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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 SEPTEMBER 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 November 3, 2003, an aggregate of 150,103,784 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 SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
-------------- -------------
REVENUES
Operating leases, satellite services and other $ 206,033 $ 194,410
Outright sales and sales-type leases 4,047 4,714
-------------- -------------
Total revenues 210,080 199,124
-------------- -------------
OPERATING COSTS AND EXPENSES:
Depreciation 85,018 78,966
Direct operating costs (exclusive of depreciation) 38,563 29,176
Selling, general and administrative expenses 19,323 23,336
Facilities restructuring and severance costs 727 1,189
-------------- -------------
Total operating costs and expenses 143,631 132,667
-------------- -------------
INCOME FROM OPERATIONS 66,449 66,457
INTEREST EXPENSE- net 38,904 38,857
-------------- -------------
INCOME BEFORE INCOME TAXES 27,545 27,600
INCOME TAX EXPENSE 6,549 6,900
-------------- -------------
NET INCOME $ 20,996 $ 20,700
============== =============
NET INCOME PER COMMON SHARE - basic and diluted $ 0.14 $ 0.14
============== =============
Weighted average common shares outstanding 150,080,000 149,940,000
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
REVENUES:
Operating leases, satellite services and other $ 600,853 $ 600,371
Outright sales and sales-type leases 12,576 15,125
------------- -------------
Total revenues 613,429 615,496
------------- -------------
OPERATING COSTS AND EXPENSES:
Depreciation 232,194 262,689
Direct operating costs (exclusive of depreciation) 103,983 96,347
Selling, general and administrative expenses 58,687 79,585
Facilities restructuring and severance costs 1,390 13,708
Gain on PAS-7 insurance claim - (40,063)
Loss on conversion of sales-type leases - 18,690
------------- -------------
Total operating costs and expenses 396,254 430,956
------------- -------------
INCOME FROM OPERATIONS 217,175 184,540
INTEREST EXPENSE, net 106,311 102,557
------------- -------------
INCOME BEFORE INCOME TAXES 110,864 81,983
INCOME TAX EXPENSE 28,712 20,496
------------- -------------
NET INCOME $ 82,152 $ 61,487
============= =============
NET INCOME PER COMMON SHARE - basic and diluted $ 0.55 $ 0.41
============= =============
Weighted average common shares outstanding 150,044,000 149,914,000
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 496,768 $ 783,998
Short-term investments 55,394 99,785
Accounts receivable-net 69,614 34,276
Net investment in sales-type leases 22,467 22,858
Prepaid expenses and other current assets 32,194 43,170
Receivable - satellite manufacturer 69,500 72,007
Insurance claim receivable 102,649 -
Deferred income taxes 9,368 7,889
------------- ------------
Total current assets 857,954 1,063,983
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 2,621,288 2,865,279
NET INVESTMENT IN SALES-TYPE LEASES 120,858 161,869
GOODWILL 2,240,323 2,238,659
DEFERRED CHARGES AND OTHER ASSETS 141,432 157,948
------------- ------------
TOTAL ASSETS $ 5,981,855 $ 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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 75,666 $ 77,309
Current portion of long-term debt 32,663 200,000
Accrued interest payable 19,653 50,961
Deferred revenues 21,115 18,923
------------ ------------
Total current liabilities 149,097 347,193
LONG-TERM DEBT 1,967,338 2,350,000
DEFERRED INCOME TAXES 445,156 417,843
DEFERRED CREDITS AND OTHER (principally customer
deposits and deferred revenue) 260,148 295,160
------------ ------------
TOTAL LIABILITIES 2,821,739 3,410,196
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value - 400,000,000
shares authorized; 150,096,928 and 149,967,476
shares outstanding at September 30, 2003
and December 31, 2003, respectively 1,501 1,500
Additional paid-in-capital 2,541,057 2,532,384
Accumulated other comprehensive loss (1,735) (2,385)
Retained earnings 628,245 546,093
Other stockholders' equity (8,952) (50)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,160,116 3,077,542
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,981,855 $ 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 COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
---------------------- ACCUMULATED
ADDITIONAL OTHER OTHER
PAR VALUE PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL LOSS EARNINGS EQUITY TOTAL INCOME
----------- --------- ---------- ------------- -------- ------------ ---------- -------------
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....... 129,452 1 1,851 -- -- -- 1,852
Unrealized gain
on cash flow hedge.... -- -- -- 286 -- -- 286 $ 286
Unrealized gain on
short-term
investments........... -- -- -- 1 -- -- 1 1
Foreign currency
translation
adjustment............ -- -- -- 363 -- -- 363 363
Acquisition of Hughes
Global Services....... -- -- -- -- -- (3,358) (3,358) --
Deferred compensation.. -- -- 6,807 -- -- (6,940) (133) --
Amortization of
deferred
compensation.......... -- -- 15 -- -- 1,396 1,411 --
Net income............. -- -- -- -- 82,152 -- 82,152 82,152
----------- ------- ---------- --------- -------- -------- ---------- ---------
BALANCE,
SEPTEMBER 30, 2003..... 150,096,928 $ 1,501 $2,541,057 $ (1,735) $628,245 $ (8,952) $3,160,116 $ 82,802
=========== ======= ========== ========= ======== ======== ========== =========
OTHER STOCKHOLDERS' EQUITY:
SEPTEMBER 30, JANUARY 1,
2003 2003
------------ ---------
Excess of purchase price over historical cost basis of net
assets acquired (See Note 2) $ (3,358) $ --
Deferred compensation, net (5,594) (50)
--------- -------
TOTAL OTHER STOCKHOLDERS' EQUITY $ (8,952) $ (50)
========= =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 82,152 $ 61,487
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 232,194 262,689
Deferred income taxes 27,683 40,786
Amortization of debt issuance costs and other deferred charges 7,435 9,419
Provision for uncollectible receivables 1,168 12,256
Other non-cash items (593) --
Gain on PAS-7 insurance claim -- (40,063)
Loss on conversion of sales-type leases -- 18,690
Facilities restructuring and severance costs 1,390 13,708
Loss on early extinguishment of debt 5,660 3,309
Changes in assets and liabilities:
Collections on investments in sales-type leases 16,921 17,165
Operating leases and other receivables (15,515) (8,455)
Prepaid expenses and other assets 21,847 2,710
Accounts payable and accrued liabilities (51,143) (2,592)
Deferred gains and revenues (1,454) 4,322
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 327,745 395,431
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including capitalized interest) (87,161) (260,037)
Insurance proceeds from satellite recoveries -- 215,000
Net sales (purchases) of short-term investments 44,393 (95,738)
Acquisitions, net of cash acquired (15,695) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (58,463) (140,775)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (550,000) (1,771,542)
Issuance of new long-term debt -- 1,800,000
Debt issuance costs -- (41,012)
Repayments of incentive obligations (8,726) (7,951)
Other 1,852 2,052
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (556,874) (18,453)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 362 --
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (287,230) 236,203
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 783,998 443,266
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 496,768 $ 679,469
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash received for interest $ 11,756 $ 9,973
------------ ------------
Cash paid for interest $ 149,248 $ 122,600
------------ ------------
Cash received for taxes $ 4,498 $ 18,551
------------ ------------
Cash paid for taxes $ 2,734 $ 2,482
------------ ------------
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 September 30, 2003 and for the
three and nine month periods ended September 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 nine
months ended September 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").
GM received a private-letter ruling from the U.S. Internal Revenue
Service confirming that the distribution of Hughes Electronics' common stock
to the holders of GM Class H common stock, in connection with the split-off,
would be tax-free to GM and its Class H stockholders for federal income tax
purposes. In addition, the transactions have been approved by a majority of
each class of GM common stockholders--GM $1-2/3 and GM Class H--voting both
as separate classes and together as a single class based on their respective
voting power. The transactions remain subject to certain conditions,
including, among other things, obtaining U.S. antitrust and Federal
Communications Commission ("FCC") approvals. 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 for the completion of the News Corporation
Transactions without causing an event of default under such facility.
(2) ACQUISITIONS
On March 7, 2003, the Company acquired substantially all of the assets of
Hughes Global Services, Inc. ("HGS") from the Company's affiliate Hughes
Electronics for approximately $8.4 million in cash and the assumption of
certain related liabilities. In connection with this transaction, the HGS-3,
HGS-5 and Leasat satellites are now operated as part of our fleet. 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 government service offerings
through the Company's G2 Satellite Solutions division. The net assets
acquired were 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 September 30,
2003 net of deferred income taxes of approximately $1.9 million. The
consolidated
9
results of the Company's G2 Satellite Solutions division from the date of
the acquisition through September 30, 2003 are included within the Company's
consolidated income statement for the nine months ended September 30, 2003.
On August 27, 2003, as part of the Company's strategic initiative to expand
our government service offerings, the Company also acquired Esatel
Communications, Inc. and its related entity, Silver Springs Teleport, LC
(together, "Esatel"). Esatel is a telecommunications firm based outside of
Washington, D.C. that specializes in providing end-to-end services and
solutions to the U.S. Government. The consolidated results of Esatel from
the date of the acquisition through September 30, 2003 are included within
the Company's consolidated income statement for the three and nine months
ended September 30, 2003.
(3) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities an
interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires the consolidation
of a variable interest entity ("VIE") where an equity investor achieves a
controlling financial interest through arrangements other than voting
interests, and it is determined that the investor will absorb a majority of
the expected losses and/or receive the majority of residual returns of the
VIE. In October 2003, the FASB deferred the effective date for the
consolidation of VIEs created prior to February 1, 2003 to December 31, 2003
for calendar year-end companies, with earlier application encouraged.
PanAmSat adopted FIN 46 as of its original effective date of July 1, 2003
for entities created prior to February 1, 2003. The adoption of FIN 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 applies 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 on July 1, 2003 had no
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 September 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 October 2003, the Company, together with Horizons LLC, which the Company
jointly owns with JSAT International Inc. ("JSAT"), a Japanese satellite
services provider, launched the Galaxy 13/Horizons I satellite. The
satellite is a Boeing 601HP with 24 C-band and 24 Ku-band transponders and
will be operated at 127 degrees west longitude. PanAmSat and JSAT will
jointly develop and own the Galaxy 13/Horizons-1 Ku-band payload, using the
capacity to offer a variety of digital video, Internet and data services as
well as to create new IP-based content distribution networks. The C-band
capacity will be owned, developed and marketed solely by PanAmSat and will
be utilized to provide High Definition Television (HDTV) as well as other
services within the United States. This satellite will also be a part of the
Company's "Power of Five" antenna program, which provides qualified cable
operators with simultaneous access to five Galaxy neighborhood satellites.
The spacecraft will take over for Galaxy 9, which will become a new Galaxy
domestic C-band replacement or in-orbit spare.
10
In May 2003, the Company commenced service on the Galaxy 12 satellite. The
spacecraft is a next-generation backup satellite for PanAmSat's domestic
cable and broadcast video customers, and is capable of providing premium
cable, HDTV and specialized new services in North America. Built and
custom-designed for PanAmSat by Orbital Sciences Corporation, Galaxy 12 has
twenty-four 36-MHz C-band transponders.
The Company expects to launch up to two more satellites by the end of 2005
for United States coverage. We are currently scheduled to launch one of
these additional satellites to replace Galaxy 5 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. This satellite will
include an additional L-band payload (See Note 11 "Commitments and
Contingencies").
As a result of the termination of the Galaxy 8-iR satellite construction
contract, as of September 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 8-iR
launch vehicle provider to defer our use of the launch to a future
satellite. The Company expects to use this launch in early 2006 to replace
the Galaxy 4R satellite (See Note 14 "Satellite Operational Developments").
(5) LONG-TERM DEBT
At September 30, 2003, the Company had total debt outstanding of $2.0
billion, including current maturities of $32.7 million related to quarterly
principal payments due in March, June and September 2004. 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 recorded a non-cash charge of
approximately $5.7 million to write-off debt issuance costs associated with
the portion of the credit facility that was prepaid. 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.
Prior to the pre-payment noted above and the October 29, 2003 amendment
described below, the Senior Secured Credit Facility was comprised of a
$250.0 million revolving credit facility, which was undrawn and had an
original termination date of December 31, 2007 (the "Revolving Facility"), a
$300.0 million term loan A facility, which had an original maturity date of
December 31, 2007 (the "Term A Facility"), and a $700.0 million term loan B
facility, which had an original maturity date of December 31, 2008 (the
"Term B Facility"). At September 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 was required to pay a commitment fee
for the unused commitments under the Revolving Facility, which, as of
September 30, 2003, on an annualized basis was 0.50%. The Company had
outstanding letters of credit totaling $1.1 million, which reduced our
ability to borrow against the Revolving Facility by such amount. As of
September 30, 2003, the amounts outstanding under the Term A Facility and
the Term B Facility were $195 million and $455 million, respectively.
On June 18, 2003, the Company and its lenders under the Company's Senior
Secured Credit Facility amended the loan agreement to allow for the
completion of the News Corporation Transactions without causing an event of
default under such facility.
On October 29, 2003, the Company amended its Senior Secured Credit Facility
to provide for the refinancing of its Term A Facility and Term B Facility
under a new Term Loan B-1 facility (the "Term B-1 Facility") with an
interest rate of LIBOR plus 2.5% and scheduled annual maturities of
principal as follows (in thousands):
Year Ending December 31, Amount Due
------------------------ ----------
2004 $ 6,500
2005 6,500
2006 6,500
2007 6,500
2008 6,500
2009 158,031
2010 459,469
----------
$ 650,000
==========
11
As a result of this amendment, the amount of the revolving credit facility,
its termination date and the provisions relating to the commitment fee
remain unchanged. Fees charged by the lenders for this amendment will be
capitalized as debt issuance costs and amortized over the revised term of
the Term B-1 Facility, along with previously capitalized debt issuance costs
related to the Term A Facility and the Term B Facility.
PanAmSat is required to maintain certain financial covenants and is also
subject to restrictive covenants under the Company's borrowings. As of
September 30, 2003, the Company was in compliance with all such covenants.
The October 29, 2003 amendment adjusted certain operating covenants under
the Senior Secured Credit Facility to provide greater operational
flexibility to the Company.
In accordance with the agreement governing the Senior Secured Credit
Facility, the Company entered into an interest rate hedge agreement 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. This interest rate hedge is
designated as a cash flow hedge. During the nine months ended September 30,
2003, no ineffectiveness was recognized in the statement of operations on
this hedge. The fair value of the outstanding interest-rate hedge agreement
as of September 30, 2003, based upon quoted market prices from the counter
party, reflected a hedge liability of approximately $2.8 million. In
conjunction with the October 29, 2003 amendment, described above, the terms
of this interest rate hedge were unchanged and the hedge continues on the
Term B-1 Facility. In addition, the Company will no longer be required to
enter into an interest rate hedge agreement under the Senior Secured Credit
Facility upon expiration of the current agreement on August 30, 2005.
As of September 30, 2003, the Company had outstanding $800 million Senior
Notes due in 2012 with a stated interest rate of 8.5%. The Company also 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 September 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.
Obligations under the Senior Notes 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. 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.
(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 nine months ended September 30, 2003, the Company
issued options to purchase 21,350 shares and 44,800 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. The Company recorded compensation expense related to
these options of approximately $10 thousand and $15 thousand for the three
and nine months ended September 30, 2003, respectively. 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 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 is being 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 $0.7 million and $1.2 million for
the three and nine months ended September 30, 2003, respectively.
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 except per share amounts).
12
THREE MONTHS ENDED: NINE MONTHS ENDED:
------------------------ ------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income, as reported $ 20,996 $ 20,700 $ 82,152 $ 61,487
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 530 -- 878 --
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects (2,468) (2,723) (7,884) (8,170)
---------- ---------- ---------- ----------
Pro forma net income $ 19,058 $ 17,977 $ 75,146 $ 53,317
========== ========== ========== ==========
Earnings per share:
Basic and Diluted - as reported $ 0.14 $ 0.14 $ 0.55 $ 0.41
========== ========== ========== ==========
Basic and Diluted - pro forma $ 0.13 $ 0.12 $ 0.50 $ 0.36
========== ========== ========== ==========
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
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 $215 million of insurance proceeds during the first half of 2002.
(8) 2002 LOSS ON CONVERSION OF SALES-TYPE LEASES
On March 29, 2002, the Company entered into an agreement with a customer
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 and $1.4
million for the three and nine months ended September 30, 2003,
respectively, and $1.2 million and $13.7 million for the three and nine
months ended September 30, 2002, respectively.
As part of the Company's continuing effort to improve operational
efficiencies, in October 2003, the Company's management approved a plan to
reduce its workforce by approximately 45 employees. As a result, the Company
anticipates that it will be required to record a severance charge of
approximately $1.5 million in the fourth quarter of 2003. These severance
costs will primarily be related to employee compensation, benefits and
outplacement services.
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. 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 nine months ended September 30,
2003, the Company recorded charges of $2.8 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, some of
which are currently being leased through 2011. The Company recorded a
non-cash charge in its consolidated income statement in the nine months
ended September 30, 2002 of $13.9 million. This charge reflects future lease
costs, net of estimated future sublease revenue related to unused facilities
and the write-off of leasehold improvements. In the nine months ended
September 30, 2003, the Company recorded restructuring credits of $1.4
million related to the signing of sub-lease agreements for amounts higher
than originally estimated.
13
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. In the third quarter of 2002,
the Company recorded a restructuring credit of $1.5 million for the reversal
of prior period severance charges due to actual costs being lower than
originally estimated.
The 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
------------- --------- ------------- --------
Balance as of December 31, 2001 -- 2.9 -- 2.9
2002 restructuring charges (credits) 13.9 (0.2) -- 13.7
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 charges (credits) (1.4) -- 2.8 1.4
Less: net cash payments in 2003 (1.1) (0.1) (1.5) (2.7)
--------- --------- --------- --------
Balance as of September 30, 2003 $ 5.1 $ 0.1 $ 1.3 $ 6.5
========= ========= ========= ========
(10) INTEREST EXPENSE-NET
Interest expense for the three months ended September 30, 2003 and 2002 is
recorded net of capitalized interest of $2.8 million and $9.5 million,
respectively, and interest income of $2.4 million and $3.5 million,
respectively. Interest expense for the nine months ended September 30, 2003
and 2002 is recorded net of capitalized interest of $11.3 million and $23.6
million, respectively and interest income of $11.4 million and $9.8 million,
respectively.
In connection with the refinancing of the Hughes Electronics term loan in
the first quarter of 2002, the Company recorded an extraordinary loss on the
early extinguishment of debt as a result of the write-off of the remaining
related unamortized debt issuance costs. 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 of
$0.8 million within income tax expense for the quarter ended March 31, 2002
and the nine months ended September 30, 2002. This reclassification had no
effect on net income but resulted in lower income before income taxes for
these periods. Included in interest expense for the nine months ended
September 30, 2003 is approximately $5.7 million for the write-off of debt
issuance costs associated with the portion of the Senior Secured Credit
Facility that was prepaid in July 2003 (See Note 5 "Long-Term Debt).
(11) COMMITMENTS AND CONTINGENCIES
SATELLITE COMMITMENTS
As of September 30, 2003, we had approximately $27.6 million of expenditures
remaining under existing satellite construction contracts and $54.3 million
remaining 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 September 30, 2003, the
Company did not have any commitments related to existing launch or in-orbit
insurance contracts for satellites to be launched, including insurance
commitments related to Galaxy 13, which were paid in full as of September
30, 2003.
In October 2003, the Company amended its launch and construction contracts
related to the Galaxy 1R replacement satellite to allow for the construction
of a navigation payload on this satellite. This navigation payload will
utilize L-band frequencies and will function independently from the C-band
payload. We currently have remaining commitments in relation to these
contracts of
14
approximately $18 million. The Company has entered into an agreement with a
customer for the sale and use of this L-band payload.
In October 2003, Hughes Electronics committed to acquire a new satellite
from Space Systems/Loral, which would replace the Company's Galaxy 4R
satellite and would be known as Galaxy 16. The Company is currently
negotiating definitive terms for its acquisition of this satellite. While
the Company has made no commitment to any launch provider for the launch of
this satellite, the Company does have launch services already under contract
which could be used for this satellite.
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 11 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 11 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. 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 of this degradation and will continue to
assess the operational impact. 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 with these two satellites.
On July 31, 2003, the Company filed a proof of loss under the insurance
policy for its Galaxy 4R spacecraft, in the amount of $169 million, subject
to salvage. As of September 30, 2003, we had reached an agreement with all
but one of the insurers representing, in the aggregate, approximately 83
percent of the insurance coverage on the satellite. As a result, in the
third quarter of 2003, we recorded an insurance claim receivable of $102.6
million reflecting the insurance policy amount for these insurers less a
negotiated settlement for salvage. We received these proceeds during the
fourth quarter of 2003. In October 2003, the Company commenced arbitration
proceedings against the last insurance provider over a disputed portion of
the remaining claim (See Note 14 "Satellite Operational Developments").
The availability and use of any proceeds from the Galaxy 11, PAS-1R, and
Galaxy 4R insurance claims are restricted by the agreements governing our
debt obligations.
Excluding Galaxy 13, which was launched on October 1, 2003, we had in effect
launch and in-orbit insurance policies covering 11 satellites in the
aggregate amount of approximately $1.3 billion as of September 30, 2003. As
of such date, these insured satellites had an aggregate net book value and
other insurable costs of $1.6 billion. We have 14 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 1R, Galaxy 3R, Galaxy 5 and SBS-6,
which are approaching the ends of their useful lives; Galaxy 8-i, which is
fully depreciated and continues to operate in an inclined orbit; Galaxy 9
and Galaxy 11, for which the Company determined that insurance was not
available on commercially reasonable terms; HGS-3 which has a net book value
of $0.7 million as of September 30, 2003; and HGS-5 and Leasat which have no
book value. The Company's Galaxy 12 satellite serves as an in-orbit backup
for all or portions of Galaxy 1R, Galaxy 4R, Galaxy 5, Galaxy 9, Galaxy 10R
and Galaxy 11.
Of the insured satellites, as of September 30, 2003, six were covered by
policies with substantial exclusions or exceptions to coverage for failures
of specific components identified by the insurer as the most likely to fail
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
15
Developments"). The fifth such satellite, PAS-8, has an excluded component
that we believe is unlikely to fail in the near future. The sixth such
satellite, Galaxy 4R, for which a proof of loss has been filed (as described
above), has a remaining policy covering $20.9 million of investments in
sales-type leases that is subject to a component exclusion.
At September 30, 2003, the uninsured satellites and the satellites insured
by Significant Exclusion Policies had a total net book value and other
insurable costs of approximately $1.3 billion. Of this amount, $625 million
related to uninsured satellites and $645 million related to satellites
insured by Significant Exclusion Policies.
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, data network and end-to-end satellite
communications services to major broadcasting, direct-to-home television
providers, telecommunications companies and government entities worldwide.
For the three months ended September 30, 2003 and 2002, PanAmSat's revenues
were $210.1 million and $199.1 million, respectively. For the nine months
ended September 30, 2003 and 2002, PanAmSat's revenues were $613.4 million
and $615.5 million. These revenues were derived from the following service
areas:
PERCENTAGE OF REVENUES PERCENTAGE OF REVENUES
THREE MONTHS ENDED: NINE MONTHS ENDED:
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
-------------- ------------- -------------- -------------
Services:
Video Services 59% 65% 61% 66%
Network Services 26% 25% 26% 24%
Government Services 10% 3% 7% 3%
Other Services 5% 7% 6% 7%
---- ---- ---- ----
Total: 100% 100% 100% 100%
==== ==== ==== ====
(13) CONTRACTED BACKLOG FOR FUTURE SERVICES
Future contractual cash payments expected from customers (backlog)
aggregated approximately $4.8 billion as of September 30, 2003, including
approximately $1.0 billion related to satellites to be launched. Included in
the total backlog of $4.8 billion is $281.8 million of backlog that may be
terminated pursuant to certain contractual termination rights. During the
third quarter of 2003, the Company reduced its backlog on its PAS-6B
satellite by approximately $360 million due to the xenon ion propulsion
system ("XIPS") related anomaly (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 $4.8 billion backlog as of September 30, 2003,
approximately $3.6 billion, or 74%, 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 experiences. They represented approximately $930 million of our
backlog as of September 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 September 30, 2003, DIRECTV Latin America represented
approximately $563 million, or 12% of our total backlog. The smallest of
these five customers represented approximately $40 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.
16
(14) SATELLITE OPERATIONAL DEVELOPMENTS
PanAmSat currently operates seven Boeing model 601 HP spacecraft ("BSS 601
HP"). In addition, PamAmSat has recently launched Galaxy 13, a BSS 601 HP
satellite undergoing final in-orbit testing which is not yet in operation
(See Note 4 "Satellite Deployment Plans"). The BSS 601 HP spacecraft uses
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.
At the end of June 2003, the secondary XIPS on PanAmSat's Galaxy 4R
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 as designed on its backup bi-propellant
system. We and the manufacturer of this satellite have determined that the
XIPS on this satellite are no longer available. As a result, this
satellite's estimated remaining useful life, based on the bi-propellant fuel
on board, was reduced to approximately 3.5 years from the date of this
anomaly. 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.
On July 31, 2003, the Company filed a proof of loss under the insurance
policy for its Galaxy 4R spacecraft, in the amount of $169 million, subject
to salvage. As of September 30, 2003, we had reached an agreement with all
but one of the insurers representing, in the aggregate, approximately 83
percent of the insurance coverage on the satellite. As a result, in the
third quarter of 2003, we recorded an insurance claim receivable of
$102.6 million reflecting the insurance policy amount for these insurers
less a negotiated settlement for salvage. We proportionately offset the
proceeds from this settlement against the insured carrying value of the
satellite and the net investment in sales-type lease. We received these
proceeds during the fourth quarter of 2003. In October 2003, the Company
commenced arbitration proceedings against the last insurance provider over
a disputed portion of the remaining claim.
We cannot assure you that we will be successful in these proceedings or, if
successful, 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 began accelerating depreciation on Galaxy 4R beginning in the
third quarter of 2003 to coincide with the satellite's revised estimated
useful life. As a result, the Company recorded additional depreciation
expense of $6.5 million in the third quarter of 2003. Once a settlement is
reached with the final insurance provider, the Company anticipates that
future depreciation on Galaxy 4R will be approximately equal to the monthly
depreciation on this satellite before the anomaly occurred.
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 as designed on its backup bi-propellant system.
We and the manufacturer of this satellite have determined that the XIPS on
this satellite are no longer available. As a result, this satellite's
estimated remaining useful life, based on the bi-propellant fuel on board,
was reduced to approximately 4.9 years from the date of this anomaly. 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 reduced its total backlog by approximately $360 million. The
insurance policy on this satellite has an exclusion for XIPS-related
anomalies and, accordingly, this was not an insured loss.
We have determined that PAS-6B's net book value is fully recoverable. The
Company began accelerating depreciation on this satellite beginning in the
third quarter of 2003 to coincide with the satellite's revised estimated
useful life. As a result, the Company recorded additional depreciation
expense of $2.7 million in the third quarter of 2003.
Two of the Company's Boeing model 601 HP spacecraft, PAS-5 and Galaxy 8-i,
have no book value and are no longer in primary customer service. 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. For these
remaining three satellites, the available bi-propellant life ranges from at
least 3.6 years to as much as 7.4 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"). GM
received a private-letter ruling from the U.S. Internal Revenue Service
confirming that the distribution of Hughes Electronics' common stock to the
holders of GM Class H common stock, in connection with the split-off, would be
tax-free to GM and its Class H stockholders for federal income tax purposes. In
addition, the transactions have been approved by a majority of each class of GM
common stockholders--GM $1-2/3 and GM Class H--voting both as separate classes
and together as a single class based on their respective voting power. The
transactions remain subject to certain conditions, including, among other
things, obtaining U.S. antitrust and Federal Communications Commission ("FCC")
approvals. 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 for 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 NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(In thousands except per share data)
Operating leases, satellite services and other $ 206,033 $ 194,410 $ 600,853 $ 600,371
Outright sales and sales-type leases 4,047 4,714 12,576 15,125
Total revenues 210,080 199,124 613,429 615,496
Depreciation 85,018 78,966 232,194 262,689
Direct operating costs (exclusive of depreciation) 38,563 29,176 103,983 96,347
Selling, general and administrative expenses 19,323 23,336 58,687 79,585
Facilities restructuring and severance costs 727 1,189 1,390 13,708
Gain on PAS-7 insurance claim -- -- -- (40,063)
Loss on conversion of sales-type leases -- -- -- 18,690
Income from operations 66,449 66,457 217,175 184,540
Interest expense- net 38,904 38,857 106,311 102,557
Income before income taxes 27,545 27,600 110,864 81,983
Income tax expense 6,549 6,900 28,712 20,496
Net income 20,996 20,700 82,152 61,487
Net income per common share - basic and diluted $ 0.14 $ 0.14 $ 0.55 $ 0.41
18
PANAMSAT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Revenues - Revenues were $210.1 million for the three months ended September 30,
2003, compared to revenues of $199.1 million for the same period in 2002 and
$613.4 million for the nine months ended September 30, 2003, compared to revenue
of $615.5 million for same period in 2002. Operating lease revenues, which were
98.1 percent of total revenues for the third quarter of 2003, increased by 6.0
percent to $206.0 million from $194.4 million for the same period in 2002. The
increase in operating lease revenues was primarily attributable to additional
government revenues related to the Company's new G2 Satellite Solutions division
and an increase in network services revenues. These increases were partially
offset by lower video revenues recorded as a result of customer credit related
issues. Operating lease revenues were $600.9 million for nine months ended
September 30, 2003, compared to $600.4 million for the same period in 2002.
Total sales and sales-type lease revenues were $4.0 million for the quarter
ended September 30, 2003, compared to $4.7 million for the same period in 2002.
Total sales-type lease revenues were $12.6 million for the nine months ended
September 30, 2003, compared to $15.1 million for the same period in 2002.
Video Services - 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.
Operating lease revenues from video services decreased by 4.7 percent to
$119.0 million during the third quarter of 2003, compared to $124.9 million
for the third quarter of 2002. This decrease was primarily due to customer
credit related issues and lower occasional services revenues. Overall video
services revenues decreased by 5.0 percent to $123.1 million in the third
quarter of 2003, compared to $129.6 million in the third quarter of 2002.
Operating lease revenue from video services decreased by 7.7 percent to
$362.0 million for nine months ended September 30, 2003 as compared to
$392.2 million for the nine months ended September 30, 2002. This decrease
was primarily due to higher 2002 revenues from the 2002 FIFA World Cup,
lower termination fee revenues and lower video revenues recorded as a result
of customer credit related issues. Overall video services revenue were
$374.6 million in the nine months ended September 30, 2003 compared to
$407.3 million in the nine months ended September 30, 2002.
Network Services - The Company 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.
Revenue from network services increased by 10.5 percent to $54.5 million for
the third quarter of 2003, compared to $49.4 million for the third quarter
of 2002. Revenue from network services increased by 7.7 percent to $157.7
million for the nine months ended September 30, 2003, compared to $146.4
million for the same period in 2002. These increases are primarily a result
of net new business recorded from network resellers.
Government Services - Our government services provides end-to-end satellite
communications services to government entities, both domestically and
internationally. Revenue from government services increased by 236.8 percent
to $21.2 million for the third quarter of 2003, compared to $6.3 million for
the third quarter of 2002. Revenue from government services increased by
148.0 percent to $46.2 million for the nine months ended September 30, 2003,
compared to $18.6 million for the same period in 2002. The $21.2 million for
the third quarter of 2003 and $46.2 million for the nine months ended
September 30, 2003 primarily represent revenues from the Company's G2
Satellite Solutions division, which was formed in 2003 after the acquisition
of Hughes Global Services ("HGS"). The amounts recorded in 2002 primarily
represented revenues from HGS, prior to the acquisition by PanAmSat, which
are currently eliminated in consolidation.
Other - The Company provides TT&C (telemetry, tracking and control),
in-orbit back-up service, and other services to its customers. Revenue from
other services decreased by 18.8 percent to $11.3 million for the third
quarter of 2003, compared to $13.9 million for the third quarter of 2002.
Revenue from other services decreased by 19.2 percent to $34.9 million for
the nine months ended September 30, 2003, compared to $43.2 million for the
same period in 2002. These decreases in other revenue are primarily
attributable to lower in-orbit back-up protection revenues related to one of
the Company's customers.
Depreciation - Depreciation expense increased $6.0 million, or 7.6 percent, to
$85.0 million for the three months ended September 30, 2003 from $79.0 million
for the same period in 2002. Depreciation for the nine months ended September
30, 2003 decreased $30.5 million, or 11.6 percent, to $232.2 million from $262.7
million for the same period in 2002. The increase in depreciation for the three
months ended September 30, 2003 is due primarily to the acceleration of
depreciation on the Company's Galaxy 4R and PAS-6B satellites (See "Satellite
Operational Developments" below) and depreciation on satellites recently placed
in service. These increases were partially offset by lower depreciation related
to Galaxy 6 and Galaxy 8-i, which were fully depreciated in September 2002 and
July 2002, respectively.
19
The decrease in depreciation for the nine months ended September 30, 2003 is due
primarily to lower depreciation related to Galaxy 6 and Galaxy 8-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 3C and Galaxy 12 satellites that were placed in service in
September 2002 and May 2003, respectively, and the acceleration of depreciation
on the Company's Galaxy 4R and PAS-6B satellites.
Direct Operating Costs (exclusive of depreciation) - Direct operating costs
increased $9.4 million or 32.2 percent, to $38.6 million for the three months
ended September 30, 2003 from $29.2 million for the same period in 2002. Direct
operating costs increased $7.7 million or 7.9 percent, to $104.0 million for the
nine months ended September 30, 2003 from $96.3 million for the same period in
2002. For the three months ended September 30, 2003, the increase in direct
operating costs are primarily due to cost of sales related to the Company's new
G2 Satellite Solutions division. For the nine months ended September 30, 2003,
the increase in direct operating costs are primarily due to cost of sales
related to the Company's new G2 Satellite Solutions division offset by lower
broadcast services costs from the 2002 FIFA World Cup, lower webcast services
costs, and reduced satellite insurance expense.
Selling, General & Administrative Expenses - Selling, general and administrative
expenses decreased $4.0 million or 17.2 percent, to $19.3 million for the three
months ended September 30, 2003 from $23.3 million for the same period in 2002.
Selling, general and administrative expenses decreased $20.9 million or 26.3
percent, to $58.7 million for the nine months ended September 30, 2003 from
$79.6 million for the same period in 2002. The decrease in selling, general and
administrative expenses for the three and nine months ended September 30, 2003
is due primarily to lower bad debt expense of $2.1 million and $11.1 million,
respectively, and cost reductions as a result of operational efficiencies.
Facilities Restructuring and Severance Costs - Net facilities restructuring and
severance costs were $0.7 million and $1.4 million for the three and nine months
ended September 30, 2003, respectively, and $1.2 million and $13.7 million for
the three and nine months ended September 30, 2002, respectively. In the three
months ended September 30, 2003, the Company recorded a charge of $0.7 million
related to the Company's teleport consolidation plan. In the nine months ended
September 30, 2003, the Company recorded charges of $2.8 million related to the
Company's teleport consolidation plan. These costs were offset by restructuring
credits of $1.4 million related to the Company's 2002 facilities restructuring
plan. The 2002 charges were primarily attributable to the consolidation of
certain of the Company's facilities (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. 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 during 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 approximately $66.5 million
for the three months ended September 30, 2003 and 2002. Income from operations
was $217.2 million for nine months ended September 30, 2003 an increase of $32.7
million or 17.7 percent from $184.5 million for the same period in 2002. The
increase in income from operations for the nine months ended September 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 6, PAS-7 and Galaxy 8-i. These increases to
income from operations for the nine months ended September 30, 2003 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 $13.7 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 $38.9 million for the three
months ended September 30, 2003 and 2002. Interest expense, net was $106.3
million for the nine months ended September 30, 2003, an increase of $3.7
million, or 3.6 percent from $102.6 million for the same period in 2002. The
increase in interest expense, net for the nine months ended September 30, 2003
was primarily due to lower capitalized interest of $12.3 million, partially
offset by lower interest expense as a result of the repayment of $550 million of
debt during 2003. Included in net interest expense for the nine months ended
September 30, 2003 and 2002 were $5.7
20
million and $3.3 million, respectively, related to the write-off of the
unamortized debt issuance costs associated with early repayments of debt in each
of these periods (See Note 10 "Interest Expense-Net" to the consolidated
financial statements).
Income Tax Expense - Income tax expense was $6.5 million for the three months
ended September 30, 2003, an increase of $0.4 million or 5.1 percent, from $6.9
million for the three months ended September 30, 2002. Income tax expense was
$28.7 million for nine months ended September 30, 2003 an increase of $8.2
million or 4.0 percent, from $20.5 million for the nine months ended September
30, 2002. The increase in income tax expense for the three months and nine
months ended September 30, 2003 as compared to the same periods in 2002 was due
to higher income from operations. The Company estimates that its effective
income tax rate will be approximately 26 percent for 2003 as compared to 25
percent for 2002.
FINANCIAL CONDITION
As part of the Company's continuing effort to improve operational efficiencies,
in October 2003, the Company's management approved a plan to reduce its
workforce by approximately 45 employees. As a result, the Company anticipates
that it will be required to record a severance charge of approximately $1.5
million in the fourth quarter of 2003. These severance costs will primarily be
related to employee compensation, benefits and outplacement services.
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 nine months ended September 30, 2003, the Company
recorded charges of $2.8 million related to this teleport consolidation plan,
primarily representing severance costs.
The Company estimates that this teleport consolidation plan will result in an
overall loss of approximately $1 million, of which, an aggregate of
approximately $7 million of costs will be incurred during 2003 and 2004, and a
net gain on the disposal of land, buildings, and equipment of approximately $6
million will be recorded in 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 40
employees.
On March 29, 2002, the Company's management approved a plan to restructure
several of its United States locations and close certain facilities, some of
which are currently being leased through 2011. The Company recorded a non-cash
charge in its consolidated income statement in the nine months ended September
30, 2002 of $13.9 million. This charge reflects future lease costs, net of
estimated future sublease revenue related to unused facilities and the write-off
of leasehold improvements. In the nine months ended September 30, 2003, the
Company recorded restructuring credits of $1.4 million related to the signing of
sub-lease agreements for amounts higher than originally estimated.
At September 30, 2003, the Company had total debt outstanding of $2.0 billion,
including current maturities of $32.7 million related to quarterly principal
payments due in March, June and September 2004. 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 recorded a non-cash charge of approximately $5.7 million to
write-off debt issuance costs associated with the portion of the credit facility
that was prepaid. 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.
Prior to the pre-payment noted above and the October 29, 2003 amendment
described below, the Senior Secured Credit Facility was comprised of a $250.0
million revolving credit facility, which was undrawn and had an original
termination date of December 31, 2007 (the "Revolving Facility"), a $300.0
million term loan A facility, which had an original maturity date of December
31, 2007 (the "Term A Facility"), and a $700.0 million term loan B facility,
which had an original maturity date of December 31, 2008 (the "Term B
Facility"). At September 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 was required to pay a commitment fee for the unused
commitments under the Revolving Facility, which, as of September 30, 2003, on an
annualized basis was 0.50%. The Company had outstanding letters of credit
totaling $1.1 million, which reduced our ability to borrow against the Revolving
Facility by such amount. As of September 30, 2003, the amounts outstanding under
the Term A Facility and the Term B Facility were $195 million and $455 million,
respectively.
21
On June 18, 2003, the Company and its lenders under the Company's Senior Secured
Credit Facility amended the loan agreement to allow for the completion of the
News Corporation Transactions without causing an event of default under such
facility.
On October 29, 2003, the Company amended its Senior Secured Credit Facility to
provide for the refinancing of its Term A Facility and Term B Facility under a
new Term Loan B-1 facility (the "Term B-1 Facility") with an interest rate of
LIBOR plus 2.5% and scheduled annual maturities of principal as follows (in
thousands):
Year Ending December 31, Amount Due
------------------------ ----------
2004 $ 6,500
2005 6,500
2006 6,500
2007 6,500
2008 6,500
2009 158,031
2010 459,469
----------
$ 650,000
==========
As a result of this amendment, the amount of the revolving credit facility, its
termination date and the provisions relating to the commitment fee remain
unchanged. Fees charged by the lenders for this amendment will be capitalized as
debt issuance costs and amortized over the revised term of the Term B-1
Facility, along with previously capitalized debt issuance costs related to the
Term A Facility and the Term B Facility.
PanAmSat is required to maintain certain financial covenants and is also subject
to restrictive covenants under the Company's borrowings. As of September 30,
2003, the Company was in compliance with all such covenants. The October 29,
2003 amendment adjusted certain operating covenants under the Senior Secured
Credit Facility to provide greater operational flexibility to the Company.
In accordance with the agreement governing the Senior Secured Credit Facility,
the Company entered into an interest rate hedge agreement 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. This interest rate hedge is designated as a
cash flow hedge. During the nine months ended September 30, 2003, no
ineffectiveness was recognized in the statement of operations on this hedge. The
fair value of the outstanding interest-rate hedge agreement as of September 30,
2003, based upon quoted market prices from the counter party, reflected a hedge
liability of approximately $2.8 million. In conjunction with the October 29,
2003 amendment, described above, the terms of this interest rate hedge were
unchanged and the hedge continues on the Term B-1 Facility. In addition, the
Company will no longer be required to enter into an interest rate hedge
agreement under the Senior Secured Credit Facility upon expiration of the
current agreement on August 30, 2005.
As of September 30, 2003, the Company had outstanding $800 million Senior Notes
due in 2012 with a stated interest rate of 8.5%. The Company also 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 September 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.
Obligations under the Senior Notes 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. 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.
Net cash provided by operating activities decreased $67.7 million, or 17
percent, to $327.7 million for the nine months ended September 30, 2003, from
$395.4 million for the nine months ended September 30, 2002. The decrease was
primarily attributable to a decrease in non-cash changes of $45.9 million and an
increase in cash used within accounts payable and accrued liabilities of $48.6
million. These decreases to cash provided by operating activities were partially
offset by an increase in net income of $20.7 million and a change in prepaid
expenses and other assets of $19.1 million. The increase in cash used within
accounts payable and accrued liabilities is primarily due to timing of vendor
payments and a $29.4 million increase in accrued interest payable largely
22
related to the $800 million Senior Notes issued in 2002. The change in cash
provided from prepaid expenses and other assets is primarily attributable to
decreases in prepaid insurance and long-term receivables.
Net cash used in investing activities was $58.5 million for the nine months
ended September 30, 2003, compared to $140.8 million for the nine months ended
September 30, 2002. The decrease in the cash used was primarily due to a
decrease in capital expenditures of $172.9 million and a $140.1 million change
in investments as a result of the sale of $44.4 million of investments during
2003 and the purchase of $95.7 million of investments during 2002. These
decreases were partially offset by the receipt of $215.0 million of proceeds
from the PAS-7 insurance claim during 2002.
Net cash used in financing activities increased to $556.9 million for the nine
months ended September 30, 2003, from $18.5 million for the nine months ended
September 30, 2002. The increase in cash used of $538.4 million is primarily
attributable to the repayment of $550 million of debt during 2003.
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 $105 million to $120 million on capital
expenditures during 2003, which will primarily be comprised of costs to
construct, insure and launch satellites.
PanAmSat currently operates seven Boeing model 601 HP spacecraft ("BSS 601 HP").
In addition, PanAmSat has recently launched Galaxy 13, a BSS 601 HP satellite
undergoing final in-orbit testing which is not yet in operation (See Note 4
"Satellite Deployment Plans" to the consolidated financial statements). The BSS
601 HP 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.
From our experience, failure of both of the XIPS on a BSS 601 HP 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, the determination of the remaining useful life of the satellite is based
upon the available bi-propellant fuel on board and available operational
actions. Two of the Company's BSS 601 HPs, PAS-5 and Galaxy 8-i, have no book
value and are no longer in primary customer service. Recently, the secondary
XIPS on the Galaxy 4R and PAS-6B satellites ceased working (See "Satellite
Operational Developments" below). The other three BSS 601 HPs 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.
For these remaining three satellites, the available bi-propellant life ranges
from at least 3.6 years to as much as 7.4 years.
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 future depreciation and planned
capital expenditures and reductions of backlog. If the Company determines to
replace a satellite experiencing a failure of both XIPS, the capital
expenditures would not be required until approximately two to three 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 two more satellites by the end of 2005 for
United States coverage. We are currently scheduled to launch one of these
additional satellites to replace Galaxy 5 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. This satellite will include an additional L-band
payload (See "Commitments and Contingencies" below).
As a result of the termination of the Galaxy 8-iR satellite construction
contract, as of September 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 8-iR launch vehicle provider to
defer our use of the launch to a future satellite. The Company expects to use
this launch in early 2006 to replace the Galaxy 4R satellite (See "Satellite
Operational Developments" below).
23
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.
SATELLITE OPERATIONAL DEVELOPMENTS
At the end of June 2003, the secondary XIPS on PanAmSat's Galaxy 4R 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 as designed on its backup bi-propellant system. We and the
manufacturer of this satellite have determined that the XIPS on this satellite
are no longer available. As a result, this satellite's estimated remaining
useful life, based on the bi-propellant fuel on board, was reduced to
approximately 3.5 years from the date of this anomaly. 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.
On July 31, 2003, the Company filed a proof of loss under the insurance policy
for its Galaxy 4R spacecraft, in the amount of $169 million, subject to salvage.
As of September 30, 2003, we had reached an agreement with all but one of the
insurers representing, in the aggregate, approximately 83 percent of the
insurance coverage on the satellite. As a result, in the third quarter of 2003,
we recorded an insurance claim receivable of $102.6 million reflecting the
insurance policy amount for these insurers less a negotiated settlement for
salvage. We proportionately offset the proceeds from this settlement against
the insured carrying value of the satellite and the net investment in
sales-type lease. We received these proceeds during the fourth quarter of 2003.
In October 2003, the Company commenced arbitration proceedings against the last
insurance provider over a disputed portion of the remaining claim.
We cannot assure you that we will be successful in these proceedings or, if
successful, 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 began accelerating depreciation on Galaxy 4R beginning in the third
quarter of 2003 to coincide with the satellite's revised estimated useful life.
As a result, the Company recorded additional depreciation expense of $6.5
million in the third quarter of 2003. Once a settlement is reached with the
final insurance provider, the Company anticipates that future depreciation on
Galaxy 4R will be approximately equal to the monthly depreciation on this
satellite before the anomaly occurred.
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 as designed on its backup bi-propellant system. We and
the manufacturer of this satellite have determined that the XIPS on this
satellite are no longer available. As a result, this satellite's estimated
remaining useful life, based on the bi-propellant fuel on board, was reduced to
approximately 4.9 years from the date of this anomaly. 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 reduced its total
backlog by approximately $360 million. The insurance policy on this satellite
has an exclusion for XIPS-related anomalies and, accordingly, this was not an
insured loss.
We have determined that PAS-6B's net book value is fully recoverable. The
Company began accelerating depreciation on this satellite beginning in the third
quarter of 2003 to coincide with the satellite's revised estimated useful life.
As a result, the Company recorded additional depreciation expense of $2.7
million in the third quarter of 2003.
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.
PanAmSat evaluates the carrying value of its goodwill in the fourth quarter of
each year and when events and circumstances warrant such a review in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires the use of fair value in
determining the amount of impairment, if any, for recorded goodwill. In
conjunction with the Company's goodwill impairment assessments, the Company
utilizes an independent valuation expert to assist the Company in assessing the
fair value of its reporting unit using discounted cash flows and other valuation
techniques. Changes in estimates utilized in this valuation, including estimates
of future cash flows, could result in a write-down of the asset in a future
period. The amount of any impairment loss resulting from the annual impairment
test could be material to PanAmSat's results of operations.
COMMITMENTS AND CONTINGENCIES
As of September 30, 2003, we had approximately $27.6 million of expenditures
remaining under existing satellite construction contracts and $54.3 million
remaining 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 September 30, 2003, the Company did not
have any commitments related to existing launch or in-orbit insurance contracts
for satellites to be launched, including insurance commitments related to Galaxy
13, which were paid in full as of September 30, 2003.
In October 2003, the Company amended its launch and construction contracts
related to the Galaxy 1R replacement satellite to allow for the construction of
a navigation payload on this satellite. This navigation payload will utilize
L-band frequencies and will function independently from the C-band payload. We
currently have remaining commitments in relation to these contracts of
approximately $18 million. The Company has entered into an agreement with a
customer for the sale and use of this L-band payload.
In October 2003, Hughes Electronics committed to acquire a new satellite from
Space Systems/Loral, which would replace the Company's Galaxy 4R satellite and
would be known as Galaxy 16. The Company is currently negotiating definitive
terms for its acquisition of this satellite. While the Company has made no
commitment to any launch provider for the launch of this satellite, the Company
does have launch services already under contract which could be used for this
satellite.
On February 19, 2003, the Company filed proofs of loss under the insurance
policies for two of its Boeing model 702 spacecraft, Galaxy 11 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 11 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. 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 of this degradation and
will continue to assess the operational impact. 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
25
material impact on 2003 revenues as a result of the difficulties with these two
satellites.
On July 31, 2003, the Company filed a proof of loss under the insurance policy
for its Galaxy 4R spacecraft, in the amount of $169 million, subject to salvage.
As of September 30, 2003, we had reached an agreement with all but one of the
insurers representing, in the aggregate, approximately 83 percent of the
insurance coverage on the satellite. As a result, in the third quarter of 2003,
we recorded an insurance claim receivable of $102.6 million reflecting the
insurance policy amount for these insurers less a negotiated settlement for
salvage. We received these proceeds during the fourth quarter of 2003. In
October 2003, the Company commenced arbitration proceedings against the last
insurance provider over a disputed portion of the remaining claim (See Note 14
"Satellite Operational Developments").
The availability and use of any proceeds from the Galaxy 11, PAS-1R, and Galaxy
4R insurance claims are restricted by the agreements governing our debt
obligations.
Excluding Galaxy 13, which was launched on October 1, 2003, we had in effect
launch and in-orbit insurance policies covering 11 satellites in the aggregate
amount of approximately $1.3 billion as of September 30, 2003. As of such date,
these insured satellites had an aggregate net book value and other insurable
costs of $1.6 billion. We have 14 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 1R, Galaxy 3R, Galaxy 5 and SBS-6, which are approaching the ends of
their useful lives; Galaxy 8-i, which is fully depreciated and continues to
operate in an inclined orbit; Galaxy 9 and Galaxy 11, for which the Company
determined that insurance was not available on commercially reasonable terms;
HGS-3 which has a net book value of $0.7 million as of September 30, 2003; and
HGS-5 and Leasat which have no book value. The Company's Galaxy 12 satellite
serves as an in-orbit backup for all or portions of Galaxy 1R, Galaxy 4R, Galaxy
5, Galaxy 9, Galaxy 10R and Galaxy 11.
Of the insured satellites, as of September 30, 2003, six were covered by
policies with substantial exclusions or exceptions to coverage for failures of
specific components identified by the insurer as the most likely to fail 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 "Satellite Operational Developments" above). The fifth
such satellite, PAS-8, has an excluded component that we believe is unlikely to
fail in the near future. The sixth such satellite, Galaxy 4R, for which a proof
of loss has been filed (as described above), has a remaining policy covering
$20.9 million of investments in sales-type leases that is subject to a component
exclusion.
At September 30, 2003, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other insurable
costs of approximately $1.3 billion. Of this amount, $625 million related to
uninsured satellites and $645 million related to satellites insured by
Significant Exclusion Policies.
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 $4.8 billion as of September 30, 2003, including approximately
$1.0 billion related to satellites to be launched. Included in the total backlog
of $4.8 billion is $281.8 million of backlog that may be terminated pursuant to
certain contractual termination rights. During the third quarter of 2003, the
Company reduced its backlog on its PAS-6B satellite by approximately $360
million due to the XIPS related anomaly. (See "Satellite Operational
Developments" above).
Due to events in the telecommunications industry and general economic conditions
in certain parts of the world, we have reviewed our
26
backlog for our top 25 customers to identify risks to our business related to
these events and conditions. Of our $4.8 billion backlog as of September 30,
2003, approximately $3.6 billion, or 74%, 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 $930 million of our backlog as of September 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 September 30,
2003, DIRECTV Latin America represented approximately $563 million, or 12% of
our total backlog, and $14.8 million of our expected revenues for the fourth
quarter of 2003. The smallest of these five customers represented approximately
$40 million, or 0.8% of our total backlog, and $1.0 million of our expected
revenues for the fourth quarter of 2003. 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 Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities an
interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires the consolidation of a
variable interest entity ("VIE") where an equity investor achieves a controlling
financial interest through arrangements other than voting interests, and it is
determined that the investor will absorb a majority of the expected losses
and/or receive the majority of residual returns of the VIE. In October 2003, the
FASB deferred the effective date for the consolidation of VIEs created prior to
February 1, 2003 to December 31, 2003 for calendar year-end companies, with
earlier application encouraged. PanAmSat adopted FIN 46 as of its original
effective date of July 1, 2003 for entities created prior to February 1, 2003.
The adoption of FIN 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 applies 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 on July 1, 2003 had no 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 September 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 "Financial Condition" above). 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
27
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 September 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 10-year
bond is applied to future cash flows from sales-type leases to arrive at a
base rate present value for sales-type leases. This discount rate is then
adjusted for a negative 10% change and then applied to the same cash flows
from sales-type leases to arrive at a present value based on the negative
change. The base rate present value and the present value based on the
negative change are then compared to arrive at the potential negative fair
value change as a result of the hypothetical change in interest rates.
- For the Company's fixed rate public debt, the current market rate of each
public debt instrument is applied to each principal amount to arrive at a
current yield to maturity for each public debt instrument as of the end of
the period. The current market rate is then reduced by a factor of 10% and
this revised market rate is applied to the principal amount of each public
debt instrument to arrive at a yield to maturity based on the adverse
interest rate change. The two yields to maturity are then compared to arrive
at the potential negative fair value change as a result of the hypothetical
change in interest rates.
- For the Company's variable rate debt, the effect in annual cash flows and
net income is calculated as a result of the potential effect of a
hypothetical 10% adverse fluctuation in interest rates. The current LIBOR
rate plus applicable margin as of the end of the quarter is applied to the
applicable principal outstanding at the end of the quarter to determine an
annual interest expense based on quarter-end rates and principal balances.
This calculation is then performed after increasing the LIBOR rate plus
applicable margin by a factor of 10%. The difference between the two annual
interest expenses calculated represents the reduction in annual cash flows
as a result of the potential effect of a hypothetical 10% adverse
fluctuation in interest rates. This amount is then tax effected based on the
Company's effective tax rate to yield the reduction in net income as a
result of the potential effect of a hypothetical 10% adverse fluctuation in
interest rates.
A potential limitation of the respective models is in the assumptions utilized
in the models including 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 September 30, 2003. Based upon economic conditions
and leading market indicators at September 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 $51.9 million and $3.2 million, respectively, as of September 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 September 30,
2003 would be a reduction in cash flows of approximately $2.4 million and a
reduction in net income of approximately $1.3 million.
28
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 September 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
September 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 plaintiff 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. On October 27, 2003,
defendants filed a brief in response to plaintiffs' appeal. 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 10.78.2 Amendment No. 2, dated as of October 29, 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 Rules
13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of the Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) of the Securities Exchange Act of
1934, as amended.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350.
(b) Reports on Form 8-K.
On July 14, 2003, we filed a Current Report on Form 8-K, Item 9, updating
current information provided with respect to our Boeing model 601 HP
satellites.
On July 15, 2003, we filed a Current Report on Form 8-K, Item 9 (information
provided under Item 12 Results of Operation and Financial Condition),
announcing certain financial results for the second quarter and six months
ended June 30, 2003 and updating certain financial guidance for the year
2003.
On August 8, 2003, we filed a Current Report on Form 8-K, Item 9, revising
certain of the Company's financial guidance for third quarter of 2003.
30
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
November 6, 2003 /s/ Michael J. Inglese
-----------------------------
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
31