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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 1, 2003, an aggregate of 150,074,946 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 of our satellites, (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 JUNE 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, JUNE 30,
2003 2002
------------ ------------
REVENUES
Operating leases, satellite services and other $ 199,400 $ 204,592
Outright sales and sales-type leases 4,193 4,641
------------ ------------
Total revenues 203,593 209,233
------------ ------------
OPERATING COSTS AND EXPENSES:
Depreciation 74,909 89,768
Direct operating costs (exclusive of depreciation) 32,232 34,682
Selling, general and administrative expenses 21,338 23,766
Facilities restructuring and severance costs 663 --
------------ ------------
Total operating costs and expenses 129,142 148,216
------------ ------------
INCOME FROM OPERATIONS 74,451 61,017
INTEREST EXPENSE- net 33,132 34,662
------------ ------------
INCOME BEFORE INCOME TAXES 41,319 26,355
INCOME TAX EXPENSE 11,021 6,589
------------ ------------
NET INCOME $ 30,298 $ 19,766
============ ============
NET INCOME PER COMMON SHARE - basic and diluted $ 0.20 $ 0.13
============ ============
Weighted average common shares outstanding 150,054,000 149,917,000
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, JUNE 30,
2003 2002
------------- -------------
REVENUES:
Operating leases, satellite services and other $ 394,820 $ 405,961
Outright sales and sales-type leases 8,529 10,411
------------- -------------
Total revenues 403,349 416,372
------------- -------------
OPERATING COSTS AND EXPENSES:
Depreciation 147,176 183,723
Direct operating costs (exclusive
of depreciation) 65,420 67,171
Selling, general and administrative expenses 39,364 56,249
Facilities restructuring and severance cost 663 12,519
Gain on PAS-7 insurance claim -- (40,063)
Loss on conversion of sales-type leases -- 18,690
------------- -------------
Total operating costs and expenses 252,623 298,289
------------- -------------
INCOME FROM OPERATIONS 150,726 118,083
INTEREST EXPENSE, net 67,407 63,700
------------- -------------
INCOME BEFORE INCOME TAXES 83,319 54,383
INCOME TAX EXPENSE 22,163 13,596
------------- -------------
NET INCOME $ 61,156 $ 40,787
============= =============
NET INCOME PER COMMON SHARE - basic and diluted $ 0.41 $ 0.27
============= =============
Weighted average common shares outstanding 150,027,000 149,901,000
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
4
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2003 2002
---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 795,320 $ 783,998
Short-term investments 56,142 99,785
Accounts receivable-net 52,638 34,276
Net investment in sales-type leases 24,011 22,858
Prepaid expenses and other current assets 34,595 43,170
Receivable - satellite manufacturer 69,500 72,007
Deferred income taxes 8,698 7,889
---------- ----------
Total current assets 1,040,904 1,063,983
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 2,755,729 2,865,279
NET INVESTMENT IN SALES-TYPE LEASES 149,580 161,869
GOODWILL 2,238,659 2,238,659
DEFERRED CHARGES AND OTHER ASSETS 151,983 157,948
---------- ----------
TOTAL ASSETS $6,336,855 $6,487,738
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 70,064 $ 77,309
Current portion of long-term debt 33,500 200,000
Accrued interest payable 45,318 50,961
Deferred revenues 24,043 18,923
----------- -----------
Total current liabilities 172,925 347,193
LONG-TERM DEBT 2,316,500 2,350,000
DEFERRED INCOME TAXES 437,330 417,843
DEFERRED CREDITS AND OTHER (principally customer
deposits and deferred revenue) 272,721 295,160
----------- -----------
TOTAL LIABILITIES 3,199,476 3,410,196
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value - 400,000,000
shares authorized; 150,067,311 and 149,967,476
outstanding at June 30, 2003 and December 31,
2002, respectively 1,501 1,500
Additional paid-in-capital 2,540,632 2,532,384
Accumulated other comprehensive loss (2,282) (2,385)
Retained earnings 607,249 546,093
Other stockholders' equity (9,721) (50)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,137,379 3,077,542
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,336,855 $ 6,487,738
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
6
PANAMSAT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
------------------------ ACCUMULATED OTHER
ADDITIONAL OTHER OTHER COMPREHENSIVE
PAR VALUE PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' INCOME
SHARES AMOUNT CAPITAL LOSS EARNINGS EQUITY TOTAL (LOSS)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
JANUARY 1, 2003 149,967,476 $ 1,500 $ 2,532,384 $ (2,385) $ 546,093 $ (50) $ 3,077,542
Additional issuance
of common stock 99,835 1 1,437 -- -- -- 1,438
Unrealized loss
on cash flow hedge -- -- -- (298) -- -- (298) $ (298)
Unrealized loss on
short-term
investments -- -- -- 39 -- -- 39 39
Foreign currency
translation
adjustment -- -- -- 362 -- -- 362 362
Acquisition of Hughes
Global Services -- -- -- -- -- (3,355) (3,355) --
Deferred compensation -- -- 6,807 -- -- (6,940) (133) --
Amortization of
deferred
compensation -- -- 4 -- -- 624 628 --
Net income -- -- -- -- 61,156 -- 61,156 61,156
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
JUNE 30, 2003 150,067,311 $ 1,501 $ 2,540,632 $ (2,282) $ 607,249 $ (9,721) $ 3,137,379 $ 61,259
=========== =========== =========== =========== =========== =========== =========== ===========
OTHER STOCKHOLDERS' EQUITY:
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
Excess of purchase price over historical cost
basis of net assets acquired (See Note 2) $(3,355) $ --
Deferred compensation (6,366) (50)
------- -------
TOTAL OTHER STOCKHOLDERS' EQUITY $(9,721) $ (50)
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
7
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS)
JUNE 30, JUNE 30,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 61,156 $ 40,787
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 147,176 183,723
Deferred income taxes 21,286 34,251
Amortization of debt issuance costs
and other deferred charges 4,971 5,469
Provision for uncollectible receivables 2,112 11,056
Other non-cash items (1,400) --
Gain on PAS-7 insurance claim -- (40,063)
Loss on conversion of sales-type leases -- 18,690
Facilities restructuring and severance costs 663 11,224
Loss on early extinguishment of debt -- 3,309
Changes in assets and liabilities:
Collections on investments in sales-type leases 11,136 11,609
Operating leases and other receivables (2,565) (3,749)
Prepaid expenses and other assets 16,971 (15,587)
Accounts payable and accrued liabilities (28,171) (4,558)
Deferred gains and revenues 1,473 10,016
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 234,808 266,177
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including capitalized interest) (54,744) (183,548)
Insurance proceeds from satellite recoveries -- 215,000
Sale of short-term investments 43,704 --
Acquisition of Hughes Global Services (8,352) --
----------- -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (19,392) 31,452
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (200,000) (1,771,542)
Issuance of new long-term debt -- 1,800,000
Debt issuance costs -- (40,829)
Repayments of incentive obligations (5,734) (5,275)
Other 1,437 1,389
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (204,297) (16,257)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 203 --
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 11,322 281,372
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 783,998 443,266
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 795,320 $ 724,638
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash received for interest $ 9,197 $ 6,364
----------- -----------
Cash paid for interest $ 78,800 $ 50,313
----------- -----------
Cash received for taxes $ 4,327 $ --
----------- -----------
Cash paid for taxes $ 1,101 $ 1,231
----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements.
8
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments which are of a normal recurring nature necessary to present
fairly the financial position, results of operations and cash flows as of
June 30, 2003 and for the three and six month periods ended June 30, 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 and six months ended June 30, 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 (the "Form 10-K") 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
Corporation") 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 Corporation of approximately 34% of the
outstanding capital stock of Hughes Electronics (the "News Corporation
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 Corporation require that,
during the period prior to the closing of the News Corporation
Transactions, 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 Corporation for PanAmSat to enter
into certain strategic and other transactions.
On June 18, 2003, the Company and its lenders under the Company's senior
secured credit facility (the "Senior Secured Credit Facility") amended the
loan agreement to allow the completion of the News Corporation
Transactions without causing an event of default under such facility.
(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 its affiliate Hughes Electronics
for approximately $8.4 million in cash and the assumption of certain
related liabilities. 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 $ 17.6
========
Total assets $ 18.4
Total liabilities 15.3
--------
Net assets acquired $ 3.1
========
Since HGS and PanAmSat are under the common control of Hughes Electronics,
the excess purchase price over the historical cost of the net assets
acquired of approximately $5.3 million was recorded within stockholders'
equity on the accompanying consolidated balance sheet as of June 30, 2003
net of deferred income taxes of approximately $1.9 million. The
consolidated results of the Company's G2 Satellite Solutions division from
the date of the acquisition through June 30, 2003 are included within the
Company's consolidated income statement for the three and six months ended
June 30, 2003.
9
(3) NEW ACCOUNTING PRONOUNCEMENTS
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 for variable interest entities in which a
Company receives an interest after that date. This pronouncement was
effective on July 1, 2003 for variable interest entities acquired before
February 1, 2003. The adoption of FIN No. 46 had no impact on our
consolidated 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 adoption of EITF
Issue No. 00-21 did not have a significant impact on our consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company has limited involvement with
derivative financial instruments and does not use them for trading or
speculative purposes. As of June 30, 2003, the Company's only derivative
financial instrument is an interest rate hedge that was entered into in
accordance with the agreement governing the Senior Secured Credit Facility
(See Note 5 "Long-Term Debt"). The adoption of SFAS No. 149 on July 1,
2003, as required, had no impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial
instruments be classified as liabilities that were previously considered
equity. The adoption of this standard on July 1, 2003, as required, had no
impact on our consolidated financial statements.
(4) SATELLITE DEPLOYMENT PLANS
In May 2003, the Company commenced service on its Galaxy XII satellite 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 at the end of 2005.
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 June
30, 2003, we had a receivable due from the satellite manufacturer of $69.5
million. Based upon the terms of our agreement with the manufacturer, this
receivable is scheduled to be paid in full 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.
(5) LONG-TERM DEBT
At June 30, 2003, the Company had total debt outstanding of $2.35 billion,
including current maturities of $33.5 million related to quarterly
principal payments due in March and June 2004. The Company's $200 million
6.0% notes issued in 1998 matured on
10
January 15, 2003 and were repaid in full, plus accrued interest of $6.0
million, from available cash.
On July 14, 2003, the Company made an optional pre-payment of $350 million
under its $1.25 billion Senior Secured Credit Facility from available cash
on hand. During the third quarter of 2003, the Company will take a
non-cash charge of approximately $6 million to write-off debt issuance
costs associated with the portion of the credit facility that was prepaid.
In February 2002, the Company entered into its Senior Secured Credit
Facility in an aggregate principal amount of up to $1.25 billion 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, with a
stated interest rate of 8.5%, 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.
Prior to the pre-payment noted above, the Senior Secured Credit Facility
was 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 June 30, 2003, the interest rates on the Term A Facility and
Term B Facility were LIBOR plus 2.75% 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 June 30,
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. Following the $350 million pre-payment
in July 2003, the amounts outstanding under the Term A Facility and the
Term B Facility were $195 million and $455 million, respectively. These
outstanding balances will be repaid in accordance with the original
maturity dates.
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.
Following the pre-payment of $350 million on July 14, 2003 noted above,
the interest rate hedge represented approximately 15% of the outstanding
borrowings under the Senior Secured Credit Facility. The notional amount
of the interest rate hedge agreement matches the repayment schedule of the
Term B Facility through the maturity date of the interest rate hedge.
During the six months ended June 30, 2003, no ineffectiveness was
recognized in the statement of operations on this hedge. The amount
accumulated in other comprehensive loss 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 June 30, 2003, based upon quoted
market prices from the counter party, reflected a hedge liability of
approximately $3.4 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.
On June 18, 2003, the Company and its lenders under the Company's Senior
Secured Credit Facility amended the loan agreement to allow the
completion of the News Corporation Transactions without causing an event
of default under such facility.
In addition to the Senior Secured Credit Facility and the Senior Notes, as
of June 30, 2003, the Company had outstanding seven, ten and thirty-year
fixed rate notes totaling $550 million issued in January 1998. The
outstanding principal balances, interest rates
11
and maturity dates for these notes as of June 30, 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 three and six months ended June 30, 2003 the Company issued
options to purchase 11,550 shares and 23,450 shares, respectively, under
the PanAmSat Corporation Long-Term Stock Incentive Plan (the "Plan").
Compensation expense for these options is based on the fair value of the
options at the respective grant dates utilizing the Black-Scholes model
for estimating fair value. As the initial options were granted on March
31, 2003, the Company recorded compensation expense related to these
options of approximately $5 thousand for both the three and six months
ended June 30, 2003. 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 of the Company's common stock on the date of grant for
all prior grants.
On April 30, 2003, the Compensation Committee of the Board of Directors
approved the issuance of up to 500,000 restricted stock units under the
Plan. Also on this date, the Company issued 398,500 of these restricted
stock units under the Plan to certain of its employees. The restricted
stock units vest 50% on the second anniversary of the grant date and the
remaining 50% on the third anniversary. Stock compensation expense will be
recognized over the vesting period based on the Company's stock price on
the grant date of $17.30. The Company recorded compensation expense
related to the restricted stock units of approximately $469 thousand for
both the three and six months ended June 30, 2003.
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: SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported $ 30,298 $ 19,766 $ 61,156 $ 40,787
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 348 -- 348 --
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects (1,955) (2,723) (3,360) (5,447)
-------- -------- -------- --------
Pro forma net income $ 28,691 $ 17,043 $ 58,144 $ 35,340
======== ======== ======== ========
Earnings per share:
Basic and Diluted - as reported $ 0.20 $ 0.13 $ 0.41 $ 0.27
======== ======== ======== ========
Basic and Diluted - pro forma $ 0.19 $ 0.11 $ 0.39 $ 0.24
======== ======== ======== ========
The pro forma amounts for compensation cost may not necessarily be
indicative of the effects on operating results for future periods.
(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
12
$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 $0.7 million for the
three and six months ended June 30, 2003 and $0 and $12.5 million for the
three and six months ended June 30, 2002, respectively. In the three
months ended June 30, 2003, the Company recorded a severance charge of
$1.2 million related to the Company's teleport consolidation plan. These
costs were offset by a restructuring credit of $0.5 million related to the
Company's 2002 facilities restructuring plan. In the six months ended June
30, 2003, the Company recorded severance charges of $2.0 million related
to the Company's teleport consolidation plan. These costs were offset by
restructuring credits of $1.3 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. In the six months ended June 30, 2003, the Company recorded
charges of $2.0 million related to this teleport consolidation plan,
primarily representing severance costs.
On March 29, 2002, the Company's management approved a plan to restructure
several of its United States locations and close certain facilities,
certain of which are currently being leased through 2011. Upon approval of
this plan, the Company recorded a non-cash charge in its consolidated
income statement in the first quarter of 2002 of $11.2 million. This
charge reflects future lease costs, net of estimated future sublease
revenue, of $8.9 million related to approximately 98,000 square feet of
unused facilities and the write-off of approximately $2.3 million of
leasehold improvements related to these facilities. 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 six months ended June 30, 2003, the Company recorded
restructuring credits of $1.3 million related to the signing of sub-lease
agreements for amounts 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 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.
13
The facilities restructuring accruals remaining as of June 30, 2003
primarily relate to long-term lease obligations to be paid through 2011
and severance costs. 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
2003 restructuring charge (credit) (1.3) -- 2.0 0.7
Less: net cash payment in 2003 (1.1) (0.1) (0.5) (1.7)
--------- --------- --------- ---------
Balance as of June 30, 2003 $ 5.2 $ 0.1 $ 1.5 $ 6.8
========= ========= ========= =========
(10) INTEREST EXPENSE-NET
Interest expense for the three months ended June 30, 2003 and 2002 is
recorded net of capitalized interest of $3.6 million and $8.7 million,
respectively, and interest income of $5.7 million and $3.7 million,
respectively. Interest expense for the six months ended June 30, 2003 and
2002 is recorded net of capitalized interest of $8.5 million and $14.1
million, respectively and interest income of $9.0 million and $6.3 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 the six months ended June 30, 2002. This reclassification had no
effect on net income but resulted in lower income before income taxes for
these periods.
(11) COMMITMENTS AND CONTINGENCIES
SATELLITE COMMITMENTS
We have invested approximately $4.3 billion in our existing satellite
fleet and ground infrastructure through June 30, 2003, and we have
approximately $30.3 million of expenditures remaining to be made under
existing satellite construction contracts and $60.2 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 June 30, 2003, the
Company did not have any commitments related to existing launch 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
until we replace or supplement them with new satellites. We have not
determined when these satellites will be replaced or supplemented but do
not currently expect to begin construction on these satellites before the
second half of 2004. 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 the insurers if
the respective proof of loss is accepted. The
14
availability and use of any proceeds from these insurance claims are
restricted by the agreements governing our debt obligations. We cannot
assure you that these proofs of loss will be accepted by the insurers or,
if accepted, how much we will receive. 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.
On July 31, 2003, the Company filed a proof of loss under the insurance
policy for its Boeing model 601 HP spacecraft, Galaxy IVR, in the amount
of $169 million, subject to salvage (See Note 14 "Satellite Operational
Developments").
As of June 30, 2003, we had in effect launch and in-orbit insurance
policies covering 11 satellites in the aggregate amount of approximately
$1.5 billion. As of such date, these insured satellites had an aggregate
net book value and other insurable costs of $1.7 billion. We have 12
uninsured satellites in orbit, which includes five satellites for which
the Company elected not to purchase insurance policies in May 2003 upon
the expiration of the existing policies. The uninsured satellites are:
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
IR, Galaxy IIIR, Galaxy V and SBS-6, which are approaching the ends of
their useful lives; Galaxy VIII-i, which is fully depreciated and
continues to operate in an inclined orbit as a supplement to Galaxy IIIC;
Galaxy IX and Galaxy XI, for which the Company determined that insurance
was not available on commercially reasonable terms; and HGS-3 which has a
net book value of $0.7 million as of June 30, 2003. The Company's Galaxy
XII satellite serves as an in-orbit backup for all or portions of Galaxy
IR, Galaxy IVR, Galaxy V, Galaxy IX, Galaxy XR and Galaxy XI.
Of the insured satellites, as of July 29, 2003, 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-9, 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-6B is currently operating on its backup
bi-propellant propulsion system (See Note 14 "Satellite Operational
Developments"). The fifth such satellite, PAS-8, has an excluded component
that we believe is unlikely to fail in the near future.
At July 29, 2003, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other
insurable costs of approximately $1.2 billion. Of this amount, $657.6
million related to uninsured satellites and $575.2 million related to
satellites insured by Significant Exclusion Policies.
A supplemental policy on Galaxy IVR covering $21.2 million of sales-type
leases does have a component exclusion. The primary policy on that
satellite has no component exclusion. This satellite is currently
operating on its backup bi-propellant propulsion system (See Note 14
"Satellite Operational Developments").
Upon the expiration of the insurance policies, there can be no assurance
that we will be able to procure new policies on commercially reasonable
terms. New policies may only be available with higher premiums or with
substantial exclusions or exceptions to coverage for failures of specific
components.
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.
(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 June 30, 2003 and 2002, PanAmSat's
revenues were $203.6 million and $209.2 million, respectively. For the six
months ended June 30, 2003 and 2002 PanAmSat's revenues were $403.3
million and $416.4 million. These revenues were derived from the following
service areas:
15
PERCENTAGE OF REVENUES PERCENTAGE OF REVENUES
THREE MONTHS ENDED: SIX MONTHS ENDED:
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Services:
Video Services 61% 66% 62% 67%
Network Services 34% 26% 32% 26%
Other Services 5% 8% 6% 7%
--------- --------- --------- ---------
Total: 100% 100% 100% 100%
========= ========= ========= =========
(13) CONTRACTED BACKLOG FOR FUTURE SERVICES
Future contractual cash payments expected from customers (backlog)
aggregated approximately $5.30 billion as of June 30, 2003, including
approximately $1.0 billion related to satellites to be launched. Included
in the total backlog of $5.30 billion is $252.2 million of backlog that
may be terminated pursuant to certain contractual termination rights. Also
included in the total backlog is backlog related to PAS-6B, which suffered
a failure of multiple propulsion systems resulting in a shortened useful
life. As a result, the Company anticipates a reduction in its total
backlog of between $280 million and $380 million. The Company expects to
refine its estimate of the remaining useful life of this satellite in the
third quarter of 2003 (See Note 14 "Satellite Operational Developments").
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 $5.30 billion backlog as of June 30, 2003,
approximately $4.0 billion, or 75.5%, related to our top 25 customers.
Having conducted both quantitative and qualitative analyses, we concluded
that five 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 five 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 $952.1
million of our backlog as of June 30, 2003. In March 2003, DIRECTV Latin
America filed a voluntary petition for a restructuring under Chapter 11 of
the U.S. bankruptcy code. At June 30, 2003, DIRECTV Latin America
represented approximately $577.9 million, or 11% of our total backlog. The
smallest of these five customers represented approximately $41.3 million,
or 0.8% 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.
(14) SATELLITE OPERATIONAL DEVELOPMENTS
PanAmSat operates seven Boeing model 601 HP spacecraft. This spacecraft
uses a xenon ion propulsion system ("XIPS"), an electrical propulsion
system that maintains the satellite's in-orbit position, as its primary
propulsion system. There are two separate XIPS on each spacecraft, each
one of which is capable of maintaining the satellite in its position.
Certain of the Boeing model 601 HP spacecraft have experienced various
problems associated with XIPS.
Two of the Company's Boeing model 601 HP spacecraft, PAS-5 and Galaxy
VIII-i, have no book value and are no longer in primary customer service.
In addition to the XIPS, each of the Company's five remaining Boeing model
601 HP spacecraft has a completely independent bi-propellant propulsion
system for secondary use, which provides back up with additional fuel life
on our satellites in the event of a XIPS failure. This minimum additional
fuel life ranges from over 3 years to 7.4 years, depending on the
satellite.
At the end of June 2003, the secondary XIPS on PanAmSat's Galaxy IVR
satellite ceased working. This problem has not affected service to any of
our customers. The primary XIPS on this satellite had previously ceased
working. The satellite is operating nominally on its backup bi-propellant
system. We and the manufacturer of this satellite have determined that the
XIPS systems on this satellite are no longer available. As a result, this
satellite's remaining useful life is now estimated to be between 3.2 and
4.1 years, based on the bi-propellant fuel on board and operational
actions that we are currently considering. This satellite, as well as
other satellites, are backed up by in-orbit satellites with immediately
available capacity. We believe that this problem will not affect revenues
from the customers on this satellite or our total backlog, as the
satellite's backup bi-propellant propulsion system has sufficient fuel to
provide ample time to seamlessly transition customers to a new or
replacement satellite. We have determined that the satellite's net book
value and our investments in sales-type leases on this satellite are fully
recoverable. Galaxy IVR is
16
insured, and we have filed a proof of loss with the insurers in an amount
of $169 million, subject to salvage. However, we cannot assure you that
this proof of loss will be accepted or, if accepted, how much we will
receive. We are developing plans to replace this satellite prior to the
end of its useful life using anticipated insurance proceeds and a spare
launch service contract that we had purchased previously.
The Company will accelerate depreciation of Galaxy IVR beginning in the
third quarter of 2003 to coincide with the satellite's revised estimated
useful life. This additional depreciation amount is expected to be between
$1.8 million and $2.6 million per month. Any insurance recovery would
reduce the net book value of the satellite, at which time the prospective
depreciation amount would be adjusted based on the remaining book value of
the satellite.
On July 9, 2003, the secondary XIPS on PanAmSat's PAS-6B satellite ceased
working. The primary XIPS on this satellite had previously ceased working.
The satellite is operating nominally on its backup bi-propellant system.
We and the manufacturer of this satellite have determined that the XIPS
systems on this satellite are no longer available. As a result, this
satellite's remaining useful life is now estimated to be between 4.6 and
6.2 years, based on the bi-propellant fuel on board and operational
actions that we are currently considering. We do not expect this problem
to affect service to our customers or to affect revenues from the
customers on this satellite over the remaining life of the satellite. We
are working with the customers on this satellite to provide a long-term
solution for their needs. As a result of this XIPS failure, the Company
anticipates a reduction in its total backlog of between $280 million and
$380 million. The Company expects to refine its estimate of the remaining
useful life of this satellite in the third quarter of 2003. The insurance
policy on this satellite has an exclusion for XIPS-related anomalies and,
accordingly, this is not an insured loss.
We have determined that PAS-6B's net book value is fully recoverable. The
Company will accelerate depreciation of this satellite beginning in the
third quarter of 2003 to coincide with the satellite's revised estimated
useful life. This additional depreciation amount is expected to be between
$0.8 million and $1.5 million per month.
The other three Boeing model 601 HP satellites that we operate continue to
have XIPS as their primary propulsion system. However, no assurance can be
given that we will not have further XIPS failures that result in shortened
satellite lives or that such failures will be insured if they occur, but
in each of these remaining three satellites, the available bi-propellant
life is at least 3.7 years.
17
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
Corporation") 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 Corporation of approximately 34% of the outstanding capital
stock of Hughes Electronics (the "News Corporation 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
Corporation 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 Corporation for PanAmSat to enter into
certain strategic and other transactions.
On June 18, 2003, the Company and its lenders under the Company's senior secured
credit facility (the "Senior Secured Credit Facility") amended the loan
agreement to allow the completion of the News Corporation Transactions without
causing an event of default under such facility.
RESULTS OF OPERATIONS
The Company's selected operating data shown below is not necessarily indicative
of future results.
SELECTED OPERATING DATA
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands except per share data)
Operating leases, satellite services and other $ 199,400 $ 204,592 $ 394,820 $ 405,961
Outright sales and sales-type leases 4,193 4,641 8,529 10,411
Total revenues 203,593 209,233 403,349 416,372
Depreciation 74,909 89,768 147,176 183,723
Direct operating costs (exclusive of depreciation) 32,232 34,682 65,420 67,171
Selling, general and administrative expenses 21,338 23,766 39,364 56,249
Facilities restructuring and severance costs 663 -- 663 12,519
Gain on PAS-7 insurance claim -- -- -- (40,063)
Loss on conversion of sales-type leases -- -- -- 18,690
Income from operations 74,451 61,017 150,726 118,083
Interest expense- net 33,132 34,662 67,407 63,700
Income before income taxes 41,319 26,355 83,319 54,383
Income tax expense 11,021 6,589 22,163 13,596
Net income 30,298 19,766 61,156 40,787
Net income per common share - basic and diluted $ 0.20 $ 0.13 $ 0.41 $ 0.27
18
PANAMSAT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Revenues - Revenues were $203.6 million for the three months ended June 30,
2003, compared to revenues of $209.2 million for the same period in 2002.
Operating lease revenues, which were 97.9 percent of total revenues for the
second quarter of 2003, decreased by 2.5 percent to $199.4 million from $204.6
million for the same period in 2002. The decrease in operating lease revenues
was primarily attributable to the additional revenue recorded in the second
quarter of the prior year from the 2002 FIFA World Cup of $10.5 million.
Partially offsetting this decrease was additional operating lease revenue in the
second quarter of 2003 related to the Company's G2 Satellite Solutions division,
which was formed after the acquisition of Hughes Global Services on March 7,
2003. Total sales and sales-type lease revenues were $4.2 million for the
quarter ended June 30, 2003, compared to $4.6 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 9.9
percent to $120.6 million during the second quarter of 2003, compared to $133.8
million for the second quarter of 2002. This decrease was primarily due to the
nonrecurrence of the 2002 FIFA World Cup described above, as well as lower video
revenues recorded as a result of credit related issues. Overall video services
revenues decreased by 9.9 percent to $124.8 million in the second quarter of
2003, compared to $138.4 million in the second quarter of 2002. Operating lease
revenue from network services increased by 24.4 percent to $68.2 million for the
second quarter of 2003, compared to $54.8 million for the second quarter of 2002
primarily a result of net new business recorded during the second quarter of
2003 from the Company's G2 Satellite Solutions division and network resellers.
Total revenue for the six months ended June 30, 2003 was $403.3 million,
compared to revenue of $416.4 million for the six months ended June 30, 2003.
Operating lease revenues were $394.8 million for six months ended June 30, 2003,
compared to $406.0 million for the same period in 2002. The decrease in
operating lease revenues of $11.2 million was due to additional occasional
services revenue recorded in the second quarter of 2002 related to the 2002 FIFA
World Cup of $10.5 million and lower termination fee revenue of $8.1 million
compared to 2002. These decreases were partially offset by revenue related to
the Company's G2 Satellite Solutions division. Total sales-type lease revenues
were $8.5 million for the six months ended June 30, 2003, compared to $10.4
million for the same period in 2002.
Operating lease revenue from video services decreased by 9.1 percent to $243.0
million for six months ended June 30, 2003 as compared to $267.3 million for the
six months ended June 30, 2002 primarily due to the 2002 FIFA World Cup and
lower termination fee revenue as discussed above. Overall video services revenue
were $251.5 million in the six months ended June 30, 2003 compared to $277.7
million in the six months ended June 30, 2002. Operating lease revenue from
network services increased by 18.8 percent to $127.7 million for the six months
ended June 30, 2003, compared to $107.5 million for the same period in 2002
primarily due to net new business related to the Company's G2 Satellite
Solutions division.
Depreciation - Depreciation expense decreased $14.9 million, or 16.6 percent, to
$74.9 million for the three months ended June 30, 2003 from $89.8 million for
the same period in 2002. Depreciation for the six months ended June 30, 2003
decreased $36.5 million, or 19.9 percent, to $147.2 million from $183.7 million
for the same period in 2002. The decrease in depreciation for the three and six
months ended June 30, 2003 is due primarily to lower depreciation 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 and Galaxy
XII satellites that were placed in service in September 2002 and May 2003,
respectively.
Direct Operating Costs (exclusive of depreciation) - Direct operating costs
decreased $2.5 million or 7.1 percent, to $32.2 million for the three months
ended June 30, 2003 from $34.7 million for the same period in 2002. Direct
operating costs decreased $1.8 million or 2.6 percent, to $65.4 million for the
six months ended June 30, 2003 from $67.2 million for the same period in 2002.
For the three months ended June 30, 2003, the decrease in direct operating costs
is primarily due to lower broadcast services costs from the 2002 FIFA World Cup
and lower webcast services costs. These decreases were partially offset by costs
relating to the Company's new G2 Satellite Solutions division. For the six
months ended June 30, 2003, the decrease in direct operating costs is primarily
due to lower broadcast services costs from the 2002 FIFA World Cup and reduced
satellite insurance expense, partially offset by costs relating to the Company's
new G2 Satellite Solutions division.
19
Selling, General & Administrative Expenses - Selling, general and administrative
expenses decreased $2.5 million or 10.2 percent, to $21.3 million for the three
months ended June 30, 2003 from $23.8 million for the same period in 2002.
Selling, general and administrative expenses decreased $16.8 million or 30.0
percent, to $39.4 million for the six months ended June 30, 2003 from $56.2
million for the same period in 2002. The decrease in selling, general and
administrative expenses for the three and six months ended June 30, 2003 is due
primarily to lower bad debt expense and cost reductions as a result of
operational efficiencies. For the three and six months ended June 30, 2003, bad
debt expense decreased $1.1 million and $8.9 million, respectively.
Facilities Restructuring and Severance Costs - Facilities restructuring and
severance costs were $0.7 million for the three and six months ended June 30,
2003 and $0 and $12.5 million for the three and six months ended June 30, 2002,
respectively. In the three months ended June 30, 2003, the Company recorded a
severance charge of $1.2 million related to the Company's teleport consolidation
plan. These costs were offset by a restructuring credit of $0.5 million related
to the Company's 2002 facilities restructuring plan. In the six months ended
June 30, 2003, the Company recorded a severance charge of $2.0 million related
to the Company's teleport consolidation plan. These costs were offset by
restructuring credits of $1.3 million related to the Company's 2002 facilities
restructuring plan. 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 (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 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 $74.5 million for the three
months ended June 30, 2003, an increase of $13.5 million, or 22.0 percent, from
$61.0 million for the same period in 2002. Income from operations was $150.7
million for six months ended June 30, 2003 an increase of $32.6 million or 27.6
percent from $118.1 million for the same period in 2002. The increase in income
from operations for the three months ended June 30, 2003 was primarily due to a
reduction in bad debt expense, a decrease in operating expenses as a result of
previous and current cost reduction initiatives, and lower depreciation related
to Galaxy VI and Galaxy VIII-i. The increase in income from operations for the
six months ended June 30, 2003 was primarily due to a reduction in bad debt
expense, a decrease in operating expenses as a result of previous and current
cost reduction initiatives, 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 first quarter of 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 $33.1 million for the three
months ended June 30, 2003, a decrease of $1.6 million, or 4.4 percent, from
$34.7 million for the same period in 2002. Interest expense, net was $67.4
million for six months ended June 30, 2003, an increase of $3.7 million, or 5.8
percent from $63.7 million for the same period in 2002. The decrease in interest
expense, net for the three months ended June 30, 2003 was primarily due to lower
interest expense as a result of the repayment of $200 million six percent notes
in January 2003, partially offset by lower capitalized interest of $5.1 million.
The increase in interest expense, net for the six months ended June 30, 2003 was
primarily due to higher interest expense related to the new debt acquired as a
result of the 2002 Refinancing and lower capitalized interest of $5.6 million.
Income Tax Expense - Income tax expense was $11.0 million for the three months
ended June 30, 2003, an increase of $4.4 million or 67.3 percent, from $6.6
million for the three months ended June 30, 2002. Income tax expense was $22.2
million for six months ended June 30, 2003 an increase of $8.6 million or 63.0
percent, from $13.6 million for the six months ended June 30, 2002. The increase
in income tax expense for the three months and six months ended June 30, 2003 as
compared to the same periods in 2002 was primarily due to higher income from
operations. The Company estimates that its effective income tax rate will be
26.6 percent for 2003 as compared to 25.0 percent for 2002.
20
FINANCIAL CONDITION
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. In the six months ended June 30, 2003, the Company recorded
charges of $2.0 million related to this teleport consolidation plan, primarily
representing severance costs.
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. For the six
months ended June 30, 2003, the Company recorded restructuring credits of $1.3
million which were primarily related to the signing of sub-lease agreements
during the first half of 2003 for amounts higher than originally estimated.
At June 30, 2003, the Company had total debt outstanding of $2.35 billion,
including current maturities of $33.5 million related to quarterly principal
payments due in March and June 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.
On July 14, 2003, the Company made an optional pre-payment of $350 million under
its $1.25 billion Senior Secured Credit Facility from available cash on hand.
During the third quarter of 2003, the Company will take a non-cash charge of
approximately $6 million to write-off debt issuance costs associated with the
portion of the credit facility that was prepaid.
In February 2002, the Company entered into its Senior Secured Credit Facility in
an aggregate principal amount of up to $1.25 billion 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, with a stated interest rate of 8.5%, 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.
Prior to the pre-payment noted above, the Senior Secured Credit Facility was
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 June 30, 2003, the interest rates on the
Term A Facility and Term B Facility were LIBOR plus 2.75% 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 June
30, 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
21
Facility by such amount. Following the $350 million pre-payment in July 2003,
the amounts outstanding under the Term A Facility and the Term B Facility were
$195 million and $455 million, respectively. These outstanding balances will be
repaid in accordance with the original maturity dates.
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. Following the pre-payment of $350 million on
July 14, 2003 noted above, the interest rate hedge represented approximately 15%
of the outstanding borrowings under the Senior Secured Credit Facility. The
notional amount of the interest rate hedge agreement matches the repayment
schedule of the Term B Facility through the maturity date of the interest rate
hedge. During the six months ended June 30, 2003, no ineffectiveness was
recognized in the statement of operations on this hedge. The amount accumulated
in other comprehensive loss 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
June 30, 2003, based upon quoted market prices from the counter party, reflected
a hedge liability of approximately $3.4 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.
On June 18, 2003, the Company and its lenders under the Company's Senior Secured
Credit Facility amended the loan agreement to allow the completion of the News
Corporation Transactions without causing an event of default under such
facility.
In addition to the Senior Secured Credit Facility and the Senior Notes, as of
June 30, 2003, the Company had 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 June 30, 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.
LIQUIDITY AND CAPITAL RESOURCES
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.
PanAmSat operates seven Boeing model 601 HP spacecraft ("BSS 601 HP"). This
spacecraft uses a xenon ion propulsion system ("XIPS"), an electrical propulsion
system that maintains the satellite's in-orbit position, as its primary
propulsion system. There are two separate XIPS on each spacecraft, each one of
which is capable of maintaining the satellite in its position. The spacecraft
also has a completely independent bi-propellant propulsion system as a back up
to the XIPS system. Certain of these spacecraft have experienced various
problems associated with XIPS. Three of the Company's BSS 601 HP spacecraft have
experienced failures of both XIPS systems.
From our experience, failure of both of the XIPS systems on a BSS 601 HP
spacecraft does not result in an immediate failure or customer service
disruption but results in a reduction of the useful life of the satellite.
Following a failure of both XIPS systems, the determination of the remaining
useful life of the satellite is based upon the available bi-propellant fuel on
board and available operational actions. Of the five BSS 601 HP satellites in
the Company's fleet with net book value (including Galaxy IVR and PAS-6B), the
bi-propellant fuel life ranges from over 3 to 7.4 years and, together with the
satellite's operation up to the date of failure, represents a significant
portion of the satellite's originally intended design life.
22
Certain insurance polices on BSS 601 HPs exclude coverage for XIPS failures. We
believe that renewal policies may similarly exclude coverage for XIPS failures.
It has been our experience that XIPS failures do not result in a loss of
revenues during the revised remaining useful life of the satellite, but may
result in impairment charges, accelerations of depreciation and planned capital
expenditures, and reductions of backlog and future revenues. If the Company
determines to replace a satellite experiencing a failure of both XIPS systems,
the capital expenditures would not be required until approximately two years
before the satellite's revised end of life.
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.
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 at the end of 2005.
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 June 30, 2003, we had a receivable due from the
satellite manufacturer of $69.5 million. Based upon the terms of our agreement
with the manufacturer, this receivable is scheduled to be paid in full 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.
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
our outstanding indebtedness and would require Hughes Electronics to obtain the
consent of News Corporation pursuant to the agreements governing the News
Corporation 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 $31.4 million, or 11.8
percent, to $234.8 million for the six months ended June 30, 2003, from $266.2
million for the six months ended June 30, 2002. The decrease in 2003 was
primarily attributable to a decrease in net income adjusted for non-cash items
of $32.5 million and an increase in the cash used within accounts payable and
accrued liabilities of $23.6 million, partially offset by a change in prepaid
expenses and other assets of $32.6 million. The increase in cash used within
accounts payable and accrued liabilities is primarily attributable to a $27.4
million increase in accrued interest payable. This increase was largely a result
of the 2002 increase in accrued interest payable on the $800 million Senior
Notes issued in the 2002 Refinancing. The change in prepaid expenses and other
assets is primarily attributable to the recording of the Company's 1997 federal
income tax refund of $18.6 million in 2002.
Net cash used in investing activities was $19.4 million for the six months ended
June 30, 2003, compared to net cash provided by investing activities of $31.5
million for the six months ended June 30, 2002. This change was primarily due to
the receipt of $215.0 million of proceeds from the PAS-7 insurance claim during
2002. This decrease in cash provided was partially offset by sales of short-term
investments in 2003 of $43.7 million and a decrease in capital expenditures of
$128.8 million during the six months ended June
23
30, 2003 as compared to the same period in 2002.
Net cash used in financing activities increased to $204.3 million for the six
months ended June 30, 2003, from $16.3 million for the six months ended June 30,
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.
SATELLITE OPERATIONAL DEVELOPMENTS
PanAmSat operates seven Boeing model 601 HP spacecraft. This spacecraft uses a
xenon ion propulsion system ("XIPS"), an electrical propulsion system that
maintains the satellite's in-orbit position, as its primary propulsion system.
There are two separate XIPS on each spacecraft, each one of which is capable of
maintaining the satellite in its position. Certain of the Boeing model 601 HP
spacecraft have experienced various problems associated with XIPS.
Two of the Company's Boeing model 601 HP spacecraft, PAS-5 and Galaxy VIII-i,
have no book value and are no longer in primary customer service. In addition to
the XIPS, each of the Company's five remaining Boeing model 601 HP spacecraft
has a completely independent bi-propellant propulsion system for secondary use,
which provides back up with additional fuel life on our satellites in the event
of a XIPS failure. This minimum additional fuel life ranges from over 3 years to
7.4 years, depending on the satellite.
At the end of June 2003, the secondary XIPS on PanAmSat's Galaxy IVR satellite
ceased working. This problem has not affected service to any of our customers.
The primary XIPS on this satellite had previously ceased working. The satellite
is operating nominally on its backup bi-propellant system. We and the
manufacturer of this satellite have determined that the XIPS systems on this
satellite are no longer available. As a result, this satellite's remaining
useful life is now estimated to be between 3.2 and 4.1 years, based on the
bi-propellant fuel on board and operational actions that we are currently
considering. This satellite, as well as other satellites, are backed up by
in-orbit satellites with immediately available capacity. We believe that this
problem will not affect revenues from the customers on this satellite or our
total backlog, as the satellite's backup bi-propellant propulsion system has
sufficient fuel to provide ample time to seamlessly transition customers to a
new or replacement satellite. We have determined that the satellite's net book
value and our investments in sales-type leases on this satellite are fully
recoverable. Galaxy IVR is insured, and we have filed a proof of loss with the
insurers in an amount of $169 million, subject to salvage. However, we cannot
assure you that this proof of loss will be accepted or, if accepted, how much we
will receive. We are developing plans to replace this satellite prior to the end
of its useful life using anticipated insurance proceeds and a spare launch
service contract that we had purchased previously.
The Company will accelerate depreciation of Galaxy IVR beginning in the third
quarter of 2003 to coincide with the satellite's revised estimated useful life.
This additional depreciation amount is expected to be between $1.8 million and
$2.6 million per month. Any insurance recovery would reduce the net book value
of the satellite, at which time the prospective depreciation amount would be
adjusted based on the remaining book value of the satellite.
On July 9, 2003, the secondary XIPS on PanAmSat's PAS-6B satellite ceased
working. The primary XIPS on this satellite had previously ceased working. The
satellite is operating nominally on its backup bi-propellant system. We and the
manufacturer of this satellite have determined that the XIPS systems on this
satellite are no longer available. As a result, this satellite's remaining
useful life is now estimated to be between 4.6 and 6.2 years, based on the
bi-propellant fuel on board and operational actions that we are currently
considering. We do not expect this problem to affect service to our customers or
to affect revenues from the customers on this satellite over the remaining life
of the satellite. We are working with the customers on this satellite to provide
a long-term solution for their needs. As a result of this XIPS failure, the
Company anticipates a reduction in its total backlog of between $280 million and
$380 million. The Company expects to refine its estimate of the remaining useful
life of this satellite in the third quarter of 2003. The insurance policy on
this satellite has an exclusion for XIPS-related anomalies and, accordingly,
this is not an insured loss.
We have determined that PAS-6B's net book value is fully recoverable. The
Company will accelerate depreciation of this satellite beginning in the third
quarter of 2003 to coincide with the satellite's revised estimated useful life.
This additional depreciation amount is expected to be between $0.8 million and
$1.5 million per month.
The other three Boeing model 601 HP satellites that we operate continue to have
XIPS as their primary propulsion system. However, no assurance can be given that
we will not have further XIPS failures that result in shortened satellite lives
or that such failures will be insured if they occur, but in each of these
remaining three satellites, the available bi-propellant life is at least 3.7
years.
24
CRITICAL ACCOUNTING ESTIMATES
We prepare the consolidated financial statements of PanAmSat in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. Recently,
certain of our satellites experienced anomalies which required that we make such
estimates in determining whether impairment charges, accelerations of
depreciation or reductions of backlog and future revenues were recognized. These
estimates were based on the expected useful life of the satellite, future
expected revenues on the satellite, remaining incentive obligations to be paid
to the satellite manufacturer, the existence of an insurance policy on the
satellite, the nature of the anomaly, ours and the manufacturer's experiences
with the anomaly, available operational actions and available redundant systems.
Due to the inherent uncertainty involved in making these estimates, actual
results reported in future periods may be affected by changes in those
estimates.
COMMITMENTS AND CONTINGENCIES
We have invested approximately $4.3 billion in our existing satellite fleet and
ground infrastructure through June 30, 2003, and we have approximately $30.3
million of expenditures remaining to be made under existing satellite
construction contracts and $60.2 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
June 30, 2003, the Company did not have any commitments related to existing
launch 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 until we replace or
supplement them with new satellites. We have not determined when these
satellites will be replaced or supplemented but do not currently expect to begin
construction on these satellites before the second half of 2004. 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 the
insurers if the respective 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 these proofs of loss
will be accepted by the insurers or, if accepted, how much we will receive. 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.
On July 31, 2003, the Company filed a proof of loss under the insurance policy
for its Boeing model 601 HP spacecraft, Galaxy IVR, in the amount of $169
million, subject to salvage (See Note 14 "Satellite Operational Developments").
As of June 30, 2003, we had in effect launch and in-orbit insurance policies
covering 11 satellites in the aggregate amount of approximately $1.5 billion. As
of such date, these insured satellites had an aggregate net book value and other
insurable costs of $1.7 billion. We have 12 uninsured satellites in orbit, which
includes five satellites for which the Company elected not to purchase insurance
policies in May 2003 upon the expiration of the existing policies. The uninsured
satellites are: 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 IR, Galaxy IIIR, Galaxy V and SBS-6, which are approaching the ends of
their useful lives; Galaxy VIII-i, which is fully depreciated and continues to
operate in an inclined orbit as a supplement to Galaxy IIIC; Galaxy IX and
Galaxy XI, for which the Company determined that insurance was not available on
commercially reasonable terms; and HGS-3 which has a net book value of $0.7
million as of June 30, 2003. The Company's Galaxy XII satellite serves as an
in-orbit backup for all or portions of Galaxy IR, Galaxy IVR, Galaxy V, Galaxy
IX, Galaxy XR and Galaxy XI.
Of the insured satellites, as of July 29, 2003, 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-9, have redundancies available
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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-6B is currently operating on its backup bi-propellant propulsion
system (See Note 14 "Satellite Operational Developments"). The fifth such
satellite, PAS-8, has an excluded component that we believe is unlikely to fail
in the near future.
At July 29, 2003, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other insurable
costs of approximately $1.2 billion. Of this amount, $657.6 million related to
uninsured satellites and $575.2 million related to satellites insured by
Significant Exclusion Policies.
A supplemental policy on Galaxy IVR covering $21.2 million of sales-type leases
does have a component exclusion. The primary policy on that satellite has no
component exclusion. This satellite is currently operating on its backup
bi-propellant propulsion system (See Note 14 "Satellite Operational
Developments").
Upon the expiration of the insurance policies, there can be no assurance that we
will be able to procure new policies on commercially reasonable terms. New
policies may only be available with higher premiums or with substantial
exclusions or exceptions to coverage for failures of specific components.
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 $5.30 billion as of June 30, 2003, including approximately $1.0
billion related to satellites to be launched. Included in the total backlog of
$5.30 billion is $252.2 million of backlog that may be terminated pursuant to
certain contractual termination rights. Also included in the total backlog is
backlog related to PAS-6B, which suffered a failure of multiple propulsion
systems resulting in a shortened useful life. As a result, the Company
anticipates a reduction in its total backlog of between $280 million and $380
million. The Company expects to refine its estimate of the remaining useful life
of this satellite in the third quarter of 2003 (See Note 14 "Satellite
Operational Developments").
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 $5.30 billion backlog as of June 30, 2003, approximately $4.0
billion, or 75.5%, related to our top 25 customers. Having conducted both
quantitative and qualitative analyses, we concluded that five 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 five
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 $952.1 million of our backlog as of June 30, 2003. In March 2003,
DIRECTV Latin America filed a voluntary petition for a restructuring under
Chapter 11 of the U.S. bankruptcy code. At June 30, 2003, DIRECTV Latin America
represented approximately $577.9 million, or 11% of our total backlog, and $58.7
million of our expected 2003 revenues. The smallest of these six customers
represented approximately $41.3 million, or 0.8% of our total backlog, and $4.1
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 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 for
variable interest entities in which a Company receives an interest after that
date. This pronouncement was effective on July 1, 2003 for variable interest
entities acquired before February 1, 2003. The adoption of FIN No. 46 had no
impact on our consolidated 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
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statement of operations. The adoption of EITF Issue No. 00-21 did not have a
significant impact on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Company has
limited involvement with derivative financial instruments and does not use them
for trading or speculative purposes. As of June 30, 2003, the Company's only
derivative financial instrument is an interest rate hedge that was entered into
in accordance with the agreement governing the Senior Secured Credit Facility
(See Note 5 "Long-Term Debt"). The adoption of SFAS No. 149 on July 1, 2003, as
required, had no impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that certain financial instruments be classified as liabilities
that were previously considered equity. The adoption of this standard on July 1,
2003, as required, had no impact on our consolidated financial statements.
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 June 30, 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
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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 June 30, 2003. Based upon economic conditions and
leading market indicators at June 30, 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 outstanding fixed-rate debt
and fixed-rate net investments in sales-type lease receivable balances would be
approximately $50.4 million and $3.1 million, respectively, as of June 30, 2003.
The potential effect of a hypothetical 10% adverse fluctuation in interest rates
for one year on PanAmSat's floating rate debt outstanding at June 30, 2003 would
be a reduction in cash flows of approximately $3.9 million and a reduction in
net income of approximately $2.2 million.
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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.
CEO and CFO Certifications. Attached as exhibits to this quarterly report are
the certifications of the Chief Executive Officer and the Chief Financial
Officer required by Rules 13a-15 and 15d-15 the Securities Exchange Act of 1934
(the "Certifications"). This section of the quarterly report contains the
information concerning the evaluation of Disclosure Controls and changes to
Internal Controls over Financial Reporting referred to in the Certifications and
this information should be read in conjunction with the Certifications for a
more complete understanding of the topics presented.
Disclosure Controls. Disclosure Controls are procedures that are designed for
the purpose of ensuring that information required to be disclosed in the
Company's reports filed under the Securities Exchange Act of 1934 (such as this
quarterly report), is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms.
Internal Controls over Financial Reporting. Internal Controls over Financial
Reporting means a process designed by, or under the supervision of, the
Company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America ("GAAP"), and includes those policies
and procedures that:
-pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
-provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statement in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company;
and
-provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that the Company's Disclosure
Controls or Internal Controls over Financial Reporting will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Further,
the design of any control system is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Because of these inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Conclusions Regarding Disclosure Controls. Based upon the required evaluation of
Disclosure Controls as of June 30, 2003, the CEO and CFO have concluded that,
subject to the limitations noted above, the Company's Disclosure Controls are
effective to ensure that material information relating to the Company and its
consolidated subsidiaries is made known to management, including the CEO and
CFO.
Changes to Internal Controls over Financial Reporting. In accordance with the
SEC's requirements, the CEO and the CFO note that, during the quarter ended June
30, 2003, there have been no significant changes in the Company's Internal
Controls over Financial Reporting or in other factors that have materially
affected or are reasonably likely to materially affect the Company's Internal
Controls over Financial Reporting, including any corrective actions with regard
to significant deficiencies and material weaknesses.
29
PANAMSAT CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company previously reported on a proposed class action complaint on behalf
of certain holders of the Company's common stock 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 suit alleged that the settlement
between Hughes Electronics, GM and EchoStar Communications Corporation
("EchoStar") of all claims related to the termination of the proposed merger
between EchoStar and Hughes violated alleged fiduciary duties. On July 10, 2003,
the Court of Chancery in the State of Delaware granted defendants' motions to
dismiss all claims with prejudice and denied plaintiffs' motion for leave to
amend the complaint. On August 4, 2003, the defendants filed a notice of appeal
to the Supreme Court of the State of Delaware in relation to the opinion and
order of the Court of Chancery in the State of Delaware. The Company believes
that, unless the appeal is successful, the July 10, 2003 ruling will effectively
conclude this suit.
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 5. OTHER INFORMATION.
Effective July 21, 2003, Lawrence N. Chapman resigned from the Board of
Directors of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 10.78.1 Amendment No. 1, dated as of June 18, 2003, to the Credit
Agreement dated as of February 25, 2002, between PanAmSat
Corporation, the several banks and other financial
institutions from time to time parties thereto and Credit
Suisse First Boston, as Administrative Agent.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
Form 8-K filed on April 14, 2003 to report an event under Item 9 which was
intended to be furnished under Item 12. The Form 8-K attached a press
release which announced certain financial results for the first quarter
ended March 31, 2003.
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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
August 6, 2003 /s/ Michael J. Inglese
-----------------------------
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
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