SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1997
Commission File Number 1-4929
COMSAT CORPORATION
6560 Rock Spring Drive
Bethesda, MD 20817
(301) 214-3000
District of Columbia 52-0781863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve (12) months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past ninety (90)
days. Yes [X] No [ ]
49,132,000 shares of the Registrant's common stock were outstanding as of
June 30, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS FOR THE CORPORATION (UNAUDITED)
COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Income Statements
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
In thousands, except per share amounts 1997 1996 1997 1996
- - --------------------------------------------------------------------------------------------------------------
REVENUES $141,274 $134,130 $275,100 $264,639
--------- --------- --------- ---------
Operating expenses:
Cost of services 63,919 61,888 123,837 120,365
Depreciation and amortization 44,846 37,863 88,309 73,230
Research and development 2,304 2,633 3,794 4,823
General and administrative 6,793 5,529 12,597 12,618
--------- --------- --------- ---------
Total operating expenses 117,862 107,913 228,537 211,036
--------- --------- --------- ---------
OPERATING INCOME 23,412 26,217 46,563 53,603
Interest and other income (expense), net 798 (4,356) (210) (7,320)
Interest expense, net of amounts capitalized (10,176) (8,103) (19,838) (15,613)
--------- --------- --------- ---------
Income from continuing operations before
taxes, minority interest and extraordinary item 14,034 13,758 26,515 30,670
Income tax expense (5,483) (6,728) (10,254) (13,459)
Minority interest in net losses of consolidated
subsidiaries 547 1,302 936 2,263
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM 9,098 8,332 17,197 19,474
--------- --------- --------- ---------
Discontinued operations, net of income tax:
Loss from operations (5,192) (2,550) (17,572) (4,365)
Loss on disposal (11,289) - (11,289) -
--------- --------- --------- ---------
Total discontinued operations (16,481) (2,550) (28,861) (4,365)
Income (loss) before extraordinary item (7,383) 5,782 (11,664) 15,109
Extraordinary loss from early extinguishment
of debt (net of tax) (2,936) - (3,946) -
--------- --------- --------- ---------
NET INCOME (LOSS) $(10,319) $ 5,782 $(15,610) $ 15,109
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.18 $ 0.17 $ 0.35 $ 0.40
Loss from discontinued operations (0.33) (0.05) (0.58) (0.09)
Extraordinary loss (0.06) - (0.08) -
--------- --------- --------- ---------
Net income (loss) $ (0.21) $ 0.12 $ (0.31) $ 0.31
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
In thousands 1997 1996
- - ----------------------------------------------------------------------------------------------------------------
ASSETS
- - ------
CURRENT ASSETS:
Cash and cash equivalents $ 6,584 $ 7,659
Receivables 162,266 132,616
Other 18,473 18,402
Net assets of discontinued operations 176,329 386,506
----------- -----------
Total current assets 363,652 545,183
----------- -----------
Property and equipment (net of accumulated depreciation
of $1,067,203 in 1997 and $1,027,437 in 1996) 1,324,308 1,322,985
Investments 87,209 124,442
Goodwill 12,801 13,189
Other assets 112,425 98,512
----------- -----------
Total assets $1,900,395 $2,104,311
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 10,376 $ 13,802
Commercial paper 161,014 17,993
Accounts payable and accrued liabilities 69,142 73,314
Due to related parties 32,554 42,562
Other 18,810 15,342
----------- -----------
Total current liabilities 291,896 163,013
----------- -----------
Long-term debt 466,630 578,379
Deferred income taxes and investment tax credits 124,977 131,827
Accrued postretirement benefit costs 51,350 50,423
Other long-term liabilities 137,339 134,523
Minority interest 5,256 4,329
Preferred Securities issued by subsidiary 200,000 200,000
STOCKHOLDERS' EQUITY:
Common stock 346,914 340,691
Retained earnings 280,595 502,839
Treasury stock (1,377) (3,006)
Other (3,185) 1,293
----------- -----------
Total stockholders' equity 622,947 841,817
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,900,395 $2,104,311
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Cash Flow Statements
<TABLE>
<CAPTION>
<S> <C><C>
Six Months Ended June 30,
-----------------------------
In thousands 1997 1996
- - ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (15,610) $ 15,109
Adjustments to reconcile net income (loss) to cash flow of
continuing operations:
Depreciation and amortization 88,309 73,230
Extraordinary loss on extinguishment of debt 3,946 -
Loss from discontinued operations 28,861 4,365
Changes in operating assets and liabilities (19,346) (1,622)
Other (3,741) 4,023
----------- -----------
Net cash provided by continuing operations 82,419 95,105
Net cash used by discontinued operations (5,442) (22,802)
----------- -----------
Net cash provided by operating activities 76,977 72,303
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (120,757) (120,241)
Investments in unconsolidated businesses (10,092) (34,170)
Proceeds from sale of investments 9,060 -
Proceeds from note on sale of investment 6,809 -
Insurance proceeds from satellite launch failure - 54,443
Decrease (increase) in INTELSAT ownership 20,986 (1,054)
Decrease in Inmarsat ownership - 5,746
Other (4,425) 7,072
----------- -----------
Net cash used in investing activities (98,419) (88,204)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 5,792 8,066
Cash dividends paid (12,000) (18,753)
Repayment/extinguishment of long-term debt (112,710) (8,460)
Net short-term borrowings 143,021 -
Repayment against company-owned life insurance policies (3,736) (51,443)
Other - (16)
----------- -----------
Net cash provided by (used for) financing activities 20,367 (70,606)
----------- -----------
Net decrease in cash and cash equivalents (1,075) (86,507)
Cash and cash equivalents, beginning of period 7,659 109,512
----------- -----------
Cash and cash equivalents, end of period $ 6,584 $ 23,005
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
See non-cash dividend discussed in Note 2 to the financial statements.
4
<PAGE>
COMSAT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by COMSAT Corporation (COMSAT or the corporation)
pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). These financial statements should be read in the
context of the financial statements and notes thereto filed with the SEC in
the corporation's 1996 Annual Report on Form 10-K. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such regulations. The accompanying
condensed consolidated financial statements reflect all adjustments and
disclosures which, in the opinion of management, are necessary for a fair
presentation. All such adjustments are of a normal recurring nature. The
results of operations for the interim periods are not necessarily
indicative of the results of the entire year.
2. DISCONTINUED OPERATIONS
The corporation placed Ascent Entertainment Group, Inc. (Ascent), its
entertainment subsidiary, and substantially all of the assets and
operations of COMSAT RSI, Inc. (CRSI), its manufacturing subsidiary, into
discontinued operations during the second quarter of 1997. The condensed
consolidated financial statements have been restated for all prior periods
presented to reflect the results of operations and net assets of Ascent and
CRSI as discontinued operations.
Ascent Entertainment Group
- - --------------------------
The corporation distributed its 80.67% ownership interest in Ascent
through a tax-free dividend to shareholders on June 27, 1997 (the
"Distribution"). COMSAT shareholders of record on June 19, 1997 received
0.4888 of a share of Ascent common stock for each share of COMSAT common
stock owned. Ascent was placed in discontinued operations on May 16, 1997,
the date on which the corporation's Board of Directors adopted a formal
plan to effect the Distribution. The book value of the net assets of Ascent
totaled approximately $195 million at June 27, 1997 and consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
In millions
- - --------------------------------------------------------------------
Current assets $ 89.2
Property and equipment, net 308.2
Intangible and other assets 343.3
Short-term debt 176.0
Other current liabilities 151.3
Long-term debt 50.0
Other non-current liabilities 168.8
--------
Net assets $ 194.6
========
</TABLE>
The non-cash dividend was recorded as an adjustment to retained
earnings.
5
<PAGE>
The operating results of the discontinued entertainment operations,
net of minority interests, are summarized below. The loss on disposal
includes Ascent's operating loss subsequent to May 16, 1997 through June
27, 1997 of $7.4 million, and costs of $4.1 million incurred by COMSAT to
facilitate the distribution. The tax expense associated with the loss on
disposal also includes a charge of $4.4 million to recognize an additional
tax provision on deferred inter-company gains while Ascent was included in
COMSAT's consolidated tax return.
COMSAT RSI, Inc.
- - ----------------
CRSI was placed in discontinued operations as of June 30, 1997. As
part of its strategic plan, the corporation has announced that it intends
to sell substantially all of the assets and operations of CRSI. See
"Management's Discussion and Analysis --Outlook." CRSI designs,
manufacturers and integrates earth stations as well as wireless and
advanced antenna systems.
The operating results of the discontinued operations for the three and
six months ended June 30, 1997 and June 30, 1996 are summarized below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended June 30,
------------------------------------------------------
In millions 1997 1996
- - ------------------------------------------------------------------------------------------------------------------
Ascent CRSI Total Ascent CRSI Total
------- ------- ------- ------- ------- -------
Revenues $ 87.7 $ 61.1 $148.8 $ 56.0 $ 49.0 $105.0
======= ======= ======= ======= ======= =======
Income (loss) from operations before
taxes and minority interest $ (6.7) $ (2.7) $ (9.4) $ (8.4) $ 2.9 $ (5.5)
Income tax benefit (expense) 0.6 1.1 1.7 2.6 (0.9) 1.7
Minority interest 2.2 0.3 2.5 1.1 0.1 1.2
------- ------- ------- ------- ------- -------
Income (loss) from operations (3.9) (1.3) (5.2) (4.7) 2.1 (2.6)
------- ------- ------- ------- ------- -------
Loss on disposal before taxes (11.5) (11.5)
Income tax benefit (expense) (2.0) (2.0)
Minority interest 2.2 2.2
------- ------- -------
Loss on disposal (11.3) - (11.3)
------- ------- -------
Income (loss) on discontinued
operations $(15.2) $ (1.3) $(16.5) $ (4.7) $ 2.1 $ (2.6)
======= ======= ======= ======= ======= =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30,
-------------------------------------------------------
In millions 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
Ascent CRSI Total Ascent CRSI Total
------- ------- ------- ------- ------- --------
Revenues $177.5 $121.3 $298.8 $128.4 $ 94.7 $223.1
======= ======= ======= ======= ======= =======
Income (loss) from operations before
taxes and minority interest $(34.7) $(0.4) $(35.1) $(13.8) $ 4.9 $ (8.9)
Income tax benefit (expense) 6.2 0.2 6.4 4.2 (1.5) 2.7
Minority interest 10.7 0.4 11.1 1.7 0.1 1.8
------- ------ ------- ------- ------- -------
Income (loss) from operations (17.8) 0.2 (17.6) (7.9) 3.5 (4.4)
------- ------ ------- ------- ------- -------
Loss on disposal before taxes (11.5) (11.5)
Income tax benefit (expense) (2.0) (2.0)
Minority interest 2.2 2.2
------- ------ -------
Loss on disposal (11.3) - (11.3)
------- ------ -------
Income (loss) on discontinued
operations $(29.1) $ 0.2 $(28.9) $(7.9) $ 3.5 $ (4.4)
======= ====== ======= ====== ======= =======
</TABLE>
The net assets of the discontinued operations are summarized below:
<TABLE>
<CAPTION>
<S> <C><C> <C><C> <C><C> <C><C> <C><C> <C><C>
June 30, 1997 December 31, 1996
------------- ----------------------------------
In millions CRSI Ascent CRSI Total
- - ------------------------------------------------------------------------------------------------------------------
Current assets $184.5 $ 83.4 $174.4 $257.8
Fixed assets, net 32.0 301.5 32.3 333.8
Intangible and other assets 14.4 12.9 351.4 364.3
Short-term debt 0.3 0.4 145.5 145.9
Other current liabilities 44.4 39.3 143.6 182.9
Long-term debt 6.6 52.0 5.1 57.1
Other non-current liabilities 3.3 4.6 178.9 183.5
------- ------- ------- -------
Net assets discontinued operations $176.3 $216.3 $170.2 $386.5
======= ======= ======= =======
</TABLE>
3. INTELSAT AND INMARSAT SHARE CHANGES
The corporation's ownership share of INTELSAT decreased from 19.1% at
December 31, 1996 to 18.0% as of June 30, 1997. As a result of the change
in ownership, the corporation is expected to receive a total of $23.0
million, of which $21.0 million was received during the first six months of
1997.
The corporation's 23% ownership share of Inmarsat as of June 30, 1997
is unchanged from December 31, 1996.
4. INVESTMENTS
In January 1997, the corporation sold its remaining interest in
Philippine Global Communications, Inc. (PhilCom) at book value in exchange
7
<PAGE>
for cash and a collateralized note receivable totaling $34.3 million, to be
paid in installments with interest through December 31, 1998. The
corporation received cash proceeds of $8.5 million in the first quarter of
1997 and $8.8 million in July 1997.
In the second quarter of 1997, the corporation sold certain marketable
equity securities and recognized a $2.0 million pre-tax gain.
5. REGULATORY MATTERS AND CONTINGENCIES
GOVERNMENT REGULATION. Under the Communications Satellite Act of 1962
(the Satellite Act), the International Maritime Satellite Act of 1978 (the
Inmarsat Act) and the Communications Act of 1934, as amended (the
Communications Act), COMSAT is subject to regulation by the Federal
Communications Commission (FCC) with respect to its capital and
organizational structure, as well as CWS and CMC's plant, operations,
services and rates. FCC decisions and policies have had and will continue
to have a significant impact on the corporation. For a discussion of these
matters refer to the description of the corporation's "Business" and Notes
10 and 11 to the corporation's 1996 financial statements included as part
of the corporation's 1996 Form 10-K and the "Management's Discussion and
Analysis -- Outlook" section of the Form 10-Q.
LITIGATION. COMSAT and its subsidiaries are a party to various
lawsuits and arbitration proceedings and are subject to various claims and
inquiries, which generally are incidental to the ordinary course of its
business. The outcome of legal proceedings cannot be predicted with
certainty. Based on currently available information, however, management
does not believe that the outcome of any matter which is pending or
threatened, either individually or in the aggregate, will have a materially
adverse effect on the consolidated financial condition of the corporation
but could materially effect consolidated results of operations in a given
year or quarter. Certain of those matters are discussed in Notes 10 and 11
to the corporation's 1996 financial statements and "Item 3 - Legal
Proceedings" included as part of the corporation's 1996 Form 10-K
As discussed in Note 11 to the 1996 financial statements, in September
1996, the U.S. District Court for the Southern District of New York granted
the corporation's motion for summary judgment in an anti-trust suit brought
by PanAmSat Corporation and dismissed the complaint in its entirety.
PanAmSat subsequently filed an appeal. In April 1997, the U.S. Court of
Appeals for the Second Circuit denied PanAmSat's appeal.
6. EXTRAORDINARY LOSS FROM EARLY RETIREMENT OF DEBT
During the period March 25, 1997 through April 9, 1997, the
corporation offered to purchase for cash its 8.125% notes due April 1, 2004
in a fixed-spread offering. The corporation repurchased $89.5 million of
the 8.125% notes and $10.0 million of its 7.7% medium term notes using
proceeds from short-term debt. The debt extinguishment loss related to the
repurchases was $4.6 million ($2.9 million after tax) and $6.2 million
($3.9 million after tax) for the three and six months ended June 30, 1997,
respectively.
8
<PAGE>
7. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting earnings
per share. This statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; early
application is not permitted. The corporation will adopt this standard in
the fourth quarter of 1997 and will restate all prior period earnings per
share data presented as required. Adoption of this statement is not
expected to have a material effect on the corporation's reported net income
(loss) per common share.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131). SFAS No.130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 131 establishes standards for the way public business
enterprises report information about operating segments and the related
disclosures about products and services, geographic areas, and major
customers. Both statements are effective for financial statements issued
for fiscal years beginning after December 15, 1997. The corporation is
reviewing what effect the new standards will have on future reporting;
however, the new standards will not have any material effect on the
corporation's financial condition.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1997
ANALYSIS OF OPERATIONS
Consolidated Operations
- - -----------------------
During the second quarter of 1997, the corporation placed both Ascent
Entertainment Group, Inc. (Ascent) and substantially all of COMSAT RSI,
Inc. (CRSI) in discontinued operations. The condensed consolidated
financial statements (unaudited) have been restated for all periods
presented to reflect them as discontinued operations.
Continuing Operations
- - ---------------------
In the second quarter of 1997, the corporation realigned its business
segments and for that and subsequent periods will report operating results
from its continuing operations in two segments -- Satellite Services and
Network Services. The Satellite Services segment includes both COMSAT World
Systems (CWS) and COMSAT Mobile Communications (CMC). The Network Services
segment includes COMSAT International (CI), COMSAT Laboratories and
Government Programs. COMSAT Laboratories and Government Programs results
now include certain non-manufacturing business that was previously reported
as part of CRSI.
Consolidated revenues from continuing operations in the second quarter
were $141.3 million, an increase of $7.2 million over the second quarter of
1996. The increase came predominantly in the Network Services segment.
Revenues from continuing operations in the six months ended June 30, 1997
were $275.1 million, $10.5 million higher than the same period last year.
This improvement was the result of a 50% increase in Network Services
revenues, which was partially offset by a decrease in Satellite Services
due to lower revenues in CMC.
Operating income from continuing operations for the second quarter and
year-to-date were $23.4 million and $46.6 million, respectively, which was
below the comparable periods of last year by $2.8 million and $7.0 million.
The declines in both periods resulted from lower operating income in CMC
offset, in part, by improvements in the Network Services segment and CWS.
Also affecting operating income in the second quarter were expenses of $1.8
million related to a potential proxy contest which was settled in the
second quarter and litigation costs of $1.5 million related to an action
brought against certain of the proxy contestants and the corporation's
former chief executive officer to enforce certain provisions of the
Communications Satellite Act of 1962, which action was dismissed in
connection with settlement of the proxy contest. For additional information
concerning settlement of the proxy contest and such litigation, see the
corporation's Form 8-K dated June 9, 1997.
Interest and other income (expense) for the second quarter and
year-to-date were income of $800,000 and expense of $200,000, respectively,
compared to net expense of $4.4 million and $7.3 million for the same
periods in 1996. The improvements in both periods stems primarily from the
impact of sales of equity investments and increased interest income.
10
<PAGE>
Interest expense, net of amounts capitalized, for the second quarter
and first six months of 1997 was $10.2 million and $19.8 million,
respectively, which was $2.1 million and $4.2 million higher than the
comparable periods last year. The increases reflect reduced interest
capitalized due to the completion of several satellite projects.
The consolidated tax rate on income from continuing operations before
taxes, minority interest and extraordinary item, for both the second
quarter and year-to-date, has improved over the comparable periods of last
year principally because of a net reduction in non-deductible items.
The change in minority interest in net losses of consolidated
subsidiaries primarily reflects the increased ownership of CI operations in
Russia.
Income from continuing operations before extraordinary item for the
second quarter was $9.1 million ($0.18 per share), which was $800,000
($0.01 per share) better than the second quarter of 1996. Year-to-date
income from continuing operations before extraordinary item was $17.2
million ($0.35 per share), $2.3 million ($0.05 per share) below the same
period last year.
Extraordinary loss from early extinguishment of debt, net of tax, for
the second quarter and year-to-date was $2.9 million ($0.06 per share) and
$3.9 million ($0.08 per share), respectively. This represents the costs
incurred from the corporation's repurchase of $89.5 million of its 8.125%
notes and $10.0 million of its Medium Term Notes (see Note 6 to the
financial statements). Of the 8.125% notes purchased through a fixed-spread
tender offer, $66.5 million was tendered during the second quarter of 1997.
Discontinued Operations
- - -----------------------
The loss from discontinued operations, net of tax, for the second
quarter was $16.5 million ($0.33 per share) compared to a loss of $2.6
million ($0.05 per share) for the same period last year. For the six months
ended June 30, 1997, the loss was $28.9 million ($0.58 per share) versus a
loss of $4.4 million ($0.09 per share) in the first half of 1996.
Discontinued operations include both Ascent and substantially all of CRSI.
Ascent was placed in discontinued operations on May 16, 1997 when
COMSAT's Board of Directors approved a plan to distribute the corporation's
80.67% interest in Ascent to COMSAT's shareholders. On June 27, 1997,
COMSAT completed the spin-off of Ascent as a tax-free dividend to COMSAT's
shareholders. The loss on disposal of Ascent ($11.3 million) includes
COMSAT's share of Ascent's operating losses subsequent to May 16, 1997
through June 27, 1997, costs incurred by COMSAT to facilitate the
distribution and additional tax provision recognized on deferred
inter-company gains when COMSAT divested its ownership in Ascent. See Note
2 to the financial statements.
COMSAT placed substantially all of CRSI in discontinued operations on
June 30, 1997. The results reported for CRSI for the second quarter and
first six months of 1997 include the results of their operations. See
"Management Discussions and Analysis --Outlook" and Note 2 to the financial
statements.
11
<PAGE>
Consolidated Results
- - --------------------
On a consolidated basis, including discontinued operations and the
extraordinary item, the net loss for the second quarter was $10.3 million,
or $0.21 per share, compared with net income of $5.8 million, or $0.12 per
share, in the same period last year. Through the first six months of 1997,
the consolidated net loss was $15.6 million, or $0.31 per share, versus net
income of $15.1 million, or $0.31 per share, in the same period of last
year.
Segment Operating Results
- - -------------------------
As noted above, effective as of the second quarter of 1997, the
corporation is reporting operating results from continuing operations in
two segments: Satellite Services and Network Services.
RESULTS BY SEGMENT:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
In millions 1997 1996 1997 1996
- - ----------------------------------------------------------------------------------------------------
REVENUES
- - --------
Satellite Services:
World Systems $ 66.5 $ 67.5 $133.3 $133.1
Mobile Communications 38.5 39.3 73.7 81.9
------- ------- ------- -------
Total Satellite Services 105.0 106.8 207.0 215.0
------- ------- ------- -------
Network Services:
International 21.0 12.3 37.4 24.2
Laboratories 9.8 5.0 17.9 10.1
Government Programs 14.9 13.2 29.6 22.1
------- ------- ------- -------
Total Network Services 45.7 30.5 84.9 56.4
------- ------- ------- -------
Eliminations and other (9.4) (3.2) (16.8) (6.8)
------- ------- ------- -------
Total revenues $141.3 $134.1 $275.1 $264.6
======= ======= ======= =======
OPERATING INCOME (LOSS)
- - -----------------------
Satellite Services:
World Systems $ 27.2 $ 24.1 $ 55.3 $ 49.7
Mobile Communications 5.4 11.4 10.9 25.3
------- ------- ------- -------
Total Satellite Services 32.6 35.5 66.2 75.0
------- ------- ------- -------
Network Services:
International (2.1) (4.6) (6.6) (8.5)
Laboratories (0.2) (0.9) (0.3) (1.9)
Government Programs 0.5 1.5 0.8 2.1
------- ------- ------- -------
Total Network Services (1.8) (4.0) (6.1) (8.3)
------- ------- ------- -------
Total segment operating income 30.8 31.5 60.1 66.7
General and administrative expense (6.8) (5.5) (12.6) (12.6)
Other (0.6) 0.2 (0.9) (0.5)
------- ------- ------- -------
Total operating income $ 23.4 $ 26.2 $ 46.6 $ 53.6
======= ======= ======= =======
</TABLE>
12
<PAGE>
Satellite Services
- - ------------------
Revenues in the Satellite Services segment in the second quarter and
year-to-date were $105.0 million and $207.0 million, respectively, which
was $1.8 million and $8.0 million below the same periods last year.
Operating income for the second quarter and first six months of 1997 was
$32.6 million and $66.2 million, respectively, a decline of $2.9 million
and $8.8 million from the same periods of 1996.
CWS revenues for the second quarter and first six months of 1997 at
$66.5 million and $133.3 million, respectively, which was 1% below the
second quarter of 1996 and was essentially unchanged from the first six
months of last year. Increased revenues from Very Small Aperture Terminal
(VSAT) leases and International Business Service (IBS) traffic were offset
by declines in full-time voice and fiber-optic cable restoration revenues.
The lower voice revenues stemmed primarily from rate reductions in
long-term carrier contracts. Operating income for the second quarter was
$27.2 million and for the year-to-date was $55.3 million, up 13% and 11%
from the comparable periods last year. The increase in the second quarter
primarily reflects the recovery of litigation costs. In addition, the
year-to-date increase reflects improved earnings on carrier-to-carrier
contracts, offset in part, by increased depreciation from placing in
service two INTELSAT satellites in the second half of 1996 and the first
half of 1997.
Revenues in CMC were $38.5 million in the second quarter, a decline of
2% compared to the second quarter of last year. For the year-to-date CMC
revenues were $73.7 million, 10% below the same period of last year. The
lower revenues were primarily the result of decreases in analog telephone
transmissions and lower volume in the bulk service contract with IDB Mobile
Communications (IDB). CMC's operating income for the second quarter was
$5.4 million and $10.9 million year-to-date, down $6.0 million and $14.4
million from the respective periods of 1996. The lower operating income is
attributable to lower revenues, increased depreciation associated with
three Inmarsat-3 satellites placed in service during 1996 and early 1997,
and increased costs related to Planet 1SM service, which began commercial
operation in January 1997.
Network Services
- - ----------------
Network Services segment revenues in the second quarter and
year-to-date were $45.7 million and $84.9 million, respectively, which was
$15.2 million and $28.5 million better than the same periods of 1996. The
operating losses in the second quarter and for the first six months of 1997
were $1.8 million and $6.1 million, respectively, an improvement of $2.2
million for both periods over last year.
CI's revenues in the second quarter and year-to-date were $21.0
million and $37.4 million, respectively, 70% and 54% better than the same
periods of last year. Revenue increases were driven primarily by advances
in CI operations in Argentina and Brazil. CI's operating loss in the second
quarter improved from $4.6 million in the second quarter of 1996 to $2.1
million in the same period this year because of increases in revenues in
the Americas region and improved operational performance in the Russian
company (BelCom). For the first six months of 1997, the operating loss of
$6.6 million, was $1.9 million better than the comparable period of last
year. CI's revenue commitments under long-term contracts were $254 million
at June 30, 1997, compared to $220 million at December 31, 1996.
13
<PAGE>
In May 1997, CI acquired full ownership of the Mexican corporation
IntelCom Red S.A. de C.V. (IntelCom Mexico), which was previously a wholly
owned-subsidiary of ICG Satellite Services, Inc., and named it COMSAT
Mexico S.A. de C.V. (COMSAT Mexico). COMSAT Mexico will offer business
customers digital, domestic and international private-line services to
support voice, data and image applications. In January 1997, CI sold its
remaining interests in Philippine Global Communications, Inc. (PhilCom) at
book value (see Note 4 to the financial statements).
COMSAT Laboratories' revenues for the second quarter and year-to-date
were $9.8 million and $17.9 million, up 95% and 78% compared with the
respective periods of 1996. The increases were primarily driven by
improvements in technical consulting revenues. The operating loss for the
second quarter and the first six months was $200,000 and $300,000,
respectively, which was $700,000 and $1.6 million better than the same
periods in 1996. The improved operating performance was as a result of
increased revenues and lower R&D expenditures. The Laboratories' backlog at
June 30, 1997 was $24 million, which was 65% higher than at the same time
last year.
Government Programs revenues in the second quarter of 1997 were $14.9
million, which was $1.7 million better than the same period of last year.
For the year-to-date, revenues were $29.6 million, which was $7.5 million
higher than last year. The increased revenues were related to the
Commercial Satellite Communications Initiative (CSCI) contract and were
offset by lower revenues from two Marisat satellites that ceased operating
in the second half of 1996 after 20 years of operations. Operating income
for the second quarter and year-to-date was $500,000 and $800,000,
respectively, which was $1.0 million and $1.3 million below the comparative
periods in 1996. The lower operating income was primarily the result of the
impact of lower revenues from the loss of the Marisat satellites and
increased costs associated with the CSCI contract.
OUTLOOK
- - -------
Many of the statements that follow are forward-looking and relate to
anticipated future operating results. Statements that look forward in time
are based on management's current expectations and assumptions, which may
be affected by subsequent developments and business conditions, and
necessarily involve risks and uncertainties. Therefore, there can be no
assurance that actual future results will not differ materially from
anticipated results. Although the corporation has attempted to identify
some of the important factors that may cause actual results to differ
materially from those anticipated, those factors should not be viewed as
the only factors which may affect future operating results.
In March 1997, COMSAT's Board of Directors approved a strategic plan
to refocus the corporation on international satellite services and digital
networking services and technology as discussed in the corporation's 1996
Annual Report on Form 10-K. As a part of the strategic plan the corporation
reaffirmed its decision to divest its ownership interest in Ascent, sell
substantially all of the assets and operations of CRSI, and other non-core
assets. On June 27, 1997, the corporation distributed its ownership
interest in Ascent to its shareholders by means of a spin-off. The company
expects to complete the sale of substantially all of CRSI by the end of
1997. It is anticipated that CRSI will be sold in at least two pieces. The
timing, estimated sale proceeds and completion of those sales, however, are
subject to, and could be affected adversely by, factors which are not
wholly within the control of the corporation (e.g., completion of due
diligence by the prospective purchasers, negotiation of definitive
agreements on mutually acceptable
14
<PAGE>
terms, receipt of any necessary third party consents and satisfaction of
any conditions which may be agreed to by the parities as part of the
definitive terms).
The Board of Directors declared a quarterly dividend of $0.05 per
share on the corporation's common stock in the second quarter, which
represents a reduction from the $0.195 per share paid in recent quarters.
The Board of Directors determines the dividend on the corporation's common
stock quarterly based on the corporation's earnings from continuing
operations, capital requirements and other factors.
In April 1997, the corporation petitioned the Federal Communications
Commission (FCC) for classification as a non-dominant carrier and for
regulatory forbearance. The petition requests that limits on the company's
rate-of-return and structural separation requirements be removed and that
CWS be allowed to change its tariff rates and introduce new services over
the INTELSAT satellite system on one-day notice.
Satellite Services
- - ------------------
Satellite Services operating income is expected to continue to be
lower in 1997 than in 1996 due to anticipated decreased earnings at CMC.
CWS's operating results in 1997 are expected to be at approximately
the same level as last year as a result of increased earnings from
carrier-to-carrier contracts and the recovery in the second quarter of 1997
of certain litigation costs, offset by higher depreciation from INTELSAT
satellites placed in service during 1996 and 1997. The carrier-to-carrier
contracts are not subject to tariff requirements or to regulatory
requirements associated with tariffs.
Operating income in CMC is expected to be lower in 1997 compared to
1996, because of continuing competition among existing Inmarsat service
providers, increased depreciation associated with Inmarsat-3 satellites
placed in service during 1996 and 1997 and costs related to Planet 1SM
service, which began commercial operations in January 1997.
Network Services
- - ----------------
Network Services 1997 operating losses are expected to be
approximately at the same level as last year, excluding the impact to
operating income of $7.8 million in revenues at COMSAT Laboratories
associated with the resolution of a patent dispute that was recorded in the
third quarter of 1996.
CI's operating loss in 1997 is expected to improve over 1996.
Improvements in CI's more mature companies are expected to be partially
offset by start-up costs in CI's newer companies. The corporation is in the
process of either seeking a strategic partner or selling the non-strategic
portions of BelCom's operations in Russia and in the Commonwealth of
Independent States. It is anticipated that this process will be completed
before the end of 1997.
Excluding the impact to operating income from the patent revenues
noted above, COMSAT Laboratories operating loss in 1997 is expected to be
higher than 1996. COMSAT Laboratories results now include Satellite
Construction Monitoring (SCM) which was previously reported as a part of
CRSI. SCM's operating income in 1997 is expected to be lower than 1996.
15
<PAGE>
Government Programs operating income is expected to be lower in 1997
than last year because of the loss of revenues related to two 20-year old
Marisat satellites which ceased operation in the second half of 1996, and
costs associated with the CSCI contract.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash in the six months of 1997 were operations
and short-term borrowings. Cash was used primarily for the purchase of
property and equipment.
The corporation's working capital at June 30, 1997 was $71.8 million,
which was $310.4 million lower than at December 31, 1996. The decrease in
working capital during the first six months of 1997 was primarily the
result of the reduction in current assets of $216.3 million due to the
spin-off of Ascent on June 27, 1997 and the use of commercial paper to
repurchase long-term debt (see Note 6 to the financial statements).
The corporation has access to short-term and long-term financing at
favorable rates. The corporation's current long-term debt ratings are A-
from Standard and Poor's and A3 from Moody's. The corporation's current
commercial paper ratings are A2 from Standard and Poor's and P2 from
Moody's. The corporation's $200 million commercial paper program had $161.0
million in borrowings outstanding at June 30, 1997. The corporation plans
to reduce short-term debt with proceeds from the sale of substantially all
of the assets and operations of CRSI and other non-core assets. A $200
million credit agreement, expiring in 1999, backs up the corporation's
commercial paper program.
During the first six months of 1997, the corporation repurchased a
total of $89.5 million of its 8.125% notes due 2004 using proceeds from
short-term debt. This reduced the total outstanding of the 8.125% notes
from $160.0 million at December 31, 1996 to $70.5 million June 30, 1997. In
addition, the corporation in the second quarter repurchased $10.0 million
of its medium-term notes. This reduced the corporation's total outstanding
medium-term notes from $74.0 million at December 31, 1996 to $64.0 million
at June 30, 1997. The corporation had $36 million remaining under a $100
million medium-term note program at June 30, 1997. The medium-term note
program is part of a $200 million debt securities shelf registration
program initiated in 1994.
The corporation's capital structure and debt-financing activities are
regulated by the FCC. The corporation is required to submit a
capitalization plan to the FCC for review annually. In August 1997, the FCC
approved the corporation's 1997 capitalization plan. Under the approved FCC
guidelines, the corporation is subject to a limit of $200 million in
short-term debt, a maximum long-term debt to total capital ratio of 45% and
an interest coverage ratio of 2.3 to 1. The latter two guidelines are
measured at year end. The corporation was in compliance with the $200
million short-term debt limit as of June 30, 1997. The corporation expects
to be in compliance with the other guidelines at the year-end 1997
measurement dates.
If the corporation were to fail to satisfy one or more of the FCC
guidelines as of an applicable measurement date, the corporation would be
required to seek advance FCC approval of future financing activities on a
case-by-case basis. If such approval were not granted, the corporation
could be required to reduce or reschedule planned capital investments,
reduce cash outlays, reduce debt or sell assets.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
See Note 5 of this Form 10-Q and Item 3 of the Corporation's 1996
Form 10-K, which are incorporated herein by reference.
ITEM 2. Change in Securities
--------------------
None
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
ITEM 5. Other Information
-----------------
None
ITEM 6. (a) Exhibits
--------
No. 11 - Computation of Earnings per Share
No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
Report dated April 21, 1997, reporting certain amendments to
the Corporation's By-laws and scheduling the Annual Meeting
of Shareholders for August 15, 1997.
Report dated April 30, 1997, reporting the resignation of C.
J. Silas as chairman and a member of the Board of Directors
and the election of Edwin I. Colodny to serve as chairman.
Report dated May 16, 1997, reporting the Board of Directors
approval of a plan to distribute the corporation's 80.67%
ownership interest in Ascent Entertainment Group, Inc. to
its shareholders through a tax-free dividend.
Report dated June 9, 1997, reporting a settlement agreement
with Herbert A. Denton, Guy P. Wyser-Pratte and certain
other persons and entities (collectively, the "Group"),
pursuant to which existing disputes between COMSAT and the
Group were resolved.
17
<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, 1997
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 1997 1996 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
PRIMARY
- - -------
Earnings (loss):
Income from continuing operations $ 9,098 $ 8,332 $ 17,197 $ 19,474
Loss from discontinued operations (16,481) (2,550) (28,861) (4,365)
Extraordinary loss (2,936) - (3,946) -
--------- --------- --------- ---------
Net income (loss) $(10,319) $ 5,782 $(15,610) $ 15,109
========= ========= ========= =========
Shares:
Weighted average number of common
shares outstanding 49,152 48,267 49,050 48,086
Add shares issuable from assumed
exercise of options 460 1,078 584 859
--------- --------- --------- ---------
Weighted average shares 49,612 49,345 49,634 48,945
========= ========= ========= =========
Primary earnings (loss) per share:
Income from continuing operations $ 0.18 $ 0.40 $ 0.17 $ 0.35
Loss from discontinued operations (0.33) (0.05) (0.58) (0.09)
Extraordinary loss (0.06) - (0.08) -
--------- --------- --------- ---------
Net income (loss) $ (0.21) $ 0.12 $ (0.31) $ 0.31
========= ========= ========= =========
ASSUMING FULL DILUTION
- - ----------------------
Earnings (loss):
Income from continuing operations $ 9,098 $ 8,332 $ 17,197 $ 19,474
Loss from discontinued operations (16,481) (2,550) (28,861) (4,365)
Extraordinary loss (2,936) - (3,946) -
---------- --------- --------- ---------
Net income (loss) $(10,319) $ 5,782 $(15,610) $ 15,109
========= ========= ========= =========
Shares:
Weighted average number of common
shares outstanding 49,152 48,267 49,050 48,086
Add shares issuable from assumed
exercise of options 529 1,085 609 1,060
--------- --------- --------- ---------
Weighted average shares 49,681 49,352 49,659 49,146
========= ========= ========= =========
Fully diluted earnings (loss) per share:
Income from continuing operations $ 0.18 $ 0.17 $ 0.35 $ 0.40
Loss from discontinued operations (0.33) (0.05) (0.58) (0.09)
Extraordinary loss (0.06) - (0.08) -
--------- --------- --------- ---------
Net income (loss) $ (0.21) $ 0.12 $(0.31) $ 0.31
========= ========= ========= =========
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000022698
<NAME> COMSAT
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.00
<CASH> 6,584
<SECURITIES> 0
<RECEIVABLES> 162,266
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 363,652
<PP&E> 2,391,511
<DEPRECIATION> 1,067,203
<TOTAL-ASSETS> 1,900,395
<CURRENT-LIABILITIES> 291,896
<BONDS> 466,630
0
0
<COMMON> 346,914
<OTHER-SE> 276,033
<TOTAL-LIABILITY-AND-EQUITY> 1,900,395
<SALES> 0
<TOTAL-REVENUES> 275,100
<CGS> 0
<TOTAL-COSTS> 123,837
<OTHER-EXPENSES> 104,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,838
<INCOME-PRETAX> 27,451
<INCOME-TAX> (10,254)
<INCOME-CONTINUING> 17,197
<DISCONTINUED> (28,861)
<EXTRAORDINARY> (3,946)
<CHANGES> 0
<NET-INCOME> (15,610)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
