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 September 30, 1999
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 [ ]
53,032,807 shares of the Registrant's common stock were outstanding as of
September 30, 1999.
<PAGE>
PART I. Financial Information
Item 1. Interim Financial Statements for the Corporation (Unaudited)
<TABLE>
<CAPTION>
COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Income Statements
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
In thousands, except per share amounts 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 155,705 $ 158,415 $ 456,171 $454,177
---------- ---------- ---------- ---------
Operating expenses:
Cost of services 86,663 73,071 250,236 204,945
Depreciation and amortization 39,087 57,458 125,531 164,509
Research and development 2,204 1,713 6,107 6,060
General and administrative 6,671 6,296 18,599 18,148
Merger costs 5,259 3,500 9,152 3,500
Impairment of long-lived assets - 14,000 - 14,000
---------- ---------- ---------- ---------
Total operating expenses 139,884 156,038 409,625 411,162
---------- ---------- ---------- --------
Operating income 15,821 2,377 46,546 43,015
Other income (expense), net (32,498) (1,021) (1,345) (4,861)
Interest costs, net of amounts capitalized (9,133) (6,088) (28,515) (30,144)
---------- ---------- ---------- ---------
Income (loss) before income taxes (25,810) (4,732) 16,686 8,010
Income tax benefit (expense) 7,408 11,301 (11,093) 6,483
---------- ---------- ---------- ---------
Net income (loss) $ (18,402) $6,569 $ 5,593 $ 14,493
========== ========== ========== =========
Earnings (loss) per common share:
Basic $ (0.35) $ 0.13 $ 0.11 $ 0.28
Assuming dilution (0.35) 0.12 0.10 0.27
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
In thousands September 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 75,031 $ 30,795
Receivables 142,542 131,052
Other 33,575 37,118
-------- ------------
Total current assets 251,148 198,965
------------ ------------
Property and equipment (net of accumulated depreciation
of $1,165,674 in 1999 and $1,298,336 in 918,987 1,209,462
Investments 360,523 249,064
Other assets 142,557 133,307
------------ ------------
Total assets $ 1,673,215 $ 1,790,798
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities:
Current maturities of long-term debt $30,993 $14,962
Accounts payable and accrued liabilities 113,944 88,297
Due to related parties 35,896 30,424
Other 10,401 7,119
------------ ------------
Total current liabilities 191,234 140,802
------------ ------------
Long-term debt 378,944 446,832
Deferred income taxes and investment tax credits 121,376 133,509
Accrued post-retirement benefit costs 49,183 48,923
Other long-term liabilities 135,058 161,692
Preferred securities issued by subsidiary 200,000 200,000
Stockholders' equity:
Common stock 442,421 430,537
Retained earnings 240,493 242,809
Treasury stock (8,816) (3,109)
Unearned compensation (3,431) (4,652)
Accumulated other comprehensive loss (73,247) (6,545)
------------ ------------
Total stockholders' equity 597,420 659,040
------------ ------------
Total liabilities and stockholders' equity $ 1,673,215 $ 1,790,798
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
COMSAT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Cash Flow Statements
Nine Months Ended September 30,
-------------------------------
In thousands 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,593 $ 14,493
Adjustments to reconcile net income to net cash provided
Depreciation and amortization 125,531 164,509
Equity in earnings of Inmarsat (12,654) -
Gain on sale of investments (26,773) (1,594)
Write-off of investments 35,985 1,950
Impairment of long-lived assets - 14,000
Changes in operating assets and liabilities (14,353) 7,970
Other 2,336 580
---------- ----------
Net cash provided by continuing operations 115,665 201,908
Net cash provided (used) by discontinued operations (7,473) 105,292
---------- ----------
Net cash provided by operating activities 108,192 307,200
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (85,110) (194,260)
Investments in unconsolidated businesses - (6,634)
Proceeds from sale of investments 30,643 1,700
Increase in INTELSAT ownership (38,064) (722)
Distribution from Inmarsat 31,248 -
Decrease in Inmarsat ownership - 5,910
Other 6,677 3,800
---------- ----------
Net cash used in investing activities (54,606) (190,206)
---------- ----------
Cash flows from financing activities:
Common stock issued 6,257 44,278
Cash dividends paid (7,909) (7,769)
Repayment of long-term debt (7,698) (9,549)
Net short-term borrowings (repayments) - (138,506)
---------- ----------
Net cash used by financing activities (9,350) (111,546)
---------- ----------
Net increase in cash and cash equivalents 44,236 5,448
Cash and cash equivalents, beginning of period 30,795 5,757
---------- ----------
Cash and cash equivalents, end of period $75,031 $ 11,205
========== ==========
</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
COMSAT prepared the accompanying unaudited condensed consolidated
financial statements pursuant to the rules and regulations of the SEC.
These financial statements should be read together with the financial
statements and notes in COMSAT's 1998 Annual Report on Form 10-K filed
with the SEC. 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 our opinion, 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. Agreement and Plan of Merger with Lockheed Martin Corporation
COMSAT and Lockheed Martin Corporation entered into an Agreement and
Plan of Merger on September 18, 1998. Under the terms of the merger
agreement, Lockheed Martin will acquire all of the outstanding common
stock of COMSAT in a two-step transaction. On September 18, 1999,
Lockheed Martin completed the first step of the transaction, a tender
offer to purchase 49% of COMSAT's outstanding common stock at a price
of $45.50 per share. The second step of the transaction, the merger of
COMSAT with a Lockheed Martin subsidiary in which COMSAT's remaining
stock will be converted into Lockheed Martin common stock on a
one-for-one basis, remains subject to satisfaction of several
conditions, including amendment of the Satellite Act and regulatory
approvals. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Outlook" on page 17 of this Form
10-Q and Note 2 to the financial statements in our 1998 Form 10-K for
additional information regarding the merger. Prior to completing the
tender offer, COMSAT sold COMSAT Government Systems, Inc., an
authorized carrier subsidiary, to Lockheed Martin at book value. COMSAT
incurred costs of $5.3 million in the third quarter of 1999 and $9.2
million in the first nine months of 1999 in connection with the
proposed merger.
3. Inmarsat Privatization
Inmarsat completed its privatization on April 15, 1999. As a result,
COMSAT now uses the equity method of accounting to report its 22.2%
ownership in the new company. Prior to 1999, COMSAT consolidated its
share of the accounts of Inmarsat and reported its share of Inmarsat's
revenues (net of space segment costs paid to Inmarsat), cost of
services, depreciation and amortization and interest costs in the
respective categories of our income statement. We now report our
proportionate share of Inmarsat's net operating results as equity
income in the "Other income (expense), net" category of our income
statement. Space segment charges paid to Inmarsat are now reported in
cost of services. Equity income from our investment in Inmarsat was
$3.6 million for the three months and $12.7 million for the nine months
ended September 30, 1999.
5
<PAGE>
As a result of the privatization and consistent with the equity method
of accounting, we reclassified Inmarsat related amounts from property
and equipment, current maturities of long-term debt, due to related
parties and long-term debt to form our investment in Inmarsat.
During March 1999, Inmarsat made a special cash distribution to its
signatories. We recorded our share of the distribution of $31.2 million
as a reduction of our investment in Inmarsat.
4. INTELSAT Share Change
During 1999, we paid $38.1 million to increase our total ownership
share of INTELSAT to 20.4% from 18.4% at December 31, 1998.
5. Change in Depreciable Lives of Satellites
Effective July 1, 1999, COMSAT extended the depreciable lives of
certain INTELSAT satellites by two to three years to reflect the
current estimated useful lives of those satellites. This change had the
effect of decreasing depreciation expense by $5.0 million in the third
quarter.
6. Regulatory Environment and Litigation
Regulatory Environment. COMSAT is subject to regulation by the Federal
Communications Commission with respect to its capital and
organizational structure, and with respect to its World Systems and
Mobile Communications businesses. Under the Communications Satellite
Act of 1962, the International Maritime Satellite Telecommunications
Act of 1978 and the Communications Act of 1934. FCC decisions and
policies have had, and will continue to have, a significant effect on
COMSAT. In addition, COMSAT's operations in various developing
countries are subject to regulation by the national and local
regulatory authorities in those countries. The regulatory environment
in many of those countries is rapidly evolving as the economies of
those countries develop. COMSAT's operations in those countries have,
and are likely to continue to face regulatory, economic and business
uncertainty.
On September 15, 1999, the FCC released a report and order adopting a
new policy of direct access to the INTELSAT system in the U.S. We
discuss these regulatory developments under "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Outlook" on page 20 of this Form 10-Q.
Litigation. COMSAT and its subsidiaries are parties to various lawsuits
and arbitration proceedings, as well as various claims and inquiries,
which generally are incidental to the ordinary course of our business.
See Note 9 for a description of an arbitration proceeding related to
the Green Bank contract to which we are a party. The outcome of legal
proceedings cannot be predicted with certainty. Based on currently
available information, however, we do not believe that the outcome of
any matter which is pending or threatened, either individually or in
the aggregate, will have a material adverse effect on our long-term
consolidated financial condition.
6
<PAGE>
Nevertheless, the outcome of such matters could materially affect our
consolidated results of operations in a given year or quarter.
In January 1999, the U.S. Department of Justice announced that it
intended to join a lawsuit filed by former employees of
Electromechanical Systems, Inc. under the qui tam provisions of the
Civil False Claims Act. We acquired Electromechanical Systems in 1994
as part of our acquisition of Radiation Systems, Inc., which became
part of COMSAT RSI, Inc. We began accounting for COMSAT RSI as a
discontinued operation in 1997 and retained Electromechanical Systems
when we sold COMSAT RSI in 1998 (see Note 9). The lawsuit names
Electromechanical Systems, COMSAT, COMSAT RSI, and several current and
former Electromechanical Systems employees and seeks potential damages
estimated at up to $40.0 million. The Department of Justice is expected
to seek to stay the lawsuit pending the outcome of a separate criminal
investigation into the same allegations that is currently being
conducted by the U.S. Attorney's office in Tampa, Florida. We intend to
vigorously defend this matter but cannot predict the ultimate outcome
or estimate the amount of liability that could result from any civil or
criminal sanctions the government may seek.
7. Earnings Per Share
The following reconciliation illustrates the calculation of our basic
and diluted earnings per share amounts for the three and nine month
periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
In millions, except per share amounts 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (18.4) $ 6.6 $ 5.6 $ 14.5
========= ========= ========= =========
Basic:
Weighted average shares outstanding 52.7 52.1 52.6 51.5
========= ========= ========= =========
Per share $ (0.35) $ 0.13 $ 0.11 $ 0.28
========= ========= ========= =========
Assuming dilution:
Weighted average shares outstanding 52.7 52.1 52.6 51.5
Stock options - 1.1 1.1 1.5
Restricted stock awards and units - 0.1 0.1 0.1
--------- --------- --------- ---------
Total 52.7 53.3 53.8 53.1
========= ========= ========= =========
Per share $ (0.35) $ 0.12 $ 0.10 $ 0.27
========= ========= ========= =========
</TABLE>
7
<PAGE>
8. Comprehensive Income
Comprehensive income consists of net income and other gains and losses
affecting our stockholders' equity that, under generally accepted
accounting principles, are excluded from net income. For COMSAT, such
items consist primarily of foreign currency translation gains and
losses and unrealized gains and losses on marketable equity securities.
The components of total comprehensive income (loss) are presented in
the following table:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
In millions 1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (18.4) $ 6.6 $ 5.6 $ 14.5
Other comprehensive income (loss):
Unrealized gain (loss) on securities 13.1 (11.4) (11.8) 5.3
Foreign currency translation (4.4) (1.4) (54.9) (6.8)
-------- ------- --------- --------
Total comprehensive income (loss) $ (9.7) (6.2) (61.1) 13.0
======== ======= ========= ========
</TABLE>
The foreign currency translation loss resulted from the devaluation of
the Brazilian currency (the Real) this year. The unrealized gain (loss)
on securities for the three and nine months ended September 30, 1999
includes an adjustment to reclassify $12.9 million and $0.5 million,
respectively, of unrealized losses related to COMSAT's direct
investment in ICO Global Communications (Holdings) Limited to net
income (loss). We wrote-off our $36.0 million direct investment in ICO
this quarter as a result of ICO's filing for Chapter 11 bankruptcy on
August 27, 1999. The unrealized gain (loss) on securities for the nine
months ended September 30, 1999 also includes an adjustment to
reclassify $16.7 million of unrealized gains related to the sale of
stock in Viatel, Inc. to net income.
9. Discontinued Operations
On June 25, 1998, we sold substantially all of COMSAT RSI, Inc. In
connection with the sale, COMSAT and the purchaser agreed to indemnify
each other against certain losses. Our indemnification obligations
generally are limited to losses incurred in excess of an agreed
threshold amount ($6.7 million) and are capped at a maximum agreed
amount ($28.0 million) in respect of claims made within an agreed
survival period (generally, approximately two years). In certain
instances, however, our indemnification obligations are not subject to
those limitations.
Certain of COMSAT RSI's assets were excluded from the sale and retained
by COMSAT, including Electromechanical Systems, Inc. and a long-term
construction contract for a radio astronomy telescope in Green Bank,
West Virginia. We also retained a claim against the prime contractor to
recover $29.0 million in costs incurred in performing the Green
8
<PAGE>
Bank contract, which are in excess of the original contract value. The
prime contractor has filed a counterclaim seeking $13.1 million in
damages for delay. The claim and counterclaim are currently in
arbitration. We may not be successful in collecting all or any portion
of this claim. The loss upon disposition of discontinued operations is
based upon our best estimates of the costs to complete the Green Bank
contract, the amount to be realized from the $29.0 million Green Bank
contract arbitration claim, potential indemnification claims and other
costs related to the discontinued operations. These estimates could
change as additional costs are incurred to complete the Green Bank
contract, upon resolution of the arbitration and upon resolution of
other matters related to the COMSAT RSI discontinued operations.
The net assets of COMSAT RSI remaining were $22.5 million at September
30, 1999 and $15.0 million at December 31, 1998. The net assets consist
primarily of receivables on long-term contracts, fixed assets, current
liabilities and the remaining reserve for the estimated loss on
disposal.
10. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (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 and gains or losses depends on the intended use of the
derivative and its resulting designation. The statement was originally
effective for fiscal years beginning after June 15, 1999. In June 1999,
the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 an amendment
of FASB Statement No. 133." SFAS No. 137 delays the effective date of
SFAS No. 133 by one year, to June 15, 2000. We will adopt SFAS No. 133
in the first quarter of 2001. We are evaluating the impact that
implementation of SFAS No. 133 will have on our consolidated financial
statements.
9
<PAGE>
11. Segment Information
Selected information regarding our operating segments, World Systems
(CWS), Mobile Communications (CMC), International (CI) and Laboratories
(Labs) follows:
<TABLE>
<CAPTION>
Three Months Ended Satellite Services
---------------------------
(in millions) CWS CMC Total CI Labs Other Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1999:
Revenues:
External customers $ 86.5 $ 30.6 $117.1 $ 25.8 $ 12.8 $ - $155.7
Intersegment 0.6 0.2 0.8 - 1.5 (2.3) -
------- ------- ------- -------- -------- -------- -------
Total $ 87.1 $ 30.8 $117.9 $25.8 $ 14.3 $ (2.3) $155.7
======= ======= ======= ======== ======== ======== =======
Segment income (loss) $ 36.9 $(31.2) $ 5.7 $ (6.4) $ (0.4) $ (24.7) $(25.8)
======= ======= ======= ========= ======== ======== ======
September 30, 1998:
Revenues:
External customers $ 76.7 $ 42.1 $118.8 $ 29.7 $ 9.9 $ - $158.4
Intersegment 0.3 0.7 1.0 0.1 1.5 (2.6) -
------- ------- ------- -------- -------- -------- -------
Total $ 77.0 $ 42.8 $119.8 $ 29.8 $ 11.4 $ (2.6) $158.4
======= ======= ======= ======== ======== ======== =======
Segment income (loss) $ 27.2 $ 7.7 $ 34.9 $ (18.6) $ (0.3) $ (20.7) $ (4.7)
======= ======= ======= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Satellite Services
---------------------------
(in millions) CWS CMC Total CI Labs Other Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999:
Revenues:
External customers $250.9 $ 91.0 $341.9 $ 81.1 $ 33.1 $ - $456.1
Intersegment 1.4 0.4 1.8 0.1 4.4 (6.3) -
------- ------- ------- -------- -------- -------- -------
Total $252.3 $ 91.4 $343.7 $ 81.2 $ 37.5 $ (6.3) $456.1
======= ======= ======= ======== ======== ======== =======
Segment income (loss) $ 98.2 $(22.3) $ 75.9 $ 11.9 $ (2.1) $ (69.0) $ 16.7
======= ======== ======== ======== ======== ======== =======
September 30, 1998:
Revenues:
External customers $225.1 $121.8 $346.9 $ 81.9 $ 25.4 $ - $454.2
Intersegment 1.1 1.9 3.0 0.1 6.5 (9.6) -
------- ------- ------- -------- -------- -------- -------
Total $226.2 $123.7 $349.9 $ 82.0 $ 31.9 $ (9.6) $454.2
======= ======= ======= ======== ======== ======== =======
Segment income (loss) $ 79.2 $ 24.0 $103.2 $ (26.8) $(2.7) $(65.7) $ 8.0
======= ======= ======= ======== ======== ======= =======
</TABLE>
We evaluate the performance of our operating segments based on income
(loss) before income taxes and interest costs. The "Other" column
includes the elimination of intersegment revenues, corporate related
items, and interest costs, net of amounts capitalized. We continue to
report our proportionate share of Inmarsat's net operating results in
the Mobile Communications' segment.
10
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Quarter Ended September 30, 1999
ANALYSIS OF OPERATIONS
Consolidated Operations
COMSAT now uses the equity method to account for its 22.2% investment in
Inmarsat. Prior to 1999, COMSAT used the pro rata method of consolidation to
report its share of Inmarsat's operating results. While the change in accounting
method did not affect consolidated net income, it did affect certain categories
on the income statement. We now report our proportionate share of Inmarsat's net
operating results as equity income in the "Other income (expense), net" category
of the income statement.
Revenues
Consolidated revenues in the third quarter of 1999 were $155.7 million, or
$2.7 million below the third quarter of 1998. For the nine months ended
September 30, 1999, revenues of $456.1 million were $1.9 million above the
comparative period of last year. For the year-to-date period, lower revenues in
Mobile Communications and International more than offset increased revenues in
World Systems and the Laboratories.
Operating Income
Operating income for the third quarter was $15.8 million, or $13.4 million
above the same period of last year. For the year-to-date period, operating
income was $46.6 million, or $3.5 million better than the comparative period of
1998. In the third quarter of 1998, we recorded a $14.0 million non-cash
impairment loss related to the write-down of the long-lived assets of BelCom,
COMSAT International's company operating in Russia and the Commonwealth of
Independent States. Exclusive of the 1998 BelCom impairment loss, third quarter
and year-to-date operating income were $600,000 and $10.5 million below the
respective periods of last year. The change in the method of accounting for our
investment in Inmarsat, lower Mobile Communications revenues and costs related
to the proposed merger with Lockheed Martin Corporation predominately caused the
decreases. Increased operating income in World Systems partially offset those
items. The improvement in World Systems was primarily the result of increased
ownership in INTELSAT and a change by World Systems during the third quarter of
1999 to extend the depreciable lives of the INTELSAT satellites.
Other Income (Expense), Net
Other income (expense), net was expense of $32.5 million for the third
quarter of 1999, as compared to expense of $1.0 million for the third quarter of
last year. The increase in expense was the result of the write-off of our 1.6%
direct ownership in ICO Global Communications (Holdings) Limited. This write-off
resulted in a non-cash, pre-tax charge of $36.0 million during the third quarter
of 1999. See "Outlook-ICO Global
11
<PAGE>
Communications." The ICO charge was offset, in part, by $3.6 million in equity
earnings from our investment in Inmarsat. For the nine months ended September
30, 1999, other expense was $1.3 million, which was $3.5 million below the
comparative expense of $4.8 million for the same period of last year. This
improvement was the result of the $25.7 million pre-tax gain from the sale of
Viatel stock during the first half of 1999 and $12.7 million in equity income
from Mobile Communications' investment in Inmarsat. The third quarter 1999
write-off of our direct investment in ICO partially offset those items.
Year-to-date 1998 results included a $2.0 million non-cash write-off of the
Laboratories' investment in Superconducting Core Technologies, Inc. in the first
quarter of 1998.
Interest Costs, Net of Amounts Capitalized
Interest costs, net of amounts capitalized for the third quarter of 1999,
were $9.1 million, or $3.0 million higher than the same period of 1998. For the
first nine months of this year, interest costs, net of amounts capitalized, were
$28.5 million, or $1.6 million below the comparative period of 1998. The third
quarter of 1998 included a $4.2 million reversal of previously accrued interest
costs related to certain tax matters (see below in income tax expense).
Exclusive of this reversal, interest costs were better by $1.2 million for the
third quarter and $5.8 million for the year-to-date, when compared to the same
periods in 1998. The year-over-year improvement in interest costs was the result
of lower levels of borrowings and the reclassification of Mobile Communications'
share of Inmarsat interest costs from this category to a component of "Other
income (expense), net."
Income (loss) before Income Taxes
The loss before income taxes for the third quarter of 1999 was $25.8
million, which was $21.1 million higher than the third quarter 1998 loss of $4.7
million. Exclusive of the ICO direct investment write-off, income before taxes
for the third quarter was $10.2 million, which was $14.9 million better than the
same period of last year. For the year-to-date period, income before income
taxes was $16.7 million, or $8.7 million better than the first nine months of
1998. Absent the ICO write-off, the year-to-date income before taxes was $52.7
million, which was $44.7 million above the comparative period of 1998. This
improvement principally was due to the gain from the sale of Viatel stock,
higher earnings from World Systems and the BelCom impairment loss in 1998. Lower
Mobile Communications revenues and costs associated with the proposed merger
with Lockheed Martin partially offset those items.
Income Tax Benefit (Expense)
For the third quarter of 1999, income tax benefit was $7.4 million, as
compared to an income tax benefit of $11.3 million in the third quarter of 1998.
A tax benefit of $12.6 million was recognized this quarter on the ICO write-off.
Income tax expense for the first nine months of this year was $11.1 million,
which compares to an income tax benefit of $6.5 million for the same period last
year. In the third quarter of 1998, the corporation favorably resolved a state
tax audit and, accordingly, reversed previously accrued interest
12
<PAGE>
costs of $1.7 million and state income taxes of $2.2 million. In addition,
events during the third quarter of 1998 led the corporation to determine that
previously accrued interest costs of $2.5 million and federal income taxes of
$15.1 million related to certain tax matters were no longer required.
Net Income (Loss)
The net loss for the third quarter of 1999 was $18.4 million, as compared
to net income of $6.6 million in the third quarter of 1998. For the nine months
ended September 30, 1999, net income was $5.6 million, which was $8.9 million
below the same period of last year. The after tax effect of the write-off of our
direct investment in ICO was $23.4 million. Therefore, exclusive of the ICO
write-off, income after taxes was $5.0 million for the third quarter of 1999 and
$29.0 million for the first nine months of 1999.
The net loss per share on a fully-diluted basis for the third quarter was
$0.35, versus earnings per share or $0.12 in the same period of 1998. For the
first nine months of 1999, earnings per share on a fully-diluted basis were
$0.10, as compared to $0.27 per share for the same period in 1998.
Segment Operating Results
We report our operating results in four segments: World Systems, Mobile
Communications, International and Laboratories. We evaluate the performance of
our operating segments based on segment income (loss) before taxes and interest
costs.
In our 1998 Form 10-Q reports, we presented our operating results in two
segments: Satellite Services and Network Services. The Satellite Services
segment included World Systems and Mobile Communications. The Network Services
segment included International, Laboratories and Government Programs. We began
reporting International and Laboratories as separate segments in the fourth
quarter of 1998. We now include the results of Government Programs as part of
the World Systems segment.
13
<PAGE>
<TABLE>
<CAPTION>
Results by Segment:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
In millions 1999 1998 1999 1999
- ----------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C> <C>
Satellite Services:
World Systems $ 87.1 $ 77.0 $ 252.3 $ 226.2
Mobile Communications 30.8 42.8 91.4 123.7
------- -------- -------- --------
Total Satellite Services 117.9 119.8 343.7 349.9
------- -------- -------- --------
International 25.8 29.8 81.2 82.0
Laboratories 14.3 11.4 37.5 31.9
Eliminations and other (2.3) (2.6) (6.3) (9.6)
------- -------- -------- --------
Total $ 155.7 $ 158.4 $ 456.1 $ 454.2
======= ======== ======== ========
SEGMENT INCOME (LOSS)
Satellite Services:
World Systems $ 36.9 $ 27.2 $ 98.2 $ 79.2
Mobile Communications (31.2) 7.7 (22.3) 24.0
-------- -------- -------- --------
Total Satellite Services 5.7 34.9 75.9 103.2
-------- -------- -------- --------
International (6.4) (18.6) 11.9 (26.8)
Laboratories (0.4) (0.3) (2.1) (2.7)
-------- -------- -------- --------
Total segment income (1.1) 16.0 85.7 (73.7)
General and administrative expenses (6.7) (6.3) (18.6) (18.2)
Merger costs (5.3) (3.5) (9.2) (3.5)
Interest costs, net of amounts capitalized (9.2) (6.1) (28.6) (30.1)
Other income (expense), net (3.5) (4.8) (12.6) (13.9)
-------- -------- -------- --------
Total $ (25.8) $ (4.7) $ 16.7 $ 8.0
======== ======== ======== ========
</TABLE>
World Systems
World Systems revenues in the third quarter of this year were $87.1
million, an increase of 13% over the same period of last year. For the first
nine months of 1999, revenues in World Systems were $252.3 million, which was an
improvement of 12% as compared to the same period of 1998. The improvement in
revenues was primarily the result of increased demand for Internet services and
other high-speed data traffic and our increased ownership in INTELSAT. In 1999,
we paid $38.1 million to increase our total ownership share of INTELSAT from
18.4% to 20.4%. A slight decline in voice revenues partially offset these
increases.
Segment income in World Systems in the third quarter was $36.9 million, an
increase of 36% as compared to the same period during 1998. For the first nine
months of 1999, World Systems segment income was $98.2 million, or 24% higher
than the same period of last year. During the third quarter of 1999, CWS
extended the depreciable lives of its share of costs on the INTELSAT satellites
based on the current estimated useful lives of those satellites. The change had
the effect of increasing CWS's segment income
14
<PAGE>
by $5.0 million this quarter. The remainder of the improvement in CWS's
segment income was from increased ownership in INTELSAT, lower operating
expenses and revenue growth.
Mobile Communications
Inmarsat completed its privatization on April 15, 1999. As a result, we
began using the equity method of accounting on January 1, 1999 to report our
22.2% ownership in the new company. Prior to 1999, we used the pro rata method
of consolidation to report our share of Inmarsat's operating results. Under the
pro rata method of consolidation, we reported our share of Inmarsat's revenues
(net of the space segment charges that we paid to Inmarsat), cost of services,
depreciation and amortization and interest costs in the appropriate categories
of our income statement. We now report our proportionate share of Inmarsat's net
operating results as equity income in "Other income (expense), net" within the
Mobile Communications operating segment. The space segment charges that we pay
to Inmarsat are now reported in cost of services. Our share of Inmarsat's
interest costs and income taxes are now reported within the Mobile
Communications segment. Prior to 1999, our share of Inmarsat's interest costs
were reported in "Interest costs, net of amounts capitalized" and taxes related
to our income from Inmarsat were reported in "Income tax expense."
Revenues in Mobile Communications for the third quarter were $30.8 million,
or 28% below the third quarter of 1998. Mobile Communications revenues in the
first nine months of 1999 were $91.4 million, or 26% below the same period last
year. Lower analog telephone traffic, principally due to lower usage in the U.S.
Government sector, and lower amounts of carrier traffic primarily caused the
declines. In addition, reporting Inmarsat's revenues using the equity method of
accounting lowered Mobile Communications' revenues by $5.2 million in the third
quarter and $11.3 million in the first nine months of 1999.
Mobile Communications' segment loss in the third quarter of 1999 was $31.2
million, as compared to segment income of $7.7 million in the third quarter of
1998. For the nine months ended September 30, 1999, Mobile Communications
segment loss was $22.3 million, versus segment income of $24.0 million in the
same period of 1998. Exclusive of the write-off of our direct investment in ICO,
Mobile Communications segment income in the third quarter was $4.8 million and
for the nine months ended September 30, 1999, was $13.7 million. Excluding the
ICO write-off, the decline in Mobile Communications segment income was due to
lower revenues, and reporting our share of Inmarsat's interest costs and income
taxes within the Mobile Communications segment. Mobile Communications' results
included interest costs and income taxes of $2.0 million for the third quarter
and $5.2 million for the first nine months of 1999. The third quarter 1999
results also included a $1.1 million gain on the sale of an investment. In
addition, the year-to-date 1998 results include a gain of $1.0 million on the
sale of an investment.
15
<PAGE>
International
International's third quarter 1999 revenues were $25.8 million, or 13%
below the third quarter of 1998. For the nine months ended September 30, 1999,
International's revenues were $81.2 million, or 1% lower than the same period of
last year. International's revenues in Brazil decreased compared to last year
due in part to the devaluation of the Brazilian currency. Lower revenues in
Brazil were offset, in part, by improvements in Argentina, Mexico and Colombia.
International's segment loss for the third quarter of 1999 was $6.4
million, compared to a loss of $18.6 million for the same period of 1998.
International third quarter 1998 results included a non-cash loss of $14.0
million related to the write-down of the long-lived assets of BelCom. Exclusive
of the BelCom impairment loss, International's loss for the third quarter of
1999 was $1.8 million worse than the same period in 1998.
International's segment income for the first nine months of 1999 was $11.9
million, compared to a segment loss of $26.8 million for the nine months ended
September 30, 1998. During the first half of 1999, we sold our remaining
investment in Viatel and recognized a gain of $25.7 million. Excluding the gain
on the sale of Viatel stock and the third quarter 1998 BelCom impairment loss,
International's year-to-date 1999 segment loss was $13.8 million, which was $1.0
million worse than the same period in 1998. The economic conditions in Latin
America are continuing to adversely affect International's operations in
Argentina, Brazil and Venezuela. During the first nine months of 1999, the
Brazilian currency has been devalued by approximately 60%.
Laboratories
The Laboratories' revenues in the third quarter of 1999 were $14.3 million,
or 25% higher than the third quarter of 1998. For the nine months ended
September 30, 1999, Laboratories' revenues were $37.5 million, or 18% better
than last year. The improvement in revenues was due to growth in our technical
consulting and product businesses. The segment loss in the third quarter was
$400,000, compared to a segment loss of $300,000 in the third quarter of 1998.
For the nine months ended September 30, 1999, the segment loss was $2.1 million,
which was $600,000 better than the first nine months of 1998. The prior year
results included a $2.0 million non-cash write-off of our investment in
Superconducting Core Technologies, Inc. Absent this write-off, the Laboratories'
segment loss in the first nine months of 1999 was $1.4 million higher than the
same period of 1998 and was primarily due to increased research and development
costs.
16
<PAGE>
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 regulatory and
other governmental proceedings, legislative actions, developments concerning the
privatization of INTELSAT, the proposed acquisition of COMSAT by Lockheed Martin
Corporation, international and domestic business conditions, increased
competition from other satellite services providers, the disposition of assets
and completion of contracts placed in discontinued operations, the effect of the
year 2000 issue on COMSAT, litigation and other factors. Therefore, there can be
no assurance that actual future results will not differ materially from
anticipated results. Although we have 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 that may
affect future operating results.
Business Combination with Lockheed Martin
COMSAT entered into an Agreement and Plan of Merger with Lockheed Martin
Corporation on September 18, 1998. Under that agreement, Lockheed Martin agreed
to acquire all of COMSAT's outstanding common stock in a two-step transaction.
The first step, a cash tender offer to purchase up to 49% of COMSAT's
outstanding common stock at a price of $45.50 per share, was completed on
September 18, 1999. As a result, Lockheed Martin now owns approximately 49% of
COMSAT's outstanding common stock.
The second step is a proposed merger of COMSAT with a wholly-owned
subsidiary of Lockheed Martin. In the merger, shareholders will receive one
share of Lockheed Martin common stock for each share of COMSAT common stock that
they own.
The merger will be completed only if the conditions set forth in the merger
agreement are satisfied. One of the conditions is the completion of the tender
offer, which has now been satisfied. Some of the other conditions are:
o amendment of the Communications Satellite Act of 1962 to permit
completion of the merger;
o receipt of all consents and approvals from governmental authorities; and
17
<PAGE>
o there is no event that has had or would reasonably be expected to have
a significant adverse effect on COMSAT.
We are working toward completing the merger. However, we do not yet know
when or whether the merger will be completed.
If Congress adopts amendments to the Satellite Act in the 1999 or 2000
legislative session, the merger would likely occur four to six months
thereafter, depending upon when the FCC acts on approvals necessary to complete
the merger. No assurance can be given that the requisite legislation will be
enacted or that such legislation will not have a significant adverse effect on
COMSAT. If legislation enabling the merger is enacted and all other closing
conditions are satisfied, FCC approval of the merger will be required. While it
is expected that the FCC would act promptly on the matter following enabling
legislation, the FCC's response time could affect the estimated time frame for
closing the merger. If the merger is not completed by September 18, 2000, either
Lockheed Martin or COMSAT may terminate the merger agreement.
Restructuring of INTELSAT
INTELSAT's management and Board of Governors are continuing efforts to
transform INTELSAT from a treaty-based, intergovernmental organization to a
fully-private, commercial company. In September 1999, the Board of Governors
prepared an interim report on INTELSAT's plan to privatize the organization.
This plan was presented in October 1999 to INTELSAT's Assembly of Parties (a
meeting of the member of governments of INTELSAT). The Assembly of Parties
unanimously approved the plan targeting privatization as early as April 1, 2001.
The Assembly endorsed proceeding further toward the privatization of INTELSAT in
a manner that would result in INTELSAT being operated as a corporation without
privileges and immunities. While the new privatized company initially will not
be publicly traded, an initial public offering is planned for 2002, subject to
market conditions and the actual date of incorporation of the restructured
INTELSAT. COMSAT is committed to privatizing INTELSAT in a pro-competitive
manner at the earliest possible time. As a minority shareholder and the U.S.
Signatory to INTELSAT, however, we lack the ability to independently effect a
restructuring of INTELSAT. The success and timing of our efforts will depend on
our ability to achieve a consensus among other Signatories and participating
member governments.
Legislative and Regulatory Developments
On July 1, 1999, the U.S. Senate passed the Open-market Reorganization for
the Betterment of International Telecommunications (ORBIT) Act (S. 376) by
unanimous consent. Senator Conrad Burns, Chairman of the Senate Commerce
Subcommittee on Communications, introduced the ORBIT legislation. COMSAT
believes that the ORBIT legislation, on the whole, represents a constructive
approach to the privatization of INTELSAT and deregulation of COMSAT.
Significantly, the ORBIT legislation would repeal the ownership restrictions on
COMSAT stock upon enactment and eliminate other
18
<PAGE>
outdated provisions in the Satellite Act. We do have concerns with some
provisions of the bill, including a requirement that the President withdraw the
U.S. from this international organization if the full privatization is not
achieved by 2002. Although we believe privatization of INTELSAT will be
completed rapidly, United States withdrawal from INTELSAT in 2002, if
privatization is not completed, would have a substantial adverse effect on our
financial condition and results of operations. Amendments to the ORBIT
legislation addressed direct access and standards to govern FCC licensing of
Inmarsat and New Skies as privatized companies and INTELSAT after that
organization is privatized.
On November 10, 1999, the House of Representatives passed the
Communications Satellite Competition and Privatization Act of 1999 (H.R. 3261).
Representative Tom Bliley, Chairman of the House Committee on Commerce,
introduced the legislation on November 9 and it went directly to the House floor
without going through committee. The next step in the legislative process will
be a conference in which lawmakers from both houses will attempt to reconcile
the differences in H.R.3261 and S. 376. We cannot predict the timing or outcome
of that process, but the differences in the two bills are substantial. Enactment
into law also will require Presidential approval. The Clinton Administration
opposed H.R. 3261 in a letter to Representative Bliley prior to its passage.
Like the bill passed by the House last year (H.R. 1872), the bill recently
passed by the House contains provisions that could adversely affect in a
material way COMSAT's results of operations and the value of its investments in
INTELSAT, Inmarsat and New Skies Satellites, N.V. In particular, the House bill
contains provisions mandating the immediate availability of "Level 4" direct
access to INTELSAT, pursuant to which U.S. customers would be able to invest in
INTELSAT as well as by-pass COMSAT to directly contract with INTELSAT for
service. If enacted, COMSAT's INTELSAT ownership could be substantially diluted
prior to privatization. The Senate Bill would permit direct access after July 1,
2001, but would not permit direct investment by U.S. customers other than
COMSAT.
The House bill also contains various criteria and deadlines related to the
privatization of INTELSAT, Inmarsat and New Skies, along with sanctions if those
conditions are not met. For example, the House bill requires that INTELSAT,
Inmarsat and New Skies must complete an initial public offering by specified
dates (by April 1, 2001 for INTELSAT, by April 1, 2000 for Inmarsat, and by a
date which has already passed for New Skies). If INTELSAT, Inmarsat and New
Skies do not satisfy those criteria, their access to the U.S. market would be
restricted or eliminated, except for the provision of, for INTELSAT, switched
voice telephony and occasional use television, and for Inmarsat, global marine
distress and safety service. COMSAT believes that the House Bill's conditions
would be difficult to meet, and that sanctions would be likely if H.R. 3261 were
to become law. The Senate bill also contains privatization criteria, but gives
the FCC more discretion with respect to allowing market entry by privatized
systems.
19
<PAGE>
Both the Senate and House bill, expressly precludes abrogation of COMSAT's
existing long-term carrier contracts under the so-called "fresh look" doctrine.
However, the House bill requires the FCC to complete a rulemaking within 180
days on the "portability" of COMSAT's capacity on INTELSAT satellites to users.
The House bill contains a number of provisions that are not contained in
the Senate bill. The House bill would ban the provision of new Internet,
high-speed data, direct-to-home broadcasting, and Ka-band satellite applications
prior to privatization. As a result, COMSAT would be barred from providing these
services, except pending completion of existing contracts. The House bill also
precludes INTELSAT from acquiring any new satellites or orbital slots prior to
privatization. All INTELSAT orbital slots not planned for use as of March 25,
1998 would have to be relinquished if the House bill is enacted. The House bill
also requires that Inmarsat spectrum must be relinquished on January 1, 2006.
Finally, COMSAT's Signatory immunity would be abolished prior to privatization
with few safeguards. This could expose COMSAT to potential liabilities for
actions taken pursuant to the INTELSAT inter-governmental agreements.
Both the Senate Bill and the House Bill would remove the existing
limitations on the ownership of COMSAT stock under the Satellite Act and,
thereby, permit Lockheed Martin to complete its proposed acquisition of the
remaining 51% of COMSAT. Under the House Bill, however, the ownership cap would
not be lifted until the effective date of the FCC order establishing direct
access. Consummation of the merger remains subject to receipt of FCC approval
for the change of control and other conditions.
Pending reconciliation of the differences between the House and Senate
bills and final passage of legislation by both houses, COMSAT cannot accurately
determine how the final legislation will effect its future business operations
and prospects.
On September 15, 1999, the FCC adopted a new policy of direct access to
INTELSAT in the United States. Specifically, the FCC authorized U.S. carriers
and users to contract directly with INTELSAT for satellite capacity (Level 3
direct access), rather than obtaining it through COMSAT. The FCC rejected
requests to allow entities other than COMSAT to invest in INTELSAT proportionate
to their usage (Level 4 direct access), finding that the FCC lacked the
authority under the 1962 Communications Satellite Act to permit Level 4 direct
access. The Satellite Act also imposes specific responsibilities upon COMSAT as
the U.S. Signatory to INTELSAT. In recognition of the costs created by Signatory
activities that are unrecoverable under INTELSAT's Level 3 direct access
program, the FCC has authorized COMSAT to file a tariff to charge all direct
users a "Signatory surcharge" to recover those costs. The FCC estimated that the
Signatory surcharge would be approximately 5.58% of the rate direct access users
would pay to INTELSAT for capacity ordered directly. The FCC also rejected
claims that COMSAT's long-term carrier contracts should be subject to government
abrogation under the "fresh look" doctrine, thus preserving COMSAT's backlog of
contracted capacity commitments. Moreover, the FCC declined to pursue claims for
"portability" of COMSAT's capacity to users, citing no evidence in the record to
support this proposal.
20
<PAGE>
COMSAT believes that the FCC lacks the authority to impose direct access
under the Satellite Act as currently enacted. Accordingly, COMSAT has appealed
the FCC's direct access order to the U.S. Court of Appeals for the District of
Columbia Circuit. COMSAT filed a request for stay of the order with the FCC
pending the outcome of COMSAT's appeal, which the FCC later denied. COMSAT
subsequently filed a motion for stay of the order with the U. S. Court of
Appeals. The Court denied that motion on November 10, 1999. COMSAT plans to seek
an expedited briefing schedule for the appeal. However, two parties have filed
petitions for reconsideration of the FCC's direct access order. This action may
delay the Court's decision on the merits. In the meantime, the FCC has announced
that Level 3 direct access will be available as of December 6, 1999, the
effective date of its order.
Direct access could fundamentally change the way COMSAT does business.
Direct access may materially reduce COMSAT World Systems' future revenues to the
extent that customers begin to contract directly with INTELSAT for new capacity
and for existing capacity as long-term contracts and capacity commitments
expire. On October 14, 1999, COMSAT amended its inter-carrier agreement with
AT&T Corp. which provides for price reductions in exchange for AT&T's commitment
to maintain specified levels of traffic on the INTELSAT system via COMSAT
through at least 2006.
In June 1998, the FCC issued a public notice requiring U.S. earth stations
using INTELSAT satellites that were scheduled to be transferred to New Skies to
file license modification applications in order to access the New Skies system.
Several companies, including COMSAT, filed applications in response to this
notice. On August 6, 1999, the FCC granted these applications for a three-year
license term, finding that New Skies' entry into the U.S. market would not pose
a very high risk to competition, but that New Skies was not yet fully
independent of INTELSAT. U.S. earth stations may now access New Skies satellites
for both domestic and international services. The FCC stated that it would
consider extending these licenses for a full ten-year term upon an appropriate
showing by New Skies. In the meantime, it directed New Skies to file quarterly
status reports on its plans for an initial public offering and other steps
toward independence.
ICO Global Communications
ICO filed for Chapter 11 bankruptcy on August 27, 1999. As a result, COMSAT
wrote off its 1.6% direct ownership interest in ICO Global Communications
(Holdings) Limited during the third quarter of 1999. In addition to this direct
investment in ICO, we have an indirect investment of $34.7 million in ICO
through our equity ownership in Inmarsat, which also is an ICO shareholder. As
of September 30, 1999, Inmarsat had not written off its investment in ICO. ICO
has stated that it needs approximately $1.2 billion in additional funding in
order to complete the development of its system and fund its operations through
deployment. On November 1, 1999, ICO announced that Craig McCaw, through his
affiliated companies, including Teledesic LLC, will lead a group of
international investors to provide up to $1.2 billion in funding to ICO. On the
same day, Inmarsat announced that, after a comprehensive and detailed analysis,
it will not proceed with any additional direct investment into ICO. It is
expected that Inmarsat will write-off
21
<PAGE>
its investment in ICO in the fourth quarter of 1999. Accordingly, COMSAT expects
to write-off its $34.7 million indirect investment in ICO at that time.
Year 2000 Issue (Year 2000 Readiness Disclosure)
The year 2000 issue stems from existing computer programs that were written
using two digits rather than four digits to define the applicable year (e.g.,
"99" for 1999). Some 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
system failure or miscalculations, which could cause a disruption of operations.
The problem is not limited to computer programs, as some computer and other
operational equipment that have date-sensitive processors may not be able to
process dates after December 31, 1999.
In the second half of 1996, we initiated a program to identify and address
year 2000 issues in order to avoid interruption to our operations at the turn of
the century. Each of our operating segments, as well as our administrative
functions, has completed the inventory and assessment phases of the year 2000
implementation plan and has completed remediation and testing of the critical
non-compliant systems identified during the first two phases. The remaining
effort is being directed at maintenance and field testing of remediated sites,
primarily in COMSAT International.
Our current estimate is that it will cost approximately $7 million prior to
January 1, 2000 to modify in-house management information systems, customer
products and other systems and equipment affected by the year 2000 issue. Of
this amount, we have spent approximately $6 million through September 30, 1999.
Management does not foresee any future events that could prevent the completion
of all testing and installations prior to January 1, 2000.
While we are devoting substantial resources to our own year 2000 compliance
effort, COMSAT, as well as other international telecommunications carriers, will
be dependent, in part, on foreign and other third-party telecommunications
carriers being year 2000 compliant. The financial impact on World Systems and
Mobile Communications of foreign or third-party telecommunications carriers
failing to meet the year 2000 challenge would be realized in either of two ways:
loss of revenue due to the inability to complete the up-link or down-link
transmissions to or from a satellite and/or a decrease in our share of INTELSAT
and Inmarsat operating results. In recognition of the potential financial
exposure resulting from this dependency on foreign and third-party
telecommunications carriers, we have undertaken, as part of our year 2000
efforts, an analysis of the year 2000 compliance efforts of these
telecommunications carriers. In addition to this analysis, we are also utilizing
the results of efforts undertaken by INTELSAT, Inmarsat and the International
Telecommunications Union (ITU).
World Systems derives a significant amount of its revenues under long-term
contracts. Almost all of these revenues are dependent upon termination with a
foreign telecommunications carrier. Even though these long-term contracts are
not subject to
22
<PAGE>
termination as a result of the year 2000 issue, a significant portion of the
expected future World Systems revenues and our share of INTELSAT revenues is
generated from services between the United States and areas of the world that
may be subject to service interruptions resulting from year 2000 readiness
issues. In addition, Mobile Communications derives a significant portion of its
revenues from services either originating or terminating outside of the United
States. If the originating or terminating carrier is unable to initiate or
terminate a call, Mobile Communications, directly and indirectly through our
share of Inmarsat revenues, would be adversely affected by reduced revenues. It
is not possible for us to accurately quantify the amount, if any, of these
exposures.
International relies on third-party telecommunications carriers to provide
services to their customers. We have sought, but have not yet received, final
certification regarding year 2000 compliance from all of our third-party
carriers. We are developing appropriate contingency plans to mitigate, to the
extent possible, the effects of possible non-compliance by third-party carriers.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of cash during the first nine months of 1999 was cash
from operations and the sale of Viatel stock. Our working capital at September
30, 1999 was $59.9 million, which was $1.8 million higher than December 31,
1998. The increase in working capital was due to a $52.2 million increase in
current assets primarily from the proceeds from sale of stock in Viatel, offset
by higher current liabilities of $50.4 million. The increase in current
liabilities was primarily from reclassifying the current portion of our share of
INTELSAT's long-term debt and certain other noncurrent liabilities to current
liabilities.
We have access to short-term and long-term financing at favorable rates.
Our current long-term debt ratings are A- from Standard and Poor's and Baal from
Moody's. Our current commercial paper ratings are A2 from Standard and Poor's
and P2 from Moody's. Following announcement of the proposed merger with Lockheed
Martin, both Standard and Poor's and Moody's placed their ratings on our
long-term debt under review for possible downgrades. Shortly after completion of
the tender offer, Moody's downgraded COMSAT's long-term debt and the Monthly
Income Preferred Securities issued by COMSAT Capital I, L.P. from A3 to Baal.
Ratings from both Moody's and Standard and Poor's remain under review for
possible further downgrades as a result of the merger. The ratings for
commercial paper are not under review at this time.
Our $200 million commercial paper program had no borrowings outstanding at
September 30, 1999. A $200 million credit agreement, expiring at the end of
1999, backs up our commercial paper program. We are currently engaged in
discussions to extend the facility through December 16, 2000. We had $36 million
remaining under a $100 million medium-term note program at September 30, 1999.
The medium-term note program is part of a $200 million debt securities shelf
registration program initiated in 1994.
23
<PAGE>
Our capital structure and debt-financing activities are regulated by the
FCC. Under the currently approved FCC guidelines, we are 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. We were in compliance with
these guidelines as of September 30, 1999. If we were to fail to satisfy one or
more of the FCC guidelines, we would be required to seek advance FCC approval of
future financing activities on a case-by-case basis.
24
<PAGE>
Item 3 Quantitative and Qualitative Disclosures About Market Risk
We do not hold or issue derivative financial instruments. We finance our
operations and manage our interest rates through a combination of short-term
commercial paper, fixed-rate long-term debt and Monthly Income Preferred
Securities (MIPS) issued by a subsidiary. The MIPS pay a fixed dividend.
Borrowing under our short-term commercial paper program can expose our operating
results to changes in short-term rates. At September 30, 1999, no commercial
paper was outstanding.
The corporation invests its excess cash in highly liquid investments with a
maturity of three months or less. Such investments can expose our operating
results to changes in short-term rates.
International conducts its operations primarily through majority-owned and
wholly-owned subsidiaries. We have financed International's subsidiaries through
capital contributions. International's largest subsidiaries utilize the local
currency as their functional currency. Therefore, fluctuations in exchange rates
relative to the U.S. Dollar are recorded as cumulative translation adjustments
as a component of our stockholders' equity. Fluctuations in exchange rates
relative to the U.S. Dollar have not had a material impact on our cash flows or
results of operations.
25
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
-----------------
See note 5 of this Form 10-Q and Item 3 of our 1998 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
---------------------------------------------------
Item 4. Submission of Matters To A Vote of Security Holders
At COMSAT's Annual Meeting of Shareholders held on August 20, 1999
(the "Annual Meeting"), the shareholders of the corporation voted to
approve the merger agreement with Lockheed Martin Corporation. The
merger agreement was approved by a vote of 39,522,725 for, 385,768
against and 83,055 abstentions. There were 3,925,450 broker non-votes.
At 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 43,415,479 501,519
Marcus C. Bennett 43,556,956 360,042
Lucy Wilson Benson 43,432,491 484,507
Edwin I. Colodny 43,540,012 376,986
Lawrence S. Eagleburger 43,137,520 779,478
Neal B. Freeman 43,550,840 366,158
Caleb B. Hurtt 43,557,426 359,572
Peter W. Likins 43,551,633 365,365
Larry G. Schafran 43,532,442 384,556
Robert G. Schwartz 43,540,881 376,117
Kathryn C. Turner 43,453,513 463,485
Guy P. Wyser-Pratte 43,522,737 394,261
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.
26
<PAGE>
Shareholders approved the appointment of Deloitte & Touche LLP as
independent public accountants for the corporation for the fiscal year
ending December 31, 1999 which appointment was approved by a vote of
43,615,608 for, 172,972 against and 128,418 abstentions.
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 4,925,221 for, 33,021,307 against
and 2,045,020 abstentions. There were 3,925,450 broker non-votes.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
27 - Financial Data Schedule
(b) Report on Form 8-K
------------------
Report dated July 19, 1999 containing a press release
regarding COMSAT's second quarter financial results and
other matters.
Report dated August 27, 1999 regarding the status of certain
conditions to closing the tender offer made by Regulus LLC,
a subsidiary of Lockheed Martin Corporation.
27
<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, thereunto duly authorized.
COMSAT Corporation
------------------
By /s/ Alan Korobov
----------------------
Alan Korobov
Controller
Date: November 15, 1999
28
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for nine months ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000022698
<NAME> COMSAT Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 75,031
<SECURITIES> 0
<RECEIVABLES> 142,542
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 251,148
<PP&E> 2,084,661
<DEPRECIATION> 1,165,674
<TOTAL-ASSETS> 1,673,215
<CURRENT-LIABILITIES> 191,234
<BONDS> 378,944
0
0
<COMMON> 442,421
<OTHER-SE> 154,999
<TOTAL-LIABILITY-AND-EQUITY> 1,673,215
<SALES> 0
<TOTAL-REVENUES> 456,171
<CGS> 0
<TOTAL-COSTS> 250,236
<OTHER-EXPENSES> 159,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,515
<INCOME-PRETAX> 16,686
<INCOME-TAX> 11,093
<INCOME-CONTINUING> 5,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,593
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.10
</TABLE>
