Back to GetFilings.com
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 MARCH 31, 2003
COMMISSION FILE NO. 0-22531
PANAMSAT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4607698
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION
OR ORGANIZATION) 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 [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 2, 2003, an aggregate of 150,052,099 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 contracted backlog for future services, (ix) risks associated
with the company's 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
or 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, 2002 (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.
WEBSITE ACCESS TO COMPANY'S REPORTS
PanAmSat's Internet website address is WWW.PANAMSAT.COM. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to
section 13(a) or 15(d) of the Exchange Act are available free of charge
through our website as soon as reasonably practicable after they are
electronically filed with, or furnished to, the Securities and Exchange
Commission.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, MARCH 31,
2003 2002
---- ----
REVENUES:
Operating leases, satellite services and other $ 195,420 $ 201,369
Outright sales and sales-type leases 4,336 5,770
------------ -------------
Total revenues 199,756 207,139
------------ -------------
OPERATING COSTS AND EXPENSES:
Depreciation 72,267 93,955
Direct operating costs (exclusive of depreciation) 33,188 32,489
Selling, general and administrative expenses 18,026 32,483
Facilities restructuring and severance costs -- 12,519
Gain on PAS-7 insurance claim -- (40,063)
Loss on conversion of sales-type leases -- 18,690
------------ -------------
Total operating costs and expenses 123,481 150,073
------------ -------------
INCOME FROM OPERATIONS 76,275 57,066
INTEREST EXPENSE- net 34,275 29,038
------------ -------------
INCOME BEFORE INCOME TAXES 42,000 28,028
INCOME TAX EXPENSE 11,142 7,007
------------ -------------
NET INCOME $ 30,858 $ 21,021
============ =============
NET INCOME PER COMMON SHARE - basic and diluted $ 0.21 $ 0.14
============ =============
Weighted average common shares outstanding 150,004,000 149,886,000
============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 619,169 $ 783,998
Short-term investments 100,616 99,785
Accounts receivable-net 51,292 34,276
Net investment in sales-type leases 23,441 22,858
Prepaid expenses and other current assets 37,671 43,170
Receivable - satellite manufacturer 69,500 72,007
Deferred income taxes 8,515 7,889
---------- ----------
Total current assets 910,204 1,063,983
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 2,819,636 2,865,279
NET INVESTMENT IN SALES-TYPE LEASES 155,789 161,869
GOODWILL 2,238,659 2,238,659
DEFERRED CHARGES AND OTHER ASSETS 152,349 157,948
---------- ----------
TOTAL ASSETS $6,276,637 $6,487,738
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
4
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 70,127 $ 77,309
Current portion of long-term debt 16,750 200,000
Accrued interest payable 19,558 50,961
Deferred revenues 19,426 18,923
----------- -----------
Total current liabilities 125,861 347,193
LONG-TERM DEBT 2,333,250 2,350,000
DEFERRED INCOME TAXES 428,922 417,843
DEFERRED CREDITS AND OTHER (principally customer
deposits and deferred revenue) 284,553 295,160
----------- -----------
TOTAL LIABILITIES 3,172,586 3,410,196
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value - 400,000,000
shares authorized; 150,038,679 and 149,967,476 outstanding
at March 31, 2003 and December 31, 2002, respectively 1,501 1,500
Additional paid-in-capital 2,533,219 2,532,334
Retained earnings 576,951 546,093
Excess of purchase price over historical cost basis of net
assets acquired (See Note 2) (5,158) --
Accumulated other comprehensive loss (2,462) (2,385)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,104,051 3,077,542
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,276,637 $ 6,487,738
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
PANAMSAT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
EXCESS OF
PURCHASE
PRICE OVER
HISTORICAL
COMMON STOCK ACCUMULATED COST COMPREHENSIVE
------------ ADDITIONAL OTHER BASIS OF OTHER
PAR VALUE PAID-IN COMPREHENSIVE RETAINED NET ASSETS INCOME
SHARES AMOUNT CAPITAL LOSS EARNINGS ACQUIRED TOTAL (LOSS)
------ ------ ------- ---- -------- -------- ----- ------
BALANCE, JANUARY
1, 2003 ................ 149,967,476 $1,500 $2,532,334 $(2,385) $546,093 $ -- $ 3,077,542 $ --
Additional issuance
of common stock ........ 71,203 1 885 -- -- -- 886 --
Unrealized loss
on cash flow hedge ..... -- -- -- (76) -- -- (76) (76)
Unrealized loss on
short-term
investments ............ -- -- -- (1) -- -- (1) (1)
Acquisition of Hughes
Global Services ........ -- -- -- -- -- (5,158) (5,158) --
Net income .............. -- -- -- -- 30,858 -- 30,858 30,858
----------- ------ ---------- ------- -------- ------- ----------- --------
BALANCE, MARCH
31, 2003 ............... 150,038,679 $1,501 $2,533,219 $(2,462) $576,951 $(5,158) $ 3,104,051 $ 30,781
=========== ====== ========== ======= ======== ======= =========== ========
6
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS)
MARCH 31, MARCH 31,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,858 $ 21,021
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 72,267 93,955
Deferred income taxes 10,750 6,764
Amortization of debt issuance costs and other deferred charges 2,471 2,682
Provision for uncollectible receivables 2,112 10,000
Other non-cash expenses (1,976) --
Gain on PAS-7 insurance claim -- (40,063)
Loss on conversion of sales-type leases -- 18,690
Facilities restructuring and severance costs -- 11,224
Loss on early extinguishment of debt -- 3,309
Changes in assets and liabilities:
Collections on investments in sales-type leases 5,497 5,979
Operating leases and other receivables (1,507) (1,401)
Prepaid expenses and other assets 15,956 8,849
Accounts payable and accrued liabilities (54,166) (21,884)
Deferred gains and revenues (3,143) 5,543
--------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 79,119 124,668
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including capitalized interest) (33,081) (73,979)
Insurance proceeds from satellite recoveries -- 173,691
Purchase of short-term investments (830) --
Acquisition of Hughes Global Services (8,216) --
--------- -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (42,127) 99,712
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings -- 1,800,000
Repayments (200,000) (1,771,542)
Debt issuance costs -- (38,360)
Other (1,821) (1,856)
--------- -----------
NET CASH USED IN FINANCING ACTIVITIES (201,821) (11,758)
--------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (164,829) 212,622
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 783,998 443,266
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 619,169 $ 655,888
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash received for interest $ 3,494 $ 2,949
--------- -----------
Cash paid for interest $ 72,248 $ 33,787
--------- -----------
Cash paid for taxes $ 720 $ 366
--------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
7
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
March 31, 2003 and for the three month periods ended March 31, 2003 and
2002 have been made. Certain prior period amounts have been reclassified
to conform with the current period's presentation. Operating results for
the three months ended March 31, 2003 and 2002 are not necessarily
indicative of the operating results for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the PanAmSat Form 10-K for the year ended December 31,
2002 filed with the Securities and Exchange Commission ("SEC") on March 6,
2003, and all other PanAmSat filings filed with the SEC through the date
of this report.
On April 9, 2003, General Motors Corporation ("GM"), Hughes Electronics
Corporation ("Hughes Electronics") and The News Corporation Limited
("News Corp.") announced the signing of definitive agreements that
provide for, among other things, the split-off of Hughes Electronics from
GM and the acquisition by News Corp. of approximately 34% of the
outstanding capital stock of Hughes Electronics (the "News Corp.
Transactions"). The transactions are subject to a number of conditions,
including, among other things, U.S. antitrust and Federal Communications
Commission (the "FCC") approvals, obtaining appropriate approvals of GM's
stockholders and obtaining a favorable ruling as to certain tax matters
from the Internal Revenue Service. No assurances can be given that the
approvals will be obtained or the transactions will be completed. The
agreements between Hughes Electronics and News Corp. require that Hughes
Electronics cause PanAmSat to conduct its business in the ordinary
course, consistent with past practice, and that Hughes Electronics
obtain the consent of News Corp. for PanAmSat to enter into certain
strategic and other transactions.
The Company's senior secured credit facility requires that the Company
obtain the consent of the lenders prior to the consummation of the News
Corp. Transactions. The Company has initiated the process for obtaining
such consent. Failure to obtain such consent would constitute an event of
default under such facility. No assurances can be given that such consent
will be obtained.
(2) ACQUISITION OF HUGHES GLOBAL SERVICES
On March 7, 2003, the Company acquired substantially all of the assets of
Hughes Global Services, Inc. ("HGS") from Hughes Electronics for
approximately $8.2 million in cash and the assumption of certain related
liabilities, subject to certain post-closing adjustments. In connection
with this transaction, the Company acquired the HGS-3 satellite and the
rights to acquire an additional satellite from Hughes Electronics. HGS
provides end-to-end satellite communications services to government
entities, both domestically and internationally, as well as to certain
private sector customers and is also a value-added reseller of satellite
bandwidth and related services and equipment. The acquisition supports
PanAmSat's strategic initiative to expand our government service offerings
through the newly created division, G2 Satellite Solutions Company. The
net assets acquired are as follows (in millions):
Total current assets $ 16.9
======
Total assets $ 17.7
Total liabilities 14.7
------
Net assets acquired $ 3.0
======
Since HGS and PanAmSat are under the common control of Hughes Electronics,
the excess purchase price of approximately $5.2 million over the
historical cost of the net assets acquired was recorded within
stockholders' equity on the accompanying consolidated balance sheet as of
March 31, 2003. The consolidated results of G2 Satellite Solutions Company
from the date of the acquisition through March 31, 2003 are included
within the Company's consolidated income statement for the quarter ended
March 31, 2003.
8
(3) NEW ACCOUNTING PRONOUNCEMENTS
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)."
This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred.
Whereas, under EITF Issue No. 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS 146
is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. As such, the Company adopted the provisions of
SFAS 146 effective January 1, 2003. The adoption of these provisions has
not had a significant impact on our financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
clarifies and expands existing disclosure requirements for guarantees,
including loan guarantees, and clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN No. 45 are effective
for the Company's current financial statements ending December 31, 2002.
The adoption of the disclosure requirements of FIN No. 45 during 2002, as
well as the initial recognition and initial measurement provisions of FIN
No. 45 in 2003, did not have an impact on our financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities -- an Interpretation of Accounting Research Bulletin No.
51." FIN No. 46 clarifies rules for consolidation of special purpose
entities. FIN No. 46 is effective for variable interest entities created
after January 31, 2003 and to variable interest entities in which a
Company receives an interest after that date. This pronouncement is
effective on January 1, 2004 for variable interest entities acquired
before February 1, 2003. The Company does not expect the adoption of FIN
No. 46 to have a significant impact on our financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF
Issue No. 00-21 addresses determination of whether an arrangement
involving more than one deliverable contains more than one unit of
accounting and how the related revenues should be measured and allocated
to the separate units of accounting. EITF Issue No. 00-21 will apply to
revenue arrangements entered into after June 30, 2003; however, upon
adoption, the EITF allows the guidance to be applied on a retroactive
basis, with the change, if any, reported as a cumulative effect of
accounting change in the statement of operations. The Company has not yet
determined the impact this new standard will have on its consolidated
results of operations or financial position, if any.
(4) SATELLITE DEVELOPMENTS
Reference is made to "Item 1. Business - Overview - Our Business
Strategy"; "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.
In April 2003, the Company launched Galaxy XII and placed it in service at
74 degrees west longitude. The spacecraft is PanAmSat's next-generation
backup satellite for its domestic cable and broadcast video customers.
Galaxy XII also offers as-needed incremental capacity for premium cable,
HDTV and specialized new services in North America. Built and
custom-designed for PanAmSat by Orbital Sciences Corporation, Galaxy XII
has twenty-four 36-MHz C-band transponders.
The Company expects to launch up to three more satellites by the end of
2005. The Company, together with Horizons LLC, which we jointly own with
JSAT International Inc. ("JSAT"), a Japanese satellite services provider,
expects to launch the Galaxy XIII/Horizons I satellite to 127 degrees west
longitude in the second half of 2003. The Company 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
9
replace Galaxy 1R at 133 degrees west longitude prior to the end of its
useful life in 2006.
In November 2002, our customer for all of the capacity on the Galaxy
VIII-iR satellite exercised its pre-launch right to terminate its lease
agreement with us. In the first quarter of 2003, the manufacturer and
PanAmSat terminated the construction contract by mutual agreement. In
connection with the termination of the construction contract, as of March
31, 2003, we had a receivable due from the satellite manufacturer of $69.5
million. We expect to collect this receivable in December 2003. In
addition, we have agreed with the Galaxy VIII-iR launch vehicle provider
to defer our use of the launch to a future satellite.
The Company transferred an authorization for a Ka-band orbital slot to
Hughes Network Systems, Inc. ("HNS"), an affiliate of the Company, in
exchange for a contingent payment of approximately $2.1 million. The
payment is payable upon the launch of a satellite by HNS to such orbital
slot. The FCC has approved the transfer of this authorization.
(5) LONG-TERM DEBT
At March 31, 2003, the Company had total debt outstanding of $2.35
billion, including current maturities of $16.8 million related to
quarterly principal payments due in March 2004. The Company's $200 million
6.0% notes issued in 1998 matured on January 15, 2003 and were repaid in
full, plus accrued interest of $6.0 million, from available cash.
In February 2002, the Company entered into a credit facility in an
aggregate principal amount of up to $1.25 billion (the "Senior Secured
Credit Facility") and completed an $800 million private placement debt
offering pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Senior Notes"). 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 were exchanged for registered notes with
substantially identical terms in November 2002. The agreement governing
the Senior Secured Credit Facility and the indenture governing the Senior
Notes contain various covenants which impose significant restrictions on
our business.
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"). Principal payments under the
Term A Facility and Term B Facility are due in varying amounts commencing
in 2004 until their respective maturity dates. At March 31, 2003, the
interest rates on the Term A Facility and Term B Facility were LIBOR plus
3.0% and LIBOR plus 3.5%, respectively. In addition, the Company is
required to pay a commitment fee in respect of the unused commitments
under the Revolving Facility which, as of March 31, 2003, was 0.50% per
year. The Company had outstanding letters of credit totaling $1.1 million,
which reduced our ability to borrow against the Revolving Facility by such
amount.
In accordance with the agreement governing the Senior Secured Credit
Facility, the Company entered into an interest rate hedge agreement for
10% of the outstanding borrowings under the Senior Secured Credit Facility
during the third quarter of 2002. This interest rate hedge is designated
as a cash flow hedge of the Company's variable rate Term B Facility. In
relation to this hedge agreement, the Company exchanged its floating-rate
obligation on $100.0 million of its Term B Facility for a fixed-rate
payment obligation of 6.64% on $100.0 million through August 30, 2005. The
notional amount of the interest rate hedge agreement matches the repayment
schedule of the Term B Facility though the maturity date of the interest
rate hedge. During the three months ended March 31, 2003, no
ineffectiveness was recognized in the statement of operations on this
hedge. The amount accumulated in other comprehensive income will fluctuate
based on the change in the fair value of the derivative at each reporting
period, net of applicable deferred income taxes. The fair value of the
outstanding interest-rate hedge agreement as of March 31, 2003, based upon
quoted market prices from the counter party, reflected a hedge liability
of approximately $2.8 million.
Obligations under the Senior Secured Credit Facility are, or will be, as
the case may be, unconditionally guaranteed by each of our existing and
subsequently acquired or organized domestic and, to the extent no adverse
tax consequences would result therefrom, foreign restricted subsidiaries.
In addition, such obligations are equally and ratably secured by perfected
first priority security interests in, and mortgages on, substantially all
of the tangible and intangible assets of the Company and its subsidiaries,
including its satellites. All 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
10
and its subsidiaries within the notes to the Company's consolidating
financial statements is not presented.
The Company's Senior Secured Credit Facility requires that the Company
obtain the consent of the lenders prior to the consummation of the News
Corp. Transactions. The Company has initiated the process for obtaining
such consent. Failure to obtain such consent would constitute an event of
default under such facility. No assurances can be given that such consent
will be obtained.
In addition to the Senior Secured Credit Facility and the Senior Notes,
the Company has outstanding seven, ten and thirty-year fixed rate notes
totaling $550 million issued in January 1998. The outstanding principal
balances, interest rates and maturity dates for these notes as of March
31, 2003 were $275 million at 6.125% due 2005, $150 million at 6.375% due
2008 and $125 million at 6.875% due 2028, respectively. Principal on these
notes is payable at maturity, while interest is payable semi-annually.
(6) STOCK-BASED COMPENSATION
Effective January 1, 2003, the Company adopted the fair value recognition
provision of FASB Statement No. 123, "Accounting for Stock Based
Compensation," prospectively, to all employee awards granted on or after
January 1, 2003, pursuant to FASB Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure."
During the quarter ended March 31, 2003 the Company issued options to
purchase 11,900 shares under the PanAmSat Corporation Long-Term Stock
Incentive Plan (the "Plan"). Compensation expense will be based on the
fair value of the options at the respective grant dates utilizing the
Black-Scholes model for estimating fair value. Since these options were
granted on March 31, 2003, the Company recorded minimal compensation
expense during the first quarter of 2003. The Company will recognize
compensation expense of approximately $50 thousand ratably over the
vesting period beginning in the second quarter of 2003 for these options
granted. Under the intrinsic value method reported previously, no
compensation expense had been recognized on options granted through
December 31, 2002, as the exercise price of the options granted equaled
the market price on the date of grant for all prior grants.
The following table illustrates the effect on net income and earnings per
share as if the fair value based method had been applied to all
outstanding and unvested awards in each period (in thousands).
THREE MONTHS ENDED:
-----------------------
MARCH 31, MARCH 31,
2003 2002
-------- ---------
Net income, as reported $ 30,858 $ 21,021
Add: Stock-based employee compensation expense
included in reported net income,
net of related tax effects -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of
related tax effects (1,406) (2,723)
-------- --------
Pro forma net income $ 29,452 $ 18,298
======== ========
Earnings per share:
Basic and Diluted - as reported $ 0.21 $ 0.14
======== ========
Basic and Diluted - pro forma $ 0.20 $ 0.12
======== ========
The pro forma amounts for compensation cost may not necessarily be
indicative of the effects on operating results for future periods.
On April 30, 2003, the Company's Board of Directors approved an amendment
to the Plan to clarify certain matters as to the issuance of restricted
stock units. Also on this date, the Compensation Committee of the Board of
Directors approved the issuance of up to 500,000 restricted stock units
under the Plan.
11
(7) 2002 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 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.
(8) 2002 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.
(9) FACILITIES RESTRUCTURING AND SEVERANCE COSTS
Net facilities restructuring and severance costs were $0 for the three
months ended March 31, 2003 and $12.5 million for the three months ended
March 31, 2002. In the three months ended March 31, 2003, the Company
recorded a severance charge of $0.8 million related to the Company's
teleport consolidation plan. These costs were offset by a restructuring
credit of $0.8 million related to the Company's 2002 facilities
restructuring plan.
In January 2003, the Company's management approved a plan to consolidate
certain of its teleports in order to improve customer service and reduce
operating costs. This teleport consolidation plan includes the closure of
certain teleports that are owned by the Company. Under this plan, we
expect the Company's Homestead and Spring Creek teleports will be
permanently closed during 2003 and 2004 and the Fillmore and Castle Rock
teleports will provide reduced services. We expect that our Napa teleport
will become the West Coast hub for communications, video, and data
services, taking on occasional-use and full-time services now provided by
the Fillmore teleport. In addition to the pre-existing services that it
provides, we expect that the Ellenwood teleport will serve as our East
Coast hub, providing similar services that migrate over from Homestead and
Spring Creek. This teleport consolidation plan will include the disposal
of land, buildings and equipment located at these teleports and severance
related costs for which the employees will be required to perform future
services.
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. During the third
quarter of 2002, the Company implemented a plan focused on further
streamlining its operations through the consolidation of certain
facilities. As a result, the Company recorded an additional non-cash
charge of $2.7 million in its consolidated income statement for the three
months ended September 30, 2002. This charge reflects future lease costs,
net of estimated future sublease revenue, of $0.9 million related to
approximately 15,000 square feet of unused facilities and the write-off of
approximately $1.8 million of leasehold improvements related to these
facilities. In the first quarter of 2003, the Company recorded a
restructuring credit of $0.8 million which was primarily related to the
signing of a sub-lease agreement during the first quarter of 2003 for an
amount higher than originally estimated.
The Company recorded severance costs of $8.2 million for the year ended
December 31, 2001. An additional $1.3 million of severance costs was
recorded during the first quarter of 2002. These costs were related to the
Company's expense reduction and
12
NET-36 (now webcast services) 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. In the third quarter of
2002, the Company recorded a restructuring credit of $1.5 million for the
reversal of prior period severance charges due to actual costs being lower
than originally estimated.
The facilities restructuring accruals remaining as of March 31, 2003
primarily relate to long-term lease obligations to be paid through 2011.
The following table summarizes the recorded accruals and activity related
to these teleport consolidation, facilities restructuring and severance
charges (in millions):
FACILITIES SEVERANCE TELEPORT
RESTRUCTURING COSTS CONSOLIDATION TOTAL
------------- ----- ------------- -----
2001 restructuring charges $ -- $ 8.2 $ -- $ 8.2
Less: net cash payments in 2001 -- (5.3) -- (5.3)
----- ------ ----- -----
Balance as of December 31, 2001 -- 2.9 -- 2.9
First quarter 2002 restructuring charge 11.2 1.3 -- 12.5
Third quarter 2002 restructuring charge (credit) 2.7 (1.5) -- 1.2
Less: net cash payments in 2002 (2.2) (2.5) -- (4.7)
Less: non-cash items in 2002 (4.1) -- -- (4.1)
----- ----- ---- -----
Balance as of December 31, 2002 7.6 0.2 -- 7.8
First quarter 2003 restructuring charge (credit) (0.8) -- 0.8 --
Less: net cash payment in 2003 (0.8) (0.1) -- (0.9)
----- ------ ----- -----
Balance as of March 31, 2003 $ 6.0 $ 0.1 $ 0.8 $ 6.9
===== ====== ===== =====
(10) INTEREST EXPENSE-NET
Interest expense for the three months ended March 31, 2003 and 2002 is
recorded net of capitalized interest of $4.9 million and $5.4 million,
respectively, and interest income of $3.2 million and $2.6 million,
respectively.
In connection with the Refinancing in the first quarter of 2002 (See Note
5 "Long-Term Debt"), the Company recorded an extraordinary loss on the
early extinguishment of debt as a result of the write-off of the remaining
unamortized debt issuance costs related to the Hughes Electronics term
loan. Upon adoption of the provisions of SFAS 145 related to the
rescission of FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt ("SFAS 4"), on January 1, 2003, the Company was
required to reclassify this loss on extinguishment of debt, as it does not
meet the new requirements for classification as an extraordinary item in
accordance with SFAS 145. As such, the Company reclassified $3.3 million
to interest expense and recorded the related income tax effect within
income tax expense of $0.8 million for the quarter ended March 31, 2002
and year ended December 31, 2002. This reclassification had no effect on
net income but will result in lower income before income taxes for these
periods.
(11) COMMITMENTS AND CONTINGENCIES
SATELLITE COMMITMENTS
We have invested approximately $4.2 billion in our existing satellite
fleet and ground infrastructure through March 31, 2003, and we have
approximately $41.5 million of expenditures remaining to be made under
existing satellite construction contracts and $65.5 million to be made
under existing satellite launch contracts. The commitments related to
satellite construction and launch contracts are net of approximately $8.4
million of costs to be paid by JSAT International Inc. in conjunction with
our Horizons joint venture. 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 March 31, 2003, the
Company did not have any commitments related to existing launch insurance
or in-orbit insurance contracts for satellites to be launched.
SATELLITE INSURANCE
On February 19, 2003, the Company filed proofs of loss under the insurance
policies for two of its Boeing model 702 spacecraft, Galaxy XI and PAS-1R,
for constructive total losses based on degradation of the solar panels.
Service to existing customers has not been affected, and we expect that
both of these satellites will continue to serve these existing customers.
The insurance policies for
13
Galaxy XI and PAS-1R are in the amounts of approximately $289 million and
$345 million, respectively, and both include a salvage provision for the
Company to share 10% of future revenues from these satellites with their
respective insurers if the proof of loss is accepted. The availability and
use of any proceeds from these insurance claims are restricted by the
agreements governing our debt obligations. We cannot assure you that the
proof of loss with respect to these two satellites will be accepted by the
insurers. The Company is working with the satellite manufacturer to
determine the long-term implications to the satellites and will continue
to assess the operational impact these losses may have. At this time,
based upon all information currently available to the Company, as well as
planned modifications to the operation of the satellites in order to
maximize revenue generation, the Company currently expects to operate
these satellites for the duration of their estimated useful lives,
although a portion of the transponder capacity on these satellites will
not be useable during such time. The Company also currently believes that
the net book values of these satellites are fully recoverable and does not
expect a material impact on 2003 revenues as a result of the difficulties
on these two satellites.
As of March 31, 2003, we had in effect launch and in-orbit insurance
policies covering 15 satellites in the aggregate amount of $1.9 billion.
We have seven uninsured satellites in orbit: PAS-4 and PAS-6, which are
used as backup satellites; PAS-5 and PAS-7 for which we received insurance
proceeds for constructive total losses; Galaxy VIII-i, which continues to
operate in an inclined orbit as a supplement to Galaxy IIIC; Galaxy XI;
and HGS-3. The Galaxy XI launch insurance policy lapsed in December 2002.
The Company elected not to purchase additional in-orbit insurance for this
satellite as the available terms were not commercially reasonable. The
claim for constructive total loss made under the launch policy was for
losses experienced prior to the expiration of the policy. HGS-3 was
purchased by PanAmSat in connection with the HGS acquisition and has a net
book value of $0.7 million as of March 31, 2003 (See Note 2 "Acquisition
of Hughes Global Services").
Of the insured satellites, five 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 and which have a
lower coverage amount than the carrying value of the satellite's insurable
costs ("Significant Exclusion Policies"). These exclusions, we believe,
substantially reduce the likelihood of a recovery in the event of a loss.
Three of these satellites, PAS-2, PAS-3R and PAS-6B, 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 fourth such satellite, PAS-8, has an excluded
component that we believe is unlikely to fail in the near future. The
fifth satellite, Galaxy IIIR, was replaced in September 2002 by Galaxy
IIIC and served as a fleet backup through April 2003 when Galaxy XII was
placed into service.
At March 31, 2003, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other
insurable costs of approximately $1.0 billion. Of this amount, $486.8
million related to uninsured satellites and $515.2 million related to
satellites insured by Significant Exclusion Policies.
A supplemental policy on Galaxy IVR for coverage of $21.4 million related
to sales-type leases does have a component exclusion. The primary policy
on that satellite has no component exclusion.
In May 2003, the insurance policies covering nine of the Company's
satellites will expire. We are currently negotiating renewal policies for
these satellites. Upon the expiration of our existing insurance policies,
there can be no assurance 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 constructive total 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.
14
(12) 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 March 31, 2003 and 2002, PanAmSat's
revenues were $199.8 million and $207.1 million, respectively. These
revenues were derived from the following service areas:
PERCENTAGE OF REVENUES
THREE MONTHS ENDED:
-----------------------------------
MARCH 31, MARCH 31,
2003 2002
---- ----
Services:
Video Services 64% 67%
Network Services 28% 26%
Other Services 8% 7%
----- -----
Total: 100% 100%
===== =====
(13) CONTRACTED BACKLOG FOR FUTURE SERVICES
Future contractual cash payments expected from customers (backlog)
aggregated approximately $5.46 billion as of March 31, 2003, including
approximately $784.8 million related to satellites to be launched.
Included in the total backlog of $5.46 billion is $258.1 million of
backlog that may be terminated pursuant to certain contractual termination
rights.
Due to 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 $5.46 billion backlog as of March 31, 2003,
approximately $4.05 billion, or 74.3%, related to our top 25 customers.
Having conducted both quantitative and qualitative analyses, we concluded
that six of our top 25 customers, including our largest customer, DIRECTV
Latin America, have a risk of future non-performance of their contractual
obligations to us. These six customers are meeting substantially all of
their obligations at the present time and are paying in a manner
consistent with past experience. They represented approximately $1.03
billion of our backlog as of March 31, 2003. In March 2003, DIRECTV Latin
America filed a voluntary petition for a restructuring under Chapter 11 of
the U.S. bankruptcy code. At March 31, 2003, DIRECTV Latin America
represented approximately $573 million, or 11% of our total backlog. The
smallest of these six customers represented approximately $39.6 million,
or 0.7% of our total backlog. If DIRECTV Latin America, one of the other
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 effect on our financial condition and results of operations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis should be read in conjunction
with the PanAmSat management's discussion and analysis included in the PanAmSat
Annual Report on Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission ("SEC") on March 6, 2003 and all other
PanAmSat filings filed with the SEC through the date of this report.
On April 9, 2003, General Motors Corporation ("GM") Hughes Electronics
Corporation ("Hughes Electronics") and The News Corporation Limited ("News
Corp.") announced the signing of definitive agreements that provide for, among
other things, the split-off of Hughes Electronics from GM and the acquisition
by News Corp. of approximately 34% of the outstanding capital stock of Hughes
Electronics (the "News Corp. Transactions"). The transactions are subject to a
number of conditions, including, among other things, U.S. antitrust and Federal
Communications Commission (the "FCC") approvals, obtaining appropriate approvals
of GM's stockholders and obtaining a favorable ruling as to certain tax matters
from the Internal Revenue Service. No assurances can be given that the approvals
will be obtained or the transactions will be completed. The agreements between
Hughes Electronics and News Corp. require that Hughes Electronics cause PanAmSat
to conduct its business in the ordinary course, consistent with past practice,
and that Hughes Electronics obtain the consent of News Corp. for PanAmSat to
enter into certain strategic and other transactions.
The Company's senior secured credit facility requires that the Company obtain
the consent of the lenders prior to the consummation of the News Corp.
Transactions. The Company has initiated the process for obtaining such consent.
Failure to obtain such consent would constitute an event of default under such
facility. No assurances can be given that such consent will be obtained.
RESULTS OF OPERATIONS
The Company's selected operating data shown below is not necessarily indicative
of future results.
SELECTED OPERATING DATA (In thousands except per share data)
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
2003 2002
---- ----
Operating leases, satellite services and other $195,420 $201,369
Outright sales and sales-type leases 4,336 5,770
Total revenues 199,756 207,139
Depreciation 72,267 93,955
Direct operating costs (exclusive of depreciation) 33,188 32,489
Selling, general and administrative expenses 18,026 32,483
Facilities restructuring and severance costs -- 12,519
Gain on PAS-7 insurance claim -- (40,063)
Loss on conversion of sales-type leases -- 18,690
Income from operations 76,275 57,066
Interest expense- net 34,275 29,038
Income before income taxes 42,000 28,028
Income tax expense 11,142 7,007
Net income 30,858 21,021
Net income per common share - basic and
Diluted $ 0.21 $ 0.14
16
PANAMSAT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Revenues - Revenues were $199.8 million for the three months ended March 31,
2003, compared to revenues of $207.1 million for the same period in 2002.
Operating lease revenues, which were 97.8 percent of total revenues for the
first quarter of 2003, decreased by 3.0 percent to $195.4 million from $201.4
million for the same period in 2002. The decrease in operating lease revenues
was primarily due to lower termination fee revenue from the distribution of
video programming of $7.7 million, as compared to the first quarter of 2002,
partially offset by net new business from network services. Total sales and
sales-type lease revenues were $4.3 million for the quarter ended March 31,
2003, compared to $5.8 million for the same period in 2002.
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 8.3
percent to $122.4 million during the first quarter of 2003, compared to $133.5
million for the first quarter of 2002. This decrease was primarily due to lower
termination fee revenue from the distribution of video programming of $7.7
million and lower occasional use services revenue of $2.7 million as compared to
2002. The decrease in occasional use services revenue is due primarily to the
2002 Winter Olympics, which took place during the first quarter of 2002. Overall
video services revenues decreased by 9.0 percent to $126.8 million in the first
quarter of 2003. Operating lease revenues from network services increased by 6.8
percent from $52.7 million for the first quarter of 2002 to $56.2 million for
the first quarter of 2003. This increase was primarily due to net new business
related to government and network resellers.
Depreciation - Depreciation expense decreased $21.7 million, or 23.1 percent, to
$72.3 million for the three months ended March 31, 2003 from $94.0 million for
the same period in 2002. The decrease in depreciation for the three months ended
March 31, 2003 is due primarily to lower depreciation of $20.5 million related
to Galaxy VI and Galaxy VIII-i, which were fully depreciated in September 2002
and July 2002, respectively, and lower depreciation expense recorded in 2003 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 Galaxy IIIC satellite
that was placed in service in the third quarter of 2002 and additional
non-satellite depreciation.
Direct Operating Costs (exclusive of depreciation) - Direct operating costs
increased $0.7 million or 2.2 percent, to $33.2 million for the three months
ended March 31, 2003 from $32.5 million for the same period in 2002. The
increase in direct operating costs is primarily attributable to costs relating
to HGS, which was acquired on March 7, 2003 and a $3.1 million write-off of
deferred charges as a result of the termination of certain vendor contracts
during the first quarter of 2003. The increase for the period was partially
offset by lower webcast services costs of $1.4 million and reduced insurance
expenses of $0.9 million.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses decreased $14.5 million, or 44.5 percent, to $18.0
million for the three months ended March 31, 2003 from $32.5 million for the
same period in 2002. The decrease is primarily due to lower bad debt expense of
approximately $7.9 million and cost reductions as a result of operational
efficiencies, including lower headcount related costs of $1.9 million.
Facilities Restructuring and Severance Costs - Facilities restructuring and
severance costs were $0 for the three months ended March 31, 2003 as compared to
$12.5 million in the first quarter of 2002. The 2002 charge was attributable to
the consolidation of certain of the Company's facilities as well as the
Company's expense reduction and webcast services restructuring plan, which
commenced in the third quarter of 2001. In the first quarter of 2003, the
Company recorded a severance charge of $0.8 million related to the Company's
2003 teleport consolidation plan. These costs were offset by a net restructuring
credit of $0.8 million related to the Company's 2002 facilities restructuring
plan (See Note 9 "Facilities Restructuring and Severance Costs" to the
consolidated financial statements).
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 Note 7 "Gain on PAS-7 Insurance Claim" to the consolidated
financial statements). There was no comparable transaction during 2003.
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
17
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 2003.
Income from Operations - Income from operations was $76.3 million for the three
months ended March 31, 2003, an increase of $19.2 million, or 33.7 percent, from
$57.1 million for the same period in 2002. The increase in income from
operations was primarily due to the company's operational streamlining that
occurred over the past year, a reduction in bad debt expense, and lower
depreciation related to Galaxy VI, PAS-7 and Galaxy VIII-i. These increases to
income from operations were offset by the changes in revenue discussed above and
several significant transactions recorded during the three months ended March
31, 2002 including the recording of: a $40.1 million gain in relation to the
settlement of the PAS-7 insurance claim; net facilities restructuring and
severance charges of $12.5 million; and 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 $34.3 million for the three
months ended March 31, 2003, an increase of $5.3 million, or 18.0 percent, from
$29.0 million for the same period in 2002. The increase in interest expense, net
for the three months ended March 31, 2003 was primarily due to higher interest
expense related to the new debt acquired as a result of the Refinancing. This
increase was offset partially by the reclassification of a $3.3 million loss on
the early extinguishment of debt recorded during the first quarter of 2002. The
loss was reclassified to interest expense upon the adoption of the provisions of
SFAS 145 on January 1, 2003 as it does not meet the new requirements for
classification as an extraordinary item (See Note 10 "Interest Expense-Net" to
the consolidated financial statements).
Income Taxes - Income taxes were $11.1 million for the three months ended March
31, 2003, an increase of $4.1 million or 59.0 percent, from $7.0 million for the
three months ended March 31, 2002. The increase in income tax expense for the
three months ended March 31, 2003 as compared to the first quarter of 2002 was
primarily due to higher income before income taxes of $14.0 million. The Company
estimates that its effective income tax rate will be 26.6 percent for 2003 as
compared to 25.0 percent for 2002.
Satellite Developments - Reference is made to "Item 1. Business - Overview - Our
Business Strategy"; "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.
In April 2003, the Company launched Galaxy XII and placed it in service at 74
degrees west longitude. The spacecraft is PanAmSat's next-generation backup
satellite for its domestic cable and broadcast video customers. Galaxy XII also
offers as-needed incremental capacity for premium cable, HDTV and specialized
new services in North America. Built and custom-designed for PanAmSat by Orbital
Sciences Corporation, Galaxy XII has twenty-four 36-MHz C-band transponders.
The Company expects to launch up to three more satellites by the end of 2005.
The Company, together with Horizons LLC, which we jointly own with JSAT
International Inc. ("JSAT"), a Japanese satellite services provider, expects to
launch the Galaxy XIII/Horizons I satellite to 127 degrees west longitude in the
second half of 2003. The Company 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.
In November 2002, our customer for all of the capacity on the Galaxy VIII-iR
satellite exercised its pre-launch right to terminate its lease agreement with
us. In the first quarter of 2003, the manufacturer and PanAmSat terminated the
construction contract by mutual agreement. In connection with the termination of
the construction contract, as of March 31, 2003, we had a receivable due from
the satellite manufacturer of $69.5 million. We expect to collect this
receivable in December 2003. In addition, we have agreed with the Galaxy VIII-iR
launch vehicle provider to defer our use of the launch to a future satellite.
The Company transferred an authorization for a Ka-band orbital slot to Hughes
Network Systems, Inc. ("HNS"), an affiliate of the Company, in exchange for a
contingent payment of approximately $2.1 million. The payment is payable upon
the launch of a satellite by HNS to such orbital slot. The FCC has approved the
transfer of this authorization.
18
FINANCIAL CONDITION
At March 31, 2003, the Company had total debt outstanding of $2.35 billion,
including current maturities of $16.8 million related to quarterly principal
payments due in March 2004. The Company's $200 million 6.0% notes issued in 1998
matured on January 15, 2003 and were repaid in full, plus accrued interest of
$6.0 million, from available cash.
In February 2002, the Company entered into a credit facility in an aggregate
principal amount of up to $1.25 billion (the "Senior Secured Credit Facility")
and completed an $800 million private placement debt offering pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Senior Notes"). 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 were exchanged for registered
notes with substantially identical terms in November 2002. The agreement
governing the Senior Secured Credit Facility and the indenture governing the
Senior Notes contain various covenants which impose significant restrictions on
our business.
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").
Principal payments under the Term A Facility and Term B Facility are due in
varying amounts commencing in 2004 until their respective maturity dates. At
March 31, 2003, the interest rates on the Term A Facility and Term B Facility
were LIBOR plus 3.0% and LIBOR plus 3.5%, respectively. In addition, the Company
is required to pay a commitment fee in respect of the unused commitments under
the Revolving Facility which, as of March 31, 2003, was 0.50% per year. The
Company had outstanding letters of credit totaling $1.1 million, which reduced
our ability to borrow against the Revolving Facility by such amount.
In accordance with the agreement governing the Senior Secured Credit Facility,
the Company entered into an interest rate hedge agreement for 10% of the
outstanding borrowings under the Senior Secured Credit Facility during the third
quarter of 2002. This interest rate hedge is designated as a cash flow hedge of
the Company's variable rate Term B Facility. In relation to this hedge
agreement, the Company exchanged its floating-rate obligation on $100.0 million
of its Term B Facility for a fixed-rate payment obligation of 6.64% on $100.0
million through August 30, 2005. The notional amount of the interest rate hedge
agreement matches the repayment schedule of the Term B Facility though the
maturity date of the interest rate hedge. During the three months ended March
31, 2003, no ineffectiveness was recognized in the statement of operations on
this hedge. The amount accumulated in other comprehensive income will fluctuate
based on the change in the fair value of the derivative at each reporting
period, net of applicable deferred income taxes. The fair value of the
outstanding interest-rate hedge agreement as of March 31, 2003, based upon
quoted market prices from the counter party, reflected a hedge liability of
approximately $2.8 million.
Obligations under the Senior Secured Credit Facility are, or will be, as the
case may be, unconditionally guaranteed by each of our existing and subsequently
acquired or organized domestic and, to the extent no adverse tax consequences
would result therefrom, foreign restricted subsidiaries. In addition, such
obligations are equally and ratably secured by perfected first priority security
interests in, and mortgages on, substantially all of the tangible and intangible
assets of the Company and its subsidiaries, including its satellites. All
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.
The Company's Senior Secured Credit Facility requires that the Company obtain
the consent of the lenders prior to the consummation of the News Corp.
Transactions. The Company has initiated the process for obtaining such consent.
Failure to obtain such consent would constitute an event of default under such
facility. No assurances can be given that such consent will be obtained.
In addition to the Senior Secured Credit Facility and the Senior Notes, the
Company has outstanding seven, ten and thirty-year fixed rate notes totaling
$550 million issued in January 1998. The outstanding principal balances,
interest rates and maturity dates for these notes as of March 31, 2003 were $275
million at 6.125% due 2005, $150 million at 6.375% due 2008 and $125 million at
6.875% due 2028, respectively. Principal on these notes is payable at maturity,
while interest is payable semi-annually.
In January 2003, the Company's management approved a plan to consolidate certain
of its teleports in order to improve customer service and reduce operating
costs. This teleport consolidation plan includes the closure of certain
teleports that are owned by the Company. Under this plan, we expect the
Company's Homestead and Spring Creek teleports will be permanently closed during
2003 and 2004 and the Fillmore and Castle Rock teleports will provide reduced
services. We expect that our Napa teleport will become the West Coast hub for
communications, video, and data services, taking on occasional-use and full-time
services now provided by the
19
Fillmore teleport. In addition to the pre-existing services that it provides, we
expect that the Ellenwood teleport will serve as our East Coast hub, providing
similar services that migrate over from Homestead and Spring Creek.
The Company estimates that this teleport consolidation plan will result in an
overall gain of approximately $2 million, of which, a net gain on the disposal
of land, buildings, and equipment of approximately $6 million will be recorded
in 2004 and an aggregate of approximately $4 million of costs will be incurred
during 2003 and 2004. These costs primarily consist of severance related costs
for which the employees will be required to perform future services. Severance
related costs associated with this consolidation plan include compensation and
benefits, outplacement services and legal and consulting expenses related to the
reduction in workforce of approximately 45 employees.
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. During the third quarter of 2002, the Company implemented a plan
focused on further streamlining its operations through the consolidation of
certain facilities. As a result, the Company recorded an additional non-cash
charge of $2.7 million in its consolidated income statement for the three months
ended September 30, 2002. This charge reflects future lease costs, net of
estimated future sublease revenue, of $0.9 million related to approximately
15,000 square feet of unused facilities and the write-off of approximately $1.8
million of leasehold improvements related to these facilities. In the first
quarter of 2003, the Company recorded a restructuring credit of $0.8 million
which was primarily related to the signing of a sub-lease agreement during the
first quarter of 2003 for an amount higher than originally estimated.
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 $140 million to $180 million on capital
expenditures during 2003, 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
uninsured launch or in-orbit 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 obtain any such additional financing would also be subject to the terms of
PanAmSat's outstanding indebtedness and would require Hughes Electronics to
obtain the consent of News Corp. pursuant to the agreements governing the News
Corp. Transactions. 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 decreased $45.6 million, or 36.5
percent, to $79.1 million for the three months ended March 31, 2003, from $124.7
million for the three months ended March 31, 2002. The decrease in 2003 was
primarily attributable to a decrease in net income adjusted for non-cash items
of $11.1 million and an increase in the cash used within accounts payable and
accrued liabilities of $32.3 million. The increase in cash used within accounts
payable and accrued liabilities is primarily attributable to: (1) a $29.5
million decrease in accrued interest payable which was largely a result of the
semi-annual interest payment in February 2003 on the $800 million Senior Notes;
and (2) a $5.1 million increase in employee bonuses paid in the first quarter of
2003 as compared to the same period in 2002.
Net cash used in investing activities was $42.1 million for the three months
ended March 31, 2003, compared to net cash provided by investing activities of
$99.7 million for the three months ended March 31, 2002. This change was
primarily due to the receipt of $173.7 million of proceeds from insurance claims
during 2002 offset partially by a decrease in capital expenditures of $40.9
million during the three months ended March 31, 2003 as compared to the three
months ended March 31, 2002.
20
Net cash used in financing activities increased to $201.8 million for the three
months ended March 31, 2003, from $11.8 million for the three months ended March
31, 2002. The increase in net cash used in financing activities in 2003 was
primarily due to the repayment of the $200 million 6.0% notes that matured and
were repaid in January 2003.
COMMITMENTS AND CONTINGENCIES
We have invested approximately $4.2 billion in our existing satellite fleet and
ground infrastructure through March 31, 2003, and we have approximately $41.5
million of expenditures remaining to be made under existing satellite
construction contracts and $65.5 million to be made under existing satellite
launch contracts. The commitments related to satellite construction and launch
contracts are net of approximately $8.4 million of costs to be paid by JSAT
International Inc. in conjunction with our Horizons joint venture. 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
March 31, 2003, the Company did not have any commitments related to existing
launch insurance or in-orbit insurance contracts for satellites to be launched.
On February 19, 2003, the Company filed proofs of loss under the insurance
policies for two of its Boeing model 702 spacecraft, Galaxy XI and PAS-1R, for
constructive total losses based on degradation of the solar panels. Service to
existing customers has not been affected, and we expect that both of these
satellites will continue to serve these existing customers. The insurance
policies for Galaxy XI and PAS-1R are in the amounts of approximately $289
million and $345 million, respectively, and both include a salvage provision for
the Company to share 10% of future revenues from these satellites with their
respective insurers if the proof of loss is accepted. The availability and use
of any proceeds from these insurance claims are restricted by the agreements
governing our debt obligations. We cannot assure you that the proof of loss with
respect to these two satellites will be accepted by the insurers. The Company is
working with the satellite manufacturer to determine the long-term implications
to the satellites and will continue to assess the operational impact these
losses may have. At this time, based upon all information currently available to
the Company, as well as planned modifications to the operation of the satellites
in order to maximize revenue generation, the Company currently expects to
operate these satellites for the duration of their estimated useful lives,
although a portion of the transponder capacity on these satellites will not be
useable during such time. The Company also currently believes that the net book
values of these satellites are fully recoverable and does not expect a material
impact on 2003 revenues as a result of the difficulties on these two satellites.
As of March 31, 2003, we had in effect launch and in-orbit insurance policies
covering 15 satellites in the aggregate amount of $1.9 billion. We have seven
uninsured satellites in orbit: PAS-4 and PAS-6, which are used as backup
satellites; PAS-5 and PAS-7 for which we received insurance proceeds for
constructive total losses; Galaxy VIII-i, which continues to operate in an
inclined orbit as a supplement to Galaxy IIIC; Galaxy XI; and HGS-3. The Galaxy
XI launch insurance policy lapsed in December 2002. The Company elected not to
purchase additional in-orbit insurance for this satellite as the available terms
were not commercially reasonable. The claim for constructive total loss made
under the launch policy was for losses experienced prior to the expiration of
the policy. HGS-3 was purchased by PanAmSat in connection with the HGS
acquisition and has a net book value of $0.7 million as of March 31, 2003 (See
Note 2 "Acquisition of Hughes Global Services").
Of the insured satellites, five 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 and which have a lower
coverage amount than the carrying value of the satellite's insurable costs
("Significant Exclusion Policies"). These exclusions, we believe, substantially
reduce the likelihood of a recovery in the event of a loss. Three of these
satellites, PAS-2, PAS-3R and PAS-6B, 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 fourth such
satellite, PAS-8, has an excluded component that we believe is unlikely to fail
in the near future. The fifth satellite, Galaxy IIIR, was replaced in September
2002 by Galaxy IIIC and served as a fleet backup through April 2003 when Galaxy
XII was placed into service.
At March 31, 2003, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other insurable
costs of approximately $1.0 billion. Of this amount, $486.8 million related to
uninsured satellites and $515.2 million related to satellites insured by
Significant Exclusion Policies.
A supplemental policy on Galaxy IVR for coverage of $21.4 million related to
sales-type leases does have a component exclusion. The primary policy on that
satellite has no component exclusion.
In May 2003, the insurance policies covering nine of the Company's satellites
will expire. We are currently negotiating renewal policies for these satellites.
Upon the expiration of our existing insurance policies, there can be no
assurance that we will be able to
21
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 constructive total 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.
BACKLOG RISK
Future contractual cash payments expected from customers (backlog) aggregated
approximately $5.46 billion as of March 31, 2003, including approximately $784.8
million related to satellites to be launched. Included in the total backlog of
$5.46 billion is $258.1 million of backlog that may be terminated pursuant to
certain contractual termination rights.
Due to 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 $5.46 billion backlog as of March 31, 2003, approximately
$4.05 billion, or 74.3%, related to our top 25 customers. Having conducted both
quantitative and qualitative analyses, we concluded that six of our top 25
customers, including our largest customer, DIRECTV Latin America, have a risk of
future non-performance of their contractual obligations to us. These six
customers are meeting substantially all of their obligations at the present time
and are paying in a manner consistent with past experience. They represented
approximately $1.03 billion of our backlog as of March 31, 2003. In March 2003,
DIRECTV Latin America filed a voluntary petition for a restructuring under
Chapter 11 of the U.S. bankruptcy code. At March 31, 2003, DIRECTV Latin America
represented approximately $573 million, or 11% of our total backlog, and $58.6
million of our expected 2003 revenues. The smallest of these six customers
represented approximately $39.6 million, or 0.7% of our total backlog, and $4.8
million of our expected 2003 revenues. If DIRECTV Latin America, one of the
other 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
effect on our financial condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
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)." This Statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Whereas, under EITF Issue No. 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
SFAS 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. As such, the Company adopted the provisions of SFAS 146
effective January 1, 2003. The adoption of these provisions has not had a
significant impact on our financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies and expands
existing disclosure requirements for guarantees, including loan guarantees, and
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis for guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
No. 45 are effective for the Company's current financial statements ending
December 31, 2002. The adoption of the disclosure requirements of FIN No. 45
during 2002, as well as the initial recognition and initial measurement
provisions of FIN No. 45 in 2003, did not have an impact on our financial
statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities -- an Interpretation of Accounting Research Bulletin No. 51." FIN No.
46 clarifies rules for consolidation of special purpose entities. FIN No. 46 is
effective for variable interest entities created after January 31, 2003 and to
variable interest entities in which a Company receives an interest after that
date. This pronouncement is effective on January 1, 2004 for variable interest
entities acquired before February 1, 2003. The Company does not expect the
adoption of FIN No. 46 to have a significant impact on our financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21
addresses determination of whether an arrangement involving more than one
deliverable contains more than one unit of accounting and how the related
revenues should be measured and allocated to the separate units of accounting.
22
EITF Issue No. 00-21 will apply to revenue arrangements entered into after June
30, 2003; however, upon adoption, the EITF allows the guidance to be applied on
a retroactive basis, with the change, if any, reported as a cumulative effect of
accounting change in the statement of operations. The Company has not yet
determined the impact this new standard will have on its consolidated results of
operations or financial position, if any.
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. We use derivative financial instruments,
including interest rate hedges to manage market risks. Additional information
regarding our interest rate hedge is contained within "Financial Condition"
above. 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 as of March 31, 2003 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 period. 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 quarter is applied to the
applicable principal outstanding at the end of the quarter to determine an
annual interest expense based on quarter-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 months ended March 31, 2003. Based upon economic conditions and
leading market indicators at March 31, 2003, 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
23
outstanding fixed-rate debt and fixed-rate net investments in sales-type lease
receivable balances would be approximately $55.9 million and $3.3 million,
respectively, as of March 31, 2003. The potential effect of a hypothetical 10%
adverse fluctuation in interest rates for one year on PanAmSat's floating rate
debt outstanding at March 31, 2003 would be a reduction in cash flows of
approximately $4.2 million and a reduction in net income of approximately $2.3
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."
ITEM 4. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. Within 90 days prior to the date of
this report, PanAmSat's President and Chief Executive Officer and PanAmSat's
Executive Vice President and Chief Financial Officer evaluated, with the
participation of PanAmSat's management, the effectiveness of the Company's
disclosure controls and procedures. Based on the evaluation, which disclosed no
significant deficiencies or material weaknesses, PanAmSat's President and Chief
Executive Officer and PanAmSat's Executive Vice President and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the evaluation.
24
PANAMSAT CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 19, 2002, a class action complaint on behalf of certain holders of
the Company's common stock was filed in the Court of Chancery in the State of
Delaware against Hughes Electronics and each of the members of the Board of
Directors of the Company. The complaint alleged that Hughes Electronics and the
Company's directors breached their fiduciary duty to the stockholders of the
Company in connection with a settlement between Hughes Electronics, GM and
EchoStar Communications Corporation ("EchoStar") terminating agreements executed
on October 26, 2001, which contemplated the merger of the Hughes Electronics
business with EchoStar. In such settlement, Hughes Electronics received $600
million and EchoStar's contingent obligation to purchase the Company's common
stock terminated. The class of plaintiffs on whose behalf the lawsuit has been
asserted is alleged to consist of all holders of the Company's common stock
excluding the defendants and any who are related to or affiliated with any of
the defendants. On January 31, 2003, the defendants filed a motion to dismiss
for failure to state a claim upon which relief can be granted. Pursuant to
Delaware law and the Company's organizational documents, the Company has an
indemnification obligation to the members of its Board of Directors from
liability for certain matters which may include this matter. Any liability of
the Company's directors for this matter may also be covered under a directors'
and officers' liability insurance policy maintained by GM for itself and its
subsidiaries, including PanAmSat. The Company has appointed counsel for its
directors and has notified the insurance carrier of this claim.
We periodically become involved in various claims and lawsuits that are
incidental to our business. Other than the matters described above, we believe
that no matters currently pending would, in the event of an adverse outcome, be
material to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 10.33.7 Third Amended and Restated PanAmSat Corporation Long-Term Stock
Incentive Plan, established in 1997, effective as of April 30, 2003.
99.1 Certification by Chief Executive Officer
99.2 Certification by Chief Financial Officer
(b) Reports on Form 8-K.
On February 26, 2003, registrant filed a Current Report on Form 8-K, dated
February 24, 2003, with an Item 9, Regulation FD disclosure.
- ------------
25
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
May 6, 2003 /s/ Michael J. Inglese
----------------------
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
26
CERTIFICATIONS
I, Joseph R. Wright, President and Chief Executive Officer of PanAmSat
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PanAmSat Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 6, 2003 /s/ Joseph R. Wright
--------------------
Joseph R. Wright
President and Chief Executive Officer
27
I, Michael J. Inglese, Executive Vice President and Chief Financial Officer of
PanAmSat Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PanAmSat Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 6, 2003 /s/ Michael J. Inglese
----------------------
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
28