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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT ON FORM 10-K
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER COMMISSION FILE NO. 0-22531
31, 2000
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PANAMSAT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4607698
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE PICKWICK PLAZA, GREENWICH, CONNECTICUT 06830
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 622-6664
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 16, 2001, the registrant had outstanding 149,723,522 shares of
Common Stock. As of such date, the aggregate market value of voting stock held
by non-affiliates of the registrant was approximately $736,467,841.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting
of Stockholders of PanAmSat Corporation, a Delaware corporation ("PanAmSat" or
the "Company") scheduled to be held on June 1, 2001 (to be filed not later
than 120 days after the end of the Company's fiscal year) is incorporated by
reference into Part III hereof.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain forward-looking
information under the captions "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
certain forward-looking statements so long as such information is identified
as forward-looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the information. When used in this Annual
Report on Form 10-K, the words "estimate," "project," "plan," "anticipate,"
"expect," "intend," "outlook," "believe," and other similar expressions are
intended to identify forward-looking statements and information. Actual
results may differ materially from anticipated results 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) risk of uninsured loss, (v) risks associated with the
business of NET/36, Inc., a wholly-owned subsidiary of the Company ("NET-36")
and (vi) litigation. Such factors are more fully described under the caption
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." PanAmSat cautions that the foregoing list of important
factors is not exclusive. Further, PanAmSat 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.
ITEM 1. BUSINESS
OVERVIEW
PanAmSat is a leading provider of global video and data broadcasting
services via satellite. The Company builds, owns and operates satellite-based
networks that deliver entertainment and information to cable television
systems, television broadcast affiliates, direct-to-home satellite television
operators ("DTH"), Internet Service Providers ("ISPs"), telecommunications
companies and other corporations. PanAmSat was formed on May 16, 1997 by the
merger and consolidation (the "Merger") of PanAmSat Corporation and the Galaxy
satellite service operations of Hughes Communications, Inc. (a subsidiary of
Hughes Electronics Corporation) into a new publicly held company, which
retained the PanAmSat name. At December 31, 2000, Hughes Electronics
Corporation beneficially owned approximately 81% of the Company's outstanding
common stock.
Both PanAmSat and Hughes were pioneers in the satellite-based distribution
of video. Prior to the formation of PanAmSat and the Hughes Galaxy satellite
service, communications satellites were used primarily by governments and
telephone companies for voice communications and international telephony
services. PanAmSat and Hughes pursued similar missions to leverage the
broadcasting capabilities of geostationary satellites to serve the needs of
video broadcasters. In 1983, the first Hughes Galaxy satellite was launched,
changing the U.S. television industry by delivering television channels to
cable service providers throughout the country. The Hughes satellite, Galaxy
I, became the first United States satellite cable neighborhood. In the
following year, Rene Anselmo founded PanAmSat as a commercial alternative to
the government-owned international satellite monopoly, Intelsat. In 1988, the
former broadcaster used his personal funds to launch the world's first
privately owned international satellite, PAS-1, which serviced the Latin
America market. In the years that followed, Hughes became a leading provider
of U.S. video distribution services, and PanAmSat became a leading provider of
international video distribution services, making the 1997 combination of the
two a global leader of the satellite-based communications services industry.
With 20 satellites, and the expected addition of two more by the end of
2001, PanAmSat now has the world's largest geostationary satellite ("GEO")
network, and is one of only three companies capable of servicing a global
footprint via its own fleet. The Company's network is capable of reaching over
98% of the world's population. PanAmSat uses its satellite-based network to
provide video program distribution, video contribution of news and special
events, and VSAT (very small aperture terminal) data networks, all supported
by an experienced engineering and operations team. In addition, ISPs and
others rely on PanAmSat networks for hundreds of connections to the U.S.
Internet backbone. In the United States, PanAmSat's fleet delivers more than
100 of the leading cable television channels to over 11,000 cable headends and
65 million cable households. Finally, PanAmSat provides the platform for six
DTH service providers around the world.
PanAmSat has built a premier customer base for each of its service lines.
Full-time video distribution service customers include AOL TimeWarner, AT&T
Broadband, the BBC, China Central Television, Cisneros Television Group,
Disney, Doordarshan (India), ESPN, Fox, Sony and Viacom. In addition to
DIRECTV Latin America, PanAmSat provides high-power Ku-band services to DTH
providers MultiChoice, Pacific Digital Media (Taiwan), Sky Latin America,
South African Broadcasting Corp./Sentech and TVB (Australia). PanAmSat carrier
service customers include ImpSat, Sprint, Telstra and WorldCom, and its
private business services customers include the Associated Press, Hughes
Network Systems ("HNS"), IBM, Reuters and Wal-Mart.
PanAmSat has substantial ground infrastructure networks available to
support the needs of its customers. The Company owns teleports in six U.S.
locations, each of which provides transmission, monitoring and control. It
leases teleport services from providers outside of the U.S. to support the
remainder of its fleet. PanAmSat also performs the telemetry, tracking and
control ("TT&C") for most of its satellites. The Company-owned network
operations and customer service plant currently can accommodate:
. 25 satellites
. 750,000 service calls/year
3
. 50 million hours/year of 24/7 video services
. 80,000 hours/year of special events video services
. 5,600 data links
. 1,200 terabits of digital data transmitted per year
. 110 channels of compressed digital video
. 250 PanAmSat-provided transmit chains
PanAmSat's early market entry, global coverage and customer service
initiatives have enabled it to develop a steady flow of revenue by signing its
customers to long-term leases. At December 31, 2000, the Company had a
contractual backlog of future services of approximately $6.0 billion.
Since 1991, PanAmSat has been a leader in compressed digital video services
for the distribution of television programming. The Company's digital channels
(multi-channel per carrier ("MCPCs") and single channel per carrier ("SCPCs")
offer a cost-effective means for programmers to break into new markets or
introduce additional channels. Digital compression technology offers
television viewers expanded and high quality program offerings through their
cable systems or DTH service providers.
The Company also offers enhanced digital services, bundled terrestrial
solutions and other value-added services to meet the needs of its rapidly
evolving broadcasting customer base. The most extensive and recent of these
initiatives was announced in September 2000, with the commercial availability
of its new Internet broadcast service, NET-36. NET-36 is a high-speed
satellite-based network capable of delivering streaming video to broadband
ISPs by using satellites to multicast video streams, avoiding the congestion
of terrestrial networks and improving on both the quality and cost of
traditional Internet Protocol ("IP") content delivery services. Local "edge"
servers strategically deployed at Digital Subscriber Line ("DSL"), cable modem
and DirecPC data centers, deliver live or "on-demand" video streams that
provide broadcasters and other Internet content providers with a quality of
service currently unavailable through the traditional Internet. In March 2001,
the NET-36 footprint reached over 3 million broadband enabled households in
the United States. NET-36 expects to enter into additional agreements with
broadband ISPs to further expand the NET-36 footprint among broadband end
users.
SERVICES
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 years ended
December 31, 2000, 1999 and 1998, PanAmSat's revenues of $1.024 billion,
$810.6 million and $767.3 million, respectively, were derived from the
following service areas:
PERCENTAGE PERCENTAGE PERCENTAGE
OF 2000 OF 1999 OF 1998
SERVICES REVENUES REVENUES REVENUES
-------- ---------- ---------- ----------
Video Services........................... 69% 72% 73%
Network Services......................... 26% 23% 21%
Other Services........................... 5% 5% 6%
Total.................................... 100% 100% 100%
Revenues derived from Hughes Electronics, the Company's majority
stockholder, and its affiliates (including HNS, DIRECTV Latin America and
DIRECTV) comprised approximately 14% of PanAmSat's revenues in 2000, making
Hughes Electronics and its affiliates the Company's largest customer. See
"Notes to Consolidated Financial Statements"--Note 2 "Business Segments and
Geographic Information".
4
VIDEO SERVICES
PanAmSat's video services provide long-term, full-time, part-time and
occasional satellite services for the transmission of news, sports,
entertainment and educational programming worldwide. PanAmSat's video services
are comprised of four categories: (i) video distribution services, (ii) DTH
services, (iii) special events services and (iv) contribution services.
Video Distribution Services. PanAmSat's primary video distribution service
is the full-time transmission of television programming to cable systems,
network affiliates and other redistribution systems. Certain PanAmSat
satellites contain broad C-band beams that deliver dozens of television
channels to these redistribution systems. PanAmSat generally provides video
distribution services under long-term contracts for full or partial
transponder usage and digital channels. The Company also offers bundled,
value-added services that include satellite capacity, digital encoding of
video channels and, if required, uplinking and downlinking services to and
from PanAmSat satellites and from the Company's teleport facilities.
PanAmSat currently operates satellites for the distribution of television
programming to cable and other redistribution systems in the United States,
Latin America, Africa, Australia and the Asia-Pacific region. The Company
creates "video neighborhoods" (an extension of the cable neighborhood concept)
on these satellites with dozens of popular television channels. Cable and
other redistribution systems then install antennas to access the popular
channels for their subscribers. Several of the Company's Galaxy satellites
deliver television programming to substantially all of the United States'
cable systems. The Ku-band beams on several of the Company's satellites are
also used for video distribution to cable systems and network affiliates.
PanAmSat's customers for full-time video distribution services include AOL
TimeWarner, AT&T Broadband, the BBC, China Central Television, Cisneros Group,
Disney, Doordarshan, ESPN, Fox, Sony and Viacom.
DTH Services. PanAmSat creates high-power Ku-band transmission beams on
several satellites that serve as platforms for the delivery of multiple
television channels for household reception using 60-90 centimeter antennas.
PanAmSat believes there is significant demand for digital DTH services because
of limited available terrestrial television channels or cable television
service in many international markets, and in the United States, limited
ethnic or niche programming. PanAmSat's customers for DTH services include
DIRECTV Latin America, MultiChoice, Pacific Digital Media, Sky Latin America,
South African Broadcasting Corp./Sentech and TVB (Australia).
Special Events Services. PanAmSat provides broadcasters with satellite
transmission services for the timely broadcast of news, sports and events
coverage on a short-term basis. This service is designed to enable
broadcasters to conduct on-the-scene transmissions using small, portable
antennas and to receive the transmissions at their broadcast centers or
affiliate stations. PanAmSat conducted approximately 80,000 hours of total
special events transmissions in 2000. In addition, PanAmSat delivered over
12,500 hours of live coverage of the Summer Olympic games in Sydney, Australia
to 25 broadcasters in two dozen countries.
In addition to short-term services for special events coverage, PanAmSat
has long-term transponder service agreements with certain satellite brokers in
the United States. These customers package domestic U.S. transponder capacity
for their broadcast, business, educational and government users.
Contribution Services. PanAmSat provides broadcasters with satellite
transmission services for the full-time transmission of news, sports and
entertainment segments to their network affiliates or broadcast centers within
the United States or around the world. PanAmSat's full-time contribution
service customers include Australian Broadcasting Corporation, CBS, CNN and
NHK (Japan).
5
NETWORK SERVICES
PanAmSat's Network Services utilize satellite-based networks that relay
voice, video and data communications within individual countries, throughout
regions and around the world. PanAmSat has designed virtually all of its
satellites for high-power, bandwidth-intensive applications that relay large
amounts of digital information among multiple sites using small, cost-
effective antennas. PanAmSat's Network Services are comprised of three
categories: (i) private business networks (through the use of VSATs), (ii)
Internet access (through ISPs) and (iii) carrier services.
Private Business Networks. PanAmSat provides satellite services directly to
network suppliers for the development and operation of private business
networks in the United States, Latin America, Europe, Africa and Asia. These
rooftop-to-rooftop VSAT networks provide dedicated, proprietary one-way and
two-way communications links among multiple business sites. VSAT network end
users include retail chains for rapid credit card authorization and inventory
control, banks for the connection of automated teller machines with processing
computers and news agencies for the timely dissemination of news and financial
information. The Company's largest single network services customer is HNS, an
affiliate of the Company, which uses PanAmSat capacity to create and operate
VSAT networks for its business customers. Other PanAmSat private business
network customers include the Associated Press, GMAC, IBM, Reuters and the
University of Southern California.
Internet Access. PanAmSat provides satellite services for the full-time
delivery of Internet information from the United States and other countries to
various locations around the world. PanAmSat's customers consist of
educational organizations, telecommunications companies, ISPs and businesses
providing direct-to-consumer Internet applications. PanAmSat believes that its
satellites are well suited for Internet service because of their ability to
deliver reliable, high-speed access to the U.S. Internet backbone, where
approximately 80% of all Internet data currently resides. PanAmSat's Internet
services customers include HNS, Microcom Systems (Nigeria) and Planet Internet
(New Zealand).
PanAmSat also provides SPOTbytes, a value-added, bundled Internet service
that offers an integrated package of services including international
satellite capacity, uplinking services from a PanAmSat teleport and dedicated
links from the teleport to the U.S. Internet backbone. PanAmSat's SPOTbytes
service is marketed primarily to non-U.S. ISPs and corporations that require
high-speed access to the U.S. Internet backbone. The service is configured in
a variety of ways to provide easily scaleable, cost-effective Internet access.
Carrier Services. PanAmSat provides satellite services to
telecommunications carriers licensed by one or more countries to provide
voice, video and data communications networks for businesses, governments and
other users. The Company's high-power satellites, which facilitate high
information throughput and the ability to use VSATs on the ground, have
enabled emerging carriers to introduce competitive new telecommunications
services in Latin America, Africa and Asia. In addition, PanAmSat offers
value-added satellite services for telecommunications customers that include
satellite capacity and teleport services that connect customers to U.S.
terrestrial networks. PanAmSat's carrier service customers include ImpSat,
Microspace, Sprint, Telstra and WorldCom.
OTHER SERVICES
Telemetry, Tracking and Control. PanAmSat provides TT&C services for more
than 20 satellites owned by either PanAmSat or by other satellite operators.
PanAmSat personnel maintain proper orbital location and altitude, monitor on-
board housekeeping systems, adjust transponder levels and remotely "rewire"
satellites, if necessary, to bring backup systems on-line in the event of a
subsystem failure. The necessary TT&C satellite commands are initiated from
PanAmSat's operations control center in Long Beach, California and are
transmitted to the satellites from PanAmSat teleport facilities located in New
York, Florida, Georgia, Colorado and California.
6
In-Orbit Backup Capacity and Replaced Satellites. PanAmSat maintains a
separate in-orbit spare for its fleet. The Galaxy VI satellite is an in-orbit
spare for the C-band capacity in the U.S. cable arc. PAS-6 serves to provide
backup protection for the Sky Latin American DTH service on PAS-6B, and upon
the launch of Galaxy IIIC in 2001, Galaxy VIII-i will provide both expansion
and backup capacity for the DIRECTV Latin America DTH service. Certain of the
Company's satellites that have been replaced may also be used for backup
capacity.
STRATEGY
PanAmSat's strategic mission is to be the global leader in providing the
highest quality, most reliable, satellite-based broadcast networks that
deliver entertainment, data and communications to everyone, everywhere.
PanAmSat's strategy to achieve its mission is based on four initiatives:
. Expanding network reach and capacity
. Providing superior customer service
. Opening new markets
. Offering new services
Each of the Company's strategic initiatives are designed to provide revenue
growth by expanding PanAmSat's leadership position in the fixed satellite
services industry ("FSS"), and leveraging that leadership position by
expanding its range of service offerings as a solutions provider meeting
customer needs.
EXPANDING THE NETWORK
PanAmSat's primary source of revenue is from the sale of satellite
bandwidth or services that rely on satellite bandwidth. PanAmSat is the
world's largest commercial provider of global satellite-based communications
services. PanAmSat, a leader in distribution of cable and broadcast
television, operates DTH platforms that deliver more than 500 television
channels worldwide. As a global leader, PanAmSat intends to continue to grow
its inventory of bandwidth to support its customers' demands.
According to a February 2001 Merrill Lynch research report, the fixed
satellite services industry is currently an approximate $8.1 billion per year
market, with an estimated growth potential to approximately $13.3 billion per
year by 2004. The Company expects demand for its services will grow, fueled by
the increasing amount of video programming, growing congestion in the
transmission of television channels over terrestrial lines, ongoing expansion
of private business networks and rapid proliferation of the Internet with its
need for faster and ever-higher bandwidth connections. In addition, the
Company anticipates that the trend towards High Definition Television ("HDTV")
will increase demand for its satellite services.
PanAmSat expects to continue to benefit from the high barriers to entry
that exist in the FSS market. In the United States, new applicants for
licenses must generally prove their concept, show plausible funding and have a
tight timeline by which they plan to get their satellites up and running.
However, the United States has access to only a portion of the available slots
around the globe. Orbital slots and related ground coverage opportunities are
administered by the International Telecommunications Union, which in turn
grants priorities to certain orbital slots to specific countries. Different
countries may have different requirements for the granting of licenses and the
development of orbital locations. PanAmSat has a group of regulatory
professionals dedicated to pursuing orbital slot opportunities on a global
basis. As a result of these activities, the Company recently has obtained the
opportunity to develop one new slot through the Australian government, and is
pursuing other opportunities around the world both through the Federal
Communications Commission ("FCC") and through other non-U.S. regulatory
authorities.
Since December 1999, PanAmSat has successfully launched five new
satellites, bringing its total fleet to 20 after eliminating satellites that
have been retired from service. During 2001, PanAmSat expects to launch one
satellite to serve the Indian Ocean Region (PAS-10) and another to serve the
U.S. and Latin America (Galaxy III-C).
7
PanAmSat is licensed to operate on C-band frequencies at 16 orbital slots,
on Ku-band frequencies at 13 slots and on Ka-band frequencies at seven slots.
Of these, the Company has not yet developed two C-band slots, two Ku-band
slots and any of its seven Ka-band slots, providing for substantial growth
opportunities. See "Risk Factors--Risk of Government Regulation."
The Importance of Fiber
PanAmSat recognizes the importance of emerging technologies and
telecommunications methods, and as a result, has not limited its inventory
growth initiative to satellite capacity. The proliferation of inexpensive
optical fiber provides the Company with the opportunity to examine each
customer's particular service requirements to determine when a hybrid
satellite-fiber bundled service would be most efficient both from a fleet-
loading standpoint, as well as from a competitive pricing standpoint. PanAmSat
has historically used fiber to supplement its domestic U.S. network, and plans
to procure fiber over key international routes to supplement its network.
CUSTOMER FIRST--MARKET DRIVEN
PanAmSat's customers represent some of the largest media companies in the
world, including ABC, AOL TimeWarner, the BBC, CCTV, Disney, ESPN, Fox, NHK
and Viacom. The Company recognizes the value of its customers and places a
strong strategic emphasis on offering customized services, providing personal
attention and taking extra steps to ensure a reliable service.
Emphasis on Reliability
Along with others in the FSS industry, PanAmSat has experienced several
satellite anomalies over the past few years with the result that a significant
portion of the new satellite capacity recently and projected to be placed in
orbit is for either replacement or backup capacity. PanAmSat believes that it
has taken significant steps to mitigate the risk of launch failure by insuring
the satellite launches for an amount sufficient to construct, launch and
insure a replacement satellite. PanAmSat enters into satellite procurements
that provide for expedited construction and delivery of a replacement
satellite in the event of a failure. In addition, PanAmSat has contracted with
multiple launch providers to minimize the risk that an entire launch program
will be delayed in the event of a failure of a particular launch vehicle.
In response to the satellite performance issues that PanAmSat has
experienced, the Company has implemented operational procedures designed to
improve the reliability of its spacecraft and provide backup service to its
customers in the event of a catastrophic failure. Pre-launch, PanAmSat has a
team of professionals dedicated to the spacecraft and launch procurement
process. This spacecraft acquisition team is responsible for all aspects of
monitoring the procurement and design process. PanAmSat engineers are
frequently on-site at the satellite manufacturer's facility to monitor quality
and timeliness during all phases of construction and testing. Post-launch, the
Company's engineers have analyzed various failure scenarios and proposed
customer restoration plans. Finally, PanAmSat maintains an in-orbit spare for
immediate backup to protect its U.S. video customers. Despite the failures of
Galaxy IV and Galaxy VII, customer service has been interrupted only once for
a catastrophic in-orbit failure (Galaxy IV--1998), and service was restored to
almost all of the Company's Galaxy IV video customers within hours. Other
failures since Galaxy IV have resulted in no material interruption of customer
service, including the failure of Galaxy VII in 2000.
Ground Infrastructure and Customer Support Center
PanAmSat believes that its ground infrastructure and customer support
center distinguish the quality of its service from other global or regional
solutions providers. PanAmSat's ground facilities are available to support the
needs of its video, data, Internet and NET-36 customers. PanAmSat operates
seven facilities (six teleports and one TT&C facility), providing a range of
technical services for customers. Each teleport and operations center, staffed
24 hours a day, is designed to:
. Monitor signal quality for both data and broadcast customers
. Protect bandwidth from piracy or other interference that could degrade
signal quality
. Maintain customer-installed equipment
8
PanAmSat maintains two network operations centers, one in Long Beach,
California, and the other in Ellenwood, Georgia, outside Atlanta, which will
be consolidated in Ellenwood during 2001. The operations center near Atlanta
is also a full-service teleport along with PanAmSat facilities in Fillmore and
Napa, California, Castle Rock, Colorado, Homestead, Florida, and Spring Creek,
New York. The teleports operate nearly 100 antennas and are equipped to offer
customers a range of services, including:
. Full-service facilities with access to all domestic and international
satellites within arc
. Analog and digital transmissions for video/data services
. C and Ku-band turnaround service
. Tape play-out and time delay services
. Occasional and full-time transmissions
. Design, installation and operation services
. Monitoring of customer-furnished equipment
. Downlinking and routing of Internet services
. Compressed digital video systems management
. Connectivity to terrestrial link circuits
. IRD authorization
. 24-hour network and/or subscriber management
. Network Operation Center (NOC) for 24-hour ad hoc service
. Carrier monitoring system (manual remote monitoring and remote spectrum
analysis)
Customer-Driven Service Offerings
PanAmSat believes its strategic loading of satellites and customer-driven
service offerings have made it a leader in program delivery to cable systems.
For instance, PanAmSat's strategy for the broadcast distribution market has
been to populate new satellites with several quality content providers in
order to create "video neighborhoods." Once premier programmers, such as AOL
TimeWarner, Disney and Viacom, enter into long-term agreements for capacity on
a particular satellite, PanAmSat can charge higher rates for subsequent
capacity on that satellite. Because cable systems and other distribution
platforms have already incurred the cost of pointing their dishes so that they
can receive the existing programming, content providers are willing to pay
higher rates for capacity on the satellite.
The Company has been a leader in compressed digital video services for the
distribution of television programming. PanAmSat's global resources enable
programmers to use two digital transmission services. The Company's MCPC
service allows several digital channels to be transmitted to the satellite
from a central site, such as a PanAmSat teleport accessing the Asia-Pacific,
Latin America, Europe or Africa. This approach is cost-effective for the
programmer because less bandwidth is required to broadcast its programming. It
also maximizes usage of the satellite resource and transmission power, and
allows for signal reception using small antennas. The SCPC service, in which
broadcasters have the freedom to transmit to the satellite from virtually any
location within the satellite's coverage area, is particularly useful for news
organizations or networks that are providing live, on-the-scene coverage of an
event. SCPC channels also permit broadcasters to relay programming directly
from their facilities around the world.
The Company continues to develop new service offerings designed to address
its customers' changing needs. Some of these new offerings are discussed in
"Offer New Services" below.
9
ACCESS NEW MARKETS
The Company's fleet has a footprint capable of reaching over 98% of the
world's population. Although PanAmSat has customers throughout the world and
distributes content on a global basis, the Company believes that certain
regions where the Company has only a limited presence, represent opportunities
for growth. In its most recent evaluations, Mexico, Brazil, India and China
were identified as presenting opportunities for business expansion for
PanAmSat. The Company currently has satellites deployed that are capable of
reaching these key markets, but either regulatory, political, technical or
other obstacles (or a combination of any or all of the foregoing), have
prevented the Company from fully realizing the opportunities. The Company
believes that incremental growth could be realized through the opening of one
or all of these markets in the near term.
On February 26, 2001, PanAmSat announced the creation of a new company,
PanAmSat de Mexico, that will enable the introduction of PanAmSat video, data
and Internet services to the Mexican telecommunications market. PanAmSat de
Mexico is the result of a joint venture between PanAmSat and a Grupo Pegaso
affiliate owned by Mr. Alejandro Burillo Azcarraga, a majority owner of the
private equity investment firm Grupo Pegaso. The new company has filed for a
concession with the Mexican government that will permit it to serve as the
reseller of PanAmSat services that require a satellite uplink within Mexico.
PanAmSat de Mexico was formed in late 2000 through a partnership between
PanAmSat International Sales, Inc. (49 percent), a subsidiary of PanAmSat, and
Corporativo W.com SA de CV (51 percent), a holding company created by Mr.
Burillo.
OFFER NEW SERVICES
PanAmSat recognizes that telecommunications is rapidly evolving.
Convergence forecasts for television and computers/Internet indicate trends
that will affect our customers' businesses and offer PanAmSat the opportunity
to provide new and enhanced services. PanAmSat has embraced new technologies
and is offering and developing new applications in consultation with its
customers to improve service and meet customer needs. These services include,
but are not limited to:
. Internet Backbone Connectivity Via Satellite (SPOTbytes)
. Broadband Distribution of IP Video Content (NET-36)
. Analog to Digital File Transfer Services (SPOTpath)
. Ka-band based Broadband Services
Internet Backbone Connectivity Via Satellite (SPOTbytes)
PanAmSat offers a bundled Internet connection package, SPOTbytes, to
international ISPs and corporate customers. With this bundled service,
PanAmSat custom designs direct links between its customers' points-of-presence
and the U.S. Internet backbone that can transmit at speeds ranging from 64
kbps to 45 Mbps or higher. Customers choose SPOTbytes to increase network
diversity, flexibility and efficiency, as well as to obtain direct,
uninterrupted access to the U.S. Internet backbone.
SPOTbytes offers several advantages over terrestrial fiber. Satellite
services can be installed and upgraded faster. The Company's SPOTbytes service
bypasses shared and congested terrestrial links and connects directly into the
Internet backbone, which enhances network performance. Satellite transmission
can also reduce expenses, especially for international ISPs, by enabling
simultaneous delivery of content to wide geographic areas without requiring
additional terrestrial infrastructure. In addition, through an enhanced
service called SPOTbytes DVB, PanAmSat is capable of providing targeted
content delivery to enterprises or ISPs, along with standard backbone
connectivity. For instance, the top web sites accessed by a particular ISPs'
customers can be cached locally and updated on a regular basis providing
decreased costs and higher performance. SPOTbytes DVB employs a versatile
digital video broadcasting (DVB) platform to offer flexible, cost-effective
U.S. backbone access to international ISPs. Benefits include low startup and
recurring costs, flexible and scalable bandwidth as well as support for
multiple points-of-presence ("POPs"). The new service, which was introduced in
Latin America in April 2000, is being marketed throughout Asia and Latin
America.
10
Strategically, PanAmSat views SPOTbytes and SPOTbytes (DVB) as
opportunities to demonstrate the IP capabilities of satellite networks and to
continue to expand the footprint of PanAmSat's terrestrial network. The
Company intends to use this footprint to eventually offer content distribution
services, which will provide PanAmSat's content customers the opportunity to
distribute high-quality content directly to ISPs (via services such as NET-36,
discussed below), while providing PanAmSat with an additional revenue stream
from an existing relationship.
Broadband Distribution of IP Video Content (NET-36)
A May 2000 report by Euroconsult predicts that the growth of the Internet
will generate approximately 33% of transponder capacity demand by 2009. To
capitalize on such expected growth, PanAmSat is implementing a strategy to
become a leading provider of IP multicasting via satellite.
In September 2000, PanAmSat announced the commercial availability of its
new Internet broadcast service, NET-36. NET-36 is an innovative broadband
satellite-based network capable of delivering streaming video to broadband
ISPs by using satellites to multicast video streams, avoiding the congestion
of terrestrial networks and improving on both the quality and cost of
traditional IP content delivery services. Local "edge" servers strategically
deployed at DSL, cable modem and DirecPC data centers, deliver live or "on-
demand" video streams that provide broadcasters and other Internet content
providers with a quality of service currently unavailable through the
traditional Internet. In March 2001, the NET-36 footprint reached over 3
million broadband households in the United States. NET-36 expects to enter
into additional agreements with broadband ISPs to further expand the NET-36
footprint. NET-36's footprint currently covers all end users who have
broadband Internet access through Qwest, BellSouth, Excite@Home, and DirecPC
POPs enabled with NET-36 edge servers. While NET-36 currently provides its
services in beta testing to several well-known content providers, NET-36 has
not yet generated revenues from its service offerings as the commercial
availability of its services only recently occurred.
Traditional land-based distribution of content to the edge of the Internet
consumes significant bandwidth, but it also results in the degradation of the
content quality. When this data is transmitted over the Internet, it is
divided into many packets. As those packets traverse the land-based Internet
backbone, each packet typically crosses multiple networks that are connected
to each other at a limited number of connections called peering points. These
peering points are frequently congested, which often results in transmission
delays and lost data. According to a December 1999 study by Dataquest,
streaming media travels through an average of 20 routers and experiences
average packet loss of 25%. When data is lost, either the data transmission
process is repeated until all of the data is transmitted successfully, or the
data arrives corrupted. As content distributors increasingly attempt to
distribute live streaming media, these difficulties are magnified. Packet loss
and transmission delays are particularly problematic with live streaming media
because lost data cannot be resent and packets arriving out of sequence due to
transmission delays may not be accessed in their original sequence. Packet
loss and transmission delays cause video images to be jerky and often cause
the transmission to stop and start while the end user's computer is waiting
for the necessary packets to arrive. This degradation in quality is among the
fundamental causes of unsatisfactory performance of many Internet-based
applications.
NET-36's solution circumvents the congested terrestrial networks by using
PanAmSat's satellite fleet and satellite-enabled servers linked to broadband
ISPs (such as Qwest, BellSouth, Excite@Home, and DirecPC). NET-36 collects
streaming media from Internet content providers and then broadcasts it via the
PanAmSat fleet to its network of servers, located in the facilities of these
ISPs and last-mile providers. The content is then either cached locally at the
server, or if live, sent directly to an end user. When a user attempts to
access information from a web site, the web cache intercepts the request and
checks to see if the information is stored locally. If local, the information
is delivered to the user from the local cache rather than having users pull
content from the content provider's actual Web server, resulting in faster
responses for users. By circumventing the need to pull data each time a user
has a request through the terrestrial network, NET-36 improves reliability,
speed and consistency for end users. NET-36 expects that most of its edge
servers will be located so that streaming media delivered to an end user over
NET-36's network will traverse through a maximum of three routers and zero
peering points before reaching the end user.
11
For streaming, NET-36 leverages on the technological advantage offered by
satellites: specifically, the capability of taking a single piece of data up
to a satellite, and delivering it simultaneously to multiple locations,
without any impact on quality or cost if data is delivered to many or fewer
locations. This concept is the basic premise for the use of satellites to
deliver video to cable headends, and the Company believes it is also an
effective strategy for the delivery of high demand, high traffic IP-based
content. Geostationary satellites, like those operated by PanAmSat, are
currently the most efficient and cost-effective delivery medium for
"multicasting."
NET-36 is a natural extension of PanAmSat's current business as NET-36 uses
the Company's existing satellites. No new orbital assets are currently
projected for the service. In addition, PanAmSat has extensive experience in
building digital video networks. Initially, NET-36 will target PanAmSat's
existing video customer base. PanAmSat believes that it can bundle and sell
NET-36 services to its existing video and other customers that have come to
rely on the Company's superior quality of service.
PanAmSat believes that current market trends show that streaming media and
other rich video and data are becoming integral components of any media
company's interactive service offerings. An October 2000 Paul Kagan &
Associates report estimated that the market for streaming media will reach $9
billion by 2010. However, the current terrestrial infrastructure cannot
support the effective delivery of this content, which results in grainy, jerky
images and lost connections for Internet users. Using traditional terrestrial
IP delivery systems, streaming is limited to a typical transmission sweet spot
of 28 or 56 kbps, but in the future, the Company believes that content
providers may require 300 kbps streams, such as those delivered by NET-36.
Streaming is the first application that will utilize the multicasting
capabilities of satellites over the NET-36 network, but the Company is working
on other uses that that will leverage the unique advantages of its network.
NET-36 has entered into agreements with last mile providers Qwest,
Excite@Home, DirecPC and BellSouth; they will use NET-36 for IP content
delivery to their Internet subscribers. Currently, these arrangements require
NET-36 to pay the last mile provider to allow NET-36 to deploy its servers at
the broadband ISP POPs. NET-36 will look to enter into more ISP relationships
to solidify its offering and expand its footprint. NET-36 is pursuing
arrangements with additional last mile providers so that the NET-36 network is
able to reach a high volume of broadband enabled end users, which, in turn, is
expected to attract content providers as NET-36 customers.
Broadcasters in the U.S. and Europe have had difficulty reaching
international markets with their content. In addition, many competing content
distribution networks have been slow to roll out streaming service in
developed markets in Asia and Latin America. Internet limitations are
magnified outside of the U.S. and Europe. Therefore, PanAmSat believes that
NET-36 will be appealing to ISPs and network providers in the countries where
consumers have broadband access but little high fidelity video and audio
content to consume. The Company believes that the rollout of SPOTbytes and
SPOTbytes DVB will provide PanAmSat with an opportunity to build a footprint
for NET-36 in markets as they evolve to the service.
PanAmSat believes that NET-36 provides the capability to generate more
revenue per transponder than currently received from leasing satellite
capacity alone. PanAmSat would charge a particular customer based on content
delivered and consumed, in terms of megabits. When NET-36 delivers content to
a network of servers, the content provider will pay based on the content
consumed. As such, each satellite has the ability to generate greater revenue
and earnings.
NET-36's business plan is based upon charging the content provider for NET-
36 service, as opposed to the ISP. PanAmSat believes that ISPs may be
unwilling or unable to pay for a satellite-based service. Instead, PanAmSat
has opted to enter into revenue sharing agreements with ISPs and offer the
service free to ISPs, while charging content providers for content delivered.
This strategy is intended to ensure both network build-out and revenue
maximization. As demand rises among content providers for content distribution
services, NET-36 intends to position its service offerings to be able to tap
into this increasingly lucrative market. PanAmSat believes that NET-36
ultimately will be a platform from which PanAmSat will launch additional
services, with streaming media being just the first service.
12
Analog to Digital File Transfer Services (SPOTpath)
PanAmSat, in partnership with Pathfire, Inc.'s software engine, recently
introduced a new-satellite based international video delivery service that is
intended to improve how news, entertainment and feature programming is managed
by broadcast, cable and other media companies worldwide. The Company does not
expect to generate significant revenue from this joint service in 2001.
The new service combines PanAmSat's global satellite infrastructure with
Pathfire's media management tools. The service will encode any programming
content into digital IP formatted files, which are transmitted via satellite
to broadcast, cable, media and entertainment companies around the world. This
new automated approach offers an alternative to "live" or prescheduled
satellite feeds by processing high volumes of media through Pathfire's Media
Commerce Network.
The Company expects this service to provide customers with a more
economical and flexible way to move non-realtime video and data, while
allowing PanAmSat to better manage the quality of service its customers
expect. PanAmSat's global infrastructure, combined with Pathfire's media
traffic management solutions, creates a total end-to-end solution for
distributing and managing media content. The alliance reflects PanAmSat's
continuing commitment to pursue value-added services that benefit its
broadcasting and telecommunications customers.
By eliminating much of the line-up and coordination time, the Company
believes that SPOTpath will provide a more efficient means of delivering
television programming, video clips, advertisements and other media. In
addition, the Company expects the service will reduce production and
distribution costs.
Ka-band Based Broadband Services
PanAmSat is pursuing Ka-band solutions for its customers. Ka-band systems
are intended for high-speed bandwidth-on-demand applications such as high-
speed Internet access, video conferencing, multimedia entertainment services,
file transfer, medical imaging, as well as traditional voice and data
communications. Recently, the FCC licensed PanAmSat to operate on the Ka-band
frequencies in seven orbital slots. PanAmSat intends to pursue the use of Ka-
band delivered services, as the Company believes it offers potential to
provide additional valuable services to its customers. The Company does not
expect to generate revenue from Ka-band services in 2001.
THE SATELLITE NETWORK
Each of the Company's satellites is custom-designed to provide high
transmission power and comprehensive coverage over specific geographic areas.
Several of the Company's satellites are designed to provide greater power and
carry larger payloads, including in most cases the ability to offer "hybrid"
services in both the C-band and Ku-band. C-band is a range of relatively low
frequencies used for commercial satellite services. In the United States, C-
band is used primarily for analog cable and broadcast distributions and also
is used for broadband networks and telecommunications in other regions of the
world. C-band requires the use of relatively large antennas to receive signals
on the ground. Ku-band is a range of relatively high frequencies used for
commercial satellite communications. Ku-band is widely used for distribution
of digital broadcast television and DTH services, as well as business
communications, and allows the use of relatively small antennas to receive the
signals.
Each of the Company's new satellites has been constructed with a design
life of 15 years, although there can be no assurance that the contractual
design life of any individual satellite will be 15 years. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Risk of In-Orbit Failure or Reduced Performance."
The Company's launch and construction strategy is to replace existing
satellites as they approach the end of their useful lives or encounter other
reductions to their useful lives with technologically advanced satellites that
meet customer needs. In addition, the Company seeks to expand its global
coverage, capacity and service offerings by deploying satellites into new
orbital locations. In most instances, a "retired" satellite should be capable
of continuing to offer services beyond the time that its replacement is
deployed. In these cases, the Company typically seeks to co-locate the older
satellite with the new satellite or to move the older satellite to an interim
location, in each case subject to applicable U.S. and
13
non-U.S. regulatory approvals. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors--Risks
of Government Regulation."
GLOBAL COVERAGE
The Company's satellites are distributed in a global network that provides
coverage in the four regions of the world: (i) the North America Region
("NAR"), (ii) the Atlantic Ocean Region ("AOR"), (iii) the Pacific Ocean
Region ("POR") and (iv) the Indian Ocean Region ("IOR").
North America Region
Nine satellites currently serve this region: Galaxy IR, Galaxy IIIR, Galaxy
IVR, Galaxy V, Galaxy VI, Galaxy IX, Galaxy XR, Galaxy XI and SBS-6. These
satellites offer services in either the Ku-band or C-band, or both. SBS-6
offers services solely in the Ku-band. Galaxy IR, Galaxy V, Galaxy VI and
Galaxy IX provide services solely in the C-band. Galaxy IIIR, Galaxy IVR,
Galaxy XI and Galaxy XR provide services in both the C-band and the Ku-band.
Some of the Company's satellites, including Galaxy IR, Galaxy V, Galaxy IX,
Galaxy XR and Galaxy XI, act as "cable neighborhoods." PanAmSat pioneered the
concept of "cable neighborhood" in the satellite services industry when it
secured key cable programming for Galaxy I, its first satellite. This prompted
cable operators to invest in ground equipment focused on Galaxy I's orbital
position. Once a core group of cable operators aligned their dishes with the
satellite, incremental capacity could be sold at higher rates to new
programmers that wanted to enter the market. This "cable neighborhood" concept
continues to be an important business strategy for the Company.
Atlantic Ocean Region
Seven satellites currently serve this region: PAS-lR, PAS-3, PAS-5, PAS-6,
PAS-6B, PAS-9 and Galaxy VIII-i. Each of these satellites provides services in
the C-band and the Ku-band, with the exception of PAS-6, PAS-6B and Galaxy
VIII-i, which are Ku-band only satellites. PAS-6 currently serves as back up
for PAS-6B. The Company has created cable neighborhoods on PAS-3 and PAS-9.
PAS-5, which was replaced by PAS-9, represents a revenue opportunity to
develop an additional orbital slot or to provide fleet backup. In 1999, PAS-5
was declared a total constructive loss and insurance was collected by the
Company. As a result, 50% of any net revenues generated by PAS-5 will be paid
to the Company's insurers.
Pacific Ocean Region
PanAmSat currently has two satellites in this region: PAS-2 and PAS-8. Each
of these satellites contains C-band and Ku-band transponders. The Company has
created a cable neighborhood on PAS-2 and operates two DTH platforms on PAS-8.
Indian Ocean Region
PanAmSat currently has two satellites in this region: PAS-4 and PAS-7. Each
of these satellites contains C-band and Ku-band transponders. The Company has
created a cable neighborhood on PAS-4 and operates two DTH platforms on PAS-7.
New Satellites in 2001
PanAmSat currently intends to launch PAS-10 in the second quarter of 2001
and Galaxy IIIC in the third quarter of 2001. PAS-10 will replace PAS-4 in the
IOR, and Galaxy IIIC will replace Galaxy IIIR and supplement Galaxy VIII-i in
the NAR and AOR, respectively. Each of PAS-4 and Galaxy VIII-i have suffered
from in-orbit anomalies which have shortened their expected useful lives. For
a more detailed discussion on the Company's planned satellites and prior in-
orbit failures, see "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations--Planned Satellites" and "--Risk Factors--
Risk of In-Orbit Failure or Reduced Performance."
14
SATELLITE PROCUREMENT AND LAUNCH ARRANGEMENTS
Satellite Procurement. The Company has three satellites under construction
and development with Boeing Satellite Systems, Inc., formerly Hughes Space and
Communications Company. In March 2001, the Company signed an agreement with
Orbital Sciences Corporation for construction of one satellite plus an option
for two additional satellites. The normal delivery time for a satellite is
approximately 12 to 24 months. Purchase agreements generally require the
Company to pay the majority of the total contract price for each satellite
during the period of the satellite's construction, with the remainder of the
contract price payable in the form of incentive payments based on orbital
performance over the design life of the satellite following launch. The
contracts also provide for price reductions or payments by the manufacturer in
the event of late delivery due to the fault of the manufacturer. Each contract
provides for a limited warranty. The contracts contain provisions that would
enable the Company to terminate them with or without cause. If terminated
without cause, the Company would be subject to substantial termination
liabilities that escalate with the passage of time. If terminated for cause,
the Company would be entitled to recover any payments it made under the
contracts and certain additional damages as specified in the contracts.
Launch Arrangements. The Company has entered into launch contracts for the
launch of both specified and unspecified future satellites. Each of the
Company's launch contracts provides that the Company may terminate the
contract at its option, subject to payment by the Company of a specified
termination fee that increases in magnitude as the applicable launch date
approaches. In addition, in the event of the failure of any launch, the
Company may exercise the right to obtain a replacement launch within a
specified period following the Company's request for re-launch.
CONTROL OF SATELLITES AFTER LAUNCH
Once a satellite is placed at its orbital location, ground stations control
it until the end of its in-orbit lifetime. PanAmSat generally provides TT&C
services for its own satellites, as well as for certain satellites owned or
operated by other entities. Third parties provide TT& C services for five of
the Company's satellites currently in orbit.
INSURANCE
Satellite Insurance
As a general philosophy, PanAmSat has historically carried satellite
insurance coverage that tracked with the book value of these assets in an
attempt to prevent any adverse financial reporting effects from satellite
health issues. The last few years of unusual satellite in-orbit anomalies have
begun to alter the in-orbit insurance coverage levels and rates that are
available to satellite operators today. In December 2000, PanAmSat executed a
new, master in-orbit insurance policy that covers 12 of its satellites. Five
of the 12 satellites are initially covered under the new policy, with the
remaining seven attaching to the policy at various dates in 2001 as their
existing policies expire (three of which are still covered under their
original launch policies). Five of the remaining satellites in the fleet are
still covered under their original launch policies; four of which have
policies covering launch plus five years and the remaining one of this group
is covered for launch plus three years. The remaining two satellites, PAS-6
and Galaxy VIII-i, are self insured today. PAS-5 was declared a total
constructive loss in 1999 and is currently not insured.
Launch Insurance
PanAmSat maintains launch insurance on each of its satellites in an amount
approximately equal to the unamortized construction, launch and launch
insurance costs for the satellite at the initial date of coverage. PanAmSat's
existing launch insurance policies cover claims arising after a launch for a
period of three to five years, with newer policies having longer coverage
periods than older policies. Such coverage includes not only catastrophic loss
of a satellite during launch, but also the failure of a satellite to obtain
proper orbit, or to perform in accordance with design specifications once in
orbit. The terms of the policies generally provide for payment of the full
insured amount if 50% or more of a satellite's communications capacity is lost
within the policy period, and, subject to certain deductibles, partial payment
for losses of less than 50% of the satellite's communications capacity within
the coverage period.
15
The insurance policies have standard commercial launch insurance provisions
and customary exclusions for (i) military or similar actions, (ii) laser,
directed-energy or nuclear anti-satellite devices, (iii) insurrection and
similar acts or governmental action to prevent such acts, (iv) governmental
confiscation, (v) nuclear reaction or radiation contamination, (vi) willful or
intentional acts of PanAmSat or its contractors, (vii) loss of market, loss of
revenue, extra expenses, incidental and consequential damages, and (viii)
third-party claims against PanAmSat.
In-orbit Insurance
PanAmSat typically obtains in-orbit insurance in advance of the expiration
of the relevant launch insurance policy. Coverage under these in-orbit
policies commences on the expiration of the launch insurance policy. Typical
in-orbit insurance periods run for periods of one to three years. PanAmSat
generally obtains in-orbit insurance with respect to its satellites in an
initial amount approximately equal to the unamortized construction, launch and
insurance costs for each of its satellites. The amount of in-orbit insurance
in force with respect to each of PanAmSat's satellites generally decreases
over time, typically based on the declining book value of the satellite.
PanAmSat generally does not insure against lost revenues in the event of a
total or partial loss of the communications capacity of a satellite. The
Company does, however, purchase insurance to cover sales-type lease
receivables when revenues have been recognized in connection with sales-type
lease arrangements and to cover its obligations with respect to performance
warranty provisions related to transponders sold outright.
Coverage under PanAmSat's in-orbit insurance policies includes claims
arising from occurrences after the expiration of the relevant launch insurance
policy. The insurance coverage includes the failure of a satellite to continue
to perform in accordance with design specifications. Payments in respect of
lost communications capacity are calculated in the same manner as under the
launch insurance policies. Partial failures or anomalies which occur during a
policy period that do not give rise to a claim may be excluded in renewal
policies. PanAmSat's in-orbit policies typically include customary commercial
satellite insurance exclusions similar to those contained in its launch
policies. Insurance may not be available for conditions detected in a prior
policy period that do not result in losses during the policy period.
Exclusions
As of December 31, 2000, PanAmSat's satellites had a net book value of
approximately $3.1 billion. The book value of the satellites that were either
self-insured or had some health exclusion at that time was approximately $290
million. Under the terms of its new master in-orbit policy, which commenced
December 1, 2000, several satellites that have existing technical anomalies
will have certain coverage exclusions when they attach to the master policy in
May 2001 (they are currently covered without exclusions under existing in-
orbit policies). When these satellites attach to the new policy, the book
value of satellites that will have certain exclusions related to their
coverage will be approximately $510 million. Additionally, at that time, the
book value of the self-insured satellites will be approximately $220 million.
Any failure not related to the exclusion will still be covered.
The primary subject of the exclusion is the satellite control processor
(SCP) on the four satellites in this category. One of them (PAS-4) is
operating on its backup SCP as a result of the failure of the primary SCP in
November 1998. This satellite is scheduled to be replaced by PAS 10, which is
scheduled for launch in the second quarter of 2001. The other three satellites
with SCP exclusions, (PAS-2, PAS-3R, and Galaxy IIIR) have both SCPs
functioning properly today.
For more information on insurance matters, including the risks relating to
certain exclusions, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "--Risk Factors--Risk of Uninsured Loss."
16
SALES AND MARKETING
PanAmSat's sales and marketing activities are separated into three general
service areas: (i) full-time program distribution; (ii) part-time and ad hoc
broadcast; and (iii) network services which includes VSAT, Internet, data
services and telephony.
PanAmSat's headquarters has a sales and marketing department for each
service area. PanAmSat and its subsidiaries also have sales and marketing
offices in Manhattan Beach, California; Coral Gables, Florida; Sydney,
Australia; London, England; Tokyo, Japan; Johannesburg, South Africa; Seoul,
South Korea; and China. The Company also maintains a representative sales
office in Mexico City, Mexico. The senior executive officers of PanAmSat are
directly involved in marketing to key broadcasting and business communications
customers.
COMPETITION
PanAmSat primarily competes with companies and organizations that own or
utilize satellite or terrestrial transmission facilities.
SATELLITE COMPETITORS
PanAmSat's satellite competitors are divided among four categories: (i)
companies with global GEO satellite systems; (ii) companies with proposed
global GEO satellite systems; (iii) regional or domestic GEO satellite
operators; and (iv) companies with non-GEO satellite systems. Many of the
Company's satellite competitors have also introduced and expanded value-added
services and bundled service offerings, which compete with the Company's
services. To a lesser extent, PanAmSat may face competition from (a) companies
who have proposed regional or transoceanic GEO satellite systems, (b) value-
added service providers and (c) optical fiber cable companies.
Global GEO Satellite Systems
PanAmSat's principal global competitor is Intelsat.
Intelsat is an international treaty organization of over 140 member nations
based in Washington, D.C. that provides global satellite capacity primarily
through its members, called "signatories." Comsat Corporation, which is a
subsidiary of Lockheed Martin Corporation, is the U.S. signatory and is the
only U.S. company permitted to have an investment interest in the Intelsat
system.
Intelsat competes with PanAmSat primarily on price and access. Intelsat
sells its services to its common carrier signatories, including Comsat, who
re-sell the services based on a tariff that may be below commercially
reasonable prices. In addition, Intelsat and its signatories can effectively
block PanAmSat from entering certain non-U.S. domestic markets.
Intelsat's mandate is to provide international satellite capacity on a non-
discriminatory basis to countries around the world. Since its formation in
1964, Intelsat's primary business has been the provision of satellite capacity
for long-distance telephony circuits. In recent years, Intelsat has launched
higher-powered satellites that are capable of providing video distribution,
DTH and private business network services. Intelsat traditionally has provided
capacity directly to its signatories, which then market such capacity to their
customers. Over 95 countries, however, now permit some form of direct access
to the Intelsat system and as of December 1999, the FCC began to permit
limited direct access in the United States. PanAmSat has filed a notification
with the FCC for limited direct access authority.
In March 1998, Intelsat approved the creation of an affiliate company that
would market satellite services directly to end-users. In November 1998,
Intelsat transferred to this affiliate, known as New Skies Satellites N.V.,
five operating satellites plus a sixth satellite that was under construction.
New Skies consummated a public offering of its equity securities in 2000 and
is increasingly independent of Intelsat. The New Skies satellite network
permits it to compete with the Company globally.
17
In May 1998, the FCC granted in part and denied in part a request by
Comsat, Intelsat's U.S. signatory, to be regulated as a non-dominant carrier.
The FCC reclassified Comsat as non-dominant in the provision of full-time
video and earth station services. The FCC determined, however, that Comsat
retains market power and should continue to be regulated as dominant in the
provision of switched voice and private line service to 63 countries and in
the provision of occasional-use video services to 142 markets. In February
1999, the FCC changed the manner in which it regulated Comsat's pricing for
these dominant carrier markets, switching from rate of return regulation to an
incentive-based pricing policy.
In early 1999, Congress enacted the Open-Market Reorganization for the
Betterment of International Telecommunications Act ("ORBIT"). This legislation
addressed the specific parameters and timetables to ensure the pro-competitive
privatization of Intelsat and the deregulation of Comsat. Intelsat filed on
January 18, 2000, an application requesting FCC authorization and associated
waivers, post-privatization, for its satellite system. The FCC conditionally
granted the application and waivers, subject to a determination whether
Intelsat's privatization plans conform to ORBIT. Intelsat has announced its
intention to convert from an intergovernmental organization to a privately
owned company in July 2001.
Proposed Global GEO Satellite Systems
PanAmSat competes with companies that have announced plans to create global
GEO satellite systems, primarily through acquisitions, partnerships or equity
interests in domestic or regional satellite systems. These companies include
Loral Space and Communications Ltd., GE American Communications, Inc. and
Lockheed Martin through its investment in Comsat. In addition, Societe
Europeenne des Satellites ("SES"), a Luxembourg-based operator of ASTRA, is a
leading satellite system for DTH, radio and multimedia services in Europe.
Each of these proposed systems has entered into substantial arrangements with
regional service providers to attempt to create a global system. Each of these
companies also offer value added services similar to those being offered by
the Company. PanAmSat believes that these companies would compete with it
primarily on price and level of service.
Regional GEO Satellite Systems
PanAmSat also competes with numerous companies and/or governments that
operate domestic or regional satellite systems in the United States, Latin
America, Europe, the Middle East, Africa and Asia. Competition from these
satellite operators is limited to service within one country or region,
depending on the operator's satellite coverage and market activities. In the
United States, GE Americom, Loral and Comsat all currently provide fixed
satellite services on a regional or domestic basis, and are the Company's
primary competitors in this market. Other important regional competitors of
the Company include Satellites Mexicanos, S.A. de C.V., an affiliate of Loral,
in Latin America and AsiaSat, a partially owned subsidiary of SES, in Asia.
These regional operators compete with PanAmSat primarily on price because
many are subsidized by local governments. In addition, some countries limit
PanAmSat's access in order to protect their national satellite systems.
Proposed and Operational Non-GEO Satellite Systems
The Company believes that operational non-geostationary telephony and data
systems are not currently competitors of PanAmSat. These non-geostationary
systems are designed primarily for mobile telephony and data services and are
not expected to serve the fixed point-to-multipoint video and
telecommunications markets. Certain other non-GEO systems under development,
such as Skybridge, Spaceway and Teledesic, are designed to offer fixed
satellite services such as data and Internet access, and they may compete with
services offered or planned to be offered by the Company.
18
OTHER COMPETITORS
Proposed Regional or Transoceanic GEO Satellite Systems
Other companies have announced plans to operate regional or transoceanic
satellite systems. Entry into the international satellite communication
industry can be expensive and difficult. The construction and launch of a
satellite comparable to PanAmSat's new satellites typically takes
approximately two or more years and costs approximately $200 million to $250
million or more. In addition, there are a limited number of orbital slots. The
operation of an international satellite communications system also requires
approvals from national telecommunications authorities and Intelsat and, in
certain cases, from regional satellite authorities. See "Item 7. Management's
Discussion and Analysis of Financial Condition and results of Operations--Risk
Factors--Risks of Government Regulation." While the trend around the world is
to liberalize these regulatory requirements, obtaining the necessary licenses
presently involves significant time, expense and expertise.
Value-Added Service Providers
In some cases, PanAmSat competes with companies to provide value-added
satellite services. These companies typically lease large amounts of satellite
capacity from satellite operators and then use that capacity to provide value-
added communications networks for their customers. For instance, several
carriers operate VSAT networks for businesses that PanAmSat also could provide
VSAT networks. In addition, brokers in the United States offer value-added
special events services to broadcasters, businesses and educational
institutions that also could be provided by PanAmSat. These companies may also
compete with NET-36 and PanAmSat's SPOTpath services. Many of these value-
added service providers and brokers use PanAmSat's services to meet their
customers' demands for satellite capacity.
Optical Fiber Cables
Optical fiber cables, considered to be a reliable method of transmitting
data and telephony, generally do not compete with PanAmSat's current services.
The primary use of optical fiber cables is to carry high-volume telephony and
data/Internet communications on a point-to-point basis, although video-based
point to multi-point projects are being investigated. Transcontinental and
intercontinental optical fiber cables currently carry video traffic, but this
service is largely for point-to-point traffic (e.g., New York to London).
Optical fiber cables are not readily usable for point-to-multipoint broadcast
applications or for the transmission of ad hoc events that require
transportable uplink earth stations. However, optical fiber is being deployed
at a rapid pace by several major companies, including Qwest Communications,
Global Crossing, Enron Corp. and Level 3 Communications, and as fiber networks
are deployed it is possible that the additional bandwidth may be marketed on a
point-to-multipoint basis. If this occurs, PanAmSat may face competition from
optical fiber companies, especially for Internet and data delivery services.
For certain services, particularly point-to-point, optical fiber is less
expensive than satellite services. As a result, any competition that PanAmSat
faces from optical fiber companies is likely to be based primarily on price
and reliability.
NET-36 COMPETITORS
The market for Internet broadcasting of high-bandwidth content is new,
intensely competitive and rapidly evolving. The Company expects that
competition will increase and that many of NET-36's competitors may not yet
have entered the market. Many of NET-36's competitors and potential
competitors may have greater name recognition, longer operating histories,
greater financial resources and larger customer bases. Increased and existing
competition could result in high barriers to market entry, price reductions,
fewer customer orders and the inability to gain market share, any of which
would cause the projected operating results of the NET-36 business to suffer.
NET-36's competitors primarily come from five market segments:
. Internet content distribution networks that accelerate delivery of web
pages, such as Akamai, Enron Communications and Digital Island;
19
. Internet webcasting companies that deliver streaming media through
terrestrial networks, such as Akamai's InterVu business;
. Internet software vendors that reduce the cost of delivery of content to
users by storing content closer to the end user, such as Inktomi;
. Internet production and event services companies, such as Broadcast.com
and Akamai's Network24 Communications business; and
. Companies that deliver streaming video and other data through satellite
networks, such as iBEAM and Cidera.
NET-36 competes on price, quality of service and network features. Certain
competitors that feature satellite based networks are dependent on the costly
transmission capacity of third-party satellite service providers (such as
PanAmSat). These competitors pay a fixed charge to utilize a third party's
satellite capacity regardless of how much capacity is actually used. By
leveraging PanAmSat's existing worldwide satellite network, NET-36 (i) obtains
cost savings on the satellite capacity it needs, (ii) has the flexibility to
obtain additional capacity as it attracts more customers, and (iii) is able to
procure more robust back-up capacity in the event of satellite failures,
resulting in less potential down time to its customers. NET-36 believes it can
successfully compete with ground based network providers on the quality of the
streaming video and audio services it delivers to the end user.
GOVERNMENT REGULATION
As an operator of a privately owned global satellite system, PanAmSat is
subject to: (i) the regulatory authority of the U.S. government; (ii) the
regulatory authority of other countries in which PanAmSat operates; and (iii)
the frequency coordination process of the International Telecommunications
Union ("ITU").
U.S. REGULATION
The ownership and operation of PanAmSat's satellite system is regulated by
the FCC. PanAmSat is subject to the FCC's jurisdiction primarily for: (i) the
licensing of satellites and U.S.-based earth stations in the United States;
(ii) avoidance of interference with other radio stations; and (iii) compliance
with FCC rules governing U.S.-licensed satellite systems. Violations of the
FCC's rules can result in various sanctions including fines, loss of
authorizations, or the denial of applications for new authorizations or to
renew existing authorizations. PanAmSat is not regulated as a common carrier
and, therefore, is not subject to rate regulation or the obligation not to
discriminate among customers, and operates with minimal governmental scrutiny
of its business decisions. PanAmSat must pay FCC filing fees in connection
with its space station and earth station applications; annual regulatory fees
that are intended to defray the FCC's regulatory expenses; and, to the extent
PanAmSat is deemed to be providing interstate or international
telecommunications services, universal service contributions.
Authorization to Launch and Operate Satellites. The FCC authorizes
satellite operators who meet its legal, technical and financial qualification
requirements to launch and operate satellites. Under the FCC's financial
qualification rules, an applicant must demonstrate that it has sufficient
funds to construct, launch, and operate each requested satellite for one year.
Licenses are issued for an initial ten-year term and the FCC gives licensees a
"replacement expectancy" with respect to the replacement of their satellites.
At the end of a ten-year license term, a satellite that has not been replaced,
or that has been re-located to another orbital location following its
replacement, may be able to continue operating under a grant of special
temporary authority. These operations, however, are secondary, and there can
be no assurance that the satellite will be permitted to continue operating
after the expiration of the initial ten-year license term. The FCC's rules and
policies limit the number of expansion satellite authorizations that may be
granted for the same frequency band at one time.
PanAmSat has final FCC authorization for sixteen satellites operating in
the C-band, the Ku-band, or both bands. PanAmSat has final FCC authorization
for one additional satellite, but the authorization does not cover certain
design changes that are the subject of a pending modification application.
PanAmSat has special
20
temporary authority to operate the satellite as modified on an interim basis.
In addition, PanAmSat has a final authorization to operate seven satellites in
the Ka-band: (two in the POR, to be located at 149 (degrees) E.L. and 173
(degrees) E.L.; four in the IOR, to be located at 36 (degrees) E.L., 40
(degrees) E.L., 48 (degrees) E.L., and 124.5 (degrees) E.L.; and one in the
United States, to be located at l03 (degrees) W.L.). PanAmSat has also
requested authority to operate eleven satellites in the broadcast satellite
services frequency ("BSS") band. If the Company does not meet certain FCC due
diligence requirements or does not place a satellite in service in an orbital
slot by a specified deadline, the Company's rights to such orbital slot may be
subject to revocation or expiration. For example, in 2000, the FCC revoked two
authorizations for the Company to operate in Ka-band slots. PanAmSat has filed
an application for review requesting the FCC to reconsider such revocations.
In addition to the above final authorizations, PanAmSat has a conditional
authorization for an IOR satellite in the C-band and Ku-band, to be located at
72 (degrees) E.L. In order to finalize this authorization, PanAmSat must make
a full financial showing.
Except as noted, none of PanAmSat's final or conditional authorizations is
subject to further administrative or judicial reconsideration or review. The
FCC reserves the right to require relocation of a satellite to a different
orbital location if it determines that relocation is in the public interest.
PanAmSat operates additional satellites under interim or special temporary
authority. PanAmSat operates PAS-7 at 68.5 (degrees) E.L. pursuant to a grant
of special temporary authority. PanAmSat is authorized to operate the Ku-band
transponders and only a portion of the C-band transponders on the satellite.
Brasilsat Al, a satellite owned by Embratel and operated and leased by
PanAmSat, previously provided U.S. domestic service from 79 (degrees) W.L.
under an interim authorization that expired on December 31, 1997. PanAmSat has
requested, but has not yet received, an extension of this authority. Pursuant
to a grant of special temporary authority, the Company has relocated Brasilsat
A1 to 144 (degrees) W.L. and it is operating there. The Company also has
amended its request for an extension of interim authority to specify the 144
(degrees) W.L. orbital location. PanAmSat also has requested a license
modification or special temporary authority to continue operating SBS-6 and
Galaxy VI beyond the end of their license terms. PanAmSat operates the HGS-1
satellite at 60 (degrees) W.L. under a grant of special temporary authority
from the FCC, and may continue such operations until 30 days before a
satellite operating on the same frequencies and serving the same geographic
area, and that has filed a valid prior coordination request with the ITU, is
launched to within one degree of 60 (degrees) W.L. PanAmSat has requested
special temporary authority to relocate PAS-5 to 155.5 (degrees) W.L. and to
operate the satellite at that orbital location. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--Risks of Government Regulation."
PanAmSat has filed applications for additional or replacement satellites in
the C-band and/or the Ku-band at 133 (degrees) W.L., 127 (degrees) W.L., 125
(degrees) W.L., 95 (degrees) W.L., 93 (degrees) W.L., 91 (degrees) W.L., 79
(degrees) W.L., and 68.5 (degrees) E.L. In order to grant two of the U.S.
additional satellite applications, the FCC would have to assign different
orbital locations than those requested by PanAmSat (79 (degrees) W.L. and 93
(degrees) W.L.) because, after PanAmSat's applications were filed, the FCC
assigned these orbital locations to other entities. PanAmSat has requested
that the 79 (degrees) W.L. application be associated with the 83 (degrees)
W.L. orbital location as a C-band only satellite.
In 1996, the FCC modified its rules for processing international satellite
system applications. PanAmSat has requested a waiver of these rules in
connection with one IOR application and one U.S. application.
PanAmSat has filed applications for six additional Ka-band satellites (two
in the AOR, two in the POR and two in the IOR), that will be processed in the
second Ka-band satellite processing round. Finally, PanAmSat has applied for
twelve V-band satellites (two in the AOR, six in the IOR and four in the
U.S.), but the FCC has not yet accepted these applications for filing.
Under the FCC's rules, unless an applicant has received an authorization to
launch and operate, it must notify the FCC in writing prior to commencing
satellite construction, and any construction engaged in is at the applicant's
own risk. While PanAmSat may proceed with the construction of planned
satellites without prior FCC approval, it must accept the risk that the FCC
may not grant the application, may not assign the satellite to its
21
proposed orbital location, or otherwise may act in a manner that limits or
eliminates some or all of the value of the construction previously done on the
satellite.
Other FCC Authorizations. Under the FCC's rules, an entity that provides
international telecommunications services on a common carrier basis must first
receive authorization, pursuant to Section 214 of the Communications Act of
1934, as amended, to provide such services. The FCC has granted PanAmSat
Carrier Services, Inc. ("PCSI") and PanAmSat Communications Carrier Services,
Inc. ("PCCS"), wholly-owned subsidiaries of the Company, Section 214 authority
to provide international private line and public switched services. As common
carriers, PCSI and PCCS are subject to rate regulation, tariffing and
nondiscrimination requirements.
Scope of Services Authorized. In 1996, the FCC eliminated the regulatory
distinction between U.S. domestic satellites and U.S.-licensed international
satellites. As a result, each of PanAmSat's satellites may be used, to the
extent technically feasible, to provide service in the United States and
internationally. Due to a restriction in the FCC's rules, however, the
transponders on PAS-9 and Galaxy XI that operate in the 10.7-11.7 GHz and
12.75-13.25 GHz frequency bands may be used solely for international service.
Coordination Requirements. The FCC requires applicants to demonstrate that
their proposed satellites would be compatible with the operations of adjacent
U.S.-licensed satellites. The FCC expects adjacent satellite operators to
coordinate with one another to minimize frequency conflicts, and it does not
become involved unless the operators are unable to resolve their conflicts.
Other U.S. Government Regulation. The U.S. Congress has added
communications satellites to the munitions list governed by The International
Traffic in Arms Regulations ("ITAR"), and transferred responsibility from the
Commerce Department to the State Department for licensing the export of
satellites and technical information related to satellites to non-U.S. launch
providers, insurers, customers, potential customers, employees, and other non-
U.S. persons. The State Department's interpretation of the regulations as they
would be applied to PanAmSat is not clear, and it is possible that these
regulations could adversely affect or delay the Company's ability to launch
and insure its satellites and to sell capacity to non-U.S. customers.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors--Risks of Government Regulation"
generally and for a description of certain frequency coordination issues
affecting PAS-6, PAS-7 and Galaxy VIII-i.
REGULATION BY NON-U.S. NATIONAL TELECOMMUNICATIONS AUTHORITIES
The United States is the licensing jurisdiction for all of PanAmSat's
operating satellites. PanAmSat has filed with the Australian Communications
Authority for a new satellite that would be operated in the POR.
Foreign laws and regulatory practices governing the provision of satellite
services to licensed entities and directly to end users vary substantially.
Most countries in which PanAmSat operates are signatories of Intelsat and, as
a result, may require PanAmSat to confirm that it has successfully completed
coordination with Intelsat before providing services on a given satellite. See
"--Intelsat Coordination." In addition, PanAmSat may be subject to national
communications and/or broadcasting laws with respect to its provision of
international satellite service. While these vary from country to country,
national telecommunications authorities, with limited exceptions, typically
have not required satellite operators to obtain licenses or regulatory
authorizations in order to provide space segment capacity to licensed
entities. "Space segment capacity" consists solely of capacity on a given
satellite without any uplink, downlink or other value-added services.
Many countries, particularly in Latin America, and increasingly in Europe,
Africa and Asia, have liberalized their regulations to permit multiple
entities to seek licenses to: (i) provide voice, data or video services for
their own use or for third-party use; (ii) own and operate private earth
station equipment; and (iii) to choose a provider of satellite capacity. This
trend should accelerate with the commitments by many World Trade Organization
("WTO") members, in the context of the WTO Agreement on Basic
Telecommunications Services, to open their
22
satellite markets to competition. Many countries allow licensed radio and
television broadcasters and cable television providers to own their own
transmission broadcast facilities and purchase satellite capacity without
restriction. In such environments, customer access to PanAmSat's services can
be a relatively simple procedure. Other countries, however, have maintained
strict monopoly regimes. In these markets, a single entity, often the
government-owned posts, telephone and telegraph authorities, may hold a
monopoly on the ownership and operation of facilities or on the provision of
communications and/or broadcasting services to, from, and within the country,
including via satellite, making it more difficult for PanAmSat and other
companies to provide services on U.S.-licensed satellites.
Most countries permit satellite carriers to provide space segment capacity
without any prior licensing or authorization. In others, however, a license is
required to provide space segment capacity. PanAmSat has obtained such
licenses in Argentina, Colombia, Ecuador, Guatemala, Honduras, Pakistan,
Paraguay and Peru. Additionally, the Company has sought service-type licenses,
in order to provide certain space segment capacity directly to end users.
PanAmSat has obtained such licenses in Australia and Japan. PanAmSat does not
yet, however, have authorization in Mexico, which effects its ability to use
certain portions of its satellite capacity. However, PanAmSat de Mexico (a
joint venture between PanAmSat and a Grupo Pegaso affiliate) filed for a
concession in Mexico that will permit the joint venture to serve as the
reseller of PanAmSat services in Mexico. PanAmSat's satellites also have only
limited authorization in Brazil and India that limit the opportunities for use
of some capacity in those countries.
Intelsat Coordination. In connection with its international satellite
services, PanAmSat must coordinate with Intelsat to assure that the use by
PanAmSat of any new satellite will not cause Intelsat technical harm. The FCC
is responsible for ensuring that PanAmSat has undergone the necessary
coordinations and that it operates in accordance with the technical parameters
forming the basis for each coordination. If PanAmSat changes the terms (either
technical or service) of its operation in a significant manner, it may need to
re-coordinate with Intelsat.
The ITU Frequency Coordination Process. Each ITU member nation is required
to register its proposed use of orbital slots with the ITU's Radio Regulations
Board. Other nations then may give notice of any use or intended use of the
radio spectrum that would conflict with the proposal. The nations then are
obligated to seek to coordinate the proposed uses and resolve interference
concerns. If all disputes are resolved, the ITU notifies the proposed use
which, at least theoretically, protects it from subsequent or nonconforming
interfering uses. The ITU Radio Regulations Board has no dispute resolution or
enforcement mechanisms, however, and international law provides no clear
remedies if this voluntary process fails.
While the right to use most frequencies is determined on a "first-come,
first-served" basis, the ITU has "planned" the use of certain frequency bands
in a manner that effectively reserves for various countries the right to use
those frequencies in accordance with certain technical parameters at a given
orbital location. PanAmSat's proposed use of BSS frequencies on eleven
satellites is subject to unresolved issues concerning the ITU's BSS band plan.
All of the registrations for PanAmSat's satellites are or will be subject
to the ITU coordination process. Certain entities have filed notices of
intended use with respect to certain orbital slots which conflict with
PanAmSat's registered orbital slots for PAS-2, PAS-4, PAS-7 and PAS-8, and
PAS-10. Such filings may delay the receipt of final registration of such
orbital slots with the ITU Radio Regulations Board. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--Risks of Government Regulation."
EMPLOYEES
At December 31, 2000, PanAmSat had approximately 805 full-time employees.
PanAmSat believes that its relations with its employees are good.
23
ITEM 2. PROPERTIES
PanAmSat's executive offices currently are located in Greenwich,
Connecticut. PanAmSat leases its executive offices pursuant to a lease that
will expire on March 31, 2003. In August 1999, the Company announced its
purchase of a new office facility in Stamford, Connecticut to serve as its
corporate headquarters. The Company subsequently sold the Stamford office
facility and entered into a ten year lease for a facility in Wilton,
Connecticut to serve as its corporate headquarters. The Company will move its
headquarters to Wilton when renovations at the new facility are complete. The
move is expected to occur in 2001.
PanAmSat currently operates seven teleports and operations control centers
in conjunction with its global satellite network. PanAmSat operates its
primary teleport in Ellenwood, Georgia and operates regional teleports in
Castle Rock, Colorado; Fillmore, California; Homestead, Florida; Napa,
California; and Spring Creek, New York. PanAmSat's operations control centers
located in Ellenwood and Long Beach provide other services, such as customer
service support in addition to teleport operations. PanAmSat owns its
teleports in Ellenwood, Georgia; Homestead, Florida; Spring Creek, New York;
Napa, California; and Fillmore, California. The Company owns its operations
control centers in Ellenwood, Georgia and Long Beach, California and leases
offices in Manhattan Beach. PanAmSat leases its teleport in Castle Rock,
Colorado.
PanAmSat also leases office space for its offices in Manhattan Beach,
California; Washington, D.C.; Coral Gables, Florida; Sydney, Australia;
Johannesburg, South Africa; London, England; Tokyo, Japan; Seoul, South Korea;
and Hong Kong, China. PanAmSat's leases for its foreign offices have been
entered into upon terms that PanAmSat believes to be reasonable and customary.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2000, no matters were submitted to a
vote of stockholders through the solicitation of proxies or otherwise.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PanAmSat Common Stock is listed on the Nasdaq National Market and commenced
trading on May 19, 1997 under the symbol "SPOT."
The following table sets forth, for the calendar periods indicated, the
high and low closing sales price per share for PanAmSat Common Stock, as
reported by the Nasdaq National Market.
2000 HIGH LOW
---- --------- ---------
First Quarter......................................... $72 1/8 $41 11/16
Second Quarter........................................ $50 15/16 $35 5/16
Third Quarter......................................... $44 1/16 $28 9/16
Fourth Quarter........................................ $41 9/16 $26 1/16
1999 HIGH LOW
---- --------- ---------
First Quarter......................................... $45 7/16 $31 1/8
Second Quarter........................................ $38 15/16 $26 9/16
Third Quarter......................................... $42 3/8 $34
Fourth Quarter........................................ $63 1/4 $35
As of March 16, 2001, there were approximately 136 holders of record of
PanAmSat Common Stock.
To date, the Company has not declared or paid cash dividends on PanAmSat
Common Stock. The Company presently intends to retain future earnings to
support the growth of its business and, therefore, does not anticipate paying
cash dividends in the near future. The payment of any future dividends on
PanAmSat Common Stock will be determined by the Company's Board of Directors
in light of conditions then existing, including the Company's earnings,
financial condition and capital requirements, restrictions in financing
agreements, business conditions and other factors.
25
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the year ended December
31, 1996 has been derived from the audited financial statements of Galaxy,
which changed its name to PanAmSat Corporation concurrent with its May 1997
acquisition of PanAmSat International (See Note 1 to the Consolidated
Financial Statements). The selected financial data as of December 31, 2000,
1999, 1998 and 1997 and for each year of the four-year periods ended December
31, 2000 has been derived from the audited consolidated financial statements
of PanAmSat appearing elsewhere in this Annual Report, and should be read in
conjunction with such consolidated financial statements and notes related
thereto and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
2000 1999 1998 1997(1) 1996
---------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DA-
TA:
Total revenues.......... $1,023,570 $ 810,617 $ 767,263 $ 629,939 $ 482,770
---------- --------- --------- ---------- ---------
Costs and expenses
Cost of outright sales
and sales-type leases.. 85,776 -- -- 20,476 52,969
Leaseback expense, net
of deferred gains...... -- 15,391 47,223 61,907 59,927
Depreciation and amorti-
zation................. 337,450 280,472 234,945 149,592 58,523
Direct operating costs.. 149,681 103,973 96,510 61,199 34,794
Selling, general and ad-
ministrative........... 97,462 72,415 70,251 42,561 34,119
Gain on Galaxy VII in-
surance claim.......... (3,362) -- -- -- --
---------- --------- --------- ---------- ---------
Operating income........ 356,563 338,366 318,334 294,204 242,438
Interest expense,
net(2)................. 128,205 112,002 97,788 30,973 4,903
Other income............ -- -- -- (385) (2,184)
---------- --------- --------- ---------- ---------
Income before taxes, mi-
nority interest and
extraordinary item..... 228,358 226,364 220,546 263,616 239,719
Income tax expense...... 102,761 104,127 95,940 117,325 89,895
Minority interest....... -- -- -- 12,819 --
Extraordinary item(3)... -- -- -- 20,643 --
---------- --------- --------- ---------- ---------
Net income.............. $ 125,597 $ 122,237 $ 124,606 $ 112,829 $ 149,824
========== ========= ========= ========== =========
OTHER FINANCIAL DATA:
EBITDA(4)............... $ 694,013 $ 618,838 $ 553,279 $ 444,181 $ 303,145
EBITDA margin(4)........ 68% 76% 72% 71% 63%
Net cash provided by op-
erating activities..... $ 418,713 $ 500,582 $ 628,119 $ 201,944 $ 165,851
Net cash used in invest-
ing activities......... (394,185) (560,199) (636,465) (1,720,440) (56,735)
Net cash provided by
(used in) financing
activities............. (12,442) (666) 94,149 1,610,206 (109,122)
Capital expenditures.... 449,560 586,910 738,540 622,347 308,735
Total assets............ 6,178,351 5,984,709 5,890,497 5,682,434 1,275,516
Total long-term obliga-
tions.................. 3,130,086 3,025,577 3,058,480 3,016,680 394,187
Total stockholders' eq-
uity................... 2,954,695 2,815,989 2,688,415 2,560,836 --
--------
(1) Results for the year ended December 31, 1997 include financial data for
PanAmSat International from May 16, 1997 (the effective date of the
Merger). See Note 1 to the Consolidated Financial Statements for a
description of the Merger.
(2) Net of capitalized interest of $56.1 million, $60.7 million, $59.9
million, $80.5 million and $14.6 million for the years ended December 31,
2000, 1999, 1998, 1997 and 1996, respectively, and net of interest income
of $6.8 million, $3.2 million, $10.4 million and $28.0 million in 2000,
1999, 1998 and 1997, respectively.
(3) Represents loss on early extinguishment of debt, net of tax.
(4) Represents earnings before net interest expense, income tax expense,
depreciation and amortization. EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. EBITDA should not be considered as a
measure of profitability or liquidity as determined in accordance with
generally accepted accounting principles in the statements of income and
cash flows. EBITDA margin is EBITDA divided by revenues and is expressed
as a percentage.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto
appearing elsewhere in this Annual Report.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
--------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
REVENUES
Operating leases, satellite services and other... $ 780,256 $787,509 $736,624
Outright sales and sales-type leases............. 243,314 23,108 30,639
--------- -------- --------
Total revenue.................................. 1,023,570 810,617 767,263
--------- -------- --------
COSTS AND EXPENSES
Cost of outright sales and sales-type leases..... 85,776 -- --
Leaseback expense, net of deferred gains......... -- 15,391 47,223
Direct operating and SG&A costs.................. 247,143 176,388 166,761
Gain on Galaxy VII insurance claim............... (3,362) -- --
Depreciation and amortization.................... 337,450 280,472 234,945
--------- -------- --------
Total.......................................... 667,007 472,251 448,929
--------- -------- --------
Income from operations........................... 356,563 338,366 318,334
Interest expense, net............................ 128,205 112,002 97,788
--------- -------- --------
Income before income taxes....................... 228,358 226,364 220,546
Income tax expense............................... 102,761 104,127 95,940
--------- -------- --------
Net income....................................... $ 125,597 $122,237 $124,606
========= ======== ========
Net income per share--basic and diluted.......... $ 0.84 $ 0.82 $ 0.83
========= ======== ========
27
CONSOLIDATED RESULTS
2000 COMPARED TO 1999
Revenues. Revenues increased $213.0 million, or 26%, to $1,023.6 million
for the year ended December 31, 2000 from $810.6 million for the same period
in 1999. This increase was primarily due to $219.2 million of additional
revenues during 2000 from new outright sales and sales-type leases of
satellite transponders for which there were no comparable transactions in
1999. The Company records certain contractual transactions as sales-type
leases in accordance with Generally Accepted Accounting Principles ("GAAP").
Most of the revenues from these agreements are recognized at service
commencement, whereas revenues from operating lease agreements are recognized
monthly over the term of the lease agreement. Video services revenues,
excluding new sales-type lease agreements were $541.4 million for the year
ended December 31, 2000, a decrease of 7% from the same period in 1999. The
decrease was primarily due to customer conversions from operating lease
agreements into sales-type lease agreements during the first half of 2000 and
the termination of a contract for a DTH platform in India in 1999. Network
services (formerly telecommunications services) revenues, excluding new
outright sales, were $207.9 million for the year ended December 31, 2000, an
increase of 11% from the same period in 1999. The increase was due primarily
to growth in data and Internet-related service agreements.
Revenues from outright sales and sales-type leases increased to $243.3
million for the year ended December 31, 2000, from $23.1 million for the same
period in 1999. The increase is attributable to the new outright sales and
sales-type lease transactions discussed above. Revenues from operating leases
of transponders, satellite services and other decreased $7.3 million, or 1%,
to $780.3 million for the year ended December 31, 2000, from $787.5 million
for the same period in 1999. The decrease was primarily due to customer
conversions from operating lease agreements into sales-type lease agreements
during the first half of 2000 and the termination of a contract for a DTH
platform in India in 1999.
Cost of Outright Sales and Sales-Type Leases of Transponders. The Company
recorded $85.8 million of costs of outright sales and sales-type leases of
transponders for the year ended December 31, 2000 for which there were no
comparable transactions in 1999.
Leaseback Expense, Net of Deferred Gains. The exercise of all remaining
early buy-out opportunities on sale-leaseback agreements was completed in
1999. As a result, the Company recorded no leaseback expense, net of deferred
gains, for the year ended December 31, 2000, as compared to $15.4 million for
the same period in 1999.
Direct Operating and Selling, General and Administrative Costs. Direct
operating and selling, general and administrative costs increased $70.8
million, or 40%, to $247.1 million for the year ended December 31, 2000, from
$176.4 million for the same period in 1999. The increase was primarily due to
direct costs associated with the Company's continued fleet expansion, costs
associated with its NET-36 initiative, additional staffing to support other
growth initiatives and a $6.1 million one-time charge associated with a sale
of real estate.
Depreciation and Amortization. Depreciation and amortization increased
$57.0 million, or 20%, to $337.5 million for the year ended December 31, 2000
from $280.5 million for the same period in 1999, due primarily to depreciation
expense associated with the addition of four new satellites placed in service
in 2000, depreciation expense on transponders acquired through the exercise of
sale-leaseback early buy-outs and the acceleration of depreciation on the
Galaxy VIII-i satellite, which began in the fourth quarter of 2000.
Income from Operations. Income from operations increased $18.2 million, or
5%, to $356.6 million for the year ended December 31, 2000 from $338.4 million
for the same period in 1999. The increase was primarily due to the gross
profit associated with the new outright sales and sales-type lease activity in
2000 offset by increased depreciation expense and direct operating and
selling, general and administrative costs.
Interest Expense, Net. Interest expense, net increased $16.2 million, or
14%, to $128.2 million for the year ended December 31, 2000 from $112.0
million for the same period in 1999. The increase was due primarily to the
increase in interest rates associated with the Company's floating rate debt
during 2000 partially offset by lower borrowing levels in 2000.
28
Income Tax Expense. Income tax expense decreased $1.4 million, or 1%, to
$102.8 million for the year ended December 31, 2000 from $104.1 million for
the same period in 1999. The Company's effective tax rate was 45% in the year
ended December 31, 2000, compared to 46% in the same period in 1999. The
decrease was due to increased tax benefits related to the Company's foreign
sales corporation.
1999 COMPARED TO 1998
Revenues. Revenues increased $43.3 million, or 6%, to $810.6 million for
the year ended December 31, 1999 from $767.3 million for the same period in
1998. Video services revenues were $580.2 million for the year ended December
31, 1999, an increase of 3% from the same period in 1998. The increase was
primarily due to new service agreements on satellites placed in service in
1999, as well as continued growth in special events service revenues as
compared to the same period in 1998. Network services revenues were $186.7
million for the year ended December 31, 1999, an increase of 17% from the same
period in 1998. The increase was due primarily to the growth in data and
Internet-related service agreements.
Revenue results can also be analyzed based on the type of agreement.
Revenues from sales and sales-type leases decreased to $23.1 million for the
year ended December 31, 1999, from $30.6 million for the same period in 1998.
The decrease is attributable to a lower volume in 1999 relative to 1998 of
outright sales and sales-type leases. Revenues from operating leases of
transponders, satellite services and other increased $50.9 million, or 7%, to
$787.5 million for the year ended December 31, 1999, from $736.6 million for
the same period in 1998. The increase was primarily due to the commencement of
commercial service on new international satellites, as well as continued
growth in special events service revenues in 1999.
Leaseback Expense, Net of Deferred Gain. Leaseback expense, net of deferred
gain, decreased $31.8 million, or 67%, to $15.4 million for the year ended
December 31, 1999, from $47.2 million for the same period in 1998. The
decrease was primarily attributable to the exercise by the Company of early
buy-out opportunities on sale-leaseback agreements during 1999.
Direct Operating and Selling, General and Administrative Costs. Direct
operating and selling, general and administrative costs increased $9.6
million, or 6%, to $176.4 million for the year ended December 31, 1999, from
$166.8 million for the same period in 1998. The increase was primarily due to
direct costs associated with additional satellites placed in service and
operating costs associated with the normal growth of the Company attributable
to the growth in the size of the satellite network.
Depreciation and Amortization. Depreciation and amortization increased
$45.6 million, or 19%, to $280.5 million for the year ended December 31, 1999
from $234.9 million for the same period in 1998, due primarily to depreciation
expense associated with additional satellites placed in service.
Income from Operations. Income from operations increased $20.1 million, or
6%, to $338.4 million for the year ended December 31, 1999 from $318.3 million
for the same period in 1998. The increase was primarily due to increased
revenue generated by the expanded satellite network and decreased leaseback
expense, net of deferred gain as a result of the exercise by the Company of
early buy-out opportunities, offset by increased depreciation and direct
operating costs associated with the Company's expanded satellite network.
Interest Expense, Net. Interest expense, net increased $14.2 million, or
15%, to $112.0 million for the year ended December 31, 1999 from $97.8 million
for the same period in 1998. The increase was due primarily to higher interest
expense resulting from new debt assumed in connection with the exercise of an
early buy-out opportunity under a sale-leaseback transaction during 1999 as
well as increased borrowing levels during the year.
Income Tax Expense. Income tax expense increased $8.2 million, or 9%, to
$104.1 million for the year ended December 31, 1999 from $95.9 million for the
same period in 1998. The Company's effective tax rate was 46% in 1999 compared
to 44% in 1998. The increase resulted from a reduction in foreign sales
corporation tax benefits in 1999.
29
SATELLITE DEPLOYMENT PLAN AND PLANNED SATELLITES
Satellite Deployment Plan
PanAmSat's satellite deployment plan is intended to enable the Company to
provide back-up and replacement capacity as well as expanded satellite
services on an expedited basis in the United States and worldwide. PanAmSat
launched five satellites since December 1999, Galaxy XI, Galaxy XR, Galaxy
IVR, PAS-9 and PAS-1R, on December 21, 1999, January 24, 2000, April 18, 2000,
July 28, 2000 and November 15, 2000, respectively. PanAmSat also retired two
satellites, SBS-5 and SBS-4, and experienced the failure of Galaxy VII during
2000. PanAmSat expects to launch four additional satellites by early 2003,
consisting of Galaxy III-C (which will replace Galaxy IIIR) for the NAR and
the AOR, Galaxy VIII-iR (which will replace Galaxy VIII-i) for the AOR, PAS 10
for the IOR and a new satellite for the NAR (yet to be named). This will
result in a planned total fleet of 23 satellites, including multiple
satellites in each ocean region worldwide and one in-orbit spare satellite
(Galaxy VI) for the United States. The Company also has options to procure
three additional satellites.
Planned Satellites
PAS-10. This satellite will be a Boeing 601 HP spacecraft. It is scheduled
for launch in the second quarter of 2001 on a Proton launch vehicle and is
expected to occupy an orbital position in the IOR at 68.5 (degrees) E.L. Some
of the Company's key customers on PAS-4 have contracted to migrate to PAS-10
upon its deployment.
Galaxy III-C. This satellite will be a Boeing 702 spacecraft, designed to
cover the United States and Latin America. It is scheduled to be launched in
the third quarter of 2001 and it is expected to occupy an orbital position
located at 95 (degrees) W.L.
Galaxy VIII-iR. This satellite will be a Boeing 601 HP spacecraft designed
to cover Latin America and serve as an on-ground spare as back-up for the
launch of Galaxy IIIC, and then a replacement for Galaxy VIII-i. It is
scheduled to be launched in the third quarter of 2002 and it is expected to
occupy an orbital position located at 95 (degrees) W.L. The Company has
entered into a contract with an affiliate of DIRECTV Latin America (which is
an affiliate of the Company) for the lease of capacity on Galaxy VIII-iR, but
such contract may be terminated by the customer following the successful
launch of Galaxy III-C. If the lease were terminated, the Company would either
modify Galaxy VIII-iR for another use or terminate its contract with Boeing
for the construction of Galaxy VIII-iR. The Company would also postpone or
terminate the launch service contracted for Galaxy VIII-iR. In such event, the
customer would be obligated to pay the Company over time for all of the
Company's contractual liabilities to Boeing and the launch services provider
for such modification, postponement and/or termination.
New NAR Satellite. This C-Band satellite, to be named in the future, will
be constructed by Orbital Sciences Corporation and designed to cover the
United States. It is scheduled to be launched in late 2002 or early 2003 and
is expected to occupy an orbital position located at 74 (degrees) W.L., co-
located with the Company's SBS-6 satellite.
As a result of the Company's planned launches, the Company currently
intends to relocate a number of its satellites.
. Galaxy III-C is expected to be deployed at 95 (degrees) W.L., Galaxy
IIIR's current location, to provide services to the United States and
Latin America. Upon this deployment, Galaxy IIIR will be moved for
service at a new orbital location to be determined.
. PAS-10 is expected to be deployed at 68.5 (degrees) E.L., PAS-4's
current location. Upon this deployment, PAS-4 will be moved for service
at a new orbital location to be determined.
. Galaxy VIII-iR is expected to be deployed at 95 (degrees) W.L., Galaxy
VIII-i's current location. Upon this deployment, Galaxy VIII-i will be
retired.
30
The implementation of the satellite deployment plan is subject to
regulatory approval by the FCC. The Company expects that after the launch of
the satellites as described above, the revenues attributable to the PAS-4
satellite will be at reduced levels compared to most of the Company's other
satellites. The Company has not yet determined whether revenue will be
adversely affected on Galaxy IIIR after the completion of the satellite
deployment plan. No assurance can be given that commercially suitable orbital
locations will be obtained for all of these satellites. Successful
implementation of the satellite deployment plan is subject to risks attendant
to the Company's business and the requirement of additional capital. See
"Liquidity and Capital Resources and Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Merger, the Company obtained a term loan in the
amount of $1.725 billion (the "Hughes Term Loan") from Hughes Electronics. The
Hughes Term Loan matures in June 2003, and bears interest at a rate equal to
that of the Revolving Credit Facility (as defined below). Pursuant to the
Hughes Term Loan, quarterly principal payments of $50 million are required
under certain circumstances depending upon the level of cash flow from
operations and the Company's credit ratings. As of March 13, 2001, the Company
was not required to make any principal payments on the Hughes Term Loan as a
result of its credit rating. Hughes Electronics has the right to request that
the Company use its best efforts to replace the Hughes Term Loan with another
credit facility on terms that may then be available to the Company. As of
March 13, 2001, Hughes Electronics had not requested the Company to replace
the borrowings.
In addition to the Hughes Term Loan, as of December 31, 2000, the Company
also had long-term indebtedness of $796.5 million comprised primarily of $750
million of Notes (as defined below) and $46.5 million of notes assumed in
connection with the exercise of an early buy-out opportunity under a sale-
leaseback transaction (as described below).
On January 16, 1998, PanAmSat completed a private placement pursuant to
Rule 144A under the Securities Act of 1933 for $750 million aggregate
principal amount of debt securities (the "Offering"). The net proceeds from
the Offering were used to repay bank loans incurred partially to finance a
tender offer for certain debt securities of PanAmSat's subsidiaries, as well
as for general corporate purposes. In August 1998, the Company converted the
private securities to public debt (the "Notes") by means of a registered
exchange offer. The Notes bear interest at various rates ranging from 6.0% to
6.785% and have five, seven, ten and 30 year maturity dates.
The Company is party to a Credit Agreement dated December 24, 1997, (the
"Credit Agreement") with certain lenders and Citicorp USA, Inc. as
administrative agent. The Credit Agreement provides the Company with loans of
up to $500 million under a five-year revolving credit facility (the "Revolving
Credit Facility"). Borrowings under the Revolving Credit Facility bear
interest, at the Company's option, at a rate based upon either a defined Base
Rate, or LIBOR plus applicable margins that are based on the Company's credit
rating. The interest margins include a component that is a facility fee, which
ranges from 0.35% to 0.75% depending on the rating level.
On July 27, 1998, the Company initiated a $500 million commercial paper
program (the "Commercial Paper Program"). Borrowings under the Revolving
Credit Facility and the Commercial Paper Program are limited to $500 million
in the aggregate and are expected to be used to fund the Company's satellite
construction program. There are currently no borrowings outstanding under the
Commercial Paper Program or the Revolving Credit Facility.
During the third quarter of 1999, the Company's credit ratings were
downgraded to BBB-/A3 by Standard and Poor's. As a result of this downgrade,
the Company expects that it will not issue commercial paper pursuant to its
Commercial Paper Program and instead expects to draw upon its Revolving Credit
Facility to fund its borrowing needs.
The Hughes Term Loan is subordinate to the Notes issued in connection with
the Offering, the Revolving Credit Facility and any notes issued under the
Commercial Paper Program.
31
In April 1999, the Company filed two insurance claims related to anomalies
on its PAS-8 and PAS-5 satellites. The claim on the PAS-8 satellite was for a
partial loss primarily resulting from the loss in geographic coverage,
connectivity and/or switchability of the Ku-band transponders. The claim on
PAS-5 was for a constructive total loss of the satellite because the Company
had ceased using all of the Ku-band capacity of the satellite on a full-time
basis, which represents more than 50% of the satellite's communications
capacity. In August 1999, the Company filed an insurance claim on its Galaxy
VIII-i satellite for a partial loss primarily resulting from battery cell
failures. In September 1999, the Company met with its insurance carriers and
agreed to settle all of the claims for net cash to PanAmSat of approximately
$304 million. The insurance settlements were recognized as offsets to the
carrying values of the related satellites, and no gain or loss has been
recognized as a result of these settlements.
In the third quarter of 2000, the Galaxy VIII-i satellite experienced
difficulties with its xenon ion propulsion system ("XIPS"), an electronic
propulsion system that is used to maintain the spacecraft's proper orbit and
position relative to earth. The satellite is operating normally on its backup
chemical propulsion system. Without the use of XIPS, the spacecraft is
expected to reach its end-of-life in late 2002. PanAmSat accelerated
depreciation of the spacecraft to reflect its revised operational life,
resulting in an increase in its depreciation expense beginning in the fourth
quarter of 2000 of approximately $15.0 million per quarter.
In December 2000, the Company filed an insurance claim related to the
failure of its Galaxy VII satellite, which ceased transmissions on November
22, 2000 due to the failure of an onboard system responsible for controlling
the spacecraft and maintaining its position relative to earth. The insurance
settlement in the amount of $132.4 million was recognized as an offset to the
carrying value of the satellite and resulted in a $3.4 million gain from
proceeds in excess of the carrying value.
The Company had options under sale-leaseback arrangements to repurchase the
transponders on Galaxy VII and Galaxy IIIR prior to the end of their
respective lease terms. In January 1999, the Company repurchased 12 C-band and
10 Ku-band transponders on Galaxy VII for approximately $141.3 million,
including a make-whole premium of $2.7 million. The Company repurchased the
remaining transponders on Galaxy VII and the Ku-band transponders on Galaxy
IIIR in July 1999 for a total cost of approximately $103.5 million in cash,
plus the assumption of $124.1 million of floating rate debt secured by the
Galaxy IIIR Ku-band transponders. The notes bear interest at LIBOR plus 0.25%
and mature on January 2, 2002. As of March 13, 2001, the outstanding principal
balance of these notes was $46.5 million. As of December 31, 2000, other than
indemnity obligations, the Company no longer had any obligations under sale-
leaseback agreements.
The significant cash outlays for the Company will continue to be primarily
capital expenditures related to the construction and launch of satellites,
debt service costs and potential acquisitions. The Company has satellites
under various stages of development and intends to deploy NET-36 for which it
has budgeted capital expenditures. According to the Company's capital plan,
PanAmSat currently expects to spend approximately $1.1 billion to construct,
insure and launch satellites, and plans to invest between $200 million and
$220 million in capital and operating expenses over the next two years to
deploy NET-36. The largest portion of PanAmSat's investment in NET-36 will be
used to deploy PanAmSat-owned antennas and servers at ISPs, cable headends and
DSL provider sites.
Assuming satellites in development are successfully launched, services on
the satellites commence on the schedule currently contemplated and NET-36 is
deployed as and when expected, PanAmSat believes that amounts available under
its $500 million Revolving Credit Facility, vendor financing, future cash flow
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 for the next twelve months and for the deployment of NET-36
for the next twenty-four months. There can be no assurance, however, that
PanAmSat's assumptions with respect to costs for future construction and
launch of its satellites and costs to deploy NET-36 will be correct, or that
amounts available under the Revolving Credit Facility, vendor financing,
future cash flow from operations and cash on hand will be sufficient to cover
any shortfall in funding for (i) launches caused by launch failures, (ii) cost
overruns, (iii) delays, (iv) capacity shortages, (v) NET-36 technical
integration problems, (vi) additional costs associated with NET-36 strategic
relationships or (vii) other unanticipated expenses. In addition, if the
32
Company were to consummate any strategic transactions or undertake any other
projects requiring significant capital expenditures, it may be required to
seek additional financing. If circumstances were to require PanAmSat to incur
additional indebtedness, the ability of PanAmSat to incur any such additional
indebtedness would be subject to the terms of PanAmSat's outstanding
indebtedness. The failure to obtain such financing could have a material
adverse effect on PanAmSat's operations and its ability to accomplish its
business plan.
Net cash provided by operating activities decreased to $418.7 million in
2000, from $500.6 million in 1999 and $628.1 million in 1998. The decrease in
2000 was primarily attributable to an increase in the gross profit earned on
sales and sales-type leases during 2000 and lower margins associated with
operating leases compared to 1999. The decrease in 1999 was primarily
attributable to proceeds from insurance claims received during 1998 related to
operating assets.
Net cash used in investing activities decreased to $394.2 million in 2000,
from $560.2 million in 1999 and $636.5 million in 1998. The decrease in 2000
was primarily due to lower capital expenditures compared to 1999 and the
absence of early buy outs of sale-leasebacks during 2000, offset by lower
proceeds from insurance. The 1999 decrease was primarily attributable to
reduced capital expenditures.
Net cash used in financing activities was $12.4 million in 2000, compared
to net cash used in financing activities of $0.7 million in 1999 and net cash
provided by financing activities of $94.1 million in 1998. The decrease in
2000 and 1999 was primarily due to lower net borrowings associated with the
Company's satellites under construction.
ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments imbedded in other contracts and for hedging
activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133
did not have a significant impact on the financial position, results of
operations, or cash flows of the Company.
MARKET RISKS
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below includes forward-looking statements of
market risk which assume for analytical purposes that certain market
conditions may occur. Actual future market conditions may differ materially
from such assumptions because the amounts noted below are the result of
analyses used for the purpose of assessing possible risks and the mitigation
thereof. Accordingly, the forward-looking statements should not be considered
projections by PanAmSat of future events or losses.
PanAmSat's cash flows and earnings are subject to fluctuations resulting
from changes in interest rates and certain of its financial instruments are
subject to changes in fair value as a result of changes in interest rates.
PanAmSat manages its exposure to these market risks through internally
established policies and procedures and, when deemed appropriate, through the
use of derivative financial instruments. PanAmSat's policy does not allow
speculation in derivative instruments for profit or execution of derivative
instrument contracts for which there are no underlying exposures. PanAmSat
does not use financial instruments for trading purposes and is not a party to
any leveraged derivatives.
As of December 31, 2000 and December 31, 1999, long-term debt consisted of
fixed-rate borrowings of $750 million, $1.725 billion of floating rate Merger
related borrowings due to Hughes and various other fixed and floating rate
borrowings. PanAmSat is subject to fluctuating interest rates on its floating
rate debt and any changes in interest rates would impact results of operations
and cash flows. The potential effect of a hypothetical 10% adverse fluctuation
in interest rates for one year on PanAmSat's floating rate debt outstanding at
December 31, 2000 and 1999 would be a reduction in cash flows of approximately
$12.7 million and $12.0 million, respectively, and a reduction in net income
of approximately $7.0 million and $7.2 million, in each year.
33
Fluctuations in interest rates may also affect the fair values of fixed-
rate borrowings and fixed-rate net investments in sales-type lease
receivables. At December 31, 2000 and 1999, outstanding borrowings bore
interest at rates ranging from 6.00% to 6.875% and sales type lease
receivables bore interest between 8.00% and 12.00%. The potential fair value
change resulting from a hypothetical 10% fluctuation in interest rates related
to PanAmSat's outstanding debt and sales-type receivable balances would be
approximately $29.8 million and $8.1 million as of December 31, 2000 and $37.1
million and $4.1 million as of December 31, 1999, respectively.
In connection with debt refinancing activities in 1997, PanAmSat entered
into certain U.S. Treasury rate lock contracts to reduce its exposure to
fluctuations in interest rates. The aggregate notional value of these
contracts was $375.0 million and these contracts were accounted for as hedges.
The cost to settle these instruments in 1998 was $9.1 million and is being
amortized to interest expense over the term of the related debt securities.
RISK FACTORS
Risk of Launch Failure. Satellites are subject to certain risks related to
delayed and failed launches. Of the 34 satellite launches by PanAmSat or its
predecessors since 1983, the Company has experienced four launch failures. For
example, in 1998 the Company's Galaxy X satellite was destroyed during the
inaugural launch of the Boeing Delta III rocket which exploded shortly after
liftoff. In addition, certain launch vehicles scheduled to be used by PanAmSat
have unproven track records and are susceptible to certain risks associated
with new launch vehicles. For example, on October 27, 1999, a Proton launch
vehicle (that did not carry any of the Company's satellites) suffered a launch
failure. The Company expects to use a Proton launch vehicle to launch PAS-10
in the second quarter of 2001. The Sea Launch is a launcher that is scheduled
to be used by PanAmSat to launch a satellite in the third quarter of 2001.
Although successful demonstration launches on the Sea Launch were completed in
March 1999 and a successful commercial launch was conducted in October 1999, a
commercial satellite launched from Sea Launch by a British communications
company failed in March 2000 just after liftoff. Sea Launch then successfully
launched PanAmSat's PAS-9 satellite in July 2000 and the Thuraya-1 satellite
for the Thuraya Satellite Telecommunications Company in October 2000. Sea
Launch is scheduled to launch two additional satellites and then PanAmSat's
Galaxy IIIC satellite in the third quarter of 2001. Although PanAmSat's
insurance coverage for these potential losses is sufficient to substantially
recover the Company's investment, the Company does not obtain insurance to
recover lost revenues or business opportunities. In addition, the design,
construction and delivery of a replacement satellite could take up to 24
months.
Risk of Construction and Launch Delays. The Company has in the past
experienced delays in satellite construction and launch which have had an
adverse effect on revenues. Future delays may have the same effect. Such
delays can result from the delays in the construction of satellites and launch
vehicles, the periodic unavailability of reliable launch opportunities,
possible delays in obtaining regulatory approvals and launch failures. Launch
failures result in significant delays in the deployment of satellites because
of the need both to construct replacement satellites and obtain other launch
opportunities. Further, a significant delay in the delivery of any satellite
would adversely affect the Company's marketing plan for the satellite. If
satellite construction schedules are not met, there can be no assurance that a
launch opportunity will be available at the time a satellite is ready to be
launched. Finally, any significant delay in the commencement of service of any
of PanAmSat's satellites could enable customers who pre-purchased or agreed to
lease capacity of the satellites to terminate their contracts. The failure to
implement PanAmSat's satellite deployment plan on schedule could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risk Of In-Orbit Failure Or Reduced Performance. Satellites are also
subject to risks after they have been properly deployed and put into
operation. If any of these risks occur, the Company's business, financial
condition and results of operations could be materially adversely affected.
These risks include, but are not limited to:
. Manufacturing Errors
Following the launch of the Company's PAS-8 satellite, an error of the
satellite's manufacturer was discovered that affected the geographical
coverage or flexibility of all of the Ku-band transponders on the
satellite. The C-band beams have not been affected by the error.
34
. New Technology
The likelihood of in-orbit failure or performance reduction may be
heightened by PanAmSat's use of new technology on certain of its
satellites. Galaxy XI, PAS-1R and Galaxy III-C are Boeing 702 model
spacecraft. Prior to Galaxy XI, the Boeing 702 model had no track
record and may be susceptible to certain risks related to its new
technology. There can be no assurance that PanAmSat's use of the Boeing
702 model spacecraft will continue to be successful.
. Circuit Failures
PAS-6 experienced several circuit failures in its solar arrays and may
experience additional failures in the future. Circuit failures require
the Company to forego the use of some transponders initially and to
turn off additional transponders in later years. No assurance can be
given that additional circuit failures will not occur.
. Spacecraft Control Processor Failures
Three of the Company's satellites, Galaxy IV, Galaxy VII and PAS-4,
experienced an anomaly in their on-board spacecraft control processors
("SCPs"), which are believed to have resulted from electrical short
circuits involving tin-plated relay switches. Each satellite contains a
primary SCP and a back-up SCP. Galaxy IV was declared a total loss in
May 1998 after both of its SCPs failed and on November 24, 2000, the
Company announced the failure of the second SCP on Galaxy VII resulting
in the loss of the satellite. PAS-4 is operating on its back-up SCP
system after its primary SCP failed and is scheduled to be replaced by
PAS-10, which is expected to be launched in the second quarter of 2001.
Of the 14 satellites owned by PanAmSat that were constructed by Boeing,
three other satellites are the same model spacecraft as the affected
satellites (PAS 2, PAS 3 and Galaxy IIIR). Both SCPs are functioning
properly on these three spacecraft. No assurance can be given that
similar or additional SCP failures will not occur.
. Battery Cell Failures
PAS-5 and Galaxy VIII-i have experienced battery cell failures. In
1999, insurance claims were filed for PAS-5 and Galaxy VIII-i. PAS-5
was declared a total loss and insurance proceeds were recovered. Galaxy
VIII-i was declared a partial loss and insurance proceeds were
recovered. The battery's sole purpose is to power the payload and
spacecraft operations during the daily eclipse periods, having a
duration of one minute to a maximum of 75 minutes per day, which occur
during two 40-day periods around each of March 21 and September 21. The
manufacturer of the satellites, Boeing, conducted an extensive analysis
of the battery data and concluded that the nature of the battery
problem is such that slow degradation of the battery cells may occur
during normal battery management procedures. PanAmSat has adopted a
battery management strategy during eclipse seasons intended to manage
any future problems with battery cells. There can be no assurance that
additional battery cell failures will not occur in future eclipse
seasons.
. Propulsion System Failures
The Galaxy VIII-i satellite has experienced difficulties with its xenon
ion propulsion system, an electronic propulsion system that is used to
maintain the spacecraft's proper orbit and attitude. The satellite is
operating normally on its backup chemical propulsion system. Without
the use of XIPS, the spacecraft is expected to reach its end-of-life in
late 2002 (ten years earlier than originally forecast). The Company's
ongoing satellite deployment plan is expected to provide for continuous
service for the Galaxy VIII-i customer with the scheduled launch of the
Galaxy IIIC satellite into the same orbital location as Galaxy VIII-i
during the third quarter of 2001 and the construction of Galaxy VIII-
iR. PanAmSat operates five other Boeing 601 HP spacecraft and two
Boeing 702 spacecraft that use XIPS. By the end of 2001, PanAmSat plans
to launch one additional Boeing 601 HP spacecraft and one additional
Boeing 702 spacecraft, each of which uses XIPS. The Boeing 702's use a
different XIPS system. Based on the information furnished to the
Company by Boeing, the manufacturer of the XIPS-equipped satellite, and
PanAmSat's experience with XIPS, PanAmSat believes this difficulty on
Galaxy
35
VIII-i is an incident that will not affect the performance of XIPS on
its other spacecraft. There can be no assurance that similar XIPS
failures or failures of other propulsion systems on the Company's
satellites will not occur in the future.
Risks Relating To The Continued Growth In The Use Of The Internet. To
support the Company's anticipated growth resulting from Internet and video and
audio transmissions using formats compatible with the Internet, the Internet's
recent and rapid growth must continue and the demand for Internet-based
services must continue to grow. This growth cannot be assured. The Internet
may not continue to grow or prove to be a viable commercial marketplace for a
number of reasons, such as:
. lack of acceptable security technologies;
. lack of easy access and use by customers;
. lack of commercial viability of e-commerce and other Internet
applications or businesses;
. congested traffic;
. inconsistent quality of service;
. lack of cost-effective, high-speed service;
. inadequate development of the necessary infrastructure;
. excessive governmental regulation; and
. uncertainty regarding intellectual property ownership.
Risks Relating To Changes In Technology. Technological changes in the
telecommunications industry could undermine the Company's competitive position
or make the Company's satellite systems obsolete. The telecommunications
industry continues to experience substantial technological innovations.
PanAmSat believes that there are many telecommunications companies that are
seeking ways to improve the ability of existing non-satellite infrastructure,
such as fiber optic cable, to transmit signals. Any significant improvement or
increase in the amount of non-satellite capacity, particularly with respect to
the existing fiber optic cable infrastructure, may cause the Company's
telecommunications services customers to shift their transmissions to non-
satellite capacity or make it more difficult for the Company to obtain new
customers. If fiber optic cable networks or other ground-based high-capacity
transmission systems are available to service a particular point, that
capacity, when available, is generally less expensive than satellite capacity.
Particular technological developments that could adversely affect the Company
include:
. the development by competitors of new satellites with greater power,
greater capabilities or more transponders, which would create more
satellite capacity at lower costs; and
. continuing improvements in fiber optic cable technology and the
continuing establishment of widespread fiber optic cable
infrastructures, which would lead to more non-satellite capacity at
lower costs.
Risks of Government Regulation. PanAmSat is subject to the regulatory
authority of the U.S. government, primarily the Federal Communications
Commission, and the national communications authorities of the countries in
which it operates. If PanAmSat does not obtain all requisite regulatory
approvals for the construction, launch and operation of any of PanAmSat's
future satellites and for the orbital slots planned for these satellites or,
the licenses obtained impose operational restrictions on PanAmSat, PanAmSat's
business, financial condition and results of operations could be materially
adversely affected. In addition, there can be no assurance that PanAmSat will
succeed in coordinating any or all of its future satellites internationally.
The risks of government regulation include:
. Some Orbital Slot Designations May Change or Expire
Following the failure of Galaxy IV, the FCC granted the Company special
temporary authority to relocate Galaxy VI from 74 (degrees) W.L. to 99
(degrees) W.L. to provide replacement C-band
36
capacity. In addition, the Company has received special temporary
authority to relocate Brasilsat A1 from 79 (degrees) W.L. to 144
(degrees) W.L. and to operate Brasilsat A1 at the new orbital location.
No assurance can be given that the Company's orbital slots granted under
temporary authority will be renewed in the future. The FCC also reserves
the right to require satellites to be re-located to a different orbital
location if it determines that re-location is in the public interest. In
addition, if the Company does not meet certain FCC due diligence
requirements or does not place a satellite in service in an orbital slot
by a specified deadline, the Company's rights to such orbital slot may
be subject to revocation or expiration. For example, in 2000, the FCC
revoked two authorizations for the Company to operate in Ka-band slots.
PanAmSat has filed an application for review requesting the FCC to
reconsider such revocations.
. Replacement Satellites and Expanded Frequency Coverage are Subject to
Regulatory Approval
Some of the Company's planned satellites are intended as replacements
for the Company's current satellites. There can be no assurance that
these planned replacement satellites will be able to occupy their
proposed orbital location. Generally, the FCC gives a "replacement
expectancy" with respect to the use of the same orbital location at the
same frequencies for replacement satellites. The grant of a replacement
expectancy may increase the likelihood that PanAmSat will be able to use
its replacement satellite to expand the frequencies or coverages
employed by the predecessors; however, no assurance can be given that
the Company will be successful at expanding such frequencies and
coverages.
. The U.S. Government May Limit the Use of Non-U.S. Launch Providers
All of PanAmSat's planned launches are currently scheduled to occur on
launch providers that are wholly or partly foreign-owned. While the U.S.
Government has recently removed quota limitations on the launch of U.S.-
manufactured satellites on Russian launch vehicles (including the
Proton, on which PAS-10 is scheduled to be launched), there can be no
assurance that the United States will not place new limitations on the
use of non-U.S. launch providers. In addition, technical discussions
between U.S. satellite manufacturers and foreign launch providers are
subject to U.S. export restrictions. The imposition of any new
limitations or restrictions could result in launch delays or increased
launch costs for PanAmSat.
. Use and Coverage Areas of Satellite Frequencies are Regulated
Certain of the Ku-band downlink beams on PAS-8 include coverage, at very
low power levels, of the West Coast of the United States and of Hawaii.
Because the Ku-band frequencies on these beams are allocated in the
United States to the broadcast satellite services frequency band
("BSS"), PanAmSat's coverage of the United States is on a "non-
conforming use" basis, requiring that PanAmSat not interfere with, and
accept interference from, any authorized users in the United States. If
PanAmSat's efforts to resolve issues relating to this non-conforming use
status are not successful, PanAmSat may not be able to operate these
satellite frequencies as intended.
. Some Satellite Frequencies Must be Coordinated Individually with the
Government
Certain of the frequencies that are intended to be used to uplink to
PAS-1R, PAS-7, PAS-6, PAS-6B, Galaxy XI, Galaxy VIII-i and Galaxy III-C
must be coordinated with the U.S. government on an earth-station-by-
earth-station basis to ensure that harmful interference to government
operations is minimized. Although PanAmSat has undertaken such
coordination and believes that it will either be able to coordinate
successfully with federal government users or to institute operational
solutions that will mitigate the problem, its failure to do so may make
it impossible to operate these satellites as planned.
PanAmSat's successful deployment of its satellites depends upon the
Company's ability to obtain regulatory authorization to operate its satellites
at certain locations. If PanAmSat does not obtain all of the authorizations
necessary to complete its satellite deployment plan on schedule, its business
prospects could be materially adversely affected.
37
Risks of Doing Business Internationally. PanAmSat, its customers or
companies with which PanAmSat does business must have authority from each
country in which PanAmSat provides services or its customers use its
satellites. The failure to obtain the authorizations necessary to operate its
satellites internationally could have a material adverse effect on PanAmSat's
business. The risks of doing business internationally include:
. New or Changes in Law or Policies
The Company could be adversely affected by new laws, regulations,
policies or changes in the interpretation or application of existing
laws, regulations or policies that modify the present regulatory
environment. For instance, the governments of China, India and Pakistan
have notified the Company that they separately intend to impose
withholding tax on payments to the Company for providing satellite
services to China, India and Pakistan, respectively. The Company
believes that the payments are exempt from Chinese, Indian and
Pakistani taxation under the United States-China Income Tax Treaty, the
United States-India Income Tax Treaty and the United States-Pakistan
Income Tax Treaty, respectively, and, therefore, has taken measures to
contest the imposition of such withholding taxes. Even if the
withholding taxes were imposed and upheld, the Company believes its
customers would be contractually responsible for the payment of such
taxes and the Company would be entitled to full payment, without
deduction for any such taxes. There can be no assurance that the
Company will be successful in its efforts to contest the imposition of
such taxes by the Governments of China, India and Pakistan. If other
governments decide to adopt similar policies, the operations and
business of the Company could be materially adversely affected.
. Local Non-U.S. Regulatory Schemes
PanAmSat believes that it presently holds the requisite licenses and
approvals for the countries in which it currently operates, although
PanAmSat does not have all requisite licenses in certain countries in
which it wishes to operate. The regulatory schemes in each country,
however, are different. As a result, there may be non-U.S. governmental
regulations of which PanAmSat is not aware. Further, portions of
PanAmSat's present and future satellites are designed to provide
service to countries in which regulatory impediments exist. There can
be no assurance that any current regulatory approvals held by PanAmSat
are, or will remain, sufficient in the view of foreign regulatory
authorities, or that any additional necessary approvals will be granted
on a timely basis, or at all, in all jurisdictions in which the Company
wishes to operate its new satellites or that applicable restrictions in
those jurisdictions will not be unduly burdensome. In addition, the
Company has limited authorization from the Russian Federation for PAS-7
to operate its C-band transponders.
Risk Of Uninsured Loss. Although the Company obtains launch insurance
policies designed to cover the cost to construct, launch and insure
replacement satellites, there is a risk that certain losses may not be covered
by the Company's policies. Typically, PanAmSat's launch policies are effective
for a period ranging between three and five years from the date of a satellite
launch. During that time, if a covered malfunction occurs, but no loss is
incurred until after the expiration of the policy, the launch insurance policy
will not cover the loss, and a subsequent in-orbit policy obtained may either
exclude losses related to the known event or impose deductibles that exceed
the loss associated with the event. In addition, PanAmSat does not generally
obtain insurance to cover the risk of revenues lost as a result of satellite
malfunctions.
There is a risk that certain losses relating to the in-orbit failure of the
Company's satellites may not be covered by the Company's in-orbit insurance
policies. PanAmSat generally obtains in-orbit insurance policies in an initial
amount approximately equal to the unamortized construction, launch and
insurance costs of its satellites. Coverage under such in-orbit policies
typically commences upon the expiration of the applicable launch insurance
policy and runs for various periods ranging from one to three years
thereafter. During that time, if a covered malfunction occurs, but no loss is
incurred until after the expiration of the policy, the in-orbit insurance
policy will not cover the loss, and a subsequent renewal policy obtained may
either exclude losses related to the known event or impose deductibles that
exceed the loss associated with the event. In addition, PanAmSat does not
generally obtain in-orbit insurance to cover the risk of revenues lost as a
result of satellite malfunctions.
38
As of December 31, 2000, PanAmSat's satellites had a net book value of
approximately $3.1 billion (including certain sales-type lease receivables and
warranty liabilities related to transponders sold outright). The book value of
the satellites that were either self-insured or had some health exclusion at
that time was approximately $290 million. Under the terms of its new master
in-orbit policy, which commenced December 1, 2000, several satellites that
have existing technical anomalies will have certain coverage exclusions when
they attach to the master policy in May 2001 (they are currently covered
without exclusions under existing in-orbit policies). When these satellites
attach to the new policy, the book value of satellites that will have certain
exclusions related to their coverage will be approximately $510 million.
Additionally, at that time, the book value of the self-insured satellites will
be approximately $220 million. The primary subject of the exclusion is the
satellite control processor on the four satellites in this category. One of
them (PAS-4) is operating on its backup SCP as a result of the failure of the
primary SCP in November 1998. This satellite is scheduled to be replaced by
PAS 10, which is scheduled for launch in the second quarter of 2001. The other
three satellites with SCP exclusions (PAS-2, PAS-3R, and Galaxy IIIR) have
both SCPs functioning properly today. The loss of any of these satellites
without insurance coverage could have a material adverse effect on the
financial condition of the Company.
Risks Associated With NET-36. NET-36 will rely on PanAmSat's existing and
future satellite network. NET-36 will utilize PanAmSat's satellites, and will
be subject to all of the risks described above. Furthermore, PanAmSat has
allocated up to 24 Ku-band transponders for use by NET-36. The availability of
these transponders assumes that PanAmSat's existing satellites do not suffer
any material in-orbit failures and that future launches are timely and
successful. Any delays or failures of PanAmSat satellites could adversely
affect the availability of satellite coverage for NET-36.
NET-36 will be deployed in complex environments and is dependent on
integrating various new and existing technologies into a seamless network. As
a result, during its initial commercial deployment, the network may suffer
technical problems due to integrating the various technologies. If these
technical problems occur, the deployment of NET-36 services could be delayed
and the Company may incur additional expenses and may not achieve anticipated
revenues.
The successful deployment of NET-36 depends on PanAmSat's ability to
establish relationships with third parties for the use and ownership of
technology and the right to deploy equipment at ISPs and other locations. The
Company will need to deploy its servers in the facilities of ISPs and others,
including cable headends and DSL points-of-presence. PanAmSat has entered into
and must continue to enter into relationships with other technology providers
in order to successfully roll-out NET-36. There can be no assurance that
PanAmSat will be able to enter into additional relationships with technology
providers or ISPs on commercially reasonable terms, or at all, or that these
relationships will allow PanAmSat to achieve its intended objectives.
The success of NET-36 is dependent upon the growth of available, last-mile
broadband capacity for Internet end-users, such as DSL, cable television,
fiber optic cable and fixed wireless systems and its use by Internet end-
users. No assurance can be given that this growth will occur or that Internet
end-users will purchase the broadband capacity consistent with PanAmSat's
expectations.
The success of NET-36 also depends on market acceptance of the services
that PanAmSat intends to offer over its network. NET-36 is still in its
infancy and has yet to attain revenue-producing customers. The market for its
services is new and unproven and its services may not achieve widespread
market acceptance. PanAmSat believes that new and existing Internet content
providers, such as data and video customers of PanAmSat, and Internet end-
users will purchase the services offered by NET-36. There can be no assurance,
however, that such content providers or Internet end-users will purchase the
services offered by NET-36 in the quantity or on the terms that PanAmSat
expects. In addition, new and existing content providers and Internet end-
users may require features and capabilities that NET-36 does not have. To
achieve market acceptance of NET-36, PanAmSat must effectively anticipate and
adapt to the requirements and demands of content providers and Internet end-
users. Failure of PanAmSat to meet these demands may result in delays,
additional expense and the failure to achieve anticipated revenues.
39
The market for Internet broadcasting of high-bandwidth content is new,
intensely competitive and rapidly evolving. The Company expects that
competition will increase and that many of NET-36's competitors may not yet
have entered the market. Many of NET-36's competitors and potential
competitors may have greater name recognition, longer operating histories,
greater financial resources and larger customer bases. Increased and existing
competition could result in high barriers to market entry, price reductions,
fewer customer orders and the inability to gain market share, any of which
would cause the projected operating results of the NET-36 business to suffer.
Risks of Inadequate Access To Capital For Growth. PanAmSat may not be able
to raise adequate capital to complete some or all of its business strategies
or to react rapidly to changes in technology, products, services or the
competitive landscape. Industry participants often face high capital
requirements in order to take advantage of new market opportunities, respond
to rigorous competitive pressures and react quickly to changes in technology.
PanAmSat expects the global satellite-based communications services market
to continue to grow due to the high demand for communications infrastructure
and the opportunities created by industry deregulation. Many of PanAmSat's
competitors are committing substantial capital and, in many instances, are
forming alliances to acquire or maintain market leadership. PanAmSat's
satellite deployment plan as well as its NET-36 business will require
substantial investments of capital over the next several years. There can be
no assurance that the Company will be able to satisfy its capital requirements
in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Market Risks."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.............................................. 42
Consolidated Statements of Income for Each of the Three Years Ended Decem-
ber 31, 2000............................................................. 43
Consolidated Balance Sheets--December 31, 2000 and 1999................... 44
Consolidated Statements of Changes in Stockholders' Equity for Each of the
Three Years Ended December 31, 2000...................................... 46
Consolidated Statements of Cash Flows for Each of the Three Years Ended
December 31, 2000........................................................ 47
Notes to Consolidated Financial Statements................................ 48
41
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
PanAmSat Corporation
We have audited the accompanying consolidated balance sheets of PanAmSat
Corporation and subsidiaries (the "Company") as of December 31, 2000 and 1999,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PanAmSat
Corporation and subsidiaries as of December 31, 2000 and 1999, and the results
of operations for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Stamford, Connecticut
January 11, 2001
42
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
2000 1999 1998
--------- -------- --------
REVENUES:
Operating leases, satellite services and other... $ 780,256 $787,509 $736,624
Outright sales and sales-type leases............. 243,314 23,108 30,639
--------- -------- --------
Total revenues................................. 1,023,570 810,617 767,263
--------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases..... 85,776 -- --
Leaseback expense, net of deferred gains......... -- 15,391 47,223
Depreciation and amortization.................... 337,450 280,472 234,945
Direct operating costs........................... 149,681 103,973 96,510
Selling, general and administrative expenses..... 97,462 72,415 70,251
Gain on Galaxy VII insurance claim............... (3,362) -- --
--------- -------- --------
Total operating costs and expenses............. 667,007 472,251 448,929
--------- -------- --------
INCOME FROM OPERATIONS............................. 356,563 338,366 318,334
INTEREST EXPENSE--Net.............................. 128,205 112,002 97,788
--------- -------- --------
INCOME BEFORE INCOME TAXES......................... 228,358 226,364 220,546
INCOME TAXES....................................... 102,761 104,127 95,940
--------- -------- --------
NET INCOME......................................... $ 125,597 $122,237 $124,606
========= ======== ========
EARNINGS PER COMMON SHARE--Basic and diluted....... $ 0.84 $ 0.82 $ 0.83
========= ======== ========
Weighted average common shares outstanding......... 149,494 149,586 149,564
========= ======== ========
See notes to consolidated financial statements.
43
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)
2000 1999
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 129,345 $ 117,259
Accounts receivable--net............................... 52,912 41,941
Net investment in sales--type leases................... 24,959 21,814
Prepaid expenses and other (principally prepaid insur-
ance)................................................. 30,360 26,808
Deferred income taxes.................................. 3,220 17,353
Insurance claim receivable............................. 132,435 33,359
---------- ----------
Total current assets................................. 373,231 258,534
---------- ----------
SATELLITES AND OTHER PROPERTY AND EQUIPMENT--Net......... 3,156,944 3,140,014
NET INVESTMENT IN SALES--TYPE LEASES..................... 221,039 146,147
GOODWILL--Net of amortization............................ 2,303,619 2,368,579
DEFERRED CHARGES......................................... 123,518 71,435
---------- ----------
TOTAL ASSETS............................................. $6,178,351 $5,984,709
========== ==========
See notes to consolidated financial statements.
44
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............... $ 79,518 $ 122,094
Deferred revenues...................................... 14,052 21,049
---------- ----------
Total current liabilities............................ 93,570 143,143
---------- ----------
DUE TO AFFILIATES (principally merger related indebted-
ness)................................................... 1,725,000 1,797,163
LONG-TERM DEBT........................................... 796,542 817,814
DEFERRED INCOME TAXES.................................... 365,982 306,922
DEFERRED CREDITS AND OTHER (principally customer depos-
its, deferred revenue and incentive payments)........... 242,562 103,678
---------- ----------
TOTAL LIABILITIES........................................ 3,223,656 3,168,720
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value--400,000,000 shares au-
thorized; 149,675,117 and 149,351,786 outstanding at
December 31, 2000 and 1999, respectively.............. 1,497 1,493
Additional paid-in-capital............................. 2,522,757 2,509,652
Retained earnings...................................... 430,441 304,844
---------- ----------
Total stockholders' equity........................... 2,954,695 2,815,989
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $6,178,351 $5,984,709
========== ==========
See notes to consolidated financial statements.
45
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
PAR VALUE ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
----------- ------ ---------- --------
BALANCE, JANUARY 1, 1998................. 149,135,654 $1,491 $2,501,344 $ 58,001
Additional issuance of common stock...... 95,467 1 2,972 --
Net income............................... -- -- -- 124,606
----------- ------ ---------- --------
BALANCE, DECEMBER 31, 1998............... 149,231,121 1,492 2,504,316 182,607
----------- ------ ---------- --------
Additional issuance of common stock...... 120,665 1 5,336 --
Net income............................... -- -- -- 122,237
----------- ------ ---------- --------
BALANCE, DECEMBER 31, 1999............... 149,351,786 1,493 2,509,652 304,844
----------- ------ ---------- --------
Additional issuance of common stock...... 323,331 4 13,105 --
Net income............................... -- -- -- 125,597
----------- ------ ---------- --------
BALANCE, DECEMBER 31, 2000............... 149,675,117 $1,497 $2,522,757 $430,441
=========== ====== ========== ========
See notes to consolidated financial statements.
46
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
-------- ---------- ----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income.................................. $125,597 $ 122,237 $ 124,606
Adjustments to reconcile net income to net
cash provided by operating activities:
Gross profit on sales--type leases.......... (136,437) -- --
Depreciation and amortization............... 337,450 280,472 234,945
Deferred income taxes....................... 73,194 94,634 62,608
Amortization of gains on sale-leasebacks.... -- (10,762) (36,140)
Amortization of debt issuance costs......... 6,108 6,110 6,105
Provision for uncollectible receivables..... (5,941) 3,994 (4,943)
Insurance proceeds (net of $257.6 million of
satellite costs)........................... -- -- 184,026
Gain on Galaxy VII insurance claim.......... (3,362) -- --
Loss on sale of real estate................. 6,096 -- --
Changes in assets and liabilities, net of
acquired assets and liabilities:
Collections on investments in sales-type
leases.................................... 24,120 21,986 43,139
Operating lease and other receivables...... 34,219 23,420 (20,103)
Prepaid expenses and other assets.......... (62,532) (19,746) 48,296
Accounts payable and accrued liabilities... (7,022) (11,090) 21,065
Accrued operating leaseback expense........ -- (18,624) (17,079)
Deferred revenues and other................ 27,223 7,951 (18,406)
-------- ---------- ----------
Net cash provided by operating activi-
ties.................................... 418,713 500,582 628,119
-------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................ (449,560) (586,910) (738,540)
Early buy-out of sale-leaseback (net of
$124.1 million of assumed indebtedness in
1999)...................................... -- (245,335) (155,530)
Net proceeds from sale of real estate....... 19,175 -- --
Insurance proceeds from satellite recov-
eries...................................... 36,200 272,046 257,605
-------- ---------- ----------
Net cash used in investing activities.... (394,185) (560,199) (636,465)
-------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings (net of $124.1 million of as-
sumed indebtedness in 1999)................ 37,695 1,700,000 1,165,000
Repayments of long-term debt................ (56,421) (1,700,000) (1,024,060)
Repayments of incentive obligations......... (6,825) (6,003) (30,632)
Debt issuance costs......................... -- -- (19,132)
Stock issued in connection with employee
benefit plans.............................. 13,109 5,337 2,973
-------- ---------- ----------
Net cash (used in) provided by financing
activities.............................. (12,442) (666) 94,149
-------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 12,086 (60,283) 85,803
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR. 117,259 177,542 91,739
-------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR....... $129,345 $ 117,259 $ 177,542
======== ========== ==========
See notes to consolidated financial statements.
47
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000, 1999 AND 1998
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION--Effective May 16, 1997, PanAmSat International
Systems, Inc. (then operating under its previous name, PanAmSat Corporation)
and the Galaxy Satellite Services division of Hughes Communications, Inc. (a
wholly-owned subsidiary of General Motors Corporation, or "GM") ("Hughes")
were merged (the "Merger"). The merged company was renamed PanAmSat
Corporation (the "Company").
As of the date of the Merger, Hughes owned 71.5% of the then outstanding
shares of the Company. In May, 1998, Hughes increased its beneficial ownership
of the Company to approximately 81% by purchasing 11.2 million shares from
minority shareholders for $851 million.
DESCRIPTION OF THE BUSINESS--PanAmSat is the world's largest commercial
provider of satellite-based communications services through its global network
of 20 satellites that provide state-of-the-art telecommunications services for
customers worldwide. The Company is a leading provider of satellite capacity
for television program distribution to network, cable and other redistribution
sources in the United States, Latin America, Africa, South Asia and the Asia-
Pacific region. The Company also provides satellite services and related
technical support for live transmissions for news and special events coverage.
In addition, PanAmSat provides satellite services to telecommunications
carriers, corporations and Internet service providers for the provision of
satellite-based communications networks, including private corporate networks
employing very small aperture antennas and international access to the U.S.
Internet backbone.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its domestic and foreign subsidiaries. All
significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported therein. Due to the
inherent uncertainty involved in making estimates, actual results reported in
future periods may be based upon amounts that differ from those estimates.
REVENUE RECOGNITION--The Company enters into contracts to provide satellite
capacity and related services. Revenues are generated from outright sale,
sales-type lease and operating lease contracts with customers to provide
satellite transponders and transponder capacity and, in certain cases, earth
station and teleport facilities, for periods typically ranging from one year
to the life of the satellite. All contracts stipulate payment terms in U.S.
dollars.
Pursuant to an outright sale contract, all rights and title to a
transponder may be purchased. In connection with an outright sale, the Company
recognizes the sale amount as revenue and the cost basis of the transponder is
removed and charged to cost of outright sales and sales-type leases. Contracts
for the sale of transponders include a telemetry, tracking and control
("TT&C") service agreement with the customer.
Lease contracts qualifying for capital lease treatment (typically based on
the term of the lease) are accounted for as sales-type leases. For sales-type
lease transactions, the Company recognizes as revenue the net present value of
the future minimum lease payments. The cost basis of the transponder is
removed and charged to cost of outright sales and sales-type leases. During
the life of the lease, the Company recognizes as revenue in each respective
period, that portion of each periodic lease payment deemed to be attributable
to interest income. The balance of each periodic lease payment, representing
principal repayment, is recognized as a reduction of the net investment in
sales-type leases. Interest income from sales-type leases of approximately $24
million, $23 million and $31 million is included in sales-type lease revenues
for the years ended December 31, 2000, 1999 and 1998, respectively.
48
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lease contracts that do not qualify as sales-type leases are accounted for
as operating leases. Operating lease revenues are generally recognized on a
straight-line basis over the lease term unless collectibility is not
reasonably assured. Differences between operating lease payments received and
revenues recognized are deferred as, or amortized from, operating lease
receivables. Revenues for occasional services are recognized as services are
performed and billed. The Company has certain obligations, including providing
spare or substitute capacity if available, in the event of satellite service
failure under certain long-term agreements. If no spare or substitute capacity
is available, the agreements may be terminated. Except for certain deposits,
the Company is not obligated to refund operating lease payments previously
made.
Future cash payments expected from customers under all long-term
arrangements described above aggregate approximately $6.0 billion as of
December 31, 2000, including approximately $1.2 billion related to satellites
to be launched.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company adopted SAB 101 as required during 2000. The
adoption of SAB 101 did not have a material effect on the Company's
consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of cash, accounts
receivable, accounts payable and accrued liabilities approximate their fair
values generally due to the short maturity of these items. The carrying amount
of the net investment in sales-type leases approximates fair value based on
the interest rates implicit in the leases.
At December 31, 1997, in connection with its debt refinancing activities,
the Company entered into certain U.S. Treasury rate lock contracts to reduce
its exposure to fluctuations in interest rates. The aggregate nominal value of
these contracts was $375 million and these contracts were accounted for as
hedges because they were applied to a specific refinancing plan that was
consummated shortly after December 31, 1997. The cost to unwind these
instruments in 1998 was $9.1 million and this amount has been deferred and is
being amortized to interest expense over the terms of the related debt
securities.
CONCENTRATION OF CREDIT RISK--The Company provides satellite transponders
and related services and extends credit to a large number of customers in the
commercial satellite communications market. Management monitors its exposure
to credit losses and maintains allowances for anticipated losses that are
charged to selling, general and administrative expenses. The currency in which
the contracts are denominated is the U.S. dollar. Revenues derived from
affiliates of Hughes comprised approximately 14% of total revenues in 2000. No
other customer provides the Company with revenues in excess of 10% of total
revenues.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consists of cash on
hand and highly liquid investments with maturities at date of acquisition of
three months or less.
Supplemental cash flow information for 2000, 1999 and 1998 is as follows
(in thousands):
2000 1999 1998
-------- -------- --------
Cash received for interest...................... $ 6,813 $ 3,166 $ 13,364
======== ======== ========
Cash paid for interest.......................... $184,822 $166,749 $138,678
======== ======== ========
Cash paid (recovered) for taxes................. $ 16,456 $(14,666) $ 3,425
======== ======== ========
49
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ACCOUNTS RECEIVABLE--Accounts receivable include amounts earned under
service agreements and occasional services which are billable as performed. An
allowance for doubtful accounts is maintained in the amount of approximately
$8.0 million and $4.6 million at December 31, 2000 and 1999, respectively.
SATELLITES AND OTHER PROPERTY AND EQUIPMENT--Satellites and other property
and equipment are stated at historical cost, or in the case of satellites
acquired in connection with the Merger, the fair value at the date of
acquisition. The capitalized cost of satellites includes all construction
costs, incentive obligations, launch costs, launch insurance, direct
development costs, and capitalized interest. Substantially all other property
and equipment consists of the Company's teleport facilities.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the respective assets as follows:
ESTIMATED LIVES
(YEARS)
---------------
Satellite systems under construction......................... --
Satellites in service........................................ 13-15
Communications equipment..................................... 7
General support equipment.................................... 5-10
Buildings.................................................... 25
The estimated useful lives of the satellites are determined by an
engineering analysis performed at the initial in-service dates. As the
telecommunications industry is subject to rapid technological change, the
Company may be required to revise the estimated useful lives of its satellites
and communications equipment or to adjust their carrying amounts. Accordingly,
the estimated useful lives are periodically reviewed using current TT&C data
provided by various service providers. If a significant change in the
estimated useful lives is identified, the Company accounts for such changes on
a prospective basis. During 2000, the estimated useful life of the Galaxy
VIII-i satellite was reduced from 15 years to 5 years as a result of
difficulties with its xenon ion propulsion system ("XIPS")(see Note 4).
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).
DEBT ISSUANCE COSTS--Included in Deferred Charges in the accompanying
balance sheet are debt issuance costs of $29.9 million at December 31, 2000
and 1999. These costs are being amortized to interest expense on a straight-
line basis over the life of the related indebtedness and the accumulated
amortization at December 31, 2000 and 1999 amounted to $18.6 million and $13.6
million, respectively.
GOODWILL--Goodwill is being amortized over 40 years. Accumulated
amortization was $272.7 million and $207.7 million at December 31, 2000 and
1999, respectively.
INVESTMENTS--The Company has investments in certain equity securities,
which represent less than a 10% ownership interest. These investments are
accounted for by the Company under the cost method and are included within
deferred charges in the accompanying balance sheet at the lower of cost or
market. The Company's investments were $6.4 million at December 31, 2000.
DEFERRED REVENUES--The Company enters into agreements with its customers
under which they make prepayments for services to be rendered over a specific
period. Payments received are deferred and amortized over the periods of
performance.
50
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TRANSPONDER INSURANCE--The Company accrues an obligation for the present
value of estimated in-orbit performance insurance costs on transponder sales,
sales-type leases and other agreements with performance warranty provisions,
concurrently with the recognition of the related revenue. The Company also
purchases insurance for the book value of its owned satellite transponders
(see Note 9). Premiums paid relative to such insurance are amortized to
expense over the insurance policy terms, which are typically one to five
years.
INCOME TAXES--The provision for income taxes is based upon reported income
before income taxes. Deferred income tax assets and liabilities reflect the
impact of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for
tax purposes, as measured by applying currently enacted tax rates. Beginning
in 1998, the Company and its subsidiaries joined with Hughes and General
Motors Corporation ("GM") in filing a consolidated U.S. Federal income tax
return. Under the tax sharing agreement with Hughes, the portion of the Hughes
consolidated tax liability recorded by PanAmSat is generally equivalent to the
liability it would have incurred on a separate return basis. From the Merger
date in 1997 and up to the date upon which Hughes became an 81% shareholder in
PanAmSat, the Company and its domestic subsidiaries filed a separate
consolidated U.S. Federal income tax return.
EARNINGS PER SHARE--The Company reports its earnings per share in
accordance with SFAS No. 128, "Earnings Per Share." The Company's only
dilutive securities are common stock options and these options have no
dilutive effect on the presented amounts of earnings per share.
STOCK-BASED COMPENSATION--As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION--The Company operates in a
single industry segment, which is to provide satellite-based
telecommunications services to customers on a worldwide basis. Substantially
all of the Company's operating facilities are located in the United States.
The geographic distribution of the Company's revenues for 2000, 1999 and 1998
was as follows:
2000 1999 1998
---- ---- ----
United States................................................. 49% 43% 59%
Latin America................................................. 18% 23% 21%
Asia.......................................................... 16% 18% 11%
Other......................................................... 17% 16% 9%
NEW ACCOUNTING PRONOUNCEMENTS--Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. The Company adopted SFAS 133 effective January 1, 2001. The
adoption of SFAS 133 did not have a significant impact on the consolidated
financial position, results of operations, or cash flows of the Company.
RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform with the current year's presentation.
51
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. NET INVESTMENT IN SALES-TYPE LEASES
The components of the net investment in sales-type leases are as follows
(in thousands):
DECEMBER 31,
------------------
2000 1999
-------- --------
Total minimum lease payments............................. $382,557 $249,045
Allowance for doubtful accounts.......................... (10,273) (10,273)
Less unearned interest income............................ (126,286) (70,811)
-------- --------
Total net investment in sales-type leases................ 245,998 167,961
Less current portion..................................... (24,959) (21,814)
-------- --------
$221,039 $146,147
======== ========
Future minimum payments due from customers under sales-type leases and
related service agreements (primarily TT&C and in-orbit performance
protection) as of December 31, 2000 are as follows (in thousands):
MINIMUM SERVICE
LEASE AGREEMENT
PAYMENTS PAYMENTS
-------- ---------
2001...................................................... $ 48,018 $ 4,559
2002...................................................... 48,159 4,560
2003...................................................... 48,150 4,560
2004...................................................... 45,893 4,260
2005...................................................... 37,544 3,440
2006 and thereafter....................................... 154,793 6,393
-------- -------
$382,557 $27,772
======== =======
4. SATELLITES AND OTHER PROPERTY AND EQUIPMENT--NET
The Company's principal operating assets consist of satellites in service,
summarized as follows (in thousands):
DECEMBER 31,
----------------------
2000 1999
---------- ----------
Satellite transponders under lease...................... $3,129,990 $2,398,407
Satellite systems under development..................... 669,669 1,204,823
Buildings and leasehold improvements.................... 50,970 58,690
Machinery and equipment................................. 273,657 206,175
Other................................................... 16,390 19,350
---------- ----------
4,140,676 3,887,445
Less accumulated depreciation........................... (983,732) (747,431)
---------- ----------
$3,156,944 $3,140,014
========== ==========
At December 31, 2000, the Company had contracts for the construction and
development of three satellites with Boeing Satellite Systems, Inc., formerly
Hughes Space and Communications Company. Satellite contracts typically require
the Company to make progress payments during the period of the satellite's
construction and orbital incentive payments (plus interest) over the orbital
life of the satellite. The incentive obligations are subject to reduction or
refund if the satellite fails to meet specific technical operating standards.
As of December 31, 1999, $77.6 million of such incentive obligations were
payable to Hughes Space and Communications Company ("HSC") and were included
within due to affiliates in the accompanying balance sheet. As described in
Note 7,
52
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HSC was acquired by Boeing Satellite Systems in 2000. All incentive
obligations are included within deferred charges as of December 31, 2000.
Annual maturities of these incentives as of December 31, 2000 are as follows:
2001............................................................. $ 8,165
2002............................................................. 9,006
2003............................................................. 9,933
2004............................................................. 10,484
2005............................................................. 10,448
2006 and thereafter.............................................. 83,990
--------
$132,026
========
The satellite construction contracts contain provisions that would enable
the Company to terminate the contracts with or without cause. If terminated
without cause, the Company would forfeit its progress payments and be subject
to termination payments that escalate with the passage of time. If terminated
for cause, the Company would be entitled to recover any payments it made under
the contracts and certain liquidated damages as specified in the contracts.
The Company has entered into launch contracts for the launch of both
specified and unspecified future satellites. Each of the Company's launch
contracts provides that the Company may terminate such contract at its option,
subject to payment by the Company of a termination fee that increases in
magnitude as the applicable launch date approaches. In addition, in the event
of a failure of any launch, the Company may exercise the right to obtain a
replacement launch within a specified period following the Company's request
for re-launch.
The Company has experienced various technical incidents on a number of its
in-orbit satellites (see Note 9). These incidents generally have resulted in
one or more of the following: (i) a limitation or total loss of the
satellite's ability to provide the full complement of services that it was
designed to provide, (ii) a material reduction to the satellite's expected
orbital life, or (iii) a reduction in certain of the satellite's on-board
redundant systems exposing it to potential damage in the event of an
additional incident. Whenever the Company experiences a satellite anomaly or
failure, management conducts an investigation of the cause of the event and
determines the effects that the anomaly may have on the carrying value of its
satellites and other assets and liabilities.
In the third quarter of 2000, the Galaxy VIII-i satellite experienced
difficulties with its xenon ion propulsion system ("XIPS"), an electronic
propulsion system that is used to maintain the spacecraft's proper orbit and
altitude. The satellite is operating normally on its backup chemical
propulsion system. Without the use of XIPS, the spacecraft is expected to
reach its end-of-life in late 2002. PanAmSat began accelerating depreciation
of the spacecraft in the fourth quarter of 2000 to reflect its revised
operational life, resulting in an increase in current and projected
depreciation expense of approximately $15.0 million per quarter. The Company
has entered into a contract with an affiliate of DIRECTV Latin America (which
is an affiliate of the Company and the sole Galaxy VIII-i customer) for the
lease of capacity on Galaxy VIII-iR (the replacement satellite for Galaxy
VIII-i currently under construction by Boeing). Such lease of capacity may be
terminated by the customer following the successful launch of Galaxy III-C. If
the lease were terminated, the Company would either modify Galaxy VIII-iR for
another use or terminate its contract with Boeing for the construction of
Galaxy VIII-iR. The Company would also postpone or terminate the launch
service contracted for Galaxy VIII-iR. In such event, the customer would be
obligated to pay the Company over time for all of the Company's contractual
liabilities to Boeing and the launch services provider for such modification,
postponement and/or termination.
In December 2000, the Company filed an insurance claim related to the
failure of its Galaxy VII satellite which ceased transmissions on November 22,
2000 due to the failure of an onboard system responsible for controlling the
spacecraft and maintaining its position relative to earth. The insurance
settlement in the amount of $132.4 million was recognized as an offset to the
carrying value of the satellite and a $3.4 million gain was recognized in
2000, representing proceeds in excess of the carrying value of the satellite.
53
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In April 1999, the Company filed two insurance claims related to anomalies
on its PAS-8 and PAS-5 satellites. The claim on the PAS-8 satellite was for a
partial loss primarily resulting from the loss in geographic coverage,
connectivity and/or switchability of the Ku-band transponders. The claim on
PAS-5 was related to battery cell failures. This claim was for a constructive
total loss of the satellite because the Company ceased using all of the Ku-
band capacity of the satellite on a full-time basis, and this capacity
represents more than 50% of the satellite's communications capacity. In August
1999, the Company filed an insurance claim on its Galaxy VIII-i satellite for
a partial loss primarily resulting from battery cell failures. In September
1999, the Company met with its insurance carriers and agreed to settle all of
the claims for net cash to PanAmSat of approximately $304 million, of which
approximately $271 million was collected as of December 31, 1999 and the
remainder was collected during 2000. The insurance settlements were recognized
as offsets to the carrying values of the related satellites, and no gain or
loss was recognized as a result of these settlements.
During 1998, the Company filed insurance claims related to the failures of
Galaxy IV, Galaxy X, both of which were total constructive losses; and PAS 6,
a partial loss. The total proceeds from the claims was $441.6 million, and a
loss, representing the excess of the carrying value of satellites and related
sales-type lease receivables over the proceeds of $0.2 million, was recorded.
The insurance proceeds relating to the PAS-6 anomaly were recorded as a
reduction in the carrying value of the PAS-6 satellite.
Future minimum lease payments due from customers under long-term operating
leases on satellites in service and to be launched are as follows (in
thousands):
DECEMBER 31, 2000
MINIMUM LEASE
PAYMENTS
-----------------
2001....................................................... $ 751,764
2002....................................................... 716,898
2003....................................................... 648,134
2004....................................................... 599,526
2005....................................................... 530,936
2006 and thereafter........................................ 2,449,459
----------
$5,696,717
==========
Future minimum lease payments due from customers related to satellites in
service and satellites to be launched totaled approximately $4.5 billion and
$1.2 billion, respectively. Included in the amounts above are 36 contracts
totaling approximately $389.9 million, in which customers have certain
termination rights.
In February 1996, the Company entered into a sale-leaseback agreement for
certain transponders on Galaxy IIIR with General Motors Acceptance Corporation
("GMAC"), a subsidiary of GM. Proceeds from the sale were $252 million and the
sale resulted in a deferred gain of $109.0 million that was deferred and is
being amortized over the seven-year leaseback period. In prior years, the
Company entered into sale-leaseback agreements for the sale of certain
transponders on SBS-6 and Galaxy VII, resulting in deferred gains that were
being amortized over the expected term of the leaseback periods. The Company's
obligations under each sale-leaseback arrangement were guaranteed by GM (as
successor-in-interest to Hughes). In connection with the Merger, the Company
agreed to pay and indemnify GM for performing any of its obligations under
such guarantees. In 1998, the Company exercised its early buy-out options for
certain transponders on the SBS-6 transaction and repurchased the transponders
for total payments of $155.5 million. In January 1999, the Company exercised
an early buy-out option for $141.3 million (including a make-whole premium of
$2.7 million) related to certain transponders on Galaxy VII. In July 1999, the
Company exercised its final early buy-out options on Galaxy IIIR and Galaxy
VII for approximately $103.5 million in cash and $124.1 million of debt
assumed in connection with the Galaxy IIIR transaction. Other than indemnity
obligations, the Company no longer has any obligations under sale-leaseback
agreements.
54
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
As of December 31, 2000 and 1999, long-term debt consisted of the following
(in thousands):
2000 1999
----------------- -----------------
FAIR FAIR
BOOK MARKET BOOK MARKET
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
6% Notes due 2003....................... $200,000 $195,780 $200,000 $187,550
6 1/8% Notes due 2005................... 275,000 262,260 275,000 248,250
6 3/8% Notes due 2008................... 150,000 137,560 150,000 129,030
6 7/8% Notes due 2028................... 125,000 100,640 125,000 96,040
Galaxy IIIR Notes....................... 67,758 67,758 124,123 124,123
Other................................... -- -- 56 56
-------- -------- -------- --------
817,758 763,998 874,179 785,049
Less current maturities (included in ac-
counts payable and accrued liabili-
ties).................................. 21,216 21,216 56,365 56,365
-------- -------- -------- --------
$796,542 $742,782 $817,814 $728,684
======== ======== ======== ========
Fair value amounts were determined based on quoted market prices for the
Notes or on current rates available to the Company for debt with similar
maturities and similar terms.
The Company has borrowings available under a $500 million, five-year
revolving credit facility (the "Revolving Credit Facility") with a bank which
was entered into in December 1997. Borrowings under the Revolving Credit
Facility bear interest, at the Company's option, at a rate based upon either a
defined Base Rate, or LIBOR plus applicable margins that are based on the
Company's credit rating. The interest margins include a component that is a
facility fee, which ranges from 0.35% to 0.75% depending on the rating level.
As of December 31, 2000, there were no amounts outstanding under the Revolving
Credit Facility.
In January 1998, the Company completed a private placement debt offering
for five, seven, ten and thirty year notes aggregating $750 million (the
"Notes Offering"), the proceeds of which were used to retire all outstanding
bank borrowings. In August 1998, the Company converted the private placement
debt to public debt by means of a debt exchange offer.
In July 1998, the Company launched a $500 million Commercial Paper Program
to provide for short-term borrowings that the Company can refinance on a long-
term basis with loans under the Revolving Credit Facility. Borrowings under
the Revolving Credit Facility and the Commercial Paper Program are limited to
$500 million in the aggregate. There were no Commercial Paper borrowings
outstanding at December 31, 2000.
In July 1999, in connection with the early buy-out of the Galaxy IIIR sale-
leaseback, the Company assumed variable rate notes. The notes bear interest at
LIBOR plus 0.25% and mature on various dates through January 2, 2002. At
December 31, 2000, $67.8 million was outstanding of which $21.2 million is
classified as current. Chase Manhattan Bank, as agent for various lenders
under the Galaxy IIIR note agreement, has a security interest in, among other
things, 24 Ku-band transponders on the Company's Galaxy III-R satellite, all
revenue and proceeds derived therefrom and any insurance proceeds payable to
the Company with respect to such transponders.
The Hughes Term Loan (see Note 7) is subordinate to the notes issued in
connection with the Notes Offering, the Revolving Credit Facility and the
notes issued under the Commercial Paper Program.
55
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Annual maturities of long-term debt are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
------------
2001............................................................ $ 21,216
2002............................................................ 46,542
2003............................................................ 200,000
2004............................................................ --
2005............................................................ 275,000
2006 and thereafter............................................. 275,000
--------
$817,758
========
Interest expense for 2000, 1999 and 1998 is presented net of interest
income of $6.8 million, $1.8 million and $5.8 million, respectively.
6. INCOME TAXES
The income tax provision consisted of the following (in thousands):
2000 1999 1998
-------- -------- -------
Taxes currently (receivable) payable:
U.S. federal and foreign.......................... $ (2,527) $ 9,493 $26,608
State and local................................... -- -- 6,723
-------- -------- -------
Total........................................... (2,527) 9,493 33,331
-------- -------- -------
Deferred tax liabilities:
U.S. federal and foreign.......................... 88,837 81,505 53,894
State and local................................... 16,451 13,129 8,715
-------- -------- -------
Total........................................... 105,288 94,634 62,609
-------- -------- -------
Total income tax provision.......................... $102,761 $104,127 $95,940
======== ======== =======
The income tax provision was different than the amount computed using the
U.S. statutory income tax rate for the reasons set forth in the following
table (in thousands):
2000 1999 1998
-------- -------- -------
Expected U.S. statutory income tax rate........... $ 79,925 $ 79,227 $77,191
U.S. state and local income tax rates--net of fed-
eral income tax effect........................... 10,693 8,534 10,035
Foreign sales corporation tax benefit............. (14,075) (6,684) (14,000)
Non-deductible goodwill amortization.............. 22,736 22,736 22,582
Other............................................. 3,482 314 132
-------- -------- -------
Total income tax provision........................ $102,761 $104,127 $95,940
======== ======== =======
56
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Temporary differences that give rise to deferred tax assets and liabilities
are as follows (in thousands):
2000 1999
-------------------- --------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Depreciation....................... $ -- $462,090 $ -- $315,909
Launch insurance costs............. -- 148,254 -- 121,340
Customer deposits.................. 22,506 -- 15,814 --
Accruals and advances.............. 25,478 -- 20,091 --
Tax credit carryforward............ 46,046 -- 65,966 --
Net operating loss carryforward.... 123,222 -- 18,746 --
Other.............................. 37,362 7,033 33,882 6,819
-------- -------- -------- --------
Total deferred taxes............... $254,614 $617,377 $154,499 $444,068
======== ======== ======== ========
At December 31, 2000, the Company had non-current deferred tax liabilities
of $617.4 million and deferred tax assets of $254.6 million, of which $3.2
million was current in nature. At December 31, 1999, the Company had non-
current deferred tax liabilities of $444.0 million and deferred tax assets of
$154.5 million, of which $17.4 million was current in nature. At December 31,
2000, the Company had $46.0 million of alternative minimum tax credits that can
be carried forward indefinitely. The Company also had $123.2 million of
deferred tax assets relating to operating loss carryforwards that expire in
varying amounts over the period of 2004-2019 if not utilized.
7. RELATED PARTY TRANSACTIONS AND BORROWINGS
Prior to the fourth quarter of 2000, the Company purchased certain of its
satellites and launch services from Hughes Space and Communications Company, a
subsidiary of Hughes, which was sold to Boeing Satellite Systems, Inc. The
Company has also provided services to several subsidiaries of Hughes.
Additionally, the Company reimburses Hughes for the allocated costs of certain
expense items it jointly incurs with Hughes, principally relating to
administrative and other expenses. The aggregate amounts of related party
transactions are summarized below (in thousands):
2000 1999 1998
-------- -------- --------
Satellite Purchases.............................. $ 65,535 $184,242 $267,133
Satellite Services Revenues:
Operating lease revenues....................... 117,395 116,044 105,663
Other satellite services....................... 26,145 21,573 17,791
Allocations of administrative and other expenses. 1,857 2,187 3,211
Interest expense................................. 129,567 109,670 109,714
Interest expense for 1999 and 1998 is presented net of $1.4 million and $3.2
million of interest income, respectively.
The following table provides summary information relative to the Company's
accounts receivable and borrowings from Hughes and its affiliates (in
thousands):
DECEMBER 31,
---------------------
2000 1999
---------- ----------
Due from affiliates.................................. $ 6,577 $ 7,696
========== ==========
Due to affiliates:
Merger-related borrowings.......................... $1,725,000 $1,725,000
Incentive obligations.............................. -- 77,628
---------- ----------
1,725,000 1,802,628
Less current portion of incentive obligations (in-
cluded in accounts payable and accrued liabili-
ties)............................................. -- (5,465)
---------- ----------
Total due to affiliates............................ $1,725,000 $1,797,163
========== ==========
57
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Merger in 1997 (and amended in 1998 in connection
with the Notes Offering described in Note 5), the Company borrowed $1.725
billion from Hughes (the "Hughes Term Loan"). The borrowings mature in June
2003, and bear interest at a rate equal to that of the Revolving Credit
Facility. Quarterly $50 million payments of principal on the Hughes Term Loan
are required under certain circumstances depending upon the level of cash flow
from operations and the Company's credit ratings. As of December 31, 2000, the
Company was not required to make any principal payments on the Hughes Term
Loan. Subsequent to May 16, 2000, Hughes has the right to request that the
Company use its best efforts to replace the borrowings with another credit
facility on terms that may then be available to the Company. As of December
31, 2000, Hughes has not requested the Company to replace the borrowings. The
Hughes borrowings are subordinate to the Notes, the Revolving Credit Facility
and the notes issued under the Commercial Paper Program (see Note 7).
8. RETIREMENT AND INCENTIVE PLANS
EMPLOYEE BENEFIT PLANS:
DEFINED CONTRIBUTION PLANS 401(K) PLAN--The Company has a 401(k) plan for
qualifying employees. A portion of employee contributions is matched by the
Company with shares of its common stock. The number of shares contributed to
the plan and the respective market values were 30,407, 33,470 and 23,681
shares and $1.2 million, $1.2 million and $1.1 million for 2000, 1999 and 1998
respectively.
DEFERRED COMPENSATION PLAN--The Company has a Restoration and Deferred
Compensation Plan (the "Deferred Compensation Plan") for eligible employees.
Under the Deferred Compensation Plan, executives and other highly compensated
employees of the Company are entitled to defer a portion of their compensation
to future years. The annual amount that can be deferred is subject to certain
limitations, and a portion of the employee's contribution may be matched by
the Company if the employee elected to defer the maximum amount permissible
under the Deferred Compensation Plan and the Internal Revenue Code of 1986, as
amended. The maximum annual Company match under both the 401(k) Plan and the
Deferred Compensation Plan is limited to an aggregate level of 4% of annual
compensation. The Company matched portion of the Deferred Compensation Plan
consists of "credits" which vest when awarded. Contributions that receive
employer matching are required to be deferred until termination of employment,
and any non-matched contributions may be deferred over a period selected by
the employee. In addition, the Company, at its discretion, may make
contributions to the Plan for the benefit of any participant as supplemental
compensation. The Deferred Compensation Plan is an unfunded plan, and the
deferrals and matching credits will receive earnings based upon rates set by
the Compensation Committee of the Board of Directors (the "Compensation
Committee"), but in no event will these amounts earn less than 100% of the
Moody's Corporate Bond Index Rate.
1997 STOCK INCENTIVE PLAN--On May 5, 1997, the Company's Board of Directors
adopted the PanAmSat Corporation Long-Term Stock Incentive Plan (the "Stock
Plan"), which provides for the granting of nonqualified stock options,
incentive stock options, alternate appreciation rights, restricted stock,
performance units and performance shares to executive officers, other
employees, directors and independent contractors of the Company. Restricted
stock, performance units and performance shares may be granted at the
discretion of the Compensation Committee on such terms as the committee may
decide. Effective December 7, 2000, the Company amended the Stock Plan to
provide that, upon a "Change in Control" (as defined) of the Company, all
unvested stock options and other awards granted under the Stock Plan would
immediately vest and become exercisable, and restrictions on any awards such
as restricted stock would immediately lapse. A "Change in Control" is defined
as (i) any transaction or series of transactions pursuant to which Hughes
Electronics Corporation and/or General Motors Corporation does not directly or
indirectly own more than fifty percent of the outstanding Common Stock, in
value, of the Company or any successor surviving entity; or (ii) the sale or
distribution of all or substantially all of the assets of the Company to an
unrelated entity or entities or to an entity in which Hughes Electronics
Corporation and/or General Motors Corporation does not directly or
58
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
indirectly own more than fifty percent in value of the equity of such entity.
Also effective December 7, 2000, the Stock Plan was amended to eliminate the
portability of unvested options for employees transferring to non-controlled
affiliates, such as Hughes Electronics Corporation.
The maximum number of shares of common stock that may be issued under the
Stock Plan is 7,456,140 and the maximum number of shares of common stock that
may be issued to any grantee pursuant to the plan is 2,000,000. In December
2000, the Board of Directors of the Company approved an increase of the number
of shares of common stock available for issuance under the Stock Plan by
10,000,000 shares to 17,456,140 shares. Such increase is subject to
stockholder approval at the Company's annual meeting of stockholders,
scheduled to be held on June 1, 2001. The Stock Plan is administered by the
Compensation Committee. As of December 31, 2000, nonqualified options for
4,527,251 shares of common stock (net of options expired or terminated) have
been granted under the Stock Plan. Such options are exercisable at a price
equal to 100% of the fair market value at the date of grant and generally vest
ratably over three years for grants prior to 1999. In 2000 and 1999, the
Company issued 881,925 and 2,298,625 options, respectively, under a two-year
grant program with ratable vesting over a four-year period, and 460,900 and
308,166 options, respectively, under the existing annual grant program with
ratable vesting over three years. Employees receiving option grants under the
two-year program will not be eligible for additional grants until 2001.
Activity in the Company's Stock Plan during the past three years is summarized
below:
EXERCISE
SHARES PRICE RANGE
--------- -------- -------------
Outstanding at January 1, 1998................ 584,890 $29.09 $29.00-$38.25
Options granted............................... 1,037,719 39.81 35.06- 59.75
Options exercised............................. (63,059) 29.00 29.00
Options expired or terminated................. (129,290) 33.57 29.00- 59.75
--------- ------
Outstanding at December 31, 1998.............. 1,430,260 $36.48 $29.00-$59.75
Options granted............................... 2,606,791 33.41 31.13- 63.25
Options exercised............................. (79,364) 33.37 29.00- 39.00
Options expired or terminated................. (501,855) 34.67 29.00- 59.75
--------- ------
Outstanding at December 31, 1999.............. 3,455,832 $34.50 $29.00-$63.25
Options granted............................... 1,342,825 41.39 51.00- 31.94
Options exercised............................. (261,758) 32.76 29.00- 39.00
Options expired or terminated................. (413,829) 37.48 29.00- 63.25
--------- ------
Outstanding at December 31, 2000.............. 4,123,070 $36.55 $29.00-$63.25
========= ======
Options exercisable at December 31, 2000...... 1,086,915 $35.08 $29.00-$63.25
========= ======
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation",
the Company has applied the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued To
Employees", to its employee stock options and other stock-based compensation
awards and, accordingly, no compensation expense has been recognized on
options granted to date. Had compensation expense for employee stock options
granted been determined based on the fair value of the options at the grant
dates (consistent with the provisions of SFAS 123), the Company's net income
would have been reduced by approximately $16 million, or $0.11 per basic and
diluted share in 2000, $13.6 million, or $0.09 per basic and diluted share in
1999 and $6.7 million, or $0.04 per basic and diluted share, in 1998.
The Company uses the Black-Scholes model for estimating the fair value of
its compensation instruments. The estimated fair value of options granted in
2000 was $25.45 and the weighted average assumptions used for calculation of
the value were as follows: risk-free interest rate of 5.9%; divided yield 0%;
expected life of ten
59
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years; stock volatility of 39.1%. The estimated fair value of options granted
in 1999 was $22.35 and the weighted average assumptions used for calculation
of the value were as follows: risk-free interest rate of 5.6%; dividend yield
0%; expected life of ten years; and stock volatility of 30.6%. The estimated
fair value of options granted in 1998 was $21.85 and the weighted average
assumptions used for calculation of the value were as follows: risk-free
interest rate of 5.7%; dividend yield 0%; expected life of ten years; and
stock volatility of 30.7%.
Beginning in 1998, directors who are not full-time employees of the Company
receive their annual retainers in shares of restricted Common Stock of the
Company. The shares are issued each year after the Company's annual meeting,
vest quarterly over the course of the year served, and may not be sold for a
period of six months after vesting, subject to the Company's trading policies.
Directors also receive meeting fees in shares of restricted Common Stock of
the Company. The shares are issued after each in-person or telephonic board or
committee meeting attended, and may not be sold for a period of six months
following the date of grant, subject to the Company's trading policies. As a
group, non-employee directors received 4,335 shares with a weighted average
fair value of $45.27 per share in 2000, 7,468 shares with a weighted average
fair value of $37.66 per share in 1999, and 6,157 shares with a weighted
average fair value of $51.00 per share in 1998. Directors also were granted
non-qualified stock options for 1,216 shares at an average price of $35.88 in
1999, and 4,284 shares at an average price of $53.09 in 1998 under the Stock
Plan (as described above) upon their initial year of election to the Board.
Director stock option grants vest over a six-month period from the date of
grant and all 5,500 shares became exercisable in 1999.
On December 7, 2000 the Company's board of directors approved a new
compensation program for non-employee directors, the PanAmSat Corporation Non-
Employee Directors Fee Plan. Effective January 1, 2001, each member of the
board who is not an employee of the Company or its affiliates will be eligible
to receive an annual fee of $50,000 for services rendered as a member of the
board and an additional annual $5,000 fee for each member who serves as a
chairperson of a committee of the board. Each non-employee director may elect
to receive up to 50% of the aggregate amount of the fee in cash. Any amount
not paid to a non-employee director in cash will be paid in restricted shares
of the Company's common stock. The number of shares to be issued in payment of
the fees will be calculated based on the average daily closing price of the
Company's common stock on Nasdaq during the month prior to the date of grant.
The shares vest 100% on the first anniversary of the date the shares are
granted; prior to being fully vested, such shares will be subject to
forfeiture upon the termination of a board member's services. Directors may
also elect to defer the fees, in the form of units of the Company's common
stock, to the PanAmSat Corporation 1999 Non-Employee Directors Compensation
Deferral Plan.
In January 1999, the Company terminated the stock options previously
granted to a senior executive of the Company and issued new options to this
individual whose status changed from employee to consultant. Under the terms
of the new option agreement, the options have strike prices equal to the
strike prices of the former options and vest over a six-month period. The new
options have a term of five years and contain a twelve-month non-compete
restriction with respect to options exercised on or before December 31, 2000.
These nonqualified stock options were not issued from shares reserved for the
Stock Plan and consist of options for 40,000 shares at a strike price of
$39.00 per share, and 31,250 shares with a strike price of $29.00 per share.
In 1999, compensation expense of $1.2 million was recognized relative to these
options based on the Black-Scholes valuation of the options as they vested.
COMPENSATION PLANS--On May 16, 1997, the Company assumed the certain
obligations of PanAmSat International with respect to its General Severance
Policy, Employee Separation Plan and an Executive Severance Pay Program. These
plans allow for benefits to be paid to the former employees of PanAmSat
International who became employees of the Company as a result of the Merger
under certain circumstances relating to a termination of employment. The
benefits provided under these programs expired at various dates through May
1999. Agreements with two officers of the Company were replaced with new
retention agreements that provide for cash payments and the issuance of
restricted stock units that entitle the holder to receive shares
60
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of common stock of the Company. These latter agreements contain a vesting term
of three years, and the related compensation expense is being amortized over
the vesting period. Two other officers of the Company exercised their
severance agreements and were entitled to separation payments that are subject
to a non-compete agreement. A portion of the separation compensation expense
has been assigned to the non-compete agreement and is being amortized over its
term. During 2000, 1999 and 1998, compensation expense of $1.6 million, $1.6
million and $3.1 million, respectively, has been recorded for these separation
and retention agreements.
9. COMMITMENTS AND CONTINGENCIES
The Company has commitments for operating leases primarily relating to
equipment and its executive office facilities in Greenwich, Connecticut and
various other locations. These leases contain escalation provisions for
increases as a result of increases in real estate taxes and operating
expenses. Minimum annual rentals of all leases, exclusive of potential
increases in real estate taxes and operating assessments, are as follows (in
thousands):
2001.............................................................. $ 6,752
2002.............................................................. 7,068
2003.............................................................. 5,661
2004.............................................................. 4,870
2005.............................................................. 4,637
2006 and thereafter............................................... 30,706
-------
$59,694
=======
Rental expenses under the operating leases were $5.1 million in 2000, $3.3
million in 1999 and $2.7 million in 1998.
The Company has historically maintained insurance for its satellites with
coverage amounts equal to the unamortized book value of the satellites
(including construction, launch and launch insurance costs, as well as certain
sales-type lease receivables and warranty liabilities related to transponders
sold outright) in the event of catastrophic loss of the satellite, failure to
obtain proper orbit, or failure to perform in accordance with design
specifications as to the launch coverage, and full or partial loss of the
satellite's communications capacity, as defined in the policies, during the
in-orbit coverage period. The Company's satellite fleet was fully-insured with
minor exclusions prior to January 1, 2000. Effective during 2000, the Company
became self-insured for potential in-orbit losses on several satellites. Four
of the Company's satellites are either fully self-insured, or insured with
significant exclusions as of December 31, 2000. The net book value of these
self-insured satellites and the significant exclusions aggregated $289
million, 89% of which relate to two satellites. This will increase to nine
satellites with a net book value of approximately $735 million in May 2001
when the current insurance coverage on five other satellites expires. The net
book value of all the Company's satellites as of December 31, 2000 was $3.1
billion. The Company did not recognize any losses for self-insured satellites
during 2000.
Coverage under the satellite insurance policies usually commences at the
date of launch for an initial period of three to five years, followed by
periodic renewals of the in-orbit portion of the coverage for periods of one
to three years. The policies are subject to certain deductibles and customary
exclusions. As discussed above, certain of the Company's satellites have
experienced malfunctions or design failures that have not resulted in total
loss claims under the existing insurance coverage at the time the incidents
occurred. These anomalies have been, or may be excluded from coverage in
future renewals of in-orbit insurance and thus expose the Company to losses in
the event that satellite failures occur as a result of these anomalies.
61
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Boeing Satellite Systems, Inc., formerly Hughes Space and Communications
Company, has security interests in certain transponders on the Company's PAS
II, PAS III and PAS IV satellites to secure incentive payments owed by the
Company to Boeing pursuant to satellite construction contracts. Additionally,
Chase Manhattan Bank, as agent for various lenders under the Galaxy IIIR Notes
has certain security interests in relation to the Company (see Note 5).
The Company is involved in litigation in the normal course of its
operations. Management does not believe the outcome of such matters will have
a material effect on the consolidated financial statements.
10. QUARTERLY FINANCIAL INFORMATION--UNAUDITED
Summary financial information on a quarterly basis for the Company in 2000
and 1999 follows (in thousands, except per share data):
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
Revenues......................... $299,104 $322,249 $199,327 $202,890
Operating income................. 127,280 139,794 51,956 37,532
Net income....................... 56,555 59,229 9,253 559
Net income per share--basic and
diluted......................... 0.38 0.40 0.06 0.00
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
Revenues......................... $193,509 $200,382 $210,739 $205,987
Operating income................. 78,315 82,392 98,244 79,415
Net income....................... 30,468 30,565 33,996 27,208
Net income per share--basic and
diluted......................... 0.20 0.20 0.23 0.18
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information set forth under the captions "Election of Directors"
and "Executive Officers of the Company" contained in the Company's Proxy
Statement (to be filed not later than 120 days after the end of the Company's
fiscal year) for the 2001 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth under the caption "Executive Compensation"
(up to but not including the subcaption "Report of the Compensation
Committee") contained in the Company's Proxy Statement (to be filed not later
than 120 days after the end of the Company's fiscal year) for the 2001 Annual
Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" contained in the Company's Proxy
Statement (to be filed not later than 120 days after the end of the Company's
fiscal year) for the 2001 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth under the subcaptions "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" under the
caption "Executive Compensation" contained in the Company's Proxy Statement
(to be filed not later than 120 days after the end of the Company's fiscal
year) for the 2001 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1.FINANCIAL STATEMENTS
See Index to Financial Statements on page 41.
2.FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because of the absence of
the conditions under which they are required, or because the
information is set forth in the financial statements or notes
thereto.
(B)REPORTS ON FORM 8-K
During the last quarter of 2000, the Company filed a Current Report
on Form 8-K with an Item 9 disclosure with the Securities and
Exchange Commission on December 4, 2000.
(C)EXHIBITS
2.1 Agreement and Plan of Reorganization, dated September 20, 1996,
among Hughes Communications, Inc., Hughes Communications Galaxy,
Inc., Hughes Communications Satellite Services, Inc., Hughes
Communications Services, Inc., Hughes Communications Carrier
Services, Inc., Hughes Communications Japan, Inc., PanAmSat
Corporation (formerly known as Magellan International, Inc.
("PanAmSat")) and PanAmSat International Systems, Inc. (formerly
known as PanAmSat Corporation and successor corporation to PanAmSat,
L.P. ("PanAmSat International")) is incorporated herein by reference
to Exhibit 2.3 to PanAmSat International's Quarterly Report on Form
10-Q for the period ended June 30, 1996.
2.2 Amendment to Agreement and Plan of Reorganization dated as of April
4, 1997 constituting Exhibit 2.1 hereto is incorporated herein by
reference to Appendix AA to the Proxy Statement/Prospectus (the
"Proxy Statement/Prospectus") contained in PanAmSat's Registration
Statement on Form S-4 (Reg. No. 333-25293) filed on April 16, 1997
(the "Registration Statement").
2.3 Agreement and Plan of Merger, dated as of April 4, 1997, among
PanAmSat International, PAS Merger Corp. and PanAmSat is
incorporated herein by reference to Appendix B to the Proxy
Statement/Prospectus.
2.4 Assurance Agreement, dated September 20, 1996, between Hughes
Electronics Corporation, PanAmSat International, Satellite Company,
L.L.C. and PanAmSat is incorporated herein by reference to Appendix
K to the Proxy Statement/Prospectus.
2.6 Stock Contribution and Exchange Agreement, dated September 20, 1996,
among Grupo Televisa, S.A., Satellite Company, L.L.C., PanAmSat and
Hughes Communications, Inc. is incorporated herein by reference to
Exhibit 2.4 to the Registration Statement.
3.1 Restated Certificate of Incorporation of PanAmSat is incorporated
herein by reference to Exhibit 3.1 to PanAmSat's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
3.2 Restated Bylaws of PanAmSat is incorporated herein by reference to
PanAmSat's Quarterly Report on Form 10-Q for the period ended June
30, 2000.
4.1.1 Amended and Restated Stockholder Agreement, dated as of May 16,
1997, by and among PanAmSat, Hughes Communications, Inc., Satellite
Company, LLC and the former holders of Class A Common Stock of
PanAmSat International is incorporated herein by reference to
Appendix M to the Proxy Statement/Prospectus.
4.1.2 Letter Agreement, dated February 26, 1999, among PanAmSat, Hughes
Communications, Inc. and the former holders of Class A Common Stock
of PanAmSat International.
64
4.2 Amended and Restated Registration Rights Agreement, dated as of May
16, 1997, by and among PanAmSat, Hughes Communications, Inc.,
Hughes Communications Galaxy, Inc., Hughes Communications Satellite
Services, Inc., Satellite Company, LLC and the former holders of
Class A Common Stock of PanAmSat International is incorporated
herein by reference to Appendix N to the Proxy
Statement/Prospectus.
4.3.1 Loan Agreement, dated May 15, 1997, between Hughes Network Systems,
Inc. and PanAmSat is incorporated by reference to Exhibit 4.3 to
PanAmSat's Current Report on Form 8-K dated June 5, 1997.
4.3.2 First Amendment to Loan Agreement, constituting Exhibit 4.3.1
hereto, dated as of December 23, 1997, between Hughes Electronics
Corporation and PanAmSat is incorporated herein by references to
Exhibit 4.3.2 to PanAmSat's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
4.3.3 Subordination and Amendment Agreement, dated as of February 20,
1998, among Hughes Electronics Corporation, PanAmSat and Citicorp
USA, Inc., as administrative agent is incorporated herein by
references to Exhibit 4.3.3 to PanAmSat's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
4.3.4 Subordination Agreement, dated as of January 16, 1998, between
Hughes Electronics and PanAmSat is incorporated herein by reference
to Exhibit 4.3.4 to PanAmSat's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
4.4 Indenture, dated as of January 16, 1998, between PanAmSat and The
Chase Manhattan Bank, as Trustee, is incorporated herein by
reference to Exhibit 4.1 to PanAmSat's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
4.5 Agreement, dated as of May 1, 1998, by and among PanAmSat and the
former holders of Class A Common Stock of PanAmSat International is
incorporated herein by reference to Exhibit 4.2.2 to PanAmSat's
Registration Statement on Form S-4 (Registration No. 333-56227).
4.7 Letter Agreement, dated July 22, 1998, between Hughes Electronics
Corporation and PanAmSat is incorporated herein by reference to
Exhibit 4.3.4 to PanAmSat's Quarterly Report on Form 10-Q for the
period ended June 30, 1998.
10.8.1 Launch Services Agreement No. 9411-002, dated November 14, 1994,
between Lockheed-Khrunichev-Energia International, Inc. and
PanAmSat International is incorporated herein by reference to
Exhibit 10.10 to Amendment No. 3 to PanAmSat International's
Registration Statement on Form S-1 (Reg. No. 33-84836), dated March
9, 1995. (1)
10.8.2 First Amendment to Launch Services Agreement No. 9411-002
constituting Exhibit 10.8.1 hereto, dated March 30, 1995, between
Lockheed-Khrunichev-Energia International, Inc. and PanAmSat
International is incorporated herein by reference to Exhibit
10.10.2 to Amendment No. 1 to PanAmSat International's Registration
Statement on Form S-1 (Reg. No. 33-95396), dated August 17, 1995.
(1)
10.8.4 Amendment Number 3 to Launch Services Agreement No. 9411-002
constituting Exhibit 10.8.1 hereto, dated August 23, 1996, between
Lockheed-Khrunichev-Energia International, Inc. and PanAmSat
International is incorporated herein by reference to Exhibit.
10.10.4 to PanAmSat International's Quarterly Report on Form 10-Q
for the period ended September 30, 1996. (1)
10.8.5 Amendment Number 4 to Launch Services Agreement No. 9411-002
constituting Exhibit 10.8.1 hereto, dated December 28, 1999,
between Lockheed-Khrunichev-Energia International, Inc. and
PanAmSat Corporation. (2)
10.16 Participation Agreement, dated as of February 7, 1996, among Hughes
Communications Galaxy, Inc., General Motors Acceptance Corporation,
Wilmington Trust Company, Chemical Bank and the lending
institutions listed as loan participants in Schedule I to the
Agreement is incorporated herein by reference to Exhibit 10.16 to
the Registration Statement.
65
10.18.1 Letter Agreement, dated February 29, 1996, among The News
Corporation Limited, Globo Participacoes, Ltd., Grupo Televisa,
S.A., and PanAmSat International is incorporated herein by
reference to Exhibit 10.17.1 to PanAmSat International's Quarterly
Report on Form 10-Q/A for the period ended March 31, 1996. (1)
10.18.2 Amendment to Letter Agreement, dated November 4, 1996,
constituting Exhibit 10.18.1 hereto, among News Corporation
Limited, Globo Participacoes, Ltd., Grupo Televisa, S.A., and
PanAmSat International is incorporated herein by reference to
Exhibit 10.17.2 to PanAmSat International's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
10.18.3 Amendment, dated as of March 5, 1998, to Letter Agreement between
News Corporation Limited, Globo Comunicacoes e Participacoes,
S.A., Grupo Televisa, S.A. and PanAmSat International constituting
Exhibit 10.18.3 hereto, is incorporated herein by reference to
Exhibit 10.18.3 to PanAmSat's Quarterly Report on Form 10-Q for
the period ended March 31, 1998. (1)
10.19.2 Second Amended and Restated Contract for PanAmSat Program, dated
April 1, 1998, between PanAmSat International and Space
Systems/Loral, Inc. is incorporated herein by reference to Exhibit
10.19.2 to PanAmSat's Registration Statement on Form S-4
(Registration No. 333-56227). (1)
10.26 Transponder Purchase and Sale Agreement, dated as of June 26,
1996, between PanAmSat International and Net Sat Servicios Ltda.
is incorporated herein by reference to Exhibit 10.2 to Net Sat
Servicios Ltda.'s Registration Statement on Form F-4 (Reg. No.
333-6318), dated January 21, 1997. (1)
10.27.1 Amended and Restated Transponder Purchase and Sale Agreement,
dated as of June 26 1996, between PanAmSat International and Net
Sat Servicios Ltda. is incorporated herein by reference to Exhibit
10.2.1 to Net Sat Servicios Ltda.'s Registration Statement on Form
F-4 (Reg. No. 333-6318), dated January 21, 1997. (1)
10.27.2 Second Amended and Restated Transponder Purchase and Sale
Agreement, dated as of March 5, 1998, between PanAmSat
International and Net Sat Servicios Ltda. is incorporated herein
by reference to Exhibit 10.27.2 to PanAmSat's Quarterly Report on
Form 10-Q for the period ended March 31, 1998. (1)
10.27.3 First Amendment, dated as of June 17, 1999, to Second Amended and
Restated Transponder Purchase and Sale Agreement between PanAmSat
International and Net Sat Servicios Ltda., constituting Exhibit
10.2.1 to Net Sat Servicios Ltda.'s Regulations Statement on Form
F-4 (Reg. No. 333-6318) dated January 21, 1997. (1)
10.31.1 Amended and Restated Collateral Trust Agreement, dated as of May
16, 1997, by and among PanAmSat, Hughes Communications, Inc.,
Satellite Company, LLC, Grupo Televisa, S.A. and IBJ Schroder Bank
& Trust Company is incorporated herein by reference to Exhibit
10.31 to PanAmSat's Quarterly Report on Form 10-Q for the period
ended June 30, 1997.
10.31.2 First Amendment, dated April 30, 1998, to Amended and Restated
Collateral Trust Agreement by and among PanAmSat, Hughes
Communications, Inc., Satellite Company, LLC, Grupo Televisa, S.A.
and IBJ Schroder Bank & Trust Company constituting Exhibit 10.31.1
hereto, is incorporated herein by reference to Exhibit 3 to
Amendment No. 1 to the Schedule 13D filed by Hughes
Communications, Inc. on May 1, 1998.
10.33 PanAmSat Corporation Long-Term Stock Incentive Plan, Established
in 1997, is incorporated herein by reference to Exhibit 10.33 of
PanAmSat's Quarterly Report on Form 10-Q for the period ended June
30, 1997.
10.33.2 Amendment to the PanAmSat Corporation Long-Term Stock Incentive
Plan, Established in 1997, is incorporated herein by reference to
Exhibit 10.33.2 to PanAmSat's Quarterly Report on Form 10-Q for
the period ended September 30, 1999.
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10.33.3 Amendment to the PanAmSat Corporation Long-Term Stock Incentive
Plan, Established in 1997, is incorporated herein by reference to
Exhibit 10.33.3 to PanAmSat's Quarterly Report on Form 10-Q for
the period ended June 30, 2000.
10.33.4 Amendment to the PanAmSat Corporation Long-Term Stock Incentive
Plan, Established in 1997, effective as of December 7, 2000.
10.34 PanAmSat Corporation Annual Incentive Plan, effective January l,
1997, is incorporated herein by reference to Exhibit 10.34 to
PanAmSat's Quarterly Report on Form 10-Q for the period ended June
30, 1997.
10.35 Intellectual Property Cross License Agreement, dated as of May 16,
1997, by and between PanAmSat and Hughes Electronics Corporation
is incorporated herein by reference to Exhibit 10.35 to PanAmSat's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.
10.36 Leveraged Lease Guaranty Indemnification Agreement, dated as of
May 16, 1997, by and between PanAmSat and Hughes Electronics
Corporation incorporated herein by reference to Exhibit 10.36 to
PanAmSat's Quarterly Report on Form 10-Q for the period ended June
30, 1997.
10.38 Fixed Price Contract for PAS 1R and PAS 9 HS-702 Spacecraft,
Related Services and Documentation--Contract No. 97-HCG-001, dated
as of August 15, 1997, between Hughes Space and Communications
Company, Inc. and PanAmSat is incorporated herein by reference to
Exhibit 10.38 to PanAmSat's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997. (1)
10.38.1 Amendment No. 1 to Fixed Price Contract for PAS 1R and PAS 9 HS-
702 Spacecraft, Related Services and Documentation--Contract No.
97-HCG-001, dated as of November 6, 2000, between Hughes Space and
Communications Company, Inc. and PanAmSat Corporation. (2)
10.38.2 Amendment No. 2 to Fixed Price Contract for PAS 1R and GIIIC HS-
702 Spacecraft, Related Services and Documentation--Contract No.
97-HCG-001, dated as of November 6, 2000, between Hughes Space and
Communications Company, Inc. and PanAmSat Corporation. (2)
10.39 Transponder Sublease Agreement for Galaxy IIIR between Hughes
Communications Galaxy, Inc. and California Broadcast Center, LLC,
dated April 21, 1997, is incorporated herein by reference to
Exhibit 10.39 to PanAmSat's Quarterly Report on Form 10-Q for the
period ended June 30, 1997. (1)
10.39.2 Amendment No. 2 dated December 15, 2000 to Transponder Sublease
Agreement for Galaxy IIIR between PanAmSat Corporation and
California Broadcast Center, LLC. (2)
10.40.1 Amended and Restated Galaxy VIII(i) Transponder Lease Agreement
between PanAmSat Corporation and California Broadcast Center, LLC,
effective as of June 30, 2000 is incorporated herein by reference
to PanAmSat's Quarterly Report on Form 10-Q for the period ended
September 30, 2000. (1)
10.40.2 Amendment No. 1, dated as of December 15, 2000, to Amended and
Restated Galaxy VIII(i) Transponder Lease Agreement between
PanAmSat Corporation and California Broadcast Center, LLC. (2)
10.41.1 Form of Indemnity Agreement between PanAmSat and each of its
directors and executive officers is incorporated herein by
reference to Exhibit 10.41 to PanAmSat's Quarterly Report on Form
10-Q for the period ended June 30, 1997.
10.41.2 Schedule identifying substantially identical agreements to the
Indemnity Agreement constituting Exhibit 10.41.1 hereto in favor
of Charles H. Noski, Frederick A. Landman, Patrick J. Costello,
Steven D. Dorfman, Dennis F. Hightower, James M. Hoak, Joseph R.
Wright, Jr., Michael T. Smith, Carl A. Brown, Kenneth N. Heintz,
Robert A. Bednarek, James W. Cuminale, David P. Berman, Roxanne S.
Austin, Tig H. Krekel, Stephen R. Kahn and R. Douglas Kahn.
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10.42 Credit Agreement, dated February 20, 1998, among PanAmSat, certain
lenders and Citicorp USA, Inc., as administrative agent is
incorporated herein by reference to Exhibit 10.42 to PanAmSat's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
10.42.2 Amendment to the Revolving Credit Agreement between Citibank and
PanAmSat Corporation, dated September 29, 1999, is incorporated
herein by reference to Exhibit 10.42.2 to PanAmSat's Quarterly
Report on Form 10-Q for the period ended September 30, 1999.
10.52 Agreement, dated as of July 10, 1998, between PanAmSat and Robert
A. Bednarek is incorporated herein by reference to Exhibit 10.46
to PanAmSat's Registration Statement on Form S-4 (Registration No.
333-56227).
10.53 Agreement, dated as of July 10, 1998, between PanAmSat and James
W. Cuminale is incorporated herein by reference to Exhibit 10.47
to PanAmSat's Registration Statement on Form S-4 (Registration No.
333-56227).
10.54 Transponder Service Agreement, dated as of April 30, 1998, between
PanAmSat International and Corporacion de Radio y Television del
Norte de Mexico, S.A. de C.V., is incorporated herein by reference
to Exhibit 10.52 to PanAmSat's Registration Statement on Form S-4
(Registration No. 333-56227). (1)
10.55 Fixed Price Contract for DOMSAT 1, DOMSAT 2, and Option
Spacecraft, Related Services and Documentation--Contract No. 98-
PAS-002, dated as of October 9, 1998, between PanAmSat and Hughes
Space and Communications Company. (1)
10.55.2 Amendment No. 1 to Fixed Price Contract for DOMSAT 1, DOMSAT 2 and
Option Spacecraft, Related Services and Documentation--Contract
No. 98-PAS-002, dated as of January 8, 1999, between PamAmSat
Corporation and Hughes Space and Communications Company, is
incorporated herein by reference to Exhibit 10.55.2 to PanAmSat's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998. (1)
10.55.3 Amendment No. 2 to Fixed Price Contract for Galaxy 10R, Galaxy 4R
and Option Spacecraft, Related Services and Documentation--
Contract No. 98-PAS-002, dated as of December 15, 2000, between
PamAmSat Corporation and Boeing Satellite Systems, Inc. (2)
10.56 PanAmSat Corporation Amended and Restated Restoration and Deferred
Compensation Plan, is incorporated herein by reference to Exhibit
10.56 to PanAmSat's Quarterly Report on Form 10-Q for the
quarterly ended September 30, 1999.
10.57 PanAmSat Corporation 1999 Non-Employee Directors Compensation
Deferral Plan, is incorporated herein by reference to Exhibit
10.57 to PanAmSat's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999.
10.57.1 Amendment to the PanAmSat Corporation 1999 Non-Employee Directors
Compensation Deferral Plan, as amended and restated as of April
25, 2000 is incorporated herein by reference to PanAmSat's
Quarterly Report on Form 10-Q for the period ended June 30, 2000.
10.58 Employment Agreement between PanAmSat Corporation and R. Douglas
Kahn, dated as of April 1, 1999, is incorporated herein by
reference to Exhibit 10.58 to PanAmSat's Quarterly Report on Form
10-Q for the period ended September 30, 1999.
10.58.1 Extension of Employment Agreement between PanAmSat Corporation and
R. Douglas Kahn, dated as of March 31, 2000 is incorporated herein
by reference to PanAmSat's Quarterly Report on Form 10-Q for the
period ended March 31, 2000.
10.59 Amended and Restated Loan and Security Agreement by and among
PanAmSat Corporation, The Chase Manhattan Bank, and certain
lending institutions, dated as of July 2, 1999, is incorporated
herein by reference to Exhibit 10.59 to PanAmSat's Quarterly
Report on Form 10-Q for the period ended September 30, 1999.
10.60 Transponder Service Agreement dated February 8, 1999, by and
between PanAmSat International Systems, Inc. and Corporacion de
Radio y Television del Norte de Mexico, S.A. de C.V is
incorporated by reference to Exhibit 10.56 to PanAmSat's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
(1)
68
10.61 Contract for Launch Services, dated as of March 15, 2000, between
Sea Launch Limited Partnership and PanAmSat Corporation is
incorporated herein by reference to PanAmSat's Quarterly Report on
Form 10-Q for the period ended March 31, 2000. (1)
10.61.1 Contract No. PAS-SL-00033-01 Amendment No. 1 (effective July 20,
2000) to the Contract for Launch Services, dated as of March 15,
2000, between Sea Launch Limited Partnership and PanAmSat
Corporation is incorporated herein by reference to PanAmSat's
Quarterly Report on Form 10-Q for the period ended September 30,
2000. (1)
10.62 PanAmSat Corporation Annual Incentive Plan 2000, is incorporated
herein by reference to Exhibit B to the Company's Definitive Proxy
Statement filed on April 28, 2000.
10.63 Galaxy IIIC Transponder Lease Agreement between PanAmSat
Corporation and California Broadcast Center, LLC, effective as of
June 30, 2000 is incorporated herein by reference to PanAmSat's
Quarterly Report on Form 10-Q for the period ended September 30,
2000. (1)
10.63.1 Amendment No. 1 to Galaxy IIIC Transponder Lease Agreement between
PanAmSat Corporation and California Broadcast Center, LLC,
effective as of December 15, 2000. (2)
10.64 Galaxy VIII(i)R Transponder Lease Agreement between PanAmSat
Corporation and California Broadcast Center, LLC, effective as of
December 15, 2000. (2)
10.65 Fixed Price Contract between PanAmSat Corporation and Boeing
Satellite Systems, Inc. for Galaxy VIII(i)R and Option Spacecraft,
Related Services and Documentation--Contract No. 00-PAS-001, dated
as of December 15, 2000. (2)
10.66 Lease between 20 Westport Holdings L.L.C., Landlord and PanAmSat
Corporation, dated September 29, 2000. (2)
21.1 List of subsidiaries of PanAmSat Corporation.
23.1 Consent of Deloitte & Touche LLP.
24.l Powers of Attorney.
--------
(1) Portions of this Exhibit have been omitted pursuant to an order of the
Securities and Exchange Commission granting confidential treatment with
respect thereto.
(2) Portions of this Exhibit have been omitted pursuant to an application for
confidential treatment filed with the Securities and Exchange Commission
under separate cover on the date hereof.
In lieu of filing certain instruments with respect to long-term debt of the
kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to
furnish a copy of such instruments to the Securities and Exchange Commission
upon request.
A copy of any of the exhibits included in this Annual Report on Form 10-K,
other than those as to which confidential treatment is pending or has been
granted by the Securities and Exchange Commission, upon payment of a fee to
cover the reasonable expenses of furnishing such exhibits, may be obtained by
written request to the Company, at the address set forth on the front cover,
attention General Counsel.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Town of Greenwich, State of Connecticut.
PanAmSat Corporation
By: /s/ James W. Cuminale
----------------------------------
James W. Cuminale
Executive Vice President,
General Counsel and Secretary
March 23, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
* Chairman of the Board of March 23, 2001
___________________________________________ Directors
MICHAEL T. SMITH
* President and Chief March 23, 2001
___________________________________________ Executive Officer
R. DOUGLAS KAHN (principal executive
officer) and Director
* Director March 23, 2001
___________________________________________
ROXANNE S. AUSTIN
* Director March 23, 2001
___________________________________________
PATRICK J. COSTELLO
* Director March 23, 2001
___________________________________________
DENNIS F. HIGHTOWER
* Director March 23, 2001
___________________________________________
JAMES M. HOAK
* Director March 23, 2001
___________________________________________
STEPHEN R. KAHN
* Director March 23, 2001
___________________________________________
JACK A. SHAW
* Director March 23, 2001
___________________________________________
JOSEPH R. WRIGHT, JR.
/s/ Michael J. Inglese Senior Vice President and March 23, 2001
___________________________________________ Chief Financial Officer
MICHAEL J. INGLESE (principal financial
officer and principal
accounting officer)
*By: /s/ James W. Cuminale March 23, 2001
_____________________________________
(JAMES W. CUMINALE, ATTORNEY-IN-FACT)
70