-----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, QKJ9gDA+aHf6y+zcxrWuUptzbbonTvCeWeU3hHXpIdNZ0wreBAC3acxqaXssnBf8 7zE3bqYG96XYzIF92vi2pg== 0000022698-97-000026.txt : 19970821 0000022698-97-000026.hdr.sgml : 19970821 ACCESSION NUMBER: 0000022698-97-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970730 FILED AS OF DATE: 19970814 DATE AS OF CHANGE: 19970819 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMSAT CORP CENTRAL INDEX KEY: 0000022698 STANDARD INDUSTRIAL CLASSIFICATION: 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: 97664140 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 FOR QUARTER ENDED JUNE 30, 1997 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 June 30, 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 [ ] 49,132,000 shares of the Registrant's common stock were outstanding as of June 30, 1997. PART I. FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS FOR THE CORPORATION (UNAUDITED) COMSAT CORPORATION AND SUBSIDIARIES Condensed Consolidated Income Statements
Quarter Ended June 30, Six Months Ended June 30, ---------------------- ------------------------- In thousands, except per share amounts 1997 1996 1997 1996 - - -------------------------------------------------------------------------------------------------------------- REVENUES $141,274 $134,130 $275,100 $264,639 --------- --------- --------- --------- Operating expenses: Cost of services 63,919 61,888 123,837 120,365 Depreciation and amortization 44,846 37,863 88,309 73,230 Research and development 2,304 2,633 3,794 4,823 General and administrative 6,793 5,529 12,597 12,618 --------- --------- --------- --------- Total operating expenses 117,862 107,913 228,537 211,036 --------- --------- --------- --------- OPERATING INCOME 23,412 26,217 46,563 53,603 Interest and other income (expense), net 798 (4,356) (210) (7,320) Interest expense, net of amounts capitalized (10,176) (8,103) (19,838) (15,613) --------- --------- --------- --------- Income from continuing operations before taxes, minority interest and extraordinary item 14,034 13,758 26,515 30,670 Income tax expense (5,483) (6,728) (10,254) (13,459) Minority interest in net losses of consolidated subsidiaries 547 1,302 936 2,263 --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 9,098 8,332 17,197 19,474 --------- --------- --------- --------- Discontinued operations, net of income tax: Loss from operations (5,192) (2,550) (17,572) (4,365) Loss on disposal (11,289) - (11,289) - --------- --------- --------- --------- Total discontinued operations (16,481) (2,550) (28,861) (4,365) Income (loss) before extraordinary item (7,383) 5,782 (11,664) 15,109 Extraordinary loss from early extinguishment of debt (net of tax) (2,936) - (3,946) - --------- --------- --------- --------- NET INCOME (LOSS) $(10,319) $ 5,782 $(15,610) $ 15,109 ========= ========= ========= ========= EARNINGS (LOSS) PER SHARE: Income from continuing operations $ 0.18 $ 0.17 $ 0.35 $ 0.40 Loss from discontinued operations (0.33) (0.05) (0.58) (0.09) Extraordinary loss (0.06) - (0.08) - --------- --------- --------- --------- Net income (loss) $ (0.21) $ 0.12 $ (0.31) $ 0.31 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. 2 COMSAT CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets
June 30, December 31, In thousands 1997 1996 - - ---------------------------------------------------------------------------------------------------------------- ASSETS - - ------ CURRENT ASSETS: Cash and cash equivalents $ 6,584 $ 7,659 Receivables 162,266 132,616 Other 18,473 18,402 Net assets of discontinued operations 176,329 386,506 ----------- ----------- Total current assets 363,652 545,183 ----------- ----------- Property and equipment (net of accumulated depreciation of $1,067,203 in 1997 and $1,027,437 in 1996) 1,324,308 1,322,985 Investments 87,209 124,442 Goodwill 12,801 13,189 Other assets 112,425 98,512 ----------- ----------- Total assets $1,900,395 $2,104,311 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY - - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ 10,376 $ 13,802 Commercial paper 161,014 17,993 Accounts payable and accrued liabilities 69,142 73,314 Due to related parties 32,554 42,562 Other 18,810 15,342 ----------- ----------- Total current liabilities 291,896 163,013 ----------- ----------- Long-term debt 466,630 578,379 Deferred income taxes and investment tax credits 124,977 131,827 Accrued postretirement benefit costs 51,350 50,423 Other long-term liabilities 137,339 134,523 Minority interest 5,256 4,329 Preferred Securities issued by subsidiary 200,000 200,000 STOCKHOLDERS' EQUITY: Common stock 346,914 340,691 Retained earnings 280,595 502,839 Treasury stock (1,377) (3,006) Other (3,185) 1,293 ----------- ----------- Total stockholders' equity 622,947 841,817 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,900,395 $2,104,311 =========== ===========
The accompanying notes are an integral part of these financial statements. 3 COMSAT CORPORATION AND SUBSIDIARIES Condensed Consolidated Cash Flow Statements
Six Months Ended June 30, ----------------------------- In thousands 1997 1996 - - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (15,610) $ 15,109 Adjustments to reconcile net income (loss) to cash flow of continuing operations: Depreciation and amortization 88,309 73,230 Extraordinary loss on extinguishment of debt 3,946 - Loss from discontinued operations 28,861 4,365 Changes in operating assets and liabilities (19,346) (1,622) Other (3,741) 4,023 ----------- ----------- Net cash provided by continuing operations 82,419 95,105 Net cash used by discontinued operations (5,442) (22,802) ----------- ----------- Net cash provided by operating activities 76,977 72,303 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (120,757) (120,241) Investments in unconsolidated businesses (10,092) (34,170) Proceeds from sale of investments 9,060 - Proceeds from note on sale of investment 6,809 - Insurance proceeds from satellite launch failure - 54,443 Decrease (increase) in INTELSAT ownership 20,986 (1,054) Decrease in Inmarsat ownership - 5,746 Other (4,425) 7,072 ----------- ----------- Net cash used in investing activities (98,419) (88,204) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued 5,792 8,066 Cash dividends paid (12,000) (18,753) Repayment/extinguishment of long-term debt (112,710) (8,460) Net short-term borrowings 143,021 - Repayment against company-owned life insurance policies (3,736) (51,443) Other - (16) ----------- ----------- Net cash provided by (used for) financing activities 20,367 (70,606) ----------- ----------- Net decrease in cash and cash equivalents (1,075) (86,507) Cash and cash equivalents, beginning of period 7,659 109,512 ----------- ----------- Cash and cash equivalents, end of period $ 6,584 $ 23,005 =========== ===========
The accompanying notes are an integral part of these financial statements. See non-cash dividend discussed in Note 2 to the 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. DISCONTINUED OPERATIONS The corporation placed Ascent Entertainment Group, Inc. (Ascent), its entertainment subsidiary, and substantially all of the assets and operations of COMSAT RSI, Inc. (CRSI), its manufacturing subsidiary, into discontinued operations during the second quarter of 1997. The condensed consolidated financial statements have been restated for all prior periods presented to reflect the results of operations and net assets of Ascent and CRSI as discontinued operations. Ascent Entertainment Group - - -------------------------- The corporation distributed its 80.67% ownership interest in Ascent through a tax-free dividend to shareholders on June 27, 1997 (the "Distribution"). COMSAT shareholders of record on June 19, 1997 received 0.4888 of a share of Ascent common stock for each share of COMSAT common stock owned. Ascent was placed in discontinued operations on May 16, 1997, the date on which the corporation's Board of Directors adopted a formal plan to effect the Distribution. The book value of the net assets of Ascent totaled approximately $195 million at June 27, 1997 and consisted of the following:
In millions - - -------------------------------------------------------------------- Current assets $ 89.2 Property and equipment, net 308.2 Intangible and other assets 343.3 Short-term debt 176.0 Other current liabilities 151.3 Long-term debt 50.0 Other non-current liabilities 168.8 -------- Net assets $ 194.6 ========
The non-cash dividend was recorded as an adjustment to retained earnings. 5 The operating results of the discontinued entertainment operations, net of minority interests, are summarized below. The loss on disposal includes Ascent's operating loss subsequent to May 16, 1997 through June 27, 1997 of $7.4 million, and costs of $4.1 million incurred by COMSAT to facilitate the distribution. The tax expense associated with the loss on disposal also includes a charge of $4.4 million to recognize an additional tax provision on deferred inter-company gains while Ascent was included in COMSAT's consolidated tax return. COMSAT RSI, Inc. - - ---------------- CRSI was placed in discontinued operations as of June 30, 1997. As part of its strategic plan, the corporation has announced that it intends to sell substantially all of the assets and operations of CRSI. See "Management's Discussion and Analysis --Outlook." CRSI designs, manufacturers and integrates earth stations as well as wireless and advanced antenna systems. The operating results of the discontinued operations for the three and six months ended June 30, 1997 and June 30, 1996 are summarized below.
Three Months Ended June 30, ------------------------------------------------------ In millions 1997 1996 - - ------------------------------------------------------------------------------------------------------------------ Ascent CRSI Total Ascent CRSI Total ------- ------- ------- ------- ------- ------- Revenues $ 87.7 $ 61.1 $148.8 $ 56.0 $ 49.0 $105.0 ======= ======= ======= ======= ======= ======= Income (loss) from operations before taxes and minority interest $ (6.7) $ (2.7) $ (9.4) $ (8.4) $ 2.9 $ (5.5) Income tax benefit (expense) 0.6 1.1 1.7 2.6 (0.9) 1.7 Minority interest 2.2 0.3 2.5 1.1 0.1 1.2 ------- ------- ------- ------- ------- ------- Income (loss) from operations (3.9) (1.3) (5.2) (4.7) 2.1 (2.6) ------- ------- ------- ------- ------- ------- Loss on disposal before taxes (11.5) (11.5) Income tax benefit (expense) (2.0) (2.0) Minority interest 2.2 2.2 ------- ------- ------- Loss on disposal (11.3) - (11.3) ------- ------- ------- Income (loss) on discontinued operations $(15.2) $ (1.3) $(16.5) $ (4.7) $ 2.1 $ (2.6) ======= ======= ======= ======= ======= =======
6
Six Months Ended June 30, ------------------------------------------------------- In millions 1997 1996 - - ------------------------------------------------------------------------------------------------------------------- Ascent CRSI Total Ascent CRSI Total ------- ------- ------- ------- ------- -------- Revenues $177.5 $121.3 $298.8 $128.4 $ 94.7 $223.1 ======= ======= ======= ======= ======= ======= Income (loss) from operations before taxes and minority interest $(34.7) $(0.4) $(35.1) $(13.8) $ 4.9 $ (8.9) Income tax benefit (expense) 6.2 0.2 6.4 4.2 (1.5) 2.7 Minority interest 10.7 0.4 11.1 1.7 0.1 1.8 ------- ------ ------- ------- ------- ------- Income (loss) from operations (17.8) 0.2 (17.6) (7.9) 3.5 (4.4) ------- ------ ------- ------- ------- ------- Loss on disposal before taxes (11.5) (11.5) Income tax benefit (expense) (2.0) (2.0) Minority interest 2.2 2.2 ------- ------ ------- Loss on disposal (11.3) - (11.3) ------- ------ ------- Income (loss) on discontinued operations $(29.1) $ 0.2 $(28.9) $(7.9) $ 3.5 $ (4.4) ======= ====== ======= ====== ======= =======
The net assets of the discontinued operations are summarized below:
June 30, 1997 December 31, 1996 ------------- ---------------------------------- In millions CRSI Ascent CRSI Total - - ------------------------------------------------------------------------------------------------------------------ Current assets $184.5 $ 83.4 $174.4 $257.8 Fixed assets, net 32.0 301.5 32.3 333.8 Intangible and other assets 14.4 12.9 351.4 364.3 Short-term debt 0.3 0.4 145.5 145.9 Other current liabilities 44.4 39.3 143.6 182.9 Long-term debt 6.6 52.0 5.1 57.1 Other non-current liabilities 3.3 4.6 178.9 183.5 ------- ------- ------- ------- Net assets discontinued operations $176.3 $216.3 $170.2 $386.5 ======= ======= ======= =======
3. 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 June 30, 1997. As a result of the change in ownership, the corporation is expected to receive a total of $23.0 million, of which $21.0 million was received during the first six months of 1997. The corporation's 23% ownership share of Inmarsat as of June 30, 1997 is unchanged from December 31, 1996. 4. INVESTMENTS In January 1997, the corporation sold its remaining interest in Philippine Global Communications, Inc. (PhilCom) at book value in exchange 7 for cash and a collateralized note receivable totaling $34.3 million, to be paid in installments with interest through December 31, 1998. The corporation received cash proceeds of $8.5 million in the first quarter of 1997 and $8.8 million in July 1997. In the second quarter of 1997, the corporation sold certain marketable equity securities and recognized a $2.0 million pre-tax gain. 5. 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 the description of the corporation's "Business" and Notes 10 and 11 to the corporation's 1996 financial statements included as part of the corporation's 1996 Form 10-K and the "Management's Discussion and Analysis -- Outlook" section of the Form 10-Q. 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 of those matters are discussed in Notes 10 and 11 to the corporation's 1996 financial statements and "Item 3 - Legal Proceedings" included as part of the corporation's 1996 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 in an anti-trust suit brought by PanAmSat Corporation and dismissed the complaint in its entirety. PanAmSat subsequently filed an appeal. In April 1997, the U.S. Court of Appeals for the Second Circuit denied PanAmSat's appeal. 6. 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. The corporation repurchased $89.5 million of the 8.125% notes and $10.0 million of its 7.7% medium term notes using proceeds from short-term debt. The debt extinguishment loss related to the repurchases was $4.6 million ($2.9 million after tax) and $6.2 million ($3.9 million after tax) for the three and six months ended June 30, 1997, respectively. 8 7. NEW ACCOUNTING PRONOUNCEMENTS 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 15, 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 is not expected to have a material effect on the corporation's reported net income (loss) per common share. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No.130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments and the related disclosures about products and services, geographic areas, and major customers. Both statements are effective for financial statements issued for fiscal years beginning after December 15, 1997. The corporation is reviewing what effect the new standards will have on future reporting; however, the new standards will not have any material effect on the corporation's financial condition. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1997 ANALYSIS OF OPERATIONS Consolidated Operations - - ----------------------- During the second quarter of 1997, the corporation placed both Ascent Entertainment Group, Inc. (Ascent) and substantially all of COMSAT RSI, Inc. (CRSI) in discontinued operations. The condensed consolidated financial statements (unaudited) have been restated for all periods presented to reflect them as discontinued operations. Continuing Operations - - --------------------- In the second quarter of 1997, the corporation realigned its business segments and for that and subsequent periods will report operating results from its continuing operations in two segments -- Satellite Services and Network Services. The Satellite Services segment includes both COMSAT World Systems (CWS) and COMSAT Mobile Communications (CMC). The Network Services segment includes COMSAT International (CI), COMSAT Laboratories and Government Programs. COMSAT Laboratories and Government Programs results now include certain non-manufacturing business that was previously reported as part of CRSI. Consolidated revenues from continuing operations in the second quarter were $141.3 million, an increase of $7.2 million over the second quarter of 1996. The increase came predominantly in the Network Services segment. Revenues from continuing operations in the six months ended June 30, 1997 were $275.1 million, $10.5 million higher than the same period last year. This improvement was the result of a 50% increase in Network Services revenues, which was partially offset by a decrease in Satellite Services due to lower revenues in CMC. Operating income from continuing operations for the second quarter and year-to-date were $23.4 million and $46.6 million, respectively, which was below the comparable periods of last year by $2.8 million and $7.0 million. The declines in both periods resulted from lower operating income in CMC offset, in part, by improvements in the Network Services segment and CWS. Also affecting operating income in the second quarter were expenses of $1.8 million related to a potential proxy contest which was settled in the second quarter and litigation costs of $1.5 million related to an action brought against certain of the proxy contestants and the corporation's former chief executive officer to enforce certain provisions of the Communications Satellite Act of 1962, which action was dismissed in connection with settlement of the proxy contest. For additional information concerning settlement of the proxy contest and such litigation, see the corporation's Form 8-K dated June 9, 1997. Interest and other income (expense) for the second quarter and year-to-date were income of $800,000 and expense of $200,000, respectively, compared to net expense of $4.4 million and $7.3 million for the same periods in 1996. The improvements in both periods stems primarily from the impact of sales of equity investments and increased interest income. 10 Interest expense, net of amounts capitalized, for the second quarter and first six months of 1997 was $10.2 million and $19.8 million, respectively, which was $2.1 million and $4.2 million higher than the comparable periods last year. The increases reflect reduced interest capitalized due to the completion of several satellite projects. The consolidated tax rate on income from continuing operations before taxes, minority interest and extraordinary item, for both the second quarter and year-to-date, has improved over the comparable periods of last year principally because of a net reduction in non-deductible items. The change in minority interest in net losses of consolidated subsidiaries primarily reflects the increased ownership of CI operations in Russia. Income from continuing operations before extraordinary item for the second quarter was $9.1 million ($0.18 per share), which was $800,000 ($0.01 per share) better than the second quarter of 1996. Year-to-date income from continuing operations before extraordinary item was $17.2 million ($0.35 per share), $2.3 million ($0.05 per share) below the same period last year. Extraordinary loss from early extinguishment of debt, net of tax, for the second quarter and year-to-date was $2.9 million ($0.06 per share) and $3.9 million ($0.08 per share), respectively. This represents the costs incurred from the corporation's repurchase of $89.5 million of its 8.125% notes and $10.0 million of its Medium Term Notes (see Note 6 to the financial statements). Of the 8.125% notes purchased through a fixed-spread tender offer, $66.5 million was tendered during the second quarter of 1997. Discontinued Operations - - ----------------------- The loss from discontinued operations, net of tax, for the second quarter was $16.5 million ($0.33 per share) compared to a loss of $2.6 million ($0.05 per share) for the same period last year. For the six months ended June 30, 1997, the loss was $28.9 million ($0.58 per share) versus a loss of $4.4 million ($0.09 per share) in the first half of 1996. Discontinued operations include both Ascent and substantially all of CRSI. Ascent was placed in discontinued operations on May 16, 1997 when COMSAT's Board of Directors approved a plan to distribute the corporation's 80.67% interest in Ascent to COMSAT's shareholders. On June 27, 1997, COMSAT completed the spin-off of Ascent as a tax-free dividend to COMSAT's shareholders. The loss on disposal of Ascent ($11.3 million) includes COMSAT's share of Ascent's operating losses subsequent to May 16, 1997 through June 27, 1997, costs incurred by COMSAT to facilitate the distribution and additional tax provision recognized on deferred inter-company gains when COMSAT divested its ownership in Ascent. See Note 2 to the financial statements. COMSAT placed substantially all of CRSI in discontinued operations on June 30, 1997. The results reported for CRSI for the second quarter and first six months of 1997 include the results of their operations. See "Management Discussions and Analysis --Outlook" and Note 2 to the financial statements. 11 Consolidated Results - - -------------------- On a consolidated basis, including discontinued operations and the extraordinary item, the net loss for the second quarter was $10.3 million, or $0.21 per share, compared with net income of $5.8 million, or $0.12 per share, in the same period last year. Through the first six months of 1997, the consolidated net loss was $15.6 million, or $0.31 per share, versus net income of $15.1 million, or $0.31 per share, in the same period of last year. Segment Operating Results - - ------------------------- As noted above, effective as of the second quarter of 1997, the corporation is reporting operating results from continuing operations in two segments: Satellite Services and Network Services. RESULTS BY SEGMENT:
Quarter Ended June 30, Six Months Ended June 30, ---------------------- ------------------------- In millions 1997 1996 1997 1996 - - ---------------------------------------------------------------------------------------------------- REVENUES - - -------- Satellite Services: World Systems $ 66.5 $ 67.5 $133.3 $133.1 Mobile Communications 38.5 39.3 73.7 81.9 ------- ------- ------- ------- Total Satellite Services 105.0 106.8 207.0 215.0 ------- ------- ------- ------- Network Services: International 21.0 12.3 37.4 24.2 Laboratories 9.8 5.0 17.9 10.1 Government Programs 14.9 13.2 29.6 22.1 ------- ------- ------- ------- Total Network Services 45.7 30.5 84.9 56.4 ------- ------- ------- ------- Eliminations and other (9.4) (3.2) (16.8) (6.8) ------- ------- ------- ------- Total revenues $141.3 $134.1 $275.1 $264.6 ======= ======= ======= ======= OPERATING INCOME (LOSS) - - ----------------------- Satellite Services: World Systems $ 27.2 $ 24.1 $ 55.3 $ 49.7 Mobile Communications 5.4 11.4 10.9 25.3 ------- ------- ------- ------- Total Satellite Services 32.6 35.5 66.2 75.0 ------- ------- ------- ------- Network Services: International (2.1) (4.6) (6.6) (8.5) Laboratories (0.2) (0.9) (0.3) (1.9) Government Programs 0.5 1.5 0.8 2.1 ------- ------- ------- ------- Total Network Services (1.8) (4.0) (6.1) (8.3) ------- ------- ------- ------- Total segment operating income 30.8 31.5 60.1 66.7 General and administrative expense (6.8) (5.5) (12.6) (12.6) Other (0.6) 0.2 (0.9) (0.5) ------- ------- ------- ------- Total operating income $ 23.4 $ 26.2 $ 46.6 $ 53.6 ======= ======= ======= =======
12 Satellite Services - - ------------------ Revenues in the Satellite Services segment in the second quarter and year-to-date were $105.0 million and $207.0 million, respectively, which was $1.8 million and $8.0 million below the same periods last year. Operating income for the second quarter and first six months of 1997 was $32.6 million and $66.2 million, respectively, a decline of $2.9 million and $8.8 million from the same periods of 1996. CWS revenues for the second quarter and first six months of 1997 at $66.5 million and $133.3 million, respectively, which was 1% below the second quarter of 1996 and was essentially unchanged from the first six months of last year. Increased revenues from Very Small Aperture Terminal (VSAT) leases and International Business Service (IBS) traffic were offset by declines in full-time voice and fiber-optic cable restoration revenues. The lower voice revenues stemmed primarily from rate reductions in long-term carrier contracts. Operating income for the second quarter was $27.2 million and for the year-to-date was $55.3 million, up 13% and 11% from the comparable periods last year. The increase in the second quarter primarily reflects the recovery of litigation costs. In addition, the year-to-date increase reflects improved earnings on carrier-to-carrier contracts, offset in part, by increased depreciation from placing in service two INTELSAT satellites in the second half of 1996 and the first half of 1997. Revenues in CMC were $38.5 million in the second quarter, a decline of 2% compared to the second quarter of last year. For the year-to-date CMC revenues were $73.7 million, 10% below the same period of last year. The lower revenues were primarily the result of decreases in analog telephone transmissions and lower volume in the bulk service contract with IDB Mobile Communications (IDB). CMC's operating income for the second quarter was $5.4 million and $10.9 million year-to-date, down $6.0 million and $14.4 million from the respective periods of 1996. The lower 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. Network Services - - ---------------- Network Services segment revenues in the second quarter and year-to-date were $45.7 million and $84.9 million, respectively, which was $15.2 million and $28.5 million better than the same periods of 1996. The operating losses in the second quarter and for the first six months of 1997 were $1.8 million and $6.1 million, respectively, an improvement of $2.2 million for both periods over last year. CI's revenues in the second quarter and year-to-date were $21.0 million and $37.4 million, respectively, 70% and 54% better than the same periods of last year. Revenue increases were driven primarily by advances in CI operations in Argentina and Brazil. CI's operating loss in the second quarter improved from $4.6 million in the second quarter of 1996 to $2.1 million in the same period this year because of increases in revenues in the Americas region and improved operational performance in the Russian company (BelCom). For the first six months of 1997, the operating loss of $6.6 million, was $1.9 million better than the comparable period of last year. CI's revenue commitments under long-term contracts were $254 million at June 30, 1997, compared to $220 million at December 31, 1996. 13 In May 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. In January 1997, CI sold its remaining interests in Philippine Global Communications, Inc. (PhilCom) at book value (see Note 4 to the financial statements). COMSAT Laboratories' revenues for the second quarter and year-to-date were $9.8 million and $17.9 million, up 95% and 78% compared with the respective periods of 1996. The increases were primarily driven by improvements in technical consulting revenues. The operating loss for the second quarter and the first six months was $200,000 and $300,000, respectively, which was $700,000 and $1.6 million better than the same periods in 1996. The improved operating performance was as a result of increased revenues and lower R&D expenditures. The Laboratories' backlog at June 30, 1997 was $24 million, which was 65% higher than at the same time last year. Government Programs revenues in the second quarter of 1997 were $14.9 million, which was $1.7 million better than the same period of last year. For the year-to-date, revenues were $29.6 million, which was $7.5 million higher than last year. The increased revenues were related to the Commercial Satellite Communications Initiative (CSCI) contract and were offset by lower revenues from two Marisat satellites that ceased operating in the second half of 1996 after 20 years of operations. Operating income for the second quarter and year-to-date was $500,000 and $800,000, respectively, which was $1.0 million and $1.3 million below the comparative periods in 1996. The lower operating income was primarily the result of the impact of lower revenues from the loss of the Marisat satellites and increased costs associated with the CSCI contract. 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. In March 1997, COMSAT's Board of Directors approved a strategic plan to refocus the corporation on international satellite services and digital networking services and technology as discussed in the corporation's 1996 Annual Report on Form 10-K. As a part of the strategic plan the corporation reaffirmed its decision to divest its ownership interest in Ascent, sell substantially all of the assets and operations of CRSI, and other non-core assets. On June 27, 1997, the corporation distributed its ownership interest in Ascent to its shareholders by means of a spin-off. The company expects to complete the sale of substantially all of CRSI by the end of 1997. It is anticipated that CRSI will be sold in at least two pieces. The timing, estimated sale proceeds and completion of those sales, however, are subject to, and could be affected adversely by, factors which are not wholly within the control of the corporation (e.g., completion of due diligence by the prospective purchasers, negotiation of definitive agreements on mutually acceptable 14 terms, receipt of any necessary third party consents and satisfaction of any conditions which may be agreed to by the parities as part of the definitive terms). The Board of Directors declared a quarterly dividend of $0.05 per share on the corporation's common stock in the second quarter, which represents a reduction from the $0.195 per share paid in recent quarters. The Board of Directors determines the dividend on the corporation's common stock quarterly based on the corporation's earnings from continuing operations, capital requirements and other factors. In April 1997, the corporation petitioned the Federal Communications Commission (FCC) for classification as a non-dominant carrier and for regulatory forbearance. The petition requests that limits on the company's rate-of-return and structural separation requirements be removed and that CWS be allowed to change its tariff rates and introduce new services over the INTELSAT satellite system on one-day notice. Satellite Services - - ------------------ Satellite Services operating income is expected to continue to be lower in 1997 than in 1996 due to anticipated decreased earnings at CMC. CWS's 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 and the recovery in the second quarter of 1997 of certain litigation costs, 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 compared to 1996, because of continuing competition among existing Inmarsat service providers, increased depreciation associated with Inmarsat-3 satellites placed in service during 1996 and 1997 and costs related to Planet 1SM service, which began commercial operations in January 1997. Network Services - - ---------------- Network Services 1997 operating losses are expected to be approximately at the same level as last year, excluding the impact to operating income of $7.8 million in revenues at COMSAT Laboratories associated with the resolution of a patent dispute that was recorded in the third quarter of 1996. CI's operating loss in 1997 is expected to improve over 1996. Improvements in CI's more mature companies are expected to be partially offset by start-up costs in CI's newer companies. The corporation is in the process of either seeking a strategic partner or selling the non-strategic portions of BelCom's operations in Russia and in the Commonwealth of Independent States. It is anticipated that this process will be completed before the end of 1997. Excluding the impact to operating income from the patent revenues noted above, COMSAT Laboratories operating loss in 1997 is expected to be higher than 1996. COMSAT Laboratories results now include Satellite Construction Monitoring (SCM) which was previously reported as a part of CRSI. SCM's operating income in 1997 is expected to be lower than 1996. 15 Government Programs operating income is expected to be lower in 1997 than last year because of the loss of revenues related to two 20-year old Marisat satellites which ceased operation in the second half of 1996, and costs associated with the CSCI contract. LIQUIDITY AND CAPITAL RESOURCES The primary sources of cash in the six months of 1997 were operations and short-term borrowings. Cash was used primarily for the purchase of property and equipment. The corporation's working capital at June 30, 1997 was $71.8 million, which was $310.4 million lower than at December 31, 1996. The decrease in working capital during the first six months of 1997 was primarily the result of the reduction in current assets of $216.3 million due to the spin-off of Ascent on June 27, 1997 and the use of commercial paper to repurchase long-term debt (see Note 6 to the financial statements). 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 $161.0 million in borrowings outstanding at June 30, 1997. 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. A $200 million credit agreement, expiring in 1999, backs up the corporation's commercial paper program. During the first six months of 1997, the corporation repurchased a total of $89.5 million of its 8.125% notes due 2004 using proceeds from short-term debt. This reduced the total outstanding of the 8.125% notes from $160.0 million at December 31, 1996 to $70.5 million June 30, 1997. In addition, the corporation in the second quarter 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 to $64.0 million at June 30, 1997. The corporation had $36 million remaining under a $100 million medium-term note program at June 30, 1997. The medium-term note program is part of a $200 million debt securities shelf registration program initiated in 1994. The corporation's capital structure and debt-financing activities are regulated by the FCC. The corporation is required to submit a capitalization plan to the FCC for review annually. In August 1997, the FCC approved the corporation's 1997 capitalization plan. Under the approved FCC guidelines, the corporation is subject to a limit of $200 million in short-term debt, a maximum long-term debt to total capital ratio of 45% and an interest coverage ratio of 2.3 to 1. The latter two guidelines are measured at year end. The corporation was in compliance with the $200 million short-term debt limit as of June 30, 1997. The corporation expects to be in compliance with the other guidelines at the year-end 1997 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. 16 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- See Note 5 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 April 21, 1997, reporting certain amendments to the Corporation's By-laws and scheduling the Annual Meeting of Shareholders for August 15, 1997. Report dated April 30, 1997, reporting the resignation of C. J. Silas as chairman and a member of the Board of Directors and the election of Edwin I. Colodny to serve as chairman. Report dated May 16, 1997, reporting the Board of Directors approval of a plan to distribute the corporation's 80.67% ownership interest in Ascent Entertainment Group, Inc. to its shareholders through a tax-free dividend. Report dated June 9, 1997, reporting a settlement agreement with Herbert A. Denton, Guy P. Wyser-Pratte and certain other persons and entities (collectively, the "Group"), pursuant to which existing disputes between COMSAT and the Group were resolved. 17 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: August 14, 1997 18 Exhibit 11 COMSAT CORPORATION AND SUBSIDIARIES Computation of Earnings Per Share
Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- In thousands, except per share amounts 1997 1996 1997 1996 - - ----------------------------------------------------------------------------------------------------------------------- PRIMARY - - ------- Earnings (loss): Income from continuing operations $ 9,098 $ 8,332 $ 17,197 $ 19,474 Loss from discontinued operations (16,481) (2,550) (28,861) (4,365) Extraordinary loss (2,936) - (3,946) - --------- --------- --------- --------- Net income (loss) $(10,319) $ 5,782 $(15,610) $ 15,109 ========= ========= ========= ========= Shares: Weighted average number of common shares outstanding 49,152 48,267 49,050 48,086 Add shares issuable from assumed exercise of options 460 1,078 584 859 --------- --------- --------- --------- Weighted average shares 49,612 49,345 49,634 48,945 ========= ========= ========= ========= Primary earnings (loss) per share: Income from continuing operations $ 0.18 $ 0.40 $ 0.17 $ 0.35 Loss from discontinued operations (0.33) (0.05) (0.58) (0.09) Extraordinary loss (0.06) - (0.08) - --------- --------- --------- --------- Net income (loss) $ (0.21) $ 0.12 $ (0.31) $ 0.31 ========= ========= ========= ========= ASSUMING FULL DILUTION - - ---------------------- Earnings (loss): Income from continuing operations $ 9,098 $ 8,332 $ 17,197 $ 19,474 Loss from discontinued operations (16,481) (2,550) (28,861) (4,365) Extraordinary loss (2,936) - (3,946) - ---------- --------- --------- --------- Net income (loss) $(10,319) $ 5,782 $(15,610) $ 15,109 ========= ========= ========= ========= Shares: Weighted average number of common shares outstanding 49,152 48,267 49,050 48,086 Add shares issuable from assumed exercise of options 529 1,085 609 1,060 --------- --------- --------- --------- Weighted average shares 49,681 49,352 49,659 49,146 ========= ========= ========= ========= Fully diluted earnings (loss) per share: Income from continuing operations $ 0.18 $ 0.17 $ 0.35 $ 0.40 Loss from discontinued operations (0.33) (0.05) (0.58) (0.09) Extraordinary loss (0.06) - (0.08) - --------- --------- --------- --------- Net income (loss) $ (0.21) $ 0.12 $(0.31) $ 0.31 ========= ========= ========= =========
19 EX-27 2 FINANCIAL DATE SCHEDULE
5 (Replace this text with the legend) 0000022698 COMSAT 1000 U.S. Dollars 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1.00 6,584 0 162,266 0 0 363,652 2,391,511 1,067,203 1,900,395 291,896 466,630 0 0 346,914 276,033 1,900,395 0 275,100 0 123,837 104,700 0 19,838 27,451 (10,254) 17,197 (28,861) (3,946) 0 (15,610) (0.31) (0.31)
-----END PRIVACY-ENHANCED MESSAGE-----