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, 2002
COMMISSION FILE NO. 0-22531
PANAMSAT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4607698
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
20 WESTPORT ROAD, WILTON, CT 06897
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: 203-210-8000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO | |
As of November 7, 2002, an aggregate of 149,960,079 shares of the Company's
Common Stock were outstanding.
1
Unless the context otherwise requires, in this Quarterly Report on Form 10-Q,
the terms "we," "our", the "Company" and "PanAmSat" refer to PanAmSat
Corporation and its subsidiaries.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains certain forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. When used in this Quarterly Report on
Form 10-Q, the words "estimate," "plan," "project," "anticipate," "expect,"
"intend," "outlook," "believe," and other similar expressions are intended to
identify forward-looking statements and information. Actual results may differ
materially from any results which might be projected, forecasted, estimated or
budgeted by PanAmSat due to certain risks and uncertainties, including without
limitation: (i) risks of launch failures, launch and construction delays and
in-orbit failures or reduced performance, (ii) risks 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, 2001 (the "Form 10-K").
Reference is also made to such other risks and uncertainties detailed from time
to time in the Company's filings with the United States Securities and Exchange
Commission ("SEC"). The Company cautions that the foregoing list of important
factors is not exclusive. Furthermore, the Company operates in an industry
sector where securities values may be volatile and may be influenced by economic
and other factors beyond the Company's control.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------ ------------
REVENUES:
Operating leases, satellite services and other $ 194,410 $ 202,006
Outright sales and sales-type leases 4,714 50,943
------------ ------------
Total revenues 199,124 252,949
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases -- 12,766
Depreciation and amortization 78,966 104,123
Direct operating costs (exclusive of
depreciation & amortization) 30,034 33,408
Selling, general and administrative expenses 22,478 33,627
Facilities restructuring and severance costs 1,189 6,892
------------ ------------
Total operating costs and expenses 132,667 190,816
------------ ------------
INCOME FROM OPERATIONS 66,457 62,133
INTEREST EXPENSE, net 38,857 27,616
------------ ------------
INCOME BEFORE INCOME TAXES 27,600 34,517
INCOME TAXES 6,900 15,014
------------ ------------
NET INCOME $ 20,700 $ 19,503
------------ ------------
EARNINGS PER SHARE - basic and diluted $ 0.14 $ 0.13
------------ ------------
Weighted average common shares outstanding 149,939,853 149,825,494
------------ ------------
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, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
REVENUES:
Operating leases, satellite services and other $ 600,371 $ 604,446
Outright sales and sales-type leases 15,125 61,960
------------- -------------
Total revenues 615,496 666,406
------------- -------------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases -- 12,766
Depreciation and amortization 262,689 304,743
Direct operating costs (exclusive of
depreciation & amortization) 98,224 114,386
Selling, general and administrative expenses 77,708 91,611
Facilities restructuring and severance costs 13,708 6,892
Gain on PAS-7 insurance claim (40,063) --
Loss on conversion of sales-type leases 18,690 --
------------- -------------
Total operating costs and expenses 430,956 530,398
------------- -------------
INCOME FROM OPERATIONS 184,540 136,008
INTEREST EXPENSE, net 99,248 87,467
------------- -------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 85,292 48,541
INCOME TAXES 21,323 21,115
------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM 63,969 27,426
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, net of income taxes 2,482 --
------------- -------------
NET INCOME $ 61,487 $ 27,426
------------- -------------
EARNINGS PER SHARE BEFORE EXTRAORDINARY
ITEM - basic and diluted $ 0.43 $ 0.18
EARNINGS PER SHARE - EXTRAORDINARY LOSS ON
EARLY EXTINGUISHMENT OF DEBT - basic and diluted 0.02 --
------------- -------------
NET INCOME PER COMMON SHARE - basic and diluted $ 0.41 $ 0.18
------------- -------------
Weighted average common shares outstanding 149,914,411 149,762,849
------------- -------------
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,
2002 2001
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 679,469 $ 443,266
Short-term investments 95,726 --
Accounts receivable-net 37,664 34,468
Net investment in sales-type leases 22,280 24,886
Prepaid expenses and other current assets 32,979 34,375
Deferred income taxes 17,962 8,181
---------- ----------
Total current assets 886,080 545,176
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 2,973,348 3,152,082
NET INVESTMENT IN SALES-TYPE LEASES 167,805 227,014
GOODWILL-Net of amortization 2,238,659 2,238,659
DEFERRED CHARGES AND OTHER ASSETS 157,964 133,879
---------- ----------
TOTAL ASSETS $6,423,856 $6,296,810
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 76,970 $ 88,269
Current portion of long-term debt 200,000 46,542
Accrued interest payable 22,066 23,988
Deferred revenues 14,876 10,554
----------- -----------
Total current liabilities 313,912 169,353
DUE TO AFFILIATES (merger-related indebtedness) -- 1,725,000
LONG-TERM DEBT 2,350,000 750,000
DEFERRED INCOME TAXES 431,635 381,754
DEFERRED CREDITS AND OTHER (principally customer
deposits and deferred revenue) 273,473 278,143
----------- -----------
TOTAL LIABILITIES $ 3,369,020 $ 3,304,250
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value - 400,000,000
shares authorized; 149,949,305 and 149,871,260
outstanding at September 30, 2002 and December 31, 2001, $ 1,499 $ 1,499
respectively
Additional paid-in-capital 2,532,005 2,530,016
Retained earnings 522,532 461,045
Accumulated other comprehensive loss (1,200) --
----------- -----------
Total stockholders' equity 3,054,836 2,992,560
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,423,856 $ 6,296,810
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
6
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
--------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 61,487 $ 27,426
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 262,689 304,743
Gross profit on sales and sales-type leases -- (32,715)
Deferred income taxes 40,786 28,459
Amortization of debt issuance costs and other deferred charges 9,419 5,926
Provision for uncollectible receivables 12,256 15,339
Gain on PAS-7 settlement (40,063) --
Loss on conversion of sales-type leases 18,690 --
Facilities restructuring and severance costs 13,708 6,892
Loss on early extinguishment of debt 2,482 --
Changes in assets and liabilities:
Collections on investments in sales-type leases 17,165 16,060
Operating leases and other receivables (8,455) (11,233)
Prepaid expenses and other assets 3,537 (31,623)
Accounts payable and accrued liabilities (2,592) 1,365
Deferred gains and revenues 4,322 30,429
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 395,431 $ 361,068
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
7
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including capitalized interest) $ (260,037) $ (241,654)
Insurance proceeds from satellite recoveries 215,000 132,435
Purchase of short-term investments (95,738) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (140,775) (109,219)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings 1,800,000 --
Repayments of long-term debt (1,771,542) (21,216)
Debt issuance costs (41,012) --
Repayments of incentive obligations (7,951) (6,400)
Stock issued in connection with employee benefit plans 2,052 5,497
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (18,453) (22,119)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 236,203 229,730
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 443,266 129,345
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 679,469 $ 359,075
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash received for interest $ 9,973 $ 11,985
----------- -----------
Cash paid for interest $ 120,600 $ 127,369
----------- -----------
Cash received for taxes $ 18,551 $ 7,396
----------- -----------
Cash paid for taxes $ 2,482 $ 1,799
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
8
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments which are of a normal recurring nature necessary to present
fairly the financial position, results of operations and cash flows as of
and for the three and nine month periods ended September 30, 2002 and 2001
have been made. Certain prior period amounts have been reclassified to
conform with the current period's presentation. Operating results for the
three and nine months ended September 30, 2002 and 2001 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, 2001 and the PanAmSat Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2002 and June 30, 2002 filed with the Securities
and Exchange Commission ("SEC") on March 11, 2002, May 6, 2002 and August
13, 2002, respectively, and all other PanAmSat filings filed with the SEC
through the date of this report.
On October 28, 2001, General Motors ("GM") and its wholly owned subsidiary
Hughes Electronics Corporation ("Hughes Electronics"), together with
EchoStar Communications Corporation ("EchoStar"), announced the signing of
definitive agreements that, subject to stockholder approval, regulatory
clearance, and certain other conditions, provide for the split-off of
Hughes Electronics from GM and the subsequent merger of the Hughes
Electronics' business with EchoStar (the "Hughes Transaction"). EchoStar
is a leading provider of direct broadcast satellite television services in
the United States through its DISH Network business unit.
On October 10, 2002, the Federal Communications Commission ("FCC")
announced that it declined to approve the transfer of the licenses
necessary to allow the Hughes Transaction to close without a public
hearing. Accordingly, the application has been designated for hearing by
an administrative law judge. The FCC, however, has given the parties until
November 27, 2002 to file an amended application to address the FCC's
concerns and to file a petition to suspend the hearing. On October 31,
2002, the U.S. Department of Justice ("DOJ"), twenty-three states, the
District of Columbia and Puerto Rico filed a complaint for permanent
injunctive relief in the United States District Court for the District of
Columbia against EchoStar, GM, Hughes Electronics and DIRECTV Enterprises
LLC. The suit seeks to permanently enjoin the Hughes Transaction and a
declaration that the proposed Hughes Transaction violates Section 7 of the
Clayton Act. On November 5, 2002, the District Court denied the
defendants' petition for an expedited trial. GM and Hughes Electronics
have announced that they will continue to coordinate their efforts with
EchoStar to proceed in accordance with the terms of the agreements.
However, no assurance can be given that the required regulatory clearances
and approvals will be obtained from the DOJ and the FCC within the
timeframes required by the agreements, or if so obtained, that all other
conditions to the transactions will be satisfied such that the Hughes
Transaction can be completed.
GM, Hughes Electronics and EchoStar have agreed that, in the event the
Hughes Transaction does not occur because of a failure to obtain certain
specified regulatory clearances or approvals (including approval by the
FCC) or financing to complete the Hughes Transaction, or because other
specified conditions have not been satisfied (including the absence of a
permanent injunction as contemplated by the DOJ's action described above),
each relating to the Hughes Transaction, Hughes Electronics will be
required to sell and EchoStar will be required to purchase all of the
shares of Common Stock of PanAmSat beneficially owned by Hughes
Electronics (approximately 81% of PanAmSat's outstanding Common Stock) for
$22.47 per share or an aggregate purchase price of approximately $2.7
billion, which is payable, depending on the circumstances, solely in cash
or in a combination of cash and either debt or equity securities of
EchoStar. EchoStar has the option to structure its purchase of Hughes
Electronics' interest in PanAmSat as a merger or tender offer so that it
can attempt to acquire 100% of PanAmSat in one transaction, in which case
Hughes Electronics must receive at least the same amount of consideration
that it would have received in the PanAmSat stock sale. EchoStar has
agreed that, unless it has previously completed a merger with PanAmSat or
a tender
9
offer for all of the outstanding PanAmSat shares, it will commence a
tender offer for all PanAmSat shares that remain outstanding following the
completion of the PanAmSat stock sale to EchoStar for a purchase price of
at least $22.47 per share (or approximately $675 million in the aggregate)
payable, at the option of the holder, either in cash or shares of EchoStar
Class A Common Stock.
Any such sale of PanAmSat would be subject to a number of conditions which
must be satisfied before the transaction could be completed, including,
the termination of the agreements governing the Hughes Transaction for
certain specified reasons (including the failure to obtain approval from
the FCC or the absence of any injunction imposed by the DOJ as discussed
above), receipt of certain regulatory approvals, the expiration or
termination of the waiting period applicable to the sale under the
Hart-Scott-Rodino Act, the lack of any effective injunction or order for
the transfer of licenses in connection with any such PanAmSat sale, and
other specified conditions.
(2) NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
The standard includes provisions for the reclassification of certain
existing recognized intangibles such as goodwill, reassessment of the
useful lives of existing recognized intangibles, reclassification of
certain intangibles out of previously reported goodwill and the
identification of reporting units. SFAS 142 provides that intangible
assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives not be amortized, but rather be
tested at least annually for impairment with a transitional goodwill
impairment test completed within six months from the date of adoption.
SFAS 142 also changed the evaluation criteria for testing goodwill for
impairment from an undiscounted cash flow approach to a test based on the
implied fair value of the goodwill at the reporting unit level. PanAmSat
has determined that, for such impairment testing, the Company has only one
reporting unit, which is at the enterprise level.
SFAS 142 requires a two-step test to determine the amount, if any, of an
impairment loss with respect to goodwill. The first step of the goodwill
impairment test, used to identify potential impairment, compares the fair
value of a reporting unit with its carrying amount, including goodwill. If
the carrying amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test must be performed to measure the
amount of impairment loss, if any.
Fair value is determined by the amount at which an asset or liability
could be bought or sold in a current transaction between willing parties.
Quoted market prices in active markets are often used as the basis for
fair value, if available. If quoted market prices are not available, the
estimate of fair value is typically based on the best information
available, including prices for similar assets and liabilities and the
results of using other valuation techniques, such as public company
trading multiples, future discounted cash flows and merger and acquisition
transaction multiples.
In the quarter ended June 30, 2002, the Company completed its transitional
assessment of the recoverability of its goodwill and determined that no
impairment charge is required. The Company measured the fair value of its
reporting unit based on the quoted market price of the Company's common
stock. Additionally, a valuation of PanAmSat was contemporaneously
performed by an independent valuation expert utilizing a discounted cash
flow approach. The fair value of the Company derived from the discounted
cash flow approach exceeded the carrying value of the Company's goodwill
as well as the value determined using the market price of PanAmSat's
stock. In accordance with SFAS No. 142, PanAmSat will perform its annual
impairment test for its reporting unit during the fourth quarter of each
year, commencing in the fourth quarter of 2002. If an impairment loss
results from the annual impairment test, the loss will be recorded as a
pre-tax charge to operating income. The amount of any impairment loss
resulting from the annual impairment test could be material to PanAmSat's
results of operations.
The adoption of SFAS 142 resulted in the elimination of goodwill
amortization beginning January 1, 2002. As of September 30, 2002, the
Company had goodwill of approximately $2.24 billion and no other
intangible assets. Prior to the adoption of SFAS 142, our annual goodwill
amortization was approximately $65 million. Net income and earnings per
share for the three and nine months ended September 30, 2002 and 2001,
adjusted to exclude amortization expense related to goodwill which is no
longer amortized, are as follows:
10
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income before extraordinary item:
Reported income before
extraordinary item $ 20,700 $ 19,503 $ 63,969 $ 27,426
Goodwill amortization -- 16,240 -- 48,720
---------- ---------- ---------- ----------
Adjusted income before
extraordinary item $ 20,700 $ 35,743 $ 63,969 $ 76,146
========== ========== ========== ==========
Net income:
Reported net income $ 20,700 $ 19,503 $ 61,487 $ 27,426
Goodwill amortization -- 16,240 -- 48,720
---------- ---------- ---------- ----------
Adjusted net income $ 20,700 $ 35,743 $ 61,487 $ 76,146
========== ========== ========== ==========
Earnings per share before extraordinary item -
basic and diluted:
Reported earnings per share before
extraordinary item - basic and diluted $ 0.14 $ 0.13 $ 0.43 $ 0.18
Goodwill amortization per share -- 0.11 -- 0.33
---------- ---------- ---------- ----------
Adjusted earnings per share before
extraordinary item - basic and diluted $ 0.14 $ 0.24 $ 0.43 $ 0.51
========== ========== ========== ==========
Net income per common share - basic and diluted:
Reported net income per common
share - basic and diluted $ 0.14 $ 0.13 $ 0.41 $ 0.18
Goodwill amortization per share -- 0.11 -- 0.33
---------- ---------- ---------- ----------
Adjusted net income per common
share - basic and diluted $ 0.14 $ 0.24 $ 0.41 $ 0.51
========== ========== ========== ==========
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). SFAS 145 provides that a loss on
extinguishment of debt meet the requirements of APB 30 to be treated as an
extraordinary item in the statement of operations. SFAS 145 also amends
FASB Statement No. 13 to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions.
In the first quarter of 2002 in connection with the Company's refinancing,
the Company recorded an extraordinary loss for the remaining unamortized
debt issuance costs related to the repayment of the Hughes Electronics
term loan (See Note 4 and Note 11 below). The provisions of SFAS 145
related to the rescission of FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt ("SFAS 4"), will be effective for the
Company beginning January 1, 2003. The Company is in the process of
evaluating the effect, if any, the provisions of SFAS 145 will have on our
financial statements. The other provisions of SFAS 145 were effective in
the second quarter of 2002 and did not have a significant impact on our
financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
The principal difference between this Statement and Issue 94-3 relates to
its requirements for recognition of a liability for a cost associated with
an exit or disposal activity. This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We do not believe
that the adoption of the provisions of SFAS 146 will have a significant
impact on our financial statements.
11
(3) SATELLITE DEVELOPMENTS
Reference is made to "Item 1. Business - Overview - Our Business
Strategy"; "Our Satellite Network and Ground Infrastructure" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Satellite Deployment Plan and Planned Satellites" in the Form
10-K for a detailed description of the Company's satellite network and its
satellite deployment plan.
Two of the three Boeing Satellite Systems ("BSS") 702 satellites that we
operate and other BSS 702's of a similar design operated by others have
experienced a progressive degradation of their solar arrays causing a
reduction in output power. Along with the manufacturer, we are monitoring
the problem to determine its cause and its expected effect. The power
reduction may require the satellite operator to permanently turn off
certain transponders on the affected satellite to allow for the continued
operation of other transponders, which could result in a loss of revenue.
Should it be necessary to turn off a significant number of transponders,
it may have a material adverse effect on our results of operations. At
this time, the power degradation has not required us to reduce the number
of operating transponders on either affected satellite.
Our BSS 702 satellites are currently covered by insurance policies.
However, if we are adversely affected by progressive solar array
degradation anomalies, there can be no assurance that we will be
reimbursed by the insurers, as they may dispute a payment obligation or
the applicable policy may not cover such loss. In addition, there can be
no assurance that, following the expiration of the current policies, we
will be able to procure new insurance that covers losses of this type.
Further, there can be no assurance that we will be able to obtain
insurance for such satellites on commercially reasonable terms.
In September 2002, the Company commenced service on its Galaxy IIIC
satellite. Galaxy IIIC supports customers from our video, Very Small
Aperture Terminal (VSAT) and broadcast services units, as well as
direct-to-home services for DIRECTV Latin America. Galaxy IIIC has 24
C-band and 24 Ku-band transponders covering the continental United States,
as well as 28 Ku-band transponders covering Latin America. Operating at 95
degrees west longitude, in the Company's Galaxy neighborhood, the
satellite replaces Galaxy IIIR and is supplemented by Galaxy VIII-i for
DTH services in Latin America.
In October 2001, we filed a proof of loss under the insurance policy on
PAS-7 related to circuit failures, which occurred in September 2001 and
resulted in a reduction of 28.9% of the satellite's total power available
for communications. During the three months ended March 31, 2002, our
insurers confirmed to us their agreement to settle the claim by payment to
the Company of $215 million in relation to the PAS-7 insurance claim and
the Company recorded a gain of $40.1 million in the three months ended
March 31, 2002 related to this insurance claim (See Note 8 below).
Our customer for all of the capacity on the Galaxy VIII-iR satellite has
exercised its pre-launch right to terminate its lease agreement with us.
In November 2002, we exercised our right to terminate the construction
agreement for this satellite because of the manufacturer's default. As a
result of the termination of the construction agreement, we will be
entitled to receive approximately $72.0 million from the manufacturer,
which represents amounts previously paid to the manufacturer and certain
additional amounts owed to us under the construction agreement. We believe
that the manufacturer will be required to satisfy its termination
obligations under the construction agreement. In addition, we have agreed
with the Galaxy VIII-iR launch vehicle provider to defer our use of the
launch for a future satellite.
The Company expects to launch up to four more satellites by 2006. The
Company expects to launch Galaxy XII (formerly named Galaxy VR) in the
first quarter of 2003 to 74 degrees west longitude. The Company, through
its joint-venture with JSAT International Inc., a Japanese satellite
services provider, also expects to launch the Galaxy XIII/Horizons-1
satellite to 127 degrees west longitude in the second quarter of 2003. The
Company also has two additional satellites that are under construction for
United States coverage. We are currently scheduled to launch one of these
additional satellites to replace Galaxy V at 125 degrees west longitude
prior to the end of its useful life in 2005. The other additional
satellite is scheduled to replace Galaxy 1R at 133 degrees west longitude
prior to the end of its useful life in 2006.
(4) LONG-TERM DEBT AND DUE TO AFFILIATES
At September 30, 2002, the Company had total debt outstanding of $2.55
billion, including current maturities of $200 million related to the
Company's five year 6.0% notes that are due in January 2003.
12
In February 2002, the Company entered into a credit facility in an
aggregate principal amount of up to $1.25 billion (the "Senior Secured
Credit Facility") and completed an $800 million private placement debt
offering pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Senior Notes"). We refer to these transactions as the
"Refinancing." We used $1.725 billion of the proceeds from the Refinancing
to repay in full the indebtedness owed under the term loan to Hughes
Electronics. The agreement governing the Senior Secured Credit Facility
and indenture governing the Senior Notes contain various covenants, which
impose significant restrictions on our business.
The Senior Secured Credit Facility is comprised of a $250.0 million
revolving credit facility, which is presently undrawn and will terminate
on December 31, 2007 (the "Revolving Facility"), a $300.0 million term
loan A facility, which matures on December 31, 2007 (the "Term A
Facility"), and a $700.0 million term loan B facility which matures on
December 31, 2008 (the "Term B Facility"). At September 30, 2002, $300
million under the Term A Facility and $700 million under the Term B
Facility were outstanding. Principal payments under the Term A Facility
and Term B Facility are due in varying amounts commencing in 2004 until
their respective maturity dates. Currently, the Revolving Facility and the
Term A Facility bear interest at LIBOR plus 3.0%, although these interest
rates are subject to adjustment based on the Company's total leverage
ratio. The Term B Facility bears interest at LIBOR plus 3.5%. In addition,
the Company is required to pay to the lenders under the Revolving Facility
a commitment fee in respect of the unused commitments at a rate that is
subject to adjustment based on the Company's total leverage ratio. As of
September 30, 2002, this commitment fee rate was 0.50% per year. As of
September 30, 2002, the Company had outstanding letters of credit totaling
$0.4 million, which reduced our ability to borrow against the Revolving
Facility by such amount.
In accordance with the agreement governing the Senior Secured Credit
Facility, the Company entered into an interest rate hedge agreement for
10% of the outstanding borrowings under the Senior Secured Credit Facility
during the third quarter of 2002. This interest rate hedge is designated
as a cash flow hedge of the Company's variable rate Term B Facility. In
relation to this hedge agreement, the Company exchanged its floating-rate
obligation on $100.0 million of its Term B Facility for a fixed-rate
payment obligation of 6.64% on $100.0 million through August 30, 2005. The
notional amount of the interest rate hedge agreement matches the repayment
schedule of the Term B facility though the maturity date of the interest
rate hedge. During the nine months ended September 30, 2002, no
ineffectiveness was recognized in the statement of operations on this
hedge. In the unlikely event that the counter party, Deutsche Bank, fails
to meet the terms of the interest rate hedge agreement, the Company's
exposure is limited to the interest rate differential on the notional
amount at each quarterly settlement period over the life of the
agreements. The Company does not anticipate nonperformance by the counter
party. Amounts accumulated in other comprehensive income ("OCI") related
to this cash flow hedge are reclassified into earnings as interest is
accrued on the hedged transaction. The amount accumulated in OCI will
fluctuate based on the change in the fair value of the derivative at each
reporting period, net of applicable deferred income taxes. The fair value
of the interest rate hedge agreement is the estimated amount that the
Company would pay or receive to terminate the agreement at the reporting
date, taking into account current interest rates, the market expectation
for future interest rates and the current creditworthiness of the Company.
The fair value of the outstanding interest-rate hedge agreement as of
September 30, 2002, based upon quoted market prices from the counter
party, reflected a hedge liability of approximately $1.9 million.
The Senior Notes bear interest at an annual rate of 8.5%, subject to
increases pursuant to a registration rights agreement entered into in
connection with the issuance of the Senior Notes (the "Registration Rights
Agreement"), as described below. The Senior Notes require interest
payments to be made semi-annually, mature in 2012, are unsecured, and are
guaranteed, on a full and unconditional and joint and several basis, by
all of the Company's domestic 100% owned subsidiaries.
Pursuant to the Registration Rights Agreement, on April 26, 2002 the
Company initiated the filing of a registration statement on Form S-4 with
the SEC in relation to an exchange of the Senior Notes for an equal amount
of new notes registered under the Securities Act and otherwise with
substantially identical terms. Following the effectiveness of the Form S-4
registration statement, these registered notes will be issued in exchange
for the Company's existing Senior Notes to all holders participating in
the exchange offer.
Pursuant to the Registration Rights Agreement, the Company is paying
additional interest on the Senior Notes for the period between August 1,
2002 and the date the SEC declares the Company's exchange offer
registration statement on Form S-4 effective. The additional interest was
initially 25 basis points with automatic increases of 25 basis points
every 90 days up to a maximum of 150 basis points. As of October 30, 2002,
the additional interest rate was 50 basis points. The SEC previously
delayed the effectiveness of our pending registration statement on Form
S-4 until the review process was completed for the registration statement
on Form S-4 of HEC Holdings, Inc., an affiliate of Hughes Electronics.
Based upon recent discussions with the SEC, the Company believes its
registration statement on Form S-4 will no longer be delayed for this
reason. We do not believe that the
13
delay of our Form S-4 review process or the payment of the additional
interest will have a significant impact on our consolidated financial
position or results of operations.
On July 29, 2002, the Company completed the transfer of certain assets and
liabilities from certain of its subsidiary guarantors to PanAmSat
Corporation. As a result of such transfers, the remaining subsidiary
guarantors, individually and in the aggregate, represent less than 1% of
the Company's consolidated total assets, total liabilities, revenues,
stockholders' equity, income from continuing operations before income
taxes and cash flows from operating activities, and such subsidiaries have
no independent assets or operations (determined in accordance with the
criteria established for parent companies in the SEC's Regulation S-X,
Rule 3-10(h)). All subsidiary guarantors and all subsidiaries of the
Company, other than the subsidiary guarantors, are minor (as defined in
the SEC's Regulation S-X, Rule 3-10(h)). Accordingly, condensed
consolidating financial information for the Company and its subsidiaries
within the notes to the Company's consolidating financial statements is
not presented.
The Company issued five, seven, ten and thirty-year fixed rate notes
totaling $750 million in January 1998. The outstanding principal balances,
interest rates and maturity dates for these notes as of September 30, 2002
were $200 million at 6.0% due 2003, $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 the notes is payable at maturity, while
interest is payable semi-annually. At September 30, 2002, $750 million was
outstanding in relation to these notes. In connection with the
Refinancing, these notes have been ratably secured by substantially all of
our assets on a pari-passu basis with the security interests covering our
obligations under the Senior Secured Credit Facility.
As of December 31, 2001, the Company had $46.5 million principal amount
outstanding under notes assumed in connection with our exercise in July
1999 of an early buy-out opportunity for certain transponders under a
sale-leaseback transaction relating to our Galaxy IIIR satellite (the
"Galaxy IIIR Notes"). The Galaxy IIIR Notes matured on January 2, 2002 and
were repaid in full on that date from available cash.
(5) SHORT-TERM INVESTMENTS
In the third quarter of 2002, the Company invested $95.7 million in
short-term investments, which primarily consist of commercial paper with
original maturities of up to nine months. In accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") the Company has
classified these short-term investments as available-for-sale. These
securities are carried at estimated fair market value. The aggregate
unrealized gains and losses related to these investments, net of taxes,
are reflected as a part of other comprehensive income within stockholders'
equity (See Note 7 below).
(6) DEFERRED CHARGES AND OTHER ASSETS
The Company's Deferred Charges and Other Assets are summarized as follows
(in millions):
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
Long-Term Receivables $ 46.6 $ 41.3
Debt Issuance Costs 42.0 10.9
Customer Incentive Programs 26.1 25.3
Prepaid Insurance 21.4 30.8
Other 21.9 25.6
--------- ---------
Total Deferred Charges and Other Assets $ 158.0 $ 133.9
========= =========
Long-Term Receivables primarily represent receivables with payment terms
extending beyond one year and receivables from operating leases with
escalating payment terms that are recognized on a straight-line basis into
revenue over the lease term. Differences between operating lease payments
received and revenues recognized are deferred as, or amortized from,
operating lease receivables.
Debt Issuance Costs represent costs incurred by the Company to secure debt
financing. These costs are being amortized to interest expense on a
straight-line basis over the life of the related indebtedness. Debt
issuance costs capitalized in relation to the Company's Refinancing (see
Note 4 above) totaled $41.0 million during the nine months ended September
30, 2002.
14
Deferred charges related to Customer Incentive Programs are amortized
against revenue over the terms of the respective customer contracts.
Similarly, Prepaid Insurance costs are amortized to expense over the terms
of the respective insurance policies.
Other Deferred Charges and Other Assets primarily consist of: investments
in certain equity securities accounted for under both the cost and equity
methods; prepayments of installation costs associated with Telemetry,
Tracking & Control ("TT&C") satellite services to third parties that are
amortized over the respective contract periods; and other miscellaneous
deferred charges and other assets.
(7) OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of other comprehensive income (loss) for the
three and nine months ended September 30, 2002 (in thousands). Other
comprehensive income components within stockholders' equity include any
changes in equity during a period that is not the result of transactions
with the Company's stockholders, net of applicable deferred income taxes.
THREE MONTHS ENDED: NINE MONTHS ENDED:
------------------- ------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Income $ 20,700 $ 19,503 $ 61,487 $ 27,426
Unrealized loss on cash flow hedge (1,188) -- (1,188) --
Unrealized loss on investments (12) -- (12) --
---------- ---------- ---------- ----------
Other Comprehensive Income $ 19,500 $ 19,503 $ 60,287 $ 27,426
========== ========== ========== ==========
(8) GAIN ON PAS-7 INSURANCE CLAIM
In October 2001, we filed a proof of loss under the insurance policy on
PAS-7 related to circuit failures, which occurred in September 2001 and
resulted in a reduction of 28.9% of the satellite's total power available
for communications. Service to existing customers was not affected, and we
expect that PAS-7 will continue to serve these customers. The insurance
policy was in the amount of $253.4 million and included a provision for us
to share 25% of future revenues on PAS-7 with the insurers. In the first
quarter of 2002, our insurers confirmed to us their agreement to settle
the PAS-7 insurance claim by payment to the Company of $215 million. These
net proceeds reflect the insurance policy amount of $253.4 million less
the expected future revenue share that would have been paid to the
insurers under the PAS-7 insurance policy, adjusted by a negotiated
discount. Pursuant to this agreement, no future revenue share payments
will be required to be made in relation to PAS-7. During the first quarter
of 2002, the Company recorded a gain of approximately $40.1 million
related to the PAS-7 insurance claim, which reflected the net proceeds
agreed to by the insurers less the net book value of the PAS-7 satellite,
including incentive obligations. The Company received $173.7 million of
these insurance proceeds during the first quarter of 2002 and received the
remaining $41.3 million of insurance proceeds during the second quarter of
2002.
(9) LOSS ON CONVERSION OF SALES-TYPE LEASES
On March 29, 2002, the Company entered into an agreement with one of its
customers regarding the revision of the customer's sales-type lease
agreements as well as certain other trade receivables. This agreement
resulted in the termination of the customer's sales-type leases and the
establishment of new operating leases in their place. As a result, the
Company recorded a non-cash charge in its consolidated income statement
for the three months ended March 31, 2002 of $18.7 million.
(10) FACILITIES RESTRUCTURING AND SEVERANCE COSTS
In the third quarter of 2002, the Company combined its facilities
restructuring costs and severance costs on its consolidated statement of
income. These costs were $1.2 million for the three months ended September
30, 2002 and $6.9 million for the corresponding period in 2001. Facilities
restructuring and severance costs were $13.7 million for the nine months
ended September 30, 2002 and were $6.9 million for the same period of
2001.
15
On March 29, 2002, the Company's management approved a plan to restructure
several of its United States locations and close certain facilities,
certain of which are currently being leased through 2011. Upon approval of
this plan, the Company recorded a non-cash charge in its consolidated
income statement in the first quarter of 2002 of $11.2 million. This
charge reflects future lease costs, net of estimated future sublease
revenue, of $8.9 million related to approximately 98,000 square feet of
unused facilities and the write-off of approximately $2.3 million of
leasehold improvements related to these facilities. During the third
quarter of 2002, the Company implemented a plan focused on further
streamlining its operations through the consolidation of certain
facilities. As a result, the Company recorded an additional non-cash
charge of $2.7 million in its consolidated income statement for the three
months ended September 30, 2002. This charge reflects future lease costs,
net of estimated future sublease revenue, of $0.9 million related to
approximately 15,000 square feet of unused facilities and the write-off of
approximately $1.8 million of leasehold improvements related to these
facilities.
The Company recorded severance costs of $8.2 million for the year ended
December 31, 2001, of which $6.9 million was recorded as of September 30,
2001. An additional $1.3 million of severance costs was recorded during
the first quarter of 2002. These costs were related to the Company's
expense reduction and NET-36 (now Webcast Services) restructuring plan
that began in the third quarter of 2001 and were primarily comprised of
employee compensation and employee benefits, outplacement services and
legal and consulting expenses associated with the cumulative reduction in
workforce of 164 employees. Included in the 2001 severance costs was
approximately $3.3 million that relates to costs associated with the
resignation of the former Chief Executive Officer of PanAmSat in August
2001. In the third quarter of 2002, the Company recorded a restructuring
credit of $1.5 million for the reversal of prior period severance charges
due to actual costs being lower than originally estimated.
The following table summarizes the recorded accruals and activity related
to these facilities restructuring and severance charges (in millions):
FACILITIES SEVERANCE
RESTRUCTURING COSTS TOTAL
------------- ----- -----
2001 restructuring charges $ -- $ 8.2 $ 8.2
First quarter 2002 restructuring charge 11.2 1.3 12.5
Third quarter 2002 restructuring charge 2.7 (1.5) 1.2
(credit)
Less net cash payments (1.8) (7.5) (9.3)
Less non-cash items (4.1) -- (4.1)
--------- --------- ---------
Balance as of September 30, 2002 $ 8.0 $ 0.5 $ 8.5
========= ========= =========
(11) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
On February 25, 2002, the Company completed its Refinancing and repaid the
$1.725 billion of indebtedness owed under the term loan to Hughes
Electronics (See Note 4 to the Company's September 30, 2002 consolidated
financial statements). In conjunction with this repayment, the Company was
required to write-off the remaining unamortized debt issuance costs of
approximately $3.3 million related to the Hughes Electronics term loan,
net of related income taxes of $0.8 million. This $2.5 million charge was
recorded within the Company's consolidated income statement for the three
months ended March 31, 2002 as an extraordinary loss on early
extinguishment of debt.
(12) INTEREST EXPENSE-NET
Interest expense for the three months ended September 30, 2002 and 2001 is
recorded net of capitalized interest of $9.5 million and $4.0 million,
respectively and interest income of $3.5 million and $3.6 million,
respectively. Interest expense for the nine months ended September 30,
2002 and 2001 is recorded net of capitalized interest of $23.6 million and
$19.4 million, respectively and interest income of $9.8 million and $12.0
million, respectively.
16
(13) COMMITMENTS AND CONTINGENCIES
SATELLITE COMMITMENTS
We have invested approximately $4.3 billion in our existing satellite
fleet and ground infrastructure through September 30, 2002, and we have
approximately $49.7 million of expenditures remaining to be made under
existing satellite construction contracts and $115.6 million to be made
under existing satellite launch contracts. These commitments do not
reflect any future amounts to be paid to construct or launch the Galaxy
VIII-iR satellite as the related construction agreement was terminated in
November of 2002 because of the manufacturer's default (See Note 3 above)
and we have agreed with the Galaxy VIII-iR launch vehicle provider to
defer our use of the launch for a future satellite. Additionally, the
commitments above related to satellite construction and launch contracts
are net of approximately $9.1 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, 2002, the Company did not have any
commitments related to existing launch insurance or in-orbit insurance
contracts for satellites to be launched.
In January 2002 and August 2002, we entered into noncontingent agreements
with Orbital Sciences Corporation, each such agreement providing for the
construction of a Ka-band satellite to be delivered in 2005, the timing of
which was in part to comply with FCC milestones associated with our
authorizations. We are exploring the business case for the use of Ka-band
frequencies and may conclude that we will not pursue the construction of
either or both of these satellites to completion. If we ultimately decide
not to proceed with either or both of these satellites, we will owe
Orbital Sciences a termination fee under the applicable contracts.
SATELLITE INSURANCE
As of September 30, 2002, we had in effect launch and in-orbit insurance
policies covering 17 satellites in the aggregate amount of $2.2 billion.
We have five uninsured satellites in orbit: PAS-4; PAS-5 and PAS-6, which
are used as backup satellites; PAS-7 for which we received net insurance
proceeds of $215 million during the nine months ended September 30, 2002;
and Galaxy VIII-i, which continues to operate as a supplement to Galaxy
IIIC.
Of the insured satellites, six were covered by policies with substantial
exclusions or exceptions to coverage for failures of specific components
identified by the insurer as the most likely to fail or, in one case, by a
policy with a lower coverage amount than the carrying value of its
insurable costs ("Significant Exclusion Policies"). These exclusions, we
believe, substantially reduce the likelihood of a recovery in the event of
a loss. Three of these satellites, PAS-2, PAS-3R and PAS-6B, have
redundancies available for the systems as to which exclusions have been
imposed. We believe that these redundancies allow for uninterrupted
operation of the satellite in the event of a failure of the component
subject to the insurance exclusion. The fourth such satellite, PAS-8, has
an excluded component that we believe is unlikely to fail in the near
future. The fifth satellite, Galaxy IIIR, was replaced in September 2002
by Galaxy IIIC and will serve as a fleet backup. The sixth satellite,
Galaxy IVR, has no component exclusion but has a coverage amount that is
lower than the carrying value of its insurable costs due to customer
sales-type leases on the satellite, which under the related insurance
policy result in a reduction of the coverage amount.
At September 30, 2002, the uninsured satellites and the satellites insured
by Significant Exclusion Policies had a total net book value and other
insurable costs of approximately $816 million. Of this amount, $237
million related to uninsured satellites and $579 million related to
satellites insured by Significant Exclusion Policies, including $22
million related to a satellite insurance policy with an insurance coverage
amount that is lower than the carrying value of its insurable costs.
Upon the expiration of our existing insurance policies, there can be no
assurance that we will be able to procure new insurance for our
satellites. In addition, new satellite insurance may only be available
with higher premiums, higher deductibles, shorter coverage periods, higher
loss percentages required for total constructive loss claims, additional
satellite health-related policy exclusions, or other terms which may make
such insurance commercially unreasonable. Accordingly, we may elect to
discontinue insuring certain satellites. An uninsured failure of one or
more of our satellites could have a material adverse effect on our
financial condition and results of operations. In addition, higher
premiums on insurance policies will increase our costs, thereby reducing
our operating income by the amount of such increased premiums.
17
(14) REVENUE BY SERVICE TYPE
PanAmSat operates its business as a single operating segment. PanAmSat
primarily provides video and data network services to major broadcasting,
direct-to-home television providers and telecommunications companies
worldwide. For the three months ended September 30, 2002 and 2001,
PanAmSat's revenues were $199.1 million and $252.9 million, respectively.
For the nine months ended September 30, 2002 and 2001, PanAmSat's revenues
were $615.5 million and $666.4 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,
2002 2001 2002 2001
--------- --------- --------- ---------
Services:
Video Services 65% 72% 66% 69%
Network Services 28% 22% 26% 24%
Other Services 7% 6% 8% 7%
--------- --------- --------- ---------
Total: 100% 100% 100% 100%
========= ========= ========= =========
(15) CONTRACTED BACKLOG FOR FUTURE SERVICES
Future contractual cash payments expected from customers (backlog)
aggregated approximately $5.50 billion as of September 30, 2002, including
approximately $638.2 million related to satellites to be launched.
Included in the total backlog of $5.50 billion is $332.5 million of
backlog that may be terminated pursuant to certain contractual termination
rights.
Due to recent events in the telecommunications industry and general
economic conditions in certain parts of the world, we have reviewed our
backlog for our top 25 customers to identify risks to our business related
to these events and conditions. Of our $5.50 billion backlog as of
September 30, 2002, approximately $4.16 billion, or 75.6% relates to our
top 25 customers. Having conducted both quantitative and qualitative
analyses, we have concluded that six of our top 25 customers have a risk
of future non-performance of their contractual obligations to us. These
six customers are meeting substantially all of their obligations at the
present time and are paying in a manner consistent with past experience.
These customers represent approximately $1.06 billion of our backlog as of
September 30, 2002. The largest of these customers represents
approximately $589 million, or 11% of our total backlog, and $79.0
million, or 9.8% of our expected 2002 revenues, and the smallest of these
customers represents approximately $41.6 million, or 0.8% of our total
backlog, and $3.4 million, or 0.4% of our expected 2002 revenues. If one
of the larger affected customers or a group of these customers becomes
unable to perform some or all of their obligations to us, it could have a
material adverse effect on our financial condition and results of
operations.
18
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, 2001 and the PanAmSat Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2002 and June 30, 2002 filed with the Securities
and Exchange Commission ("SEC") on March 11, 2002, May 6, 2002 and August
13, 2002, respectively, and all other PanAmSat filings filed with the SEC
through the date of this report.
On October 28, 2001, General Motors ("GM") and its wholly owned subsidiary
Hughes Electronics Corporation ("Hughes Electronics"), together with
EchoStar Communications Corporation ("EchoStar"), announced the signing of
definitive agreements that, subject to stockholder approval, regulatory
clearance and certain other conditions, provide for the split-off of
Hughes Electronics from GM and the subsequent merger of the Hughes
Electronics' business with EchoStar (the "Hughes Transaction"). EchoStar
is a leading provider of direct broadcast satellite television services in
the United States through its DISH Network business unit.
On October 10, 2002, the Federal Communications Commission ("FCC")
announced that it declined to approve the transfer of the licenses
necessary to allow the Hughes Transaction to close without a public
hearing. Accordingly, the application has been designated for hearing by
an administrative law judge. The FCC, however, has given the parties until
November 27, 2002 to file an amended application to address the FCC's
concerns and to file a petition to suspend the hearing. On October 31,
2002, the U.S. Department of Justice ("DOJ"), twenty-three states, the
District of Columbia and Puerto Rico filed a complaint for permanent
injunctive relief in the United States District Court for the District of
Columbia against EchoStar, GM, Hughes Electronics and DIRECTV Enterprises
LLC. The suit seeks to permanently enjoin the Hughes Transaction and a
declaration that the proposed Hughes Transaction violates Section 7 of the
Clayton Act. On November 5, 2002, the District Court denied the
defendants' petition for an expedited trial. GM and Hughes Electronics
have announced that they will continue to coordinate their efforts with
EchoStar to proceed in accordance with the terms of the agreements.
However, no assurance can be given that the required regulatory clearances
and approvals will be obtained from the DOJ and the FCC within the
timeframes required by the agreements, or if so obtained, that all other
conditions to the transactions will be satisfied such that the Hughes
Transaction can be completed.
GM, Hughes Electronics and EchoStar have agreed that, in the event the
Hughes Transaction does not occur because of a failure to obtain certain
specified regulatory clearances or approvals (including approval by the
FCC) or financing to complete the Hughes Transaction, or because other
specified conditions have not been satisfied (including the absence of a
permanent injunction as contemplated by the DOJ's action described above),
each relating to the Hughes Transaction, Hughes Electronics will be
required to sell and EchoStar will be required to purchase all of the
shares of Common Stock of PanAmSat beneficially owned by Hughes
Electronics (approximately 81% of PanAmSat's outstanding Common Stock) for
$22.47 per share or an aggregate purchase price of approximately $2.7
billion, which is payable, depending on the circumstances, solely in cash
or in a combination of cash and either debt or equity securities of
EchoStar. EchoStar has the option to structure its purchase of Hughes
Electronics' interest in PanAmSat as a merger or tender offer so that it
can attempt to acquire 100% of PanAmSat in one transaction, in which case
Hughes Electronics must receive at least the same amount of consideration
that it would have received in the PanAmSat stock sale. EchoStar has
agreed that, unless it has previously completed a merger with PanAmSat or
a tender offer for all of the outstanding PanAmSat shares, it will
commence a tender offer for all PanAmSat shares that remain outstanding
following the completion of the PanAmSat stock sale to EchoStar for a
purchase price of at least $22.47 per share (or approximately $675 million
in the aggregate) payable, at the option of the holder, either in cash or
shares of EchoStar Class A Common Stock.
Any such sale of PanAmSat would be subject to a number of conditions which
must be satisfied before the transaction could be completed, including,
the termination of the agreements governing the Hughes Transaction for
certain specified reasons (including the failure to obtain approval from
the FCC or the absence of any injunction imposed by the DOJ as discussed
above), receipt of certain regulatory approvals, the expiration or
termination of the waiting period applicable to the sale under the
Hart-Scott-Rodino Act, the lack of any effective injunction or order for
the transfer of licenses in connection with any such PanAmSat sale, and
other specified conditions.
19
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,
2002 2001 2002 2001
---- ---- ---- ----
(UNAUDITED; IN THOUSANDS)
Operating leases, satellite services and other $ 194,410 $ 202,006 $ 600,371 $ 604,446
Outright sales and sales-type leases 4,714 50,943 15,125 61,960
Total revenues 199,124 252,949 615,496 666,406
Cost of outright sales and sales-type leases -- 12,766 -- 12,766
Depreciation and amortization 78,966 104,123 262,689 304,743
Direct operating costs (exclusive of depreciation
& amortization) 30,034 33,408 98,224 114,386
Selling, general and administrative expenses 22,478 33,627 77,708 91,611
Facilities restructuring and severance costs 1,189 6,892 13,708 6,892
Gain on PAS-7 insurance claim -- -- (40,063) --
Loss on conversion of sales-type leases -- -- 18,690 --
Income from operations 66,457 62,133 184,540 136,008
Interest expense, net 38,857 27,616 99,248 87,467
Income before income taxes and
extraordinary item 27,600 34,517 85,292 48,541
Income taxes 6,900 15,014 21,323 21,115
Net income before extraordinary item 20,700 19,503 63,969 27,426
Extraordinary loss on early
extinguishment of debt, net of taxes -- -- 2,482 --
Net income $ 20,700 $ 19,503 $ 61,487 $ 27,426
Earnings per common share before
extraordinary item - basic and diluted $ 0.14 $ 0.13 $ 0.43 $ 0.18
Earnings per common share -
extraordinary loss on early
extinguishment of debt - basic and
diluted -- -- 0.02 --
Net income per common share - basic and
diluted $ 0.14 $ 0.13 $ 0.41 $ 0.18
20
PANAMSAT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Revenues - Revenues were $199.1 million for the three months ended September 30,
2002, compared to revenues of $252.9 million for the same period in 2001.
Operating lease revenues, which were 98 percent of total revenues for the third
quarter of 2002, decreased by 4 percent to $194.4 million from $202.0 million
for the same period in 2001. The decrease in operating lease revenues was
primarily due to lower termination fee revenue from the distribution of video
programming of $3.9 million, as compared to the third quarter of 2001. Total
sales and sales-type lease revenues were $4.7 million for the quarter ended
September 30, 2002, compared to $50.9 million for the same period in 2001. This
decrease is primarily the result of $45.5 million of new sales-type lease
revenue which was recorded during the third quarter of 2001, for which there was
no comparable revenue in the third quarter of 2002.
The Company provides video services that are primarily full-time, part-time and
occasional satellite services for the transmission of news, sports,
entertainment and educational programming worldwide. The Company also provides
network services, which support satellite-based networks that relay voice, video
and data communications within individual countries, throughout regions and on a
global basis. Operating lease revenues from video services decreased by 6
percent to $124.9 million during the third quarter of 2002, compared to $132.3
million for the third quarter of 2001. This decrease was primarily due to lower
termination fee revenue from the distribution of video programming, as compared
to the third quarter of 2001. Overall video services revenues decreased by 29.3
percent to $129.6 million in the third quarter of 2002, primarily due to the
$45.5 million of new sales-type lease revenue recorded during the third quarter
of 2001. Operating lease revenues from network services decreased by 1 percent
to $54.8 million for the third quarter of 2002, as compared to the same period
in 2001. This decrease was primarily a result of customer credit issues and
lower Internet termination fee revenues earned during the three months ended
September 30, 2002 offset partially by net new business related to network
services.
Total revenues for the nine months ended September 30, 2002 were $615.5 million
compared to revenues of $666.4 for the nine months ended September 30, 2001.
Operating lease revenues decreased to $600.4 million for the nine months ended
September 30, 2002, compared to $604.4 million for the same period in 2001. The
decrease in operating lease revenues during the nine months ended September 30,
2002 was primarily due to lower program distribution and DTH video revenues,
partially offset by the occasional video services revenues related to the 2002
FIFA World Cup recorded during the three months ended June 30, 2002. Total sales
and sales-type lease revenues were $15.1 million for the nine months ended
September 30, 2002, compared to $62.0 million for the same period in 2001. This
decrease is primarily the result of $45.5 million of new sales-type lease
revenue recorded during the nine months ended September 20, 2001, for which
there was no comparable revenue in 2002.
For the nine months ended September 30, 2002, operating lease revenues from
video service decreased by 2 percent to $392.2 million as compared to $399.8
million for the same period in 2001. This decrease was primarily due to lower
program distribution and DTH video revenues. These decreases were partially
offset by the occasional video services revenues related to the 2002 FIFA World
Cup which were recorded during the three months ended June 30, 2002 and higher
termination fee revenues recorded during the nine months ended September 30,
2002. Overall video services revenues were $407.3 million for the nine months
ended September 30, 2002, a decrease of 13 percent as compared to the nine
months ended September 30, 2001. Operating lease revenues for the nine months
ended September 30, 2002 from network services of $162.3 million remained
relatively flat, as compared to $162.0 million for the same period in 2001.
Additional network services revenues recorded during the nine months ended
September 30, 2002 were primarily offset by reduced revenue recorded as a result
of customer credit issues and lower Internet related revenues.
Cost of Outright Sales and Sales-Type Leases - Cost of outright sales and
sales-type leases were $12.8 million for the three and nine months ended
September 30, 2001 due to the commencement of a new sales-type lease agreement
during the third quarter of 2001. There were no comparable costs for the three
and nine months ended September 30, 2002 since there were no new sales-type
leases recorded in those periods.
Depreciation and Amortization - Depreciation and amortization decreased $25.1
million, or 24 percent, to $79.0 million for the three months ended September
30, 2002 from $104.1 million for the same period in 2001. Depreciation and
amortization for the nine months ended September 30, 2002 decreased $42.0
million, or 14 percent, to $262.7 million from $304.7 million for the same
period in 2001. The decrease in depreciation and amortization for the three and
nine months ended September 30, 2002 is due primarily to the elimination of
goodwill amortization as a result of the adoption of SFAS 142 during 2002
(approximately $16 million per quarter), lower depreciation related to Galaxy
VIII-i which was fully depreciated in July of 2002, and lower depreciation
expense recorded in 2002 as a result of the write-off of our PAS-7 satellite
during the first quarter of 2002 (See Gain on PAS-7 Insurance Claim below).
21
These decreases were partially offset by additional depreciation expense related
to our PAS-1R satellite that was placed in service in the first quarter of 2001,
our PAS-10 satellite that was placed into service in July 2001, and additional
non-satellite depreciation.
Direct Operating Costs - Direct operating costs decreased $3.4 million or 10
percent, to $30.0 million for the three months ended September 30, 2002 from
$33.4 million for the same period in 2001. Direct operating costs decreased
$16.2 million or 14 percent to $98.2 million for the nine months ended September
30, 2002 from $114.4 million for the same period in 2001. The three-month and
nine-month decreases in direct operating costs are primarily related to lower
direct operating expenses related to Webcast Services, lower headcount related
expenses, lower consulting expenses and lower engineering costs. The decrease
for the nine months ended September 30, 2002 was partially offset by additional
direct operating costs related to the 2002 FIFA World Cup, which were recorded
during the second quarter of 2002.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses decreased $11.1 million, or 33 percent, to $22.5 million
for the three months ended September 30, 2002 from $33.6 million for the same
period in 2001. Selling, general and administrative expenses decreased $13.9
million, or 15 percent, to $77.7 million for the nine months ended September 30,
2002 from $91.6 million for the same period in 2001. The three-month and
nine-month decreases are primarily due to lower bad debt expense of
approximately $6.8 million and $3.1 million, respectively, as well as lower
Webcast Services expenses and compensation and benefits related expenses during
both the three and nine month periods.
Facilities Restructuring and Severance Costs - Facilities restructuring and
severance costs decreased $5.7 million to $1.2 million for the three months
ended September 30, 2002 from $6.9 million for the same period of 2001.
Facilities restructuring and severance costs increased $6.8 million to $13.7
million for the nine months ended September 30, 2002 as compared to $6.9 million
for the corresponding period of 2001. The three-month and nine-month changes are
primarily attributable to the $6.9 million severance charge recorded in the
third quarter of 2001 and the $11.2 million facilities restructuring charge
recorded in the first quarter of 2002, respectively. These costs are
attributable to the consolidation of certain of the Company's facilities as well
as the Company's expense reduction and Webcast Services restructuring plan,
which commenced in the third quarter of 2001 (See "Financial Condition" below).
Gain on PAS-7 Insurance Claim - During the three months ended March 31, 2002,
the Company recorded a gain of approximately $40.1 million related to the PAS-7
insurance claim, which reflects the net proceeds agreed to by the insurers of
$215 million less the net book value of the PAS-7 satellite, including incentive
obligations. (See "Satellite Developments" below). There was no comparable
transaction during 2001.
Loss on Conversion of Sales-Type Leases - On March 29, 2002, the Company entered
into an agreement with one of its customers regarding the revision of the
customer's sales-type lease agreements as well as certain other trade
receivables. This agreement resulted in the termination of the customer's
sales-type leases and the establishment of new operating leases in their place.
As a result, the Company recorded a non-cash charge in its consolidated income
statement for the three months ended March 31, 2002 of $18.7 million. There was
no comparable transaction in 2001.
Income from Operations - Income from operations was $66.5 million for the three
months ended September 30, 2002, an increase of $4.4 million, or 7 percent, from
$62.1 million for the same period in 2001. Excluding $32.7 related to the
sales-type lease recorded during the quarter ended September 30, 2001, the
increase in income from operations was primarily due to the Company's continued
focus on operational efficiencies and the elimination of goodwill amortization
as a result of the adoption of SFAS 142 (as defined in New Accounting
Pronouncements below) during the first quarter of 2002. Income from operations
was $184.5 million for the nine months ended September 30, 2002, an increase of
$48.5 million, or 36 percent, from $136.0 million for the same period in 2001.
The increase in income from operations for the nine month period ended September
30, 2002 was driven primarily by the Company's operational streamlining that has
occurred over the last year, the elimination of goodwill amortization as of
January 1, 2002 as a result of the adoption of SFAS 142, and several significant
transactions, which were recorded during the nine months ended September 30,
2002. These significant transactions included the recording of a $40.1 million
gain in relation to the settlement of the PAS-7 insurance claim; the recording
of $13.7 million in net facilities restructuring and severance charges related
to several of the Company's U.S. locations; and the recording of a $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, 2002, an increase of $11.2 million, or 41 percent,
from $27.6 million for the same period in 2001. The increase in interest
expense, net for the three months ended September 30, 2002 was primarily due to
higher interest expense related to the new debt acquired as a result of the
Refinancing, offset partially by higher capitalized interest of approximately
$5.5 million as a result of additional satellites under construction balances in
2002. Interest expense, net was $99.2 million for the nine months ended
September 30, 2002, an increase of $11.7 million, or 13
22
percent, from $87.5 million for the same period in 2001. The increase in
interest expense, net for the nine months ended September 30, 2002 was primarily
attributable to higher interest expense related to the new debt acquired as a
result of the Refinancing.
Income Taxes - Income taxes were $6.9 million for the three months ended
September 30, 2002, a decrease of $8.1 million or 54 percent, from $15.0 million
for the three months ended September 30, 2001. Income taxes were $21.3 million
for the nine months ended September 30, 2002, an increase of $0.2 million, from
$21.1 million for the nine months ended September 30, 2001. The reduction in the
Company's effective income tax rate from 43.5 percent in 2001 to 25 percent in
2002 was primarily a result of the elimination of goodwill amortization due to
the adoption of SFAS 142.
Extraordinary Loss on Early Extinguishment of Debt - On February 25, 2002, the
Company completed its Refinancing and repaid the $1.725 billion indebtedness
owed under the term loan to Hughes Electronics (See "- Financial Condition"). In
conjunction with this repayment, the Company was required to write-off the
remaining unamortized debt issuance costs of approximately $3.3 million related
to the Hughes Electronics term loan, net of related income taxes of $0.8
million. This $2.5 million charge was recorded within the Company's consolidated
income statement for the three months ended March 31, 2002 as an extraordinary
loss on early extinguishment of debt. There was no comparable transaction in
2001.
Satellite Developments - Refer to "Item 1. Business - Overview - Our Satellite
Network and Ground Infrastructure" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Satellite Deployment
Plan and Planned Satellites" in the Form 10-K for a detailed description of the
Company's satellite network and its satellite deployment plan.
In September 2002, the Company commenced service on its Galaxy IIIC satellite.
Galaxy IIIC supports customers from our video, Very Small Aperture Terminal
(VSAT) and broadcast services units, as well as direct-to-home services for
DIRECTV Latin America. Galaxy IIIC has 24 C-band and 24 Ku-band transponders
covering the continental United States, as well as 28 Ku-band transponders
covering Latin America. Operating at 95 degrees west longitude, in the Company's
Galaxy neighborhood, the satellite replaces Galaxy IIIR and is supplemented by
Galaxy VIII-i for DTH services in Latin America.
In October 2001, we filed a proof of loss under the insurance policy on PAS-7
related to circuit failures, which occurred in September 2001 and resulted in a
reduction of 28.9% of the satellite's total power available for communications.
During the three months ended March 31, 2002, our insurers confirmed to us their
agreement to settle the claim by payment to the Company of $215 million in
relation to the PAS-7 insurance claim and the Company recorded a gain of $40.1
million in the three months ended March 31, 2002 related to this insurance claim
(See Note 8 to the Company's September 30, 2002 consolidated financial
statements).
Our customer for all of the capacity on the Galaxy VIII-iR satellite has
exercised its pre-launch right to terminate its lease agreement with us. In
November 2002, we exercised our right to terminate the construction agreement
for this satellite because of the manufacturer's default. As a result of the
termination of the construction agreement, we will be entitled to receive
approximately $72.0 million from the manufacturer, which represents amounts
previously paid to the manufacturer and certain additional amounts owed to us
under the construction agreement. We believe that the manufacturer will be
required to satisfy its termination obligations under the construction
agreement. In addition, we have agreed with the Galaxy VIII-iR launch vehicle
provider to defer our use of the launch for a future satellite.
The Company expects to launch up to four more satellites by 2006. The Company
expects to launch Galaxy XII (formerly named Galaxy VR) in the first quarter of
2003 to 74 degrees west longitude. The Company, through its joint-venture with
JSAT International Inc., a Japanese satellite services provider, also expects to
launch the Galaxy XIII/Horizons-1 satellite to 127 degrees west longitude in the
second quarter of 2003. The Company also has two additional satellites that are
under construction for United States coverage. We are currently scheduled to
launch one of these additional satellites to replace Galaxy V at 125 degrees
west longitude prior to the end of its useful life in 2005. The other additional
satellite is scheduled to replace Galaxy 1R at 133 degrees west longitude prior
to the end of its useful life in 2006.
We have invested approximately $4.3 billion in our existing satellite fleet and
ground infrastructure through September 30, 2002, and we have approximately
$49.7 million of expenditures remaining to be made under existing satellite
construction contracts and $115.6 million to be made under existing satellite
launch contracts. These commitments do not reflect any future amounts to be paid
to construct or launch the Galaxy VIII-iR satellite as the related construction
agreement was terminated in November of 2002 because of the manufacturer's
default (See Note 3 to the Company's September 30, 2002 consolidated financial
statement) and we have agreed with the Galaxy VIII-iR launch vehicle provider to
defer our use of the launch for a future satellite. Additionally, the
commitments above related to satellite construction and launch contracts are net
of approximately $9.1 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
23
satellites to be launched are cancelable, up to thirty days prior to the
satellite's launch. As of September 30, 2002, the Company did not have any
commitments related to existing launch insurance or in-orbit insurance contracts
for satellites to be launched.
In January 2002 and August 2002, we entered into noncontingent agreements with
Orbital Sciences Corporation, each such agreement providing for the construction
of a Ka-band satellite to be delivered in 2005, the timing of which was in part
to comply with FCC milestones associated with our authorizations. We are
exploring the business case for the use of Ka-band frequencies and may conclude
that we will not pursue the construction of either or both of these satellites
to completion. If we ultimately decide not to proceed with either or both of
these satellites, we will owe Orbital Sciences a termination fee under the
applicable contracts.
As of September 30, 2002, we had in effect launch and in-orbit insurance
policies covering 17 satellites in the aggregate amount of $2.2 billion. We have
five uninsured satellites in orbit: PAS-4; PAS-5 and PAS-6, which are used as
backup satellites; PAS-7 for which we received net insurance proceeds of $215
million during the nine months ended September 30, 2002; and Galaxy VIII-i,
which continues to operate as a supplement to Galaxy IIIC.
Of the insured satellites, six were covered by policies with substantial
exclusions or exceptions to coverage for failures of specific components
identified by the insurer as the most likely to fail or, in one case, by a
policy with a significantly lower coverage amount than its book value
("Significant Exclusion Policies"). These exclusions, we believe, substantially
reduce the likelihood of a recovery in the event of a loss. Three of these
satellites, PAS-2, PAS-3R and PAS-6B, have redundancies available for the
systems as to which exclusions have been imposed. We believe that these
redundancies allow for uninterrupted operation of the satellite in the event of
a failure of the component subject to the insurance exclusion. The fourth such
satellite, PAS-8, has an excluded component that we believe is unlikely to fail
in the near future. The fifth satellite, Galaxy IIIR, was replaced in September
2002 by Galaxy IIIC and will serve as a fleet backup. The sixth satellite,
Galaxy IVR, has no component exclusion but has a coverage amount that is lower
than its book value due to customer sales-type leases on the satellite, which
under the related insurance policy result in a reduction of the coverage amount.
At September 30, 2002, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other insurable
costs of approximately $816 million. Of this amount, $237 million related to
uninsured satellites and $579 million related to satellites insured by
Significant Exclusion Policies, including $22 million related to a satellite
insurance policy with an insurance coverage amount that is lower than the
carrying value of its insurable costs.
Upon the expiration of our existing insurance policies, there can be no
assurance that we will be able to procure new insurance for our satellites. In
addition, new satellite insurance may only be available with higher premiums,
higher deductibles, shorter coverage periods, higher loss percentages required
for total constructive loss claims, additional satellite health-related policy
exclusions, or other terms which may make such insurance commercially
unreasonable. Accordingly, we may elect to discontinue insuring certain
satellites. An uninsured failure of one or more of our satellites could have a
material adverse effect on our financial condition and results of operations. In
addition, higher premiums on insurance policies will increase our costs, thereby
reducing our operating income by the amount of such increased premiums.
FINANCIAL CONDITION
In the third quarter of 2002, the Company invested $95.7 million in short-term
investments, which primarily consist of commercial paper with original
maturities of one to nine months. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") the Company has classified these short-term
investments as available-for-sale. These securities are carried at estimated
fair market value. The aggregate unrealized gains and losses related to these
investments, net of taxes, are reflected as a part of other comprehensive income
within stockholders' equity.
At September 30, 2002, the Company had total debt outstanding of $2.55 billion,
including current maturities of $200 million related to the Company's five year
6.0% notes that are due in January 2003.
In February 2002, the Company entered into a credit facility in an aggregate
principal amount of up to $1.25 billion (the "Senior Secured Credit Facility")
and completed an $800 million private placement debt offering pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Senior Notes"). We refer
to these transactions as the "Refinancing." We used $1.725 billion of the
proceeds from the Refinancing to repay in full the indebtedness owed under the
term loan to Hughes Electronics. The agreement governing the Senior Secured
Credit Facility and indenture governing the Senior Notes contain various
covenants, which impose significant restrictions on our business.
24
The Senior Secured Credit Facility is comprised of a $250.0 million revolving
credit facility, which is presently undrawn and will terminate on December 31,
2007 (the "Revolving Facility"), a $300.0 million term loan A facility, which
matures on December 31, 2007 (the "Term A Facility"), and a $700.0 million term
loan B facility which matures on December 31, 2008 (the "Term B Facility"). At
September 30, 2002, $300 million under the Term A Facility and $700 million
under the Term B Facility were outstanding. Principal payments under the Term A
Facility and Term B Facility are due in varying amounts commencing in 2004 until
their respective maturity dates. Currently, the Revolving Facility and the Term
A Facility bear interest at LIBOR plus 3.0%, although these interest rates are
subject to adjustment based on the Company's total leverage ratio. The Term B
Facility bears interest at LIBOR plus 3.5%. In addition, the Company is required
to pay to the lenders under the Revolving Facility a commitment fee in respect
of the unused commitments at a rate that is subject to adjustment based on the
Company's total leverage ratio. As of September 30, 2002, this commitment fee
rate was 0.50% per year. As of September 30, 2002, the Company had outstanding
letters of credit totaling $0.4 million, which reduced our ability to borrow
against the Revolving Facility by such amount.
In accordance with the agreement governing the Senior Secured Credit Facility,
the Company entered into an interest rate hedge agreement for 10% of the
outstanding borrowings under the Senior Secured Credit Facility during the third
quarter of 2002. This interest rate hedge is designated as a cash flow hedge of
the Company's variable rate Term B Facility. In relation to this hedge
agreement, the Company exchanged its floating-rate obligation on $100.0 million
of its Term B Facility for a fixed-rate payment obligation of 6.64% on $100.0
million through August 30, 2005. The notional amount of the interest rate hedge
agreement matches the repayment schedule of the Term B facility though the
maturity date of the interest rate hedge. During the nine months ended September
30, 2002, no ineffectiveness was recognized in the statement of operations on
this hedge. In the unlikely event that the counter party, Deutsche Bank, fails
to meet the terms of the interest rate hedge agreement, the Company's exposure
is limited to the interest rate differential on the notional amount at each
quarterly settlement period over the life of the agreements. The Company does
not anticipate nonperformance by the counter party. Amounts accumulated in other
comprehensive income ("OCI") related to this cash flow hedge are reclassified
into earnings as interest is accrued on the hedged transaction. The amount
accumulated in OCI will fluctuate based on the change in the fair value of the
derivative at each reporting period, net of applicable deferred income taxes.
The fair value of the interest rate hedge agreement is the estimated amount that
the Company would pay or receive to terminate the agreement at the reporting
date, taking into account current interest rates, the market expectation for
future interest rates and the current creditworthiness of the Company. The fair
value of the outstanding interest-rate hedge agreement as of September 30, 2002,
based upon quoted market prices from the counter party, reflected a hedge
liability of approximately $1.9 million.
The Senior Notes bear interest at an annual rate of 8.5%, subject to increases
pursuant to a registration rights agreement entered into in connection with the
issuance of the Senior Notes (the "Registration Rights Agreement"), as described
below. The Senior Notes require interest payments to be made semi-annually,
mature in 2012, are unsecured, and are guaranteed, on a full and unconditional
and joint and several basis, by all of the Company's domestic 100% owned
subsidiaries.
Pursuant to the Registration Rights Agreement, on April 26, 2002 the Company
initiated the filing of a registration statement on Form S-4 with the SEC in
relation to an exchange of the Senior Notes for an equal amount of new notes
registered under the Securities Act and otherwise with substantially identical
terms. Following the effectiveness of the Form S-4 registration statement, these
registered notes will be issued in exchange for the Company's existing Senior
Notes to all holders participating in the exchange offer.
Pursuant to the Registration Rights Agreement, the Company is paying additional
interest on the Senior Notes for the period between August 1, 2002 and the date
the SEC declares the Company's exchange offer registration statement on Form S-4
effective. The additional interest was initially 25 basis points with automatic
increases of 25 basis points every 90 days up to a maximum of 150 basis points.
As of October 30, 2002, the additional interest rate was 50 basis points. The
SEC previously delayed the effectiveness of our pending registration statement
on Form S-4 until the review process was completed for the registration
statement on Form S-4 of HEC Holdings, Inc., an affiliate of Hughes Electronics.
Based upon recent discussions with the SEC, the Company believes its
registration statement on Form S-4 will no longer be delayed for this reason. We
do not believe that the delay of our Form S-4 review process or the payment of
the additional interest will have a significant impact on our consolidated
financial position or results of operations.
On July 29, 2002, the Company completed the transfer of certain assets and
liabilities from certain of its subsidiary guarantors to PanAmSat Corporation.
As a result of such transfers, the remaining subsidiary guarantors, individually
and in the aggregate, represent less than 1% of the Company's consolidated total
assets, total liabilities, revenues, stockholders' equity, income from
continuing operations before income taxes and cash flows from operating
activities, and such subsidiaries have no independent assets or operations
(determined in accordance with the criteria established for parent companies in
the SEC's Regulation S-X, Rule 3-10(h)). All subsidiary guarantors and all
subsidiaries of the Company, other than the subsidiary guarantors, are minor (as
defined in the SEC's
25
Regulation S-X, Rule 3-10(h)). Accordingly, condensed consolidating financial
information for the Company and its subsidiaries within the notes to the
Company's consolidating financial statements is not presented.
The Company issued five, seven, ten and thirty-year fixed rate notes totaling
$750 million in January 1998. The outstanding principal balances, interest rates
and maturity dates for these notes as of September 30, 2002 were $200 million at
6.0% due 2003, $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 the notes is
payable at maturity, while interest is payable semi-annually. At September 30,
2002, $750 million was outstanding in relation to these notes. In connection
with the Refinancing, these notes have been ratably secured by substantially all
of our assets on a pari-passu basis with the security interests covering our
obligations under the Senior Secured Credit Facility.
As of December 31, 2001, the Company had $46.5 million principal amount
outstanding under notes assumed in connection with our exercise in July 1999 of
an early buy-out opportunity for certain transponders under a sale-leaseback
transaction relating to our Galaxy IIIR satellite (the "Galaxy IIIR Notes"). The
Galaxy IIIR Notes matured on January 2, 2002 and were repaid in full on that
date from available cash.
On March 29, 2002, the Company's management approved a plan to restructure
several of its United States locations and close certain facilities, certain of
which are currently being leased through 2011. Upon approval of this plan, the
Company recorded a non-cash charge in its consolidated income statement in the
first quarter of 2002 of $11.2 million. This charge reflects future lease costs,
net of estimated future sublease revenue, of $8.9 million related to
approximately 98,000 square feet of unused facilities and the write-off of
approximately $2.3 million of leasehold improvements related to these
facilities. During the third quarter of 2002, the Company implemented a plan
focused on further streamlining its operations through the consolidation of
certain facilities. As a result, the Company recorded an additional non-cash
charge of $2.7 million in its consolidated income statement for the three months
ended September 30, 2002. This charge reflects future lease costs, net of
estimated future sublease revenue, of $0.9 million related to approximately
15,000 square feet of unused facilities and the write-off of approximately $1.8
million of leasehold improvements related to these facilities.
The Company recorded severance costs of $8.2 million for the year ended December
31, 2001, of which $6.9 million was recorded as of September 30, 2001. An
additional $1.3 million of severance costs was recorded during the first quarter
of 2002. These costs were related to the Company's expense reduction and NET-36
(now Webcast Services) restructuring plan that began in the third quarter of
2001 and were primarily comprised of employee compensation and employee
benefits, outplacement services and legal and consulting expenses associated
with the cumulative reduction in workforce of 164 employees. Included in the
2001 severance costs was approximately $3.3 million that relates to costs
associated with the resignation of the former Chief Executive Officer of
PanAmSat in August 2001. Approximately $7.5 million of the $9.5 million of total
severance costs have been paid through September 30, 2002. In the third quarter
of 2002, the Company recorded a credit of $1.5 million for the reversal of prior
year severance accruals due to actual costs being lower than originally
estimated.
The Company expects its significant cash outlays will continue to be primarily
capital expenditures related to the construction and launch of satellites and
debt service costs. The Company has satellites under various stages of
development, for which the Company has budgeted capital expenditures. PanAmSat
currently expects to spend approximately $295 million to $310 million on capital
expenditures during 2002, which will primarily be comprised of costs to
construct, insure and launch satellites.
Assuming satellites under development are successfully launched and services on
the satellites commence on the schedule currently contemplated, PanAmSat
believes that amounts available under the Revolving Facility, vendor financing,
future cash flows from operations and cash on hand will be sufficient to fund
its operations and its remaining costs for the construction and launch of
satellites currently under development. There can be no assurance, however, that
PanAmSat's assumptions with respect to costs for future construction and launch
of its satellites will be correct, or that amounts available under the Revolving
Facility, vendor financing, future cash flows from operations and cash on hand
will be sufficient to cover any shortfalls in funding for (i) launches caused by
uninsured launch or in-orbit failures, (ii) cost overruns, (iii) delays, (iv)
capacity shortages, or (v) other unanticipated expenses.
In addition, if the Company were to consummate any strategic transactions or
undertake any other projects requiring significant capital expenditures, the
Company may be required to seek additional financing. If circumstances were to
require PanAmSat to incur such additional indebtedness, the ability of PanAmSat
to obtain any such additional financing would also be subject to the terms of
PanAmSat's outstanding indebtedness and the agreements governing the Hughes
Transaction. 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. Additionally, the agreements between Hughes Electronics and
26
EchoStar relating to the Hughes Transaction require that Hughes Electronics
obtain the consent of EchoStar for PanAmSat to enter into certain strategic
transactions and other material transactions outside of the ordinary course of
PanAmSat's business until the transactions contemplated by such agreements have
been completed or the agreements have been terminated.
Net cash provided by operating activities increased $34.3 million, or 9 percent,
to $395.4 million for the nine months ended September 30, 2002, from $361.1
million for the nine months ended September 30, 2001. The increase in 2002 was
primarily attributable to an increase in net income adjusted for non-cash items
of $25.4 million and a decrease in the cash used within prepaid expenses and
other assets of $35.2 million, partially offset by a decrease in the cash
provided by deferred gains and revenue of $26.1 million.
Net cash used in investing activities was $140.8 million for the nine months
ended September 30, 2002, compared to net cash used in investing activities of
$109.2 million for the nine months ended September 30, 2001. The increase in net
cash used in investing activities in 2002 was primarily due to an increase in
capital expenditures of $18.4 million and the purchase of short-term investments
of $95.7 million during the nine months ended September 30, 2002 as compared to
the nine months ended September 30, 2001, offset partially by the receipt of
$82.6 million of additional proceeds from insurance claims during 2002 as
compared to 2001.
Net cash used in financing activities decreased to $18.5 million for the nine
months ended September 30, 2002, from $22.1 million for the nine months ended
September 30, 2001. The decrease in net cash used in financing activities in
2002 was primarily due to: repayments of long-term debt of $1.772 billion under
the Hughes Electronics term loan which was completed in February 2002 and the
repayment of the Galaxy IIIR Notes in January 2002, as well as debt issuance
costs paid during 2002 of $41.0 million related to the Refinancing. These
decreases in net cash used in financing activities were partially offset by $1.8
billion of new borrowings obtained in the Refinancing.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
provides that intangible assets with finite useful lives be amortized and that
goodwill and intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment with a transitional goodwill
impairment test completed within six months from the date of adoption. SFAS 142
also changed the evaluation criteria for testing goodwill for impairment from an
undiscounted cash flow approach to a test based on the implied fair value of the
goodwill at the reporting unit level (see Note 2 to the Company's September 30,
2002 consolidated financial statements). PanAmSat has determined that for such
impairment testing the Company has only one reporting unit, which is at the
enterprise level.
In the quarter ended June 30, 2002, the Company completed its transitional
assessment of the recoverability of its goodwill and determined that no
impairment charge is required. The Company measured the fair value of its
reporting unit based on the quoted market price of the Company's common stock.
Additionally, a valuation of PanAmSat was contemporaneously performed by an
independent valuation expert utilizing a discounted cash flow approach. The fair
value of the Company derived from the discounted cash flow approach exceeded the
carrying value of the Company's goodwill as well as the value determined using
the market price of PanAmSat's stock. In accordance with SFAS No. 142, PanAmSat
will perform its annual impairment test for its reporting unit during the fourth
quarter of each year, commencing in the fourth quarter of 2002. If an impairment
loss results from the annual impairment test, the loss will be recorded as a
pre-tax charge to operating income. The amount of any impairment loss resulting
from the annual impairment test could be material to PanAmSat's results of
operations.
The adoption of SFAS 142 resulted in the elimination of goodwill amortization
beginning January 1, 2002. As of September 30, 2002, the Company had goodwill of
approximately $2.24 billion and no other intangible assets. Prior to the
adoption of SFAS 142, our annual goodwill amortization was approximately $65
million. Net income and earnings per share for the three and nine months ended
September 30, 2002 and 2001, adjusted to exclude amortization expense related to
goodwill which is no longer amortized, are as follows:
27
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Income before extraordinary item:
Reported income before extraordinary item $ 20,700 $ 19,503 $ 63,969 $ 27,426
Goodwill amortization -- 16,240 -- 48,720
---------- ---------- ---------- ----------
Adjusted income before extraordinary item $ 20,700 $ 35,743 $ 63,969 $ 76,146
========== ========== ========== ==========
Net income:
Reported net income $ 20,700 $ 19,503 $ 61,487 $ 27,426
Goodwill amortization -- 16,240 -- 48,720
---------- ---------- ---------- ----------
Adjusted net income $ 20,700 $ 35,743 $ 61,487 $ 76,146
========== ========== ========== ==========
Earnings per share before extraordinary item -
basic and diluted:
Reported earnings per share before
extraordinary item - basic and diluted $ 0.14 $ 0.13 $ 0.43 $ 0.18
Goodwill amortization per share -- 0.11 -- 0.33
---------- ---------- ---------- ----------
Adjusted earnings per share before
extraordinary item - basic and diluted $ 0.14 $ 0.24 $ 0.43 $ 0.51
========== ========== ========== ==========
Net income per common share - basic and diluted:
Reported net income per common share -
basic and diluted $ 0.14 $ 0.13 $ 0.41 $ 0.18
Goodwill amortization per share -- 0.11 -- 0.33
---------- ---------- ---------- ----------
Adjusted net income per common share -
basic and diluted $ 0.14 $ 0.24 $ 0.41 $ 0.51
========== ========== ========== ==========
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145 provides that a loss on extinguishment of
debt meet the requirements of APB 30 to be treated as an extraordinary item in
the statement of operations. SFAS 145 also amends FASB Statement No. 13 to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.
In the first quarter of 2002 in connection with the Company's Refinancing, the
Company recorded an extraordinary loss for the remaining unamortized debt
issuance costs related to the repayment of the Hughes Electronics term loan (See
Note 4 and Note 11 to the Company's September 30, 2002 consolidated financial
statements). The provisions of SFAS 145 related to the rescission of FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt ("SFAS
4"), will be effective for the Company beginning January 1, 2003. The Company is
in the process of evaluating the effect, if any, the provisions of SFAS 145 will
have on our financial statements. The other provisions of SFAS 145 were
effective in the second quarter of 2002 and did not have a significant impact on
our financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The principal difference between this
Statement and Issue 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. We do not believe that the adoption of the provisions of SFAS 146 will
have a significant impact on our financial statements.
28
BOEING 702 SOLAR ARRAY DEGRADATION RISK
Two of the three Boeing Satellite Systems ("BSS") 702 satellites that we operate
and other BSS 702's of a similar design operated by others have experienced a
progressive degradation of their solar arrays causing a reduction in output
power. Along with the manufacturer, we are monitoring the problem to determine
its cause and its expected effect. The power reduction may require the satellite
operator to permanently turn off certain transponders on the affected satellite
to allow for the continued operation of other transponders, which could result
in a loss of revenue. Should it be necessary to turn off a significant number of
transponders, it may have a material adverse effect on our results of
operations. At this time, the power degradation has not required us to reduce
the number of operating transponders on either affected satellite.
Our BSS 702 satellites are currently covered by insurance policies. However, if
we are adversely affected by progressive solar array degradation anomalies,
there can be no assurance that we will be reimbursed by the insurers, as they
may dispute a payment obligation or the applicable policy may not cover such
loss. In addition, there can be no assurance that, following the expiration of
the current policies, we will be able to procure new insurance that covers
losses of this type. Further, there can be no assurance that we will be able to
obtain insurance for such satellites on commercially reasonable terms.
BACKLOG RISK
Future contractual cash payments expected from customers (backlog) aggregated
approximately $5.50 billion as of September 30, 2002, including approximately
$638.2 million related to satellites to be launched. Included in the total
backlog of $5.50 billion is $332.5 million of backlog that may be terminated
pursuant to certain contractual termination rights.
Due to recent events in the telecommunications industry and general economic
conditions in certain parts of the world, we have reviewed our backlog for our
top 25 customers to identify risks to our business related to these events and
conditions. Of our $5.50 billion backlog as of September 30, 2002, approximately
$4.16 billion, or 75.6% relates to our top 25 customers. Having conducted both
quantitative and qualitative analyses, we have concluded that six of our top 25
customers have a risk of future non-performance of their contractual obligations
to us. These six customers are meeting substantially all of their obligations at
the present time and are paying in a manner consistent with past experience.
These customers represent approximately $1.06 billion of our backlog as of
September 30, 2002. The largest of these customers represents approximately $589
million, or 11% of our total backlog, and $79.0 million, or 9.8% of our expected
2002 revenues, and the smallest of these customers represents approximately
$41.6 million, or 0.8% of our total backlog, and $3.4 million, or 0.4% of our
expected 2002 revenues. If one of the larger affected customers or a group of
these customers becomes unable to perform some or all of their obligations to
us, it could have a material adverse effect on our financial condition and
results of operations.
MARKET RISKS
The Company manages its exposure to market risks through internally established
policies and procedures and, when deemed appropriate, through the use of
derivative financial instruments. We use derivative financial instruments,
including interest rate hedges to manage market risks. Additional information
regarding our interest rate hedge is contained within "Financial Condition"
above. The objective of the Company's policies is to mitigate potential income
statement, cash flow and fair value exposures resulting from possible future
adverse fluctuations in interest rates. The Company evaluates its exposure to
market risk by assessing the anticipated near-term and long-term fluctuations in
interest rates on a daily basis. This evaluation includes the review of leading
market indicators, discussions with financial analysts and investment bankers
regarding current and future economic conditions and the review of market
projections as to expected future interest rates. The Company utilizes this
information to determine its own investment strategies as well as to determine
if the use of derivative financial instruments is appropriate to mitigate any
potential future interest rate exposure that the Company may face. The Company's
policy does not allow speculation in derivative instruments for profit or
execution of derivative instrument contracts for which there are no underlying
exposures. The Company does not use financial instruments for trading purposes
and is not a party to any leveraged derivatives.
The Company determines the impact of changes in interest rates on the fair value
of its financial instruments based on a hypothetical 10% adverse change in
interest rates from the rates in effect as of September 30, 2002 for these
financial instruments. The Company uses separate methodologies to determine the
impact of these hypothetical changes on its sales-type leases, fixed rate public
debt and variable rate debt as follows:
29
- For the Company's sales-type leases, a discount rate based on a
30-year bond is applied to future cash flows from sales-type leases
to arrive at a base rate present value for sales-type leases. This
discount rate is then adjusted for a negative 10% change and then
applied to the same cash flows from sales-type leases to arrive at a
present value based on the negative change. The base rate present
value and the present value based on the negative change are then
compared to arrive at the potential negative fair value change as a
result of the hypothetical change in interest rates.
- For the Company's fixed rate public debt, the current market rate of
each public debt instrument is applied to each principal amount to
arrive at a current yield to maturity for each public debt
instrument as of the end of the year. The current market rate is
then reduced by a factor of 10% and this revised market rate is
applied to the principal amount of each public debt instrument to
arrive at a yield to maturity based on the adverse interest rate
change. The two yields to maturity are then compared to arrive at
the potential negative fair value change as a result of the
hypothetical change in interest rates.
- For the Company's variable rate debt, the effect in annual cash
flows and net income is calculated as a result of the potential
effect of a hypothetical 10% adverse fluctuation in interest rates.
The current LIBOR rate plus applicable margin as of the end of the
quarter is applied to the applicable principal outstanding at the
end of the quarter to determine an annual interest expense based on
quarter-end rates and principal balances. This calculation is then
performed after increasing the LIBOR rate plus applicable margin by
a factor of 10%. The difference between the two annual interest
expenses calculated represents the reduction in annual cash flows as
a result of the potential effect of a hypothetical 10% adverse
fluctuation in interest rates. This amount is then tax effected
based on the Company's effective tax rate to yield the reduction in
net income as a result of the potential effect of a hypothetical 10%
adverse fluctuation in interest rates.
The only potential limitations of the respective models are in the assumptions
utilized in the models such as the hypothetical adverse fluctuation rate and the
discount rate. The Company believes that these models and the assumptions
utilized are reasonable and sufficient to yield proper market risk disclosure.
The Company has not experienced any material changes in interest rate exposures
during the three or nine months ended September 30, 2002. Based upon economic
conditions and leading market indicators at September 30, 2002, the Company does
not foresee a significant adverse change in interest rates in the near future.
As a result, the Company's strategies and procedures to manage exposure to
interest rates have not changed in comparison to the prior year.
The potential fair value change resulting from a hypothetical 10% adverse
fluctuation in interest rates related to PanAmSat's outstanding fixed-rate debt
and fixed-rate net investments in sales-type lease receivable balances would be
approximately $85.6 million and $5.2 million, respectively, as of September 30,
2002. The potential effect of a hypothetical 10% adverse fluctuation in interest
rates for one year on PanAmSat's floating rate debt outstanding at September 30,
2002 would be a reduction in cash flows of approximately $4.6 million and a
reduction in net income of approximately $2.5 million.
30
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risks."
ITEM 4 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. Within 90 days prior to the date of
this report, PanAmSat's President and Chief Executive Officer and PanAmSat's
Executive Vice President and Chief Financial Officer evaluated, with the
participation of PanAmSat's management, the effectiveness of the Company's
disclosure controls and procedures. Based on the evaluation, which disclosed no
significant deficiencies or material weaknesses, PanAmSat's President and Chief
Executive Officer and PanAmSat's Executive Vice President and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls
subsequent to the evaluation.
31
PANAMSAT CORPORATION
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) 10.82 Letter dated September 27, 2002, modifying certain terms of the
Employment Agreement dated August 20, 2002 between PanAmSat
Corporation and Joseph R. Wright, Jr. *
99.1 Certification by Chief Executive Officer
99.2 Certification by Chief Financial Officer
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter for
which this report is filed.
--------------------------------------------------------------------------------
* Exhibit indicated is an executive contract.
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 12, 2002 /s/ Michael J. Inglese
------------------------------------
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
32
CERTIFICATIONS
I, Joseph R. Wright, President and Chief Executive Officer of PanAmSat
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PanAmSat Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Joseph R. Wright
-------------------------------------
Joseph R. Wright
President and Chief Executive Officer
33
I, Michael J. Inglese, Executive Vice President and Chief Financial Officer of
PanAmSat Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PanAmSat Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Michael J. Inglese
-------------------------------------
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
34