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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 0-22531
PanAmSat Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4607698
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
20 Westport Road, Wilton, CT 06897
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 203-210-8000
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 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO | |
As of August 9, 2002, an aggregate of 149,937,864 shares of the Company's Common
Stock were outstanding.
Unless the context otherwise requires, in this Quarterly Report on Form 10-Q,
the terms "we," "our", the "Company" and "PanAmSat" refer to PanAmSat
Corporation and its subsidiaries.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains certain forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. When used in this Quarterly Report on
Form 10-Q, the words "estimate," "plan," "project," "anticipate," "expect,"
"intend," "outlook," "believe," and other similar expressions are intended to
identify forward-looking statements and information. Actual results may differ
materially from any results which might be projected, forecasted, estimated or
budgeted by PanAmSat due to certain risks and uncertainties, including without
limitation: (i) risks of launch failures, launch and construction delays and
in-orbit failures or reduced performance, (ii) risk that we may not be able to
obtain new or renewal satellite insurance policies on commercially reasonable
terms or at all, (iii) risks related to domestic and international government
regulation, (iv) risks of doing business internationally, (v) risks related to
possible future losses on satellites that are not adequately covered by
insurance, (vi) risks of inadequate access to capital for growth, (vii) risks
related to competition, (viii) risks related to the Company's Internet-related
business, (ix) risks associated with the Company's recently completed
refinancing and other indebtedness, (x) risks related to control by our majority
stockholder, and (xi) litigation. Such risks are more fully described in "Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Quarterly Report on Form 10-Q and under the caption "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 (the "Form 10-K"). Reference is also made to such other
risks and uncertainties detailed from time to time in the Company's filings with
the United States Securities and Exchange Commission ("SEC"). The Company
cautions that the foregoing list of important factors is not exclusive.
Furthermore, the Company operates in an industry sector where securities values
may be volatile and may be influenced by economic and other factors beyond the
Company's control.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended June 30, 2002 and 2001
(In Thousands, Except Share Data)
June 30, June 30,
2002 2001
---- ----
REVENUES:
Operating leases, satellite services and other $ 204,592 $ 202,937
Outright sales and sales-type leases 4,641 5,293
------------ ------------
Total revenues 209,233 208,230
------------ ------------
OPERATING COSTS AND EXPENSES:
Depreciation and amortization 89,768 101,724
Direct operating costs 35,701 43,518
Selling, general and administrative expenses 22,747 30,266
------------ ------------
Total operating costs and expenses 148,216 175,508
------------ ------------
INCOME FROM OPERATIONS 61,017 32,722
INTEREST EXPENSE, net 34,662 27,543
------------ ------------
INCOME BEFORE INCOME TAXES 26,355 5,179
INCOME TAXES 6,589 2,253
------------ ------------
NET INCOME $ 19,766 $ 2,926
------------ ------------
EARNINGS PER SHARE - basic and diluted $ 0.13 $ 0.02
------------ ------------
Weighted average common shares outstanding 149,917,209 149,763,139
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Six Months Ended June 30, 2002 and 2001
(In Thousands, Except Share Data)
June 30, June 30,
2002 2001
---- ----
REVENUES:
Operating leases, satellite services and other $ 405,961 $ 402,440
Outright sales and sales-type leases 10,411 11,017
------------- ------------
Total revenues 416,372 413,457
------------- ------------
OPERATING COSTS AND EXPENSES:
Depreciation and amortization 183,723 200,620
Direct operating costs 68,190 80,978
Selling, general and administrative expenses 55,230 57,984
Facilities restructuring costs 11,224 --
Gain on PAS-7 insurance claim (40,063) --
Loss on conversion of sales-type leases 18,690 --
Severance costs 1,295 --
------------- ------------
Total operating costs and expenses 298,289 339,582
------------- ------------
INCOME FROM OPERATIONS 118,083 73,875
INTEREST EXPENSE, net 60,391 59,851
------------- ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 57,692 14,024
INCOME TAXES 14,423 6,101
------------- ------------
INCOME BEFORE EXTRAORDINARY ITEM 43,269 7,923
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of income taxes 2,482 --
------------- ------------
NET INCOME $ 40,787 $ 7,923
------------- ------------
EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM
basic and diluted $ 0.29 $ 0.05
EARNINGS PER SHARE - EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT - basic and diluted 0.02 --
------------- ------------
NET INCOME PER COMMON SHARE - basic and diluted $ 0.27 $ 0.05
------------- ------------
Weighted average common shares outstanding 149,901,479 149,733,287
------------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
June 30, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 724,638 $ 443,266
Accounts receivable-net 33,144 34,468
Net investment in sales-type leases 23,253 24,886
Prepaid expenses and other current assets 50,451 34,375
Deferred income taxes 17,501 8,181
---------- ----------
Total current assets 848,987 545,176
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 2,974,304 3,152,082
NET INVESTMENT IN SALES-TYPE LEASES 175,945 227,014
GOODWILL-Net of amortization 2,238,659 2,238,659
DEFERRED CHARGES AND OTHER ASSETS 164,408 133,880
---------- ----------
TOTAL ASSETS $6,402,303 $6,296,810
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (continued)
(In Thousands, Except Share Data)
June 30, December 31,
2002 2001
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 72,755 $ 88,269
Current portion of long-term debt 200,000 46,542
Accrued interest payable 45,973 23,988
Deferred revenues 20,569 10,554
---------- ----------
Total current liabilities 339,297 169,353
DUE TO AFFILIATES (merger-related
indebtedness) -- 1,725,000
LONG-TERM DEBT 2,350,000 750,000
DEFERRED INCOME TAXES 425,325 381,754
DEFERRED CREDITS AND OTHER (principally customer
deposits and deferred revenue) 252,995 278,143
---------- ----------
TOTAL LIABILITIES $3,367,617 $3,304,250
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value - 400,000,000
shares authorized; 149,928,236 and 149,871,260
outstanding at June 30, 2002 and December 31, 2001, respectively $ 1,499 $ 1,499
Additional paid-in-capital 2,531,355 2,530,016
Retained earnings 501,832 461,045
---------- ----------
Total stockholders' equity 3,034,686 2,992,560
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,402,303 $6,296,810
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
6
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2002 and 2001
(In Thousands)
June 30, June 30,
2002 2001
--------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 40,787 $ 7,923
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 183,723 200,620
Deferred income taxes 34,251 13,570
Amortization of debt issuance costs 4,382 3,054
Provision for uncollectible receivables 11,056 7,339
Gain on PAS-7 settlement (40,063) --
Loss on conversion of sales-type leases 18,690 --
Facilities restructuring costs 11,224 --
Loss on early extinguishment of debt 2,482 --
Changes in assets and liabilities:
Collections on investments in sales-type leases 11,609 10,339
Operating leases and other receivables (3,749) (10,454)
Prepaid expenses and other assets (14,500) (32,573)
Accounts payable and accrued liabilities (3,731) 14,117
Deferred gains and revenues 10,016 15,362
--------- ---------
Net cash provided by operating activities $ 266,177 $ 229,297
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
7
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (continued)
For the Six Months Ended June 30, 2002 and 2001
(In Thousands)
June 30, June 30,
2002 2001
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including capitalized interest) $ (183,548) $(161,446)
Insurance proceeds from satellite recoveries 215,000 132,435
----------- ---------
Net cash provided by (used in) investing activities 31,452 (29,011)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings 1,800,000 --
Repayments of long-term debt (1,771,542) (21,216)
Debt issuance costs (40,829) --
Repayments of incentive obligations (5,275) (3,970)
Stock issued in connection with employee benefit plans 1,389 4,167
----------- ---------
Net cash used in financing activities (16,257) (21,019)
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 281,372 179,267
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 443,266 129,345
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 724,638 $ 308,612
----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash received for interest $ 6,364 $ 8,386
----------- ---------
Cash paid for interest $ 50,313 $ 82,079
----------- ---------
Cash paid for taxes $ 1,231 $ 883
----------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
8
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments which are of a normal recurring nature necessary to present
fairly the financial position, results of operations and cash flows as of
and for the three and six month periods ended June 30, 2002 and 2001 have
been made. Certain prior period amounts have been reclassified to conform
with the current period's presentation. Operating results for the three
and six months ended June 30, 2002 and 2001 are not necessarily indicative
of the operating results for the full year. For further information, refer
to the financial statements and footnotes thereto included in the Form
10-K.
On October 28, 2001, General Motors ("GM"), Hughes Electronics Corporation
("Hughes Electronics") and EchoStar Communications Corporation
("EchoStar") announced the signing of definitive agreements that, subject
to stockholder approval, regulatory clearance, the receipt and
effectiveness of a favorable ruling from the IRS that the separation of
Hughes Electronics (or a newly formed holding company holding all of the
capital stock of Hughes Electronics) from GM will be tax-free to GM and
its stockholders for U.S. federal income tax purposes and certain other
conditions, provide for the split-off of Hughes Electronics (or such newly
formed holding company) from GM and the subsequent merger of the Hughes
Electronics and EchoStar businesses (the "Hughes Transaction"). EchoStar
is a leading provider of direct broadcast satellite television services in
the United States through its DISH Network business unit. The parties
expect the transactions to close in the second half of 2002.
GM, Hughes Electronics and EchoStar have agreed that, in the event the
Hughes Transaction does not occur because certain specified regulatory
clearances or approvals have not been obtained or other specified
conditions have not been satisfied, each relating to the Hughes
Transaction, Hughes Electronics will sell and EchoStar will purchase all
of the shares of Common Stock of PanAmSat beneficially owned by Hughes
Electronics (approximately 81% of PanAmSat's outstanding Common Stock) for
$22.47 per share or an aggregate purchase price of approximately $2.7
billion, which is payable, depending on the circumstances, solely in cash
or in a combination of cash and either debt or equity securities of
EchoStar. EchoStar has the option to structure its purchase of Hughes
Electronics' interest in PanAmSat as a merger or tender offer so that it
can attempt to acquire 100% of PanAmSat in one transaction, in which case
Hughes Electronics must receive at least the same amount of consideration
that it would have received in the PanAmSat stock sale. EchoStar has
agreed that, unless it has previously completed a
9
merger with PanAmSat or a tender offer for all of the outstanding PanAmSat
shares, it will commence a tender offer for all PanAmSat shares that
remain outstanding following the completion of the PanAmSat stock sale to
EchoStar for a purchase price of at least $22.47 per share (or
approximately $675 million in the aggregate) payable, at the option of the
holder, either in cash or shares of EchoStar Class A Common Stock.
Any such sale of PanAmSat would be subject to a number of conditions which
must be satisfied before the transaction could be completed, including,
the termination of the agreements governing the Hughes Transaction for
certain specified reasons, receipt of certain regulatory approvals, the
expiration or termination of the waiting period applicable to the sale
under the Hart-Scott-Rodino Act, the lack of any effective injunction or
order for the transfer of licenses in connection with any such PanAmSat
sale, and other specified conditions.
(2) New Accounting Pronouncements
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
The standard includes provisions for the reclassification of certain
existing recognized intangibles such as goodwill, reassessment of the
useful lives of existing recognized intangibles, reclassification of
certain intangibles out of previously reported goodwill and the
identification of reporting units. SFAS 142 provides that intangible
assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives not be amortized, but rather be
tested at least annually for impairment with a transitional goodwill
impairment test completed within six months from the date of adoption.
SFAS 142 also changed the evaluation criteria for testing goodwill for
impairment from an undiscounted cash flow approach to a test based on the
implied fair value of the goodwill at the reporting unit level. PanAmSat
has determined that, for such impairment testing, the Company has only one
reporting unit, which is at the enterprise level.
SFAS 142 requires a two-step test to determine the amount, if any, of an
impairment loss with respect to goodwill. The first step of the goodwill
impairment test, used to identify potential impairment, compares the fair
value of a reporting unit with its carrying amount, including goodwill. If
the carrying amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test must be performed to measure the
amount of impairment loss, if any.
Fair value is determined by the amount at which an asset or liability
could be bought or sold in a current transaction between willing parties.
Quoted market prices in active markets are often used as the basis for
fair value, if available. If quoted market prices are not available, the
estimate of fair value is typically based on the best information
available, including prices for similar assets and liabilities and the
results of using other valuation techniques, such as public company
trading multiples, future discounted cash flows and merger and acquisition
transaction multiples.
10
In the quarter ended June 30, 2002, the Company completed its transitional
assessment of the recoverability of its goodwill and determined that no
impairment charge is required. The Company measured the fair value of its
reporting unit based on the quoted market price of the Company's common
stock, which the Company believes has been stabilized by the price per
share agreed to by EchoStar for PanAmSat (See Note 1 to the Company's June
30, 2002 consolidated financial statements). However, there can be no
assurance that the Company's quoted market price will remain at its
current level once the EchoStar transactions discussed above are
completed. A sustained reduction in the quoted market price of the
Company's stock subsequent to the completion of the EchoStar transactions
discussed above could potentially result in a reduction in the fair value
of the Company and, consequently, the recording of an impairment charge
related to its goodwill.
The adoption of SFAS 142 resulted in the elimination of goodwill
amortization beginning January 1, 2002. As of June 30, 2002, the Company
had goodwill of approximately $2.24 billion and no other intangible
assets. Prior to the adoption of SFAS 142, our annual goodwill
amortization was approximately $65 million. Net income and earnings per
share for the three and six months ended June 30, 2002 and 2001, adjusted
to exclude amortization expense related to goodwill which is no longer
amortized, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Unaudited; in thousands except per share data)
Income before extraordinary item:
Reported income before
extraordinary item $ 19,766 $ 2,926 $ 43,269 $ 7,923
Goodwill amortization -- 16,240 -- 32,480
---------- ---------- ---------- ----------
Adjusted income before
extraordinary item $ 19,766 $ 19,166 $ 43,269 $ 40,403
========== ========== ========== ==========
Net income:
Reported net income $ 19,766 $ 2,926 $ 40,787 $ 7,923
Goodwill amortization -- 16,240 -- 32,480
---------- ---------- ---------- ----------
Adjusted net income $ 19,766 $ 19,166 $ 40,787 $ 40,403
========== ========== ========== ==========
Earnings per share before extra-
ordinary item - basic and diluted:
Reported earnings per share before
extraordinary item - basic and diluted $ 0.13 $ 0.02 $ 0.29 $ 0.05
Goodwill amortization per share -- 0.11 -- 0.22
---------- ---------- ---------- ----------
Adjusted earnings per share before
extraordinary item - basic and diluted $ 0.13 $ 0.13 $ 0.29 $ 0.27
========== ========== ========== ==========
Net income per common share -
basic and diluted:
Reported net income per common
share - basic and diluted $ 0.13 $ 0.02 $ 0.27 $ 0.05
Goodwill amortization per share -- 0.11 -- 0.22
---------- ---------- ---------- ----------
Adjusted net income per common
share - basic and diluted $ 0.13 $ 0.13 $ 0.27 $ 0.27
========== ========== ========== ==========
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). SFAS 145 provides that a loss on
extinguishment of debt meet the requirements of APB 30 to be treated as an
extraordinary item in the statement of operations. SFAS 145 also amends
FASB Statement No. 13 to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions.
11
Additionally, SFAS 145 eliminates FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers ("SFAS 44"), as the transition
provisions of the Motor Carrier Act of 1980 are completed; therefore SFAS
44 is no longer necessary.
In the first quarter of 2002 in connection with the Company's Refinancing,
the Company recorded an extraordinary loss for the remaining unamortized
debt issuance costs related to the repayment of the Hughes Electronics
term loan (See Note 4 and Note 10 below). The provisions of SFAS 145
related to the rescission of FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt ("SFAS 4"), will be effective for the
Company beginning January 1, 2003. The Company is in the process of
evaluating the effect, if any, the provisions of SFAS 145 will have on our
financial statements. The other provisions of SFAS 145 were effective in
the second quarter of 2002 and did not have a significant impact on our
financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
The principal difference between this Statement and Issue 94-3 relates to
its requirements for recognition of a liability for a cost associated with
an exit or disposal activity. This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We do not believe
that the adoption of the provisions of SFAS 146 will have a significant
impact on our financial statements.
(3) Satellite Developments
Reference is made to "Item 1. Business - Overview - Our Business Strategy
and Our Satellite Network and Ground Infrastructure" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Satellite Deployment Plan and Planned Satellites" in the Form
10-K for a detailed description of the Company's satellite network and its
satellite deployment plan.
Two of the three Boeing Satellite Services ("BSS") 702 satellites that we
operate and other BSS 702's of a similar design operated by others have
experienced a progressive degradation of their solar arrays causing a
reduction in output power. Along with the manufacturer, we are monitoring
the problem to determine its cause and its expected effect. The power
reduction may require the satellite operator to permanently turn off
certain transponders on the affected satellite to allow for the continued
operation of other transponders, which could result in a loss of revenue.
Should it be necessary to turn off a significant number of transponders,
it may have a material adverse effect on our results of operations. At
this time, the power degradation has not required us to reduce the number
of operating transponders on either affected satellite.
12
Our BSS 702 satellites are currently covered by insurance policies.
However, if we are adversely affected by progressive solar array
degradation anomalies, there can be no assurance that we will be
reimbursed by the insurers, as they may dispute a payment obligation or
the anomaly may occur outside of an insurance policy period. In addition,
there can be no assurance that, following the expiration of the current
policies, we will be able to procure new insurance that covers losses of
this type. Further, there can be no assurance that we will be able to
obtain insurance for such satellites on commercially reasonable terms.
On June 15, 2002, we successfully launched our Galaxy IIIC satellite, the
22nd spacecraft in our fleet. Galaxy IIIC will support customers from our
video, VSAT and broadcast services units, as well as direct-to-home
services for DIRECTV Latin America. Galaxy IIIC has 24 C-band and 24
Ku-band transponders covering the continental United States, as well as 28
Ku-band transponders covering Latin America. Ultimately operating at 95
degrees west longitude, in the Company's Galaxy neighborhood, the
satellite will take over for Galaxy IIIR and complement Galaxy VIIIi.
Galaxy IIIR, which currently resides in the 95 degrees west longitude
slot, will co-locate with Galaxy IIIC until September 2002 when Galaxy
IIIC is placed in-service.
In October 2001, we filed a proof of loss under the insurance policy on
PAS-7 related to circuit failures, which occurred in September 2001 and
resulted in a reduction of 28.9% of the satellite's total power available
for communications. During the three months ended March 31, 2002, our
insurers confirmed to us their agreement to settle the claim by payment to
the Company of $215 million in relation to the PAS-7 insurance claim and
the Company recorded a gain of $40.1 million in the three months ended in
March 31, 2002 related to this insurance claim (See Note 6 below).
The Company expects to launch up to five more satellites by 2006. Galaxy
VIII-iR is scheduled to be ready for launch in the fourth quarter of 2002
and will cover Latin America. We have entered into a contract with an
affiliate of DIRECTV Latin America, one of our affiliates, for the lease
of capacity on Galaxy VIII-iR, but the customer may terminate that
contract following the commencement of service on Galaxy IIIC. If the
customer were to terminate the contract, we would either modify Galaxy
VIII-iR for other use at another orbital location or terminate our
contract with Boeing for the construction of Galaxy VIII-iR. In the event
that the customer terminates the contract, the customer would be obligated
to pay us over time for all of our contractual liabilities to Boeing and
certain of the costs of the launch services provider for such
modification, postponement and/or termination.
The Company, through its joint-venture with JSAT Corporation, a Japanese
satellite services provider, expects to launch the Galaxy XIII/Horizons
satellite to 127 degrees west longitude in early 2003. The Company also
expects to launch Galaxy XII (formerly named Galaxy VR) in the second
quarter of 2003 to 74 degrees west longitude. The Company also has two
additional satellites that are under construction for United States
coverage. We are currently scheduled to launch one of these additional
satellites to replace Galaxy V
13
at 125 degrees west longitude prior to the end of its useful life in 2005.
The other additional satellite is scheduled to replace Galaxy 1R at 133
degrees west longitude prior to the end of its useful life in 2006.
(4) Long-Term Debt and Due to Affiliates
In February 2002, the Company completed an $800 million private placement
debt offering pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Senior Notes") and entered into a credit facility in an
aggregate principal amount of up to $1.25 billion (the "Senior Secured
Credit Facility"). We refer to these transactions as the "Refinancing." We
used $1.725 billion of the proceeds from the Refinancing to repay in full
the indebtedness owed under the term loan to Hughes Electronics. The
Senior Notes bear interest at an annual rate of 8.5%, are payable
semi-annually, mature in 2012 and are unsecured.
The Senior Secured Credit Facility is comprised of a $250.0 million
revolving credit facility, which is presently undrawn and will terminate
on December 31, 2007 (the "Revolving Facility"), a $300.0 million term
loan A facility, which matures on December 31, 2007 (the "Term A
Facility"), and a $700.0 million term loan B facility which matures on
December 31, 2008 (the "Term B Facility"). At June 30, 2002, both the $300
million under the Term A Facility and the $700 million under the Term B
Facility were outstanding. Principal payments under the Term A Facility
and Term B Facility are due in varying amounts from 2004 until their
respective maturity dates. Currently, the Revolving Facility and the Term
A Facility bear interest at LIBOR plus 3.0%, although these interest rates
are subject to adjustment based on the Company's total leverage ratio. The
Term B Facility bears interest at LIBOR plus 3.5%. In addition, the
Company is required to pay to the lenders under the Revolving Facility a
commitment fee in respect of the unused commitments thereunder at a rate
that is subject to adjustment based on the Company's total leverage ratio.
As of June 30, 2002, the Company had letters of credit outstanding
totaling $0.8 million that were guaranteed by the Revolving Facility. This
has reduced our ability to borrow against the Revolving Facility by the
aggregate amount of the outstanding letters of credit.
The agreement governing the Senior Secured Credit Facility requires the
Company to enter into interest rate hedge agreements with respect to at
least 10% of the borrowings under the Senior Secured Credit Facility
within 360 days of securing the facility. The indenture governing the
Senior Notes and the agreement governing the Senior Secured Credit
Facility contain various covenants, which impose significant restrictions
on our business.
In connection with the Refinancing, the notes issued in January 1998
totaling $750 million were ratably secured by substantially all of our
assets on a pari-passu basis with the security interests covering our
obligations under the Senior Secured Credit Facility.
On April 26, 2002, the Company initiated the filing of a registration
statement on Form S-4 with the SEC in relation to an exchange offer of
$800 million of 8 1/2% Senior Notes due
14
2012. Following the effectiveness of the Form S-4 registration statement,
these registered notes will be issued in exchange for the Company's
existing Senior Notes issued in February 2002 pursuant to Rule 144A under
the Securities Act of 1933. The terms of the registered senior notes to be
issued under the S-4 registration statement will be substantially similar
to the terms of the currently outstanding Senior Notes. The existing
Senior Notes are secured by substantially all of our assets and are
guaranteed on a senior unsecured basis by all of our domestic
subsidiaries. The notes to be issued in connection with this Form S-4 will
be similarly guaranteed. All of the Company's subsidiary guarantors are
domestic and, directly or indirectly, 100% owned by PanAmSat Corporation.
The guarantees are full and unconditional and joint and several and there
are no restrictions on the ability of the Company to obtain funds from its
subsidiaries.
On July 29, 2002, the Company completed the transfer of certain assets and
liabilities from certain of its subsidiary guarantors to PanAmSat
Corporation. As a result of such transfers, the remaining subsidiary
guarantors, individually and in the aggregate, represent less than 1% of
the Company's consolidated total assets, total liabilities, revenues,
stockholders' equity, income from continuing operations before income
taxes and cash flows from operating activities, and such subsidiaries have
no independent assets or operations (determined in accordance with the
criteria established for parent companies in the SEC's Regulation S-X,
Rule 3-10(h)). All subsidiary guarantors and all subsidiaries of the
Company, other than the subsidiary guarantors, are minor (as defined in
the SEC's Regulation S-X, Rule 3-10(h)). Accordingly, condensed
consolidating financial information for the Company and its subsidiaries
within the notes to the Company's consolidating financial statements is
not presented.
Pursuant to the Company's obligations under a registration rights
agreement entered into in connection with the issuance of the Senior
Notes, the Company will pay additional interest on such Senior Notes for
the period between August 1, 2002 and the date the SEC declares the
Company's exchange offer registration statement on Form S-4 effective.
(Such registration statement was initially filed on April 26, 2002.) The
additional interest is initially 25 basis points, increasing by 25 basis
points every 90 days up to a maximum of 150 basis points. The SEC has
indicated that such action will be delayed until the review process has
been completed for a registration statement on Form S-4 of HEC Holdings,
Inc., an affiliate of Hughes Electronics. We do not believe that the delay
of our Form S-4 review process or the payment of the additional interest
will have a significant impact on our consolidated financial statements.
As of December 31, 2001, the Company had $46.5 million principal amount
outstanding under notes assumed in connection with our exercise in July
1999 of an early buy-out opportunity for certain transponders under a
sale-leaseback transaction relating to our Galaxy IIIR satellite (the
"Galaxy IIIR Notes"). The Galaxy IIIR Notes matured on January 2, 2002 and
were repaid in full on that date from available cash.
15
(5) Deferred Charges and Other Assets
The Company's Deferred Charges and Other Assets are summarized as follows
(in millions):
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Long-Term Receivables $ 45.9 $ 41.3
Debt Issuance Costs 44.1 10.9
Customer Incentive Programs 26.1 25.3
Prepaid Insurance 24.7 30.8
Other 23.6 25.6
------ ------
Total Deferred Charges and Other Assets $164.4 $133.9
====== ======
Long-Term Receivables primarily represent receivables with payment terms
extending beyond one year and receivables from operating leases with
escalating payment terms that are recognized on a straight-line basis into
revenue over the lease term. Differences between operating lease payments
received and revenues recognized are deferred as, or amortized from,
operating lease receivables.
Debt Issuance Costs represent costs incurred by the Company to secure debt
financing. These costs are being amortized to interest expense on a
straight-line basis over the life of the related indebtedness. Debt
issuance costs capitalized in relation to the Company's Refinancing (see
Note 4 above) totaled $40.8 million during the six months ended June 30,
2002.
Deferred charges related to Customer Incentive Programs are amortized
against revenue over the terms of the respective customer contracts.
Similarly, Prepaid Insurance costs are amortized to expense over the terms
of the respective insurance policies.
Other Deferred Charges and Other Assets primarily consist of: investments
in certain equity securities accounted for under both the cost and equity
methods; prepayments of Telemetry, Tracking & Control ("TT&C") satellite
services to third parties that are amortized over the respective contract
periods; and other miscellaneous deferred charges and other assets.
(6) Gain on PAS-7 Insurance Claim
In October 2001, we filed a proof of loss under the insurance policy on
PAS-7 related to circuit failures, which occurred in September 2001 and
resulted in a reduction of 28.9% of the satellite's total power available
for communications. Service to existing customers was not affected, and we
expect that PAS-7 will continue to serve these customers. The insurance
policy was in the amount of $253.4 million and included a provision for us
to
16
share 25% of future revenues on PAS-7 with the insurers. In the first
quarter of 2002, our insurers confirmed to us their agreement to settle
the PAS-7 insurance claim by payment to the Company of $215 million. These
net proceeds reflect the insurance policy amount of $253.4 million less
the expected future revenue share that would have been paid to the
insurers under the PAS-7 insurance policy, adjusted by a negotiated
discount. Pursuant to this agreement, no future revenue share payments
will be required to be made in relation to PAS-7. During the first quarter
of 2002, the Company recorded a gain of approximately $40.1 million
related to the PAS-7 insurance claim, which reflected the net proceeds
agreed to by the insurers less the net book value of the PAS-7 satellite,
including incentive obligations. The Company received $173.7 million of
these insurance proceeds during the first quarter of 2002 and received the
remaining $41.3 million of insurance proceeds during the second quarter of
2002.
(7) Loss on Conversion of Sales-Type Leases
On March 29, 2002, the Company entered into an agreement with one of its
customers regarding the revision of the customer's sales-type lease
agreements as well as certain other trade receivables. This agreement
resulted in the termination of the customer's sales-type leases and the
establishment of new operating leases in their place. As a result, the
Company recorded a non-cash charge in its consolidated income statement
for the three months ended March 31, 2002 of $18.7 million.
(8) Facilities Restructuring Costs
On March 29, 2002, the Company's management approved a plan to restructure
several of its United States locations and close certain facilities,
certain of which are currently being leased through 2011. Upon approval of
this plan, the Company recorded a non-cash charge in its consolidated
income statement in the first quarter of 2002 of $11.2 million. This
charge reflects future lease costs, net of estimated future sublease
revenue, of $8.9 million related to approximately 98,000 square feet of
unused facilities and the write-off of approximately $2.3 million of
leasehold improvements related to these facilities. The balance of the
facilities restructuring accrual was $7.4 million as of June 30, 2002.
(9) Severance Costs
The Company recorded severance costs of $8.2 million for the year ended
December 31, 2001 and severance costs of $1.3 million during the first
quarter of 2002. These costs were related to the Company's expense
reduction and NET-36 restructuring plan that began in the third quarter of
2001 and were primarily comprised of employee compensation and employee
benefits, outplacement services and legal and consulting expenses
associated with the cumulative reduction in workforce of 164 employees.
Included in the 2001 severance costs was approximately $3.3 million that
relates to costs associated with the resignation of the former Chief
Executive Officer of PanAmSat in August 2001. Approximately $6.9 million
of the $9.5 million of total severance costs have been paid through June
30, 2002 and approximately $2.6 million was recorded within accrued
17
liabilities on the consolidated balance sheet at June 30, 2002.
Substantially all of the remaining accrued severance costs at June 30,
2002 will be paid during 2002.
(10) Extraordinary Loss on Early Extinguishment of Debt
On February 25, 2002, the Company completed its Refinancing and repaid the
$1.725 billion of indebtedness owed under the term loan to Hughes
Electronics (See Note 4 to the Company's June 30, 2002 consolidated
financial statements). In conjunction with this repayment, the Company was
required to write-off the remaining unamortized debt issuance costs of
approximately $3.3 million related to the Hughes Electronics term loan,
net of related income taxes of $0.8 million. This $2.5 million charge was
recorded within the Company's consolidated income statement for the three
months ended March 31, 2002 as an extraordinary loss on early
extinguishment of debt.
(11) Interest Expense-Net
Interest expense for the three months ended June 30, 2002 and 2001 is
recorded net of capitalized interest of $8.7 million and $6.1 million,
respectively and interest income of $3.7 million and $5.3 million,
respectively. Interest expense for the six months ended June 30, 2002 and
2001 is recorded net of capitalized interest of $14.1 million and $15.4
million, respectively and interest income of $6.3 million and $8.4
million, respectively.
(12) Commitments and Contingencies
Satellite Commitments
We have invested approximately $4.2 billion in our existing satellite
fleet and ground infrastructure through June 30, 2002, and we have
approximately $129.5 million of expenditures remaining to be made under
existing satellite construction contracts and $121.2 million to be made
under existing satellite launch contracts. The commitments related to
satellite construction contracts reflect approximately $10.5 million of
contractually required reimbursements to be received in conjunction with
our joint venture with JSAT Corporation. Satellite launch and in-orbit
insurance contracts related to future satellites to be launched are
cancelable, up to thirty days prior to the satellite's launch. As of June
30, 2002, the Company did not have any commitments related to existing
launch insurance or in-orbit insurance contracts for satellites to be
launched.
In January 2002, we entered into a noncontingent agreement with Orbital
Sciences Corporation for the construction of a Ka-band satellite to be
delivered in 2005, the timing of which was in part to comply with FCC
milestones associated with our authorizations. We are exploring the
business case for the use of Ka-band frequencies and may conclude that we
will not pursue the construction of the satellite to completion. If we
ultimately decide not to proceed with this satellite, we will owe Orbital
Sciences a termination fee under the contract.
18
Satellite Insurance
As of June 30, 2002, we had in effect launch and in-orbit insurance
policies covering 17 satellites in the aggregate amount of $2.3 billion.
We have five uninsured satellites in orbit: PAS-5; PAS-4 and PAS-6, which
are used as backup satellites; PAS-7 for which we received net insurance
proceeds of $215 million during the six months ended June 30, 2002; and
Galaxy VIIIi, which is scheduled for replacement in September 2002.
Of the insured satellites, six were covered by policies with substantial
exclusions or exceptions to coverage for failures of specific components
identified by the insurer as the most likely to fail ("Significant
Exclusion Policies"). These exclusions, we believe, substantially reduce
the likelihood of a recovery in the event of a loss. Those six satellites
include Galaxy IIIR which is scheduled for replacement in September 2002,
PAS-2, PAS-3R, Galaxy IVR and PAS-6B which have redundancies available for
the systems as to which exclusions have been imposed. We believe that
these redundancies allow for uninterrupted operation of the satellite in
the event of a failure of the component subject to the insurance
exclusion. The sixth satellite, PAS-8, has an excluded component that we
believe is unlikely to fail in the near future. In order to balance the
risk of loss and the likelihood of a recovery, given the exclusions to
coverage, the Company reduced the sums insured by approximately 52% of the
in-orbit insurance coverage on its PAS-2, PAS-3R and Galaxy 3R satellites
upon the expiration of the related insurance policies in May 2002.
At June 30, 2002, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other
insurable costs of approximately $850 million.
Upon the expiration of our existing insurance policies, there can be no
assurances that we will be able to procure new insurance for our
satellites. In addition, new satellite insurance may only be available
with: higher premiums, higher deductibles, shorter coverage periods,
higher loss percentages required for total constructive loss claims,
additional satellite health-related policy exclusions, or other terms
which may make such insurance commercially unreasonable. Accordingly, we
may elect to discontinue insuring certain satellites. An uninsured failure
of one or more of our satellites could have a material adverse effect on
our financial condition and results of operations. In addition, higher
premiums on insurance policies will increase our costs, thereby reducing
our operating income by the amount of such increased premiums.
(13) Revenue By Service Type
PanAmSat operates its business as a single operating segment. PanAmSat
primarily provides video and data network services to major broadcasting,
direct-to-home television providers and telecommunications companies
worldwide. For the three months ended June 30, 2002 and 2001, PanAmSat's
revenues were $209.2 million and $208.2 million, respectively. For the six
months ended June 30, 2002 and 2001, PanAmSat's revenues
19
were $416.4 million and $413.5 million. These revenues were derived from
the following service areas:
Percentage of Revenues Percentage of Revenues
Three Months Ended: Six Months Ended:
------------------- -----------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Services:
Video Services 66% 68% 67% 67%
Network Services 26% 25% 26% 26%
Other Services 8% 7% 7% 7%
--------------- ---------------
Total: 100% 100% 100% 100%
=============== ===============
(14) Contracted Backlog for Future Services
Future cash payments expected from customers (backlog) aggregated
approximately $5.55 billion as of June 30, 2002, including approximately
$565.6 million related to satellites to be launched. Included in the total
backlog of $5.55 billion is $305.3 million of backlog that may be
terminated by the customers pursuant to certain termination rights.
Due to recent events in the telecommunications industry and general
economic conditions in certain parts of the world, we have reviewed our
backlog for our top 25 customers to identify risks to our business related
to these events and conditions. Of our $5.55 billion backlog as of June
30, 2002, approximately $4.2 billion, or 75.8% relates to our top 25
customers. Having conducted both quantitative and qualitative analyses, we
have concluded that eight of our top 25 customers have a risk of future
non-performance of their contractual obligations to us. These eight
customers are meeting substantially all of their obligations at the
present time and are paying in a manner consistent with past experiences.
These customers represent approximately $1.1 billion of our backlog as of
June 30, 2002. The largest of these customers represents approximately
$609 million, or 11% of our total backlog, and $83.9 million, or 10.4% of
our expected 2002 revenues, and the smallest of these customers represents
approximately $40.9 million, or 0.7% of our total backlog, and $4.9
million, or 0.6% of our expected 2002 revenues. If one of the larger
affected customers or a group of these customers becomes unable to perform
some or all of their obligations to us, it could have a material adverse
affect on our financial condition and results of operations.
20
PANAMSAT CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On October 28, 2001, General Motors ("GM"), Hughes Electronics Corporation
("Hughes Electronics") and EchoStar Communications Corporation
("EchoStar") announced the signing of definitive agreements that, subject
to stockholder approval, regulatory clearance, the receipt and
effectiveness of a favorable ruling from the IRS that the separation of
Hughes Electronics (or a newly formed holding company holding all of the
capital stock of Hughes Electronics) from GM will be tax-free to GM and
its stockholders for U.S. federal income tax purposes and certain other
conditions, provide for the split-off of Hughes Electronics (or such newly
formed holding company) from GM and the subsequent merger of the Hughes
Electronics and EchoStar businesses (the "Hughes Transaction"). EchoStar
is a leading provider of direct broadcast satellite television services in
the United States through its DISH Network business unit. The parties
expect the transactions to close in the second half of 2002.
GM, Hughes Electronics and EchoStar have agreed that, in the event the
Hughes Transaction does not occur because certain specified regulatory
clearances or approvals have not been obtained or other specified
conditions have not been satisfied, each relating to the Hughes
Transaction, Hughes Electronics will sell and EchoStar will purchase all
of the shares of Common Stock of PanAmSat beneficially owned by Hughes
Electronics (approximately 81% of PanAmSat's outstanding Common Stock) for
$22.47 per share or an aggregate purchase price of approximately $2.7
billion, which is payable, depending on the circumstances, solely in cash
or in a combination of cash and either debt or equity securities of
EchoStar. EchoStar has the option to structure its purchase of Hughes
Electronics' interest in PanAmSat as a merger or tender offer so that it
can attempt to acquire 100% of PanAmSat in one transaction, in which case
Hughes Electronics must receive at least the same amount of consideration
that it would have received in the PanAmSat stock sale. EchoStar has
agreed that, unless it has previously completed a merger with PanAmSat or
a tender offer for all of the outstanding PanAmSat shares, it will
commence a tender offer for all PanAmSat shares that remain outstanding
following the completion of the PanAmSat stock sale to EchoStar for a
purchase price of at least $22.47 per share (or approximately $675 million
in the aggregate) payable, at the option of the holder, either in cash or
shares of EchoStar Class A Common Stock.
Any such sale of PanAmSat would be subject to a number of conditions which
must be satisfied before the transaction could be completed, including,
the termination of the agreements governing the Hughes Transaction for
certain specified reasons, receipt of certain regulatory approvals, the
expiration or termination of the waiting period applicable to the sale
under the Hart-Scott-Rodino Act, the lack of any effective injunction or
order for the transfer of licenses in connection with any such PanAmSat
sale, and other specified conditions.
21
RESULTS OF OPERATIONS
The Company's selected operating data shown below is not necessarily indicative
of future results.
SELECTED OPERATING DATA
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------- ------- -------- --------
(Unaudited; in thousands)
Operating leases, satellite services and other $204,592 $202,937 $ 405,961 $402,440
Outright sales and sales-type leases 4,641 5,293 10,411 11,017
Total revenues 209,233 208,230 416,372 413,457
Cost of outright sales and sales-type leases -- -- -- --
Depreciation and amortization 89,768 101,724 183,723 200,620
Direct operating costs 35,701 43,518 68,190 80,978
Selling, general and administrative expenses 22,747 30,266 55,230 57,984
Facilities restructuring costs -- -- 11,224 --
Gain on PAS-7 insurance claim -- -- (40,063) --
Loss on conversion of sales-type leases -- -- 18,690 --
Severance costs -- -- 1,295 --
Income from operations 61,017 32,722 118,083 73,875
Interest expense, net 34,662 27,543 60,391 59,851
Income before income taxes and
extraordinary item 26,355 5,179 57,692 14,024
Income taxes 6,589 2,253 14,423 6,101
Net income before extraordinary item 19,766 2,926 43,269 7,923
Extraordinary loss on early extinguishment
of debt, net of taxes -- -- 2,482 --
Net income $ 19,766 $ 2,926 $ 40,787 $ 7,923
Earnings per common share before
extraordinary item -basic and diluted $ 0.13 $ 0.02 $ 0.29 $ 0.05
Earnings per common share -
extraordinary loss on early
extinguishment of debt - basic and
diluted -- -- 0.02 --
Net income per common share - basic and
diluted $ 0.13 $ 0.02 $ 0.27 $ 0.05
22
PANAMSAT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues - Revenues were $209.2 million for the three months ended June 30,
2002, compared to revenues of $208.2 million for the same period in 2001.
Operating lease revenues, which were 98 percent of total revenues for the second
quarter of 2002, increased by 1 percent to $204.6 million from $202.9 million
for the same period in 2001. The increase in operating lease revenues was
primarily due to occasional services revenue related to the 2002 FIFA World Cup
and higher network services revenue. These increases were partially offset by
lower program distribution and direct-to-home (DTH) video revenues, as compared
to the same period in 2001. Total sales and sales-type lease revenues for the
quarters ended June 30, 2002 and 2001 represented interest income related to
sales-type leases of $4.6 million and $5.3 million, respectively.
The Company provides video services that are primarily full-time, part-time and
occasional satellite services for the transmission of news, sports,
entertainment and educational programming worldwide. The Company also provides
network services, which support satellite-based networks that relay voice, video
and data communications within individual countries, throughout regions and on a
global basis. Operating lease revenues from video services decreased by 1.9
percent to $133.8 million during the second quarter of 2002, compared to $136.4
million for the second quarter of 2001. This decrease was primarily due to lower
program distribution and DTH video revenues during the second quarter of 2002.
These decreases were partially offset by the occasional video services revenue
related to the 2002 FIFA World Cup that were recorded in the second quarter of
2002. Overall video services revenues were $138.4 million in the second quarter
of 2002, a decrease of 2.3 percent as compared to the second quarter of 2001.
Operating lease revenues from network services increased by 5.1 percent to $54.8
million for the second quarter of 2002, as compared to the same period in 2001.
The increase was due to higher network service revenues resulting from
additional incremental new business and higher termination fee revenues earned
during the three months ended June 30, 2002, as compared to the same period in
2001. These increases were offset partially by reduced revenues recorded during
the three months ended June 30, 2002, as a result of customer credit issues.
Total revenues for the six months ended June 30, 2002 were $416.4 million
compared to revenues of $413.5 for the six months ended June 30, 2001. Operating
lease revenues increased to $406.0 million for the six months ended June 30,
2002, compared to $402.4 million for the same period in 2001. The increase in
operating lease revenues was primarily due to the occasional video services
revenues related to the 2002 FIFA World Cup recorded during the three months
ended June 30, 2002, higher termination fee revenues recorded during the three
months ended March 31, 2002 and higher network services revenues, as compared to
the same period in 2001. These increases were partially offset by lower program
distribution and DTH video revenues and reduced revenue recorded as a result of
customer credit issues during the six months ended June 30, 2002. Total sales
and sales-type lease revenues represented interest
23
income related to sales-type leases of $10.4 million for the six months ended
June 30, 2002, compared to $11.0 million for the same period in 2001.
For the six months ended June 30, 2002, operating lease revenues from video
service were $267.3 million as compared to $267.5 million for the same period in
2001. This decrease was primarily due to lower program distribution and DTH
video revenues and reduced revenue recorded as a result of customer credit
issues. These decreases were substantially offset by the occasional video
services revenues related to the 2002 FIFA World Cup which were recorded during
the three months ended June 30, 2002 and higher termination fee revenues
recorded during the three months ended March 31, 2002. Overall video services
revenues were $277.7 million for the six months ended June 30, 2002, a decrease
of 0.3 percent as compared to the six months ended June 30, 2001. Operating
lease revenues from network services for the six months ended June 30, 2002 were
$107.5 million, an increase of 1 percent from $106.5 million for the same period
in 2001. This increase was due to additional network services revenues offset
partially by reduced revenue recorded during the same period as a result of
customer credit issues.
Depreciation and Amortization - Depreciation and amortization decreased $11.9
million, or 12 percent, to $89.8 million for the three months ended June 30,
2002 from $101.7 million for the same period in 2001. Depreciation and
amortization for the six months ended June 30, 2002 decreased $16.9 million, or
8 percent, to $183.7 million from $200.6 million for the same period in 2001.
The decrease in depreciation and amortization for the three and six months ended
June 30, 2002 is due primarily to the elimination of goodwill amortization as a
result of the adoption of SFAS No. 142 during 2002 (approximately $16 million
per quarter) and lower depreciation expense recorded during the first quarter of
2002 as a result of the write-off of our PAS-7 satellite during the first
quarter of 2002 (See Gain on PAS-7 Insurance Claim below). These decreases were
partially offset by additional depreciation expense related to our PAS-1R
satellite that was placed in service in the first quarter of 2001 and our PAS-10
satellite that was placed into service in June 2001, and additional
non-satellite depreciation.
Direct Operating Costs - Direct operating costs decreased $7.8 million or 18
percent, to $35.7 million for the three months ended June 30, 2002 from $43.5
million for the same period in 2001. Direct operating costs decreased $12.8
million or 16 percent to $68.2 million for the six months ended June 30, 2002
from $81.0 million for the same period in 2001. The three-month and six-month
decreases in direct operating costs are primarily related to lower direct
operating expenses related to Webcast Services, lower headcount related
expenses, lower consulting expenses and lower engineering costs. These decreases
were partially offset by $3.2 million of direct operating costs related to the
2002 FIFA World Cup, which were recorded during the second quarter of 2002.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses decreased $7.6 million, or 25 percent, to $22.7 million
for the three months ended June 30, 2002 from $30.3 million for the same period
in 2001. Selling, general and administrative expenses decreased $2.8 million, or
5 percent, to $55.2 million for the six months ended June 30, 2002 from $58.0
million for the same period in 2001. The three-month and six-month decreases are
24
primarily due to lower Webcast Services expenses and lower headcount related
expenses. The decrease in selling, general and administrative expenses for the
six months ended June 30, 2002 as compared to the same period in 2001, was
partially offset by an increase in sales-type lease reserves and bad debt
expense of approximately $3.7 million.
Facilities Restructuring Costs - On March 29, 2002, the Company's management
approved a plan to restructure several of its United States locations and close
certain facilities, certain of which are currently being leased through 2011.
Upon approval of this plan, the Company recorded a non-cash charge in its
consolidated income statement for the three months ended March 31, 2002 of $11.2
million. This charge reflects future lease costs, net of estimated future
sublease revenues, of $8.9 million related to approximately 98,000 square feet
of unused facilities and the write-off of approximately $2.3 million of
leasehold improvements related to these facilities. There was no comparable
transaction during 2001. The balance of the facilities restructuring accrual was
$7.4 million as of June 30, 2002.
Gain on PAS-7 Insurance Claim - During the three months ended March 31, 2002,
the Company recorded a gain of approximately $40.1 million related to the PAS-7
insurance claim, which reflects the net proceeds agreed to by the insurers of
$215 million less the net book value of the PAS-7 satellite, including incentive
obligations. (See "Satellite Developments" below). There was no comparable
transaction during 2001.
Loss on Conversion of Sales-Type Leases - On March 29, 2002, the Company entered
into an agreement with one of its customers regarding the revision of the
customer's sales-type lease agreements as well as certain other trade
receivables. This agreement resulted in the termination of the customer's
sales-type leases and the establishment of new operating leases in their place.
As a result, the Company recorded a non-cash charge in its consolidated income
statement for the three months ended March 31, 2002 of $18.7 million. There was
no comparable transaction in 2001.
Severance Costs - Severance costs were $1.3 million for the six months ended
June 30, 2002. These severance costs reflect employee reductions that were
implemented during the three months ended March 31, 2002 in connection with the
Company's expense reduction and Webcast Services restructuring plan, which
commenced in the third quarter of 2001. There were no comparable severance costs
during the three or six months ended June 30, 2001.
Income from Operations - Income from operations was $61.0 million for the three
months ended June 30, 2002, an increase of $28.3 million, or 86 percent, from
$32.7 million for the same period in 2001. The increase in income from
operations for the three month period ended June 30, 2002 was driven primarily
by the Company's continued focus on operational efficiencies and the elimination
of goodwill amortization as a result of the adoption of SFAS No. 142 during the
first quarter of 2002 (See Note 2 to the Company's June 30, 2002 consolidated
financial statements). Income from operations was $118.1 million for the six
months ended June 30, 2002, an increase of $44.2 million, or 60 percent, from
$73.9 million for the same period in 2001. The increase in income from
operations for the six month period ended June 30, 2002 was driven primarily by
the Company's operational streamlining that has occurred over the last six to
25
nine months, the elimination of goodwill amortization as of January 1, 2002 as a
result of the adoption of SFAS No. 142, and several significant transactions,
which were recorded during the three months ended March 31, 2002. These
significant transactions included the recording of a $40.1 million gain in
relation to the settlement of the PAS-7 insurance claim; the recording of an
$11.2 million facilities restructuring charge related to several of the
Company's U.S. locations; and the recording of an $18.7 million loss on the
conversion of several sales-type leases to operating leases by one of the
Company's customers.
Interest Expense, Net - Interest expense, net was $34.7 million for the three
months ended June 30, 2002, an increase of $7.2 million, or 26 percent, from
$27.5 million for the same period in 2001. The increase in interest expense, net
for the three months ended June 30, 2002 was primarily due to higher interest
expense related to the new debt acquired as a result of the Refinancing, offset
partially by higher capitalized interest of approximately $2.6 million as a
result of additional satellites under construction balances in 2002. Interest
expense, net was $60.4 million for the six months ended June 30, 2002, an
increase of $0.5 million, or 1 percent, from $59.9 million for the same period
in 2001. The increase in interest expense, net for the six months ended June 30,
2002 was primarily attributable to higher interest expense related to the new
debt acquired as a result of the Refinancing, partially offset by lower interest
expense as a result of lower interest rates in 2002 related to the Company's
variable rate borrowings.
Income Taxes - Income taxes were $6.6 million for the three months ended June
30, 2002, an increase of $4.3 million or 192 percent, from $2.3 million for the
three months ended June 30, 2001. Income taxes were $14.4 million for the six
months ended June 30, 2002, an increase of $8.3 million or 136 percent, from
$6.1 million for the three months ended June 30, 2001. The increase in income
taxes is primarily a result of the increase in income from operations. The
reduction in the Company's effective income tax rate from 43.5 percent in 2001
to 25 percent in 2002 was primarily a result of the elimination of goodwill
amortization due to the adoption of Statement of Financial Accounting Standards
No. 142.
Extraordinary Loss on Early Extinguishment of Debt - On February 25, 2002, the
Company completed its Refinancing and repaid the $1.725 billion indebtedness
owed under the term loan to Hughes Electronics (See "- Financial Condition"). In
conjunction with this repayment, the Company was required to write-off the
remaining unamortized debt issuance costs of approximately $3.3 million related
to the Hughes Electronics term loan, net of related income taxes of $0.8
million. This $2.5 million charge was recorded within the Company's consolidated
income statement for the three months ended March 31, 2002 as an extraordinary
loss on early extinguishment of debt. There was no comparable transaction in
2001.
Satellite Developments - Refer to "Item 1. Business - Overview - Our Satellite
Network and Ground Infrastructure" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Satellite Deployment
Plan and Planned Satellites" in the Form 10-K for a detailed description of the
Company's satellite network and its satellite deployment plan.
26
On June 15, 2002, we successfully launched our Galaxy IIIC satellite, the 22nd
spacecraft in our fleet. Galaxy IIIC will support customers from our video, VSAT
and broadcast services units, as well as direct-to-home services for DIRECTV
Latin America. Galaxy IIIC has 24 C-band and 24 Ku-band transponders covering
the continental United States, as well as 28 Ku-band transponders covering Latin
America. Ultimately operating at 95 degrees west longitude, in the Company's
Galaxy neighborhood, the satellite will take over for Galaxy IIIR and complement
Galaxy VIIIi. Galaxy IIIR, which currently resides in the 95 degrees west
longitude slot, will co-locate with Galaxy IIIC until September 2002 when Galaxy
IIIC is placed in-service.
In October 2001, we filed a proof of loss under the insurance policy on PAS-7
related to circuit failures, which occurred in September 2001 and resulted in a
reduction of 28.9% of the satellite's total power available for communications.
During the three months ended March 31, 2002, our insurers confirmed to us their
agreement to settle the claim by payment to the Company of $215 million in
relation to the PAS-7 insurance claim and the Company recorded a gain of $40.1
million in the three months ended in March 31, 2002 related to this insurance
claim (See Note 6 to the Company's June 30, 2002 consolidated financial
statements).
The Company expects to launch up to five more satellites by 2006. Galaxy VIII-iR
is scheduled to be ready for launch in the fourth quarter of 2002 and will cover
Latin America. We have entered into a contract with an affiliate of DIRECTV
Latin America, one of our affiliates, for the lease of capacity on Galaxy
VIII-iR, but the customer may terminate that contract following the commencement
of service on Galaxy IIIC. If the customer were to terminate the contract, we
would either modify Galaxy VIII-iR for other use at another orbital location or
terminate our contract with Boeing for the construction of Galaxy VIII-iR. In
the event that the customer terminates the contract, the customer would be
obligated to pay us over time for all of our contractual liabilities to Boeing
and certain of the costs of the launch services provider for such modification,
postponement and/or termination.
The Company, through its joint-venture with JSAT Corporation, a Japanese
satellite services provider, expects to launch the Galaxy XIII/Horizons
satellite to 127 degrees west longitude in early 2003. The Company also expects
to launch Galaxy XII (formerly named Galaxy VR) in the second quarter of 2003 to
74 degrees west longitude. The Company also has two additional satellites that
are under construction for United States coverage. We are currently scheduled to
launch one of these additional satellites to replace Galaxy V at 125 degrees
west longitude prior to the end of its useful life in 2005. The other additional
satellite is scheduled to replace Galaxy 1R at 133 degrees west longitude prior
to the end of its useful life in 2006.
We have invested approximately $4.2 billion in our existing satellite fleet and
ground infrastructure through June 30, 2002, and we have approximately $129.5
million of expenditures remaining to be made under existing satellite
construction contracts and $121.2 million to be made under existing satellite
launch contracts. The commitments related to satellite construction contracts
reflect approximately $10.5 million of contractually required reimbursements to
be received in conjunction with our joint venture with JSAT Corporation.
Satellite launch and in-orbit insurance contracts related to future satellites
to be launched are cancelable, up to thirty days prior to the satellite's
launch. As of June 30, 2002, the Company did not have any
27
commitments related to existing launch insurance or in-orbit insurance contracts
for satellites to be launched.
In January 2002, we entered into a noncontingent agreement with Orbital Sciences
Corporation for the construction of a Ka-band satellite to be delivered in 2005,
the timing of which was in part to comply with FCC milestones associated with
our authorizations. We are exploring the business case for the use of Ka-band
frequencies and may conclude that we will not pursue the construction of the
satellite to completion. If we ultimately decide not to proceed with this
satellite, we will owe Orbital Sciences a termination fee under the contract.
As of June 30, 2002, we had in effect launch and in-orbit insurance policies
covering 17 satellites in the aggregate amount of $2.3 billion. We have five
uninsured satellites in orbit: PAS-5; PAS-4 and PAS-6, which are used as backup
satellites; PAS-7 for which we received net insurance proceeds of $215 million
during the six months ended June 30, 2002; and Galaxy VIIIi, which is scheduled
for replacement in September 2002.
Of the insured satellites, six were covered by policies with substantial
exclusions or exceptions to coverage for failures of specific components
identified by the insurer as the most likely to fail ("Significant Exclusion
Policies"). These exclusions, we believe, substantially reduce the likelihood of
a recovery in the event of a loss. Those six satellites include Galaxy IIIR
which is scheduled for replacement in September 2002, PAS-2, PAS-3R, Galaxy IVR
and PAS-6B which have redundancies available for the systems as to which
exclusions have been imposed. We believe that these redundancies allow for
uninterrupted operation of the satellite in the event of a failure of the
component subject to the insurance exclusion. The sixth satellite, PAS-8, has an
excluded component that we believe is unlikely to fail in the near future. In
order to balance the risk of loss and the likelihood of a recovery, given the
exclusions to coverage, the Company reduced the sums insured by approximately
52% of the in-orbit insurance coverage on its PAS-2, PAS-3R and Galaxy 3R
satellites upon the expiration of the related insurance policies in May 2002.
At June 30, 2002, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other insurable
costs of approximately $850 million.
Upon the expiration of our existing insurance policies, there can be no
assurances that we will be able to procure new insurance for our satellites. In
addition, new satellite insurance may only be available with: higher premiums,
higher deductibles, shorter coverage periods, higher loss percentages required
for total constructive loss claims, additional satellite health-related policy
exclusions, or other terms which may make such insurance commercially
unreasonable. Accordingly, we may elect to discontinue insuring certain
satellites. An uninsured failure of one or more of our satellites could have a
material adverse effect on our financial condition and results of operations. In
addition, higher premiums on insurance policies will increase our costs, thereby
reducing our operating income by the amount of such increased premiums.
28
Financial Condition
In February 2002, the Company completed an $800 million private placement debt
offering pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"Senior Notes") and entered into a credit facility in an aggregate principal
amount of up to $1.25 billion (the "Senior Secured Credit Facility"). We refer
to these transactions as the "Refinancing." We used $1.725 billion of the
proceeds from the Refinancing to repay in full the indebtedness owed under the
term loan to Hughes Electronics. The Senior Notes bear interest at an annual
rate of 8.5%, are payable semi-annually, mature in 2012 and are unsecured.
The Senior Secured Credit Facility is comprised of a $250.0 million revolving
credit facility, which is presently undrawn and will terminate on December 31,
2007 (the "Revolving Facility"), a $300.0 million term loan A facility, which
matures on December 31, 2007 (the "Term A Facility"), and a $700.0 million term
loan B facility which matures on December 31, 2008 (the "Term B Facility"). At
June 30, 2002, both the $300 million under the Term A Facility and the $700
million under the Term B Facility were outstanding. Principal payments under the
Term A Facility and Term B Facility are due in varying amounts from 2004 until
their respective maturity dates. Currently, the Revolving Facility and the Term
A Facility bear interest at LIBOR plus 3.0%, although these interest rates are
subject to adjustment based on the Company's total leverage ratio. The Term B
Facility bears interest at LIBOR plus 3.5%. In addition, the Company is required
to pay to the lenders under the Revolving Facility a commitment fee in respect
of the unused commitments thereunder at a rate that is subject to adjustment
based on the Company's total leverage ratio. As of June 30, 2002, the Company
had letters of credit outstanding totaling $0.8 million that were guaranteed by
the Revolving Facility. This has reduced our ability to borrow against the
Revolving Facility by the aggregate amount of the outstanding letters of credit.
The agreement governing the Senior Secured Credit Facility requires the Company
to enter into interest rate hedge agreements with respect to at least 10% of the
borrowings under the Senior Secured Credit Facility within 360 days of securing
the facility. The indenture governing the Senior Notes and the agreement
governing the Senior Secured Credit Facility contain various covenants, which
impose significant restrictions on our business.
In connection with the Refinancing, the notes issued in January 1998 totaling
$750 million were ratably secured by substantially all of our assets on a
pari-passu basis with the security interests covering our obligations under the
Senior Secured Credit Facility.
On April 26, 2002, the Company initiated the filing of a registration statement
on Form S-4 with the SEC in relation to an exchange offer of $800 million of 8
1/2% Senior Notes due 2012. Following the effectiveness of the Form S-4
registration statement, these registered notes will be issued in exchange for
the Company's existing Senior Notes issued in February 2002 pursuant to Rule
144A under the Securities Act of 1933. The terms of the registered senior notes
to be issued under the S-4 registration statement will be substantially similar
to the terms of the currently outstanding Senior Notes. The existing Senior
Notes are secured by substantially all of our assets and are guaranteed on a
senior unsecured basis by all of our domestic subsidiaries. The notes to be
issued in connection with this Form S-4 will be similarly guaranteed. All of the
Company's subsidiary guarantors are domestic and, directly or indirectly, 100%
owned by
29
PanAmSat Corporation. The guarantees are full and unconditional and joint and
several and there are no restrictions on the ability of the Company to obtain
funds from its subsidiaries.
On July 29, 2002, the Company completed the transfer of certain assets and
liabilities from certain of its subsidiary guarantors to PanAmSat Corporation.
As a result of such transfers, the remaining subsidiary guarantors, individually
and in the aggregate, represent less than 1% of the Company's consolidated total
assets, total liabilities, revenues, stockholders' equity, income from
continuing operations before income taxes and cash flows from operating
activities, and such subsidiaries have no independent assets or operations
(determined in accordance with the criteria established for parent companies in
the SEC's Regulation S-X, Rule 3-10(h)). All subsidiary guarantors and all
subsidiaries of the Company, other than the subsidiary guarantors, are minor (as
defined in the SEC's Regulation S-X, Rule 3-10(h)). Accordingly, condensed
consolidating financial information for the Company and its subsidiaries within
the notes to the Company's consolidating financial statements is not presented.
Pursuant to the Company's obligations under a registration rights agreement
entered into in connection with the issuance of the Senior Notes, the Company
will pay additional interest on such Senior Notes for the period between August
1, 2002 and the date the SEC declares the Company's exchange offer registration
statement on Form S-4 effective. (Such registration statement was initially
filed on April 26, 2002.) The additional interest is initially 25 basis points,
increasing by 25 basis points every 90 days up to a maximum of 150 basis points.
The SEC has indicated that such action will be delayed until the review process
has been completed for a registration statement on Form S-4 of HEC Holdings,
Inc., an affiliate of Hughes Electronics. We do not believe that the delay of
our Form S-4 review process or the payment of the additional interest will have
a significant impact on our consolidated financial statements.
As of December 31, 2001, the Company had $46.5 million principal amount
outstanding under notes assumed in connection with our exercise in July 1999 of
an early buy-out opportunity for certain transponders under a sale-leaseback
transaction relating to our Galaxy IIIR satellite (the "Galaxy IIIR Notes"). The
Galaxy IIIR Notes matured on January 2, 2002 and were repaid in full on that
date from available cash.
The Company recorded severance costs of $8.2 million for the year ended December
31, 2001 and severance costs of $1.3 million during the first quarter of 2002.
These costs were related to the Company's expense reduction and NET-36
restructuring plan that began in the third quarter of 2001 and were primarily
comprised of employee compensation and employee benefits, outplacement services
and legal and consulting expenses associated with the cumulative reduction in
workforce of 164 employees. Included in the 2001 severance costs was
approximately $3.3 million that relates to costs associated with the resignation
of the former Chief Executive Officer of PanAmSat in August 2001. Approximately
$6.9 million of the $9.5 million of total severance costs have been paid through
June 30, 2002 and approximately $2.6 million was recorded within accrued
liabilities on the consolidated balance sheet at June 30, 2002. Substantially
all of the remaining accrued severance costs at June 30, 2002 will be paid
during 2002.
30
The Company expects its significant cash outlays will continue to be primarily
capital expenditures related to the construction and launch of satellites and
debt service costs. The Company has satellites under various stages of
development, for which the Company has budgeted capital expenditures. PanAmSat
currently expects to spend approximately $310 million to $340 million on capital
expenditures during 2002, which will primarily be comprised of costs to
construct, insure and launch satellites.
Assuming satellites under development are successfully launched and services on
the satellites commence on the schedule currently contemplated, PanAmSat
believes that amounts available under the Revolving Facility, vendor financing,
future cash flows from operations and cash on hand will be sufficient to fund
its operations and its remaining costs for the construction and launch of
satellites currently under development. There can be no assurance, however, that
PanAmSat's assumptions with respect to costs for future construction and launch
of its satellites will be correct, or that amounts available under the Revolving
Facility, vendor financing, future cash flows from operations and cash on hand
will be sufficient to cover any shortfalls in funding for (i) launches caused by
launch failures, (ii) cost overruns, (iii) delays, (iv) capacity shortages, or
(v) other unanticipated expenses.
In addition, if the Company were to consummate any strategic transactions or
undertake any other projects requiring significant capital expenditures, the
Company may be required to seek additional financing. If circumstances were to
require PanAmSat to incur such additional indebtedness, the ability of PanAmSat
to incur any such additional indebtedness would also be subject to the terms of
PanAmSat's outstanding indebtedness. The failure to obtain such financing or the
failure to obtain such financing on terms considered reasonable by the Company
could have a material adverse effect on PanAmSat's operations and its ability to
accomplish its business plan.
Net cash provided by operating activities increased $36.9 million, or 16
percent, to $266.2 million for the six months ended June 30, 2002, from $229.3
million for the six months ended June 30, 2001. The increase in 2002 was
primarily attributable to an increase in net income adjusted for non-cash items
of $34.0 million and a decrease in the cash used within prepaid expenses and
other assets of $18.1 million, partially offset by an increase in the cash used
within accounts payable and accrued liabilities of $17.8 million.
Net cash provided by investing activities was $31.5 million for the six months
ended June 30, 2002, compared to net cash used in investing activities of $29.0
million for the six months ended June 30, 2001. The increase in net cash
provided by investing activities in 2002 was primarily due to the receipt of
$82.6 million of additional proceeds from insurance claims during the six months
ended June 30, 2002 as compared to the six months ended June 30, 2001, offset
partially by an increase in capital expenditures of $22.1 million in 2002 as
compared to 2001.
Net cash used in financing activities decreased to $16.3 million for the six
months ended June 30, 2002, from $21.0 million for the six months ended June 30,
2001. The decrease in net cash used in financing activities in 2002 was
primarily due to: repayments of long-term debt of $1.772 billion under the
Hughes Electronics term loan which was completed in February 2002 and the
repayment of the Galaxy IIIR Notes in January 2002, as well as debt issuance
costs paid during 2002 of $40.8 million related to the Refinancing. These
decreases in net cash used in financing activities were partially offset by $1.8
billion of new borrowings obtained in the Refinancing.
31
New Accounting Pronouncements
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
provides that intangible assets with finite useful lives be amortized and that
goodwill and intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment with a transitional goodwill
impairment test completed within six months from the date of adoption. SFAS 142
also changed the evaluation criteria for testing goodwill for impairment from an
undiscounted cash flow approach to a test based on the implied fair value of the
goodwill at the reporting unit level. PanAmSat has determined that for such
impairment testing the Company has only one reporting unit, which is at the
enterprise level.
In the quarter ended June 30, 2002, the Company completed its transitional
assessment of the recoverability of its goodwill and determined that no
impairment charge is required. The Company measured the fair value of its
reporting unit based on the quoted market price of the Company's common stock,
which the Company believes has been stabilized by the price per share agreed to
by EchoStar for PanAmSat (See Note 1 to the Company's June 30, 2002 consolidated
financial statements). However, there can be no assurance that the Company's
quoted market price will remain at its current level once the EchoStar
transactions discussed above are completed. A sustained reduction in the quoted
market price of the Company's stock subsequent to the completion of the EchoStar
transactions discussed above could potentially result in a reduction in the fair
value of the Company and, consequently, the recording of an impairment charge
related to its goodwill.
The adoption of SFAS 142 resulted in the elimination of goodwill amortization
beginning January 1, 2002. As of June 30, 2002, the Company had goodwill of
approximately $2.24 billion and no other intangible assets. Prior to the
adoption of SFAS 142, our annual goodwill amortization was approximately $65
million. Net income and earnings per share for the three and six months ended
June 30, 2002 and 2001, adjusted to exclude amortization expense related to
goodwill which is no longer amortized, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Unaudited; in thousands except per share data)
Income before extraordinary item:
Reported income before
extraordinary item $ 19,766 $ 2,926 $ 43,269 $ 7,923
Goodwill amortization -- 16,240 -- 32,480
---------- ---------- ---------- ----------
Adjusted income before
extraordinary item $ 19,766 $ 19,166 $ 43,269 $ 40,403
========== ========== ========== ==========
Net income:
Reported net income $ 19,766 $ 2,926 $ 40,787 $ 7,923
Goodwill amortization -- 16,240 -- 32,480
---------- ---------- ---------- ----------
Adjusted net income $ 19,766 $ 19,166 $ 40,787 $ 40,403
========== ========== ========== ==========
Earnings per share before extra-
ordinary item - basic and diluted:
Reported earnings per share before
extraordinary item - basic and diluted $ 0.13 $ 0.02 $ 0.29 $ 0.05
Goodwill amortization per share -- 0.11 -- 0.22
---------- ---------- ---------- ----------
Adjusted earnings per share before
extraordinary item - basic and diluted $ 0.13 $ 0.13 $ 0.29 $ 0.27
========== ========== ========== ==========
Net income per common share -
basic and diluted:
Reported net income per common
share - basic and diluted $ 0.13 $ 0.02 $ 0.27 $ 0.05
Goodwill amortization per share -- 0.11 -- 0.22
---------- ---------- ---------- ----------
Adjusted net income per common
share - basic and diluted $ 0.13 $ 0.13 $ 0.27 $ 0.27
========== ========== ========== ==========
32
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145 provides that a loss on extinguishment of
debt meet the requirements of APB 30 to be treated as an extraordinary item in
the statement of operations. SFAS 145 also amends FASB Statement No. 13 to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.
Additionally, SFAS 145 eliminates FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers ("SFAS 44"), as the transition provisions of
the Motor Carrier Act of 1980 are completed; therefore SFAS 44 is no longer
necessary.
In the first quarter of 2002 in connection with the Company's Refinancing, the
Company recorded an extraordinary loss for the remaining unamortized debt
issuance costs related to the repayment of the Hughes Electronics term loan (See
Note 4 and Note 10 to the Company's June 30, 2002 consolidated financial
statements). The provisions of SFAS 145 related to the rescission of FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt ("SFAS
4"), will be effective for the Company beginning January 1, 2003. The Company is
in the process of evaluating the effect, if any, the provisions of SFAS 145 will
have on our financial statements. The other provisions of SFAS 145 were
effective in the second quarter of 2002 and did not have a significant impact on
our financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The principal difference between this
Statement and Issue 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. We do not believe that the adoption of the provisions of SFAS 146 will
have a significant impact on our financial statements.
Boeing 702 Solar Array Degradation Risk
Two of the three Boeing Satellite Services ("BSS") 702 satellites that we
operate and other BSS 702's of a similar design operated by others have
experienced a progressive degradation of their solar arrays causing a reduction
in output power. Along with the manufacturer, we are monitoring the problem to
determine its cause and its expected effect. The power reduction may require the
satellite operator to permanently turn off certain transponders on the affected
satellite to allow for the continued operation of other transponders, which
could result in a loss of revenue. Should it be necessary to turn off a
significant number of transponders, it may have a material adverse effect on our
results of operations. At this time, the power degradation has not required us
to reduce the number of operating transponders on either affected satellite.
Our BSS 702 satellites are currently covered by insurance policies. However, if
we are adversely affected by progressive solar array degradation anomalies,
there can be no assurance that we will be reimbursed by the insurers, as they
may dispute a payment obligation or the anomaly may occur outside of an
insurance policy period. In addition, there can be no assurance that, following
the expiration of the current policies, we will be able to procure new insurance
that
33
covers losses of this type. Further, there can be no assurance that we will be
able to obtain insurance for such satellites on commercially reasonable terms.
Backlog Risk
Future cash payments expected from customers (backlog) aggregated approximately
$5.55 billion as of June 30, 2002, including approximately $565.6 million
related to satellites to be launched. Included in the total backlog of $5.55
billion is $305.3 million of backlog that may be terminated by the customers
pursuant to certain termination rights.
Due to recent events in the telecommunications industry and general economic
conditions in certain parts of the world, we have reviewed our backlog for our
top 25 customers to identify risks to our business related to these events and
conditions. Of our $5.55 billion backlog as of June 30, 2002, approximately $4.2
billion, or 75.8% relates to our top 25 customers. Having conducted both
quantitative and qualitative analyses, we have concluded that eight of our top
25 customers have a risk of future non-performance of their contractual
obligations to us. These eight customers are meeting substantially all of their
obligations at the present time and are paying in a manner consistent with past
experiences. These customers represent approximately $1.1 billion of our backlog
as of June 30, 2002. The largest of these customers represents approximately
$609 million, or 11% of our total backlog, and $83.9 million, or 10.4% of our
expected 2002 revenues, and the smallest of these customers represents
approximately $40.9 million, or 0.7% of our total backlog, and $4.9 million, or
0.6% of our expected 2002 revenues. If one of the larger affected customers or a
group of these customers becomes unable to perform some or all of their
obligations to us, it could have a material adverse affect on our financial
condition and results of operations.
Market Risks
The Company manages its exposure to market risks through internally established
policies and procedures and, when deemed appropriate, through the use of
derivative financial instruments. The objective of the Company's policies is to
mitigate potential income statement, cash flow and fair value exposures
resulting from possible future adverse fluctuations in interest rates. The
Company evaluates its exposure to market risk by assessing the anticipated
near-term and long-term fluctuations in interest rates on a daily basis. This
evaluation includes the review of leading market indicators, discussions with
financial analysts and investment bankers regarding current and future economic
conditions and the review of market projections as to expected future interest
rates. The Company utilizes this information to determine its own investment
strategies as well as to determine if the use of derivative financial
instruments is appropriate to mitigate any potential future interest rate
exposure that the Company may face. The Company's policy does not allow
speculation in derivative instruments for profit or execution of derivative
instrument contracts for which there are no underlying exposures. The Company
does not use financial instruments for trading purposes and is not a party to
any leveraged derivatives.
The Company determines the impact of changes in interest rates on the fair value
of its financial instruments based on a hypothetical 10% adverse change in
interest rates from the rates in effect
34
as of June 30, 2002 for these financial instruments. The Company uses separate
methodologies to determine the impact of these hypothetical changes on its
sales-type leases, fixed rate public debt and variable rate debt as follows:
- For the Company's sales-type leases, a discount rate based on a
30-year bond is applied to future cash flows from sales-type leases
to arrive at a base rate present value for sales-type leases. This
discount rate is then adjusted for a negative 10% change and then
applied to the same cash flows from sales-type leases to arrive at a
present value based on the negative change. The base rate present
value and the present value based on the negative change are then
compared to arrive at the potential negative fair value change as a
result of the hypothetical change in interest rates.
- For the Company's fixed rate public debt, the current market rate of
each public debt instrument is applied to each principal amount to
arrive at a current yield to maturity for each public debt
instrument as of the end of the year. The current market rate is
then reduced by a factor of 10% and this revised market rate is
applied to the principal amount of each public debt instrument to
arrive at a yield to maturity based on the adverse interest rate
change. The two yields to maturity are then compared to arrive at
the potential negative fair value change as a result of the
hypothetical change in interest rates.
- For the Company's variable rate debt, the effect in annual cash
flows and net income is calculated as a result of the potential
effect of a hypothetical 10% adverse fluctuation in interest rates.
The current LIBOR rate plus applicable margin as of the end of the
year is applied to the applicable principal outstanding at the end
of the year to determine an annual interest expense based on
year-end rates and principal balances. This calculation is then
performed after increasing the LIBOR rate plus applicable margin by
a factor of 10%. The difference between the two annual interest
expenses calculated represents the reduction in annual cash flows as
a result of the potential effect of a hypothetical 10% adverse
fluctuation in interest rates. This amount is then tax effected
based on the Company's effective tax rate to yield the reduction in
net income as a result of the potential effect of a hypothetical 10%
adverse fluctuation in interest rates.
The only potential limitations of the respective models are in the assumptions
utilized in the models such as the hypothetical adverse fluctuation rate and the
discount rate. The Company believes that these models and the assumptions
utilized are reasonable and sufficient to yield proper market risk disclosure.
The Company has not experienced any material changes in interest rate exposures
during the three or six months ended June 30, 2002. Based upon economic
conditions and leading market indicators at June 30, 2002, the Company does not
foresee a significant adverse change in interest rates in the near future. As a
result, the Company's strategies and procedures to manage exposure to interest
rates have not changed in comparison to the prior year.
The potential fair value change resulting from a hypothetical 10% adverse
fluctuation in interest rates related to PanAmSat's outstanding fixed-rate debt
and fixed-rate net investments in sales-
35
type lease receivable balances would be approximately $72.2 million and $4.1
million, respectively, as of June 30, 2002. The potential effect of a
hypothetical 10% adverse fluctuation in interest rates for one year on
PanAmSat's floating rate debt outstanding at June 30, 2002 would be a reduction
in cash flows of approximately $5.2 million and a reduction in net income of
approximately $2.9 million.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risks."
36
PANAMSAT CORPORATION
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.3 Amended and Restated Bylaws of PanAmSat Corporation
99.1 Certification by Chief Executive Officer
99.2 Certification by Chief Financial Officer
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter
for which this report is filed.
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37
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PanAmSat Corporation
Date: August 13, 2002 /s/ Michael J. Inglese
----------------------------
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
38