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, 1996
Commission File Number 1-4929
COMSAT CORPORATION
6560 Rock Spring Drive
Bethesda, MD 20817
(301) 214-3000
District of Columbia 52-0781863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve (12) months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past ninety (90)
days. Yes [X] No [ ]
48,472,000 shares of the Registrant's common stock were outstanding as of
June 30, 1996.
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PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS FOR THE CORPORATION (UNAUDITED)
COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Income Statements
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Quarter Ended June 30, Six Months Ended June 30,
-------------------------- ----------------------------
In thousands, except per share amounts 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------
REVENUES $ 232,247 $ 210,809 $ 477,972 $ 418,692
---------- ---------- ---------- ----------
Operating expenses:
Cost of services 142,969 105,220 297,995 226,433
Depreciation and amortization 55,382 48,853 108,086 96,231
Research and development 5,692 6,031 10,834 10,636
General and administrative 5,529 5,766 12,618 10,696
---------- ---------- ---------- ----------
Total operating expenses 209,572 165,870 429,533 343,996
---------- ---------- ---------- ----------
OPERATING INCOME 22,675 44,939 48,439 74,696
Interest and other income (expense), net (1,133) 743 (2,489) 2,772
Interest expense, net of amounts capitalized (10,215) (10,374) (19,316) (19,249)
---------- ---------- ---------- ----------
Income before taxes 11,327 35,308 26,634 58,219
Income tax expense (5,545) (13,296) (11,525) (21,634)
---------- ---------- ---------- ----------
NET INCOME $ 5,782 $ 22,012 $ 15,109 $ 36,585
========== ========== ========== ==========
EARNINGS PER SHARE $ 0.12 $ 0.46 $ 0.31 $ 0.77
=========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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June 30, December 31,
In thousands 1996 1995
- -----------------------------------------------------------------------------------------------------------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 27,320 $ 124,156
Receivables 278,987 234,465
Inventories 33,963 26,851
Other 31,735 40,353
----------- -----------
Total current assets 372,005 425,825
----------- -----------
Property and equipment (net of accumulated depreciation
of $1,206,670 in 1996 and $1,156,518 in 1995) 1,531,567 1,528,053
Investments 128,203 88,378
Goodwill 66,989 67,569
Franchise rights 104,595 107,962
Other assets 156,257 96,479
----------- -----------
TOTAL ASSETS $2,359,616 $2,314,266
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current notes payable $ 63,954 $ 11,688
Accounts payable and accrued liabilities 147,839 164,801
Due to related parties 19,597 22,825
Other 5,485 5,155
----------- -----------
Total current liabilities 236,875 204,469
----------- -----------
Long-term debt 657,585 664,601
Deferred income taxes and investment tax credits 143,786 134,208
Accrued postretirement benefit costs 50,225 49,497
Other long-term liabilities 133,529 129,911
----------- -----------
Total liabilities 1,222,000 1,182,686
----------- -----------
Minority interest 88,173 92,147
----------- -----------
Preferred securities issued by subsidiary 200,000 200,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 328,597 324,074
Retained earnings 529,594 533,238
Treasury stock (4,245) (9,020)
Other (4,503) (8,859)
----------- -----------
Total stockholders' equity 849,443 839,433
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,359,616 $2,314,266
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Cash Flow Statements
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Six Months Ended June 30,
--------------------------
In thousands 1996 1995
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,109 $ 36,585
Adjustments for noncash depreciation and amortization 108,086 96,231
Changes in operating assets and liabilities (43,268) (32,437)
Other (2,676) 7,752
----------- -----------
Net cash provided by operating activities 77,251 108,131
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (172,374) (158,402)
Decrease (increase) in INTELSAT ownership (1,054) 17,132
Decrease (increase) in Inmarsat ownership 5,746 (9,018)
Investments in unconsolidated businesses (38,295) (20,109)
Insurance proceeds from satellite launch failure 54,443 -
Other (954) (1,466)
----------- -----------
Net cash used in investing activities (152,488) (171,863)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 8,102 4,594
Cash dividends paid (18,753) (18,365)
Proceeds from issuance of long-term debt - 81,986
Repayment of long-term debt (9,489) (8,870)
Net short-term borrowings 50,000 9,568
Repayment of borrowings against company-owned life
insurance policies (51,443) -
Other (16) (4,982)
----------- -----------
Net cash provided by (used for) financing activities (21,599) 63,931
----------- -----------
Net increase (decrease) in cash and cash equivalents (96,836) 199
Cash and cash equivalents, beginning of period 124,156 18,658
----------- -----------
Cash and cash equivalents, end of period $ 27,320 $ 18,857
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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4
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COMSAT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by COMSAT Corporation (COMSAT or the corporation)
pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). These financial statements should be read in the
context of the financial statements and notes thereto filed with the SEC in
the corporation's 1995 Annual Report on Form 10-K. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such regulations. The accompanying
condensed consolidated financial statements reflect all adjustments and
disclosures which are, in the opinion of management, necessary for a fair
presentation. All such adjustments are of a normal recurring nature. The
results of operations for the interim periods are not necessarily
indicative of the results of the entire year.
2. INTELSAT AND INMARSAT SHARE CHANGES
The corporation's ownership share of INTELSAT has increased slightly
since December 31, 1995.
The corporation received cash proceeds of $5.7 million for a reduction
in its ownership share in Inmarsat from 24.0% at December 31, 1995 to 23.0%
as of June 30, 1996.
3. INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out) or
market, consist of the following:
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June 30, December 31,
In thousands 1996 1995
- -----------------------------------------------------------------------------------------------
Finished goods $10,485 $ 8,137
Work in progress 14,263 10,260
Raw materials 9,215 8,454
-------- --------
Total $33,963 $26,851
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4. INVESTMENTS
As discussed in Notes 7 and 10 to the 1995 financial statements, the
corporation and Inmarsat have committed to invest in I-CO Global
Communications (Holdings) Limited (ICO). In January 1996, the corporation
made an additional $29.2 million investment in ICO. The total investment in
ICO, including the corporation's share of Inmarsat's investment in ICO, was
$54.2 million as of June 30, 1996. See Note 7 of this Form 10-Q for further
discussion of ICO matters.
5
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5. SATELLITE LAUNCH FAILURE
On February 14, 1996, the launch of the INTELSAT 708 satellite failed.
The corporation's share of the construction and capitalized interest costs
was fully insured. Insurance proceeds totaling $54.4 million were received
in the second quarter of 1996.
6. DENVER ARENA DEVELOPMENT PROJECT
On March 28, 1996, Ascent Entertainment Group Inc. (Ascent), an 80.67%
owned subsidiary of COMSAT, entered into an agreement with The Anschutz
Corporation (TAC), with which Ascent had been jointly developing a proposed
arena project in Denver, Colorado, to purchase TAC's interests and assets
related to the project. Ascent paid TAC $6.6 million in cash. Ascent also
agreed to pay an additional $5.0 million and granted a paid-up suite
license, both contingent on the construction and occupancy of the proposed
arena. As part of the agreement, TAC agreed to use reasonable efforts to
facilitate the development of the proposed arena. In connection with this
agreement, Ascent also purchased TAC's limited partnership interest in New
Elitch Gardens, Ltd. (Elitch Gardens), which owns an amusement park in
downtown Denver, for $4.1 million. This purchase increased Ascent's
ownership interest in Elitch Gardens from 13% to 26%.
Additionally, on March 28, 1996, Ascent entered into an agreement with
Southern Pacific Transportation Company (SPT) to purchase land in downtown
Denver for $20.0 million for the proposed arena site. Pursuant to the
agreement, the closing was to have occurred on or before June 28, 1996 but
did not take place, and the agreement terminated. The corporation has been
advised by Ascent that the agreement may be reinstated. If the agreement is
reinstated, consummation of the transaction is subject to several
conditions including obtaining reasonable financing, reaching agreements
with the city and county of Denver regarding the construction of the
proposed arena and the release of the Denver Nuggets and Colorado Avalanche
from their current leases at McNichols Arena.
7. REGULATORY MATTERS AND CONTINGENCIES
INVESTMENT IN ICO. As discussed in Note 10 to the 1995 financial
statements, the corporation has applied to the FCC for authority to
participate as an investor and service provider in ICO. In acting on the
application, which is opposed by ICO's competitors, the FCC will determine
whether the corporation satisfies the requisite legal and policy criteria
to participate in ICO. The corporation believes that all necessary
operating authorizations with respect to ICO will be obtained, although the
FCC may condition U.S. service via ICO on reciprocal access by ICO's U.S.
competitors to foreign markets. In addition, the provision of ICO service
in the U.S. may be subject to the availability of adequate spectrum on an
economic basis.
INMARSAT SATELLITES. As discussed in Note 11 to the 1995 financial
statements, the corporation had received FCC authorization to participate
in the procurement of four third- generation Inmarsat satellites, with an
application relating to a fifth satellite pending. The first Inmarsat-3
satellite was successfully launched in April 1996 and was placed in service
in May 1996. Also, in May 1996, the corporation received authorization to
participate in the procurement of the fifth satellite and to provide
communications services, including its Planet 1(SM) and other land mobile
services, over the Inmarsat-3 satellites.
6
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LITIGATION. As discussed in Note 11 to the 1995 financial statements,
the corporation is defending an antitrust suit brought by PanAmSat against
the corporation. 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 which is
pending before the court 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 adverse effect on the corporation's
financial statements.
On May 10, 1996, TRW, Inc. filed a patent infringement lawsuit in the
U.S. District Court for the Central District of California against ICO. The
suit seeks injunctive relief and monetary damages. The corporation has been
advised by ICO that it intends to vigorously defend the lawsuit.
8. PLANNED BUSINESS COMBINATION
On April 19, 1996, Ascent and its majority owned subsidiary, On
Command Video Corporation (OCV) entered into an agreement with
SpectraVision, Inc. (SpectraVision), which is currently operating under
Chapter 11 bankruptcy protection, and SpectraVision's Creditors Committee.
Pursuant to the agreement, Ascent would combine OCV with SpectraVision's
assets and certain of its liabilities to form a new company which would be
72.5 percent owned by Ascent and the current minority shareholders of OCV.
The SpectraVision bankruptcy estate would receive 27.5 percent of the new
company's stock which would be distributed through a bankruptcy plan to
SpectraVision's estate. The new company would also issue warrants to be
distributed by Ascent to purchase 13 percent of the new company's common
stock and warrants to SpectraVision's estate to purchase another 7 percent
of the stock, in each case on a fully diluted basis. Ascent has agreed that
warrants to purchase 9.2 percent of the new company's common stock will be
distributed to Ascent's financial advisor in consideration for services in
connection with the transaction and for the new company in the future.
On August 2, 1996, the Bankruptcy Court approved SpectraVision's
disclosure statement for distribution to SpectraVision's creditors. The
Court set September 4, 1996 as the date by which creditors must vote on the
Plan of Reorganization (the Plan) described in the disclosure statement,
and set September 11, 1996, as the date for a confirmation hearing to
approve the Plan. Ascent, OCV and SpectraVision are negotiating the final
terms and conditions of certain agreements which must be entered into prior
to consummation of the transaction. The transaction remains subject to
bankruptcy court approval and other conditions. Assuming such conditions
are satisfied Ascent's management believes the transaction will be
completed by the end of the third quarter.
9. NEW ACCOUNTING PRONOUNCEMENT
As discussed in Note 1 to the corporation's 1995 financial statements,
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" was issued in 1995 and was effective beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No.
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25, "Accounting for Stock Issued to Employees," which recognizes
compensation based on the intrinsic value of the equity instrument awarded.
The corporation has elected to continue to account for its stock-based
compensation awards to employees under APB No. 25 and will disclose the
required pro forma effect on net income and earnings per share in the
corporation's 1996 annual financial statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1996
ANALYSIS OF OPERATIONS
CONSOLIDATED OPERATIONS
- -----------------------
Consolidated revenues for the second quarter of 1996 were $232.3
million, an increase of $21.4 million over the second quarter of 1995. The
majority of the increase came from growth within the Technology Services
segment. All business units reported increases in second quarter revenues
over the same period of last year, except COMSAT Mobile Communications
(CMC) and Ascent Entertainment Group, Inc. (Ascent). Excluding
non-recurring revenues recorded in the second quarter of 1995 associated
with National Basketball Association (NBA) expansion fees, Ascent's second
quarter revenues increased over the same period last year. Year-to-date
revenues were $478.0 million, an increase of $59.3 million over the same
period last year which reflects improvements in all business units except
CMC.
Operating income in the second quarter was $22.7 million, a decline of
$22.3 million from the prior year. During the second quarter of 1995, the
corporation recorded non-recurring credits totaling $14.8 million that
included a benefit plan curtailment gain at COMSAT RSI, Inc. (CRSI), a
credit for Inmarsat-related costs in CMC that were over-accrued during 1994
and the NBA expansion fees. Excluding non-recurring items, the decline over
the second quarter of 1995 was $7.5 million. For the first half of 1996
operating income was $48.4 million, $26.3 below the comparable period in
1995. Excluding non-recurring items, the decrease was $11.5 million. The
primary causes of the decline in operating income were the establishment of
a contingency reserve in International Communication's regulated World
Systems division, lower revenues and increased satellite depreciation
expense in CMC, and increased operating losses in Ascent.
Interest and other income (expense), net, decreased in the second
quarter and year-to-date by $1.9 million and $5.3 million, respectively,
largely due to dividend payments on the $200 million of Monthly Income
Preferred Securities which were issued in July 1995, offset in part by the
minority interest in the losses from Ascent.
Interest expense, net of amounts capitalized, for the quarter as well
as for the year-to-date period, was relatively unchanged from 1995. This
was as a result of a decrease in interest expense because of reduced
short-term borrowings, offset by lower interest capitalized due to
completion of satellite projects.
The tax provision for the second quarter of 1996 reflects an increase
in the corporation's effective tax rate for the year. The effective tax
rate increased primarily due to higher non-deductible losses from foreign
ventures.
Net income for the second quarter was $5.8 million, which was $16.2
million below that of the same period last year. Year-to-date net income
was $15.1 million, which was $21.5 million lower than the first half of
1995. Excluding the non-recurring items discussed above, income declined
$6.8 million for the second quarter and $12.0 million for the first six
months of 1996. Earnings per share for the second quarter and first half of
1996 were $0.12 and $0.31,
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respectively, compared to $0.46 and $0.77 for the same periods last year.
Excluding non-recurring items, earnings per share for the second quarter
and first half of 1995 were $0.26 and $0.57, respectively.
SEGMENT OPERATING RESULTS
- -------------------------
Commencing in 1996, the corporation reports operating results in three
segments: International Communications, Technology Services and
Entertainment. The International Communications segment includes COMSAT
World Systems (CWS), COMSAT Mobile Communications (CMC) and COMSAT
International Ventures (CIV). Prior to 1996, CMC was reported in a separate
segment.
RESULTS BY SEGMENT:
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Quarter Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
In millions 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
REVENUES
- --------
International Communications:
World Systems $ 67.5 $ 63.0 $133.1 $125.7
Mobile Communications 39.3 46.1 81.9 93.2
International Ventures 12.4 8.2 24.3 16.1
------- ------- ------- -------
Total International Communications 119.2 117.3 239.3 235.0
Technology Services 70.4 48.1 132.0 94.9
Entertainment 49.1 49.3 118.7 96.7
Eliminations and other (6.4) (3.9) (12.0) (7.9)
------- ------- ------- -------
Total revenues $232.3 $210.8 $478.0 $418.7
======= ======= ======= =======
OPERATING INCOME (LOSS)
- -----------------------
International Communications:
World Systems $ 24.0 $ 26.7 $ 49.4 $ 54.3
Mobile Communications 11.2 17.6 24.9 30.2
International Ventures (4.6) (4.6) (8.5) (8.0)
------- ------- ------- -------
Total International Communications 30.6 39.7 65.8 76.5
Technology Services 5.1 6.5 8.5 9.1
Entertainment (6.9) 6.3 (11.1) 3.1
------- ------- ------- -------
Total segment operating income 28.8 52.5 63.2 88.7
General and administrative expenses (5.5) (5.8) (12.6) (10.7)
Other (0.6) (1.8) (2.2) (3.3)
------- ------- ------- -------
Total operating income $ 22.7 $ 44.9 $ 48.4 $ 74.7
======= ======= ======= =======
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INTERNATIONAL COMMUNICATIONS
- ----------------------------
Revenues in the International Communications segment in the second
quarter were $119.2 million and for the first six months were $239.3
million, 2% better than the same periods of last year. Operating income for
the second quarter was $30.6 million and for the first half of 1996 was
$65.8 million, 23% and 14% lower than the same periods of 1995,
respectively.
CWS's second quarter and year-to-date revenues increased 7% and 6%,
respectively, over the same periods of 1995 mostly due to increases in VSAT
leases, INTELSAT system revenues, IBS traffic and Wide-band Mobile
revenues. Operating income in CWS declined 10% in the second quarter and 9%
for the first half of the year as compared to the previous year. This was a
result of a lower rate base in the regulated business, offset in part by
higher revenues.
Revenues in CMC, as compared to last year, decreased 15% in the second
quarter and 12% for the first six months of 1996 primarily as a result of
the expiration of the AMSC service contract, lower revenues from IDB and a
decline in telex traffic. In addition, analog telephone revenues decreased
relative to last year, since traffic remained flat year-to-year while
prices decreased to meet continued competitive pressures. Digital service
revenues are slightly improved, but CMC's market share has declined over
last year. The lower market share is the result of aggressive pricing by
CMC's competitors and delays in introducing several digital data services
caused by technical problems.
CMC's operating income declined $6.4 million for the second quarter
and $5.3 million for the first half as compared to last year. During the
second quarter of 1995, CMC recorded a $3.3 million non-recurring credit
for Inmarsat-related costs that were over-accrued during 1994. Exclusive of
the non-recurring, item the decline over last year was $3.1 million for the
quarter and $2.0 million for the first six months. This was primarily as a
result of the decline in revenues offset in part by cost savings from the
third quarter 1995 restructuring.
CIV's revenues increased 50% over last year for both the second
quarter and the first half of 1996 principally due to the growth in the
Argentina and Brazil ventures, offset in part by decreases in the Russian
venture, BelCom. In 1995, CIV experienced operational difficulties at
BelCom and management changes were made during the first quarter of 1996.
CIV's operating loss, as compared to last year, was unchanged for the
quarter and 6% higher for the first half of the year. Improvements in
operating income in the Argentina and Brazil ventures were offset by
start-up costs in CIV's newer ventures.
TECHNOLOGY SERVICES
- -------------------
The Technology Services segment includes CRSI and COMSAT Laboratories.
This segment reported a 46% improvement in revenues in the second quarter
and a 39% increase year-to-date over the same periods of last year.
Approximately half of the growth was related to the consolidation of
revenues from two new companies, JEFA and Plexsys International, which were
not included in consolidated results until the second half of 1995. The
balance of the improvement came predominantly from the Commercial Satellite
Communications Initiative (CSCI) contract with the U.S. Department of
Defense, mobile satellite service programs and shipments of wireless
antennas which were mostly for the U.S. Personal Communications Service
(PCS) market. Operating income declined $1.4 million for the second quarter
and $0.6
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million for the first half of 1996 as compared to last year. During the
second quarter of 1995, CRSI recorded a non-recurring benefit plan
curtailment gain of $2.7 million. Excluding such gain, Technology Services
performance improved over last year by $1.3 million for the quarter and
$2.1 million for the first six months of 1996, which is primarily the
result of the improvement in revenues.
ENTERTAINMENT
- -------------
The Entertainment segment is comprised of Ascent of which COMSAT owns
80.67% of the common stock. Revenues for the second quarter were $49.1
million as compared to $49.3 million for the same period of last year. For
the first six months, revenues were $118.7 million as compared to $96.7
million. The second quarter of 1995 included non-recurring revenues of $8.8
million related to NBA expansion fees. In addition, the second quarter and
first half of 1995 included revenues of $6.8 million and $13.7 million,
respectively, for the Satellite Cinema business, which ceased operations
December 31, 1995. Exclusive of these items, revenues improved in the
second quarter by $15.4 million and for the first half of 1996 by $44.5
million. Approximately half of these increases is related to the Colorado
Avalanche National Hockey League franchise, which was acquired in July
1995. The balance of the increase was predominantly related to growth at On
Command Video Corporation (OCV).
This segment's operating loss for the second quarter was $6.9 million
as compared to operating income of $6.3 million for the same period of
1995. For the first half of the year, the loss was $11.1 million compared
to income of $3.1 million for the same period last year. The decreases in
both periods are primarily attributable to the non-recurring 1995 NBA
expansion fees and losses related to the Ascent sport franchises, offset in
part by improvements resulting from the elimination of the unprofitable
Satellite Cinema operations which incurred a $2.7 million operating loss
during the first half of 1995.
OUTLOOK
- -------
MANY OF THE STATEMENTS THAT FOLLOW ARE FORWARD-LOOKING AND RELATE TO
ANTICIPATED FUTURE OPERATING RESULTS. STATEMENTS WHICH LOOK FORWARD IN TIME
ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ASSUMPTIONS, WHICH MAY
BE AFFECTED BY SUBSEQUENT DEVELOPMENTS AND BUSINESS CONDITIONS, AND
NECESSARILY INVOLVE RISKS AND UNCERTAINTIES. THEREFORE, THERE CAN BE NO
ASSURANCE THAT ACTUAL FUTURE RESULTS WILL NOT DIFFER MATERIALLY FROM
ANTICIPATED RESULTS. ALTHOUGH THE CORPORATION HAS ATTEMPTED TO IDENTIFY
SOME OF THE IMPORTANT FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED, THOSE FACTORS SHOULD NOT BE VIEWED AS
THE ONLY FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS.
In July 1996, Bruce L. Crockett resigned as president and chief
executive officer, and the Board of Directors elected Betty C. Alewine
president and chief executive officer of the corporation. The corporation
also announced that it planned to concentrate its primary efforts on its
core international telecommunications services and venture businesses, and
over time, to redeploy its capital into such businesses. Among other
things, this could entail a further reduction in the corporation's
ownership interest in Ascent at an opportune time.
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In the first quarter of 1996, the corporation retained an investment
banker to assess strategic alternatives for enhancing shareholder value and
to analyze the capital needs of its businesses for continued expansion,
while permitting COMSAT as a parent organization to reduce debt, strengthen
its balance sheet and improve liquidity. The investment banker's portion of
the review has been completed. The corporation is now actively considering
the alternatives encompassed by the study and is prioritizing those options
in light of strategic, operational and market conditions. Actions as a
result of this analysis will be announced as and when decisions are made
and implemented.
CWS's operating income is expected to be lower in the second half of
the year as compared to the first half of 1996 due to a reduced rate base
resulting from the receipt in the second quarter of 1996 of insurance
proceeds related to the launch failure of the INTELSAT 708 satellite.
Operating income in CMC for the second half of 1996 is expected to
decline over the first half of the year as CMC seeks to respond to
competition by lowering several service prices and improving the
operational performance of its digital services. In addition, the
introduction of Planet 1(SM) in the fourth quarter will result in increased
start-up costs.
CIV's revenues are expected to continue to grow, driven by increases
in the Argentina and Brazil ventures. CIV losses for the second half of
1996 are expected to be at approximately the same level as the first half
of the year as increases in operating income in the Argentina and Brazil
ventures are offset by losses at BelCom and CIV's newer ventures. It is
anticipated that BelCom will continue to have a negative impact on earnings
as BelCom's new management team takes steps to improve operating results.
Delays in achieving improvements in BelCom's operating results could result
in greater than expected losses at CIV. In August 1996, the corporation
increased its ownership interest in BelCom from 72.2% to 98.5% of BelCom's
outstanding voting stock primarily as a result of converting certain
outstanding indebtednes of Belcom into equity. Accordingly, the corporation
will recognize a larger portion of BelCom's losses in the second half of
1996.
Revenues in Technology Services are expected to continue to increase
as a result of anticipated strong worldwide demand for wireless
communications infrastructure and increased U.S. Government spending on
advanced communications products and services. Operating margins and income
in Technology Services are also expected to improve, although not at the
same pace as revenues due to the introduction of services under the CSCI
contract, the roll-out of new VSAT and cellular switch products and
increasing investment in product development. Backlog in the Technology
Services segment at June 30, 1996 was $247 million as compared to $209
million at June 30, 1995. Earnings growth in Technology Services, however,
will continue to depend upon this segment's ability to contain costs and
complete projects with favorable margins.
Operating losses at Ascent Entertainment Group are projected to be
higher in the second half of the year as compared to the first half of
1996. This is primarily a result of seasonality, increased costs in the
sports franchises and at OCV, and the expected impact of the pending
SpectraVision transaction on OCV results. A number of factors could cause
Ascent's
13
<PAGE>
actual results to differ materially from those projected, including, but
not limited to, unanticipated costs associated with consummation of the
SpectraVision transaction or integration of SpectraVision's and OCV's
businesses, the level of ticket sales and other revenues by Ascent's
professional sports franchises, and market conditions.
On a consolidated basis, the corporation expects continued improvement
in revenues as a result of growth predominantly within the Technology
Services and Entertainment segments. Interest costs are expected to
increase during the balance of 1996 due to increased borrowings primarily
for capital expenditures. Operating results in the second half of 1996 are
expected to be significantly below results for the same period of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash in the first half of 1996 were operations,
short-term borrowings and insurance proceeds related to the February 1996
launch failure of the INTELSAT 708 satellite. Cash was expended primarily
for property and equipment, repayment of life insurance loans, investment
in ICO and dividends. The corporation's working capital decreased from
$221.4 million at December 31, 1995 to $135.1 million at June 30, 1996.
The corporation has $26 million remaining at June 30, 1996 under a
$100 million medium-term note program, which is unchanged from year-end
1995. The medium-term note program is part of a $200 million debt
securities shelf registration program initiated in 1994.
The corporation has access to short- and long-term financing at
favorable rates. The corporation's current long-term debt ratings are A-
from Standard and Poor's and A3 from Moody's. The corporation's current
commercial paper ratings are A2 from Standard and Poor's and P2 from
Moody's.
The corporation's capital structure and debt-financing activities are
regulated by the FCC. The corporation is required to submit a financial
plan to the FCC for review annually. Under existing FCC guidelines, the
corporation is subject to a maximum long-term debt to total capital ratio
of 45%, a limit of $200 million in short-term debt and an interest coverage
ratio of 2.3 to 1. In April 1996, the corporation submitted its current
plan, which seeks a temporary decrease in the interest coverage ratio to a
minimum of 1.9 to 1 for the 1996 plan year and an increase in its
short-term debt limit to $275 million as long as the financials of Ascent
are consolidated with those of COMSAT.
The corporation was in compliance with both the long-term debt to
total capital ratio and the short-term debt limit at June 30, 1996 and
expects to be in compliance with those guidelines at year-end 1996 if the
short-term debt limit is modified as requested. If the FCC approves this
request, the corporation expects that the cash flows from operations and
its short-term borrowing capacity will be sufficient to fund its cash
requirements for the balance of 1996. Comsat expects to seek a further
modification of the interest coverage ratio, in order to comply with that
guideline at the December 31, 1996 annual measurement date, primarily due
to Ascent's operations. Accordingly, the corporation will need to apply for
a further modification of the interest coverage ratio and, in order to meet
its funding requirements beyond 1996, may seek a further modification of
the short-term debt limit.
14
<PAGE>
If the corporation were to fail to satisfy one or more of the FCC
guidelines as of an applicable measurement date, the corporation would be
required to seek advance FCC approval of future financing activities on a
case by case basis. If such approval were not granted, the corporation
could be required to reduce or reschedule planned capital investments,
reduce cash outlays, reduce debt or sell assets.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
See Notes 7 and 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
---------------------------------------------------
At the Corporation's Annual Meeting of Shareholders held on May
17, 1996 (the "Annual Meeting"), all twelve of the Corporation's
nominees for director were elected by the vote totals noted
below:
Nominee For Withheld
------- --- --------
Lucy Wilson Benson 40,877,599 406,100
Edwin I. Colodny 40,876,797 406,901
Bruce L. Crockett 40,861,828 419,332
Lawrence S. Eagleburger 40,863,831 419,867
Neal B. Freeman 40,887,576 396,122
Arthur Hauspurg 40,873,674 409,997
Caleb B. Hurtt 40,890,337 393,361
Peter W. Likens 40,890,028 393,670
Howard M. Love 40,890,261 393,437
Robert G. Schwartz 40,875,226 408,472
C. J. Silas 40,889,350 393,348
Delores D. Wharton 40,927,189 356,509
Bruce L. Crockett resigned as a director of the Corporation on
July 19, 1996. The Corporation also has three directors who are
appointed by the President pursuant to the Satellite Act of 1962
and whose terms continued after the Annual Meeting. They are:
Barry M. Goldwater, Peter S. Knight and Charles T. Manatt.
The following additional matters were approved at the Annual
Meeting:
o amendment of the Non-Employee Directors Stock Option Plan to
(i) authorize the grant of share awards or phantom stock
units, and (ii) provide for the vesting of participants'
rights under the Plan in the event of certain changes in
control, which amendment was approved by a vote of
38,744,089 for, 1,872,431 against, 355,677 abstentions and
312,194 broker non-votes; and
16
<PAGE>
o appointment of Deloitte & Touche LLP as independent public
accountants of the Corporation for the fiscal year ending
December 31, 1996, which appointment was approved by a vote
of 41,014,447 for, 114,542 against and 155,402 abstentions.
A shareholder proposal requiring the reporting of governmental
service during the past five years of certain of the
Corporation's directors, officers and consultants was defeated by
vote of 1,367,737 for, 28,982,244 against, 2,103,282 abstentions
and 8,831,128 broker non-votes.
ITEM 5. Other Information
-----------------
None
ITEM 6. (a) Exhibits
--------
No. 11 - Computation of Earnings per Share
No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
Report dated April 19, 1996 reporting that Ascent
Entertainment Group, Inc. had entered into an agreement to
acquire certain assets of SpectraVision, Inc.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
COMSAT Corporation
------------------
By /s/ Alan G. Korobov
-------------------
Alan G. Korobov
Controller
Date: August 14, 1996
18
<PAGE>
Exhibit 11
COMSAT CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Share
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
In thousands, except per share amounts 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
PRIMARY
- -------
Earnings $ 5,782 $22,012 $15,109 $36,585
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 48,267 47,179 48,086 47,084
Add shares issuable from assumed exercise
of options 1,078 676 859 672
------- ------- ------- -------
Weighted average shares 49,345 47,855 48,945 47,756
======= ======= ======= =======
Primary earnings per share $0.12 $0.46 $0.31 $0.77
======= ======= ======= =======
ASSUMING FULL DILUTION
- ----------------------
Earnings $5,782 $22,012 $15,109 $36,585
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 48,267 47,179 48,086 47,084
Add shares issuable from assumed exercise
of options 1,085 678 1,060 421
------- ------- ------- -------
Weighted average shares 49,352 47,857 49,146 47,505
======= ======= ======= =======
Fully diluted earnings per share $0.12 $0.46 $0.31 $0.77
======= ======= ======= =======
</TABLE>
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000022698
<NAME> COMSAT CORPORATION
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 APR-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<EXCHANGE-RATE> 1.00 1.00
<CASH> 27,320 27,320
<SECURITIES> 0 0
<RECEIVABLES> 278,987 278,987
<ALLOWANCES> 0 0
<INVENTORY> 33,963 33,963
<CURRENT-ASSETS> 372,005 372,005
<PP&E> 2,738,237 2,738,237
<DEPRECIATION> 1,206,670 1,206,670
<TOTAL-ASSETS> 2,359,616 2,359,616
<CURRENT-LIABILITIES> 236,875 236,875
<BONDS> 657,585 657,585
0 0
0 0
<COMMON> 328,597 328,597
<OTHER-SE> 520,846 520,846
<TOTAL-LIABILITY-AND-EQUITY> 2,359,616 2,359,616
<SALES> 0 0
<TOTAL-REVENUES> 477,972 232,247
<CGS> 0 0
<TOTAL-COSTS> 297,995 142,969
<OTHER-EXPENSES> 131,538 66,603
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 19,316 10,215
<INCOME-PRETAX> 26,634 11,327
<INCOME-TAX> 11,525 5,545
<INCOME-CONTINUING> 15,109 5,782
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 15,109 5,782
<EPS-PRIMARY> 0.31 0.12
<EPS-DILUTED> 0.31 0.12
</TABLE>
