwise cure any default of Tenant hereunder. To the extent that any of the Security Deposit is used for this purpose, Tenant shall pay such amount to Landlord along with the next month's Rent in order to replenish the Security Deposit to the original amount stated herein. The Security Deposit shall be returned to Tenant within 30 days of the Expiration Date or earlier termination of this Lease to the extent that such amount is not depleted in order to remedy any default by Tenant hereunder. SECTION 30. MISCELLANEOUS GENERAL PROVISIONS (a) Payments Deemed Rent. Any amounts of money to be paid by Tenant to Landlord pursuant to the provisions of this Lease, whether or not such payments are denominated Rent or Additional Rent and whether or not they are to be periodic or recurring, shall be deemed Rent or Additional Rent for purposes of this Lease; and any failure to pay any of same shall entitle Landlord to exercise all of the rights and remedies afforded hereby or by law or in equity for the collection and enforcement of Tenant's obligation to pay Rent. Tenant's obligation to pay any such Rent or Additional Rent pursuant to the provisions of this Lease shall survive the expiration or other termination of this Lease and the surrender of possession of the Master Lease Property. (b) Interest on Deposits. Any amount deposited with Landlord under this Lease shall be held by Landlord in a federally insured, interest bearing account. Any interest earned on such deposit shall accrue to Tenant and shall be transferred to Tenant promptly after the Expiration Date or such earlier time as may be specified in this Lease unless Landlord is required by Applicable Laws to return such interest to Tenant sooner than stated herein. Any amount deposited with Mortgagee by Tenant (or by Landlord on Tenant's behalf) shall be held by Mortgagee pursuant to Applicable Laws and pursuant to the security documents between Landlord and Mortgagee. No interest shall accrue unless required by Applicable Laws or such security documents. Notwithstanding the foregoing, any amounts placed in the Escrow Account shall be governed by the provisions of Subsection 21(b)(iii)(B). (c) Landlord Cross Default. Any default by Landlord under the Master Lease shall be a default by Landlord under this Lease. (d) Estoppel Letters. Tenant shall, within ten (10) business days following written request from Landlord, execute, acknowledge and deliver to Landlord or to any then existing or prospective lender, investor or purchaser, with respect to the Installations Premises or any part thereof, designated by Landlord, a written statement certifying (i) that this Lease is in full force and effect (if such is the case) and unmodified (or, if modified, stating the nature of such modification), (ii) the date to which Rent has been paid, (iii) that there are not, to Tenant's actual knowledge, any uncured defaults by Landlord or Tenant (or specifying such defaults if any are claimed), and (iv) such other matters as Landlord may reasonably request. Any such statement may be relied upon by any such then existing or prospective lender, investor or purchaser. If Tenant fails to deliver such statement within the 10 business day period and if following the expiration of that period Landlord gives a second written request for the statement and Tenant fails to deliver the statement within 5 business days after the second request, Tenant shall conclusively be deemed to have responded that this Lease is in full force and effect and unmodified and that there are no uncured defaults in Landlord's performance hereunder. (e) Brokers. Each party represents and warrants to the other that no broker procured this Lease on its behalf and that such party had no conversations or negotiations with any broker concerning the leasing of the Installations Premises, other than Barnes, Morris, Pardoe and Foster, which firm is receiving a commission from Tenant in connection with the Purchase and Sale Agreement and is not entitled to a commission in connection with this Lease. Each party shall indemnify the other against liability in connection with a breach of its representation and warranty in this Subsection and in connection with any claim for a brokerage or finder's commission or fee arising out of its acts. This indemnification shall survive any termination of this Lease. (f) Applicable Law. This Lease and all matters pertinent thereto shall be construed and enforced in accordance with the Applicable Laws of the State of Maryland, excluding choice of laws principles. (g) Entire Agreement. This Lease, including all exhibits hereto, constitutes the entire agreement between the parties hereto with respect to the leasing of the Installations Premises and may not be modified except by an instrument in writing executed by the parties hereto. (h) Binding Effect. This Lease and the respective rights and obligations of the parties hereto shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto as well as the parties themselves; subject, however, to Subsection (o) below. (i) Survival. All provisions of this Lease which by their express terms survive termination of this Lease or which by the operation of their terms are intended to be performed, in whole or in part, after termination of this Lease, shall survive any termination of this Lease. (j) Severability. If any provision of this Lease shall be held to be invalid, void or unenforceable, such provision shall be deemed reformed to be valid, in effect and enforceable, and to be as close in meaning and intent as the defective provision and still the remaining provisions hereof shall not be affected or impaired, and such remaining provisions shall remain in full force and effect. (k) Headings, Gender, etc. As used in this Lease, the word "person" shall mean and include, where appropriate, an indivi dual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate, and words of any gender shall include any other gender. The topical headings of the several paragraphs of this Lease are inserted only as a matter of convenience and reference, and do not affect, define, limit or describe the scope or intent of this Lease. References in this Lease to Sections and Subsections are references to Sections and Subsections of this Lease. (l) Waiver of Jury. To the extent permitted by Applicable Laws, each of Landlord and Tenant hereby waives any right it may have to a jury trial in the event of litigation between Landlord and Tenant pertaining to this Lease. (m) Landlord's Right to Cure. Landlord may, but shall not be obligated to, cure any default by Tenant, specifically including, but not by way of limitation, Tenant's failure to pay Impositions, obtain Insurance, Care for the Installations Premises, or satisfy lien claims, after complying with any applicable notice and cure provisions established under this Lease; and whenever Landlord so elects, all reasonable out of pocket costs and expenses paid by Landlord in curing such default, including, without limitation, reasonable attorneys' fees, shall be Additional Rent due on the next scheduled Rent payment date. (n) Relationship of Parties. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any act of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. (o) Landlord Means Owner. The term "Landlord" as used in this lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the Installations Premises and, in the event of any transfer or transfers of the title to all of the Installations Premises, Landlord herein named (and in case of any subsequent transfer or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed (but not any liabilities accrued prior to the date of transfer); provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease, shall be paid to Tenant and further provided that the transferee assumes in writing all of the covenants and obligations of Landlord to observed and performed on and after the date of transfer. (p) References to Size. Landlord and Tenant acknowledge and agree that any references in this Lease to the size of the Property, the Auxiliary Building Areas, the Auxiliary Buildings or any portion thereof are for convenience only and regardless of whether the actual size of such areas is greater or less than the size stated in this Lease, all obligations of the parties hereunder, including without limitation, the obligation to pay Rent shall remain the same and shall not be affected by any errors in references to size. (q) Unavoidable Delays. For purposes of this Lease, the term "Unavoidable Delays" shall mean delays caused by strikes, lockouts, acts of God, inability to obtain labor or materials, governmental restrictions or inaction, enemy action, civil commotion, fire, terrorist action, epidemic, public utility failure, unavoidable casualty, moratorium or similar laws prohibiting performance, severe weather conditions or any other similar matter which shall be beyond the reasonable control of Landlord or Tenant, as the case way be; but the lack or insufficiency of funds shall not constitute an Unavoidable Delay. (r) Landlord's Approvals. Wherever Landlord's consent or approval are required under this Lease, Landlord shall approve or disapprove the matter within ten (10) business days after Tenant requests the consent or approval in writing. If Landlord fails to do so and if, following the expiration of the ten (10) business day period, Tenant gives a second written request for the consent or approval and Landlord fails to approve or disapprove the matter within five (5) business days after the second request, Landlord shall conclusively be deemed to have consented to or approved the matter, as the case may be. (s) Rate of Interest. If any amount owed by Landlord to Tenant under this Lease remains unpaid after such amount is due and notice thereof has been given to Landlord, the outstanding amount shall bear interest at the Stipulated Rate from the date such amount is due and such notice is given to the date such amount is paid. (t) Cooperation of Parties. Whenever the parties are required to cooperate with each other under this Lease but are entitled to reimbursement for their out-of-pocket costs to third parties, the party that is obligated to cooperate shall provide an estimate of such third party costs to the party requesting such cooperation and obtain the prior written approval from such other party not to be unreasonably withheld or delayed before such costs are incurred. (u) Reconciliation. Nothing in this Lease shall prevent or impair Tenant from performing its obligations or observing its covenants under the Existing Space Leases. Further, nothing in this Lease shall prevent or impair any of the Existing Tenants from exercising their rights and privileges under the Existing Space Leases. No such action by Tenant or the Existing Tenants in accordance with the Existing Space Leases shall be deemed to be a breach or default by Tenant under this Lease. (v) Memorandum of Lease. Upon request of either party the other party shall promptly execute and deliver a memorandum or other short form version of this Lease setting forth the basic terms of this Lease excluding Rent. The party recording such memorandum, short form version, or other document giving notice of this Lease shall pay any and all recordation and transfer taxes due in connection with such recordation. (w) Financial Reports. In the event that Tenant is no longer a publicly traded company with common stock trading on either the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Exchange (or, in the event the Tenant's stock is no longer traded on such exchanges, or a successor or reasonably equivalent exchange), Tenant shall supply Landlord, within ten (10) business days of Landlord's request therefor (to be no more frequent than once per year), copies of Tenant's most recent financial reports. Such reports shall (i) include an income statement, balance sheet, statement owner's equity and statement of cash flows, (ii) shall be audited by a certified public accountant or, to the extent audited Financial Reports are not otherwise obtained by Tenant for other purposes, certified by the chief financial officer of Tenant, to his/her knowledge, as being true, correct and complete financial reports, and (iii) shall be dated no later than twelve months prior to Landlord's request. Notwithstanding the foregoing, in the event that Landlord requests such financial reports within one hundred twenty (120) days after Tenant's fiscal year end, Tenant shall have up to one hundred twenty (120) days from such fiscal year end to supply such reports to Landlord; provided Tenant has given Landlord its most recent financial reports and such reports are not dated earlier than twelve (12) months prior to Tenant's fiscal year end. (x) Landlord's Affiliates. Notwithstanding anything contained in this Lease to the contrary, any act or omission of an affiliate of Landlord on any Excluded Areas shall not be a default of Landlord under this Lease. In no event shall this provision be construed in any manner as a waiver of any right that Tenant has at law or in equity against such affiliate as a result of such act or occurrence. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed as of the day and year stated herein. LANDLORD: LCOR CLARKSBURG L.L.C. By: Clarksburg Management, Inc. By: /s/ Michael T. Goulder Name: Michael T. Goulder Title: Vice President TENANT: COMSAT CORPORATION By: /s/ Allen E. Flower Name: Allen E. Flower Title: Vice President and Chief Financial Officer SCHEDULE I AAA: Section 11(b) Accelerated Payment: Section 21(b)(iii)(A) Additional Easements: Section 6(f) Additional Rent: Section 4(b) Adequate Assurance of Future Performance: Section 22(d) All Risks: Section 14(a)(i) Alterations: Section 13(a) Applicable Laws: Section 5(b)(iv) Appurtenances: Section 6(d) Assignment: Section 19(b) Base Rent: Section 4(a) Care, Care for, Care of: Section 11(a) Comparable Properties: Section 14(a)(ii) Contents: Section 27(e) Damage: Section 15(a) Declaration: Section 11(a) Default Measuring Period: Section 21(b)(iii)(B) Development: Section 6(a) Effective Date: Preamble Environmental Conditions: Section 27(a) Escrow Account: Section 21(b)(iii)(B) Escrowee: Section 21(b)(iii)(B) Events of Default: Section 21(a) Excluded Area: Section 6(d) Existing Space Leases: Section 19(a) Existing Tenants: Section 19(a) Hazardous Material: Section 27 and 27(d) Holdover Period: Section 24 Impositions: Section 7(a) and 7(d) Indemnifying Party: Section 16(c) Indemnitee: Section 16(c) Indemnity Payment: Section 16(c) Initial Term: Section 3(a) Insurance: Section 14(a) Insurance Notice: Section 14(g) Intelsat: Section 13(c) Landlord: Preamble, Section 30(o) Landlord Approved SNDA: Section 19(b) Lease: Preamble Lease Year: Section 3(b) Liability Policy: Section 14(a)(ii) Master Lease: Section 21(a)(iii) Mitigation Leases: Section 21(b)(iii)(B) Mortgagee: Section 7(e)(i) Net Award: Section 17(b) Operating Expenses: Section 21(b)(iii)(B) Post Default Leases: Section 21(b)(iii)(B) Prime Rate: Section 4(h) Purchase and Sale Agreement: Recital (a) Remediation Obligation: Section 27(a) Renewal Notice: Section 28(b) Renewal Option, Renewal Term: Section 28(a) Rent: Section 4(b) Restricted Areas: Section 12 Restricted Property: Section 13(c) Security Deposit: Section 29 Signs: Section 9(a) Stipulated Rate: Section 4(h) Sublease: Section 19(b) Subtenant: Section 19(c) Taken, Taking: Section 17(a) Tax and Insurance Holdbacks: Section 21(b)(iii)(B) Tenant: Preamble Tenant Approved SNDA: Section 20(a) Tenant's Property: Section 13(c) Term: Section 3(a) Third Party Claim: Section 16(d)(i) Unavoidable Delays: Section 30(q) Utilities: Section 8(a) SCHEDULE OF EXHIBITS EXHIBIT SECTION Exhibit A (Description of Land) 1(a) Exhibit B (Description of 1(a) Main Building Area) Exhibit C (Description of 1(a) Installations Premises) Exhibit D Intentionally Omitted Exhibit E (Wire Instructions) 4(g) Exhibit F (Portion of Installations Premises) 17(c) Exhibit G (Existing Space Leases) 19(a) Exhibit H (Landlord Approved SNDA) 19(b) Exhibit I (Tenant Approved SNDA) 20(a) Exhibit J (Operations and Maintenance 27(b) Plan) EX-10.52 6 AGREEMENT COMAST CORP/ARGENTINA/ICO GLOBAL EXHIBIT 10.52 AGREEMENT AMONG COMSAT CORPORATION COMSAT ARGENTINA S. A. AND ICO GLOBAL COMMUNICATIONS (HOLDINGS) LIMITED ICO GLOBAL COMMUNICATIONS HOLDINGS B.V. ICO GLOBAL COMMUNICATIONS SERVICES INC. Dated as of September 30, 1998 AGREEMENT This Agreement ("Agreement") is made and entered into as of the 30th day of September,1998 ("Effective Date") by and among the following parties: COMSAT Corporation, a Washington D.C. corporation ("COMSAT Corporation"), with its principal place of business at 6560 Rock Springs Drive, Bethesda, Maryland 20817, U.S.A.; COMSAT ARGENTINA S. A., a sociedad anonime ("COMSAT Argentina"), with its principal place of business at Carlos Pellegrini 1363, 6th Floor, (1011) Buenos Aires, Argentina; ICO Global Communications (Holdings) Limited, a Bermuda corporation ("ICO Bermuda"), with its principal place of business at Clarendon House, 2 Church Street, Hamilton, Bermuda; ICO Global Communications Holdings B.V., a Netherlands corporation ("ICO Netherlands"), with its principal place of business at Drentestraat 20, 1083 HK Amsterdam, The Netherlands; and ICO Global Communications Services Inc., a Delaware corporation ("ICO Services"), with its principal place of business at The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware, USA. In consideration of the covenants contained in this Agreement, the parties hereto hereby agree as follows: Section 1. Defined Terms. Each of the terms set forth below, when used in this Agreement, will have the definition set forth opposite such term: Closing Date - The date to be agreed to by the parties, as more fully set forth in Section 9 hereof. Closing - The closing of the transactions contemplated by this Agreement pursuant to Section 9 hereof. COMSAT - COMSAT Corporation and COMSAT Argentina. COMSAT Entity - COMSAT Corporation and each of its direct and indirect subsidiaries. COMSAT Shares - The ICO Bermuda shares owned , respectively, on the date of this Agreement by COMSAT Corporation , being a total of 2,015,604 shares, and COMSAT Argentina , being a total of 1,226,007 shares, as such shares and the number thereof may change to reflect any changes in the share capital of ICO Bermuda or the relationship between ICO Bermuda and any successor entity at any time during the period of performance of this Agreement. COMSAT Subscription Agreements - The Subscription Agreements dated January, 1995, and all amendments thereto, between COMSAT Corporation and COMSAT Argentina, respectively, and a predecessor to ICO Bermuda and related documents and similar documents between any COMSAT Entity and any ICO Entity. Distribution Rights - All rights and preferences of any COMSAT Entity to distribute any services of any ICO Entity or otherwise act for any ICO Entity anywhere in the world, including but not limited to all such rights and preferences that may have been granted or promised by any ICO Entity to any COMSAT Entity, including without limitation, any distribution rights granted, promised or referred to in the Information Memorandum, COMSAT Subscription Agreements, actions of or publications by any ICO Entity or its Board of Directors, or employees or agents, or other agreement, whether referred to as distribution rights, commercial rights, gateway operator, service partner, service provider, right to be a National Service Wholesaler, National Service Retailer, Service Wholesaler, Service Retailer, or otherwise . Nothing herein shall be construed as preventing COMSAT from acting as a non-exclusive provider to International Mobile Satellite Organization ("Inmarsat") for the distribution in the United States of non-hand held ICO products for the maritime and aeronautical market segments or non-hand held ICO services for the maritime and aeronautical market segments. ICO - ICO Bermuda, ICO Netherlands, and ICO Services. ICO Services is a wholly owned subsidiary of ICO Netherlands, which is a wholly owned subsidiary of ICO Global Communications (Netherlands Antilles) N.V., a Netherlands Antilles corporation, which is a wholly owned subsidiary of ICO Global Communications (Operations) Limited, a Cayman Islands corporation, which is a wholly owned subsidiary of ICO Bermuda. ICO Entity - ICO Bermuda and each of its direct and indirect subsidiaries. ICO Services/USEI Memorandum of Understanding - A memorandum of understanding in form and substance acceptable to ICO Services setting forth in outline form an agreement between USEI and ICO Services or an entity designated by ICO Services that would, among other things, (i) replace the Main Agreement, (ii) set forth USEI's consent to the transfer by COMSAT to ICO Services or an entity designated by ICO Services of the USEI Agreement and USEI Lease without condition at the request of ICO, and (iii) provide that the USEI Agreement can be terminated by COMSAT or, in the event the USEI Agreement has been transferred to ICO Services or an entity designated by ICO Services, by ICO Services or such entity without cost to COMSAT, ICO Services, or such entity. ICO Cayman Islands - ICO Global Communications (Holdings) Limited, a corporation organized under the laws of the Cayman Islands. Information Memorandum - The Information Memorandum dated 16 September 1994 as amended by the First Addendum thereto dated 18 January 1995 and the Second Addendum thereto dated 23 January 1995, referred to in the COMSAT Subscription Agreement, pursuant to which COMSAT Corporation and COMSAT Argentina acquired the COMSAT Shares. Interconnect Agreement - Interconnect Agreement dated March 5, 1997 between COMSAT Corporation and ICO Netherlands and all amendments thereto, if any. Licenses - All licenses, authorizations, approvals, and permits and applications therefor from any governmental authority obtained or applied for by (i) COMSAT Corporation in connection with the Interconnect Agreement and the Main Agreement or either or in the performance of its obligations thereunder or in connection with any Distribution Rights and/or (ii) COMSAT Argentina in connection with any Distribution Rights. Main Agreement - Main Agreement dated March 5, 1997 between COMSAT Corporation and ICO Services and all amendments thereto, if any. Main Agreement Documents - All plans, reports, memoranda, test results, insurance policies, schedules and other documents of whatsoever nature created or obtained by COMSAT Corporation in connection with the performance of its obligations under the Main Agreement and Interconnect Agreement or either and that are reasonably necessary to continue the installation, operations, maintenance, and interconnection of the SAN and not subject to attorney-client privilege. Main Agreement Subcontracts - All agreements entered into by any COMSAT Entity with third parties pursuant to or in connection with the performance of COMSAT Corporation's obligations under the Main Agreement and Interconnect Agreement or either. Parent Company Guaranty - The Parent Company Guaranty dated March 5, 1997 executed by ICO Cayman Islands in favor of COMSAT Corporation relating to the Main Agreement and the Interconnect Agreement. SAN - The Satellite Access Node constructed pursuant to the Main Agreement. Site Lease - The Lease of Earth Station Site dated April 4, 1997 between COMSAT Corporation and USEI and all amendments thereto, if any. Transition Agreement - The Transition Agreement to be entered into by ICO Services and COMSAT at the Closing, the form of which is attached hereto as Annex 1. USEI - U.S. Electrodynamics, Inc., a corporation organized under the laws of the state of Washington, USA. USEI Agreement - The Agreement dated April 4, 1997 between COMSAT Corporation and USEI relating to the construction and operation of the SAN and all amendments thereto, if any. Section 2. Payment. At the Closing, ICO Bermuda (or, at ICO Bermuda's direction, any one or more of the parties included within the definition of ICO) will pay to COMSAT, by wire transfer to the bank account designated in writing by COMSAT, in immediately available funds, the aggregate sum of (i) in consideration for terminating the Main Agreement and Interconnect Agreement, U.S. dollars four million five hundred thousand (U.S. $ 4,500,000), and (ii) an additional sum (in U.S. dollars) equal to all amounts which the parties hereto agree are or will be owed by ICO to COMSAT Corporation through the Closing Date pursuant to the Main Agreement and Interconnect Agreement that have not been paid as of such date, which sum shall be determined no ;later than five (5) days prior to the Closing. Section 3. Termination. The Interconnect Agreement and Main Agreement shall terminate as of the Closing Date, except for the following portions of the Interconnect Agreement and Main Agreement which will remain in effect: (a) Sections 12,18, 19, and 34 of the Interconnect Agreement, and (b) Sections C10, H4, H5, H14, and H15.13 of the Main Agreement. Section 4. Transfers To ICO and Transition Agreement. (A) At the Closing, COMSAT Corporation and ICO Services or other entity designated by ICO Services will execute and deliver, as of the Closing Date, an Assignment and Assumption Agreement in the form attached hereto as Annex 2, pursuant to which (i) COMSAT Corporation will assign or transfer to ICO Services or other entity designated by ICO Services, all rights, titles, and interests under the following, and (ii) ICO Services or other entity designated by ICO Services will assume the obligations of COMSAT Corporation that arise after the Closing under the following, and (iii) ICO Services will indemnify COMSAT against all claims by third parties (including costs) accruing after the Closing in connection with such assumed obligations and reimburse COMSAT for any taxes or fees that may become payable as a result of such assignment or transfer of rights, titles, and interests under, the following: (1) Site Lease; (2) All Main Agreement Documents; (3) All Main Agreement Subcontracts; (4) All Licenses (to the extent transferable and subject to any conditions applicable to transfer); (5) All rights, titles, and interests of COMSAT Corporation in and to all equipment, facilities, improvements, structures, and other physical property and rights of whatsoever nature acquired by COMSAT Corporation in connection with or for the SAN being constructed pursuant to the Main Agreement or in connection with the Interconnect Agreement; and (6) All Distribution Rights. (B) Except as otherwise agreed by the parties to facilitate the transition services under the Transition Agreement, COMSAT Corporation will deliver to ICO at or before the Closing the following documents which are defined in the Main Agreement in whatever state of completion or readiness such documents may exist on the Closing Date and otherwise on an "as is" basis: As Built Plans Confidential Information (received from ICO in connection with the Main Agreement or Interconnect Agreement) Plans Requisite Consents (to the extent transferable and subject to any conditions of transfer applicable thereto) Site Lease Building Contract Copy of all Building Contractor Insurance Policies in COMSAT's possession Warranties applicable to equipment installed pursuant to the Main Agreement and all subcontracts, consulting agreements, utility agreements and similar agreements entered into by COMSAT Corporation pursuant to the Main Agreement. (C) COMSAT Corporation will deliver to ICO at or before the Closing the following with respect to the Interconnect Agreement: (1) Confidential Information, as defined in the Interconnect Agreement, received from ICO in connection with the Interconnect Agreement, (2) Names, addresses, telephone numbers, and other relevant information relating all parties to which COMSAT Corporation provided quotes for ICO interconnect services, and (3) Such other information as may be in COMSAT's possession and that COMSAT may have created or obtained prior to the Effective Date in order to perform its obligations under the Interconnect Agreement ("ICO Interconnect Information"), provided that COMSAT shall not be obligated to deliver quotes, traffic estimates or other information that is derived from or represents a commingling of ICO Interconnect Information and other COMSAT proprietary information (such as quotes based on a bundling of forecasted ICO traffic and other non-ICO related traffic). At the request of ICO Services at any time during the term of the Transition Agreement, COMSAT will assign or otherwise transfer to a party designated by ICO Services or amend or otherwise take all actions required to substitute such party in place of COMSAT as the applicant under, whichever ICO Services elects, all licenses and other permits and authorizations applied for by COMSAT to the U.S. Federal Communications Commission pursuant to the Main Agreement or Interconnect Agreement. (D) At the Closing, ICO Services and COMSAT will enter into the Transition Agreement. (E) If the Closing occurs, at the request of ICO Services at any time at or prior to termination of the Transition Agreement and without the need for further documentation other than the providing of written notice therefor from ICO Services to COMSAT Corporation, COMSAT Corporation shall transfer to ICO Services or other entity designated by ICO Services the rights of COMSAT Corporation under the USEI Agreement, and ICO Services or such other entity shall assume the obligations of COMSAT Corporation under the USEI Agreement that arise after such transfer. Section 5. Registration Rights. (A) No ICO Entity will object to or hinder the sale by COMSAT Corporation or COMSAT Argentina of any or all of the COMSAT Shares in a private sale not prohibited by the rules or regulations of the U.S. Securities and Exchange Commission ("SEC"). ICO Bermuda shall promptly register in its company register the transfer of such shares from COMSAT pursuant to such sale from COMSAT to any purchaser designated by COMSAT pursuant to such sale provided such transfer is made in accordance with, and not in violation of, the Bye-laws and/or Memorandum of Continuance of ICO Bermuda or any successor entity thereof and all applicable laws and regulations. In furtherance thereof: (1) ICO Bermuda hereby represents and warrants to COMSAT, which representation and warranty shall survive the execution, delivery, and any Closing hereunder, that as of the date of this Agreement there is nothing in the Bye-laws, Memorandum of Continuance or other charter document of ICO Bermuda that would restrict ICO Bermuda's ability to register such transfer of shares except for the provisions of Bye-laws 55, 56, and 57 of ICO Bermuda's Bye-laws, a copy of which are attached hereto as Annex 6. (2) Until the earlier of (i) January 1, 2000 or (ii) until neither COMSAT Corporation nor COMSAT Argentina holds any COMSAT Shares, ICO Bermuda or any successor entity shall remain current with all public filings and other public disclosures required to be made with the SEC under the Securities Exchange Act of 1934, as amended, and other applicable laws and regulations. (B) If ICO Bermuda or any successor entity thereof files a registration statement with the SEC with respect to the offer and sale to the public in the United States of any of ICO Bermuda's (or any successor entity's) authorized and unissued ordinary shares, par value $0.01 per shares, (the "ICO Offered Shares") at any time during the two year period commencing on January 1, 1999, then COMSAT Corporation and COMSAT Argentina will have the right to require ICO Bermuda or any successor entity thereof to include in such registration statement any COMSAT Shares owned by COMSAT Corporation and/or COMSAT Argentina as of the date of this Agreement which COMSAT Corporation or COMSAT Argentina notifies ICO Bermuda in writing that it desires to sell in the offering (the "COMSAT Offered Shares"). ICO Bermuda shall provide COMSAT at least twenty days advance written notice of its intent to file any such registration statement with the SEC, and COMSAT shall thereafter have fifteen days to notify ICO Bermuda of its desire to sell the COMSAT Offered Shares pursuant to such registration statement. The aforementioned right to require any or all of the COMSAT Shares to be included in a registration statement filed by ICO Bermuda or any successor entity with the SEC shall be subject to the following conditions: the receipt by ICO Bermuda of a written opinion of US legal counsel reasonably satisfactory to ICO to the effect that registration under the Securities Act of 1933 is required (because in the judgment of such counsel there is no applicable exemption) in connection with the transaction contemplated by COMSAT Corporation or COMSAT Argentina involving the COMSAT Offered Shares; in the opinion of the lead underwriter for the offering (the lead underwriter will be selected by ICO Bermuda) market conditions would allow for the sale of both the ICO Offered Shares and the COMSAT Offered Shares; if any ICO shareholder other than COMSAT Corporation or COMSAT Argentina to which ICO Bermuda has given demand or piggyback registration rights as of the date of this Agreement (an "other ICO shareholder") demands that its ICO shares be registered, ICO will not be required to include any COMSAT Offered Shares in the registration unless in the good faith opinion of the lead underwriter market conditions would allow for the sale of the ICO Offered Shares, the COMSAT Offered Shares and the shares of each such other ICO shareholder; if as of the closing of the sale of the shares subject to any such registration the lead underwriter deems it necessary to reduce the number of shares proposed to be sold, any such reduction will apply first to the COMSAT Offered Shares; COMSAT proposes no changes to the underwriting agreement or other documentation required to be approved by COMSAT in connection with the offering (other than changes reasonably required to include the COMSAT Offered Shares in such offering) if such underwriting agreement and other such documentation are satisfactory to ICO Bermuda and, if applicable, each such other ICO shareholder; provided such agreement will not (i) obligate COMSAT to adhere to any lock-up period for COMSAT Offered Shares not included in such offering or (ii) provide for any deferral of payment to COMSAT for the shares sold by it in such offering; and COMSAT will bear its legal fees and its related costs (including the proportionate share of any NASD and SEC filing fees) and the underwriter fees and discounts attributable to the COMSAT Offered Shares. In any such offering ICO Bermuda will enter into customary underwriting arrangements, supply information, make requests, and otherwise use reasonable commercial efforts, including (except as indicated above) the payment of necessary fees for the preparation, filing, and printing of the registration statement and exhibits thereto (including copies of preliminary and final prospectuses and to obtain all legal opinions, auditors consents, and comfort letters, and participate in and cooperate with due diligence activities and any "road shows" or similar marketing efforts if requested by the lead underwriter to facilitate the offering. ICO Bermuda will deliver or cause to be delivered to COMSAT such number of copies as may be reasonably requested by COMSAT of preliminary and final registration statements and prospectuses (including any revised or supplemental prospectuses) and except as indicated above will pay all expenses in connection with the registration of the COMSAT Offered Shares. ICO Bermuda and any successor entity thereof will indemnify and hold harmless COMSAT and its officers, directors, employees, agents, representatives and underwriters against claims, losses, damages, liabilities and expenses (including attorneys fees and sums payable in satisfaction of judgments or decrees) resulting from or attributable to any untrue statement of a material fact or allegedly untrue statement or alleged omission to state therein any material fact required to be stated or necessary to make any statements not misleading except insofar as the information shall have been furnished in writing to ICO Bermuda by COMSAT Corporation or COMSAT Argentina, or other violations or non-compliance by ICO Bermuda with applicable laws or regulations or contractual obligations, relating to such offering, and if such indemnification is deemed void as against public policy shall contribute to COMSAT such sums as would be equal to any payments otherwise payable to COMSAT and its officers, directors, employees, agents, representatives and underwriters to indemnify and hold harmless each of them pursuant to this Section 6(B). Section 6. Representations. (A) COMSAT Corporation hereby covenants and agrees that the copies of the Site Lease, USEI Agreement, and Main Agreement Subcontracts heretofore delivered to ICO are the originals or true copies of the originals of such documents and that such documents at the Closing will be in full force and effect and that COMSAT will not be in breach of its obligations thereunder. COMSAT Corporation hereby represents and warrants that (i) COMSAT Corporation is the owner free and clear of all liens, claims, and encumbrances of the rights attributed to COMSAT Corporation under (and subject to the terms of) the Interconnect Agreement, Main Agreement, Site Lease, USEI Agreement, and Main Agreement Subcontracts, and (ii) neither COMSAT Corporation nor COMSAT Argentina has assigned or otherwise transferred or encumbered or entered into any agreements with any third party that creates any rights, liens, claims, and encumbrances on or to the Distribution Rights, and (iii) COMSAT Corporation and COMSAT Argentina each has the authority and power to enter into this Agreement and to perform its obligations hereunder. (B) ICO hereby represents and warrants to COMSAT and agrees that (i) ICO is the owner free and clear of all liens, claims, and encumbrances of the rights attributed to ICO under the Interconnect Agreement and Main Agreement and (ii) ICO has the authority and power to enter into this Agreement and to perform its obligations hereunder, (iii) the information set forth on Annex 4 hereto with respect to registration rights granted to other shareholders of ICO Bermuda is true and correct, and (iv) ICO Bermuda has succeeded to and is fully liable for the obligations of its predecessor, ICO Cayman Islands, under the Parent Company Guaranty. (C) At the Closing, COMSAT and ICO will each execute and deliver to the other a Representation and Warranty Agreement in the form attached hereto as Annex 5, pursuant to which each such party makes, as of the Closing Date, the same covenants, representations, and warranties as are set forth in this Section 6. Section 7. Mutual Releases. At the Closing, COMSAT and ICO will execute and deliver a Mutual Release in the form attached hereto as Annex 3, pursuant to which COMSAT will release, or will cause to be released, each ICO Entity from, and ICO will release, or will cause to be released, each COMSAT Entity from, all claims and causes of action whatsoever related to the Distribution Rights or any rights or warranties related to the Main Agreement, the Interconnect Agreement, and the Main Agreement Subcontracts (except as provided for in Section 3 hereto) which any COMSAT Entity or ICO Entity, as the case may be, may have against any ICO Entity or COMSAT Entity, as the case may be, and COMSAT will agree not to assert (and will cause each COMSAT Entity not to assert) against any ICO Entity or any other person or entity not a party to this Agreement any claims arising out of or connected with the Distribution Rights and/or any matters contained in the letter from Crowell & Moring to ICO Bermuda dated 15 April 1998 and the draft Writ sent to ICO Bermuda on 9 June 1998. Section 8. USEI Transactions. Forthwith after the Effective Date, COMSAT will (i) notify USEI that COMSAT and ICO have entered into this Agreement and that COMSAT has no objection to USEI conducting negotiations with ICO Services in an attempt to reach agreement on an ICO Services/USEI Memorandum of Understanding (ii) cooperate with ICO to the extent reasonably requested in ICO's efforts to enter into the ICO Services/USEI Memorandum of Understanding and (iii) seek the written consent of USEI to assign the USEI Agreement to ICO Services or any entity designated by ICO Services. (B) Forthwith after the Effective Date, ICO Services or other entity designated by ICO will use good faith efforts to enter into the ICO Services/USEI Memorandum of Understanding not later than 60 days after the Effective Date. Section 9. Closing. (A) Unless otherwise hereafter mutually agreed in writing by the parties hereto, the Closing Date will be a date acceptable to COMSAT and ICO not later than 30 days after the Effective Date; PROVIDED THAT the Closing shall not occur on such date unless on or prior thereto either of the following conditions has occurred (i) USEI and ICO Services or an entity designated by ICO Services have entered into the ICO Services/USEI Memorandum of Understanding or (ii) USEI has given (and not withdrawn) its consent for COMSAT to assign the USEI Agreement to ICO Services or any entity designated by ICO Services. If neither of the conditions referred to in (i) or (ii) of this Section 9(A) has occurred within such 30 day period, the Closing Date shall be deferred to a date acceptable to ICO and COMSAT not later than 60 days after the Effective Date; PROVIDED THAT if neither of the conditions referred to in (i) or (ii) of this Section 9(A) has occurred on or before 60 days after the Effective Date, each of COMSAT and ICO will have the right to terminate this Agreement by giving written notice thereof to the other party. If this Agreement is so terminated, no party hereto will have any right or obligation under this Agreement. (B) The Closing and the performance by the parties hereto of their respective obligations under this Agreement at the Closing are conditional upon the occurrence or fulfillment prior to the Closing of the conditions to Closing expressly set forth in this Agreement and the performance by COMSAT and ICO of their respective obligations at the Closing. (C) The Closing will occur at 10 o'clock AM on the Closing Date in the offices of COMSAT Corporation at 6560 Rock Springs Drive, Bethesda MD 20817 U.S.A. At the Closing each party hereto will execute and deliver the documents required and take the other action required to be taken to fulfill at the Closing all the obligations of such part under this Agreement. Section 10. General. (i) All notices sent by COMSAT or ICO to the other party will be sent by telefax or delivered to the address for such party set forth below: Notices to COMSAT Notices to ICO COMSAT Corporation ICO Global Communications 6560 Rock Springs Drive 1 Queen Caroline Street Bethesda MD 20817 Hammersmith London W6 9 BN USA United Kingdom Attention: General Counsel Attention: General Counsel Fax. No. 301-214-7145 Fax No. 44-181-741-0851 (ii) No party hereto will have any right to assign or otherwise transfer or encumber its rights or obligations under this Agreement. (iii) This Agreement shall be governed by and interpreted and construed in accordance with English Law; provided, however, that all suits, claims, actions, proceedings or disputes arising or brought under Section 5 "Registration Rights" of this Agreement shall be governed by and interpreted and construed in accordance with the laws of the State of New York without regard to conflicts of laws principles. (iv) The parties agree that the courts of England are to have exclusive jurisdiction to settle any dispute which may arise in connection with the validity, effect, interpretation or performance of this Agreement or otherwise arising out of or in connection with this Agreement or any of its terms. (v) At the request of any party hereto, all the parties hereto will execute and deliver all other documents that may be required to give effect to the agreements contemplated by this Agreement. (vi) The Parent Company Guaranty will remain in effect after the Closing and will cover only (i) the obligations of ICO Services under the Transition Agreement, and (ii) the obligations of ICO under the Main Agreement and Interconnect Agreement that remain in effect after the Closing pursuant to Section 3 and the Assignment and Assumption Agreement hereof. (vii) It is expressly agreed and acknowledged by each of the parties that the execution and performance of this Agreement is not, and is not to be construed as, any admission whatsoever of any liability on the part of any of the parties to this Agreement. (viii) Except to the extent required by applicable law and to parties with whom any party has contracted or may contract or intend to contract with respect to any of the matters that are the subject of this Agreement, no party hereto shall make any announcement, news release, or other public statement regarding this Agreement or its subject matter without prior written approval of the other parties, such approval not to be unreasonably withheld or delayed. (ix) This Agreement sets out the entire agreement and understanding between the parties in respect of the subject matter of this Agreement. It is agreed that: (a) No party hereto has entered into this Agreement in reliance on any representation, warranty or undertaking of any other party which is not expressly set out or referred to in this Agreement, (b) No party shall have any remedy in respect of any misrepresentation or untrue statement made by any other party which is not contained in this Agreement, and (c) This clause shall not exclude any liability for fraudulent misrepresentation. (x) At and after the Closing, each of COMSAT and ICO will execute and deliver all documents and take all actions required to give effect to the agreements of the parties set forth in this Agreement. (xi) Attached hereto and hereby made a part hereof are the following Annexes: Annex 1. Form of Transition Agreement Annex 2. Form of Assignment and Assumption Agreement Annex 3. Form of Mutual Release Annex 4. Information Relating to Registration Rights granted to other Shareholders of ICO Bermuda Annex 5. Form of Representation and Warranty Agreement Annex 6. Bye-laws 55, 56, and 57 of ICO Bermuda IN WITNESS WHEREOF, the parties hereto have entered into this Agreement on the date first mentioned above. COMSAT Corporation ICO GLOBAL COMMUNICATIONS (HOLDINGS) LIMITED By: /s/ John Mattingly By: /s/ Olof Lundberg Name: John Mattingly Name: Olof Lundberg Title: President, COMSAT Title: CEO Satellite Services COMSAT ARGENTINA S. A. ICO GLOBAL COMMUNICATIONS HOLDINGS B.V. By: /s/ Luis Valencia By: /s/ Olof Lundberg Name: Luis Valencia Name: Olof Lundberg Title: President of the Board of Directors Title: CEO ICO GLOBAL COMMUNICATIONS SERVICES INC. By: /s/ Olof Lundberg Name: Olof Lundberg Title: CEO EX-21 7 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF COMSAT CORPORATION (As of December 31, 1998) Bethesda Real Property, Inc. COMSAT Capital I, L.P. COMSAT Digital Teleport, Inc. COMSAT General Corporation COMSAT General Telematics, Inc. COMSAT Technology, Inc. CTS Transnational, Inc. Electromechanical Systems, Inc. COMSAT Government Systems, Inc. COMSAT International, Inc. BelCom, Inc. ZAO BelComRus BelCom Rep Office ZAO MKT ZAO Novocom Stavropol-Cellular COMSAT Argentina, S.A. COMSAT Asia (L) Incorporated Guanzhou T.H. Communication Technology Services, Ltd. Tian Hang Technology Services, Ltd. COMSAT do Brasil Equipamentos Telecommunicacoes, Ltda. COMSAT Brasil, Ltda. COMSAT de Colombia, S.A. Comunicaciones Satelitales de Columbia, S.A. COMSAT Dijital Hizmetleri Ticaret Anonim Sirketi COMSAT de Guatemala, S.A COMSAT Iletisim Hizmetleri Ticaret Anonim Sirketi COMSAT Max Limited COMSAT de Mexico, S.A. de C.V. COMSAT de Panama, S.A. COMSAT Peru, S.A. COMSAT Venezuela, COMSATVEN, C.A. CIV C.I.S. Holdings, Inc. COMSAT Laboratories Inc. COMSAT Laboratories India, Inc. Indicom Personal Communications Private Ltd. (99%) COMSAT Mobile Investments, Inc. COMSAT Overseas, Inc. (owns 1% of Indicom Personal Communications Private Ltd.) COMSAT Personal Communications, Inc. CRSI Acquisition, Inc. d/b/a COMSAT RSI, JEFA Wireless Systems EX-23 8 CONSENT OF DELOITTE EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in COMSAT Corporation's Registration Statement No. 2-87942 on Form S-8, Registration Statement No. 33-5259 on Form S-8, Registration Statement No. 33-25124 on Form S-8, Registration Statement No. 33-35364 on Form S-8, Registration Statement No. 33-53610 on Form S-8, Registration Statement No. 33-51661 on Form S-3, Registration Statement No. 33-54369 on Form S-8, Registration Statement No. 33-54685 on Form S-8, Registration Statement No. 33-56331 on Form S-8, Registration Statement No. 33-56333 on Form S-8, Registration Statement No. 33-59531 on Form S-8, Registration Statement No. 33-59513 on Form S-8, Registration Statement No. 33-59841 on Form S-3, Registration Statement No. 33-33061 on Form S-3 of our report dated February 18, 1999, appearing in this Annual Report on Form 10-K of COMSAT Corporation for the year ended December 31, 1998. Deloitte & Touche LLP Washington, D.C. March 24, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the the financial statements for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 0000022698 COMSAT Corporation 1,000 U.S. Dollars Year DEC-31-1998 JAN-01-1998 DEC-31-1998 1 30,795 0 148,175 (17,123) 0 198,965 2,507,798 1,298,336 1,790,798 140,802 446,832 0 0 430,537 228,503 1,790,798 0 616,469 0 284,053 272,914 0 39,812 32,208 5,791 26,417 0 0 0 26,417 0.51 0.50
-----END PRIVACY-ENHANCED MESSAGE-----