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, 2001
Commission File No. 0-22531
PanAmSat Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4607698
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
20 Westport Road, Wilton, CT 06897
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 203-210-8000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of October 23, 2001, an aggregate of 149,847,692 shares of the Company's
Common Stock were outstanding.
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 Corporation ("PanAmSat" or the "Company") 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 of government regulation, (iii) risks of doing business
internationally, (iv) risks of uninsured loss, (v) risks associated with
Internet businesses, (vi) risks of inadequate access to capital for growth and
(vii) risks associated with the Company's planned refinancing. Such risks are
more fully described in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Quarterly Report on Form
10-Q and under the caption "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 (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 Securities and Exchange Commission.
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, 2001 and 2000
(In Thousands, Except Share Data)
September 30, September 30,
2001 2000
------------ ------------
REVENUES:
Operating leases, satellite services and other $ 202,006 $ 190,796
Outright sales and sales-type leases 50,943 8,531
------------ ------------
Total revenues 252,949 199,327
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases 12,766 -
Depreciation and amortization 104,123 83,534
Direct operating costs 33,408 40,231
Selling, general and administrative expenses 33,627 23,606
Severance costs 6,892 -
------------ ------------
Total operating costs and expenses 190,816 147,371
------------ ------------
INCOME FROM OPERATIONS 62,133 51,956
INTEREST EXPENSE, net 27,616 35,132
------------ ------------
INCOME BEFORE INCOME TAXES 34,517 16,824
INCOME TAXES 15,014 7,571
------------ ------------
NET INCOME $ 19,503 $ 9,253
------------ ------------
NET INCOME PER COMMON SHARE - basic
and diluted $ 0.13 $ 0.06
------------ ------------
Weighted average common shares outstanding 149,825,000 149,743,000
---------------- ----------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Nine Months Ended September 30, 2001 and 2000
(In Thousands, Except Share Data)
September 30, September 30,
2001 2000
------------ ------------
REVENUES:
Operating leases, satellite services and other $ 604,446 $ 583,514
Outright sales and sales-type leases 61,960 237,166
------------ ------------
Total revenues 666,406 820,680
------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases 12,766 85,776
Depreciation and amortization 304,743 238,819
Direct operating costs 114,386 109,037
Selling, general and administrative expenses 91,611 68,017
Severance costs 6,892 -
------------ ------------
Total operating costs and expenses 530,398 501,649
------------ ------------
INCOME FROM OPERATIONS 136,008 319,031
INTEREST EXPENSE, net 87,467 91,689
------------ ------------
INCOME BEFORE INCOME TAXES 48,541 227,342
INCOME TAXES 21,115 102,304
------------ ------------
NET INCOME $ 27,426 $ 125,038
------------ ------------
NET INCOME PER COMMON SHARE - basic and
diluted $ 0.18 $ 0.83
------------ ------------
Weighted average common shares outstanding 149,763,000 150,153,000
---------------- ----------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands, Except Share Data)
September 30, December 31,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 359,075 $ 129,345
Accounts receivable-net 48,806 52,912
Net investment in sales-type leases 24,254 24,959
Prepaid expenses and other (principally prepaid insurance) 38,181 30,360
Deferred income taxes 2,886 3,220
Insurance claim receivable - 132,435
----------- -----------
Total current assets 473,202 373,231
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 3,150,146 3,156,944
NET INVESTMENT IN SALES-TYPE LEASES 233,475 221,039
GOODWILL-Net of amortization 2,254,899 2,303,619
DEFERRED CHARGES 141,393 123,518
----------- -----------
TOTAL ASSETS $ 6,253,115 $ 6,178,351
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)-(continued)
(In Thousands, Except Share Data)
September 30, December 31,
2001 2000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 113,555 $ 79,518
Deferred revenues 13,093 14,052
------------ ------------
Total current liabilities 126,648 93,570
DUE TO AFFILIATES 1,725,000 1,725,000
(merger-related
indebtedness)
LONG-TERM DEBT 750,000 796,542
DEFERRED INCOME TAXES 394,107 365,982
DEFERRED CREDITS AND OTHER (principally customer deposits and deferred
revenue) 269,844 242,562
------------ ------------
TOTAL LIABILITIES $3,265,599 $3,223,656
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
6
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)-(continued)
(In Thousands, Except Share Data)
September 30, December 31,
2001 2000
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value -- 400,000,000
shares authorized; 149,840,500 and 149,675,117
outstanding at September 30, 2001 and December 31,
2000, respectively $ 1,498 $ 1,497
Additional paid-in-capital 2,528,151 2,522,757
Retained earnings 457,867 430,441
----------- -----------
Total stockholders' equity 2,987,516 2,954,695
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,253,115 $ 6,178,351
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
7
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2001 and 2000
(In Thousands)
September 30, September 30,
2001 2000
------------ -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 27,426 $ 125,038
Adjustments to reconcile net income to
net cash provided by operating activities:
Gross profit on sales and sales-type leases (32,715) (134,178)
Depreciation and amortization 304,743 238,819
Deferred income taxes 28,459 101,255
Amortization of debt issuance costs 4,581 4,581
Provision for uncollectible receivables 15,339 (1,894)
Changes in assets and liabilities:
Collections on investments in sales-type leases 16,060 18,612
Operating leases and other receivables (11,233) 18,420
Prepaid expenses and other assets (30,278) (63,262)
Accounts payable and accrued liabilities 8,257 (7,023)
Deferred gains and revenues 30,429 23,464
----------- -----------
Net cash provided by operating activities $ 361,068 $ 323,832
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
8
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (continued)
For the Nine Months Ended September 30, 2001 and 2000
(In Thousands)
September 30, September 30,
2001 2000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including capitalized interest) $ (241,654) $ (317,585)
Insurance proceeds from satellite recoveries 132,435 36,200
------------- -------------
Net cash used in investing activities (109,219) (281,385)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (21,216) (56,421)
Repayments of incentive obligations (6,400) (4,905)
Stock issued in connection with employee benefit plans 5,497 10,239
------------- -------------
Net cash used in financing activities (22,119) (51,087)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 229,730 (8,640)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 129,345 117,259
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 359,075 $ 108,619
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received for interest $ 11,985 $ 4,867
------------- -------------
Cash paid for interest $ 127,369 $ 149,091
------------- -------------
Cash received for taxes $ 7,396 $ 0
------------- -------------
Cash paid for taxes $ 1,799 $ 28,981
------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
9
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
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, 2001 and 2000 have been made. Certain prior
period amounts have been reclassified to conform with the current year's
presentation. Operating results for the three and nine months ended
September 30, 2001 and 2000 are not necessarily indicative of the operating
results for the full year. For further information, refer to the financial
statements and footnotes thereto included in the Form 10-K.
(2) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which is effective July 1, 2001. SFAS 141 requires the
purchase method of accounting for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method. The Company
does not believe that the adoption of SFAS 141 will have a significant
impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized
intangibles 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 for
purposes of assessing potential future impairments of goodwill. SFAS 142
also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption and requires the Company to
evaluate the carrying value of goodwill for impairment annually thereafter.
The Company is currently assessing but has not yet determined the impact of
SFAS 142 on its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets
10
and the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. This standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The Company is required to
adopt the provisions of SFAS No. 143 at the beginning of fiscal 2002. The
Company has not determined the impact, if any, the adoption of this
statement will have on its financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions". This Statement also
amends ARB No. 51, "Consolidated Financial Statements", to eliminate the
exception to consolidation for a subsidiary for which control is likely to
be temporary. This Statement requires that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired. This Statement also broadens the presentation of
discontinued operations to include more disposal transactions. The
provisions of this Statement are required to be adopted by the Company at
the beginning of fiscal 2002. The Company has not determined the impact, if
any, adoption of this statement will have on its financial position or
results of operations.
(3) Satellite Developments
Reference is made to "Item 1. - Business - Strategy - Expanding the Network
and -The Satellite Network" 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 2001, the Company announced that the PAS-7 Indian Ocean Region
satellite had experienced a reduction of approximately 25 percent of its
power capacity as a result of a technical difficulty with one of the
spacecraft's solar arrays. However, the Company's customers have been
unaffected by this difficulty and the Company expects that the satellite
will continue to serve its existing customers.
11
PAS-7 is an FS 1300 model satellite built by Space Systems/Loral that
carries 14 C-band and 30 Ku-band transponders serving Europe, the Middle
East, Africa, and Asia from 68.5 degrees east longitude. In accordance with
the insurance policy maintained on this satellite, the Company filed a
proof of loss with the insurers in relation to this anomaly on October 17,
2001. This insurance policy is in the approximate amount of $250 million
and includes a provision for the Company to share future revenues on the
satellite with the insurers if the proof of loss is accepted. The Company
is closely monitoring the satellite to ensure that it continues to meet the
needs of the customers that it serves. The Company is also working with the
satellite manufacturer to determine the long-term implications to the
satellite. The Company does not expect a material impact on 2001 revenues
as a result of the difficulty on the PAS-7 satellite.
In August 2001, the Company announced that it had formed a new
joint-venture with Japan's JSAT Corporation ("JSAT") to expand digital
services in North America. Through this strategic relationship, called
"Horizons," PanAmSat and JSAT will jointly own, develop and market Ku-band
video, data and Internet satellite services at 127 degrees west longitude
and will share revenues on a 50/50 basis for the Ku-band services. Together
PanAmSat and JSAT will invest more than $100 million to develop the Ku-band
payload for the new Boeing Satellite Systems, Inc. model 601 HP satellite
that is scheduled for launch in late 2002 to 127 degrees west longitude.
PanAmSat will separately own, develop and market the C-band capacity on
this new satellite as part of the Company's Galaxy cable neighborhood. The
C-band payload will replace the Galaxy IX satellite in PanAmSat's domestic
U.S. fleet. Galaxy IX will then migrate to a new orbital location where it
will continue to provide C-band services as part of PanAmSat's Galaxy
fleet.
In July 2001, the Company announced that the Galaxy IIIC satellite is
scheduled to be launched in the first quarter of 2002. As a result, Galaxy
IIIC is expected to commence service in the second quarter of 2002, two
quarters later than previously anticipated. The schedule was revised due to
manufacturing delays required to remedy certain issues discovered during
factory testing by the manufacturer, Boeing Satellite Systems, Inc. Galaxy
IIIC is intended to serve as the replacement for Galaxy IIIR at 95 degrees
west longitude. Upon the deployment of Galaxy IIIC, Galaxy IIIR will be
moved for service at a new orbital location to be determined.
Also, in July 2001, the Company commenced service on its PAS-10 satellite
that was launched in May 2001. PanAmSat's total fleet of satellites in
orbit now stands at 21. PAS-10 succeeded PAS-4 at 68.5 degrees east
longitude in the Company's Indian Ocean Region cable neighborhood and it
will enable the delivery of new digital and IP-based services across
Africa, Asia, Europe and the Indian subcontinent. Upon the deployment of
PAS-10, PAS-4 was moved to 72 degrees east longitude for service.
The Company expects to launch four satellites by early 2003. Galaxy IIIC is
scheduled to be launched in the first quarter of 2002. Galaxy VIIIi-R is
scheduled
12
to be launched in the third quarter of 2002 to 95 degrees west longitude.
The PanAmSat and JSAT joint-venture expects to launch a satellite to 127
degrees west longitude in late 2002. The Company also expects to launch
Galaxy XII in late 2002 or early 2003 to 74 degrees west longitude.
Eight of the Company's satellites are either fully self-insured or insured
with significant exclusions as of September 30, 2001. The net book value of
these self-insured satellites and the significant exclusions as of
September 30, 2001 aggregated $671 million.
(4) Severance Costs
On July 12, 2001, the Company announced its plans to reduce future
operating expenses Company-wide as a result of revised revenue
expectations. In conjunction with this expense reduction plan, the Company
began restructuring its NET-36 organization and began integrating the
NET-36 product (now called Web Cast Services) with the Company's other
value added service offerings.
The Company incurred severance costs of approximately $3.8 million during
the quarter ended September 30, 2001 to implement this operating expense
reduction and NET-36 restructuring plan. These severance costs were
primarily related to employee compensation and employee benefits,
outplacement services and legal and consulting expenses associated with
this reduction in workforce of 123 employees.
The Company also incurred additional severance costs of approximately $3.1
million during the quarter ended September 30, 2001 related to the
resignation in August 2001 of the Company's former Chief Executive Officer.
These severance costs were primarily related to employee compensation and
employee benefits.
Total severance costs for the quarter ended September 30, 2001 were $6.9
million. The remaining accrual related to these severance costs at
September 30, 2001 was approximately $5.3 million.
(5) The Hughes Term Loan
The Company has an outstanding term loan in the amount of $1.725 billion
(the "Term Loan") from Hughes Electronics Corporation, an affiliate of the
Company ("Hughes "). The Term Loan matures in June 2003 and bears interest
at a rate equal to that of the Company's revolving credit facility. The
Term Loan is subordinate to the $750 million of notes, the revolving credit
facility and the commercial paper program. Hughes has the right to request
that the Company use its best efforts to replace the Term Loan with another
credit facility on terms that may then be available to the Company. On
October 15, 2001, in accordance with the Loan Agreement dated May 15, 1997
between Hughes and the Company, as amended, Hughes requested that the
Company use its best efforts to replace the Term Loan
13
in order to repay the principal amount outstanding under the Term Loan plus
any accrued and unpaid interest. The Term Loan has been in place since the
merger between Hughes and PanAmSat in 1997. The Company intends to
refinance the Term Loan with long-term borrowings, however, no time frame
has been set for these transactions and there is no assurance that they
will occur. Additionally, the refinancing of the Term Loan, if successful,
could result in increased costs to the Company, including higher annual
interest expense.
(6) Interest Expense-Net
Interest expense for the three months ended September 30, 2001 and 2000 is
recorded net of capitalized interest of $4.0 million and $11.5 million,
respectively and interest income of $3.6 million and $2.3 million,
respectively. Interest expense for the nine months ended September 30, 2001
and 2000 is recorded net of capitalized interest of $19.4 million and
$45.1 million, respectively, and interest income of $12.0 million and $4.9
million, respectively.
(7) Revenue By Service Type
PanAmSat operates its business as a single operating segment. PanAmSat
primarily provides video and data network services to major broadcasting,
DTH providers and telecommunications companies worldwide. For the three
months ended September 30, 2001 and 2000, PanAmSat's revenues were $253.0
million and $199.3 million, respectively, and for the nine months ended
September 30, 2001 and 2000, PanAmSat's revenues were $666.4 million and
$820.7 million, respectively. These revenues were derived from the
following service areas:
Percentage of Revenues Percentage of Revenues
3 months ended 9 months ended
9/30/01 9/30/00 9/30/01 9/30/00
-------------------------------------------------
Services:
---------
Video Services 72% 69% 69% 70%
Network Services 22% 24% 24% 25%
Other Services 6% 7% 7% 5%
------ ------ ------ ------
Total: 100% 100% 100% 100%
------ ------ ------ ------
(8) Evaluation of Long-lived Assets
The Company periodically evaluates potential impairment loss relating to
long-lived assets, including goodwill, when a change in circumstances
occurs, by assessing whether the unamortized carrying amount can be
recovered over the remaining life through undiscounted future expected cash
flows generated by the underlying assets (excluding interest payments).
14
The Company evaluates potential impairment loss relating to enterprise
level goodwill by assessing whether the unamortized carrying amount can be
recovered over the remaining life through undiscounted future expected cash
flows generated by the underlying asset (excluding interest charges). If
the undiscounted future cash flows were less than the unamortized carrying
value of the asset, an impairment charge would be recorded. The impairment
charge would be measured as the amount by which the carrying amount of the
asset exceeds the present value of estimated expected future cash flows
using a discount rate commensurate with the risks involved.
The Company evaluates long-lived assets, such as satellites and other
property and equipment for impairment in a similar manner. If the
undiscounted future cash flows were less than the carrying value of the
asset, an impairment charge would be recorded. The impairment charge would
be measured as the excess of the carrying value of the asset over the
present value of estimated expected future cash flows using a discount rate
commensurate with the risks involved.
15
PANAMSAT CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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,
------------------------------- -------------------------------
(unaudited; in thousands) (unaudited, in thousands)
2001 2000 2001 2000
---- ---- ---- ----
Operating leases, satellite services and other $ 202,006 $ 190,796 $ 604,446 $ 583,514
Outright sales and sales-type leases 50,943 8,531 61,960 237,166
Total revenues 252,949 199,327 666,406 820,680
Cost of outright sales and sales-type leases 12,766 - 12,766 85,776
Depreciation and amortization 104,123 83,534 304,743 238,819
Direct operating costs 33,408 40,231 114,386 109,037
Selling, general and administrative expenses 33,627 23,606 91,611 68,017
Severance costs 6,892 - 6,892 -
Income from operations 62,133 51,956 136,008 319,031
Interest expense, net 27,616 35,132 87,467 91,689
Income taxes 15,014 7,571 21,115 102,304
Net income per common share-basic and diluted $ 0.13 $ 0.06 $ 0.18 $ 0.83
16
PANAMSAT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues - Revenues were $253.0 million for the three months ended
September 30, 2001, compared to revenues of $199.3 million for the same period
in 2000. This increase was primarily due to $45.5 million of new sales-type
lease revenue recorded in the third quarter of 2001 for which there was no
comparable revenue in the third quarter of 2000. Total sales and sales-type
lease revenues were $50.9 million for the quarter ended September 30, 2001,
compared to $8.5 million for the same period in 2000. Included within total
sales and sales-type lease revenues for the quarter ended September 30, 2001 and
2000 was interest income related to sales-type leases of $5.5 million and $6.5
million, respectively. Operating lease revenues, which were 80 percent of total
revenues for the third quarter of 2001, increased by 6 percent to $202.0 million
from $190.8 million for the same period in 2000. This increase was primarily due
to new direct-to-home video services and growth in Internet-related services.
Revenues for the nine months ended September 30, 2001 were $666.4 million
compared to revenues of $820.7 million for the nine months ended September 30,
2000. The primary reason for this decrease was $219.2 million of new outright
sales and sales-type lease revenue in 2000 compared to $45.5 million of new
sales-type lease revenue in 2001. Included within total sales and sales-type
lease revenues for the nine months ended September 30, 2001 and 2000 was
interest income related to sales-type leases of $16.5 million and $18.0 million,
respectively. Operating lease revenues were $604.4 million or 91 percent of
total revenues for the nine months ended September 30, 2001 compared to $583.5
million or 71 percent of total revenues for the same period in 2000. Revenues,
excluding new sales and sales-type leases, increased by $19.4 million or 3
percent to $620.9 million for the nine months ended September 30, 2001 from
$601.5 million for the nine months ended September 30, 2000. This increase was
primarily due to increased operating lease revenues from new direct-to-home
video services and growth in Internet related services. Outright sales and
sales-type leases represent substantial long-term commitments for services. The
net present value of the payments due to the Company over the life of these
agreements are recorded as revenues in the period that such services begin.
Therefore, revenues from these transactions are subject to greater variation
from period to period than are operating lease revenues.
The Company provides video services which 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
increased 2 percent to $132.3 million for the three months ended September 30,
2001 compared to $129.5 million for the three months ended September 30, 2000.
The increase in operating lease revenue for the three months ended September 30,
2001 is due primarily to new direct-to-home services that commenced late in the
third quarter of 2000 and other video services. Operating lease revenues from
17
network services increased 17 percent to $55.6 million for the third quarter of
2001, as compared to $47.6 million during the same period in 2000, primarily due
to growth in data and Internet-related services. For the nine months ended
September 30, 2001, operating lease revenues from video services were $399.7
million, an increase of 2 percent over $392.4 million for the same period in
2000. The increase in operating lease revenues from video services for the nine
months ended September 30, 2001 is primarily due to new direct-to-home services
that commenced late in the third quarter of 2000. Operating lease revenues from
network services for the nine months ended September 30, 2001 were $162.1
million, an increase of 7 percent from $150.8 million during the same period in
2000. The increase in network services revenues for the nine months ended
September 30, 2001 is primarily due to growth in Internet-related service
agreements.
Cost of Outright Sales and Sales-Type Leases - Cost of outright sales and
sales-type leases were $12.8 million for the three 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 months ended
September 30, 2000 since there were no new sales-type leases recorded in that
period. For the nine months ended September 30, 2001, costs of outright sales
and sales-type leases were $12.8 million compared to $85.8 million for the same
period in 2000 primarily due to the greater number of outright sales and
sales-type lease agreements recorded in 2000 than in 2001.
Depreciation and Amortization - Depreciation and amortization increased
$20.6 million, or 25 percent, to $104.1 million for the three months ended
September 30, 2001 from $83.5 million for the same period in 2000. Depreciation
and amortization for the nine months ended September 30, 2001 increased $65.9
million, or 28 percent, to $304.7 million from $238.8 million for the same
period in 2000. The increase in depreciation and amortization for the three and
nine month periods ended September 30, 2001 is due primarily to depreciation
expense associated with the addition of four new satellites placed in service
during 2000 and two new satellites placed in service during 2001. Also, the
reduction in the remaining useful life of the Galaxy VIIIi satellite resulted in
approximately $15.0 million of additional quarterly depreciation contributing to
higher depreciation for both the three and nine months ended September 30, 2001.
Direct Operating Costs - Direct operating costs decreased $6.8 million or
17 percent, to $33.4 million for the three months ended September 30, 2001 from
$40.2 million for the same period in 2000. This decrease is due primarily to
reduced engineering and third party expenses associated with the NET-36
initiative and other reduced expenses including travel and consulting costs.
Direct operating costs increased $5.4 million or 5 percent to $114.4 million for
the nine months ended September 30, 2001 from $109.0 million for the same period
in 2000. The increase in direct operating costs for the nine month period is
primarily related to additional headcount to support the Company's services,
customer service transition costs, increased repairs and maintenance expenses,
and the development of the NET-36 initiative.
Selling, General and Administrative Expenses - Selling, general and
administrative costs increased $10.0 million, or 42 percent, to $33.6 million
for the three
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months ended September 30, 2001 from $23.6 million for the same period in 2000.
Selling, general and administrative costs increased $23.6 million, or 35 percent
to $91.6 million for the nine months ended September 30, 2001 from $68.0 million
for the same period in 2000. The three month and nine month increases in
selling, general and administrative costs are primarily related to increased bad
debt expense, the development of the NET-36 initiative and additional headcount
to support the Company's services.
Severance Costs - Severance costs were $6.9 million for the three and nine
months ended September 30, 2001. Of this $6.9 million, approximately $3.8
million relates to severance costs associated with the Company's expense
reduction and NET-36 restructuring plan that was announced on July 12, 2001 and
approximately $3.1 million relates to costs associated with the resignation in
August 2001 of the former Chief Executive Officer of PanAmSat. There were no
comparable costs for the three and nine month periods ended September 30, 2000.
Income from Operations - Income from operations was $62.1 million for the
three months ended September 30, 2001 an increase of $10.1 million or 20
percent, from $52.0 million for the same period in 2000. The increase in income
from operations for the three month period ended September 30, 2001 is due
primarily to the gross profit associated with the new sales-type lease agreement
that was executed in the third quarter of 2001 for which there were no
comparable transactions in 2000 and the increase in operating lease revenue from
2000 to 2001. Income from operations was $136.0 million for the nine months
ended September 30, 2001, a decrease of $183.0 million or 57 percent, from
$319.0 million for the same period in 2000. The decrease in income from
operations for the nine month period ended September 30, 2001 is due primarily
to the gross profit associated with the $219.2 million of new outright sales and
sales-type lease agreements that were executed during the nine months ended
September 30, 2000 compared to $45.5 million related to a new sales-type lease
agreement executed during the same period in 2001. Also contributing to this
decrease in income from operations, were higher direct operating and selling,
general and administrative costs and depreciation expenses in the nine months
ended September 30, 2001 as compared to the same period in 2000.
Interest Expense, Net - Interest expense, net was $27.6 million for the
three months ended September 30, 2001, a decrease of $7.5 million or 21 percent
from $35.1 million for the same period in 2000. Interest expense, net was $87.5
million for the nine months ended September 30, 2001, a decrease of $4.2 million
or 5 percent from $91.7 million for the same period in 2000. The decrease in
interest expense, net for the three and nine months ended September 30, 2001 was
due primarily to decreased interest expense as a result of lower interest rates
related to the Company's variable rate borrowings, which was partially offset by
a reduction in capitalized interest due to fewer satellites under construction
during the three and nine months ended September 30, 2001 as compared to the
three and nine months ended September 30, 2000.
Income Taxes - Income taxes were $15.0 million for the three months ended
September 30, 2001, an increase of $7.4 million or 98 percent, from $7.6 million
for the three months ended September 30, 2000. The increase in income taxes is
primarily a
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result of increased income from operations as noted above which resulted in an
increase in taxable income of $17.7 million for the three months ended September
30, 2001. Income taxes were $21.1 million for the nine months ended September
30, 2001, a decrease of $81.2 million or 79 percent, from $102.3 million for the
nine months ended September 30, 2000. The decrease in income taxes for the nine
month period ended September 30, 2001 is due to the decreased income from
operations as noted above, which resulted in a decrease in taxable income of
$178.8 million for the nine months ended September 30, 2001, as well as a
decrease in the Company's effective tax rate to 43.5 percent as a result of the
greater beneficial effects of the Foreign Sales Corporation ("FSC") replacement
legislation known as the Exclusion for Extraterritorial Income.
Satellite Developments - Reference is made to "Item 1. - Business -
Strategy - Expanding the Network and - The Satellite Network" 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 2001, the Company announced that the PAS-7 Indian Ocean Region
satellite had experienced a reduction of approximately 25 percent of its power
capacity as a result of a technical difficulty with one of the spacecraft's
solar arrays. However, the Company's customers have been unaffected by this
difficulty and the Company expects that the satellite will continue to serve its
existing customers. PAS-7 is an FS 1300 model satellite built by Space
Systems/Loral that carries 14 C-band and 30 Ku-band transponders serving Europe,
the Middle East, Africa, and Asia from 68.5 degrees east longitude. In
accordance with the insurance policy maintained on this satellite, the Company
filed a proof of loss with the insurers in relation to this anomaly on October
17, 2001. This insurance policy is in the approximate amount of $250 million and
includes a provision for the Company to share future revenues on the satellite
with the insurers if the proof of loss is accepted. The Company is closely
monitoring the satellite to ensure that it continues to meet the needs of the
customers that it serves. The Company is also working with the satellite
manufacturer to determine the long-term implications to the satellite. The
Company does not expect a material impact on 2001 revenues as a result of the
difficulty on the PAS-7 satellite.
In August 2001, the Company announced that it had formed a new
joint-venture with Japan's JSAT Corporation ("JSAT") to expand digital services
in North America. Through this strategic relationship, called "Horizons,"
PanAmSat and JSAT will jointly own, develop and market Ku-band video, data and
Internet satellite services at 127 degrees west longitude and will share
revenues on a 50/50 basis for the Ku-band services. Together PanAmSat and JSAT
will invest more than $100 million to develop the Ku-band payload for the new
Boeing Satellite Systems, Inc. model 601 HP satellite that is scheduled for
launch in late 2002 to 127 degrees west longitude. PanAmSat will separately own,
develop and market the C-band capacity on this new satellite as part of the
Company's Galaxy cable neighborhood. The C-band payload will replace the Galaxy
IX satellite in PanAmSat's domestic U.S. fleet. Galaxy IX will then migrate to a
new orbital location where it will continue to provide C-band services as part
of PanAmSat's Galaxy fleet.
20
In July 2001, the Company announced that the Galaxy IIIC satellite is
scheduled to be launched in the first quarter of 2002. As a result, Galaxy IIIC
is expected to commence service in the second quarter of 2002, two quarters
later than previously anticipated. The schedule has been revised due to
manufacturing delays required to remedy certain issues discovered during factory
testing by the manufacturer, Boeing Satellite Systems, Inc. Galaxy IIIC is
intended to serve as the replacement for Galaxy IIIR at 95 degrees west
longitude. Upon the deployment of Galaxy IIIC, Galaxy IIIR will be moved for
service at a new orbital location to be determined.
Also in July 2001, the Company commenced service on its PAS-10 satellite
that was launched in May 2001. PanAmSat's total fleet of satellites now stands
at 21. PAS-10 succeeded PAS-4 at 68.5 degrees east longitude in the Company's
Indian Ocean Region cable neighborhood and it will enable the delivery of new
digital and IP-based services across Africa, Asia, Europe and the Indian
subcontinent. Upon the deployment of PAS-10, PAS-4 was moved to 72 degrees east
longitude for service.
The Company expects to launch four satellites by early 2003. Galaxy IIIC is
scheduled to be launched in the first quarter of 2002. Galaxy VIIIi-R is
scheduled to be launched in the third quarter of 2002 to 95 degrees west
longitude. The PanAmSat and JSAT joint-venture expects to launch a satellite to
127 degrees west longitude in late 2002. The Company expects to launch Galaxy
XII in late 2002 or early 2003 at 74 degrees west longitude.
Eight of the Company's satellites are either fully self-insured or insured
with significant exclusions as of September 30, 2001. The net book value of
these self-insured satellites and the significant exclusions as of September 30,
2001 aggregated $671 million.
Financial Condition
The Company has an outstanding term loan in the amount of $1.725 billion
(the "Term Loan") from Hughes Electronics Corporation, an affiliate of the
Company ("Hughes"). The Term Loan matures in June 2003 and bears interest at a
rate equal to that of the Company's revolving credit facility discussed below.
The Term Loan is subordinate to the $750 million of notes, the revolving credit
facility and the commercial paper program discussed below. Hughes has the right
to request that the Company use its best efforts to replace the Term Loan with
another credit facility on terms that may then be available to the Company. On
October 15, 2001, in accordance with the Loan Agreement dated May 15, 1997
between Hughes and the Company, as amended, Hughes requested that the Company
use its best efforts to replace the Term Loan in order to repay the principal
amount outstanding under the Term Loan plus any accrued and unpaid interest. The
Term Loan has been in place since the merger between Hughes and PanAmSat in
1997. The Company intends to refinance the Term Loan with long-term
21
borrowings, however, no time frame has been set for these transactions and there
is no assurance that they will occur. Additionally, the refinancing of the Term
Loan, if successful, could result in increased costs to the Company, including
higher annual interest expense.
The Company issued five, seven, ten and thirty-year fixed rate notes
totaling $750 million in January 1998. The outstanding principal balances and
interest rates for these notes as of September 30, 2001 were $200 million at
6.0%, $275 million at 6.125%, $150 million at 6.375% and $125 million at
$6.875%, respectively. Principal on the notes is payable at maturity, while
interest is payable semi-annually. At September 30, 2001, $750 million was
outstanding in relation to these notes.
In July 1999, in connection with the early buy-out of satellite
sale-leasebacks, the Company assumed $124.1 million of variable rate notes, of
which $46.5 million was outstanding at September 30, 2001. The weighted average
interest rate on the notes was 4.92% at September 30, 2001. These notes mature
in January 2002.
The Company maintains a $500 million multi-year revolving credit facility
that provides for short-term and long-term borrowings and a $500 million
commercial paper program. Borrowings under the credit facility bear interest at
a rate equal to LIBOR plus a spread based on PanAmSat's credit rating. The
multi-year revolving credit facility provides for a commitment through December
24, 2002. Borrowings under the credit facility and commercial paper program are
limited to $500 million in the aggregate. No amounts were outstanding under
either the multi-year revolving credit facility or the commercial paper program
at September 30, 2001.
The significant cash outlays for the Company 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 $320 million to $350 million on capital
expenditures during 2001, 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 its revolving credit 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 its revolving credit facility, vendor financing, future cash
flow from operations and cash on hand will be sufficient to cover any shortfalls
in funding for (i) launches caused by launch failures, (ii) cost overruns, (iii)
delays, (iv) capacity shortages, or (v) other unanticipated expenses. As a
result of the request by Hughes that the Company use its best efforts to replace
the Hughes Term Loan, the Company is required
22
to use its best efforts to obtain refinancing. The ability of PanAmSat to obtain
refinancing is subject to the terms of PanAmSat's outstanding indebtedness as
well as the ability of the Company to obtain such refinancing on terms
considered reasonable by the Company.
In addition, if the Company were to consummate any strategic transactions
or undertake any other projects requiring significant capital expenditures, the
Company may be required to seek additional financing. If circumstances were to
require PanAmSat to incur such additional indebtedness, the ability of PanAmSat
to incur any such additional indebtedness would also be subject to the terms of
PanAmSat's outstanding indebtedness. The failure to obtain such financing or the
failure to obtain such financing on terms considered reasonable by the Company
could have a material adverse effect on PanAmSat's operations and its ability to
accomplish its business plan.
Net cash provided by operating activities increased to $361.1 million for
the nine months ended September 30, 2001, from $323.8 million for the nine
months ended September 30, 2000. The increase in 2001 was primarily attributable
to: (1) higher profit earned on $20.9 million of additional operating lease
revenues recorded in 2001 as compared to 2000; (2) the decrease in cash used
within prepaid expenses and other of $33.0 million primarily resulting from a
decrease in prepaid in-orbit insurance related to fewer satellites placed
in-service in 2001 as compared to 2000; and (3) an increase in cash provided
within accounts payable and accrued expenses of $15.3 million primarily
resulting from the timing of payments to vendors. These increases in cash
provided by operating activities were partially offset by an increase in cash
used within operating leases and other receivables of $29.7 million as a result
of the effects on cash flows of the changes in accounts receivable.
Net cash used in investing activities was $109.2 million for the nine
months ended September 30, 2001, compared to net cash used in investing
activities of $281.4 million for the nine months ended September 30, 2000. The
decrease in net cash used in investing activities in 2001 was primarily due to
the receipt of $96.2 million of additional proceeds from insurance claims during
the nine months ended September 30, 2001 as compared to the nine months ended
September 30, 2000 and a reduction in capital expenditures for satellite systems
under development in 2001 of $83.3 million as compared to 2000.
Net cash used in financing activities decreased to $22.1 million for the
nine months ended September 30, 2001, from $51.1 million for the nine months
ended September 30, 2000. The decrease in net cash used in financing activities
in 2001 was primarily attributable to lower scheduled repayments of long term
debt during 2001, partially offset by a reduction in stock issued in connection
with employee benefit plans in 2001 as compared to 2000.
23
Market Risk
-----------
The Company manages its exposure to market risks through internally
established policies and procedures and, when deemed appropriate, through the
use of derivative financial instruments. The objective of the Company's policies
is to mitigate potential income statement, cash flow and fair value exposures
resulting from possible future adverse fluctuations in interest rates. The
Company evaluates its exposure to market risk by assessing the anticipated
near-term and long-term fluctuations in interest rates on a daily basis. This
evaluation includes the review of leading market indicators, discussions with
financial analysts and investment bankers regarding current and future economic
conditions and the review of market projections as to expected future interest
rates. The Company utilizes this information to determine its own investment
strategies as well as to determine if the use of derivative financial
instruments is appropriate to mitigate any potential future interest rate
exposure that the Company may face. The Company's policy does not allow
speculation in derivative instruments for profit or execution of derivative
instrument contracts for which there are no underlying exposures. The Company
does not use financial instruments for trading purposes and is not a party to
any leveraged derivatives.
The Company determines the impact of changes in interest rates on the fair
value of its financial instruments based on a hypothetical 10% adverse change in
interest rates from the rates in effect as of the end of the year 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:
o 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.
o 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.
o For the Company's variable rate debt, the effect in annual cash flows
and net income is calculated as a result of the potential effect of a
hypothetical 10% adverse fluctuation in interest rates. The current
LIBOR rate plus applicable margin as of the end of the year is applied
to the applicable principal outstanding at the end of the year to
determine an annual interest expense based on year-end
24
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 nine months ended September 30, 2001. Based upon economic
conditions and leading market indicators at September 30, 2001, 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 $33.8 million and $7.3 million, respectively, as of September 30,
2001. 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,
2001 would be a reduction in cash flows of approximately $6.3 million and a
reduction in net income of approximately $3.5 million.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk.
25
PANAMSAT CORPORATION
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.71 Employment Agreement between PanAmSat Corporation and Joseph R.
Wright, Jr., dated as of August 20, 2001. *
(b) Reports on Form 8-K.
Registrant filed a Current Report on Form 8-K, dated August 14, 2001,
in respect of the Company's announcement that it had elected Joseph
R. Wright, Jr. as its President and Chief Executive Officer.
--------------------------------------------------------------------------------
*Exhibit indicated is an executive contract.
26
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PanAmSat Corporation
Date: October 26, 2001 /s/ Michael J. Inglese
----------------------------
Michael J. Inglese
Senior Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
27