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, 1998
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 [ ]
52,416,412 shares of the Registrant's common stock were outstanding as of
June 30, 1998.
<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>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
In thousands, except per share amounts 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 151,045 $ 142,437 $ 295,762 $ 275,968
----------- ----------- ----------- -----------
Operating expenses:
Cost of services 65,929 65,082 131,874 124,705
Depreciation and amortization 55,556 44,846 107,051 88,309
Research and development 2,549 2,304 4,347 3,794
General and administrative 6,049 6,793 11,852 12,597
----------- ----------- ----------- -----------
Total operating expenses 130,083 119,025 255,124 229,405
----------- ----------- ----------- -----------
OPERATING INCOME 20,962 23,412 40,638 46,563
Other income (expense), net (1,015) 1,345 (3,840) 726
Interest expense, net of amounts capitalized (12,724) (10,176) (24,056) (19,838)
----------- ----------- ----------- -----------
Income from continuing operations before taxes and extraordinary item 7,223 14,581 12,742 27,451
Income tax expense (3,149) (5,483) (4,818) (10,254)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 4,074 9,098 7,924 17,197
Loss from discontinued operations, net of tax - (16,481) - (28,861)
----------- ----------- ----------- -----------
Income (loss) before extraordinary item 4,074 (7,383) 7,924 (11,664)
Extraordinary loss from early extinguishment of debt (net of tax) - (2,936) - (3,946)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 4,074 $ (10,319) $ 7,924 $ (15,610)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC:
Income from continuing operations before extraordinary item $ 0.08 $ 0.19 $ 0.15 $ 0.35
Loss from discontinued operations - (0.34) - (0.59)
Extraordinary loss - (0.06) - (0.08)
----------- ----------- ----------- -----------
Net income (loss) $ 0.08 $ (0.21) $ 0.15 $ (0.32)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - ASSUMING DILUTION:
Income from continuing operations before extraordinary item $ 0.08 $ 0.18 $ 0.15 $ 0.35
Loss from discontinued operations - (0.33) - (0.58)
Extraordinary loss - (0.06) - (0.08)
----------- ----------- ----------- -----------
Net income (loss) $ 0.08 $ (0.21) $ 0.15 $ (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 1998 1997
- ----------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,335 $ 5,757
Receivables 132,380 147,621
Other 40,348 22,387
Net assets of discontinued operations 18,403 142,484
------------- ------------
Total current assets 200,466 318,249
------------- ------------
Property and equipment (net of accumulated depreciation
of $1,262,996 in 1998 and $1,161,242 in 1997) 1,397,507 1,359,293
Investments 118,933 91,543
Goodwill 13,557 12,722
Other assets 124,671 112,968
------------- ------------
TOTAL ASSETS $ 1,855,134 $ 1,894,775
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 13,785 $ 13,785
Commercial paper 19,998 149,506
Accounts payable and accrued liabilities 84,120 89,772
Due to related parties 40,515 34,664
Other 3,206 8,919
------------- ------------
Total current liabilities 161,624 296,646
------------- ------------
Long-term debt 454,478 461,960
Deferred income taxes and investment tax credits 126,351 121,749
Accrued post-retirement benefit costs 49,549 49,246
Other long-term liabilities 207,425 178,903
Preferred securities issued by subsidiary 200,000 200,000
STOCKHOLDERS' EQUITY:
Common stock 428,137 366,901
Retained earnings 229,564 226,785
Treasury stock (7,223) (1,758)
Unearned compensation (5,502) (4,739)
Accumulated other comprehensive income (loss) 10,731 (918)
------------- ------------
Total stockholders' equity 655,707 586,271
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,855,134 $ 1,894,775
============= ============
</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 1998 1997
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,924 $ (15,610)
Adjustments to reconcile net income (loss) to cash flow of
continuing operations:
Depreciation and amortization 107,051 88,309
Write-off of investment 1,950 -
Extraordinary loss from early extinguishment of debt - 3,946
Loss from discontinued operations - 28,861
Changes in operating assets and liabilities (1,611) (19,346)
Other (3,469) (3,741)
----------- ------------
Net cash provided by continuing operations 111,845 82,419
Net cash provided (used) by discontinued operations 113,752 (5,442)
----------- ------------
Net cash provided by operating activities 225,597 76,977
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (119,435) (120,757)
Investments in unconsolidated businesses (7,121) (10,092)
Proceeds from sale of investments 1,200 9,060
Proceeds from note on sale of investment - 6,809
Decrease in INTELSAT ownership - 20,986
Decrease in Inmarsat ownership 6,101 -
Other 1,158 (4,425)
----------- ------------
Net cash used in investing activities (118,097) (98,419)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 42,366 5,792
Cash dividends paid (5,145) (12,000)
Repayment/extinguishment of long-term debt (11,635) (112,710)
Net short-term borrowings (repayments) (129,508) 143,021
Other - (3,736)
----------- ------------
Net cash provided (used) by financing activities (103,922) 20,367
----------- ------------
Net decrease in cash and cash equivalents 3,578 (1,075)
Cash and cash equivalents, beginning of period 5,757 7,659
----------- ------------
Cash and cash equivalents, end of period $ 9,335 $ 6,584
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE 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 1997 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. 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 began accounting for Ascent Entertainment Group, Inc.
(Ascent), its former entertainment subsidiary, and substantially all
of the assets and operations of COMSAT RSI, Inc. (CRSI), its
manufacturing subsidiary, as discontinued operations in the second
quarter of 1997.
The income (loss) from discontinued operations, net of tax, for Ascent
and CRSI for the three and six months ended June 30, 1997, is
summarized below:
<TABLE>
<CAPTION>
<S> <C> <C>
Period Ended June 30, 1997
----------------------------------
In millions Three Months Six Months
-------------------------------------------------------------------------------------------
Ascent $ (15.1) $ (29.1)
CRSI (1.3) 0.2
----------- ------------
Total $ (16.4) $ (28.9)
=========== ============
</TABLE>
COMSAT RSI, INC.
In February 1998, the corporation sold substantially all of the assets
of JEFA Wireless Systems (JEFA), a wholly owned subsidiary of CRSI
engaged in the wireless communications integration and intelligent
transportation systems business, in a separate transaction. Pursuant
to the sale agreement, the corporation assigned to the buyer its
rights in certain contracts and made a payment of $4.7 million, net of
a working capital adjustment at closing, to complete the transaction.
5
<PAGE>
On June 25, 1998, the corporation completed the sale of substantially
all of CRSI to a subsidiary of TBG Industries, Inc. for $116.5
million. After adjusting for changes in inter-company loans and
advances, COMSAT received cash proceeds of $111.9 million.
Certain of CRSI's assets were excluded from the sale, including
Electromechanical Systems, Inc. (EMS) and CRSI's 53% ownership
interest in Plexsys International Corporation (Plexsys). Plexsys
ceased doing business on July 1, 1998. The corporation has written-off
its investment in Plexsys and certain amounts owed to it by Plexsys.
Such amounts were included in the corporation's 1997 loss from
discontinued operations. COMSAT also will retain and complete a
long-term construction contract for a radio astronomy telescope in
Green Bank, West Virginia.
Discontinued operations include management's best estimates of the
amounts expected to be realized on the sale of net assets, operating
results through anticipated disposal dates, facility closure costs and
the estimated costs to complete the long-term contract retained by the
corporation. The net assets of CRSI's discontinued operations include
management's estimate of the amount to be realized from a $29 million
claim, which is currently in arbitration for work performed on the
long-term contract. These estimates could change as additional costs
are incurred to complete the disposals and the long-term contract and
upon resolution of the arbitration.
The net assets of CRSI's discontinued operations included in the
condensed consolidated balance sheets as of June 30, 1998, and
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
In millions 1998 1997
---------------------------------------------------------------------------------------------
Current assets $ 42.3 $ 181.5
Fixed assets, net 3.6 33.8
Intangible and other assets 1.0 13.0
Short-term debt - 4.4
Other current liabilities 7.1 28.8
Provision for estimated loss on disposal 21.4 49.5
Long-term debt - 1.5
Other non-current liabilities - 1.6
----------- -----------
Net assets of discontinued operations $ 18.4 $ 142.5
=========== ===========
</TABLE>
ASCENT ENTERTAINMENT GROUP, INC.
The corporation distributed its 80.67% interest in Ascent through a
tax-free dividend to shareholders on June 27, 1997. 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 accounted for as a discontinued operation beginning on May
15, 1997, the date on which the corporation's Board of Directors
adopted a formal plan to effect the distribution. The tax-free
dividend of approximately $195 million was recorded as a reduction of
COMSAT's consolidated retained earnings.
6
<PAGE>
3. CHANGE IN SATELLITE ACCOUNTING POLICIES
Effective January 1, 1998, the corporation changed its accounting
policy with respect to the cost of satellites lost at launch or in
orbit. Such costs will be expensed in the period in which the
satellite is lost at launch or experiences a total failure in orbit.
Previously, the costs of failed satellites were amortized over their
original useful lives. Partial in-orbit failures will be evaluated for
impairment according to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets to be Disposed of." Also effective January 1, 1998,
the corporation changed its accounting policy with respect to
satellite performance incentive payments paid to manufacturers to
capitalize the net present value of such costs as a component of the
cost of the satellite. Previously, certain of these payments were
expensed as paid. These changes did not have a material effect on the
corporation's financial statements.
4. COMPREHENSIVE INCOME
In January 1998, the corporation adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and the display of comprehensive income and its components
in the corporation's financial statements; however, the adoption of
this statement had no impact on the corporation's results of
operations or stockholders' equity. SFAS No. 130 requires minimum
pension liability adjustments, unrealized gains and losses on the
corporation's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other
comprehensive income. Total comprehensive income (loss) for the three
and six months ended June 30, 1998 and 1997 were:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ---------------------------
In millions 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 4.1 $ (10.3) $ 7.9 $ (15.6)
Other comprehensive income (loss) (1.0) 0.2 11.6 (4.2)
--------- ---------- ---------- ----------
Total comprehensive income (loss) $ 3.1 $ (10.1) $ 19.5 $ (19.8)
========= ========== ========== ==========
</TABLE>
Other comprehensive income (loss) includes changes in the unrealized
gain (loss) of available-for-sale securities, net of tax, of $4.5
million, $16.7 million, $200,000 and $(3.1) million for the three and
six month periods ended June 30, 1998 and 1997, respectively. The
three months ended June 30, 1998, also includes the foreign currency
translation loss from COMSAT's Brazil subsidiary, which is no longer
accounted for as a highly inflationary economy.
7
<PAGE>
5. INTELSAT AND INMARSAT SHARE CHANGES
The corporation's 18.0% ownership share of INTELSAT is unchanged from
December 31, 1997.
The corporation's ownership share of Inmarsat decreased from 23.0% at
December 31, 1997, to 22.2% as of June 30, 1998. As a result of the
change in ownership, the corporation received a total of $6.1 million
during the six months ended June 30, 1998.
6. INVESTMENTS
In March 1998, the corporation wrote off its $2.0 million ($1.3
million net of tax) investment in Superconducting Core Technologies,
Inc. (SCT). The non-cash charge is reported in Other income (expense),
net, on the condensed consolidated income statement.
7. REGULATORY ENVIRONMENT AND LITIGATION
REGULATORY ENVIRONMENT. 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 COMSAT World Systems (CWS) and
COMSAT Mobile Communications (CMC). FCC decisions and policies have
had and will continue to have a significant impact on the corporation.
In April 1998, the FCC granted the corporation's petition to be
deregulated and reclassified as a "non-dominant" telecommunications
carrier in the major markets of CWS. The FCC's decision eliminates
rate-of-return restrictions, structural separation regulation and
14-day advance tariff notification in regard to approximately 90% of
COMSAT's INTELSAT business. It also allows CWS to integrate earth
station and space segment services, requiring only that COMSAT list
those offerings separately in tariff filings at the FCC. The FCC
denied requests by major INTELSAT users to condition non-dominant
carrier status on the grant of direct access for users to INTELSAT
satellite capacity. The FCC concluded that COMSAT's long-term carrier
contracts do not impede competition; thus, such contracts would not be
subject to regulatory abrogation based on the so called "fresh look"
doctrine. The FCC indicated, however, that it would begin a future
proceeding to consider direct access implications. For a discussion of
these matters refer to "Management's Discussion and Analysis
--Outlook" section of the Form 10-Q and the description of the
corporation's "Business" and Notes 8 and 9 to the corporation's 1997
financial statements included as part of the corporation's 1997 Form
10-K.
8
<PAGE>
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 8 and 9 to the corporation's 1997
financial statements included as part of the corporation's 1997 Form
10-K and "Item 1 - Legal Proceedings" of Part II of the March 31, 1998
Form 10-Q.
8. EARNINGS PER SHARE
The following reconciliation illustrates the calculation of the
corporation's basic and diluted earnings per share amounts for the
three and six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
In millions, except per share amounts 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
Income from continuing operations
before extraordinary item $ 4.1 $ 9.1 $ 7.9 $ 17.2
=========== ============ ============ ============
Basic:
Weighted average shares 51.9 48.7 51.1 48.6
=========== ============ ============ ============
Per share $ 0.08 $ 0.19 $ 0.15 $ 0.35
=========== ============ ============ ============
Assuming dilution:
Weighted average shares 51.9 48.7 51.1 48.7
Stock options 1.6 0.4 1.6 0.5
Restricted stock awards and units 0.2 0.3 0.2 0.3
----------- ------------ ------------ ------------
Total 53.7 49.4 52.9 49.5
=========== ============ ============ ============
Per share $ 0.08 $ 0.18 $ 0.15 $ 0.35
============ ============ ============ ============
</TABLE>
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" and in February 1998, issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." 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. SFAS No. 132 requires revised disclosures about pension and
post-retirement benefit plans. Adoption of SFAS No. 132 will not have
a material effect on the corporation's presentation of pension and
post-retirement benefit disclosures. In light of the recent
developments in the
9
<PAGE>
corporation's regulatory environment (see Note 7 and the "Management's
Discussion and Analysis -- Outlook" section of the Form 10-Q), the
corporation is evaluating the effect of implementing SFAS No. 131 on
its presentation of operating segments and related disclosures. The
corporation will adopt SFAS Nos. 131 and 132 in the fourth quarter of
1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The statement requires companies to recognize all derivatives as
either assets or liabilities, with the instruments measured at fair
value. The accounting for changes in fair value, gains or losses,
depends on the intended use of the derivative and its resulting
designation. The statement is effective for fiscal years beginning
after June 15, 1999. The corporation will adopt SFAS No. 133 in the
first quarter of 2000. The corporation is evaluating the impact
implementation of SFAS No. 133 will have on its consolidated financial
statements.
10. NOTE RECEIVABLE
In January 1997, the corporation sold its 19.66% interest in
Philippine Global Communications, Inc. (PhilCom) for cash and a
collaterized note receivable totaling $32.6 million. At December 31,
1997, the remaining note receivable balance of $12.7 million was to be
paid in two payments during 1998. Subsequent to June 30, 1998, the
note was amended so that the balance would be paid in installments,
with interest, through June 2000. The corporation received a payment
of $1.0 million in August 1998. The non-current portion of $7.5
million was reclassified to other assets at June 30, 1998.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998
ANALYSIS OF OPERATIONS
CONSOLIDATED OPERATIONS
CONTINUING OPERATIONS
Consolidated revenues from continuing operations in the second quarter
and first six months of 1998 were $151.1 million and $295.8 million,
respectively, which were $8.7 million and $19.8 million better than their
comparative periods in 1997. The higher revenues were primarily the result
of improvements in Network Services segment revenues.
Operating income for the second quarter and year-to-date was $20.9
million and $40.6 million, respectively, which was $2.5 million and $6.0
million below the same periods last year. The decrease in operating income
was primarily the result of an increase in depreciation expense in both
Satellite Services and Network Services as new satellites and
communications equipment were placed in service.
Other income (expense), net, for the second quarter was a net expense
of $1.0 million, compared with a net income of $1.4 million in the second
quarter last year. Second quarter of 1997 results included a non-recurring
gain from the sale of an equity investment. For the first six months of
1998, other income (expense) was a net expense of $3.8 million versus
income of $700,000 for the same period last year. The year-to-date results
included the first quarter 1998 non-cash write-off of the corporation's
$2.0 million investment in Superconducting Core Technologies, Inc. In
addition, the 1997 results included a currency gain recorded in the first
quarter related to the sale of an equity investment as well as the second
quarter gain noted above.
Interest expense, net of amounts capitalized for the second quarter
and first six months of 1998, was $12.7 million and $24.1 million,
respectively, compared to $10.2 million and $19.8 million for the same
periods of 1997. The increase was primarily the result of increased
interest expense and a reduction in the amount of interest capitalized due
to the completion of several satellite projects.
Income tax expense for the second quarter was $3.1 million and for the
first six months of 1998 was $4.8 million. These amounts were $2.2 million
and $5.5 million below the comparative periods of 1997. The decline was
primarily the result of lower income on which tax expense is calculated.
Income from continuing operations before extraordinary item for the
second quarter and year-to-date was $4.1 million and $7.9 million,
respectively, $5.0 million and $9.3 million below the same periods of last
year.
11
<PAGE>
Basic earnings per share for continuing operations for the second
quarter was $0.08 and for the first six months of 1998 was $0.15, $0.11 and
$0.20 below the comparative periods of 1997. Diluted earnings per share for
continuing operations was $0.08 for the second quarter and $0.15
year-to-date, which were $0.10 and $0.20 below the same periods of last
year.
During the first half of 1997, the corporation repurchased $100
million of its long-term debt. This early extinguishment of debt resulted
in an extraordinary loss in 1997 of $3.9 million. The portion of this
extraordinary loss that was recorded in the second quarter of 1997 was $2.9
million.
DISCONTINUED OPERATIONS
During the second quarter of 1997, the corporation began accounting
for the operations of both Ascent Entertainment Group, Inc. (Ascent) and
substantially all of COMSAT RSI, Inc. (CRSI) as discontinued operations.
See Note 2 to the financial statements.
CONSOLIDATED RESULTS
On a consolidated basis, the net income for the second quarter and
first six months of 1998 was $4.1 million and $7.9 million, respectively,
compared to net losses of $10.3 million and $15.6 million in the same
periods of 1997.
Basic earnings per share for the second quarter were $0.08 and for the
first six months was $0.15, compared to losses per share of $0.21 and $0.32
for the same periods of 1997. Diluted earnings per share were $0.08 for the
second quarter and $0.15 year-to-date, versus losses per share of $0.21 and
$0.31 for the same periods of last year.
SEGMENT OPERATING RESULTS
The corporation reports operating results 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.
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
RESULTS BY SEGMENT:
Quarter Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
In millions 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
REVENUES
Satellite Services:
World Systems $ 69.1 $ 66.5 $ 135.0 $ 133.3
Mobile Communications 40.1 43.3 80.9 81.9
------------ ------------- ------------ -------------
Total Satellite Services 109.2 109.8 215.9 215.2
------------ ------------- ------------ -------------
Network Services:
International 27.1 21.0 52.2 37.4
Laboratories 11.5 9.7 20.5 17.8
Government Programs 13.7 11.3 28.0 22.3
------------ ------------- ------------ -------------
Total Network Services 52.3 42.0 100.7 77.5
------------ ------------- ------------ -------------
Eliminations and other (10.4) (9.4) (20.8) (16.8)
------------ ------------- ------------ -------------
Total revenues $ 151.1 $ 142.4 $ 295.8 $ 275.9
============ ============= ============ =============
OPERATING INCOME
(LOSS)
Satellite Services:
World Systems $ 25.0 $ 27.2 $ 49.8 $ 55.3
Mobile Communications 7.2 5.4 15.0 10.9
------------ ------------- ------------ -------------
Total Satellite Services 32.2 32.6 64.8 66.2
------------ ------------- ------------ -------------
Network Services:
International (5.0) (2.1) (10.6) (6.6)
Laboratories - (0.2) (0.6) (0.3)
Government Programs 0.6 0.5 1.5 0.8
------------ ------------- ------------ -------------
Total Network Services (4.4) (1.8) (9.7) (6.1)
------------ ------------- ------------ -------------
Total segment operating
income 27.8 30.8 55.1 60.1
General and administrative
expense (6.1) (6.8) (11.9) (12.6)
Other (0.8) (0.6) (2.6) (0.9)
------------ ------------- ------------ -------------
Total operating income $ 20.9 $ 23.4 $ 40.6 $ 46.6
============ ============= ============ =============
</TABLE>
SATELLITE SERVICES
Revenues in the Satellite Services segment in the second quarter were
$109.2 million, which were $600,000 below the second quarter of 1997. For
the first six months of 1998, revenues were $215.9 million, which were
$700,000 above the comparative period of last year. Operating income in the
second quarter and year-to-date was $32.2 million and $64.8 million,
respectively, which was $400,000 and $1.4 million below the same periods
last year.
CWS's revenues in the second quarter of 1998 were $69.1 million, which
were $2.6 million above the same period of 1997. For the first half of
1998, revenues of $135.0 million were $1.7 million better than the
comparative period of last year. The increase in revenues was primarily the
result of improvements in International Business Service (IBS) traffic and
wide-band mobile services, offset in part by lower full-time voice
revenues. The improvement in IBS was due primarily to increases in
high-speed data and Internet services. CWS's operating income for the
second quarter of 1998 and year-to-date was $25.0 million and $49.8
million, respectively, which was $2.2 million and $5.5 million lower than
the same periods last year. The
13
<PAGE>
decline in operating income was due to increased depreciation from placing
in service four INTELSAT satellites during the past year.
Revenues in CMC during the second quarter and first six months of 1998
were $40.1 million and $80.9 million, respectively, or $3.2 million and
$1.0 million below the comparative periods of last year. Increases in voice
traffic revenue were more than offset by a decline in sales of Planet 1
terminals, which were introduced to market in January 1997. The results in
both periods also reflect improved revenues from services provided to the
Federal Aviation Administration's (FAA) Wide Area Augmentation System
(WAAS). CMC's operating income for the quarter was $7.2 million, which was
$1.8 million better than the second quarter of 1997. For the first half of
1998, operating income was $15.0 million, which was $4.1 million higher
than the same period last year. The improvement in operating income was
primarily the result of lower operating costs, partially offset by
increased depreciation from two Inmarsat satellites placed in service
during the last 12 months. The operating costs in 1997 included marketing
costs associated with the launch of Planet 1 service.
NETWORK SERVICES
Network Services revenues for the second quarter of 1998 and
year-to-date were $52.3 million and $100.7 million, respectively, which
were $10.3 million and $23.2 million higher than the same periods last
year. The operating loss in the second quarter and first half of 1998 was
$4.4 million and $9.7 million, compared to operating losses of $1.8 million
and $6.1 million for the comparative periods of 1997.
Revenues in CI during the second quarter were $27.1 million, which
were $6.1 million or 29% higher than the same period last year. For the
first six months revenues were $52.2 million, which were $14.8 million or
40% above the first half of 1997. The improvement in revenues was driven
primarily by increases in Brazil, Argentina, Colombia and Venezuela. CI's
operating loss in the second quarter of 1998 was $5.0 million, compared to
an operating loss of $2.1 million in the comparative quarter of 1997. The
year-to-date operating loss was $10.6 million, or $4.0 million higher than
the same period last year. The increased operating losses were primarily
due to increased depreciation, higher operating costs in Brazil, and
start-up costs in Mexico. Revenue commitments under long-term contracts
increased to $343 million at June 30, 1998, compared to $323 million at
December 31, 1997 and $254 million at June 30, 1997.
COMSAT Laboratories revenues in the second quarter and for the first
six months of 1998 were $11.5 million and $20.5 million, respectively, or
$1.8 million and $2.7 million higher than the same periods last year
because of increases in technical consulting and communication product
revenues. The Laboratories' operating income for the second quarter was
break-even, versus a loss of $200,000 in the same quarter last year. For
the first half of 1998, the Laboratories operating loss was $600,000, or
$300,000 higher than the same period of 1997. The Laboratories' backlog at
June 30, 1998 was $29 million, as compared to $28 million at December 31,
1997 and $24 million at June 30, 1997.
14
<PAGE>
Government Programs revenues for the second quarter of 1998 were $13.7
million, which was $2.4 million higher than the second quarter last year.
For the year-to-date, revenues were $28.0 million, or $5.7 million better
than last year. The improvement over last year was primarily the result of
increased revenues from the Commercial Satellite Communications Initiative
(CSCI) contract. Operating income in Government Programs for the second
quarter and year-to-date was $600,000 and $1.5 million, respectively, or
$100,000 and $700,000 better than the comparative periods of last year.
OUTLOOK
MANY OF THE STATEMENTS THAT FOLLOW ARE FORWARD-LOOKING AND RELATE TO
ANTICIPATED FUTURE EVENTS AND 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. THESE
STATEMENTS AND THE CORPORATION'S FUTURE OPERATING RESULTS MAY BE AFFECTED
BY THE TIMING AND OUTCOME OF PENDING REGULATORY AND LEGISLATIVE ACTIONS,
INCLUDING A BILL PASSED BY THE U.S. HOUSE OF REPRESENTATIVES (WHICH CALLS
FOR MAJOR AMENDMENTS TO THE COMMUNICATIONS SATELLITE ACT ADVERSE TO COMSAT
AND THE PRIVATIZATION OF INTELSAT AND INMARSAT); EFFORTS TO RESTRUCTURE
INTELSAT AND INMARSAT; FCC AND OTHER GOVERNMENTAL PROCEEDINGS; COMPETITIVE
BUSINESS CONDITIONS; THE DISPOSITION OF DISCONTINUED OPERATIONS; AND OTHER
FACTORS. 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.
During the first part of 1998, significant progress was made in the
corporation's ongoing efforts to restructure INTELSAT and Inmarsat.
The INTELSAT Assembly of Parties, at its March 1998 meeting, approved
a restructuring plan to transfer six INTELSAT satellites (five currently in
orbit and one to be launched in 1999) into a separate, new commercial
company. The new company, incorporated in the Netherlands, has been
temporarily named New Skies Satellites N.V. (New Skies). It is expected
that the transfer of assets from INTELSAT to New Skies will occur during
the second half of 1998. Additionally, an initial public offering is
expected to occur sometime during 1999 to fund New Skies' future capital
requirements. New Skies will operate as an entirely separate company,
independent of INTELSAT. INTELSAT's direct ownership in New Skies, set at
10%, will be held in a non-voting trust. Individual ownership levels will
be limited to 17% and it is expected that COMSAT's initial direct
investment in New Skies will be approximately 16.6%. Competitors of New
Skies are expected to initiate regulatory proceedings at the FCC seeking
actions adverse to New Skies including challenges to U.S. market access.
15
<PAGE>
In June 1998, the FCC issued a public notice requiring U.S. earth
stations licensees which currently use INTELSAT satellites that will
transfer to New Skies to file license modification applications by July 17,
1998 in order to access the New Skies system. Several companies, including
COMSAT, filed applications in response to this notice. The corporation
anticipates that the FCC will ultimately grant these applications.
Competitors of New Skies, however, may oppose these applications or
initiate other proceedings at the FCC seeking actions adverse to New Skies,
including potentially denial of U.S. market access.
COMSAT currently consolidates its share of the accounts of INTELSAT
and recognizes its portion of INTELSAT's results of operations each
reporting period. COMSAT anticipates it will use the cost method of
accounting for its investment in New Skies. Under the cost method, COMSAT
would only recognize income at the time dividends from New Skies are
received. COMSAT does not anticipate that New Skies will declare dividends
during its first year of operations. As a result, beginning at the time of
the transfer of assets to New Skies, the corporation's pre-tax earnings
from its investments in both INTELSAT and New Skies will be lower by
approximately $1.5 million each quarter as compared to periods prior to the
transfer in the absence of other factors that may affect operating results
in CWS.
In March 1998, the Inmarsat Council approved a plan to transfer the
operating assets of the current Inmarsat intergovernmental organization to
a new company. This plan was presented at the April 1998 meeting of
Inmarsat's Assembly of Parties. During its meeting, the Assembly endorsed
the Council's plan for full privatization. At its next meeting, which is
slated to occur in September 1998, the Assembly is expected to finalize
outstanding issues. According to current plans, Inmarsat will become an
independent commercial company in the first quarter of 1999. While the new
company initially would not be publicly traded, it is expected that the
company would proceed with an initial public offering within 24 months
after its creation. As currently proposed, individual ownership in the new
company would be capped at 15%, although COMSAT's ownership in Inmarsat at
the time of privatization would be grandfathered. COMSAT's voting rights,
however, would be capped at 15% with respect to votes against certain
shareholder resolutions. Prior to the public offering, owners are expected
to be able to trade shares, and strategic investors may invest up to $500
million in equity in the new company.
Approval of the final Inmarsat restructuring proposal will require (i)
a vote of two-thirds of the member governments that are present and voting
(up to 84, with each having one vote) at the Assembly of Parties at which
approval is sought and (ii) a further vote by Inmarsat Council members
representing two-thirds of Inmarsat's total investment that all conditions
precedent to the transaction have been satisfied (or waived). The timetable
for the restructing of Inmarsat is contingent upon Inmarsat member
governments reaching broad consensus on implementing the proposed
amendments to the Inmarsat Convention prior to formal ratification. If
consensus is not achieved, the ratification process could take longer. The
corporation, as a minority shareholder and the U.S. signatory to Inmarsat,
lacks the ability to independently effect a restructuring of Inmarsat. The
success and timing of the corporation's privatization efforts will be
dependent upon the corporation's ability to achieve a consensus among other
signatories and participating member governments. Morever, the issue of
whether legislation authorizing U.S. approval of Inmarsat privatization is
required has yet to be resolved.
16
<PAGE>
As with INTELSAT, COMSAT consolidates its shares of the accounts of
Inmarsat. Assuming COMSAT continues to own at least 20% of the new company
at the time it is privatized and other details and assumptions related to
the restructuring do not change, the corporation anticipates that it would
use the equity method of accounting for its investment in the privatized
Inmarsat. Under the equity method, the corporation would continue to
include its proportionate share of the new company's operating results as
part of the corporation's operating results. As such, adoption of the
equity method of accounting for the corporation's investment in the
privatized Inmarsat is not expected to affect the corporation's net income.
The accounting method used for this investment, however, will be dependent
upon the terms and conditions of the final Inmarsat restructuring and the
corporation's then current ownership interest.
On April 24, 1998, the FCC granted the corporation's petition for
reclassification as a non-dominant common carrier in markets that represent
approximately 90% of CWS's revenues. For those markets, rate-of-return
regulation has been lifted effective immediately. In the remaining
"thin-route" markets, which are expected to account for only 10% or less of
the CWS business in 1998, the FCC denied the corporation's request to
forbear from dominant carrier regulation. The FCC, however, stated that it
would consider on an expedited basis a form of incentive-based regulation
to replace dominant rate-of-return regulation for the thin-route business,
and issued a Notice of Proposed Rulemaking seeking public comment. A
decision by the FCC in the thin-route regulation proceeding is expected
before the end of the year. The FCC's non-dominant order also granted the
corporation's request to file tariffs on one-day's notice with a
presumption of lawfulness and granted the corporation's request for the
elimination of the CWS structural separation requirements. The order also
gave CWS authority to enter the earth station market on an unseparated and
non-dominant basis. The FCC indicated that it plans to initiate a
proceeding to explore the implications of enabling users to have direct
access to the INTELSAT system. At this time, no action has been taken to
initiate that proceeding. Finally, the FCC concluded that COMSAT's
long-term carrier contracts do not impede competition; thus, such contracts
would not be subject to regulatory abrogation based on the so called "fresh
look" doctrine.
In May 1998, the U.S. House of Representatives passed a bill entitled
the "Communications Satellite Competition and Privatization Act of 1998"
(HR 1872). While the corporation supports HR 1872's stated objective of
privatizing INTELSAT and Inmarsat in a pro-competitive manner, COMSAT is
opposed to HR 1872 in its current form. The corporation is, and will
continue, opposing HR 1872, unless it is modified in a manner that would
not adversely affect the corporation's business and the value of its
shareholders' investments in the INTELSAT and Inmarsat satellite systems.
To become law, a companion bill will have to be considered and passed by
the U.S. Senate, proceed through a House-Senate conference, and be signed
by the President. An international satellite bill, S. 2365, was introduced
in the Senate on July 28, 1998. COMSAT believes that S. 2365, on the whole,
represents a more constructive approach to privatization and international
satellite policy. The proposed Senate bill excludes many of the provisions
of HR 1872 that could impair COMSAT's investments and operations. The
Senate bill, however, contains certain provisions (including a provision
authorizing direct access to INTELSAT and Inmarsat on so-called "thin
routes" and another provision which could lead to U.S. withdrawal from
INTELSAT and Inmarsat if full privatization has not been realized by
January 1, 2003) which the corporation believes are not needed and could be
counterproductive.
17
<PAGE>
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year
(i.e. "97" for 1997). Certain of the corporation's computer programs that
have date-sensitive software may not operate properly when the last two
digits become "00", as will occur on January 1, 2000. To the extent that
this situation exists, there is the potential for computer system failure
or miscalculations, which could cause a disruption of operations. The
problem is not limited to computer programs, as some of the corporation's
equipment that has date-sensitive processors may not be able to process
dates after December 31, 1999.
In the second half of 1996, the corporation initiated a program to
identify and properly address issues associated with the year 2000 problem
in order to avoid interruption to the corporation's operations at the turn
of the century. The corporation has made substantial progress in assessing
how it will be impacted by the year 2000 issue. Currently, the corporation
is in the process of modifying or replacing computer systems and other
date-sensitive equipment, so that the corporation's key systems will be
year 2000 compliant. The corporation presently believes that such changes
to the corporation's key systems and equipment will be completed and tested
by the end of the second quarter of 1999.
The corporation's current estimate is that it will cost between $6
million and $8 million prior to January 1, 2000 to modify its in-house
management information systems, customer products, and other systems and
equipment affected by the year 2000 issue. Year 2000 modifications and
replacements are based on management's best estimates, which were derived
using assumptions of future events, including the continued availability of
resources and the reliability of third party modification plans. Specific
factors that might cause material differences in the estimates include, but
are not limited to, the availability and cost of personnel with appropriate
and necessary skills, the ability to locate and correct all relevant
computer code and similar uncertainties.
While the corporation is devoting substantial resources to its own
year 2000 compliance effort, COMSAT, as well as other international
communications carriers will be dependent, in part, upon foreign and other
third party telecommunication carriers being year 2000 compliant.
International communications services, such as those provided by the
Satellite Services segment, depend on interconnection between U.S. and
foreign communication carriers. At this time, the corporation is evaluating
what, if any, effect year 2000 non-compliance by other carriers may have on
the corporation's financial performance.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash in the first six months of 1998 were cash
from operations, proceeds from sale of CRSI and from the exercise of stock
options. Cash was used primarily for the purchase of property and equipment
and to reduce short-term debt. The corporation's working capital at June
30, 1998 was $38.8 million, which was $17.2 million higher than at December
31, 1997.
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 $20
million in borrowings outstanding at June 30, 1998. During the second
quarter, the corporation reduced short-term debt with the proceeds from the
sale of substantially all of the assets and operations of CRSI. A $200
million credit agreement, expiring in 1999, backs up the corporation's
commercial paper program.
The corporation had $36 million remaining at June 30, 1998 under a
$100 million medium-term note program, which is unchanged from year-end
1997. The medium-term 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 Federal Communications Commission (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. The corporation submitted its 1998 capitalization plan to the FCC in
May 1998 and a response from the FCC is expected in the third quarter of
1998. Under the existing 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,
1998 and expects to be in compliance with the other guidelines at December
31, 1998.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 of this Form 10-Q, Item 1 of Part II of the
Corporation's March 31, 1998 Form 10-Q and Item 3 of the
Corporation's 1997 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
At the Corporation's Annual Meeting of Shareholders held on
May 15, 1998 (the "Annual Meeting"), all twelve of the
Corporation's nominees for director were elected by the vote
totals noted below:
NOMINEE FOR WITHHELD
------- --- --------
Betty C. Alewine 43,458,316 292,637
Marcus C. Bennett 42,682,818 289,059
Lucy Wilson Benson 42,657,117 314,760
Edwin I. Colodny 42,670,683 301,194
Lawrence S. Eagleburger 42,403,027 568,850
Neal B. Freeman 42,674,222 297,655
Caleb B. Hurtt 42,680,497 291,380
Peter W. Likins 42,681,612 290,265
Larry G. Schafran 42,675,367 296,510
Robert G. Schwartz 42,655,530 316,347
Kathryn C. Turner 42,671,969 299,908
Guy P. Wyser-Pratte 42,680,544 291,333
The Corporation also has two directors, Peter S. Knight and
Charles T. Manatt, who are appointed by the President pursuant
to the Communications Satellite Act of 1962 and whose terms
continued after the Annual Meeting. A third director position
is vacant pending appointment by the President.
Shareholders approved the appointment of Deloitte & Touche LLP
as independent public accountants for the Corporation for the
fiscal year ending December 31, 1998 which appointment was
approved by a vote of 42,729,308 for, 224,552 against and
82,940 abstentions.
20
<PAGE>
A shareholder proposal requiring the Corporation to reaffirm
its political non-partisanship and require the reporting of
certain practices was defeated by a vote of 5,711,532 for,
26,955,363 against and 3,827,672 abstentions. There were
6,542,233 broker non-votes.
ITEM 5. OTHER INFORMATION
None
ITEM 6. (a) EXHIBITS
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
21
<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 13, 1998
22
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<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.00
<CASH> 9,335
<SECURITIES> 0
<RECEIVABLES> 132,380
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 200,466
<PP&E> 2,660,503
<DEPRECIATION> 1,262,996
<TOTAL-ASSETS> 1,855,134
<CURRENT-LIABILITIES> 161,624
<BONDS> 454,478
0
0
<COMMON> 428,137
<OTHER-SE> 227,570
<TOTAL-LIABILITY-AND-EQUITY> 1,855,134
<SALES> 0
<TOTAL-REVENUES> 295,762
<CGS> 0
<TOTAL-COSTS> 131,874
<OTHER-EXPENSES> 123,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,056
<INCOME-PRETAX> 12,742
<INCOME-TAX> (4,818)
<INCOME-CONTINUING> 7,924
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