-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, dw6cn3b1qcL4xjwE7Q/yGd/jj6So1M07lEwxWiKwLQ6CKjtPVfA1rqehxyJDeCGB gwBpglGTYyQ7eTT85mzh4w== 0000022698-95-000016.txt : 199507100000022698-95-000016.hdr.sgml : 19950710 ACCESSION NUMBER: 0000022698-95-000016 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950707 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMSAT CORP CENTRAL INDEX KEY: 0000022698 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 520781863 STATE OF INCORPORATION: DC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-04929 FILM NUMBER: 95552638 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/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Amendment No. 1 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1994 Commission file number 1-4929 COMSAT Corporation (Exact name of registrant as specified in its charter) District of Columbia 52-0781863 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6560 Rock Spring Drive, Bethesda, MD 20817 (Address of principal executive offices) Registrant's telephone number, including area code: (301) 214-3000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, without par value New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by non-affiliates of the Registrant was $832 million based on a closing market price of $17-7/8 per share on March 1, 1995, as reported on the composite tape for New York Stock Exchange listed issues. 47,055,846 shares of Common Stock, without par value, were outstanding on February 28, 1995. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference: Part of the Form 10-K into which Title the document is incorporated - ----- -------------------------------- COMSAT - Annual Meeting of Shareholders - Part III Notice and Proxy Statement - 1995 Item 8. Financial Statements and Supplementary Data. INDEPENDENT AUDITORS' REPORT To the Shareholders of COMSAT Corporation: We have audited the accompanying consolidated balance sheets of COMSAT Corporation and its subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flow for each of the three years in the period ended December 31, 1994. The consolidated financial statements give retroactive effect to the merger of COMSAT Corporation and subsidiaries and Radiation Systems, Inc. and subsidiaries on June 3, 1994, which has been accounted for as a pooling-of-interests as described in Note 2. 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 COMSAT Corporation and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 after giving retroactive effect to the merger between COMSAT Corporation and Radiation Systems, Inc. as described in Note 2, 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. As discussed in Note 13 to the consolidated financial statements, in 1993 the corporation changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109. Deloitte & Touche LLP Washington, D.C. February 10, 1995 2
COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS For the Years Ended December 31, 1994, 1993 and 1992 (In thousands, except per share amounts) 1994 1993 1992 -------- -------- -------- Revenues $826,899 $754,285 $688,093 -------- -------- -------- Operating expenses: Cost of services 462,277 423,473 375,099 Depreciation and amortization 167,784 142,111 130,760 Research and development 16,369 15,302 17,123 General and administrative 22,851 21,819 21,168 Merger and integration costs 7,367 - - Provision for restructuring - - 38,961 -------- -------- -------- Total operating expenses 676,648 602,705 583,111 -------- -------- -------- Operating income 150,251 151,580 104,982 Other income, net 2,348 9,765 4,592 Interest cost (48,940) (45,881) (46,792) Interest capitalized 23,662 22,197 20,481 -------- -------- -------- Income before taxes and cumulative effect of accounting change 127,321 137,661 83,263 Income tax expense (49,679) (55,192) (29,971) -------- -------- -------- Income before cumulative effect of accounting change 77,642 82,469 53,292 Cumulative effect of accounting change for income taxes - 1,925 - -------- -------- -------- Net income $ 77,642 $ 84,394 $ 53,292 ======== ======== ======== Earnings per share: Before cumulative effect of accounting change $ 1.64 $ 1.75 $ 1.16 Cumulative effect of accounting change - 0.04 - -------- -------- -------- Net income $ 1.64 $ 1.79 $ 1.16 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 3
COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 and 1993 (In thousands) 1994 1993 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 18,658 $ 16,230 Receivables 226,189 210,182 Inventories 21,933 19,328 Deferred income taxes 10,914 8,333 Other 20,546 19,873 ---------- ---------- Total current assets 298,240 273,946 ---------- ---------- Property and equipment 1,431,066 1,332,432 Investments 69,541 15,414 Goodwill 46,535 35,957 Franchise rights 39,119 41,084 Other assets 91,491 74,680 ---------- ---------- Total assets $1,975,992 $1,773,513 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations $ 7,115 $ 76,915 Commercial paper 121,356 47,233 Accounts payable and accrued liabilities 145,893 116,140 Due to related parties 36,750 56,601 Accrued interest 4,357 5,231 Income taxes payable 1,609 1,518 ---------- ---------- Total current liabilities 317,080 303,638 ---------- ---------- Long-term debt 515,542 410,550 Deferred income taxes 104,309 81,468 Deferred investment tax credits 18,489 22,151 Accrued postretirement benefit costs 50,817 50,014 Other long-term liabilities 112,824 120,879 Commitments and contingencies (notes 8, 9 & 16) - - Minority interest 30,015 21,373 Stockholders' equity: Common stock, without par value, 100,000 shares authorized, 48,054 shares issued in 1994 and 48,404 in 1993 312,143 311,506 Preferred stock, 5,000 shares authorized, no shares issued or outstanding - - Retained earnings 532,229 488,090 Treasury stock, at cost, 1,243 shares in 1994 and 2,031 in 1993 (12,502) (21,473) Unearned compensation (7,249) (10,891) Other 2,295 (3,792) ---------- ---------- Total stockholders' equity 826,916 763,440 ---------- ---------- Total liabilities and stockholders' equity $1,975,992 $1,773,513 ========== ==========
The accompanying notes are an integral part of these financial statements. 4
COMSAT CORPORATION AND SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS For the Years Ended December 31, 1994, 1993 and 1992 (In thousands) 1994 1993 1992 -------- -------- -------- Cash flows from operating activities: Net income $ 77,642 $ 84,394 $ 53,292 Adjustments for noncash expenses: Depreciation and amortization 167,784 142,111 130,760 Cumulative effect of accounting change - (1,925) - Provision for restructuring - - 38,961 Changes in operating assets and liabilities: Receivables and other current assets (17,169) (21,047) (44,760) Current liabilities (14,847) 32,199 (7,659) Noncurrent liabilities 25,808 26,117 44,091 Other 3,509 (5,223) 1,873 -------- -------- -------- Net cash provided by operating activities 242,727 256,626 216,558 -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment (274,562) (234,552) (221,291) Investments in unconsolidated businesses (53,397) (8,639) (10,268) Purchase of subsidiaries, net of cash acquired of $11,655 in 1992 (35,676) (3,140) (5,321) Purchase of minority shares of subsidiaries (4,016) (12,606) - Decrease in INTELSAT ownership 13,520 16,442 19,760 Decrease in Inmarsat ownership 3,573 4,771 886 Other (3,471) 4,529 (7,920) -------- -------- -------- Net cash used in investing activities (354,029) (233,195) (224,154) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt 112,296 32,745 207,013 Net short-term borrowings (repayments) 74,123 (562) 43,642 Borrowings against company-owned life insurance policies 32,437 - - Common stock issued 5,291 7,952 16,514 Proceeds from issuance of subsidiary's common stock 1,486 11,582 - Repayment of long-term debt (77,023) (40,481) (234,439) Cash dividends paid (33,547) (30,410) (27,837) Purchase of treasury stock - (5,968) - Other (1,333) 6,164 (212) -------- -------- -------- Net cash provided by (used for) financing activities 113,730 (18,978) 4,681 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 2,428 4,453 (2,915) Cash and cash equivalents, beginning of year 16,230 11,777 14,692 -------- -------- -------- Cash and cash equivalents, end of year $ 18,658 $ 16,230 $ 11,777 ======== ======== ======== Supplemental cash flow information: Interest paid, net of amount capitalized $ 24,880 $ 26,083 $ 30,376 Income taxes paid $ 30,639 $ 28,618 $ 26,409 Noncash financing of Inmarsat satellites $ 7,197 $ 6,200 $ 12,480
The accompanying notes are an integral part of these financial statements. 5
COMSAT CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY For the Years Ended December 31, 1994, 1993 and 1992 (In thousands) Shares Shares Common Retained Treasury Unearned Issued Outstanding Stock Earnings Stock Compensation Other ------------------------------------------------------------------------ Balance at December 31, 1991 48,073 44,606 $286,118 $408,612 $(32,036) $(5,985) $ 1,074 Net income 53,292 Cash dividends (27,837) Common Stock Issued: Stock options and restricted stock units 11 1,002 5,161 8,789 Employee stock purchase plan 166 166 2,564 Stock options and restricted stock awarded 68 4,278 620 (4,898) Amortization of stock incentive plan expense 3,929 Translation adjustment (2,458) Other 348 721 ------------------------------------------------------------------------ Balance at December 31, 1992 48,250 45,842 298,469 434,067 (22,627) (6,233) (1,384) Net income 84,394 Cash dividends (30,410) Common stock issued: stock options and restricted stock units 407 1,018 3,810 Employee stock purchase plan 154 154 3,153 Restricted stock awarded 348 5,322 3,312 (8,634) Amortization of stock incentive plan expense 3,291 Tax benefit on exercise of stock options 3,544 Minimum pension liability adjustment (2,301) Purchase of treasury stock (378) (5,968) Other 39 685 (107) ------------------------------------------------------------------------ Balance at December 31, 1993 48,404 46,373 311,506 488,090 (21,473) (10,891) (3,792) Net income 77,642 Cash dividends (33,547) Common stock issued: Stock options and restricted stock units 105 233 808 Employee stock purchase and 401k plans 257 257 5,455 Investors' plan 76 76 977 Amortization of stock performance awards 1,420 Amortization of stock incentive plan expense 2,868 Tax benefit on exercise of stock options 715 Retirement of treasury stock (683) (8,163) 8,163 Translation adjustment 5,343 Other 44 774 744 ------------------------------------------------------------------------ Balance at December 31, 1994 48,054 46,811 $312,143 $532,229 $(12,502) $(7,249) $ 2,295 ========================================================================
The accompanying notes are an integral part of these financial statements. 6 COMSAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies that have guided the preparation of these financial statements are: Principles of Consolidation. Accounts of COMSAT Corporation and its majority-owned subsidiaries (the corporation) have been consolidated. Significant intercompany transactions have been eliminated. Minority interest on the balance sheet is primarily comprised of the interest of other shareholders of On Command Video Corporation (OCV). As of December 31, 1994, the corporation owned 79.7% of OCV. The minority interest share of the net income of consolidated businesses is included in "Other income, net." The corporation has consolidated its shares of the accounts of the International Telecommunications Satellite Organization (INTELSAT) and 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, 1994, the corporation owned 20.1% of INTELSAT and 22.4% of Inmarsat. 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 corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993. This accounting standard requires the use of the asset and liability approach for financial accounting and reporting for income taxes. 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. 7 Earnings Per Share. Earnings per share are computed using the average number of shares outstanding during each period, adjusted for outstanding stock options, restricted stock units and unissued restricted stock awards. The weighted average number of shares for each year is 47,356,000 for 1994, 47,095,000 for 1993 and 45,875,000 for 1992. Earnings per share and the weighted average number of shares outstanding for 1992 have been adjusted for a two-for-one stock split on June 1, 1993 (see Note 10). Goodwill. The balance sheet includes goodwill related to the acquisitions of OCV, the Denver Nuggets Limited Partnership and other ventures. Goodwill is amortized over 15 to 25 years. Accumulated goodwill amortization was $7,131,000 and $4,513,000 at December 31, 1994 and 1993, respectively. Franchise Rights and Other Assets. Franchise rights were recorded in connection with the consolidation of the Nuggets in 1992 and are being amortized over 25 years. The amounts shown on the balance sheets are net of accumulated amortization of $4,920,000 and $2,955,000 at December 31, 1994 and 1993, respectively. The cash surrender values of life insurance policies (net of loans) totaling $12,784,000 and $40,849,000 at December 31, 1994 and 1993, respectively, are included in "Other assets." Other income on the income statement includes the increases in the cash surrender values of these policies. Additionally, other income for 1993 includes income of $4,131,000 ($3,137,000 net of tax) from the death benefit proceeds of corporate-owned policies. Cash Flow Information. The corporation considers highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. New Accounting Pronouncements. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was issued in May 1993 and was adopted by the corporation in 1994. This statement requires that certain investments in debt or equity securities be carried on the balance sheet at fair value. The effect of adopting this statement is not material to the corporation as of December 31, 1994. Statement Presentation. The financial statements for 1993 and 1992 have been restated for the merger accounted for as a pooling of interests as discussed in Note 2. Certain amounts have been reclassified to conform with the current year's presentation. 8 2. MERGER WITH RADIATION SYSTEMS, INC. On June 3, 1994, the corporation consummated its merger with Radiation Systems, Inc. (RSi), based in Sterling, Virginia. RSi designs, manufactures and integrates satellite earth stations, advanced antennas and other turnkey systems for telecommunications, radar, air traffic control and military uses. Each share of RSi's common stock was converted into 0.780 of a share of the corporation's common stock. A total of 6,147,000 shares of the corporation's common stock were issued for RSi's common stock. The January 1994 merger agreement stipulated that each share of RSi's common stock would be exchanged for $18.25 in the corporation's common stock, based on the average closing price of the corporation's stock during the 20 trading days ending five trading days before the closing of the transaction. The agreement also provided that in no event would a share of RSi common stock be exchanged for less than 0.638 or more than 0.780 of a share of the corporation's common stock. The merger has been accounted for as a pooling of interests. Accordingly, the 1993 and 1992 financial statements have been restated to include RSi. Prior to the merger, RSi reported on a June 30 fiscal year basis. The accompanying financial statements include RSi's financial statements restated on a calendar year basis. There were no significant intercompany transactions between the two companies prior to the merger. The corporation recorded nonrecurring charges to operations in 1994 totaling $7,367,000 ($6,269,000 net of taxes or $0.13 per share) for merger and integration costs. These charges consisted of $4,446,000 for investment banking, legal and other professional fees, $2,226,000 for the costs associated with closing a former RSi division and $695,000 for severance and related costs. 9 Operating results of the separate companies for the periods prior to the merger are as follows: Six Months Ended Year Ended In thousands, except June 30, December 31, per share amounts 1994 1993 1992 - ---------------------------------------------------------------------- Revenues: COMSAT $ 337,436 $ 640,390 $ 563,615 RSi 70,920 113,895 124,478 ---------- ---------- ---------- $ 408,356 $ 754,285 $ 688,093 ========== ========== ========== Income before cumulative effect of accounting change:* COMSAT $ 39,217 $ 74,044 $ 42,924 RSi 6,695 8,425 10,368 ---------- ---------- ---------- $ 45,912 $ 82,469 $ 53,292 ========== ========== ========== Net income:* COMSAT $ 39,217 $ 75,282 $ 42,924 RSi 6,695 9,112 10,368 ---------- ---------- ---------- $ 45,912 $ 84,394 $ 53,292 ========== ========== ========== Earnings per share: Income before cumulative effect of accounting change:* Before merger $ 0.96 $ 1.82 $ 1.09 After merger $ 0.97 $ 1.75 $ 1.16 Net income:* Before merger $ 0.96 $ 1.85 $ 1.09 After merger $ 0.97 $ 1.79 $ 1.16 * Excludes $4,264,000 of merger and integration costs ($4,114,000 after tax, or $0.08 per share) recorded in the second quarter of 1994. 3. RECEIVABLES Receivables at each year end are composed of: In thousands 1994 1993 --------------------------------------------------------------- Commercial receivables $ 155,552 $ 121,391 Receivables under long-term contracts: U.S. Government: Amounts billed 5,530 13,946 Unbilled costs and accrued profits 34,265 47,651 Commercial customers: Amounts billed 8,029 7,639 Unbilled costs and accrued profits 21,713 24,765 Related party receivables 8,889 3,846 Other 1,586 3,782 ---------- ---------- Total 235,564 223,020 Less allowance for doubtful accounts (9,375) (12,838) ---------- ---------- Net $ 226,189 $ 210,182 ========== ========== 10 Unbilled amounts represent accumulated costs and accrued profits which will be billed at future dates in accordance with contract terms and delivery schedules. All but approximately $5,100,000 of these amounts are expected to be collected within one year. Unbilled amounts are net of progress payments of $55,563,000 in 1994 and $42,616,000 in 1993. 4. INVENTORIES Inventories, stated at the lower of cost (first-in, first- out) or market, consist of the following at each year end. In thousands 1994 1993 --------------------------------------------------------------- Finished goods $ 5,228 $ 4,705 Work in progress 9,187 8,346 Raw materials 7,518 6,277 ------------- ------------- Total $ 21,933 $ 19,328 ============= ============= 5. PROPERTY AND EQUIPMENT Property and equipment include the corporation's shares of INTELSAT and Inmarsat property and equipment. In thousands 1994 1993 --------------------------------------------------------------- Property and equipment at cost: Satellites $ 1,255,019 $ 1,182,924 Furniture, fixtures and equipment 674,407 538,774 Buildings and improvements 121,596 122,369 Land 7,044 7,059 ------------- ------------- Total 2,058,066 1,851,126 Less accumulated depreciation (990,596) (858,008) ------------- ------------- Net property and equipment in service 1,067,470 993,118 Property and equipment under construction: INTELSAT satellites 222,793 222,223 Inmarsat third-generation satellites 93,328 66,962 Other 47,475 50,129 ------------- ------------- Total $ 1,431,066 $ 1,332,432 ============= ============= Depreciation is calculated using the straight-line method over the estimated service life of each asset. The service lives for property and equipment are: satellites, 10 to 13 years; furniture, fixtures and equipment, 3 to 15 years; buildings and improvements, 3 to 40 years. Costs of satellites which are lost at launch or that fail in orbit are carried, net of any insurance proceeds, in the property accounts. The remaining net amounts are depreciated over the estimated service life of a satellite of the same series. 11 6. ACQUISITIONS AND INVESTMENTS Beacon Communications Corp. In December 1994, the corporation acquired the assets of Beacon Communications Corp., a film and television production company based in Los Angeles. The cost of this acquisition was $29,133,000. The purchase agreement calls for future cash consideration of up to $16,900,000 which is contingent on the production and performance of motion pictures over the next five years. Investments. In June 1994, the corporation acquired an approximately 17% interest in Philippine Global Communications, Inc. (PhilCom), a provider of international communications services in the Philippines, for $42,141,000. The corporation's share of PhilCom's income or losses is recorded using the "equity method" of accounting and is included in the "Other income, net" on the income statement. The corporation has investments in other businesses that are accounted for using the equity and cost methods of accounting. These investments (including PhilCom in 1994) totaled $69,541,000 and $15,414,000 at December 31, 1994 and 1993, respectively. Rock Spring II Limited Partnership. The corporation entered into a limited partnership to build and lease a new headquarters facility. The corporation holds a 50% interest in the partnership, primarily as a limited partner. The managing general partner, a regional real estate investment company, owns the remaining 50% interest in the partnership. An affiliate of the managing general partner owns the building site and has leased this site to the partnership. The corporation's investment in the partnership is included in the Investments line on the balance sheet. The corporation relocated its headquarters operations to the new building during the second quarter of 1993. The corporation entered into a 15-year lease with the partnership for the building starting April 1993 (see Note 8). The partnership borrowed $27,000,000 in the form of a 26- year mortgage at a fixed interest rate of 9.45% to cover construction costs. As of December 31, 1994, the corporation has guaranteed repayment of this loan. The corporation's guarantee will be reduced to $2,700,000 after satisfaction of certain contractual requirements which are expected to be completed in 1995. Subsequently, the corporation's guarantee will be reduced as the principal balance is paid down and completely eliminated once the outstanding loan balance is less than $24,300,000. The loan balance was $26,978,000 as of December 31, 1994. 12 7. DEBT The corporation, as regulated by the Federal Communications Commission (FCC), is allowed to undertake long-term borrowings of up to 45% of its total capital (long-term debt plus equity) and $200,000,000 in short-term borrowings. Commercial Paper. The corporation issues short-term commercial paper with repayment terms of 90 days or less under a $200,000,000 program. The corporation had $121,356,000 and $43,233,000 in borrowings outstanding at December 31, 1994 and 1993, respectively. The weighted average interest rate on these borrowings was 6.1% and 3.4% at December 31, 1994 and 1993, respectively. Credit Facilities. The corporation has a $200,000,000 revolving credit agreement which expires in December 1999 as a backup to the commercial paper program. There have been no borrowings under this agreement. The corporation had a $4,000,000 current note payable at December 31, 1993 under a separate credit agreement which was terminated in connection with the merger discussed in Note 2. Long-Term Debt. Long-term debt including the corporation's share of INTELSAT and Inmarsat debt at each year end consists of: In thousands 1994 1993 - ---------------------------------------------------------------------- 8.125% notes due 2004 $ 160,000 $ 160,000 8.95% notes due 2001 75,000 75,000 9.55% notes due 1994 - 70,000 6.75% INTELSAT Eurobonds due 2000 30,194 31,344 7.375% INTELSAT Eurobonds due 2002 40,258 41,793 8.375% INTELSAT Eurobonds due 2004 40,258 - 6.625% INTELSAT Asian bonds due 2004 40,258 - Inmarsat lease financing obligations 100,434 98,659 Medium-term notes, due 2006 interest rates of 8.05% to 8.66% 32,000 - ESOP debt 1,877 2,651 Other, net of discounts on notes payable 2,378 8,018 ---------- ---------- Total 522,657 487,465 Less current maturities (7,115) (76,915) ---------- ----------- Total long-term debt $ 515,542 $ 410,550 ========== =========== In March 1994, INTELSAT issued $200,000,000 of 6.625% notes payable. Interest is payable annually in arrears and the principal is due March 22, 2004. Additionally, in October 1994, INTELSAT issued $200,000,000 of 8.375% notes payable. Interest is payable annually in arrears and the principal is due October 14, 2004. The corporation received its share of the proceeds of these notes and has recorded its share of the long-term debt. 13 In 1993, the corporation prepaid $30,000,000 of its 9.55% notes with the proceeds from INTELSAT's 6.75% Eurobonds. The remaining $70,000,000 balance of the 9.55% notes was repaid in April 1994 and, accordingly, was classified as a current liability on the December 31, 1993 balance sheet. In July 1994, the corporation filed a shelf registration statement with the Securities and Exchange Commission (SEC) to issue up to $200,000,000 of debt securities. The corporation also filed a prospectus supplement with the SEC to issue up to $100,000,000 of such securities under a "medium-term note program." The corporation issued two medium-term notes totaling $32,000,000 in 1994 with rates of 8.05% to 8.66% and a $5,000,000 note (8.5% interest) in February, 1995. The remaining $63,000,000 may be issued from time to time, at fixed or floating interest rates, as determined at the time of issuance. The principal amount of debt (excluding the Inmarsat lease financing obligation) maturing over the next five years is $2,110,000 in 1995, $1,719,000 in 1996, $505,000 in 1997, $305,000 in 1998 and $305,000 in 1999. Inmarsat Lease Financing Obligations. Inmarsat borrowed 140,400,000 pounds sterling under a capital lease agreement to finance the construction of second-generation Inmarsat satellites. Inmarsat also entered into another capital lease arrangement to finance the construction costs of its third-generation satellites. As of December 31, 1994, 80,000,000 pounds sterling of the 197,000,000 pounds sterling available for this purpose has been borrowed. The corporation's share of these lease obligations is included in long-term debt. Inmarsat has hedged its obligations through various foreign exchange transactions to minimize the effect of fluctuating interest and exchange rates (see Note 16). The corporation's share of the payments under these lease obligations for each of the next five years from 1995 through 1999 is $9,481,000, $10,506,000, $14,230,000, $15,407,000 and $16,717,000, and $72,482,000 thereafter. These payments include interest totaling $38,389,000 and a current maturity of $5,005,000. ESOP Debt. As discussed in Note 11, the corporation has an Employee Stock Ownership Plan (ESOP). The ESOP has bank notes payable outstanding which are guaranteed by the corporation. Accordingly, these notes are reported as long- term debt of the corporation. The ESOP debt includes an 8.75% note with quarterly principal and interest payments through 1996 and a 10.95% note with quarterly principal and interest payments through 1997. 14 8. COMMITMENTS AND CONTINGENCIES Property and Equipment. As of December 31, 1994, the corporation had commitments to acquire property and equipment totaling $140,138,000. Of this total, $117,787,000 is payable over the next three years. These commitments are related principally to the purchase of INTELSAT and Inmarsat satellites. Employment and Consulting Agreements. The corporation has employment and consulting agreements with certain officers, coaches and players. Virtually all of these agreements provide for guaranteed payments. Other contracts provide for payments contingent upon the fulfillment of certain terms and conditions. Amounts required to be paid under such agreements total approximately $23,900,000 in 1995, $25,200,000 in 1996, $22,700,000 in 1997, $19,000,000 in 1998, $9,300,000 in 1999 and $3,500,000 thereafter. Leases. As discussed in Note 6, the corporation has a 15- year lease which started April 1993 on its headquarters building in Bethesda, Maryland. The corporation also has leases of other property and equipment. Rental expense under operating leases was $8,381,000 in 1994, $7,993,000 in 1993 and $4,253,000 in 1992. The future rental payments under operating leases are $7,155,000 in 1995, $6,462,000 in 1996, $6,597,000 in 1997, $6,599,000 in 1998 and $5,621,000 in 1999. Government Contracts. The corporation is subject to audit and investigation by various agencies which oversee contract performance in connection with the corporation's contracts with the U.S. Government. Management believes that potential claims from such audits and investigations will not have a material adverse effect on the consolidated financial statements. Environmental Issue. The corporation is engaged in a program to monitor a toxic solvent spill of limited scope at the site of its former manufacturing subsidiary in California. The corporation believes that it has complied with the directions of state authorities to date, including removing approximately 458 cubic yards of soil from the site soon after the leak was discovered in 1986 and conducting ongoing groundwater monitoring at the site. The corporation has accruals to cover monitoring costs over the near term, but it is unclear at this time whether or to what extent groundwater remediation may be required. Investment in Inmarsat Affiliate. In 1994, the corporation committed to invest $114 million directly in a new satellite system affiliated with Inmarsat. The corporation has also committed to invest $33 million indirectly as its pro rata share of Inmarsat's $150 million investment in the venture. This new affiliate plans to construct, deploy and operate spacecraft in intermediate circular orbit, and interconnecting terrestrial facilities, for the provision of worldwide mobile communications via handheld devices. In two orders 15 released November 1994 and December 1994, the FCC ruled in a contested proceeding that the corporation would be legally qualified to participate directly in the new venture provided that the corporation does not extend its statutory role in Inmarsat to obtain exclusive U.S. rights to access the venture's satellites. The corporation has petitioned the U.S. Court of Appeals for the District of Columbia Circuit to review the FCC ruling generally with regard to the standard applied to determine the corporation's scope of authority under the Inmarsat Act and particularly with regard to the proviso on participating in the new venture. At the same time, the corporation is acting to structure its relationship with the new venture to enable it to comply with the FCC proviso. In consideration for the above-referenced Inmarsat investment, the new venture will provide Inmarsat with satellite capacity for the provision of specialized maritime and aeronautical communications services. The corporation's legal qualifications to participate in Inmarsat's investments will be contingent on showing that Inmarsat's planned operations are consistent with the corporation's scope of authority under the Inmarsat Act, which the FCC has ruled is limited to maritime communications and non-maritime services ancillary thereto. The corporation has been directed by the FCC to file an application for authorization to participate in the new venture directly and indirectly through its investment in Inmarsat by May 1, 1995. 9. REGULATORY ENVIRONMENT AND LITIGATION Regulatory Environment. Under the Communications Act of 1934 and the Satellite Act, as amended, the corporation is subject to regulation by the FCC with respect to communications services provided through the INTELSAT and Inmarsat systems and the rates charged for those services. Until 1985, the corporation was, with minor exceptions, the sole U.S. provider of international satellite communications services using the INTELSAT system. Since then, the FCC has authorized several international satellite systems separate from INTELSAT. These separate systems currently compete against the corporation for voice, video and data traffic. In 1993, the FCC substantially eliminated prior restrictions on the ability of separate systems to offer public switched telephony services, thereby increasing competition to the corporation in the voice market. The U.S. Government has established a goal of eliminating all restrictions on competitive systems by 1997. 16 In 1993, the FCC initiated an audit of the corporation's role as the U.S. signatory to Inmarsat and as a provider of international mobile satellite services. In 1994, the FCC completed its audit and informed the corporation that earnings from international mobile satellite services do not appear excessive, and the FCC does not intend to take enforcement action based on the audit. The corporation has received FCC authorization to participate in the construction of five third-generation Inmarsat satellites, despite opposition which argued that the satellites are outside the corporation's scope of authority under the Inmarsat Act on the basis that these satellites are principally designed to serve land-based users. The FCC postponed consideration of the scope of authority contention until it acts on the corporation's application to provide commercial services via the satellites, which is planned to be filed in 1995. The corporation believes that all requisite operating authorizations with respect to these satellites will be obtained. Litigation. In 1989, Pan American Satellite (PanAmSat) filed an antitrust suit against the corporation alleging interference with PanAmSat's efforts to compete in the international satellite communications market and seeking trebled damages of approximately $1.5 billion. In 1991, a U.S. Court of Appeals ruled that the corporation is immune from antitrust suits in its role as a signatory to INTELSAT. In February 1992, the U.S. Supreme Court denied PanAmSat's request for a review of the lower court's decision. An amended complaint was filed alleging that the corporation violated antitrust laws in its business activities purportedly outside of its role as a signatory to INTELSAT. In March 1993, a U.S. District Court denied the corporation's motion to dismiss the amended complaint and allowed PanAmSat to proceed with discovery. In February 1994, PanAmSat submitted a report estimating its alleged damages (before trebling) at a 1994 present value of $227,436,000. Also in February 1994, PanAmSat filed a motion with the District Court for acceptance of a third amended and supplemental complaint that would add several new claims and 15 new defendants to the suit, primarily as alleged co-conspirators with the corporation. In June 1994, the court denied PanAmSat's motion and ruled that discovery be completed. Discovery in the suit ended in November 1994; however, PanAmSat has motions pending which, if granted, would result in additional discovery. In December 1994, the corporation filed a motion for summary judgment directed to dismissal of all claims in the complaint. In the opinion of management, the complaint against the corporation is without merit, and the ultimate disposition of this matter will not have a material effect on the corporation's financial statements. The corporation is defending an intellectual property infringement suit initiated by Spectradyne, Inc. against its COMSAT Video Enterprises, Inc. and On Command Video Corporation subsidiaries in 1992, seeking damages in an unspecified amount and injunctive relief. The initial patent claims were 17 dismissed. Spectradyne thereafter twice amended its complaint, first to substitute new patent infringement claims along with claims that the corporation's subsidiaries induced unnamed third parties to infringe a copyrighted software interface, and then to substitute direct copyright infringement claims for the inducement to infringe claims. In 1994, a U.S. District Court granted summary judgment dismissing all of these claims except one copyright issue. The corporation believes that the suit is without merit and that the ultimate disposition of this matter will not have a material effect on the corporation's financial statements. 10. STOCKHOLDERS' EQUITY Effective June 1, 1993, the corporation's Articles of Incorporation were amended to increase the number of authorized shares of the corporation's common stock from 40,000,000 shares to 100,000,000 shares and to split each share of common stock outstanding on June 1, 1993 into two shares of common stock. Earnings per share and share amounts for all prior periods have been restated to reflect this stock split. The corporation's Articles of Incorporation were also amended to increase the number of authorized shares of the corporation's preferred stock from 1,000 shares to 5,000,000 shares and to permit preferred stock to be convertible into any other class of stock. No preferred stock is currently outstanding. Treasury Stock. The corporation acquired 404,500 shares of RSi common stock in 1993 for $5,098,000. Additionally, RSi acquired 80,000 shares of its own common stock for $870,000. These shares, which were equivalent to 378,000 shares of COMSAT common stock, were accounted for as treasury stock transactions as of December 31, 1993. These shares, in addition to RSi's other treasury shares, were retired upon consummation of the merger discussed in Note 2. Accordingly, 683,000 shares of the corporation's common stock with a total cost of $8,163,000 were retired in 1994. Investors' Plus Plan. The corporation has a plan which allows investors to purchase shares of common stock directly from the corporation. In 1994, 76,000 shares were issued with total proceeds of $977,000. 11. STOCK INCENTIVE PLANS The corporation has stock incentive plans which provide for the issuance of stock options, restricted stock awards, stock appreciation rights and restricted stock units. A total of 5,550,000 shares of common stock may be granted under the current plans. As of December 31, 1994, 1,234,000 shares of the corporation's treasury stock and 750,000 unissued common shares were reserved for these plans. As of December 31, 1994, no stock appreciation rights were outstanding. 18 Stock Options. Under the current plans, the exercise price for stock options may not be less than 50% of the fair market value of the stock when granted. Options vest over three years and expire after 15 years. Stock option activity was as follows: In thousands, Number of Exercise except per share amounts Shares Price Range - ------------------------------------------------------------------- Balance at January 1, 1992 2,256 $ 5.97-19.23 Options granted 464 9.72-23.08 Options exercised (1,032) 5.97-19.22 Options canceled (22) 5.97-13.94 ------- -------------- Balance at December 31, 1992 1,666 5.97-23.08 Options granted 1,288 16.99-30.31 Options exercised (408) 5.97-18.42 Options canceled (27) 5.97-27.03 ------- -------------- Balance at December 31, 1993 2,519 5.97-30.31 Options granted 1,398 23.08-27.63 Options exercised (126) 5.97-25.41 Options canceled (49) 5.97-27.63 ------- -------------- Balance at December 31, 1994 3,742 $ 5.97-30.31 ======= ============== Options exercisable at December 31, 1994 1,377 $ 5.97-30.31 ======= ============== The exercise price of certain options granted prior to 1993 is equal to 50% of the market price on the grant date. The cost of these awards, which is the 50% discount to market when granted, was recorded as unearned compensation and is shown as a separate component of stockholders' equity. This unearned compensation is being amortized to expense over the three-year vesting period. The exercise price for options awarded after 1992 is equal to the fair market value on the grant date. Accordingly, no expense is recorded for these options. Restricted Stock Awards. Restricted stock awards are shares of stock that are subject to restrictions on their sale or transfer. During 1993 and 1992, respectively, 348,000 and 68,000 restricted stock awards were granted, net of awards forfeited. The 1993 awards vest over six years and the 1992 awards vest over five years. The market value of the shares awarded was recorded as unearned compensation and is being amortized to expense over the vesting period for each grant. In 1994, 265,000 "performance-based" restricted stock awards were granted. Grantees do not have record ownership of the underlying shares of stock until the end of a two-year performance period. The actual shares awarded will be based upon the achievement of the applicable financial performance targets. The shares issued will then be subject to restrictions on their sale or transfer for three additional years. The expected cost of these grants is being amortized over five years. The 1994 amortization was recorded as compensation expense of $1,420,000 and a corresponding increase to stockholders' equity described as "amortization of stock performance awards." 19 Unearned compensation has not been recorded for these grants since actual shares have not been issued and the number of shares to be issued is not yet known. 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 1994, 1993 and 1992, respectively, 115,000, 49,000 and 42,000 restricted stock units were granted. At December 31, 1994, 189,000 partially vested restricted stock units were outstanding. The cost of these awards, which is the market value of the units when vested, is amortized to expense over the three- year vesting period. The amounts amortized to expense in 1994, 1993 and 1992 were $335,000, $1,538,000 and $1,048,000, 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 offering date for 1995 purchases was November 18, 1994, when 85% of the fair market value was $16.74. A total of 2,248,000 shares of the corporation's unissued common stock has been reserved for this plan. Employee Stock Ownership Plan. The corporation has an Employee Stock Ownership Plan (ESOP) which was established in 1988 by RSi for the benefit of eligible employees. The ESOP has acquired 714,000 shares of common stock with bank loan proceeds. The corporation makes periodic contributions to the ESOP at least sufficient to make principal and interest payments as they are due. Contributions to the ESOP charged to expense totaled $864,000 in 1994, $1,049,000 in 1993 and $1,026,000 in 1992. The corporation has guaranteed the ESOP's bank notes payable and has reported the unpaid balance of these loans as a liability of the corporation (see Note 7). An unearned ESOP compensation amount, which is equal to the unpaid bank loans, has been reported as a reduction to stockholders' equity. 12. PENSION AND OTHER BENEFIT PLANS The corporation has a non-contributory, defined benefit pension plan for qualifying employees. Pension benefits are based on years of service and compensation prior to retirement. 20 The components of net pension expense for each year are: In thousands 1994 1993 1992 - --------------------------------------------------------------------- Service cost for benefits earned during the year $ 3,719 $ 3,087 $ 3,583 Interest cost on projected benefit obligation 6,817 7,044 6,556 Credit for actual return on pension plan assets (624) (13,010) (5,197) Net amortization and deferral (7,572) 5,427 (2,697) -------- -------- -------- Net pension expense $ 2,340 $ 2,548 $ 2,245 ======== ======== ======== In September 1992, the corporation offered an early retirement program to some employees in connection with its restructuring of certain operations (see Note 14). This program provided enhanced retirement benefits and an option for a lump sum payment of all benefits. The additional pension expense for this program was $6,582,000 and is included in the provision for restructuring in the 1992 income statement. The following table shows the pension plan's obligations and assets as well as the amount recognized in the corporation's balance sheets at each year end. In thousands 1994 1993 - ---------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ 72,620 $ 88,271 ========= ========= Accumulated benefit obligation $ 74,403 $ 90,981 ========= ========= Actuarial present value of projected benefit obligation for service rendered to date $ 87,347 $ 109,543 Pension plan assets at fair value 95,003 99,070 --------- --------- Plan assets greater than (less than) projected benefit obligation 7,656 (10,473) Unrecognized net loss (gain) (9,459) 12,116 Unrecognized transition asset at January 1, 1986 being amortized over 11 years (4,818) (6,026) --------- --------- Net pension liability $ (6,621) $ (4,383) ========= ========= Assumed discount rate 8.5% 7.0% Assumed rate of compensation increase 5.5% 5.0% Expected rate of return on pension plan assets 9.0% 9.0% The plan's assets consist primarily of common stock, corporate and government bonds and short-term investments. The corporation's policy is to fund the minimum actuarially computed contributions required by law. The corporation made a $102,000 cash contribution to the plan in 1994, and $4,100,000 in 1993. Supplemental Executive Retirement Plan. The corporation has an unfunded supplemental pension plan for executives. The expense for this plan was $2,976,000, $2,058,000 and $1,917,000 for 1994, 1993 and 1992, respectively. 21 In accordance with the provisions of Financial Accounting Standard No. 87, the corporation recorded a minimum plan liability for the excess of the accumulated benefit obligation over the accrued plan liability. This was reported as a reduction to stockholders' equity of $1,557,000 as of December 31, 1994 and $2,301,000 as of December 31, 1993. These amounts are net of deferred income taxes and net of an intangible asset recorded for the unrecognized transition obligation. The corporation's accrued liabilities for this plan were $16,041,000 and $15,679,000 at December 31, 1994 and 1993, respectively. As of December 31, 1994, the accumulated benefit obligation was approximately $16,041,000, and the projected benefit obligation was approximately $16,558,000, assuming a discount rate of 8.5% and future salary increases of 5.5%. 401(k) Plan. The corporation has a 401(k) plan for qualifying employees. A portion of employee contributions is matched by the corporation. Prior to 1994, these matching contributions were made in cash. The corporation's matching contributions for the years ended December 31, 1993 and 1992 were $3,237,000 and $2,860,000, respectively. Starting in 1994, the matching contributions have been made in shares of the corporation's common stock. During 1994, 79,000 shares of common stock with a total market value of $1,941,000 were contributed to the plan. Postretirement Benefits. The corporation provides health and life insurance benefits to qualifying retirees. The expected cost of these benefits is recognized during the years in which employees render service. The components of the net postretirement benefit expense for each year were: In thousands 1994 1993 1992 - ---------------------------------------------------------------------- Service cost for benefits earned during the year $ 1,756 $ 1,898 $ 2,157 Interest cost on accumulated postretirement benefit obligation 2,867 3,518 3,762 Net amortization and deferral (1,221) (321) 232 -------- -------- -------- Net postretirement benefit expense $ 3,402 $ 5,095 $ 6,151 ======== ======== ======== The early retirement program discussed earlier in this note resulted in an additional postretirement benefit expense of $2,107,000 in 1992. 22 The following table shows the plan's obligations as well as the liability recognized in the corporation's balance sheet at each year end. In thousands 1994 1993 - ---------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 20,598 $ 25,258 Fully eligible active participants 3,845 3,826 Other active participants 12,363 14,846 --------- --------- Total 36,806 43,930 Unrecognized gain from plan changes 11,614 12,873 Unrecognized net gain (loss) 2,397 (6,789) --------- --------- Net postretirement benefit liability $ 50,817 $ 50,014 ========= ========= Assumed discount rate 8.5% 7.0% Assumed rate of compensation increase 5.5% 5.0% In 1993, the corporation made several modifications to its postretirement benefits program including higher participant premium payments, higher deductibles and out-of-pocket maximums and reduced benefits for certain participants. Additionally, the corporation implemented a managed health care program to better control costs. These changes resulted in a reduction in the accumulated postretirement benefit obligation and an unrecognized gain of $12,873,000 as of December 31, 1993. A 10.0% increase in health care costs was assumed for 1995 with the rate decreasing 0.5% each year to an ultimate rate of 6.0%. Increasing the assumed trend rate by 1.0% each year would have increased the accumulated postretirement benefit obligation as of December 31, 1994 by $4,647,000 and the benefit expense for 1994 by $763,000. 13. INCOME TAXES The corporation adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1993. This accounting statement changed the method for the recognition and measurement of deferred tax assets and liabilities. The cumulative effect of adopting SFAS No. 109 on the corporation's financial statements was to increase income by $1,925,000 ($0.04 per share) and was recorded in the first quarter of 1993. Prior year financial statements were not restated. The components of income tax expense for each year are: In thousands 1994 1993 1992 - ---------------------------------------------------------------------- Federal: Current $ 28,655 $ 32,646 $ 25,349 Deferred 18,064 19,419 3,682 Investment tax credits (3,550) (3,627) (3,943) State and local 6,510 6,754 4,883 --------- --------- --------- Total $ 49,679 $ 55,192 $ 29,971 ========= ========= ========= 23 The difference between tax expense computed at the statutory Federal tax rate and the corporation's effective tax rate is: In thousands 1994 1993 1992 - ---------------------------------------------------------------------- Federal income taxes computed at the statutory rate $ 44,562 $ 48,182 $ 28,309 Reduction under gross change tax method - - (2,694) Investment tax credits (3,550) (3,627) (3,943) Dispositions of assets - - 2,913 State income taxes, net of Federal income tax benefit 4,227 4,326 2,547 Rate increase on prior year deferred taxes - 2,977 - Goodwill 920 670 707 Merger costs 1,556 - - Other 1,964 2,664 2,132 --------- --------- --------- Income tax expense $ 49,679 $ 55,192 $ 29,971 ========= ========= ========= SFAS No. 109 requires that deferred tax liabilities and assets be adjusted for the effect of a change in tax laws or rates. Accordingly, the corporation recorded a charge to income tax expense of $2,977,000 in the third quarter of 1993 to adjust prior years' deferred tax assets and liabilities for an increase in the Federal income tax rate from 34% to 35%. The net current and net non-current components of deferred tax accounts as shown on the balance sheet at December 31, 1994 and 1993 are: In thousands 1994 1993 - ---------------------------------------------------------------------- Current deferred tax asset $ 10,914 $ 8,333 Non-current deferred tax liability (104,309) (81,468) --------- --------- Net liability $ (93,395) $ (73,135) ========= ========= The deferred tax assets and liabilities at December 31, 1994 and 1993 are: In thousands 1994 1993 - ---------------------------------------------------------------------- Assets: Postretirement benefits $ 22,947 $ 20,902 Accrued expenses 41,247 32,291 ITC carryforwards - 13,115 Alternative minimum tax credit 35,688 32,368 Contract revenue 8,432 7,135 Other 377 2,486 --------- --------- Total deferred tax assets 108,691 108,297 --------- --------- Liabilities: Property and equipment (202,086) (179,376) Other - (2,056) --------- --------- Total deferred tax liabilities (202,086) (181,432) --------- --------- Net liability $ (93,395) $ (73,135) ========= ========= The corporation's investment tax credit carryforwards have been fully utilized as of December 31, 1994. 24 The Internal Revenue Service (IRS) has completed examinations of the Federal income tax returns of the corporation through 1989 and is currently examining Federal income tax returns for 1990 through 1992. The corporation has also amended its returns and filed claims for refunds for 1979 through 1987. The IRS has denied these claims. The corporation is contesting this denial by the IRS. In the opinion of the corporation, adequate provision has been made for income taxes for all periods through 1994. 14. PROVISION FOR RESTRUCTURING In September 1992, the corporation recorded a $38,961,000 charge for restructuring costs. At that time, the corporation announced its plans to realign business activities, downsize certain functions, and reposition COMSAT Video Enterprises, Inc. (CVE) to capitalize on the growing market for on-demand entertainment. The restructuring costs relate to headcount reductions throughout the corporation and the elimination of the former COMSAT Systems Division and the consolidation of its operations with those of COMSAT Laboratories into a new division, COMSAT Technology Services, as well as the transfer of television distribution services from COMSAT Systems Division to CVE. This charge consists of $12,644,000 for early retirement and reduction in force costs related to the reorganization and $26,317,000 for equipment, property and other items. 15. BUSINESS SEGMENT INFORMATION The corporation reports operating results and financial data in four business segments: International Communications, Mobile Communications, Entertainment and Technology Services. The International Communications segment consists of activities undertaken by the corporation in its COMSAT World Systems business, including INTELSAT services. This segment also includes the activities of COMSAT International Ventures. The Mobile Communications segment consists of activities undertaken by the corporation in its COMSAT Mobile Communications business, including Inmarsat services. The Entertainment segment includes entertainment services and video distribution services to television networks. The results for CVE, On Command Video Corporation, the Denver Nuggets and Beacon Communications Corp. are reported in the Entertainment segment. The Technology Services segment includes the design and manufacture of voice and data communications networks and products, systems integration services, and applied research and technology services and includes the operations of COMSAT RSI and COMSAT Laboratories. 25 In thousands(1) 1994 1993 1992 - ----------------------------------------------------------------------------------- Revenues(2): International Communications $ 271,136 $ 249,935 $ 253,308 Mobile Communications 193,530 190,040 158,031 Entertainment(3) 156,846 121,814 86,217 Technology Services(2) 219,119 202,161 205,499 Eliminations and other corporate(3) (13,732) (9,665) (14,962) ----------- ----------- ----------- Total $ 826,899 $ 754,285 $ 688,093 =========== =========== =========== Operating income (loss): International Communications $ 88,534 $ 89,795 $ 96,507 Mobile Communications 47,850 48,766 37,418 Entertainment(3) 10,530 6,516 3,097 Technology Services 15,467 12,109 12,492 Merger and integration costs (7,367) - - Provision for restructuring(4) - - (38,961) Other corporate(3) (4,763) (5,606) (5,571) ----------- ----------- ----------- Total $ 150,251 $ 151,580 $ 104,982 =========== =========== =========== Identifiable assets as of December 31: International Communications $ 884,637 $ 822,034 $ 792,123 Mobile Communications 420,570 401,649 394,659 Entertainment(3) 368,904 257,718 195,662 Technology Services 147,015 165,011 155,600 Corporate and other assets(3)(5) 154,866 127,101 116,941 ----------- ----------- ----------- Total $ 1,975,992 $ 1,773,513 $ 1,654,985 =========== =========== =========== Property and equipment additions: International Communications $ 136,525 $ 116,652 $ 120,833 Mobile Communications 55,103 50,586 83,099 Entertainment(3) 90,053 65,325 18,071 Technology Services 4,067 7,468 11,458 Corporate and other assets(3) 835 2,835 1,033 ----------- ----------- ----------- Total $ 286,583 $ 242,866 $ 234,494 =========== =========== =========== Depreciation and amortization: International Communications $ 84,925 $ 73,636 $ 70,967 Mobile Communications 35,299 32,772 27,304 Entertainment(3) 38,010 25,329 19,519 Technology Services 6,880 7,916 10,531 Corporate and other assets(3) 2,670 2,458 2,439 ----------- ----------- ----------- Total $ 167,784 $ 142,111 $ 130,760 =========== =========== ===========
(1) Segment information for 1993 and 1992 has been restated for the merger with RSi as discussed in Note 2. (2) Technology Services segment revenues include intersegment sales totaling $8,625,000 in 1994, $10,132,000 in 1993 and $19,500,000 in 1992. Intersegment sales for other segments are not significant. On October 3, 1992, the corporation sustained tornado damage at its Largo, Florida facility. Revenues reported for the Technology Services segment include business interruption insurance proceeds of $4,835,000 in 1994, $3,021,000 in 1993 and $1,572,000 in 1992. (3) The Denver Nuggets results were reported in Eliminations and other corporate activities prior to 1994. Segment results for 1993 and 1992 have been restated to report these results in the Entertainment segment. (4) If the 1992 provision for restructuring (see Note 14) had been charged to segment operating income, the amounts allocated to each segment would have been: International Communications - $6,955,000; Mobile Communications - $3,332,000; Entertainment - $14,146,000; Technology Services - $10,240,000; and Other Corporate - $4,288,000. (5) The corporation's investments in unconsolidated businesses are included in Corporate and other assets. 26 Related Party Transactions and Significant Customers. The corporation provides support services to INTELSAT and support services and satellite capacity to Inmarsat. The revenues from these services were $26,162,000 in 1994, $23,190,000 in 1993 and $21,477,000 in 1992. These revenues were recorded primarily in the International Communications and Technology Services segments. Customers comprising 10% or greater of the corporation's revenues are: In thousands 1994 1993 1992 - ----------------------------------------------------------------------- U.S. Government $ 121,715 $ 115,446 $ 117,245 AT&T 100,096 117,582 135,499 16. FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISKS SFAS No. 107, which became effective in 1992, and SFAS No. 119, which became effective in 1994, require disclosures about the fair value of financial instruments. In these disclosures, fair values are estimates and do not necessarily represent the amounts that would be received or paid in an actual sale or settlement of the financial instruments. At December 31, 1994, the corporation was contingently liable to banks for $26,214,000 for outstanding letters of credit securing performance of certain contracts. As discussed in Note 6, the corporation has guaranteed repayment of the construction loan related to its headquarters building. The corporation has other financial guarantees totaling approximately $9,600,000 as of December 31, 1994. The majority of these guarantees expire in 1995 through 1999. The estimated fair value of these instruments is not significant. Inmarsat has entered into foreign currency contracts designed to minimize exposure to exchange rate fluctuations on fixed operating expenses denominated in British pounds sterling. At December 31, 1994, Inmarsat had several contracts maturing in 1995 through 1997 to purchase 87,500,000 pounds sterling for a total of $139,347,000. The corporation's share of the estimated fair value of these contracts, as determined by a bank, is an unrealized gain of approximately $700,000 at December 31, 1994. 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 8.4%, 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 27 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, 1994, Inmarsat had $416,936,000 of swaps to be exchanged for 255,282,000 pounds sterling at various dates through 2006. Inmarsat is exposed to loss if one or more of the counterparties defaults. However, Inmarsat does not anticipate non-performance by the counterparties as all are major financial institutions. The corporation's share of the estimated fair value of these swaps is an unrealized loss of $3,713,000 at December 31, 1994. 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) was estimated by computing present values of the related cash flows using risk adjustments to U.S. Treasury rates obtained from investment bankers. December 31, 1994 ------------------------------- In thousands Book Amount Fair Value - -------------------------------------------------------------- 8.125% notes $ 160,000 $ 156,010 8.95% notes 75,000 76,671 6.75% INTELSAT Eurobonds 30,194 28,370 7.375% INTELSAT Eurobonds 40,258 38,282 6.625% INTELSAT Asian bonds 40,258 35,700 The fair values of the remaining long-term debt not itemized above and the corporation's other financial instruments are approximately equal to their carrying values. 17. SUBSEQUENT EVENTS Denver Sports Arena. In January 1995, the corporation, through a proposed joint venture between the corporation and The Anschutz Corporation, reached an agreement in principle with the City and County of Denver pursuant to which the joint venture would construct a sports and entertainment complex in Denver, Colorado. The 19,000-seat arena's construction is contingent on the negotiation of final agreements with the city and the landowner. The arena would be scheduled to open for the 1997-98 NBA season. The new facility would generate additional revenue and augment fan amenities to strengthen the Denver Nuggets franchise. The arena construction costs are expected to total approximately $132 million. The corporation would contribute up to $30 million during the three-year construction period and the other partner would contribute a like amount. The remaining construction costs would be financed with debt, sponsor advances and other sources. Debt. INTELSAT intends to issue $200 million of bonds in the first quarter of 1995. The corporation will record its share of the borrowings as long-term debt of approximately $40 million when the bonds are issued. 28 18. Quarterly Financial Information (Unaudited) (1)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year 1994 Revenues(2) $200,495 $207,861 $200,771 $217,772 $826,899 Operating income(3) 36,874 41,893 41,436 30,048 (4) 150,251 Net income 20,181 21,617 21,398 14,446 77,642 Earnings per share 0.43 0.46 0.45 0.30 1.64 Dividends per share .18 1/2 .18 1/2 .19 1/2 .19 1/2 0.76 Stock price: High 30 26 1/2 26 1/2 25 5/8 30 Low 24 7/8 20 1/2 23 17 1/2 17 1/2 Close 26 1/8 23 1/2 25 5/8 18 5/8 18 5/8 1993 Revenues(2) $194,681 $185,778 $179,320 $194,506 $754,285 Operating income 40,826 41,370 39,983 29,401 (5) 151,580 Income before cumulative effect of accounting change(6) 20,507 23,066 19,445 (7) 19,451 (8) 82,469 Net income 22,432 23,066 19,445 (7) 19,451 (8) 84,394 Earnings per share Before cumulative effect of accounting change 0.44 0.49 0.41 0.41 1.75 Net income 0.48 0.49 0.41 0.41 1.79 Dividends per share .18 1/2 .18 1/2 .18 1/2 .18 1/2 0.74 Stock price: High 27 7/8 31 5/8 31 7/8 35 1/4 35 1/4 Low 23 3/4 27 1/4 26 3/4 27 1/2 23 3/4 Close 27 7/8 30 1/4 28 1/2 29 3/4 29 3/4
(1) As discussed in Note 2 to the financial statements, the corporation consummated its merger with Radiation Systems, Inc. (RSi) in June 1994. The merger has been treated as a pooling of interests for accounting purposes. Accordingly, financial statements for all periods prior to the merger have been restated to include RSi. (2) Revenues include business interruption insurance income of $941, $1,253 and $827 in the first, second and third quarters of 1993, respectively, and $4,835 in the second quarter of 1994. (3) Operating income is net of nonrecurring charges for merger and integration costs totaling $4,264, $477 and $2,626 in the second, third and fourth quarters of 1994, respectively. (4) The fourth quarter of 1994 includes nonrecurring charges of $1,049 for employee severance costs related to a reduction in force and $7,206 for the corporation's share of costs related to an early retirement program offered by INTELSAT. (5) Operating income in the fourth quarter of 1993 reflects the impact of rate reductions associated with long-term agreements in COMSAT World Systems. (6) The corporation recorded an increase to income of $1,925 in the first quarter of 1993 for a change in accounting for income taxes (see Note 13 to the financial statements). (7) The third quarter of 1993 includes a charge to income tax expense of $2,977 to adjust prior years' deferred tax assets and liabilities for an increase in the Federal income tax rate from 34% to 35%. (8) Net income for the fourth quarter of 1993 includes the reversal of interest on tax contingencies and an adjustment to the effective tax rate totaling $3,900. 29 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: July 7 1995 By /s/ Allen E. Flower (Allen E. Flower, Controller) 30 EXHIBIT INDEX Exhibit No. Description Page - ---------------------------------------------------------------------------- Exhibit 23 - Consent of Independent Auditors dated July 7, 1995 32 31 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in COMSAT Corporation's Registration Statement No. 2-83319 on Form S-8, Registration Statement No. 2-87942 on Form S-8, Registration Statement No. 33-5259 on Form S-8, Registration Statement No. 33-25124 on Form S-8, Registration Statement No. 33-35364 on Form S-8, Registration Statement No. 33-53610 on Form S-8, Registration Statement No. 33-51661 on Form S-3, Registration Statement No. 33-54369 on Form S-3, Registration Statement No. 33-54685 on Form S-8, Registration Statement No. 33-54687 on Form S-8, Registration Statement No. 33-56331 on Form S-8, Registration Statement No. 33-56333 on Form S-8 and Registration Statement No. 33-59841 on Form S-3 of our report dated February 10, 1995, appearing in this Annual Report on Form 10-K/A, Amendment No. 1, of COMSAT Corporation for the year ended December 31, 1994. Deloitte and Touche LLP Washington, D.C. July 7, 1995 32 -----END PRIVACY-ENHANCED MESSAGE-----