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 September 30, 1994
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
incorporate 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
47,895,244 shares of the Registrant's common stock were
outstanding as of September 30, 1994.
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<PAGE>
PART I.FINANCIAL INFORMATION
Item 1.Interim Financial Statements for the Corporation (Unaudited)
COMSAT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $200,771 $179,320 $609,127 $559,779
-------- -------- -------- --------
Operating Expenses:
Cost of Services 106,148 94,694 333,491 305,844
Depreciation and Amortization 42,572 34,884 122,880 104,221
Research and Development 4,279 3,999 11,228 11,277
General and Administrative 5,859 5,760 16,584 16,258
Merger and Integration Costs 477 - 4,741 -
-------- -------- -------- --------
Total Operating Expenses 159,335 139,337 488,924 437,600
-------- -------- -------- --------
Operating Income 41,436 39,983 120,203 122,179
Interest and Other Income, Net 1,089 3,546 2,773 5,780
Interest Expense, Net of Amounts Capitalized (7,423) (5,407) (18,576) (19,033)
-------- -------- -------- --------
Income Before Taxes and Cumulative Effect
of Accounting Change 35,102 38,122 104,400 108,926
Income Tax Expense (13,704) (18,677) (41,204) (45,908)
-------- -------- -------- --------
Income Before Cumulative Effect of
Accounting Change 21,398 19,445 63,196 63,018
Cumulative Effect of Accounting Change for
Income Taxes - - - 1,925
-------- -------- -------- --------
Net Income $ 21,398 $ 19,445 $ 63,196 $ 64,943
======== ======== ======== ========
Earnings Per Share:
Primary:
Before Cumulative Effect of
Accounting Change $0.45 $0.41 $1.34 $1.34
Cumulative Effect of
Accounting Change - - - 0.04
-------- -------- -------- --------
Net Income $0.45 $0.41 $1.34 $1.38
======== ======== ======== ========
Fully Diluted:
Before Cumulative Effect of
Accounting Change $0.45 $0.41 $1.33 $1.34
Cumulative Effect of
Accounting Change - - - 0.04
-------- -------- -------- --------
Net Income $0.45 $0.41 $1.33 $1.38
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 15,825 $ 16,230
Receivables 209,647 210,182
Inventories 21,110 19,328
Other 24,124 28,206
---------- ----------
Total Current Assets 270,706 273,946
---------- ----------
Property and Equipment (Net of
accumulated depreciation
of $956,807 in 1994 and
$858,008 in 1993) 1,398,674 1,332,432
Investments 69,706 14,395
Goodwill 40,697 35,957
Franchise Rights 39,615 41,084
Other Assets 62,637 75,699
---------- ----------
Total Assets $1,882,035 $1,773,513
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term
Obligations $5,759 $76,915
Current Notes Payable 171,081 47,233
Accounts Payable and Accrued Liabilities 95,159 116,140
Due to Related Parties 23,533 56,601
Other 10,355 6,749
---------- ----------
Total Current Liabilities 305,887 303,638
---------- ----------
Long-Term Debt 443,302 410,550
Deferred Income Taxes and Investment
Tax Credits 118,705 103,619
Accrued Postretirement Benefit Costs 51,356 50,014
Other Long-Term Liabilities 125,341 120,879
---------- ----------
Total Liabilities 1,044,591 988,700
---------- ----------
Minority Interest 25,066 21,373
---------- ----------
Stockholders' Equity:
Common Stock 309,441 311,506
Retained Earnings 526,835 488,090
Treasury Stock (12,537) (21,473)
Other (11,361) (14,683)
---------- ----------
Total Stockholders' Equity 812,378 763,440
---------- ----------
Total Liabilities and
Stockholders' Equity $1,882,035 $1,773,513
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1994 1993
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 63,196 $ 64,943
Adjustment for Noncash Depreciation
and Amortization 122,880 104,221
Changes in Operating Assets and Liabilities (21,935) 2,776
Other (1,942) (2,249)
-------- --------
Net Cash Provided by Operating Activities 162,199 169,691
Cash Flows from Investing Activities:
Purchase of Property and Equipment (206,795) (159,095)
Decrease in INTELSAT Ownership 12,950 14,803
Decrease in Inmarsat Ownership 3,517 4,686
Investments in Unconsolidated Businesses (54,528) (7,370)
Other (13,217) (966)
-------- --------
Net Cash Used in Investing Activities (258,073) (147,942)
Cash Flows from Financing Activities:
Common Stock Issued 5,287 16,408
Cash Dividends Paid (24,433) (22,564)
Proceeds from Issuance of Long-Term Debt 40,323 32,747
Repayment of Long-Term Debt (75,641) (37,646)
Net Short-Term Borrowings 117,684 3,264
Borrowings Against Company-Owned Life
Insurance Policies 32,013 -
Other - (4,266)
-------- --------
Net Cash Provided by (Used for)
Financing Activities 95,233 (12,057)
-------- --------
Effect of Exchange Rate Changes on Cash 236 (163)
-------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents (405) 9,529
Cash and Cash Equivalents, Beginning of Period 16,230 11,777
-------- --------
Cash and Cash Equivalents, End of Period $ 15,825 $ 21,306
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE>
COMSAT CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Financial Statement Presentation
These financial statements include the accounts of COMSAT
Corporation and its majority owned subsidiaries (the
"corporation") and reflect all adjustments that are, in the
opinion of management, necessary to fairly present the results of
the periods covered. These financial statements should be read
in conjunction with the consolidated financial statements of the
corporation for the year ended December 31, 1993 as restated for
the merger accounted for as a pooling of interests (see Note 2).
The corporation filed a Form 8-K/A dated June 8, 1994 with the
Securities and Exchange Commission containing supplemental
financial statements as restated for the merger. References
hereafter to the corporation's 1993 financial statements refer to
the restated financial statements contained in such Form 8-K/A.
Certain prior period amounts have been reclassified to conform
with the current period's presentation.
2. Merger with Radiation Systems, Inc.
Effective 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 was issued in this
transaction. The merger transaction costs (consisting primarily
of investment banking and legal fees) and expenses of integrating
the two companies (consisting primarily of employee severance
costs) have resulted in charges totalling $4.7 million ($4.4
million after tax, or $0.09 per share) in the second and third
quarters of 1994. Most of these costs are not expected to be
deductible for income tax purposes, accordingly, the consolidated
tax provision includes the effect of deductible expenses only.
Integration efforts are still in process and the corporation
expects to record additional charges in the fourth quarter of
1994 related to integration and transition plans.
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The merger has been accounted for as a pooling of interests.
Accordingly, the accompanying financial statements have been
restated for all periods presented 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. In addition, the
accompanying financial statements reflect certain adjustments to
conform the period in which SFAS No. 109 was adopted. There were
no significant intercompany transactions between the two
companies prior to the merger.
COMSAT acquired 404,500 shares of RSi common stock for
$5,098,000 in 1993. These shares were accounted for as treasury
stock on the December 31, 1993 balance sheet. These shares, in
addition to RSi's treasury shares totaling $3,064,000, were
retired upon consummation of the merger.
Operating results of the separate companies for the periods
prior to the merger and through June 30, 1994 are as follows:
<TABLE>
<CAPTION>
Six Months Three Months Nine Months
In thousands, except Ended Ended Ended
per share amounts June 30, 1994 Sept. 30, 1993 Sept. 30, 1993
- -------------------- ------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
COMSAT $ 337,436 $ 152,519 $ 472,945
RSi 70,920 26,801 86,834
--------- --------- ---------
$ 408,356 $ 179,320 $ 559,779
========= ========= =========
Income Before Cumulative
Effect of Accounting Change:*
COMSAT $ 39,217 $ 17,434 $ 55,897
RSi 6,695 2,011 7,121
--------- --------- ---------
$ 45,912 $ 19,445 $ 63,018
========= ========= =========
Net Income:*
COMSAT $ 39,217 $ 17,434 $ 57,135
RSi 6,695 2,011 7,808
-------- --------- ---------
$ 45,912 $ 19,445 $ 64,943
========= ========= =========
Earnings Per Share:
Income Before Cumulative Effect of
Accounting Change:*
Before Merger $ 0.96 $ 0.43 $ 1.38
After Merger $ 0.97 $ 0.41 $ 1.34
Net Income:*
Before Merger $ 0.96 $ 0.43 $ 1.41
After Merger $ 0.97 $ 0.41 $ 1.38
</TABLE>
* Excludes $4.3 million of merger and integration costs ($4.1 million
after tax, or $0.08 per share) recorded in the second quarter of 1994.
Page 6
<PAGE>
3. Insurance Proceeds
Revenues include business interruption insurance proceeds of
$0.9 million, $1.3 million and $0.8 million in the first, second
and third quarters of 1993, respectively, and $4.8 million in the
second quarter of 1994. These proceeds are from insurance claims
related to tornado damage sustained at the corporation's Largo,
Florida facility in 1992.
4. INTELSAT and Inmarsat Share Changes
The corporation decreased its ownership share of INTELSAT
from 20.9% at December 31, 1993 to 20.1% as of September 30,
1994. The corporation received cash proceeds of $12.9 million
and has a $0.6 million receivable for the balance due.
The corporation also decreased its ownership share of
Inmarsat from 23.0% at December 31, 1993 to 22.4% as of September
30, 1994. The corporation received cash proceeds of $3.5 million
and has a $0.1 million receivable for the balance due.
5. Inventories
Inventories, stated at the lower of cost (first-in, first-
out) or market, consist of the following (in thousands):
September 30, 1994 December 31, 1993
------------------ -----------------
Finished Goods $ 6,343 $ 4,705
Work in Progress 9,287 8,346
Raw Materials 5,480 6,277
-------- --------
Total $ 21,110 $ 19,328
======== ========
6. Investments
In June 1994, the corporation acquired approximately a 17%
interest in Philippine Global Communications, Inc. (PhilCom), a
provider of international communications services in the
Philippines, for $42.0 million. The corporation records its
share of PhilCom's income or losses using the "equity method" of
accounting.
7. Debt
In March 1994, INTELSAT issued $200.0 million of 6.625%
notes due March 22, 2004. Interest is payable annually in
arrears. The corporation has recorded its share of these notes
payable.
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<PAGE>
The corporation increased its commercial paper program to
$200.0 million in March 1994. The corporation had $169.0 million
in commercial paper borrowings at September 30, 1994 in addition
to the corporation's $2.1 million share of INTELSAT's commercial
paper borrowings.
The corporation repaid the $70.0 million balance of its
9.55% notes in April 1994. This amount was classified as a
current liability in the December 31, 1993 balance sheet.
In July 1994, the corporation filed a shelf registration
statement with the SEC to issue up to $200.0 million of debt
securities. The corporation also filed a prospectus supplement
with the SEC to issue up to $100.0 million of such debt
securities under a "medium-term note program." The corporation
will issue such notes as needed in the future. The proceeds will
be used for general corporate purposes, which may include the
repayment of long-term and short-term debt.
8. Litigation
As discussed in Note 9 to the corporation's 1993 financial
statements, the corporation is engaged in an antitrust suit filed
by Pan American Satellite (PanAmSat). Discovery in the suit
ended on November 1, 1994, and the corporation plans to file a
motion for summary judgment by the end of 1994. 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 brought by SpectraVision, Inc. against its
COMSAT Video Enterprises, Inc. and On Command Video Corporation
subsidiaries as discussed in Note 9 to the corporation's 1993
financial statements. In November 1994, a federal judge
dismissed the remaining patent claim, leaving one copyright issue
unresolved. In the opinion of management, the claim is without
merit and the ultimate resolution of this issue will not have a
material effect on the corporation's financial statements.
Two shareholder class action lawsuits were filed in Nevada
state court in February 1994 challenging the merger between RSi
and the corporation as discussed in Note 9 to the corporation's
1993 financial statements. In August 1994, a Nevada state judge
rejected the plaintiffs' claims and dismissed the suits.
9. Change in Accounting for Income Taxes
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," was adopted by the corporation
effective January 1, 1993. The cumulative effect of adopting
SFAS No. 109 was to increase income by $1.9 million ($0.04 per
share) in the first quarter of 1993.
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10. Subsequent Events
In October 1994, INTELSAT issued $200.0 million 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 and will record its share of the long-term
debt in the fourth quarter of 1994.
In October 1994, the corporation announced an agreement to
purchase Beacon Communications, a Los Angeles-based film and
television production company. The transaction is structured as
an asset purchase with payments of approximately $10.0 million
in cash, $19.0 million in assumption of existing liabilities, and
future cash considerations contingent on the production and
performance of motion pictures over the next five years. This
purchase is expected to be consummated in the fourth quarter of
1994.
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<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1994
ANALYSIS OF OPERATIONS
Consolidated Operations
Effective June 3, 1994, the corporation consummated its
merger with Radiation Systems, Inc. (RSi) (see Note 2 to the
accompanying financial statements). RSi designs, manufactures
and integrates satellite earth stations, advanced antennas and
other turnkey systems for telecommunications, radar, air traffic
control and military uses. The merger has been accounted for as
a pooling of interests. Accordingly, the accompanying financial
statements have been restated to include RSi for all periods prior
to the merger.
Consolidated revenues for the third quarter of 1994
increased $21.5 million and year-to-date revenues increased
$49.3 million over the same periods of 1993. All of the
corporation's segments reported significant revenue growth in
this year's third quarter as compared to the third quarter of
1993. Additionally, all of the segments except for Mobile
Communications reported revenue growth in the first three
quarters of 1994. Improved results for Mobile Communications in
this year's third quarter were not sufficient to offset lower
revenues reported in the first half of this year. Some of the
revenue improvement is attributable to business interruption
insurance income of $4.8 million in the second quarter of 1994 as
compared to $3.0 million in the first three quarters of 1993,
including $0.8 million in the third quarter of 1993. These
proceeds were from insurance claims related to tornado damage
sustained at the corporation's Largo, Florida facility in 1992.
The merger transaction costs (consisting primarily of
investment banking and legal fees) and expenses of integrating
the operations of the two companies (consisting primarily of
employee severance costs) resulted in charges totalling $4.7
million ($4.4 million after tax, or $0.09 per share) in the
second and third quarters of 1994. The operations of the merged
companies will be further streamlined to achieve efficiencies and
to yield operational synergies and cost savings. The corporation
will record additional charges related to integration and
transition activities in the fourth quarter of 1994.
Page 10
<PAGE>
Absent the merger costs, operating income for the quarter
increased $1.9 million over last year's third quarter. All of
the segments except for the Technology Services segment reported
increases in operating income in this year's third quarter. The
decline in the Technology Services segment is primarily
attributable to the business interruption insurance income
included in last year's third quarter.
Year-to-date operating income, absent the merger costs,
increased $2.8 million over the first nine months of 1993. This
is attributable to higher operating results for the Entertainment
and Technology Services businesses offset by some decline in the
International Communications and Mobile Communications
businesses. The International Communications and Mobile
Communications segments reported improved results in this year's
third quarter, however, these improvements were not sufficient to
offset lower results in the first half of 1994.
Interest and other income decreased $2.5 million in the
third quarter and $3.0 million for the first nine months of 1994,
as compared to the same periods last year. Last year's second
and third quarters included $1.5 million and $2.6 million,
respectively, of proceeds from company-owned life insurance
policies. Additionally, the first quarter of 1993 included $2.2
million of costs incurred to prepay $30.0 million of long-term
debt in last year's first quarter.
Net interest expense for 1994 has changed only slightly as
compared to the same periods last year.
The effective income tax rate decreased in 1994 as compared
to 1993 due primarily to a one-time charge to income taxes in the
third quarter of 1993 for an increase in the federal income tax
rate effective July 1993. Most of the $4.7 million merger and
integration costs recorded in the second and third quarters of
1994 are not expected to be deductible for income tax purposes.
Accordingly, the tax provision includes the effect of deductible
expenses only.
Segment Operating Results
The corporation reports operating results in four segments:
International Communications, Mobile Communications,
Entertainment and Technology Services. Beginning with the second
quarter of 1994, the corporation reports its entertainment
businesses, COMSAT Video Enterprises, Inc., On Command Video
Corporation and the Denver Nuggets, in the Entertainment segment.
The Denver Nuggets' results were previously reported in
Eliminations and Other activities. Results for prior periods
have been restated for this change. Revenues and operating
income for the Technology Services segment have been
retroactively restated to include the operations of RSi.
Operating results for each segment have also been restated to
reallocate indirect expenses.
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Results by Segment (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
1994 1993 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
International Communications $ 67.2 $ 61.7 $ 195.0 $ 190.1
Mobile Communications 51.3 47.3 141.4 144.5
Entertainment 33.0 26.6 111.9 87.3
Technology Services (1) 53.7 45.5 170.6 145.3
Eliminations and Other (2) (4.4) (1.8) (9.8) (7.4)
------- ------- ------- -------
Total Revenues $ 200.8 $ 179.3 $ 609.1 $ 559.8
======= ======= ======= =======
OPERATING INCOME (LOSS)
International Communications $ 24.0 $ 22.5 $ 70.6 $ 76.0
Mobile Communications 13.9 12.6 33.8 37.5
Entertainment 2.9 2.4 9.4 4.2
Technology Services (1)(3) 2.0 3.2 9.5 9.1
Other Corporate (4) (1.4) (0.7) (3.1) (4.6)
------- ------- ------- -------
Total Operating Income $ 41.4 $ 40.0 $ 120.2 $ 122.2
======= ======= ======= =======
</TABLE>
(1) Revenues and operating income for the Technology Services segment
include business interruption insurance income of $0.9 million,
$1.3 million and $0.8 million in the first, second and third quarters
of 1993, respectively, and $4.8 million in the second quarter of 1994.
(2) The elimination of intersegment revenues is reported in Eliminations
and Other. For 1993, tenant rental income from the corporation's
former headquarters building was also reported here.
(3) Technology Services segment operating income includes merger and
integration costs of $4.2 million and $0.5 million in the second
and third quarters of 1994, respectively.
(4) Other Corporate principally includes unallocated research and
development costs, and in the first quarter of 1993, a $3.3 million
charge for costs related to the corporation's move to its new
headquarters facility.
International Communications
The International Communications segment includes the
results of COMSAT World Systems (CWS) and COMSAT International
Ventures (CIV). Third quarter revenues increased $5.5 million
over last year's third quarter. This is primarily attributable
to a $3.2 million increase in CWS revenues. This increase is due
primarily to the initiation of four new long-term television
leases as well as increases in short-term leases and occasional
use television revenues due to World Cup Soccer and international
crises. CIV's revenues improved $2.3 million over last year's
third quarter. This is attributable to improved performance of
the corporation's subsidiary in Argentina, and revenues from its
Brazilian operations that started in the first quarter of 1994.
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<PAGE>
Year-to-date revenues for this segment increased $4.9
million as compared to the same period last year. CWS revenues
fell $0.4 million behind 1993's year-to-date revenues. Higher
television revenues were more than offset by lower voice
revenues. Voice revenues declined due to the continuing
conversion of analog circuits to more efficient digital service
in addition to reduced rates negotiated with AT&T, MCI and
Sprint. CIV's year-to-date revenues grew $5.3 million over the
first nine months of 1993 due primarily to its operations in
Argentina and Brazil.
Operating income for the segment increased $1.5 million in
the third quarter as compared to the same quarter last year.
This is primarily attributable to the growth in CWS revenues
offset somewhat by higher satellite depreciation expense and
capitalized interest amortization. The first INTELSAT VII series
satellite became operational in the fourth quarter last year and
the second satellite became operational in the third quarter this
year. CIV's operating results improved slightly comparing the
third quarters of 1994 and 1993.
Segment operating income for the first nine months of the
year decreased $5.4 million versus the first nine months of 1993.
This segment's improved results in the third quarter of 1994 did
not overcome lower results for the first half of this year.
Higher satellite depreciation and amortization costs for CWS
outpaced revenue gains. CIV's year-to-date results have remained
at approximately the same levels as 1993, as management,
administrative and operating expenses related to new and existing
ventures have kept pace with the growing revenues.
Mobile Communications
Mobile Communications segment third quarter revenues
increased $4.0 million over last year's third quarter. Digital
traffic increased 16% as the number of digital terminals in the
marketplace grew to more than 3,000. Additionally, revenues from
service contracts with IDB and AMSC increased over last year.
Year-to-date revenues fell $3.1 million below last year's
level. Telephone and telex revenues declined in part due to
carrier rate reductions instituted late last year. In addition,
the first nine months of 1993 included record traffic volumes due
to international events such as the conflict in Somalia.
Third quarter operating income increased $1.3 million over
the third quarter of 1993. Revenue increases were partially
offset by increases in cost of sales related to higher traffic
volumes. Year-to-date operating income fell $3.7 million below
the first nine months of 1993. This is attributable to lower
revenues for this period in addition to increased depreciation
related to upgrades to earth stations and a new Inmarsat
headquarters building.
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<PAGE>
Entertainment
Third quarter revenues increased $6.4 million and year-to-
date revenues increased $24.6 million as compared to the same
periods last year. This is largely attributable to the growth in
hotel rooms equipped with the On Command Video (OCV) system,
partly offset by a decline in revenues from hotel rooms using the
Satellite Cinema system. The number of rooms equipped with the
OCV system has almost doubled since the third quarter of 1993.
The Satellite Cinema rooms installed have declined since 1993,
primarily as many of these rooms have been converted to the newer
system. Revenues for the Denver Nuggets grew $0.9 million in the
third quarter and $7.5 million in the first nine months of 1994
as compared to the same periods last year. These improved
results are attributable to higher ticket sales and advertising
revenues for the regular season games plus the twelve playoff
games in the second quarter of 1994 when the Nuggets advanced to
the second round of the National Basketball Association playoffs.
Operating income for the quarter increased $0.5 million and
year-to-date operating income increased $5.2 million over the
same periods last year. These improved operating results are
mainly attributable to the growth in profits from video
distribution services in addition to the Nuggets playoff results
in the second quarter of 1994.
Technology Services
Revenues grew $8.2 million in the third quarter of 1994 as
compared to the third quarter of 1993. Revenues for the first
nine months of 1994 grew $25.3 million over the same period last
year. Revenues include business interruption insurance income of
$0.9 million, $1.3 million and $0.8 million in the first, second
and third quarters of 1993, respectively, and $4.8 million in the
second quarter of 1994. The insurance proceeds stem from tornado
damage to the corporation's facility in Largo, Florida in 1992.
The $4.8 million recorded in this year's second quarter was the
final settlement with the insurance company.
Absent the insurance income, the growth in revenues was
primarily due to increased exports of commercial earth station
products, primarily projects in Cote d'Ivoire (Ivory Coast), Peru
and Guatemala, a major cellular installation project in
Argentina, and sales of satellite communications equipment for
the U.S. Government's MILSTAR program. The Argentina contract
was substantially completed in the second quarter of 1994; the
Guatemala and Peru contracts will be substantially completed in
the fourth quarter of 1994; and the Cote d'Ivoire contract will
be substantially completed in the first quarter of 1995. These
increases were partially offset by a decline in revenues under
some long-term U.S. Government contracts for radar and navigation
antennas.
Page 14
<PAGE>
Merger transaction and integration costs totalling $4.2
million and $0.5 million were charged to the operations of the
Technology Services segment in the second and third quarters of
1994, respectively. Absent these charges, operating income
declined $0.6 million in the third quarter and grew $5.1 million
in the first nine months of 1994 as compared to the same periods
last year. Higher revenues in the third quarter were offset by
overruns on certain contracts and the absence of insurance income
in the third quarter of 1994. The improved year-to-date results
are primarily attributable to the operating margins on higher
contract revenues and the increased business interruption
insurance income.
Outlook
The corporation expects 1994 earnings to grow less than ten
percent. In addition, the corporation has announced plans to
make significant investments in long-term growth opportunities in
the International Communications, Mobile Communications and
Entertainment segments in 1995. As a result of this and other
factors discussed below, the corporation will not achieve double
digit growth in earnings for 1995.
The corporation expects that the International
Communications segment will continue to see growth in CWS
circuits. However, 1994 will see a slight reduction in operating
income in the fourth quarter compared to the third quarter due to
the expiration of several broadcast leases and the one-time
impact of a small downsizing. In the beginning of 1995, CWS will
implement a scheduled rate reduction of about ten percent on
approximately half of its voice circuits. The corporation is
optimistic that continued circuit and television lease growth
will offset these rate cuts as we move further into the new year.
The corporation expects growth to continue in CIV's
ventures and has announced plans to invest up to $200 million in
international ventures in 1995. CIV will continue to concentrate
on emerging countries to establish high growth regional
franchises and use COMSAT's presence in these ventures to market
a broad range of COMSAT products and services.
The corporation is optimistic that the third quarter growth
in traffic in the Mobile Communications segment will continue.
Growth will be helped by the increased availability of digital
terminals. Almost 300 new digital Standard M terminals per month
are being commissioned, which should help sustain growth in
digital traffic. Mobile Communications will continue to face
competition which will keep revenue and earnings growth at lower
than historical growth rates. The corporation has announced two
important developments in the Mobile Communications business.
First, Mobile Communications will develop a laptop size, six
pound "mini-M" terminal for use by mid-1996. This terminal will
provide a bridge from the briefcase-size terminals of today to
the small hand held satellite terminals expected by the year
2000. The investment of up to $50 million is intended to lead to
on-time availability of low-cost Standard M terminals to maximize
the continuing investment in the next generation of Inmarsat
satellites. Second, the corporation is planning to invest in the
proposed
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Inmarsat-P satellite system being designed to compete in
the global hand-held service market. The competition, which is
scheduled to occur in the year 1998 and beyond, is expected to
come primarily from the Motorola-led Iridium system. Depending
on the commitment of other key investors, the overall strategic
plan and the timing of necessary U.S. government approvals, the
corporation may invest up to fifteen percent of the estimated
$1.5 billion in equity funding required for the project.
Revenues and earnings are expected to continue to increase
from the hospitality and sports side of the Entertainment segment
for the remainder of 1994 and throughout 1995. Installation of
OCV systems in hotels continues with a total of over 250,000
rooms now installed. However, beginning in 1995, the
Entertainment segment will experience an expected $12 million
decline in revenues and operating income associated with
beginning a five year extension of the long-term NBC distribution
contract. This decline will be partially offset in 1995 by the
third quarter receipt of about $9 million representing the
Nuggets' share of new franchise fees associated with the NBA's
expansion into Toronto and Vancouver, Canada. The corporation
has also announced plans to expand its entertainment businesses.
The corporation has agreed to acquire the assets of Beacon
Communications Corp., a Los Angeles-based independent film and
television production company. This acquisition is expected to
be consummated in the fourth quarter of 1994. In addition, the
corporation plans to construct a state-of-the-art sports and
entertainment complex near downtown Denver in a 50-50 partnership
with The Anschutz Corporation. The facility would seat 19,000
and be scheduled to open for the 1997-98 NBA season if city
approval is received, as expected, by the end of 1994 or early in
1995. The new facility would help maximize the value of the
corporation's investment in the Denver Nuggets through the
generation of additional revenues. It would also allow the
corporation and certain potential investors to pursue a National
Hockey League franchise for Denver.
In the Technology Services segment, COMSAT RSI expects that
its revenues and operating income (excluding merger costs and
insurance income) may decline slightly over the next several
quarters as it completes several large international contracts
and makes adjustments in its operations brought on by the merger
in June 1994. The nature of this division's earth station
systems integration business makes it susceptible to quarterly
fluctuations in revenues and earnings due to the significant
impact of a few large orders. The large international contracts
referred to above, for instance, accounted for 20.4% and 17.8% of
the division's revenues for the three and nine month periods
ended September 30, 1994, respectively. COMSAT RSI has
experienced longer than expected delays in booking certain
international orders to fill the gap created by the completion of
these orders. However, with its newly-acquired manufacturing
capabilities, a more complete earth station product line, and the
ability to leverage the unique technical strengths of COMSAT
Laboratories, COMSAT RSI is poised to compete even more
aggressively in both commercial and government markets, and its
customer base should continue to grow. The corporation is
optimistic
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that this will lead to additional bookings in the near
future. This division is also considering further investments in
the area of wireless systems to support the growing worldwide
demand for advanced cellular and personal communications
networks. Additional integration and transition expenses will be
necessary in the fourth quarter of 1994 which may further improve
the long-term profitability and competitiveness of the division.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash in the first three quarters of
1994 were operations, borrowings and proceeds from the decreases
in INTELSAT and Inmarsat ownership. Cash was expended primarily
for property and equipment, investments in businesses, repayment
of long-term debt and quarterly dividends.
The corporation's working capital deficit increased $5.5
million from December 31, 1993 to September 30, 1994. This is
attributable to a $2.2 million increase in current liabilities
and a decrease in current assets of $3.3 million. Current assets
decreased primarily due to a decline in prepaid expenses and
other current assets. The increase in current liabilities is
primarily due to a $123.8 million increase in commercial paper
borrowings, $70.0 million of which was used to repay the balance
of the corporation's 9.55% notes (see Note 7 to the accompanying
financial statements). Amounts due to related parties decreased
$33.1 million primarily due to the repayment of an advance from
INTELSAT with the proceeds of long-term notes as discussed below.
Additionally, accounts payable and accrued liabilities decreased
$21.0 million primarily because of a reduction in deferred
revenues related to the Denver Nuggets. Receipts for season
tickets are recorded as deferred revenues and recognized as games
are played.
In March 1994, INTELSAT issued $200.0 million of 6.625%
notes. The corporation has recorded its $40.4 million share of
the long-term debt. Proceeds from the debt were primarily used
to repay an advance from INTELSAT which was included in amounts
due to related parties on the December 31, 1993 balance sheet.
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The corporation has access to short- and long-term financing
at favorable rates. The corporation's borrowing activities, as
regulated by the Federal Communications Commission, allow long-
term borrowings up to 45% of total capital (long-term debt plus
equity) and $200.0 million of short-term debt. The corporation has
established a $200.0 million commercial paper program. As of
September 30, 1994, the corporation had $169.0 million in
commercial paper borrowings in addition to the corporation's $2.1
million share of INTELSAT's commercial paper borrowings.
In July 1994, the corporation filed a shelf registration
statement with the SEC to issue up to $200.0 million of debt
securities. The corporation also filed a prospectus supplement
with the SEC to issue up to $100.0 million of such debt securities
under a "medium-term note program." The corporation will issue
such notes as needed in the future. The proceeds will be used
for general corporate purposes, which may include the repayment
of long-term and short-term debt.
In October 1994, INTELSAT issued $200.0 million of notes
payable. The corporation has received its share of the proceeds
and will record its share of the long-term debt in the fourth
quarter of 1994.
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Part II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 on page 8 of this Form 10-Q 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
(b) Reports on Form 8-K
(i) Report on Form 8-K dated July 12, 1994,
filing a press release reporting that the
audit by the FCC of the corporation's
participation in Inmarsat and the
corporation's earnings in 1991 and 1992 has
been completed.
(ii) Report on Form 8-K (as amended on Form 8-K/A)
dated July 15, 1994, filing a press release
announcing the corporation's financial
results for the quarter ending June 30, 1994.
(iii) Report on Form 8-K (as amended on Form
8-K/A) dated July 19, 1994, reporting
Supplemental Quarterly Income Statements
for 1992 and 1993 as restated for the
merger with Radiation Systems, Inc.
accounted for as a pooling of interests.
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SIGNATURES
Pursuant to the requirements on the Securities and 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 ________________________
Allen E. Flower
Controller
Date: November 14, 1994
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Exhibit 11
COMSAT CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Earnings:
Income Before Cumulative Effect
of Accounting Change $21,398 $19,445 $63,196 $63,018
Cumulative Effect of Accounting
Change - - - 1,925
------- ------- ------- -------
Net Income $21,398 $19,445 $63,196 $64,943
======= ======= ======= =======
Shares:
Weighted Average Number of Common
Shares Outstanding 46,650 46,351 46,538 46,228
Add - Shares Issuable from Assumed
Exercise of Options 806 782 776 749
------- ------- ------- -------
Weighted Average Shares 47,456 47,133 47,314 46,977
======= ======= ======= =======
Primary Earnings Per Share:
Before Cumulative Effect of
Accounting Change $0.45 $0.41 $1.34 $1.34
Cumulative Effect of Accounting
Change - - - 0.04
------- ------- ------- -------
Net Income $0.45 $0.41 $1.34 $1.38
======= ======= ======= =======
ASSUMING FULL DILUTION
Earnings:
Income Before Cumulative Effect
of Accounting Change $21,398 $19,445 $63,196 $63,018
Cumulative Effect of Accounting
Change - - - 1,925
------- ------- ------- -------
Net Income $21,398 $19,445 $63,196 $64,943
======= ======= ======= =======
Shares:
Weighted Average Number of
Common Shares Outstanding 46,650 46,351 46,538 46,228
Add - Shares Issuable from Assumed
Exercise of Options 827 795 850 805
------- ------- ------- -------
Weighted Average Shares 47,477 47,146 47,388 47,033
======= ======= ======= =======
Fully Diluted Earnings Per Share:
Before Cumulative Effect of
Accounting Change $0.45 $0.41 $1.33 $1.34
Cumulative Effect of Accounting
Change - - - 0.04
------- ------- ------- -------
Net Income $0.45 $0.41 $1.33 $1.38
======= ======= ======= =======
</TABLE>
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