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, 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
46,614,620 shares of the Registrant's common stock were
outstanding as of June 30, 1994.
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PART I.FINANCIAL INFORMATION
Item 1.Interim Financial Statements for the Corporation (Unaudited)
<TABLE>
<CAPTION>
COMSAT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
1994 1993 1994 1993
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues $207,861 $185,778 $408,356 $380,459
-------- -------- -------- --------
Operating Expenses:
Cost of Services 112,608 100,807 227,343 211,150
Depreciation and Amortization 40,029 34,748 80,308 69,337
Research and Development 3,706 3,603 6,949 7,278
General and Administrative 5,361 5,250 10,725 10,498
Merger and Integration Costs 4,264 - 4,264 -
-------- -------- -------- --------
Total Operating Expenses 165,968 144,408 329,589 298,263
-------- -------- -------- --------
Operating Income 41,893 41,370 78,767 82,196
Interest and Other Income, Net 447 3,177 1,684 2,234
Interest Expense, Net of Amounts Capitalized (5,001) (6,626) (11,153) (13,626)
-------- -------- -------- --------
Income Before Taxes and Cumulative Effect
of Accounting Change 37,339 37,921 69,298 70,804
Income Tax Expense (15,722) (14,855) (27,500) (27,231)
-------- -------- -------- --------
Income Before Cumulative Effect of
Accounting Change 21,617 23,066 41,798 43,573
Cumulative Effect of Accounting Change for
Income Taxes - - - 1,925
-------- -------- -------- --------
Net Income $21,617 $23,066 $41,798 $45,498
======== ======== ======== ========
Earnings Per Share:
Primary:
Before Cumulative Effect of Accounting $0.46 $0.49 $0.89 $0.93
Cumulative Effect of Accounting Change - - - 0.04
-------- -------- -------- --------
Net Income $0.46 $0.49 $0.89 $0.97
======== ======== ======== ========
Fully Diluted:
Before Cumulative Effect of Accounting $0.46 $0.49 $0.88 $0.92
Cumulative Effect of Accounting Change - - - 0.05
-------- -------- -------- --------
Net Income $0.46 $0.49 $0.88 $0.97
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
COMSAT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31
1994 1993
-------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $9,519 $16,230
Receivables 229,723 210,182
Inventories 19,548 19,328
Other 23,543 28,206
---------- -----------
Total Current Assets 282,333 273,946
---------- -----------
Property and Equipment (Net of accumulated
depreciation of $920,243 in 1994 and
$858,008 in 1993) 1,370,740 1,332,432
Investments 67,748 14,395
Goodwill 39,174 35,957
Franchise Rights 40,115 41,084
Other Assets 80,393 75,699
---------- ----------
Total Assets $1,880,503 $1,773,513
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Obligations $4,507 $76,915
Current Notes Payable 171,582 47,233
Investment Purchase Commitment 22,000 -
Accounts Payable and Accrued Liabilities 93,890 116,140
Due to Related Parties 22,090 56,601
Other 7,580 6,749
---------- ----------
Total Current Liabilities 321,649 303,638
---------- ----------
Long-Term Debt 439,795 410,550
Deferred Income Taxes and Investment
Tax Credits 117,858 103,619
Accrued Postretirement Benefit Costs 50,901 50,014
Other Long-Term Liabilities 128,632 120,879
---------- ----------
Total Liabilities 1,058,835 988,700
---------- ----------
Minority Interest 24,711 21,373
---------- ----------
Stockholders' Equity:
Common Stock 307,601 311,506
Retained Earnings 514,525 488,090
Treasury Stock (12,713) (21,473)
Other (12,456) (14,683)
---------- ----------
Total Stockholders' Equity 796,957 763,440
---------- ----------
Total Liabilities and Stockholders' Equity $1,880,503 $1,773,513
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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COMSAT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
1994 1993
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $41,798 $45,498
Adjustment for Noncash Depreciation
and Amortization 80,308 69,337
Changes in Operating Assets and Liabilities (45,960) (4,590)
Other (2,171) (3,176)
------- -------
Net Cash Provided by Operating Activities 73,975 107,069
------- -------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (141,694) (87,961)
Decrease in INTELSAT Ownership 12,777 14,613
Decrease in Inmarsat Ownership 3,389 4,686
Investments in Unconsolidated Businesses (31,604) (4,806)
Other (8,352) (293)
------- -------
Net Cash Used in Investing Activities (165,484) (73,761)
------- -------
Cash Flows from Financing Activities:
Common Stock Issued 4,126 4,703
Cash Dividends Paid (15,336) (15,158)
Proceeds from Issuance of Long-Term Debt 40,352 32,747
Repayment of Long-Term Debt (77,649) (36,968)
Net Short-Term Borrowings 123,122 (13,857)
Borrowings Against Corporate-Owned Life
Insurance Policies 10,079 -
Other - (870)
------- -------
Net Cash Provided by (Used for) Financing
Activities 84,694 (29,403)
------- -------
Effect of Exchange Rate Changes on Cash 104 (191)
------- -------
Net Increase (Decrease) in Cash and Cash
Equivalents (6,711) 3,714
Cash and Cash Equivalents, Beginning of
Period 16,230 11,777
------- -------
Cash and Cash Equivalents, End of Period $9,519 $15,491
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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 a charge of $4.3 million ($4.1 million
after tax, or $0.08 per share) in the second quarter 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 second-half of 1994 as plans to
integrate the operations are completed.
The merger has been accounted for as a pooling of interests.
Accordingly, the accompanying financial statements have been
retroactively 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
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conform the period in which SFAS No. 109 was adopted. There were
no significant intercompany transactions between the two
companies.
In 1993, COMSAT acquired 404,500 shares of RSi common stock
for $5,098,000. 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 are as follows:
<TABLE>
<CAPTION>
In thousands,
except per share amounts Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
COMSAT $ 167,907 $ 154,143 $ 337,436 $ 320,426
RSi 39,954 31,635 70,920 60,033
---------- ----------- ---------- ----------
$ 207,861 $ 185,778 $ 408,356 $ 380,459
========== ========== ========== ==========
Income Before Cumulative Effect of
Accounting Change:*
COMSAT $ 20,924 $ 20,150 $ 39,217 $ 38,463
RSi 4,807 2,916 6,695 5,110
---------- ---------- --------- ----------
$ 25,731 $ 23,066 $ 45,912 $ 43,573
========== ========== ========= ==========
Net Income:*
COMSAT $ 20,924 $ 20,150 $ 39,217 $ 39,701
RSi 4,807 2,916 6,695 5,797
---------- ---------- --------- ----------
$ 25,731 $ 23,066 $ 45,912 $ 45,498
========== ========== ========= ==========
Earnings Per Share:
Income Before Cumulative Effect of
Accounting Change:*
Before Merger $ 0.51 $ 0.50 $ 0.96 $ 0.95
After Merger $ 0.54 $ 0.49 $ 0.97 $ 0.93
Net Income:*
Before Merger $ 0.51 $ 0.50 $ 0.96 $ 0.98
After Merger $ 0.54 $ 0.49 $ 0.97 $ 0.97
</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.
3. Insurance Proceeds
Revenues include business interruption insurance proceeds of
$0.9 million and $1.3 million in the first and second 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.
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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 June 30, 1994.
This resulted in decreases in assets of $17.0 million and
liabilities of $3.8 million. The corporation received cash
proceeds of $12.8 million and has a $0.4 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 June 30,
1994. This resulted in decreases in assets of $7.1 million and
liabilities of $3.4 million. The corporation received cash
proceeds of $3.4 million and has a $0.3 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):
June 30, 1994 December 31, 1994
------------- -----------------
Finished Goods $ 4,414 $ 4,705
Work in Progress 9,140 8,346
Raw Materials 5,994 6,277
-------- --------
Total $ 19,548 $ 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 paid $20.0
million in cash in June 1994. The remaining $22.0 million is due
in August 1994, and has been recorded as a short-term liability
on the accompanying balance sheet. The corporation will record
its share of PhilCom's income or losses in the future 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 the long-term
debt.
The corporation increased its commercial paper program to
$200.0 million in March 1994. The corporation had $170.4 million
in commercial paper borrowings at June 30, 1994.
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The corporation repaid the $70.0 million balance of its
9.55% notes in April 1994. This amount was classified as a
current liability on the December 31, 1993 balance sheet.
In July 1994, the corporation filed a shelf registration
statement with the SEC to issue up to $200 million of debt
securities. Pursuant to this, the corporation filed a prospectus
supplement with the SEC to issue up to $100 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). In the opinion of
management, this suit 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 July 1994, a federal judge
rejected the major claims of patent and copyright infringement
made by SpectraVision, Inc. Two relatively narrow, technical
patent and copyright issues remain unresolved. The corporation
expects to prevail on those issues and believes that the ultimate
resolution of all claims will not have a material effect on the
corporation's financial statements.
Two shareholder class action lawsuits were filed in February
1994 challenging the merger between RSi and the corporation as
discussed in Note 9 to the corporation's 1993 financial
statements. The corporation believes that these lawsuits are
without merit and that the ultimate disposition of these matters
will not have a material effect on the corporation's financial
statements.
9. New Accounting Pronouncements
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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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED
JUNE 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 retroactively to include RSi for
all periods prior to the merger.
Consolidated revenues for the second quarter of 1994
increased $22.1 million over the same period in 1993. Year-to-
date revenues increased $27.9 million over the same period of
1993. Revenues include business interruption insurance income of
$0.9 million and $1.3 million in the first and second quarters of
1993, respectively, and $4.8 million in the second quarter of
1994. These proceeds were from insurance claims related to
tornado damage sustained at the corporation's Largo, Florida
facility in 1992. Absent these insurance proceeds, higher
revenues in 1994 were fueled mainly by growth in the
corporation's Entertainment and Technology Services segments with
some offset for a decline in revenues in the Mobile
Communications segment.
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 a charge of $4.3 million
($4.1 million after tax, or $0.08 per share) in the second
quarter of 1994. The operations of the merged companies will be
further integrated to achieve efficiencies and to yield
operational synergies and cost savings. The corporation will
record additional charges in the second half of 1994 as
integration and transition plans are completed.
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Absent the merger costs, operating income for the quarter
increased $4.8 million over last year's second quarter and year-
to-date operating income increased $0.8 million over the first
half of 1993. The growth in operating income was primarily due
to improved operating results in the Entertainment segment and
the business interruption insurance income offset partially by
lower operating results for the International Communications and
Mobile Communications segments.
Interest and other income declined $2.7 million in the
second quarter and $0.6 million for the first six months of 1994,
as compared to the same periods last year. Last year's second
quarter included $1.5 million of proceeds from certain company-
owned life insurance policies. Additionally, the first quarter
of 1993 included costs incurred to prepay $30.0 million of long-
term debt in last year's first quarter.
Net interest expense declined $1.6 million and $2.5 million
in the second quarter and year-to-date periods of 1994,
respectively, as compared to the same periods last year. The
corporation has temporarily replaced higher cost long-term debt
with lower cost commercial paper borrowings. Interest
capitalized during 1994 has increased over amounts capitalized in
1993 as more property was under construction for INTELSAT and
Inmarsat satellites.
The effective income tax rate increased in 1994 as compared
to 1993 due to an increase in the federal income tax rate
effective July 1993 as well as the tax treatment of merger costs.
Most of the $4.3 million merger and integration costs recorded in
the second quarter 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 Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
------------------ -----------------
<S> <C> <C> <C> <C>
REVENUES
International Communications $ 63.9 $ 63.5 $ 127.8 $ 128.4
Mobile Communications 46.1 47.2 90.1 97.2
Entertainment 38.5 26.8 78.9 60.7
Technology Services (1) 61.6 51.3 116.9 99.8
Eliminations and Other (2) (2.2) (3.0) (5.3) (5.6)
------- ------- ------- -------
Total Revenues $ 207.9 $ 185.8 $ 408.4 $ 380.5
======= ======= ======= =======
OPERATING INCOME (LOSS)
International Communications $ 24.3 $ 25.4 $ 46.6 $ 53.5
Mobile Communications 9.7 11.7 19.9 24.9
Entertainment 4.7 0.5 6.5 1.8
Technology Services (1)(3) 4.1 4.1 7.5 6.0
Other Corporate (4) (0.9) (0.3) (1.7) (4.0)
------- ------- ------- -------
Total Operating Income $ 41.9 $ 41.4 $ 78.8 $ 82.2
======= ======= ======= =======
</TABLE>
(1) Revenues and operating income for the Technology Services segment
include business interruption insurance income of $0.9 million and
$1.3 million in the first and second 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 for the second quarter
of 1994 includes a charge of $4.3 million for merger and integration
costs.
(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
- ----------------------------
Second quarter revenues increased $0.4 million over last
year's second quarter. Year-to-date revenues decreased $0.6
million as compared to the first half of 1993. This segment
includes the results of COMSAT World Systems (CWS) and COMSAT
International Ventures (CIV). CWS revenues fell $1.4 million
below last year's second quarter and $3.6 million below the first
half of the year primarily due to lower revenues for voice
circuits. Voice revenues have fallen due to the conversion of
analog circuits to more efficient digital service and reduced
rates negotiated with AT&T, MCI and Sprint. Higher revenues for
television services partially offset the decline in voice
revenues. CWS has signed several new long-term television leases
with customers. Additionally, CWS recorded short-term television
revenues this year related to events such as the Winter Olympics,
World Cup Soccer and the elections in South Africa.
CIV revenues increased $1.8 million over last year's second
quarter and $3.0 million over the first half of 1993. This is
primarily attributable to the improved performance of the
corporation's subsidiary in Argentina.
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Operating income decreased $1.1 million and $6.9 million for
the second quarter and year-to-date periods, respectively. This
decline is primarily attributable to CWS's lower revenues
compounded by higher satellite depreciation and capitalized
interest amortization. The first INTELSAT VII satellite was
launched in the fourth quarter of 1993. INTELSAT recorded a
credit to pension expense in the second quarter of 1994 to
conform to accounting requirements for retirement plans. CWS
recorded its $2.7 million share of this adjustment as a reduction
of operating expenses in the second quarter of this year.
CIV's operating results have declined slightly this year as
management, administrative, and operating expenses related to new
and existing ventures grew faster than revenues.
Mobile Communications
- ---------------------
Revenues decreased $1.1 million in the second quarter and
$7.1 million in the first six months of 1994 as compared to the
same periods last year. Rate cuts instituted last year on shore-
to-ship services, in addition to lower traffic this year, are
primarily responsible for lower telephone and telex revenues in
1994. International events such as the conflict in Somalia were
largely responsible for record traffic volumes in the first half
of 1993, particularly in the first quarter. A growth in Standard
M (the new digital service) telephone minutes driven by an
increase in terminals in service helped to moderate the loss in
Standard A revenues. Additionally, revenues from service
contracts with IDB and AMSC increased over last year.
Second quarter operating income decreased $2.0 million and
year-to-date operating income decreased $5.0 million over the
same periods last year. This is primarily attributable to lower
revenues partially offset by lower operating expenses in 1994,
including the corporation's share of Inmarsat's operating
expenses. Lower expenses include costs associated with the
provision of Standard C services, lower promotional expenses and
reduced costs associated with Inmarsat's new headquarters
facility.
Entertainment
- -------------
Second quarter revenues increased $11.7 million and year-to-
date revenues increased $18.2 million as compared to the same
periods last year. This is largely attributable to higher
revenues from rooms equipped with the On Command Video (OCV)
system, partially offset by a decline in revenues from non-OCV
system hotel rooms. The number of rooms equipped with the OCV
system has more than doubled since the second quarter of 1993.
The growth in installed rooms and the favorable customer response
to OCV's product have dramatically increased system revenues.
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Additionally, revenues for the Denver Nuggets, which are now
reported in the Entertainment segment, grew $4.4 million in the
second quarter and $6.6 million in the first six 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 $4.2 million and
year-to-date operating income increased $4.7 million over the
same periods last year. These improved operating results are
mainly attributable to the growth in income from hotel rooms
installed with the OCV system in addition to the NBA playoff
results for the Denver Nuggets.
Technology Services
- -------------------
The Technology Services segment now includes the results of
COMSAT RSI (the combination of RSi and the former COMSAT
Technology Services business) and COMSAT Laboratories. Revenues
grew $10.3 million in the second quarter of 1994 as compared to
the second quarter of 1993. Revenues for the first six months of
1994 grew $17.1 million over the first half of 1993. Revenues
include business interruption insurance income of $0.9 million
and $1.3 million in the first and second 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 is the final settlement
with the insurance company. Absent the insurance income, the
growth in revenues was attributable to shipments of commercial
earth station products, including major projects in Guatemala and
Cote d'Ivoire (Ivory Coast), and a major cellular installation
project in Argentina. This was partially offset by a decline in
revenues under some long-term U.S. Government contracts for radar
and navigation antennas.
Merger transaction and integration costs totaling $4.3
million were charged to the operations of the Technology Services
segment. Absent this expense, operating income grew $4.3 million
in the second quarter and $5.8 million in the first half of 1994
as compared to the same periods last year. This is primarily
attributable to the operating margins on higher contract revenues
and the business interruption insurance income.
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Outlook
The International Communications segment is expected to have
only moderate growth in revenues in the second half of 1994.
Operating income for the second half of 1994 is expected to be
approximately equal to the first half of this year. Additional
depreciation and amortization expense following the launch of the
INTELSAT 702 satellite in June 1994 will partially offset revenue
increases.
The FCC has completed its review of COMSAT Mobile
Communication's (CMC) financial participation in Inmarsat and
CMC's earnings in 1991 and 1992. The corporation has been
informed by the FCC that CMC's earnings during those years do not
appear excessive, and that the FCC does not intend to take
enforcement action regarding these matters. The Mobile
Communications business is expected to continue to face increased
competition and sluggish demand. Traffic growth has been held
back by a lack of new digital terminals. There are only a few
manufacturers of such terminals at this time. Digital traffic is
expected to grow as more terminals become available. Absent
unforeseen significant world events, results for the Mobile
Communications segment are expected to continue the trend of the
first half of the year.
The corporation is studying alternatives for providing new
worldwide, satellite-delivered, hand-held telephony services by
the end of the decade and has not yet determined its desired
level of participation in any of these alternatives.
Approximately sixty thousand additional hotel rooms are
expected to be installed with the OCV system before the end of
1994. The Entertainment segment will continue to report growth in
revenues and operating income as these rooms become operational.
The Nuggets will not report significant results until the fourth
quarter of this year when the next NBA regular season commences.
The corporation expects modest revenue growth in the
Technology Services segment in the near term as it leverages the
combined strengths of the corporation's worldwide marketing and
systems integration skills with its newly acquired capabilities
and expanded product lines. COMSAT RSI will target international
and domestic opportunities that include satellite and other
wireless communications, radar, scientific and related special
applications markets. With the merger recently consummated,
management is reviewing streamlining actions to improve long-term
profitability and competitiveness. Additional integration and
transition expenses will be recorded in the second half of 1994
as plans for these actions are completed.
Page 14
<PAGE>
The corporation has a goal to achieve double-digit growth in
earnings per share for 1994 as compared to 1993. However, the
combination of earnings for the first half of the year and the
additional shares outstanding resulting from the RSi merger will
make this goal difficult to achieve.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash in the first half of 1994 were
operations, short- and long-term 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 the payment of
dividends.
The corporation's working capital deficit increased $9.6
million from December 31, 1993 to June 30, 1994. This is
primarily attributable to an $18.0 million increase in current
liabilities offset by an increase in current assets of $8.4
million. The increase in current assets is primarily
attributable to higher accounts receivable. Receivables related
to ongoing contract work in the Technology Services segment have
grown since billing milestones have not yet been reached.
Additionally, cash receipts from a key customer were delayed
until July. The increase in current liabilities is primarily due
to a $123.1 million increase in commercial paper borrowings,
$70.0 million of which was used to pay the balance of the
corporation's 9.55% notes (see Note 7 to the accompanying
financial statements). Advances from INTELSAT were repaid with
the proceeds of long-term notes as discussed below.
Additionally, accounts payable and accrued liabilities decreased
$22.3 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 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 from
related parties on the December 31, 1993 balance sheet.
As discussed in Note 6 to the accompanying financial
statements, in June 1994, the corporation acquired an equity
interest in Philippine Global Communications, Inc., a provider of
international communications services in the Philippines, for
$42.0 million. The corporation paid $20.0 million in cash in
June 1994. The remaining $22.0 million is due in August 1994,
and has been recorded as a short-term liability on the balance
sheet.
Page 15
<PAGE>
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 million of short-term debt. The corporation has
established a $200 million commercial paper program. As of June
30, 1994, the corporation had $170.4 million in commercial paper
borrowings.
In July 1994, the corporation filed a shelf registration
statement with the SEC to issue up to $200 million of debt
securities. Pursuant to this, the corporation filed a prospectus
supplement with the SEC to issue up to $100 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.
Page 16
<PAGE>
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) Reported dated April 15, 1994, filing a press
release announcing the corporation's financial
results for the quarter ending March 31, 1994
(ii) Report dated May 26, 1994, filing a press
release announcing the fraction of a share
of the corporation's common stock to be
exchanged for a share of common stock of
Radiation Systems, Inc. ("RSi").
(iii)Report dated June 3, 1994, reporting the
consummation of the merger of RSi into CTS
America, Inc., a wholly owned subsidiary of
the corporation.
Page 17
<PAGE>
(iv) Report dated June 8, 1994 filing
supplemental consolidated financial
statements of COMSAT Corporation for
1991, 1992 and 1993, as restated for the
merger with RSi. Also filed two press
releases: (1) dated June 8, 1994, describing
the denial by a federal judge of PanAmSat's
motion to add new defendants and new claims
to its pending lawsuit against the corporation;
and (2) dated June 29, 1994, describing
the corporation's investment in Philippine
Global Communications, Inc.
(v) Report dated June 8, 1994, amending the
earlier Form 8-K dated June 8, 1994.
Page 18
<PAGE>
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 /s/ Allen E. Flower
--------------------
Allen E. Flower
Controller
Date: August 11, 1994
Page 19
<PAGE>
COMSAT CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Earnings:
Income Before Cumulative Effect
of Accounting Change $21,617 $23,066 $41,798 $43,573
Cumulative Effect of Accounting Change - - - 1,925
-------- -------- -------- --------
Net Income $21,617 $23,066 $41,798 $45,498
======== ======== ======== ========
Shares:
Weighted Average Number of Common Shares
Outstanding 46,555 46,422 46,481 46,312
Add - Shares Issuable from Assumed
Exercise of Options 747 749 747 710
-------- -------- -------- --------
Weighted Average Shares 47,302 47,171 47,228 47,022
======== ======== ======== ========
Primary Earnings Per Share:
Before Cumulative Effect of Accounting $0.46 $0.49 $0.89 $0.93
Cumulative Effect of Accounting Change - - - 0.04
-------- -------- -------- --------
Net Income $0.46 $0.49 $0.89 $0.97
======== ======== ======== ========
ASSUMING FULL DILUTION
Earnings:
Income Before Cumulative Effect
of Accounting Change $21,617 $23,066 $41,798 $43,573
Cumulative Effect of Accounting Change - - - 1,925
-------- -------- -------- --------
Net Income $21,617 $23,066 $41,798 $45,498
======== ======== ======== ========
Shares:
Weighted Average Number of Common Shares
Outstanding 46,555 46,422 46,481 46,312
Add - Shares Issuable from Assumed
Exercise of Options 749 777 837 824
-------- -------- -------- --------
Weighted Average Shares 47,304 47,199 47,318 47,136
======== ======== ======== ========
Fully Diluted Earnings Per Share:
Before Cumulative Effect of
Accounting Change $0.46 $0.49 $0.88 $0.92
Cumulative Effect of Accounting Change - - - 0.05
-------- -------- -------- --------
Net Income $0.46 $0.49 $0.88 $0.97
======== ======== ======== ========
</TABLE>
<PAGE>
