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