-----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, H6NyWANc/Jpa5sQc5X5AR742nwGVjlgi9wUnTtIiuqd7OEOSV5+tu8I7AeWPduJP YFoftiB5lxhAbfe8ldOzbA== 0000022698-97-000008.txt : 19970520 0000022698-97-000008.hdr.sgml : 19970520 ACCESSION NUMBER: 0000022698-97-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04929 FILM NUMBER: 97609378 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended March 31, 1997 Commission File Number 1-4929 COMSAT CORPORATION 6560 Rock Spring Drive Bethesda, MD 20817 (301) 214-3000 District of Columbia 52-0781863 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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 twelve (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 ninety (90) days. Yes [X] No [ ] 49,074,000 shares of the Registrant's common stock were outstanding as of March 31, 1997. 1 PART I. FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS FOR THE CORPORATION (UNAUDITED) COMSAT CORPORATION AND SUBSIDIARIES Condensed Consolidated Income Statements
Quarter Ended March 31, ---------------------------- In thousands, except per share amounts 1997 1996 - ------------------------------------------------------------------------------------------------------------------- REVENUES $ 281,680 $ 248,555 ----------- ------------ Operating expenses: Cost of services 199,290 157,856 Depreciation and amortization 70,504 52,704 Research and development 3,697 5,142 General and administrative 5,849 7,089 ----------- ------------ Total operating expenses 279,340 222,791 ----------- ------------ OPERATING INCOME 2,340 25,764 Interest and other income (expense), net (1,005) (3,181) Interest expense, net of amounts capitalized (14,474) (9,101) ----------- ------------ Income (loss) before taxes, minority interest, and extraordinary item (13,139) 13,482 Income tax expense (109) (5,710) Minority interest in net losses of consolidated subsidiaries 8,967 1,555 ----------- ------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (4,281) 9,327 Extraordinary loss from early extinguishment of debt (net of $585 tax) (1,010) - ----------- ------------ NET INCOME (LOSS) $ (5,291) $ 9,327 =========== ============ EARNINGS (LOSS) PER SHARE: Before extraordinary item $ (0.09) $ 0.19 Extraordinary loss (0.02) - ----------- ------------ Net income (loss) $ (0.11) $ 0.19 =========== ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2 COMSAT CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets
March 31, December 31, In thousands 1997 1996 - --------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 22,359 $ 12,721 Receivables 329,563 314,766 Inventories 39,308 39,635 Other 38,922 42,717 ------------- ------------ Total current assets 430,152 409,839 ------------- ------------ Property and equipment (net of accumulated depreciation of $1,306,257 in 1997 and $1,266,560 in 1996) 1,643,904 1,656,763 Investments 93,038 133,592 Goodwill 151,979 155,250 Franchise rights 100,984 102,189 Other assets 221,100 208,170 ------------- ------------ TOTAL ASSETS $ 2,641,157 $ 2,665,803 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current notes payable $ 170,755 $ 159,719 Commercial paper 63,487 17,993 Accounts payable and accrued liabilities 163,602 168,039 Deferred income 75,493 81,942 Due to related parties 13,770 34,602 Other 26,971 22,788 ------------- ------------ Total current liabilities 514,078 485,083 ------------- ------------ Long-term debt 603,745 635,474 Deferred income taxes and investment tax credits 133,665 136,322 Accrued postretirement benefit costs 50,979 50,423 Other long-term liabilities 153,058 147,818 Minority interest 158,717 167,472 Preferred securities issued by subsidiary 200,000 200,000 STOCKHOLDERS' EQUITY: Common stock 344,442 340,691 Retained earnings 488,006 502,839 Treasury stock (2,228) (3,006) Other (3,305) 2,687 Total stockholders' equity 826,915 843,211 ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,641,157 $ 2,665,803 ============= ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3 COMSAT CORPORATION AND SUBSIDIARIES Condensed Consolidated Cash Flow Statements
Quarter Ended March 31, ---------------------------- In thousands 1997 1996 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (5,291) $ 9,327 Adjustments for noncash depreciation and amortization 70,504 52,704 Changes in operating assets and liabilities (4,890) (42,866) Other 707 8,784 ----------- ------------ Net cash provided by operating activities 61,030 27,949 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (85,571) (91,713) Expenditures for film production cost (2,297) (687) Investments in unconsolidated businesses (9,395) (34,783) Proceeds from sale of investments 9,060 - Proceeds from note on sale of investment 6,809 - Decrease in INTELSAT ownership 191 - Decrease in Inmarsat ownership - 5,739 Other 2,282 (4,198) ----------- ------------ Net cash used in investing activities (78,921) (125,642) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued 3,314 2,234 Cash dividends paid (9,542) (9,328) Proceeds from issuance of long-term debt 912 - Repayment/extinguishment of long-term debt (29,649) (5,830) Net short-term borrowings 62,494 47,998 Repayment against company-owned life insurance policies - (51,175) Other - (6) ----------- ------------ Net cash provided by (used for) financing activities 27,529 (16,107) ----------- ------------ Net increase (decrease) in cash and cash equivalents 9,638 (113,800) Cash and cash equivalents, beginning of period 12,721 124,156 ----------- ------------ Cash and cash equivalents, end of period $ 22,359 $ 10,356 =========== ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4 COMSAT CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 1. FINANCIAL STATEMENT PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by COMSAT Corporation (COMSAT or the corporation) pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These financial statements should be read in the context of the financial statements and notes thereto filed with the SEC in the corporation's 1996 Annual Report on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations. The accompanying condensed consolidated financial statements reflect all adjustments and disclosures which, in the opinion of management, are necessary for a fair presentation. All such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of the entire year. 2. INTELSAT AND INMARSAT SHARE CHANGES The corporation's ownership share of INTELSAT decreased from 19.1% at December 31, 1996 to 18.0% as of March 31, 1997. As a result of the change in ownership, the corporation will receive $22.5 million, the majority of which is expected to be received during the second quarter of 1997. The corporation's 23% ownership share of Inmarsat as of March 31, 1997 is unchanged from December 31, 1996. 3. INVENTORIES Inventories, stated at the lower of cost (first-in, first-out) or market, consist of the following:
March 31, December 31, In thousands 1997 1996 - ---------------------------------------------------------------------------------------------------------- Finished goods $ 18,484 $ 18,015 Work in progress 10,809 11,811 Raw materials 10,015 9,809 ----------- ------------ Total $ 39,308 $ 39,635 =========== ============
4. INVESTMENTS In January 1997, the corporation sold its remaining interest in Philippine Global Communications, Inc. (PhilCom) at book value in exchange for cash and a collateralized note receivable totaling $34.3 million. The corporation received cash proceeds of $8.5 million in the first quarter with the balance to be paid in installments with interest through December 31, 1998. 5 5. ASCENT ENTERTAINMENT GROUP, INC. ASCENT CREDIT FACILITIES. In March 1997, On Command Corporation (OCC) amended its credit facility to increase the amount that OCC may borrow to $150.0 million from $125.0 million. Concurrently, Ascent Entertainment Group, Inc. (Ascent) amended its credit facility to reduce the amount that Ascent can borrow to $140.0 million from $200.0 million and committed to raise not less than $50.0 million in subordinated debt before October 1997 as a condition to further renewal of its credit facility. Additionally, the amendment (i) eliminated the $125.0 million limit on the available borrowings under the facility prior to receipt of NBA and NHL consents; (ii) provided that those financial covenants in the Ascent Credit Facility related to the financial results of OCC will not be measured until year-end 1997; (iii) provided for the $140.0 million of availability to be divided into a term loan of $50.0 million and a revolving facility of $90.0 million; and (iv) modified certain other financial covenants. Ascent's management believes it will successfully raise the subordinated debt. DENVER ARENA PROJECT. On May 7, 1997, Ascent entered into a Land Purchase Agreement (the "Agreement") with Southern Pacific Transportation Company ("SPT") pursuant to which Ascent would purchase approximately 49 acres in Denver as the site for the proposed arena for $20.0 million. The Agreement is similar to the previously expired agreement between SPT and Ascent. Pursuant to the Agreement, the closing of the land purchase needs to occur on or before August 31, 1997. Consummation of the transaction is subject to several conditions, including obtaining satisfactory financing and reaching agreements with the City and County of Denver regarding the construction of the proposed arena and the release of the Nuggets and the Avalanche from their existing leases at McNichols Arena. The Agreement also provides for SPT to effect a state-approved environmental clean-up plan on the site, and to provide continuing partial indemnification with regard to certain environmental liabilities. Management believes that these negotiations will be successfully concluded, but there can be no assurance that Ascent will be able to reach acceptable terms for the construction of the new arena. 6. REGULATORY MATTERS AND CONTINGENCIES GOVERNMENT REGULATION. Under the Communications Satellite Act of 1962 (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 Federal Communications Commission (FCC) with respect to its capital and organizational structure, as well as CWS and CMC's plant, operations, services and rates. FCC decisions and policies have had and will continue to have a significant impact on the corporation. For a discussion of these matters refer to Management's Discussion and Analysis of Operations of Financial Condition - Outlook, and Notes 10 and 11 to the corporation's 1996 financial statements (Form 10-K). LITIGATION. COMSAT and its subsidiaries are a party to various lawsuits and arbitration proceedings and are subject to various claims and inquiries, which generally are incidental to the ordinary course of its business. The outcome of legal proceedings cannot be predicted with certainty. Based on currently available information, however, management does not believe that the outcome of any matter which is pending or threatened, either individually or in the aggregate, will have a materially adverse effect on the consolidated financial condition of the corporation but could materially effect consolidated results of operations in a given year or quarter. Certain 6 of those matters are discussed in Notes 10 and 11 to the corporation's 1996 financial statements (Form 10-K). As discussed in Note 11 to the 1996 financial statements, in September 1996, the U.S. District Court for the Southern District of New York granted the corporation's motion for summary judgment against an anti-trust suit brought by PanAmSat Corporation and dismissed the complaint in its entirety. PanAmSat filed an appeal, which was argued before the U.S. Court of Appeals for the Second Circuit in April 1997, and a decision is pending before the court. 7. EXTRAORDINARY LOSS FROM EARLY RETIREMENT OF DEBT During the period March 25, 1997 through April 9, 1997, the corporation offered to purchase for cash its 8.125% notes due April 1, 2004 in a fixed-spread offering. As of March 31, 1997, $23.0 million of the notes had been repurchased, and the corporation incurred a loss on debt extinguishment of $1.6 million ($1.0 million after tax) in the first quarter of 1997. In April 1997, the corporation repurchased an additional $66.5 million of the 8.125% notes and $10.0 million of its 7.7% medium term notes. The debt extinguishment loss related to the April 1997 repurchases was $4.3 million ($2.7 million after tax). 8. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This statement establishes standards for computing and presenting earnings per share. This statement is effective for financial statements issued for periods ending after December 31, 1997, including interim periods; early application is not permitted. The corporation will adopt this standard in the fourth quarter of 1997 and will restate all prior period earnings per share data presented as required. Adoption of this statement will not have a material impact on the corporation's reported net income (loss) per common share. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997 ANALYSIS OF OPERATIONS CONSOLIDATED OPERATIONS - ----------------------- Consolidated revenues for the first quarter of 1997 were $281.7 million, an increase of $33.1 million over the first quarter of 1996. The majority of the increase came from both the Technology Services and Entertainment segments. All business units reported increases in first quarter revenues over the same period of last year, except COMSAT Mobile Communications (CMC). First quarter 1997 revenues in the Entertainment segment include $18.1 million related to SpectraVision, Inc., which was acquired in October 1996 by On Command Corporation (OCC), a 57.2% subsidiary of Ascent Entertainment Group, Inc. (Ascent). Operating income in the first quarter was $2.3 million, down $23.4 million from the same quarter last year. The decline resulted primarily from increased operating losses at Ascent associated with OCC's acquisition of SpectraVision and a lower operating income in CMC. 7 Interest and other income (expense) for the first quarter was a net expense of $1.0 million, which improved from a net expense of $3.2 million in the same period last year primarily due to interest income and a currency gain on the sale of an equity investment. Interest expense, net of amounts capitalized, for the first quarter was $14.5 million as compared to $9.1 million for the first quarter of 1996. The increase stems from increased borrowings at Ascent and the reduction of interest capitalized due to the completion of several satellite projects. Income tax expense for the first quarter of 1997 totaled $100,000 due to non-deductible losses incurred at Ascent's OCC subsidiary. Since October 1996, OCC is no longer included in COMSAT's consolidated tax group, and COMSAT is not able to recognize a benefit from OCC's losses in its tax return. Minority interest in net losses of consolidated subsidiaries primarily reflects the minority interest in the losses of Ascent, net of taxes, which have increased from the same quarter last year due principally to increased losses at OCC after its SpectraVision acquisition in October 1996. Extraordinary loss from early extinguishment of debt ($1.0 million or $0.02 per share), net of tax, represents first quarter costs incurred from the corporation's purchase of its 8.125% notes (see Note 7 to the financial statements). Of the notes purchased through a tender offer, $23.0 million was tendered during the first quarter of 1997. The consolidated net loss for the first quarter was $5.3 million, compared with net income of $9.3 million for the first quarter of 1996. The loss per share for the first quarter was $0.11, which was $0.30 per share below the same period last year. SEGMENT OPERATING RESULTS - ------------------------- The corporation reports operating results in three segments: International Communications, Technology Services and Entertainment. The International Communications segment includes COMSAT World Systems (CWS), COMSAT Mobile Communications (CMC) and COMSAT International (CI). The Technology Services sebment includes COMSAT RSI, Inc. (CRSI) and COMSAT Laboratories. The Entertainment segment represents the corporation's 80.67% ownership interest in Ascent. The method of allocating certain research and development costs was changed in 1997, and 1996's segment operating results have been restated for this change. 8
RESULTS BY SEGMENT: Quarter Ended March 31, In millions 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- REVENUES International Communications: World Systems $ 66.8 $ 65.6 Mobile Communications 35.2 42.6 International 16.4 11.9 ---------- ---------- Total International Communications 118.4 120.1 Technology Services 82.9 61.6 Entertainment 89.9 72.4 Eliminations and other (9.5) (5.5) ---------- ---------- Total revenues $ 281.7 $ 248.6 ========== ========== OPERATING INCOME (LOSS) International Communications: World Systems $ 28.1 $ 25.6 Mobile Communications 5.5 13.8 International (4.5) (3.8) ---------- ---------- Total International Communications 29.1 35.6 Technology Services 2.9 1.6 Entertainment (23.5) (4.2) ---------- ---------- Total segment operating income 8.5 33.0 General and administrative expenses (5.9) (7.1) Other (0.3) (0.1) ---------- ---------- Total operating income $ 2.3 $ 25.8 ========== ==========
INTERNATIONAL COMMUNICATIONS - ---------------------------- Revenues in the International Communications segment in the first quarter were $118.4 million, which was slightly below the same period last year. Operating income for the first quarter was $29.1 million, a decline of 18% compared to the first quarter of 1996. CWS's revenues for the first quarter increased 2% to $66.8 million, primarily due to increased Very Small Aperture Terminal (VSAT) leases and International Business Service (IBS) traffic. Operating income for the first quarter was $28.1 million, up 10% from the comparable period last year. The increase in operating income was a result of improved earnings on carrier-to-carrier contracts, offset in part, by increased depreciation from placing in service two INTELSAT satellites during 1996. Revenues in CMC were $35.2 million in the first quarter, a decline of 17% compared to the first quarter of last year. The lower revenues were primarily the result of decreases in analog telephone and telex revenues and lower volume in the bulk service contract with IDB Mobile Communications (IDB). CMC's operating income for the first quarter was $5.5 million, compared with $13.8 million in the same quarter last year. The decrease in operating income is attributable to lower revenues, increased depreciation associated with three Inmarsat-3 satellites placed in service during 1996 and early 1997, and increased costs related to Planet 1SM service, which began commercial operation in January 1997. 9 CI's revenues in the first quarter increased 38% to $16.4 million compared to the first quarter of 1996. Revenues increased in nearly all of the international companies of CI, with the largest improvement occurring in Brazil where revenues increased by 132% over the comparable period of 1996. Increased start-up costs at new companies drove CI's operating loss in the first quarter to $4.5 million compared to $3.8 million for the first quarter last year. In January 1997, CI sold its remaining interests in Philippine Global Communications, Inc. (PhilCom) at book value (see Note 4 to the financial statements). TECHNOLOGY SERVICES - ------------------- Revenues from the Technology Services segment for the first quarter were $82.9 million, a 35% increase over the first quarter of last year. The improvement was primarily the result of increases in revenues from transponder leases under the Commercial Satellite Communications Initiative (CSCI) contract, sales of wireless antennas for personal communication systems (PCS), gateway earth stations for the Asia Cellular Satellite system (ACeS) and ORBCOMM Global, L.P. (ORBCOMM) mobile satellite systems, and revenues related to intelligent transportation system projects. In addition, COMSAT Laboratories revenues in the first quarter of 1997 more than doubled compared to the first quarter of 1996 because of increased technical consulting. Operating income in Technology Services for the first quarter of 1997 was $2.9 million, which was 81% higher than the comparable period of 1996, due primarily to the higher revenues at COMSAT Laboratories. ENTERTAINMENT - ------------- The Entertainment segment is comprised of COMSAT's 80.67% ownership interest in Ascent. Revenues for the first quarter were $89.9 million, which was 24% higher than the first quarter of 1996. The increase in revenues was due to a larger room installation base at OCC resulting primarily from the acquisition of SpectraVision. The operating loss in the Entertainment segment during the first quarter was $23.5 million compared to a loss of $4.2 million for the first quarter of last year. The increased operating loss was primarily attributable to increased depreciation expense and other costs at OCC, a satellite failure in January 1997 affecting certain SpectraVision rooms, lower revenues at the Denver Nuggets and higher costs at the Colorado Avalanche and the Denver Nuggets. OUTLOOK - ------- MANY OF THE STATEMENTS THAT FOLLOW ARE FORWARD-LOOKING AND RELATE TO ANTICIPATED FUTURE 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. THEREFORE, THERE CAN BE NO ASSURANCE THAT ACTUAL FUTURE RESULTS WILL NOT DIFFER MATERIALLY FROM ANTICIPATED RESULTS. ALTHOUGH THE CORPORATION HAS ATTEMPTED TO IDENTIFY SOME OF THE IMPORTANT FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED, THOSE FACTORS SHOULD NOT BE VIEWED AS THE ONLY FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS. 10 As discussed in the corporation's 1996 Annual Report on Form 10-K, COMSAT's Board of Directors approved, in March 1997, a strategic plan to refocus the corporation on international satellite services and digital networking services and technology. As a part of the strategic plan, the corporation reaffirmed its commitment to divest its 80.67% interest in Ascent through a spin-off or sale. In response to the corporation's January 1997 request the Internal Revenue Service issued a ruling letter dated May 12, 1997. The ruling confirms that, if the corporation were to spin-off its ownership interest in Ascent to its shareholders, the spin-off would not be taxable to the corporation and its shareholders. The corporation also announced that it intends to sell substantially all of the assets and operations of CRSI, as well as other non-core assets. At its April 1997 meeting, the Board of Directors authorized the corporation's quarterly dividend at $0.05 per share. This is a reduction from the $0.195 per share paid for the previous eleven quarters. In April 1997, the corporation petitioned the Federal Communications Commission (FCC) for classification as a non-dominant carrier and for forbearance from certain regulation. The petition requests that CWS be allowed to change its tariff rates and introduce new services over the INTELSAT satellite system on one-day notice. It also requests that limits on the company's rate-of-return and structural separation requirements be removed. CWS operating results in 1997 are expected to be at approximately the same level as last year as a result of increased earnings from carrier-to-carrier contracts, offset by higher depreciation from INTELSAT satellites placed in service during 1996 and 1997. The carrier-to-carrier contracts are not subject to tariff requirements or to regulatory requirements associated with tariffs. Operating income in CMC is expected to be lower in 1997 as compared to last year, because of continuing competition among existing Inmarsat service providers and increased depreciation associated with the Inmarsat-3 satellites placed in service during 1996 and 1997. CI's operating loss in 1997 is expected to be improved over last year. Improvements at CI's more mature companies are expected to be partially offset by start-up costs in CI's newer companies. The corporation has initiated efforts to either seek an operating partner or sell its non-strategic operations in Russia and in the Commonwealth of Independent States before the end of 1997. On May 1, 1997, CI acquired full ownership of the Mexican corporation IntelCom Red S.A. de C.V. (IntelCom Mexico), which was previously a wholly owned-subsidiary of ICG Satellite Services, Inc., and named it COMSAT Mexico S.A. de C.V. (COMSAT Mexico). COMSAT Mexico will offer business customers digital, domestic and international private-line services to support voice, data and image applications. 11 Technology Services' 1997 revenues and operating income are expected to improve over 1996, exclusive of royalties from the license agreement recognized in the third quarter of 1996 and the reserves taken in the fourth quarter of 1996 on certain long-term, fixed-price contracts. Future earnings growth in Technology Services will continue to depend upon this segment's ability to contain costs and complete projects with favorable margins. Backlog in the Technology Services segment at March 31, 1997 was $256 million, compared to $244 million at December 31, 1996. Included in this segment's March 31, 1997 backlog is $145 million of U.S. Government contracts and $29 million of contracts that are unfunded. As is customary, these contracts include provisions for cancellation at the convenience of the U.S. Government or the prime contractor. If such a provision were exercised, the corporation would likely assert a claim for reimbursement of costs and a reasonable allowance for profit thereon. Operating losses at Ascent are projected to be higher during 1997 as compared to last year, primarily as a result of the acquisition by OCC of SpectraVision in October 1996, as well as increased costs in the sports franchises. In addition, Ascent's ownership of OCC declined at the time of the acquisition of SpectraVision to less than 80%. As a result, OCC is no longer a part of the COMSAT consolidated tax group, and COMSAT is no longer able to recognize tax benefits on OCC losses in its tax returns. As a result of anticipated continued losses at Ascent, COMSAT expects to report net losses in 1997 until Ascent is no longer a part of COMSAT's consolidated results. LIQUIDITY AND CAPITAL RESOURCES The primary sources of cash in the first three months of 1997 were operations and short-term borrowings. Cash was used primarily for property, equipment and dividends. The corporation's working capital deficit at March 31, 1997 was $83.9 million, an increase of $8.7 million from December 31, 1996. The increased deficit was primarily the result of purchasing $23.0 million of long-term debt using proceeds from short-term debt. The corporation has access to short-term and long-term financing at favorable rates. The corporation's current long-term debt ratings are A- from Standard and Poor's and A3 from Moody's. The corporation's current commercial paper ratings are A2 from Standard and Poor's and P2 from Moody's. The corporation's $200 million commercial paper program had $63.5 million in borrowings outstanding at March 31, 1997. Ascent had $160.0 million in short-term debt at March 31, 1997. A $200 million credit agreement, expiring in 1999, backs up the corporation's commercial paper program. In March and April 1997, the corporation purchased a total of $89.5 million of its 8.125% notes due 2004 using proceeds from short-term debt. Of the total, $23.0 million was tendered in March 1997. This reduced the total outstanding of the 8.125% notes from $160.0 million at December 31, 1996 to $70.5 million at April 30, 1997. In addition, the corporation in April 1997 repurchased $10.0 million of its medium-term notes. This reduced the corporation's total outstanding medium-term notes from $74.0 million at December 31, 1996 and March 31, 1997 to $64.0 million at April 30, 1997. 12 The corporation had $36 million remaining under a $100 million medium-term note program at April 30, 1997. The medium-term note program is part of a $200 million debt securities shelf registration program initiated in 1994. The corporation plans to reduce short-term debt with proceeds from the sale of substantially all of the assets and operations of CRSI and other non-core assets. 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 existing FCC guidelines, the corporation is subject to a limit of $200 million in short-term debt, a maximum long-term debt to total capital ratio of 45% and an interest coverage ratio of 2.3 to 1. The latter two guidelines are measured at year end. In October 1996, the FCC approved a temporary decrease in the interest coverage ratio to a minimum of 1.9 to 1, and an increase in the short-term debt limit to $325 million for the 1996 plan year and until the FCC acts on the corporation's 1997 capital plan. The corporation was in compliance with the $325 million short-term debt limit as of March 31, 1997. The corporation submitted its 1997 capitalization plan on April 30, 1997. As a result of restructuring actions being undertaken, the corporation expects to be in compliance with the unmodified guidelines at the applicable measurement dates. If the corporation were to fail to satisfy one or more of the FCC guidelines as of an applicable measurement date, the corporation would be required to seek advance FCC approval of future financing activities on a case-by-case basis. If such approval were not granted, the corporation could be required to reduce or reschedule planned capital investments, reduce cash outlays, reduce debt or sell assets. 13 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings See Note 6 of this Form 10-Q and Item 3 of the Corporation's 1996 Form 10-K, which are incorporated herein by reference. ITEM 2. Change in Securities None ITEM 3. Defaults Upon Senior Securities None ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 5. Other Information None ITEM 6. (a) Exhibits No. 11 - Computation of Earnings per Share No. 27 - Financial Data Schedule (b) Reports on Form 8-K Report dated February 11, 1997, reporting the Corporation's comments on the final report of the INTELSAT 2000 Working Party. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. COMSAT Corporation By /s/ Alan G. Korobov ------------------- Alan G. Korobov Controller Date: May 15, 1997 15
Exhibit 11 COMSAT CORPORATION AND SUBSIDIARIES Computation of Earnings Per Share Three Months Ended March 31, ---------------------------- In thousands, except per share amounts 1997 1996 - ------------------------------------------------------------------------------------------------------------------- PRIMARY Earnings (loss): Before extraordinary item $ (4,281) $ 9,327 Extraordinary loss (1,010) - ----------- ----------- Net income (loss) $ (5,291) $ 9,327 =========== =========== Shares: Weighted average number of common shares outstanding 48,948 47,904 Add shares issuable from assumed exercise of options - 643 ----------- ----------- Weighted average shares 48,948 48,547 =========== =========== Primary earnings (loss) per share: Before extraordinary item $ (0.09) $ 0.19 Extraordinary loss (0.02) - ----------- ----------- Net income (loss) $ (0.11) $ 0.19 =========== =========== ASSUMING FULL DILUTION Earnings (loss): Before extraordinary item $ (4,281) $ 9,327 Extraordinary loss (1,010) - ----------- ----------- Net income (loss) $ (5,291) $ 9,327 =========== =========== Shares: Weighted average number of common shares outstanding 48,948 47,904 Add shares issuable from assumed exercise of options - 846 ----------- ----------- Weighted average shares 48,948 48,750 =========== =========== Fully diluted earnings (loss) per share: Before extraordinary item $ (0.09) $ 0.19 Extraordinary loss (0.02) - ----------- ----------- Net income (loss) $ (0.11) $ 0.19 =========== ===========
16 EX-27 2 FINANCIAL DATA SCHEDULE
5 (Replace this text with the legend) 0000022698 COMSAT 1000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1.00 22,359 0 329,563 0 39,308 430,152 2,950,161 1,306,257 2,641,157 514,078 603,748 0 0 344,442 482,473 2,641,157 0 281,680 0 199,290 80,050 0 14,474 (4,172) 109 (4,281) 0 (1,010) 0 (5,291) (0.11) (0.11)
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