UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2006
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-22531
Intelsat Corporation
(Exact name of registrant as specified in its charter)
Delaware | 95-4607698 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
3400 International Drive, N.W., Washington, D.C. | 20008 | |
(Address of principal executive offices) | (Zip Code) |
(202) 944-6800
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of November 13, 2006, an aggregate of 548 shares of our common stock were outstanding.
INDEX
Page | ||||
Item 1. |
||||
December 31, 2005 and September 30, 2006 (Unaudited) |
5 | |||
Three months ended September 30, 2005 and for the period July 1, 2006 (predecessor entity) and for the period July 1, 2006 to September 30, 2006 (successor entity) |
7 | |||
Nine months ended September 30, 2005 and for the period January 1, 2006 to July 1, 2006 (predecessor entity) and for the period July 1, 2006 to September 30, 2006 (successor entity) |
8 | |||
Nine months ended September 30, 2005 and for the period January 1, 2006 to July 1, 2006 (predecessor entity) and for the period July 1, 2006 to September 30, 2006 (successor entity) |
9 | |||
10 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
51 | ||
Item 3. |
74 | |||
Item 4. |
74 | |||
Item 1. |
75 | |||
Item 1A. |
75 | |||
Item 2. |
75 | |||
Item 3. |
75 | |||
Item 4. |
75 | |||
Item 5. |
75 | |||
Item 6. |
76 | |||
78 |
2
INTRODUCTION
On July 3, 2006, following the completion of the acquisition of PanAmSat Holding Corporation by a subsidiary of Intelsat, Ltd., the certificate of incorporation of PanAmSat Holding Corporation was amended to rename the entity Intelsat Holding Corporation and the certificate of incorporation of PanAmSat Corporation was amended to rename the entity Intelsat Corporation. In this quarterly report on Form 10-Q, unless the context otherwise requires or it is otherwise indicated, all references to (1) Intelsat Corp, PanAmSat Opco, we, us and our refer to Intelsat Corporation (formerly known as PanAmSat Corporation) and its subsidiaries and (2) Holdco and PanAmSat Holdco refer to Intelsat Holding Corporation (formerly known as PanAmSat Holding Corporation) and not its subsidiaries. Although the effective date of the Intelsat Acquisition Transactions (as defined in this quarterly report) was July 3, 2006, due to the immateriality of the results of operations for the period between July 1, 2006 and July 3, 2006, we have accounted for the Intelsat Acquisition Transactions as if they had occurred on July 1, 2006.
FINANCIAL AND OTHER INFORMATION
Unless otherwise indicated, all references to dollars and $ in this quarterly report are to, and all monetary amounts in this quarterly report are presented in, U.S. dollars. Unless otherwise indicated, the financial information contained in this quarterly report has been prepared in accordance with United States generally accepted accounting principles, referred to as U.S. GAAP.
Certain monetary amounts, percentages and other figures included in this quarterly report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
In this quarterly report, we refer to and rely on publicly available information regarding our industry and our competitors. Although we believe the information is reliable, we cannot guarantee the accuracy and completeness of the information and have not independently verified it.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and service development efforts. 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 quarterly report on Form 10-Q, the words may, might, should, estimate, project, plan, anticipate, expect, intend, outlook, believe and other similar expressions are intended to identify forward-looking statements and information.
The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:
| risks associated with operating our in-orbit satellites; |
| satellite launch failures, satellite launch and construction delays and in-orbit failures or reduced performance; |
| our ability to obtain new or renewal satellite insurance policies on commercially reasonable terms or at all; |
| possible future losses on satellites that are not adequately covered by insurance; |
3
| domestic and international government regulation; |
| changes in our contracted backlog or expected contracted backlog for future services; |
| pricing pressure and overcapacity in the markets in which we compete; |
| inadequate access to capital markets; |
| competition; |
| customer defaults on their obligations owed to us; |
| our international operations and other uncertainties associated with doing business internationally; and |
| litigation. |
In connection with Intelsat (Bermuda), Ltd.s (a wholly-owned subsidiary of Intelsat, Ltd.) acquisition of Holdco as described in this quarterly report, factors that may cause results or developments to differ materially from the forward-looking statements made in this quarterly report include, but are not limited to:
| our substantial level of indebtedness following consummation of the Intelsat Acquisition Transactions, as defined in this quarterly report; |
| certain covenants in our debt agreements following consummation of the Intelsat Acquisition Transactions; |
| the ability of our subsidiaries to make distributions to us in amounts sufficient to make required interest and principal payments on our indebtedness; |
| a change in the health of, or a catastrophic loss during the in-orbit operations of, one or more of our existing satellites or the satellites of Intelsat (Bermuda), Ltd.; |
| the failure to successfully integrate or to obtain expected synergies in connection with our acquisition by Intelsat (Bermuda), Ltd. on the expected timetable or at all; and |
| the failure to achieve the strategic objectives envisioned for Intelsat (Bermuda), Ltd.s acquisition of Holdco. |
The forward-looking statements made in this quarterly report reflect our intentions, plans, expectations, assumptions and beliefs about future events. These forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and other factors, many of which are outside of our control. These factors could cause actual results or developments to differ materially from the expectations expressed or implied in the forward-looking statements and include known and unknown risks. Known risks include, among others, the risks discussed under Item 1ARisk Factors in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2006, the political, economic and legal conditions in the markets we are targeting for communications services or in which we operate and other risks and uncertainties inherent in the telecommunications business in general and the satellite communications business in particular.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, performance or achievements. Because actual results could differ materially from our intentions, plans, expectations, assumptions and beliefs about the future, you are urged not to rely on forward-looking statements in this quarterly report and to view all forward-looking statements made in this quarterly report with caution. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
4
Item 1. | Financial Statements. |
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Predecessor Entity | Successor Entity | |||||||
As of December 31, |
As of September 30, |
|||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 125,945 | $ | 142,736 | ||||
Accounts receivablenet |
70,786 | 71,041 | ||||||
Net investment in sales-type leases |
12,260 | | ||||||
Due from affiliates |
| 39,966 | ||||||
Prepaid expenses and other |
15,775 | 13,372 | ||||||
Deferred income taxes |
16,711 | 16,820 | ||||||
Total current assets |
241,477 | 283,935 | ||||||
Satellites and other property and equipmentnet |
1,949,560 | 1,834,040 | ||||||
Net investment in sales-type leases |
64,913 | | ||||||
Goodwill |
2,244,131 | 3,750,514 | ||||||
Amortizable intangible assetsnet |
244 | 340,761 | ||||||
Non-amortizable intangible assets |
2,614 | 1,120,000 | ||||||
Deferred charges and other assetsnet |
325,142 | 185,857 | ||||||
Total assets |
$ | 4,828,081 | $ | 7,515,107 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current Liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 85,261 | $ | 114,684 | ||||
Due to affiliates |
50,233 | | ||||||
Current portion of long-term debt |
16,600 | 39,237 | ||||||
Current portion of satellite incentive obligations |
13,240 | 14,534 | ||||||
Accrued interest payable |
37,103 | 63,085 | ||||||
Deferred gains and revenues |
24,514 | 31,484 | ||||||
Total current liabilities |
226,951 | 263,024 | ||||||
Long-term debt, net of current portion |
2,915,400 | 3,462,800 | ||||||
Deferred income taxes |
24,312 | 497,889 | ||||||
Deferred satellite incentive obligations, net of current portion |
98,112 | 103,274 | ||||||
Deferred revenue, net of current portion |
50,843 | 47,730 | ||||||
Accrued retirement benefits |
| 38,235 | ||||||
Deferred credits and other |
199,933 | 150,736 | ||||||
Total liabilities |
3,515,551 | 4,563,688 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock $0.01 par value; 1,000 shares authorized, at December 31, 2005 and September 30, 2006, and 548 shares outstanding at December 31, 2005 and September 30, 2006 |
| | ||||||
Paid-in capital |
803,545 | 2,949,428 | ||||||
Retained earnings |
512,500 | 2,363 | ||||||
Accumulated other comprehensive loss |
(97 | ) | (372 | ) | ||||
Other stockholders equity |
(3,418 | ) | | |||||
Total stockholders equity |
1,312,530 | 2,951,419 | ||||||
Total liabilities and stockholders equity |
$ | 4,828,081 | $ | 7,515,107 | ||||
See accompanying notes to unaudited consolidated financial statements.
5
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND
JULY 1, 2006 (PREDECESSOR ENTITY) AND
FOR THE PERIOD JULY 1, 2006 TO SEPTEMBER 30, 2006 (SUCCESSOR ENTITY)
(in thousands)
Predecessor Entity | Successor Entity | ||||||||||||
Three Months Ended September 30, 2005 |
July 1, 2006 |
Period July 1 to September 30, 2006 | |||||||||||
Revenues: |
|||||||||||||
Operating leases, satellite services and other |
$ | 205,637 | $ | | $ | 200,177 | |||||||
Revenues from affiliates |
| | 51,227 | ||||||||||
Outright sales and sales-type leases |
3,481 | | | ||||||||||
Total revenues |
209,118 | | 251,404 | ||||||||||
Operating costs and expenses: |
|||||||||||||
Depreciation and amortization |
68,861 | | 71,866 | ||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
30,973 | | 44,304 | ||||||||||
Costs from affiliates |
| | 18,468 | ||||||||||
Selling, general and administrative expenses |
18,931 | | 25,068 | ||||||||||
Restructuring and transaction costs |
209 | 142,332 | 5,213 | ||||||||||
(Gain) loss on undesignated interest rate swap |
(18,332 | ) | | 14,328 | |||||||||
Total operating costs and expenses |
100,642 | 142,332 | 179,247 | ||||||||||
Income (loss) from operations |
108,476 | (142,332 | ) | 72,157 | |||||||||
Interest expensenet |
48,272 | | 70,710 | ||||||||||
Other incomenet |
1,598 | | 1,443 | ||||||||||
Income (loss) before income taxes |
61,802 | (142,332 | ) | 2,890 | |||||||||
Income tax expense (benefit) |
10,333 | (29,242 | ) | 527 | |||||||||
Net income (loss) |
$ | 51,469 | $ | (113,090 | ) | $ | 2,363 | ||||||
See accompanying notes to unaudited consolidated financial statements.
6
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
FOR THE PERIOD JANUARY 1, 2006 TO JULY 1, 2006 (PREDECESSOR ENTITY) AND
FOR THE PERIOD JULY 1, 2006 TO SEPTEMBER 30, 2006 (SUCCESSOR ENTITY)
(in thousands)
Predecessor Entity | Successor Entity | ||||||||||||
Nine Months Ended September 30, 2005 |
Period January 1 to July 1, 2006 |
Period July 1 to September 30, 2006 | |||||||||||
Revenues: |
|||||||||||||
Operating leases, satellite services and other |
$ | 621,183 | $ | 436,864 | $ | 200,177 | |||||||
Revenues from affiliates |
| | 51,227 | ||||||||||
Outright sales and sales-type leases |
10,595 | 5,895 | | ||||||||||
Total revenues |
631,778 | 442,759 | 251,404 | ||||||||||
Operating costs and expense: |
|||||||||||||
Cost of outright sales and sales-type leases |
(4,303 | ) | (1,943 | ) | | ||||||||
Depreciation and amortization |
205,791 | 138,655 | 71,866 | ||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
99,811 | 70,977 | 44,304 | ||||||||||
Costs from affiliates |
| | 18,468 | ||||||||||
Selling, general and administrative expenses |
56,777 | 38,033 | 25,068 | ||||||||||
Prior Sponsor management fees |
10,444 | | | ||||||||||
Restructuring and transaction costs |
3,974 | 145,186 | 5,213 | ||||||||||
Loss on termination of sales-type lease |
2,307 | | | ||||||||||
(Gain) loss on undesignated interest rate swap |
305 | (23,140 | ) | 14,328 | |||||||||
Total operating costs and expenses |
375,106 | 367,768 | 179,247 | ||||||||||
Income from operations |
256,672 | 74,991 | 72,157 | ||||||||||
Interest expensenet |
211,875 | 107,601 | 70,710 | ||||||||||
Other income (expense)net |
1,524 | (2,679 | ) | 1,443 | |||||||||
Income (loss) before income taxes |
46,321 | (35,289 | ) | 2,890 | |||||||||
Income tax expense |
7,095 | 8,007 | 527 | ||||||||||
Net income (loss) |
$ | 39,226 | $ | (43,296 | ) | $ | 2,363 | ||||||
See accompanying notes to unaudited consolidated financial statements.
7
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
FOR THE PERIOD JANUARY 1 TO JULY 1, 2006 (PREDECESSOR ENTITY) AND
FOR THE PERIOD JULY 1 TO SEPTEMBER 30, 2006 (SUCCESSOR ENTITY)
(in thousands)
Predecessor Entity | Successor Entity | |||||||||||||
Nine Months Ended September 30, 2005 |
Period January 1 to July 1, 2006 |
Period July 1 to September 30, 2006 |
||||||||||||
Cash flows from operating activities: |
||||||||||||||
Net income (loss) |
$ | 39,226 | $ | (43,296 | ) | $ | 2,363 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||||
Depreciation and amortization |
205,791 | 138,655 | 71,866 | |||||||||||
Deferred income taxes |
5,027 | 1,051 | (674 | ) | ||||||||||
Amortization of debt issuance costs and other deferred charges |
14,338 | 10,741 | 1,030 | |||||||||||
Loss on early extinguishment of debt |
24,161 | | | |||||||||||
Provision for uncollectible receivables |
(2 | ) | (1,903 | ) | 322 | |||||||||
Restructuring and transaction costs |
3,998 | 93,715 | | |||||||||||
Amortization of discounts on notes |
| | (2,527 | ) | ||||||||||
(Gain) loss on undesignated interest rate swap |
305 | (20,303 | ) | 17,194 | ||||||||||
Reversal of sales-type lease liabilities |
(4,303 | ) | (1,943 | ) | | |||||||||
Loss on termination of sales-type lease |
2,307 | | | |||||||||||
Loss on investment |
| 3,316 | | |||||||||||
Other non-cash items |
(2,260 | ) | (378 | ) | (431 | ) | ||||||||
Changes in assets and liabilities: |
||||||||||||||
Collections on investments in sales-type leases |
19,922 | 8,761 | | |||||||||||
Operating leases and other receivables |
6,825 | (20,789 | ) | (959 | ) | |||||||||
Prepaid expenses and other assets |
(2,484 | ) | 2,058 | (1,120 | ) | |||||||||
Accounts payable and accrued liabilities |
(26,202 | ) | 54,995 | (2,441 | ) | |||||||||
Due to affiliates |
(79 | ) | 896 | (22,462 | ) | |||||||||
Accrued retirement benefits |
| | (2,913 | ) | ||||||||||
Other long-term liabilities |
19,801 | 13,308 | 1,190 | |||||||||||
Deferred gains and revenues |
(33,963 | ) | 11,505 | 2,467 | ||||||||||
Net cash provided by operating activities |
272,408 | 250,389 | 62,904 | |||||||||||
Cash flows from investing activities: |
||||||||||||||
Capital expenditures (including capitalized interest) |
(142,179 | ) | (129,265 | ) | (28,858 | ) | ||||||||
Proceeds from sale of teleport |
3,161 | | | |||||||||||
Distribution from equity investment |
| 1,796 | | |||||||||||
Acquisitions and divestitures, net of cash acquired/paid |
(41,863 | ) | (5,543 | ) | 56,670 | |||||||||
Net cash (used in) provided by investing activities |
(180,881 | ) | (133,012 | ) | 27,812 | |||||||||
Cash flows from financing activities: |
||||||||||||||
Issuance of new long-term debt |
| | 575,000 | |||||||||||
Capital contribution by parent |
658,350 | | | |||||||||||
Repayments of long-term debt |
(671,900 | ) | (8,300 | ) | (180 | ) | ||||||||
Dividends to stockholder |
(53,785 | ) | (186,481 | ) | (565,656 | ) | ||||||||
Capitalized debt issuance costs |
(598 | ) | | (28,602 | ) | |||||||||
Funding of capital expenditures by customer |
33,464 | 30,172 | 857 | |||||||||||
Repayments of incentive obligations |
(9,464 | ) | (5,683 | ) | (2,971 | ) | ||||||||
Net cash used in financing activities |
(43,933 | ) | (170,292 | ) | (21,552 | ) | ||||||||
Effect of exchange rate changes on cash |
1,210 | 27 | 516 | |||||||||||
Net increase (decrease) in cash and cash equivalents |
48,804 | (52,888 | ) | 69,680 | ||||||||||
Cash and cash equivalents, beginning of period |
38,607 | 125,945 | 73,056 | |||||||||||
Cash and cash equivalents, end of period |
$ | 87,411 | $ | 73,057 | $ | 142,736 | ||||||||
Supplemental disclosure of cash flow information: |
||||||||||||||
Cash received for interest |
$ | 2,333 | $ | 2,863 | $ | 1,644 | ||||||||
Cash paid for interest |
$ | 222,111 | $ | 112,474 | $ | 49,213 | ||||||||
Cash received for taxes |
$ | 69 | $ | 3,214 | $ | 30 | ||||||||
Cash paid for taxes |
$ | 7,243 | $ | 1,355 | $ | 1,497 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
These consolidated financial statements reflect the financial statements of Intelsat Corporation (formerly known as PanAmSat Corporation) and its subsidiaries on a consolidated basis. Unless the context otherwise requires or it is otherwise indicated within these consolidated financial statements, Intelsat Corporation and its subsidiaries are referred to as Intelsat Corp, PanAmSat Corporation, PanAmSat, we, us and our. The terms Holdco, PanAmSat Holdco and PanAmSat Holding Corporation refer to our parent company, Intelsat Holding Corporation (formerly known as PanAmSat Holding Corporation) and not its subsidiaries.
The unaudited consolidated financial statements presented for the three and nine months ended September 30, 2005 and the period January 1, 2006 through July 1, 2006 represent the Predecessor entity. The unaudited consolidated financial statements for the three months ended September 30, 2006 represent the Successor entity. As a result of the application of purchase accounting, the financial statements of the predecessor entity are not comparable with the financial statements of the successor entity, because they are, in effect, those of a new entity. See below and Note 2 Intelsat Acquisition Transactions.
These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The consolidated financial statements include all normal and recurring adjustments that management considers necessary to present fairly the financial position as of September 30, 2006, and results of operations for the Predecessor three and nine months ended September 30, 2005 and for the Predecessor period July 1, 2006, the Successor period July 1, 2006 to September 30, 2006 and for the Predecessor period January 1, 2006 to July 1, 2006 and for the Successor period July 1, 2006 to September 30, 2006. The consolidated financial statements also include the cash flows for the Predecessor nine months ended September 30, 2005, the Predecessor period January 1, 2006 through July 1, 2006 and the Successor period July 1, 2006 through September 30, 2006. Certain prior period amounts have been reclassified to conform to the current periods presentation. Operating results for these periods are not necessarily indicative of the operating results for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our audited financial statements for the year ended December 31, 2005 included in Intelsat Corps Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 10, 2006, and all of our other filings filed with the SEC from March 10, 2006 through the date of this report. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (Revised), Share Based Payment (SFAS 123R). See Note 8 Stock Based Compensation.
As a result of the Intelsat Acquisition Transactions (as defined below), certain of our accounting policies were changed to conform with Intelsat, Ltd.s current accounting policies. The majority of these changes have not had, and are not expected to have, a significant impact on our consolidated financial statements. However, the change in our accounting for sales-type leases to conform with Intelsat, Ltd.s current accounting polices as service contracts did have, and is expected to have, a significant impact on our consolidated financial statements. See Note 2 Intelsat Acquisition Transactions.
On July 3, 2006, Intelsat (Bermuda), Ltd., referred to as Intelsat Bermuda, completed the acquisition of PanAmSat Holding Corporation, pursuant to a Merger Agreement, dated as of August 28, 2005, by and among Intelsat Bermuda, Proton Acquisition Corporation, a wholly owned subsidiary of Intelsat Bermuda, and PanAmSat Holding Corporation (the Intelsat Merger Agreement). Pursuant to the Intelsat Merger Agreement, Proton Acquisition Corporation merged with and into PanAmSat Holding Corporation, with PanAmSat Holding Corporation surviving the merger (the Intelsat Merger). On July 3, 2006, following the completion of the
9
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Intelsat Merger, the certificate of incorporation of PanAmSat Holding Corporation was amended to rename the entity Intelsat Holding Corporation and the certificate of incorporation of PanAmSat Corporation was amended to rename the entity Intelsat Corporation. Upon completion of the Intelsat Merger, Intelsat Holding Corporation became a wholly-owned subsidiary of Intelsat Bermuda. See Note 2 Intelsat Acquisition Transactions.
Following the completion of the Intelsat Acquisition Transactions, substantially all of the employees of Intelsat Global Service Corporation, an indirect subsidiary of Intelsat Bermuda, were transferred to us pursuant to an employee transfer agreement. As the transaction occurred between entities under common control, the transaction was accounted for at carrying value, which approximated fair value. As such, net liabilities of $11.9 million were recognized by Intelsat Corp and were treated as a distribution to its Parent. In addition, substantially all of the Intelsat entities, including Holdco and us, have entered into a master inter-company services agreement (the MISA). The employee transfer and the effects of the MISA have had, and are expected to have, a significant impact on our consolidated financial statements. See Note 2 Intelsat Acquisition Transactions.
Although the effective date of the Intelsat Merger and the Intelsat Acquisition Transactions was July 3, 2006, due to the immateriality of the results of operations for the period between July 1, 2006 and July 3, 2006, we have accounted for the Intelsat Acquisition Transactions as if they had occurred on July 1, 2006, except for acquisition transactions costs which are recorded within the predecessor period of July 1, 2006.
2. Intelsat Acquisition Transactions
On August 28, 2005, Holdco and Intelsat Bermuda signed the Intelsat Merger Agreement under which Intelsat Bermuda would acquire Holdco and its sole subsidiary, PanAmSat Corporation, for $25 per common share in cash, or approximately $3.2 billion, plus a pro rata share of undeclared regular quarterly dividends, if any, for the quarter in which the acquisition was consummated. On October 26, 2005, Holdcos then shareholders approved and adopted the Intelsat Merger Agreement. Under that agreement, which was approved unanimously by the boards of directors of both companies, Intelsat Bermuda acquired all of Holdcos outstanding common shares. Also in connection with the Intelsat Merger Agreement, our prior board of directors approved the adoption of a severance plan, on terms similar to our then existing severance plan, and authorized a retention pool of up to $10 million for non-senior management employees.
On July 3, 2006, Intelsat Bermuda completed the acquisition of Holdco, pursuant to the Intelsat Merger Agreement, with Proton Acquisition Corporation, a wholly owned subsidiary of Intelsat Bermuda, merging with and into Holdco, with Holdco surviving the merger, and each share of common stock of Holdco was converted into the right to receive $25.00, plus approximately $0.00927 as the pro rata share of undeclared regular quarterly dividends. On July 3, 2006, the common stock of PanAmSat Holding Corporation (Symbol PA) was de-listed from the New York Stock Exchange.
In connection with the completion of the Intelsat Acquisition Transactions, we recorded approximately $142.3 million of restructuring and transaction costs within our consolidated statement of operations during the Predecessor stub period July 1, 2006. All of these costs were expenses of the Predecessor and were expensed during the Predecessor period just prior to completion of the Intelsat Acquisition Transactions. These costs included approximately $97.2 million of costs associated with the cash settlement of options and deferred stock units, $21.2 million of severance-related compensation received by certain of our prior executives (including $19.9 million of employee excise taxes) $15.4 million of severance and related costs recorded pursuant to our 2005 severance pay plan and $8.5 million of costs related to executive severance and benefits. We had previously recorded approximately $2.9 million of restructuring and transaction costs related to certain employee retention costs during the first six months of 2006.
10
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Consummation of the Intelsat Acquisition Transactions resulted in a change of control under the indenture governing Intelsat Corps currently outstanding 9% senior notes due 2014, referred to as the 2014 senior notes, giving the holders of these notes the right to require Intelsat Corp to repurchase these notes at the price stated in the indenture. We commenced an offer to purchase the 2014 senior notes, referred to as the Change of Control Offer, on August 2, 2006. The Change of Control Offer expired on September 26, 2006 at which time approximately $180,000 of the outstanding 2014 senior notes were tendered and repurchased by us using cash on hand.
In connection with the completion of the Intelsat Acquisition Transactions, our board of directors authorized the amendment of our senior secured credit facilities (the July 2006 Amended and Restated Credit Agreement), which included revised terms for our revolving credit facility and term loans, and which became effective at the completion of the Intelsat Acquisition Transactions. The July 2006 Amended and Restated Credit Agreement renewed and extended the credit facilities provided under our Credit Agreement dated as of August 20, 2004, as previously amended and restated as of March 22, 2005 (the March 2005 Amended and Restated Credit Agreement), and provides for a $355.9 million Tranche A-3 Term loan with a six year maturity, a $1,635.1 million Tranche B-2 Term Loan with a seven and one-half year maturity, and a $250.0 million revolving credit facility with a six year maturity. Up to $150.0 million of the revolving credit facility is available for issuance of letters of credit. Additionally, up to $35.0 million of the revolving credit facility is available for swingline loans. Both the face amount of any outstanding letters of credit and any swingline loans reduce availability under the revolving credit facility on a dollar for dollar basis. Availability under the revolving credit facility was $195.4 million at September 30, 2006. The revolving credit facility is available on a revolving basis from July 3, 2006 and terminating six years later. Interest rates under the July 2006 Amended and Restated Credit Agreement range from LIBOR plus 2.125% to LIBOR plus 2.875% or ABR plus 1.125% to ABR plus 1.875%, depending on certain financial measures. Obligations under the July 2006 Amended and Restated Credit Agreement continue to be guaranteed by certain of Intelsat Corps subsidiaries and secured by a perfected first priority security interest to the extent legally permissible in substantially all of the borrowers and the guarantors tangible and intangible assets, with certain agreed exceptions, as was the case with the March 2005 Amended and Restated Credit Agreement.
On July 3, 2006, also in connection with the Intelsat Acquisition Transactions, we issued 9% Senior Notes due 2016 in an aggregate principal amount of $575.0 million, referred to as the New Opco Notes. The Intelsat Merger, the Tender Offer and related fees and expenses were funded through the incurrence of significant debt, including the proceeds of the New Opco Notes, and $260.0 million principal amount of Floating Rate Senior Notes due 2013 (the Intelsat Bermuda Floating Rate Notes), $1,330.0 million principal amount of 11 1/4% Senior Notes due 2016 (the Intelsat Bermuda Non-Guaranteed Fixed Rate Notes) and $750.0 million principal amount of 9 1/4% Senior Notes due 2016 (the Intelsat Bermuda Guaranteed Notes), referred to collectively as the New Intelsat Bermuda Notes, issued by Intelsat Bermuda; and a borrowing by Intelsat Bermuda under a new $600.0 million senior unsecured credit facility, referred to as the Intelsat Bermuda Bridge Credit Facility. This debt was acquired to fund the Intelsat Merger, while the 2014 senior notes and the Restated and Amended Credit Facilities described above represented a portion of the debt acquired in connection with the Intelsat Merger. Additionally, cash on hand at Intelsat Bermuda and its subsidiaries, including us, was also used to fund the Intelsat Acquisition Transactions.
Following completion of the Intelsat Merger, Intelsat General Corporation, a wholly-owned indirect subsidiary of Intelsat Bermuda (IGen), acquired our former subsidiary, G2 Satellite Solutions Corporation (G2 Satellite Solutions), which comprised our government services business, for cash consideration in the amount of $73.0 million. The acquisition occurred by means of a merger in which G2 Satellite Solutions merged into IGen, with IGen continuing as the surviving entity. As a result of our sale of G2 Satellite Solutions, its financial condition as of September 30, 2006, and its results of operations for the third quarter of 2006 were excluded from our financial statements. Additionally, as a result of the sale of G2 Satellite Solutions, segment disclosures were no longer required.
11
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Following the completion of the Intelsat Merger, substantially all of the employees of Intelsat Global Service Corporation (IGSC), an indirect subsidiary of Intelsat Bermuda, were transferred to us pursuant to an employee transfer agreement. In addition, substantially all of the Intelsat entities, following the Intelsat Merger, including Holdco and us, have entered into a master inter-company services agreement (the MISA) pursuant to which these entities will provide services to each other. In each case, services will be provided on terms that we believe are not materially less favorable to each party than are available on an arms length basis and on terms that our board of directors and the board of directors of Intelsat Bermuda and Holdco have determined to be fair. The employee transfer resulted in an increase in total consolidated assets and liabilities as of September 30, 2006 of approximately $11.2 million and $38.2 million, respectively. The MISA increased revenues and expenses for the Successor period July 1, 2006 to September 30, 2006 by approximately $39.3 million and $37.5 million, respectively.
The Intelsat Merger, the tender offer with respect to Holdcos 10 3/4% senior discount notes due 2014 (the Tender Offer) , the issuance of the New Opco Notes, the entering into the July 2006 Amended and Restated Credit Agreement, the sale of G2 Satellite Solutions to IGen, the transfer of employees and the entering into the MISA are collectively referred to as the Intelsat Acquisition Transactions.
A preliminary allocation of the purchase price for the Intelsat Merger was performed using information currently available and is based on preliminary estimates of the fair values of assets acquired and liabilities assumed in connection with the Intelsat Acquisition Transactions. These preliminary estimates are based on available information and certain assumptions we consider reasonable and may be revised as additional information becomes available. These preliminary valuation estimates were derived in part by using the assistance of an independent appraiser. The final purchase price allocation for the Intelsat Acquisition Transactions will be dependent upon the finalization of asset and liability valuations. Any final adjustments may change the allocations of purchase prices which could affect the fair value assigned to the assets acquired and liabilities assumed and could result in a material change, including a change in the amount of goodwill recorded.
The assets and liabilities values acquired in the Intelsat Merger are based on a purchase price which was calculated as follows (in thousands):
Cash paid |
$ | 3,168,201 | |
Transaction costs |
86,032 | ||
Preliminary purchase price |
3,254,233 | ||
Net liabilities Holdco |
272,792 | ||
Net equity acquired |
$ | 3,527,025 | |
12
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Intelsat Merger included the purchase of the assets and liabilities of Holdco and the New Opco Notes. Holdco had a negative book value of $247.6 million prior to the Intelsat Merger and fair market valuation adjustments of $25.2 million, resulting in a net deficit of $272.8 million, which reduced the purchase price of consolidated Holdco. The purchase price allocation of our assets and liabilities is as follows (in thousands):
Fair Value of Net Assets Acquired |
||||
Current assets acquired |
$ | 185,698 | ||
Satellites and other property and equipment |
1,861,829 | |||
Other non-current assets |
158,523 | |||
Intangible assets |
1,485,000 | |||
Goodwill |
3,806,631 | |||
Assumed debt |
(2,927,100 | ) | ||
Current liabilities less current portion of debt |
(248,548 | ) | ||
Deferred tax liability |
(502,351 | ) | ||
Other non-current liabilities |
(292,657 | ) | ||
Total |
$ | 3,527,025 | ||
The Intelsat Acquisition Transactions included the payment of a substantial portion of the cash purchase price paid to the PanAmSat Holdco shareholders by PanAmSat Holdco and PanAmSat Corporation. Of the approximately $3.2 billion cash purchase price, PanAmSat Holdco paid $975.0 million from proceeds received from the Intelsat Bermuda Loans.
As a result of the Intelsat Acquisition Transactions, the accounting for sales-type leases was changed to conform to the current accounting policies of our parent, Intelsat, Ltd., and such contracts are now accounted for as service agreements. We previously recognized as revenues at the inception of the lease the net present value of the future minimum lease payments, and continue to receive cash payments from the lessee throughout the term of the lease. In addition, during the life of the lease, we recognized as revenue the portion of each periodic lease payment deemed attributable to interest income. As a result of the change to conform accounting policies, these sales-type leases are now recognized as service contracts. This accounting policy change resulted in a fair value adjustment under purchase accounting of approximately $72.3 million of net assets related to previously recorded sales-type leases and the recording of approximately $2.5 million of additional revenues during the third quarter of 2006.
In connection with the Intelsat Acquisition Transactions, management approved restructuring plans to consolidate and integrate the management and operations of Holdco and Intelsat. See Note 10 Restructuring Costs.
The following unaudited pro forma results of operations of Intelsat Corp assume that the Intelsat Acquisition Transactions took place on January 1, 2005 for the periods presented (in thousands):
Nine Months Ended | ||||
September 30, 2005 |
September 30, 2006 | |||
Revenue |
$701,601 | $737,962 | ||
Net income (loss) |
13,915 | (58,509) |
13
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The unaudited pro forma results of operations are being furnished solely for informational purposes and are not intended to represent or be indicative of the consolidated results of operations that we would have reported had these transactions been completed as of the dates and for the periods presented, nor is it necessarily indicative of future results.
3. Holdcos Initial Public Offering
On March 22, 2005, Holdco consummated an initial public offering of 50 million shares of its common stock at $18 per share and used a portion of the net proceeds to make a capital contribution to us of approximately $658.4 million. We used this capital contribution to repay approximately $265.0 million of the borrowings under our Term Loan A Facility and on April 1, 2005, we redeemed $353.5 million, or 35%, of our 2014 senior notes, and paid a redemption premium of $31.8 million to holders of those notes. We also repaid an additional $25.0 million of the Term Loan A Facility with cash on hand on March 22, 2005.
4. Historical Dividend Policy
On March 21, 2005, our board of directors declared a dividend to Holdco of approximately $5.28 million, which was paid in April 2005. On June 20, 2005, our board of directors declared a dividend to Holdco of approximately $47.5 million, which was paid on July 14, 2005. On September 19, 2005, our board of directors declared a dividend to Holdco of approximately $47.5 million, which was paid on October 13, 2005. Also, in September 2005, we recorded and paid a dividend of $1.0 million related to amounts funded to Holdco for the payment of certain expenses.
Our board of directors adopted a dividend policy that became effective upon the closing of Holdcos initial public offering, and remained in effect until the closing of the Intelsat Acquisition Transactions on July 3, 2006. Our dividend policy reflected an intention to distribute a substantial portion of the cash generated by our business in excess of operating expenses and working capital requirements, interest and principal payments on our indebtedness and capital expenditures as regular quarterly dividends to our sole stockholder, Holdco, for payment as a dividend to its stockholders. On December 14, 2005, our board of directors declared a dividend to Holdco of approximately $47.5 million, which was paid on January 13, 2006. Also in December 2005, we recorded dividends of $4.5 million related to amounts to be funded to Holdco for the payment of certain expenses, of which $0.5 million was paid in December 2005, $1.5 million was paid in March 2006, and the remaining $2.5 million was paid in April 2006. On March 16, 2006, our board of directors declared a dividend to Holdco of approximately $52.3 million, which was paid in April 2006. Also, in March 2006, we recorded dividends of $7.0 million related to amounts to be funded to Holdco for the payment of certain expenses, of which $1.5 million was paid in May 2006 and $5.5 million was paid in June 2006. On June 9, 2006, our board of directors declared a dividend to Holdco of approximately $52.3 million, which was paid on June 29, 2006. Also, in June 2006, we recorded and paid dividends of $23.5 million related to amounts funded to Holdco for the payment of certain expenses related to the Intelsat Acquisition Transactions in July 2006. On July 3, 2006, we recorded and paid dividends of $565.7 million resulting from the net proceeds of the issuance of the New Opco Notes, which were used to fund a portion of the cash consideration paid to Holdcos shareholders pursuant to the Intelsat Merger Agreement.
Upon completion of the Intelsat Acquisition Transactions on July 3, 2006, the prior dividend policy was suspended.
14
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
5. Long-term Debt
As of December 31, 2005 and September 30, 2006, long-term debt consisted of the following (in thousands):
Predecessor Entity | Successor Entity | ||||||||
December 31, 2005 |
September 30, 2006 |
||||||||
Senior Secured Credit Facilities: |
|||||||||
Revolving Credit Facility |
$ | | $ | | |||||
Term Loan A due 2009 |
355,910 | | |||||||
Term Loan B-1 due 2011 |
1,643,400 | | |||||||
Term Loan A-3 due 2012 |
| 355,910 | |||||||
Term Loan B-2 due 2014 |
| 1,635,100 | |||||||
Fixed Rate Notes: |
|||||||||
6 3/8% Notes due 2008 |
150,000 | 150,000 | |||||||
Unamortized discount on the 6 3/8% Notes due 2008 |
| (419 | ) | ||||||
8 1/2% Notes due 2012 |
1,190 | 1,190 | |||||||
9% Senior Notes due 2014 |
656,500 | 656,320 | |||||||
Unamortized premium on the 9% Senior Notes due 2014 |
| 16,865 | |||||||
9% Senior Notes due 2016 |
| 575,000 | |||||||
6 7/8% Notes due 2028 |
125,000 | 125,000 | |||||||
Unamortized discount on the 6 7/8% Notes due 2028 |
| (13,343 | ) | ||||||
Capital Lease Obligation |
| 414 | |||||||
Total long-term debt |
2,932,000 | 3,502,037 | |||||||
Less: current portion of capital lease obligation |
| 280 | |||||||
Less: current portion of long-term debt |
16,600 | 38,957 | |||||||
Total long-term debt, excluding current portion |
$ | 2,915,400 | $ | 3,462,800 | |||||
As part of the Intelsat Acquisition Transactions, Intelsat Corps pre-acquisition fixed-rate long-term debt was revalued based on quoted market prices, resulting in a net fair value purchase price increase of approximately $3.4 million. This net fair value purchase price increase is being amortized to interest expense over the remaining term of the notes. The amortization of the net fair value purchase price increase for the Successor period July 1, 2006 through September 30, 2006 reduced interest expense by approximately $0.3 million.
At September 30, 2006, we had total debt outstanding of approximately $3.5 billion, including current maturities of $39.0 million primarily related to our Term Loan B-2 Facility due 2014.
On July 3, 2006, also in connection with the Intelsat Acquisition Transactions, we issued the New Opco Notes in the aggregate principal amount of $575.0 million. The Intelsat Acquisition Transactions, the Tender Offer and related fees and expenses were funded through the incurrence of significant debt, including the proceeds of the New Opco Notes, the New Intelsat Bermuda Notes and the Intelsat Bermuda Bridge Credit Facility. Cash on hand at Intelsat Bermuda and its subsidiaries, including us, was also used.
In connection with the completion of the Intelsat Acquisition Transactions, our board of directors authorized the amendment of our senior secured credit facilities, which included revised terms for our revolving credit facility and term loans, and which became effective at the completion of the Intelsat Acquisition Transactions.
15
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The July 2006 Amended and Restated Credit Agreement renewed and extended the credit facilities provided under our March 2005 Amended and Restated Credit Agreement, and consists of a $355.9 million Tranche A-3 Term loan with a six year maturity, a $1,635.1 million Tranche B-2 Term Loan with a seven and one-half year maturity, and a $250.0 million Revolving Credit Facility with a six year maturity. At September 30, 2006, the interest rate on the Term Loan A-3 facility was 7.633% (LIBOR of 5.508% plus 2.125%). At September 30, 2006, the interest rate on the Term Loan B-2 facility was 8.008% (LIBOR of 5.508% plus 2.500%).
Up to $150.0 million of the Revolving Credit Facility is available for issuance of letters of credit. Additionally, up to $35.0 million of the Revolving Credit Facility is available for swingline loans. In addition, we are required to pay a commitment fee for the unused commitments under the revolving credit facility, if any, which, as of September 30, 2006 on an annual basis was 0.375%. As of September 30, 2006, we had outstanding letters of credit of $54.6 million and the revolving credit facility was undrawn. Both the face amount of any outstanding letters of credit and any swingline loans reduce availability under the Revolving Credit Facility on a dollar for dollar basis. The Revolving Credit Facility is available on a revolving basis from July 3, 2006 and terminating six years later. Any amounts borrowed under the Revolving Credit Facility would bear interest at LIBOR plus 2.125% as of September 30, 2006, although this interest rate is subject to adjustment based on our total leverage ratio.
Interest rates under the July 2006 Amended and Restated Credit Agreement range from LIBOR plus 2.125% to LIBOR plus 2.875% or ABR plus 1.125% to ABR plus 1.875%, depending on certain financial measures. Obligations under the July 2006 Amended and Restated Credit Agreement continue to be guaranteed by certain of Intelsat Corps subsidiaries and secured by a perfected first priority security interest to the extent legally permissible in substantially all of the borrowers and the guarantors tangible and intangible assets, with certain agreed exceptions, as was the case with the March 2005 Amended and Restated Credit Agreement.
The interest rates on the Term Loan A-3 and Term Loan B-2 reset on October 2, 2006 and the interest rates increased to 7.497% (LIBOR of 5.372% plus 2.125%) and 7.872% (LIBOR of 5.372% plus 2.500%), respectively. During the nine months ended September 30, 2005, we recorded non-cash interest expense charges totalling approximately $56.0 million for unamortized debt issuance costs written off as a result of the $353.5 million, or 35% of the outstanding principal amount, repayment of our 2014 senior notes in April 2005, including a redemption premium of $31.8 million paid to the holders of these notes, and $318.4 million of voluntary debt repayments made on our Term Loan A Facility during this period. There were no such charges recorded during the Predecessor period January 1, 2006 to July 1, 2006 and the Successor period July 1, 2006 to September 30, 2006.
The 2014 senior notes require interest payments to be made semi-annually, are unsecured, and are, or will be, as the case may be, unconditionally guaranteed by each of our existing and certain subsequently acquired or organized domestic restricted subsidiaries. See Note 15 Condensed Consolidating Financial Information below. Consummation of the Intelsat Acquisition Transactions resulted in a change of control under the indenture governing the 2014 senior notes giving the holders of these notes the right to require us to repurchase these notes at 101% of par value. We commenced a Change of Control Offer on August 2, 2006. The Change of Control Offer expired on September 26, 2006 at which time approximately $180 thousand of the outstanding 2014 senior notes were tendered and repurchased by us from cash on hand.
As of September 30, 2006, we also had outstanding 10 and 30-year fixed rate notes totaling $275.0 million. The outstanding principal balances, interest rates and maturity dates for these notes as of September 30, 2006, are $150.0 million at 6 3/8% due 2008 and $125.0 million at 6 7/8% due 2028, respectively. Principal on these notes is payable at maturity, while interest is payable semi-annually. As of September 30, 2006, we also had outstanding
16
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
$1.2 million of our 8 1/2% senior notes due 2012. These notes are unsecured, and are unconditionally guaranteed by each of our existing domestic restricted subsidiaries. (See Note 15 Condensed Consolidating Financial Information below).
With a portion of the proceeds from Holdcos initial public offering, Holdco made a capital contribution to us of approximately $658.4 million, which we used to repay approximately $265.0 million of the borrowings under the Term Loan A Facility of the March 2005 Amended and Restated Credit Agreement on March 22, 2005, redeem $353.5 million, or 35%, of our 2014 senior notes and pay a redemption premium of $31.8 million to holders of these notes on April 1, 2005. We also repaid an additional $25.0 million of this Term Loan A Facility with cash on hand on March 22, 2005. On June 17, 2005, we made a voluntary prepayment of $28.4 million under this Term Loan A facility from available cash on hand.
6. Interest Rate Swap Agreement
On March 14, 2005, we entered into a five-year interest rate swap agreement to hedge interest expense on a notional amount of $1.25 billion. The notional amount will amortize down to $625 million from March 14, 2008 until expiration on March 15, 2010. In relation to this swap agreement, we exchanged our floating-rate obligation on $1.25 billion of our Term Loan B-1 Facility for a fixed-rate obligation, subject to scheduled rate increases based on the LIBOR rate used.
The counterparties to this agreement are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swap agreement, our exposure is limited to the interest rate differential on the notional amount at each quarterly settlement period over the life of the agreements. We do not anticipate non-performance by the counterparties.
The fair value of the interest rate swap agreement is the estimated amount that we would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates, the market expectation for future interest rates and our current creditworthiness. The interest rate swap agreement remained undesignated through May 24, 2005, and the decrease in the fair value of the interest rate swap of approximately $18.6 million was recorded within loss on undesignated interest rate swap in our consolidated statement of operations for the six months ended June 30, 2005, in accordance with the provisions of SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities as amended and interpreted (SFAS 133). Between May 25, 2005 and June 30, 2005, the interest rate swap was designated as a cash flow hedge and deemed effective and, therefore, qualified for hedge accounting treatment under SFAS 133. In accordance with SFAS 133, changes in the hedged asset or liability representing the effectiveness of the hedge were recorded within accumulated other comprehensive income (loss) in our consolidated balance sheet. The balance within accumulated other comprehensive income (loss) related to the interest rate swap was approximately $1.4 million, net of income taxes at December 31, 2005. During the nine months ended September 30, 2005, $630,000 of hedge ineffectiveness was recorded as additional interest expense.
Pursuant to SFAS 133, we are required to perform a quarterly analysis of the effectiveness of the hedge. Under SFAS 133, in order to maintain the effectiveness of the hedge, an effectiveness rate of between 80% and 125% must be maintained. This effectiveness rate is calculated by dividing the cumulative change in the hedge liability by the cumulative change in the cash flows of the debt being hedged. As of September 30, 2005, we completed our effectiveness assessment in relation to this swap agreement. As a result of this test, it was determined that the interest rate swap agreement was no longer an effective hedge and, therefore, did not qualify for hedge accounting treatment under SFAS 133. As a result, the interest rate swap has been undesignated from July 1, 2005 through September 30, 2006. For the three month Predecessor period ended September 30, 2005, the fair value of the interest rate swap asset and swap interest earned increased by $18.3 million and for the nine
17
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
month Predecessor period ended September 30, 2005, the fair value of the interest rate swap asset and swap interest earned decreased by $0.3 million. During the Predecessor period January 1, 2006 to July 1, 2006, the fair value of the interest rate swap asset and swap interest earned increased by $23.1 million and the fair value of the interest rate swap asset and swap interest earned during the Successor period July 1, 2006 to September 30, 2006 decreased by $14.3 million. These gains and losses were recorded within gain (loss) on undesignated interest rate swap in our consolidated statement of operations.
As of September 30, 2006, the asset related to this interest rate swap of $7.0 million was included in deferred charges and other assetsnet within our consolidated balance sheet.
On the interest rate reset date of September 14, 2006, the interest rate which the counterparties will utilize on December 14, 2006 to compute interest due to us was determined to be 5.39%. This will result in the counterparties paying us approximately $2.7 million on December 14, 2006 (the difference between the rate we must pay of 4.523% and the rate we will receive from the counterparties of 5.39%).
7. Europe*Star Acquisition
On August 31, 2005, we acquired multiple European orbital slots, as well as a satellite with European, Middle Eastern, African and Asian coverage from Alcatel, a French communications company, for a purchase price of approximately $60.2 million plus liabilities and costs incurred in relation to the acquisition of approximately $13.7 million, including $9.0 million of contingent performance payments due to Alcatel in addition to the purchase price. Through September 30, 2006, we paid $63.4 million of this aggregate purchase price. Of this $63.4 million, $48.2 million was paid prior to the Intelsat Acquisition Transactions. The remaining $15.2 million was paid in August 2006. As of September 30, 2006, $7.2 million of this purchase price, which was recorded as an incentive obligation, remains to be paid and approximately $1.2 million of customer deposit liabilities remain outstanding. The satellite acquired, formerly known as Europe*Star 1, was renamed PAS-12, and is capable of providing a broad range of enhanced services to European customers for program distribution, broadcast contribution and enterprise networking. The agreement provides for future performance payment installments plus related interest contingent on the future performance of the satellite.
8. Stock Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS 123R) using the prospective method. Accordingly, prior periods have not been restated. We also adopted the fair value recognition provisions of SFAS 123, Accounting for Stock Based Compensation (SFAS 123) on January 1, 2003, for all employee awards granted on or after January 1, 2003, pursuant to SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS 148). As such, we recorded compensation expense for employee stock options granted after December 31, 2002, but not in relation to previous awards granted. Awards granted prior to January 1, 2003 were accounted for in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Prior to our adoption of SFAS 123R, benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows. SFAS 123R now requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. The adoption of SFAS 123R as required on January 1, 2006 did not have a material impact on our consolidated financial statements.
1997 Stock Incentive PlanOn May 5, 1997, our board of directors adopted the PanAmSat Corporation Long-Term Stock Incentive Plan (the 1997 Stock Plan), which provided 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 its independent contractors. Awards
18
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
were granted at the discretion of the Compensation Committee on such terms as the committee decided. Effective December 7, 2000, we amended the 1997 Stock Plan to provide that, upon a Change-in-Control (as defined) of it, all unvested stock options and other awards granted under the 1997 Stock Plan would immediately vest and become exercisable, and restrictions on any awards, such as restricted stock, would immediately lapse.
Upon consummation of the Recapitalization, which constituted a Change-in-Control as defined in the 1997 Stock Plan, all outstanding employee stock options vested and became exercisable, and all outstanding restricted shares and restricted stock units immediately vested. Certain members of our management agreed not to have certain of their equity interests cashed out in the Recapitalization; existing options, restricted shares and restricted stock units granted to such individuals remained outstanding as options and shares.
In October 2004, Holdco assumed the 1997 Stock Plan, and the outstanding stock options were converted into an aggregate of 762,372 options to purchase shares of Holdco common stock. No new awards were made, and no new awards could have been made, under the 1997 Stock Plan after March 31, 2004. This plan was terminated immediately prior to the completion of the Intelsat Acquisition Transactions on July 3, 2006.
2004 Stock Option PlanOn August 20, 2004, our board of directors adopted the 2004 Stock Option Plan for Key Employees of PanAmSat Corporation (the 2004 Stock Plan), which provided for the granting of stock options, stock appreciation rights and dividend equivalent rights to executive officers, other employees, and others having a relationship with it or its subsidiaries. In 2004, we granted options to purchase 3,578,828 shares of common stock at an exercise price of $4.21.
In October 2004, Holdco assumed the 2004 Stock Plan in connection with the Contribution and all outstanding options became options of Holdco. Subsequently, Holdco granted 702,597 options in October 2004 at an exercise price of $4.21 and 26,339 options in February 2005 at an exercise price of $18.04.
Upon the completion of the Intelsat Acquisition Transactions, 762,372 options related to the 1997 Stock Incentive Plan and 4,139,415 options related to the 2004 Stock Option Plan were settled for cash on July 3, 2006.
Certain of our senior executives who were offered, and accepted, employment with Intelsat after the completion of the Intelsat Acquisition Transactions, agreed not to have certain of their stock options cashed out in the Intelsat Acquisition Transactions. As a result, a total of 168,349 options granted to these individuals under the 2004 Stock Option Plan were rolled over into share compensation arrangements relating to common shares of Intelsat Holding, Ltd., the indirect parent of Intelsat Bermuda, and the number of options were adjusted to reflect the fair value of the Intelsat Holding, Ltd. stock on the acquisition date.
19
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
There were no grants, exercises, forfeitures or expirations in either the 1997 Stock Plan or the 2004 Stock Plan during the Predecessor period January 1, 2006 to June 30, 2006 and for the Successor period July 1, 2006 to September 30, 2006, as shown below:
Shares | Weighted Average Exercise Price |
Range | |||||||
1997 Stock Plan | |||||||||
Balance at December 31, 2005 |
762,372 | $ | 3.46 | $ | 3.43-$4.04 | ||||
Cashed out as a result of the Intelsat Acquisition Transactions |
(762,372 | ) | $ | 3.46 | $ | 3.43-$4.04 | |||
Balance at September 30, 2006 |
| $ | | $ | | ||||
2004 Stock Plan | |||||||||
Balance at December 31, 2005 |
4,307,764 | $ | 4.29 | $ | 4.21-$18.04 | ||||
Cashed out as a result of the Intelsat Acquisition Transactions |
(4,139,415 | ) | $ | 4.30 | $ | 4.21-$18.04 | |||
Converted to Intelsat Holding, Ltd. Options |
(168,349 | ) | $ | 4.21 | $ | 4.21 | |||
Balance at September 30, 2006 |
| $ | | $ | | ||||
Exercisable at September 30, 2006 |
| $ | | $ | | ||||
For the nine months ended September 30, 2005, there were no options exercised, no related tax benefits realized and no cash inflows from share-based compensation in financing activities. During the predecessor period July 1, 2006, 4,901,787 options were settled for cash of approximately $102 million as a result of the Intelsat Acquisition Transactions. The total intrinsic value of stock options outstanding as of September 30, 2005 was approximately $101.6 million. The total intrinsic value of stock options exercisable as of September 30, 2005 was approximately $17.6 million. At September 30, 2006, no stock options were outstanding.
The stock options granted in the third and fourth quarters of 2004 by both Holdco and us were scheduled to vest over five to eight years. Certain of the awards granted in the third and fourth quarters of 2004 were scheduled to vest over a five-year period based upon the passage of time and the remainders were scheduled to vest after an eight-year period. The vesting of the eight-year options was subject to acceleration if certain pre-established company operating performance targets were achieved. The 2005 operating performance targets established for the plan were met, resulting in the accelerated vesting of 20%, or 445,814, of the 2,229,072 outstanding performance based options. Compensation expense for these nonqualified stock options was based on the fair value of the options at the respective grant dates utilizing the Black-Scholes model for estimating fair value. Holdco recorded stock compensation expense of $0.3 million and $0 million, as well as related tax benefits of $0.1 million and $0 million in the Predecessor three-month period ended September 30, 2005 and the Successor period July 1, 2006 to September 30, 2006, in relation to the options granted under the 2004 Stock Plan. For the Predecessor nine months ended September 30, 2005 and for the Predecessor period January 1, 2006 to June 30, 2006, stock compensation expense of $0.8 million and $0.5 million and related tax benefits of $0.3 million and $0.2 million, respectively, were recorded. These amounts were recorded by Holdco as they were not considered material in relation to our financial statements. The expense relating to the cash settlement of the 4,901,787 stock options of $93.7 million was recorded within restructuring and transaction costs during the Predecessor period July 1, 2006, immediately prior to the completion of the Intelsat Acquisition Transactions.
During the first quarter of 2005, we granted 26,339 stock options under the 2004 Stock Plan. The weighted average fair value per option granted during the nine months ended September 30, 2005 was $2.62. This estimate was based on the Black-Scholes option pricing model with the following weighted average assumptions:
| The risk-free rate of the options granted was based on the U.S. Treasury yield curve in effect at the time of grant. |
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INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
| The expected life of the options granted was estimated using the historical exercise behavior of employees. |
| The dividend yield and stock volatility of the options granted were based on the fact that we were privately held at that time and had no plan to issue dividends to our then existing shareholders. |
Nine months ended 2005 |
|||
Risk free rate |
3.82 | % | |
Dividend yield |
0 | % | |
Expected life |
6.8 years | ||
Stock volatility |
0 | % |
Deferred Stock UnitsWe had a Supplemental Savings Plan and a Deferred Compensation Plan for eligible employees. Under both plans, executives and other highly compensated employees were entitled to defer a portion of their compensation to future years. In July 2004, our board of directors amended the Deferred Compensation Plan and the Supplemental Savings Plan to permit certain senior executives to elect to have all or part of their accounts under the plans invested in deferred stock units, each of which represented the notional right to receive a share of our common stock. The deferred stock units were converted into a notional right to receive a share of Holdco common stock at the same conversion ratio as for the other transactions in the Recapitalization. As of the date of conversion, these deferred stock units represented the notional right to receive 202,213 shares of Holdco common stock, on an adjusted basis, with a value of $1.5 million. During 2005, we reclassified this amount from our liability for deferred compensation plans to additional paid-in capital as these deferred stock units were expected to be paid out in shares of Holdco common stock, rather than in cash. Additionally, these deferred stock units, all of which were outstanding and vested immediately prior to the completion of the Intelsat Acquisition Transactions, were entitled to accrue credits in the same amount as dividends paid to holders of Holdcos common stock. For the Predecessor three months ended September 30, 2005, we recorded compensation expense of $0.1 million. For the Predecessor nine months ended September 30, 2005 and for the Predecessor period January 1, 2006 to June 30, 2006, we recorded compensation expense of $0.7 million and $0.2 million, respectively, in relation to these deferred stock units.
In connection with the Intelsat Acquisition Transactions, we terminated both the Supplemental Savings Plan and the Deferred Compensation Plan immediately before the closing on July 3, 2006. Payments of account balances to participants of the plans are expected to be made within twelve months of the plans termination. As of September 30, 2006, our liabilities for the two plans totaled approximately $6.4 million. Additionally, the settlement of the 0.2 million deferred stock units held within the Deferred Compensation Plan resulted in an additional liability of approximately $5.1 million, which was paid in connection with the closing of the Intelsat Acquisition Transactions. As stated above, $1.5 million of this amount was recorded within additional paid in capital in our consolidated balance sheet as of September 30, 2006. The difference of $3.6 million was expensed in connection with the Intelsat Acquisition Transactions in the July 1, 2006 Predecessor period within restructuring and transaction costs.
On September 16, 2004, our board of directors approved a revised compensation program for our non-employee directors. Each non-employee director was entitled to annual cash compensation of $50,000, and was also granted options to purchase 65,848 shares of common stock. The chairman of our board of directors received an additional annual fee of $100,000 and was granted options to purchase an additional 65,848 shares. Holdco assumed this program and the options were for Holdco stock at the modified price of $4.21.
On June 8, 2005, the Compensation Committee of our board of directors and that of Holdco approved a combined compensation program for non-employee directors. Costs of this compensation program were shared
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INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
equally by Holdco and us. Non-employee directors were compensated $70,000 per annual term, $35,000 paid in cash, quarterly and as earned, and $35,000 paid in shares of Holdco common stock, calculated using the closing price of our common stock on the day prior to the grant date.
For the initial board term following the closing of the initial public offering of Holdcos common stock on March 22, 2005, the $35,000 in compensation paid in shares of our common stock was calculated as above and granted on the date the plan was approved. Accordingly, each non-employee director was granted 1,747 shares on June 8, 2005. Common stock issued to non-employee directors as compensation was not transferable until vested. The common stock granted on June 8, 2005, vested on March 22, 2006.
The terms of the 2006 compensation program for non-employee directors remained the same as the 2005 compensation program through July 3, 2006 except that the $35,000 per director previously paid in shares of our common stock was paid in cash in April 2006.
In addition to compensation for service on our board, our prior Audit Committee members were paid $7,500 per term, our prior Compensation Committee members $5,000 per term, our prior Chairman of the board $100,000 per term, our prior Audit Committee Chairman $20,000 per term, and our prior Compensation Committee Chairman $10,000 per term, each payable quarterly in cash and as earned.
During the three and nine months ended September 30, 2005, we recorded expense of approximately $0.1 million and $0.2 million, respectively, and during the Predecessor period January 1, 2006 to June 30, 2006, we recorded expense of approximately $0.3 million related to this compensation plan.
As noted above, on July 3, 2006 in connection with the completion of the Intelsat Acquisition Transactions, all shares of Holdcos outstanding common stock, stock options and deferred stock units, except for the 168,349 options discussed above, were converted into shares of Holdco common stock and were cashed out. The holders of such equity based arrangements received the $25 per share Intelsat Merger consideration (plus approximately $0.00927 per share in respect of undeclared regular quarterly dividends, less any related costs to exercise) as a result of the completion of the Intelsat Merger. Immediately prior to the completion of the Intelsat Acquisition Transactions, we recorded total costs of approximately $103.5 million related to these equity based arrangements, of which approximately $97.2 million was recorded by us and 50% of the expense related to the cash settlement for the non-employee directors options, or approximately $6 million, was recorded by Holdco during the Predecessor period July 1, 2006. The 50-50 expense allocation of the non-employee directors option costs was based on our estimation that the non-employee directors performed services equally for us and Holdco.
The Board of Directors of Intelsat Holdings adopted the Intelsat Holdings, Ltd. 2005 Share Incentive Plan (the 2005 Share Plan) with an effective date of January 28, 2005, pursuant to which up to 1,124,296 ordinary shares (later increased to 1,300,000 ordinary shares) were reserved for grant to employees and directors of Intelsat Holdings and its direct and indirect subsidiaries. The 2005 Share Plan permits granting of awards in the form of incentive share options, nonqualified share options, restricted shares, restricted share units, share appreciation rights, phantom shares and performance awards.
Certain employees of IGSC who were transferred to Intelsat Corp following the completion of the acquisition transaction previously had been granted both time vesting and performance vesting restricted shares under the 2005 Share Plan. The restricted share grants are liability classified under SFAS 123R. Following the employee transfer, Intelsat Corp has recorded compensation expense over the service period for the time vesting shares based on the intrinsic value (which equaled fair value) at the date of the grant of $2.15 per share. No compensation expense was recorded for performance vesting shares since it was not probable that the performance criteria would be met.
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INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Since awards made consisted of shares of Intelsat Corps parent, Intelsat Holdings, compensation costs for vested awards and the cost to repurchase shares are reflected as capital contributions in Intelsat Corps financial statements. We recognized $6 thousand of compensation costs during the Successor period July 1, 2006 to September 30, 2006.
The employees were granted 107,139 restricted shares, of which 15,167 shares were fully vested prior to the employee transfer. A summary of the status of Intelsat Holdings non-vested shares as of September 30, 2006, and the changes during the Successor period from July 1, 2006 to September 30, 2006 are set forth below:
Number of shares | Weighted-Average Grant-Date Fair Value | |||||
Restricted shares |
||||||
Non-vested restricted shares outstanding as of July 1, 2006 (the date of employee transfer) |
91,972 | $ | 2.15 | |||
Restricted shares forfeited and repurchased at par value |
| 2.15 | ||||
Shares repurchased by Intelsat Holdings |
| 2.15 | ||||
Vested |
(2,673 | ) | 2.15 | |||
Total non-vested restricted shares at September 30, 2006 |
89,299 | $ | 2.15 | |||
The non-vested restricted shares have a remaining weighted-average vesting period of 40 months and the performance shares will remain outstanding for approximately seven years.
During the Successor period July 1, 2006 to September 30, 2006, Intelsat Holdings entered into share-based compensation arrangements (SCAs) with a number of employees of Intelsat Holdings and its direct and indirect subsidiaries under the 2005 Share Plan which may permit such employees to purchase Intelsat Holdings common shares. These SCAs vest over time and are subject to continued employment through each applicable vesting date. The vesting of these SCAs accelerates in the event that the current private equity owners of Intelsat Holdings (or other private equity investors) cease to own 40% or more of Intelsat Holdings.
In connection with the Intelsat Acquisition Transactions, two of our executives who were executives of Intelsat Corp prior to July 3, 2006 and held options to purchase common stock of PanAmSat Holdco rolled over such options by entering into SCAs to purchase Intelsat Holdings common shares. While the rollover adjusted the exercise price and number of applicable shares covered, the vesting period associated with the previous PanAmSat Holdco stock options continued and the share-based compensation arrangements vest in annual installments through August 2009.
Any common shares held by employees as a result of the exercise of SCAs may be repurchased by Intelsat Holdings, and any outstanding but unexercised SCAs may be cancelled, at any time after termination of employment. Shares issued as a result of the exercise of SCAs may be repurchased at the lesser of fair market value and the exercise price in the event of voluntary termination by the employee and other defined circumstances. Since these repurchase features enable Intelsat Corp to recover the shares without transferring any appreciation in value if the employee terminates voluntarily, for accounting purposes, the SCA is not deemed to be granted under SFAS 123R.
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INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. Retirement plans and other retiree benefits
(a) Pension and other post-retirement benefits
Following the completion of the Intelsat Merger, substantially all of the employees of IGSC, an indirect subsidiary of Intelsat Bermuda, were transferred to us pursuant to an employee transfer agreement. The parties further agreed that it was their mutual intent that the transferred employees continued to participate in and receive benefits from the employee benefit Plans and arrangements that are sponsored by IGSC as of the effective date until such time as the parties develop and implement integrated employee benefit Plans that will be available to both the transferred employees as well as to legacy Intelsat Corp employees. Intelsat Corp legally assumed the assets and liabilities of the plans related to the transferred employees as of July 3, 2006 pursuant to the employee transfer agreement, and will become the plans sponsor effective on that date, subject to completion of documentation of the amended and restated plans. As a result of the employee transfer agreement, it was agreed that the Intelsat Medical Plans liability will transfer for all participants other than those retirees who claim to be eligible for certain retiree medical benefits pursuant to a 2001 Board resolution, and future reimbursement will be made for the net benefit claims incurred for all employees terminated and for all resolution participants. Furthermore, the Intelsat Restoration Plan liability would be transferred with no future reimbursement, and the Intelsat Staff Retirement Plan would be transferred to Intelsat Corp at the accrued liability balance at the effective date. Furthermore, IGSC will reimburse Intelsat Corp for a fraction of the future cash contributions required. See Note 2 Intelsat Acquisition Transactions.
IGSC was not required to make any additional contributions in 2005 to the defined benefit retirement plan. We do not currently expect that it will be required to make any such contributions during 2006. Furthermore, we do not expect to make any contributions to our post-retirement health insurance plan, which is an unfunded plan.
Net periodic pension benefits costs (benefit) include the following components for the Successor period July 1, 2006 to September 30, 2006:
Successor Entity | ||||
Period July 1 to 2006 |
||||
Service cost |
$ | 1,020 | ||
Interest cost |
4,686 | |||
Expected return on plan assets |
(6,148 | ) | ||
Amortization of unrecognized prior service cost |
(98 | ) | ||
Total costs (benefit) |
$ | (540 | ) | |
Net periodic other post-retirement benefits costs include the following components for the Successor period July 1, 2006 to September 30, 2006:
Successor Entity | |||
Period July 1 to 2006 | |||
Service cost |
$ | 307 | |
Interest cost |
133 | ||
Total costs |
$ | 440 | |
24
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(b) Other retirement Plans
Intelsat Corp maintains three defined contribution retirement plans for employees in the United States, one for legacy Intelsat employees who were hired before July 19, 2001, one for legacy Intelsat employees hired on or after July 19, 2001 and one plan covering the legacy PanAmSat employees. The company recognized compensation expense of $0.6 million and $1.8 million for the Predecessor three and nine month periods ended September 30, 2005, respectively. For the Predecessor period January 1, 2006 to July 1, 2006, we recorded expense of $1.2 million and for the Successor period July 1, 2006 to September 30, 2006, $1.7 million of expense was recorded. Intelsat also maintains an unfunded deferred compensation plan for executives; however, benefit accruals under the plan were discontinued during 2001. Intelsat Corp maintains other defined contribution retirement plans in several non-U.S. jurisdictions.
10. Restructuring Costs
In connection with the Intelsat Acquisition Transactions, management approved restructuring plans to consolidate and integrate the management and operations of PanAmSat Holdco and Intelsat, Ltd. We expect to pay $11.0 million for accrued liabilities related to this restructuring plan and our facilities restructuring plans established prior to the completion of the Intelsat Acquisition Transactions over the next five years. In addition, we expect to pay an additional $18.0 million related to our workforce restructuring plan.
(a) Facilities Restructuring Plans
The Intelsat Acquisition restructuring plan includes the closure of our former corporate headquarters in Wilton, Connecticut, as well as two other locations in the United States. In accordance with SFAS 141, Business Combinations we have recorded a liability in purchase accounting of approximately $7.0 million in relation to this plan. These costs, which relate primarily to payments due on existing lease obligations, are expected to be incurred and paid through 2011.
We had previously recorded liabilities in connection with our 2002 approval of a plan to restructure several of our United States locations and close certain facilities, some of which are currently being leased through 2011. Additionally, in an effort to further streamline our operations, during 2004 we consolidated our Manhattan Beach, El Segundo and Long Beach, California facilities. As of the date of the Intelsat Merger, we had $4.3 million accrued for these lease obligations. As of September 30, 2006, $4.0 million remains unpaid and will be paid through 2011.
(b) Workforce Restructuring Plan
As part of the acquisition consolidation and integration, we have approved a workforce restructuring plan. This plan provides for the retention of key employees and the relocation and/or severance of employees due to planned facility closures. This workforce reduction covers approximately 240 employees. During the Predecessor period July 1, 2006 and the Successor period July 1, 2006 through September 30, 2006, we recorded approximately $15.4 million and $2.3 million, respectively, of operating expenses in the consolidated statements of operations in relation to this plan. These costs included employee compensation, benefits, outplacement services, legal services and relocation. They are expected to be incurred and paid through June 2008. See Note 12 Commitments and ContingenciesChange-in-Control Obligations.
11. Interest ExpenseNet
Interest expense for the Predecessor three months ended September 30, 2005 was recorded net of capitalized interest of $7.3 million and interest income of $0.8 million. Interest expense for the Predecessor nine months
25
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ended September 30, 2005 was recorded net of capitalized interest of $18.3 million and interest income of $2.1 million. For the Predecessor period January 1, 2006 to July 1, 2006 and the Successor period July 1, 2006 to September 30, 2006, interest expense was recorded net of capitalized interest of $13.0 million and $7.3 million, respectively, and interest income of $2.8 million and $2.1 million, respectively. Included in interest expense for the Predecessor nine months ended September 30, 2005 is approximately $56.0 million of unamortized debt issuance costs which were written-off as a result of the $290.0 million debt repayment made on our senior secured credit facilities on March 22, 2005, the redemption of $353.3 million, or 35%, of our 2014 senior notes on April 1, 2005, including the redemption premium of $31.8 million paid to the holders of these notes, and the voluntary prepayment of $28.4 million on June 17, 2005 under our Term Loan A facility from available cash on hand. There were no such charges recorded during 2006.
12. Commitments and Contingencies
Satellite Incentive Obligations
Satellite construction contracts typically require that we make progress payments during the period of the satellites construction and orbital incentive payments (plus interest as defined in each agreement with the satellite manufacturer) over the orbital life of the satellite. The incentive obligations may be subject to reduction if the satellite fails to meet specific technical operating standards. As of September 30, 2006, we had $117.8 million of liabilities recorded in relation to these satellite incentive obligations. Certain of our satellite construction contracts also provide that certain amounts paid by us during the construction phase are subject to refund (with interest) if the satellite fails to meet these technical operating standards.
Operating Leases
We have commitments for operating leases primarily relating to equipment and our former executive office facilities in Wilton, Connecticut and various other locations. These leases contain escalation provisions for increases as a result of increases in real estate taxes and operating expenses. As of September 30, 2006, minimum annual rentals of all leases, exclusive of potential increases in real estate taxes, operating assessments and future sub-lease income aggregated approximately $20.6 million.
Satellite Construction and Launch Commitments
As of September 30, 2006, we had approximately $51.5 million of expenditures remaining under existing satellite construction contracts and $102.0 million remaining under existing satellite launch contracts. Satellite launch and in-orbit insurance contracts related to future satellites to be launched are cancelable up to thirty days prior to the satellites launch. As of September 30, 2006, we did not have any non-cancelable commitments related to existing launch insurance or in-orbit insurance contracts for satellites to be launched.
On April 12, 2005, we entered into an agreement for the construction of PAS-11, which will be located at 43 degrees west longitude and will serve as a replacement for our PAS-6B Ku-band satellite and the C-band portion of our PAS-3R satellite. In July 2005, we signed an agreement for the launch of this satellite in the first quarter of 2007. Additionally, we have an agreement with one of our major customers for the funding of a portion of the capital expenditures necessary to construct and launch PAS-11 in this timeframe. Such funding represents an obligation for us when it is received from the customer. As of September 30, 2006, the present value of our obligation related to funding from this customer is approximately $73.4 million. This obligation is scheduled to be repaid to the customer over a three-year period beginning in October of 2006. Within our consolidated balance sheet as of September 30, 2006, $42.5 million of this obligation was recorded within short-term accounts payable and accrued liabilities, while the remainder of $30.9 million was recorded within long-term deferred credits and other. Based on our latest deployment plan and launch schedules, the PAS-11 satellite is anticipated to be launched in the third quarter of 2007. This delay is the result of delays in the launch vehicle manifest.
26
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On December 5, 2005, we entered into agreements with the same customer and with the manufacturer of our PAS-11 satellite, which, among other things, allows the customer to procure directly from the manufacturer long-lead items that could be used for the construction of a replacement satellite for PAS-11 on an expedited basis, if needed. Pursuant to the agreement with the customer, we would be required to construct and launch a replacement for PAS-11 in the event of a launch failure or other significant health related issue impacting PAS-11s Ku-band transponders within two years after completion of its in-orbit testing. This customer has leased all of the Ku-band capacity on PAS-11 and would be required to lease all of the Ku-band capacity on a replacement satellite for PAS-11, if such replacement satellite is required.
Horizons Contribution Obligation
On August 1, 2005, we formed our second 50-50 joint venture with JSAT, a leading satellite operator in the Asia-Pacific region, that will build and launch a Ku-band satellite to replace our SBS-6 satellite at 74 degrees west longitude. The joint venture is named Horizons-2. The satellite will support digital video, high-definition television and IP-based content distribution networks to broadband Internet and satellite news gathering services in the United States. This Horizons-2 satellite is currently being constructed and is expected to be in service by the fourth quarter of 2008. The total investment in this joint venture is expected to be approximately $163 million, of which each of the joint venture partners is required to fund their 50% share beginning in early 2008. The contribution obligation arises from our obligation to fund amounts due under Horizons-2s loan agreement with a third party lender. We have entered into a Security and Pledge Agreement with the lender and pursuant to this agreement, granted a security interest in our contribution obligation to the lender. Therefore we have recorded this obligation as an indirect guarantee in accordance with FASB Interpretation No. 45 (As Amended), Guarantors Accounting and Disclosure Requirements for Indebtedness of Others (FIN 45). Our investment in this joint venture is being accounted for using the equity method. As of September 30, 2006, we have recorded a liability of $34.7 million representing our 50% share of the amount drawn through that date on the Horizons-2 loan, within our consolidated financial statements in relation to the future funding of our investment in Horizons-2.
Satellite Insurance
On January 15, 2006, our Galaxy 3R satellite, operating in an inclined orbit at 74 degrees WL, experienced an anomaly of its secondary spacecraft control processor (SCP) and was taken out of service. This satellite had no net book value as of December 31, 2005 and this event is not expected to have a material impact on our future operations or financial results. In January 2006, our Galaxy 12 satellite was replaced by our Galaxy 14 satellite and Galaxy 12 became an in-orbit spare. Additionally, in late February 2006, our Galaxy 1R satellite was replaced by our Galaxy 15 satellite and on March 3, 2006, Galaxy 1R was de-orbited. On June 18, 2006, we successfully launched our Galaxy 16 satellite into orbit. This satellite replaced our Galaxy 4R satellite at 99 degrees WL and was put into service in August 2006. Our Galaxy 4R satellite was placed into non-primary operating service at an inclined orbit at 77 degrees WL at the end of the third quarter of 2006.
As of September 30, 2006, we had in effect launch and in-orbit insurance policies covering four satellites in the aggregate amount of approximately $400.0 million. As of such date, these insured satellites had an aggregate net book value of $437.9 million. As of September 30, 2006, we had 20 uninsured satellites in orbit with a net book value in aggregate of $887.7 million.
Of the insured satellites, as of September 30, 2006, one was covered by an insurance policy with substantial exclusions or exceptions to coverage for failures of specific components identified by the underwriters as at risk for possible failure, or Significant Exclusion Policies. The exclusions reduce the probability of an insurance recovery in the event of a loss on this satellite. Galaxy 13/ Horizons 1, which was placed in service in
27
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
January 2004 and is insured by a policy with an exclusion for Xenon-Ion Propulsion Systems (XIPS) related anomalies, continues to have XIPS available as its primary propulsion system. It also has a bi-propellant fuel system currently in use, with bi-propellant fuel for approximately 10.3 years as of September 30, 2006.
At September 30, 2006, the uninsured satellites and the satellite insured by a Significant Exclusion Policy had a total net book value and other insurable costs of approximately $951.8 million. Of this amount, $64.1 million related to the satellite insured by a Significant Exclusion Policy. Upon the expiration of the insurance policies, there can be no assurance that we will procure new policies.
An uninsured failure of one or more of our satellites could have a material adverse effect on our financial condition and results of operations. In addition, higher premiums on insurance policies will increase our costs, thereby reducing our income from operations by the amount of such increased premiums.
Customer and Vendor Obligations
We have contracts with certain of our customers which require us to provide equipment, services and other support during the term of the related contracts with us and we have long-term contractual obligations with service providers primarily for the operation of certain of our satellites. As of September 30, 2006, we had commitments under these customer and vendor contracts which aggregated approximately $190.5 million related to the provision of equipment, services and other support.
In July 2005, we entered into a series of contracts, one of which obligates us to guarantee the performance of one of our customers serving as the general contractor for an unrelated third party under a Contractors Bond in the amount of approximately $8.8 million. We believe that if the customer defaults on its obligations to the unrelated third party, we will take the place of the customer as the general contractor on the overall project. Accordingly, we have recorded a non-contingent liability and a deferred charge of approximately $0.8 million to reflect the fair value of our obligation to stand ready to perform under the terms of the guarantee in accordance with the provisions of FIN 45. We have also determined that we have no contingent liability under these contracts as prescribed in SFAS No. 5, Accounting for Contingencies because the likelihood that we will be required to perform under the agreements is remote.
At the completion of the project, which is expected to occur within the next year, we will be relieved from our non-contingent obligations under the indemnity agreement. Accordingly and based on the provisions of FIN 45, the balance of the non-contingent liability is being amortized ratably against selling, general and administrative expenses over the overall term of the project based on the percentage of the overall project completed in each period. As of September 30, 2006, the balance of the liability was approximately $0.2 million and the balance of the deferred charge was written off in connection with purchase accounting.
Change-in-Control Obligations
Certain of our senior executives were party to change-in-control severance agreements which provided for payment of severance and other benefits in the event of an involuntary termination of the executives employment (as defined in such agreements) within three years after a change in control. The closing of the Intelsat Acquisition Transactions on July 3, 2006 constituted a change in control which satisfied the conditions for payment under these agreements. Accordingly, the payments required under these severance agreements became payable by us as a result of the completion of the Intelsat Acquisition Transactions. Certain of our senior executives were involuntarily terminated. Certain other of our senior executives were offered, and accepted, employment with post-merger Intelsat and as a result, were not eligible to receive any payments related to their respective change-in-control agreements. The pre-tax cost of termination-related benefits specified by the
28
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
severance agreements of those senior executives that were involuntarily terminated was $8.5 million, which was expensed in July 2006 immediately prior to the completion of the Intelsat Acquisition Transactions.
In connection with the Intelsat Acquisition Transactions, our board of directors approved the adoption of a 2005 Severance Pay Plan on terms similar to our existing 2003 Severance Pay Plan and authorized a retention pool of up to $10 million for employees. Retention bonuses totaling approximately $9.8 million were designated for employees, of which $6.2 million was expensed through September 30, 2006. The remainder of $3.6 million will be expensed over the required employee service periods following the completion of the Intelsat Acquisition Transactions through the first quarter of 2008. The 2005 Severance Pay Plan allows for the payment of enhanced severance to employees laid off or who resign for good reason (as defined in such plan) due to, and within 18 months following, a change in control (as defined in such plan). As a result of the completion of the Intelsat Acquisition Transactions, a change-in-control (as defined in the plan) occurred in July 2006. The total expected cost of future severance and related costs to be paid pursuant to the 2005 Severance Pay Plan as a result of the completion of the Intelsat Acquisition Transactions is estimated to be approximately $15.4 million, which was expensed in the Predecessor period July 1, 2006 immediately prior to the completion of the Intelsat Acquisition Transactions.
As more fully described in Note 8 Stock Based Compensation, we and Holdco granted stock options to certain employees and non-employee directors subsequent to the Recapitalization. The options granted by us were assumed by Holdco in October 2004. The vesting of the stock options was to accelerate in the event of certain changes in control of Holdco. In addition, certain employees received deferred stock units, each of which represented the notional right to receive a share of Holdco common stock. Upon the completion of the Intelsat Acquisition Transactions, all outstanding options and other equity based arrangements, with the exception of 168,349 stock options which were rolled over into share-based compensation arrangements relating to common shares of Intelsat Holdings, Ltd., became fully vested and were converted into a right to receive cash as specified in the Intelsat Merger Agreement. The holders of such equity based arrangements received the $25 per share Intelsat Merger consideration (plus approximately $0.00927 per share in respect of undeclared regular quarterly dividends less any related costs to exercise) as a result of the completion of the Merger. In the Predecessor period July 1, 2006 immediately prior to the completion of the Intelsat Acquisition Transactions, total costs related to these equity based arrangements of approximately $103.5 million were recorded, approximately $97.2 million of which was recorded by us and $6.0 million of which was recorded by Holdco.
The costs related to the executive change-in-control obligations and the stock based compensation obligations, including reimbursement of employee excise taxes and lost income tax deductions, was approximately $35.0 million. We expensed $19.9 million of these costs in the Predecessor period July 1, 2006, immediately prior to the completion of the Intelsat Acquisition Transactions. See Note 2 Intelsat Acquisition Transactions. The remaining amount will represent costs to us in that it will result in lost tax deductions in future periods.
Income Tax Commitments and Contingencies
Prior to August 20, 2004, our parent, PanAmSat Holdco, joined with The DIRECTV Group and General Motors Corporation (GM) in filing a consolidated U.S. Federal income tax return. In April 2004, PanAmSat Holdco entered into a tax separation agreement with The DIRECTV Group that superseded four earlier tax-related agreements among PanAmSat Holdco and its subsidiaries, The DIRECTV Group and certain of its affiliates. Pursuant to the tax separation agreement, The DIRECTV Group agreed to indemnify PanAmSat Holdco for all federal and consolidated state and local income taxes a taxing authority may attempt to collect from us regarding any liability for the federal or consolidated state or local income taxes of GM and The DIRECTV Group, except those income taxes PanAmSat Holdco is required to pay under the tax separation
29
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
agreement. In addition, The DIRECTV Group agreed to indemnify PanAmSat Holdco for any taxes (other than those taxes described in the preceding sentence) related to any periods or portions of such periods ending on or prior to the day of the closing of a PanAmSat Recapitalization, which occurred on August 20, 2004, in amounts equal to 80% of the first $75.0 million of such other taxes and 100% of any other taxes in excess of the first $75.0 million. As a result, PanAmSat Holdcos tax exposure after indemnification related to these periods was capped at $15.0 million. The tax separation agreement with DIRECTV was effective from the August 20, 2004 until the expiration of the statute of limitations with respect to all taxes to which the tax separation agreement relate.
Our income tax provision, prior to and including 2006, includes estimates of potential tax expense for the possible reduction upon the Internal Revenue Service audit of the tax benefits we derived from a deduction for the Extraterritorial Income Exclusion, or ETI, and its predecessor regime (the Foreign Sales Corporation) as well as for the potential tax expense that may arise from an adverse outcome from our foreign tax withholding issues. For all years prior to and including 2006, we have assessed our minimum and maximum exposure for federal tax issues, including Foreign Sales Corporation and ETI issues, as well as foreign tax withholding issues, and have provided taxes in the amount of our estimated exposure.
Foreign Withholding Taxes and Other Tax Reserves
We have outstanding tax claims related to withholding taxes assessed on revenues derived from broadcasters inside and outside of India who broadcast from or into India. The total amount assessed for all periods from March 31, 1996 through March 31, 2004 is approximately $65.2 million. We are contesting the imposition of such taxes. On August 11, 2006, the Income Tax Appellate Tribunal in New Delhi issued a decision which overturned the tax assessment for the 1997/98 assessment year. If the decision is not appealed or is ultimately upheld on appeal, this decision would resolve the dispute at issue in our favor. However, there can be no assurance that the tax authorities will not appeal this decision to the High Court. While this contest proceeds, we have been required to advance cash and provide letters of credit totaling approximately $54.7 million. As of September 30, 2006, we had paid cash of approximately $1.2 million related to these assessment years. If unsuccessful in our contest, we could be subject to comparable claims for subsequent years. In connection with the Recapitalization, The DIRECTV Group, which controlled us prior to the Recapitalization, agreed to indemnify us for these and certain other taxes related to any periods or portions of such periods ending on or prior to the day of the closing of the Recapitalization in amounts equal to 80% of the first $75.0 million of such taxes and 100% of such taxes in excess of the first $75.0 million. As a result, our net tax liability related to these periods is capped at $15.0 million.
With respect to this Indian tax exposure and other, non-Indian tax exposures, we have recorded total tax reserves of $68.5 million. Based upon the tax separation agreement we entered into with The DIRECTV Group as part of the Recapitalization, we have recorded a $49.2 million receivable at September 30, 2006 related to these tax reserves.
Other
Boeing Satellite Systems, Inc., formerly Hughes Space and Communications Company, has security interests in certain transponders on our PAS-2, PAS-3, PAS-4 and PAS-5 satellites to secure incentive payments owed by us pursuant to satellite construction contracts.
We currently have outstanding letters of credit totaling $54.6 million, which primarily relate to the India tax issue noted above.
We are involved in litigation in the normal course of our operations. Management does not believe the outcome of such matters will have a material effect on the consolidated financial statements.
30
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
13. Income Taxes
The difference in the companys effective tax rate for the three months ended September 30, 2005 and the period July 1, 2006 through September 30, 2006 is primarily the result of a reduction in the benefits claimed under the ETI exclusion and non-deductible transaction costs in the July 1, 2006 period. These items are the primary drivers of the difference between the U.S. statutory income tax rate of 35% and the effective tax rates of 16.7%, 20.5% and 18.2% for the Predecessor three months ended September 30, 2005, the Predecessor period July 1, 2006 and the Successor period July 1, 2006 to September 30, 2006 respectively.
14. Certain Relationships and Related Transactions
Transactions with Intelsat, Ltd. and its subsidiaries
Following the completion of the Intelsat Acquisition Transactions, IGen, a wholly-owned indirect subsidiary of Intelsat Bermuda, acquired our subsidiary, G2 Satellite Solutions Corporation, which comprised our government services business, for cash consideration in the amount of $73 million. The acquisition occurred by means of a merger in which G2 Satellite Solutions Corporation merged into IGen, with IGen continuing as the surviving entity. As a result of our sale of G2 Satellite Solutions, its financial condition as of September 30, 2006, and its results of operations for the third quarter of 2006 were excluded from our financial statements. Additionally, as a result of the sale of G2 Satellite Solutions, segment disclosures were no longer required. As noted below, in accordance with the MISA, IGen continues to purchase satellite capacity from us.
Also following the completion of the Intelsat Acquisition Transactions, substantially all of the employees of IGSC were transferred to us pursuant to an employee transfer agreement. As the transaction occurred between entities under common control, the transaction was accounted for at carrying value, which approximated fair value. As such, net liabilities of $11.9 million were recognized by Intelsat Corp and were treated as a distribution to its Parent. In addition, substantially all of the direct and indirect subsidiaries of Intelsat Holdings, Ltd., following the Intelsat Acquisition Transactions, including Holdco and us, entered into the MISA pursuant to which these entities will provide services to each other. In each case, services will be provided on terms that we believe are not materially less favorable to each party than are available on an arms length basis and on terms that the relevant boards of directors have determined to be fair. The MISA may be amended from time to time as required for changes in services or pricing.
For the Successor period July 1, 2006 to September 30, 2006, we recorded revenue of approximately $12.0 million related to capacity purchased from us by subsidiaries of Intelsat Holdings, Ltd. We also recorded revenue of approximately $39.3 million related to services provided by us to subsidiaries of Intelsat Holdings, Ltd. in accordance with the MISA, and recognized $37.5 million of costs related to those revenues. As of September 30, 2006, we have accrued a gross receivable of $62.8 million from subsidiaries of Intelsat Subsidiary Holding Company, Ltd. and a gross payable of $22.8 million to subsidiaries of Intelsat Subsidiary Holding Company, Ltd.
Other Related Party Transactions
We have a 50% ownership interest in the Horizons-1 joint venture, which we account for under the equity method of accounting. We lease Ku-band satellite capacity on the Horizons I satellite, which is owned by this joint venture. During the Predecessor three months ended September 30, 2005 and the Successor period July 1, 2006 through September 30, 2006, we recorded expenses of approximately $0.9 million and $1.0 million, respectively. During the Predecessor nine months ended September 30, 2005, we recorded expenses of approximately $2.7 million in relation to the lease of such Ku-band satellite capacity. For the Predecessor period January 1, 2006 through July 1, 2006, and the Successor period July 1, 2006, through September 30, 2006, we recorded expense of $2.1 million and $1.0 million, respectively. Additionally, we provide telemetry, tracking and
31
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
control services for the Horizons-1 satellite. During both the Predecessor three months ended September 30, 2005 and the Successor period July 1, 2006 through September 30, 2006, we recorded revenues of approximately $0.2 million. During the Predecessor nine months ended September 30, 2005 and the Predecessor period January 1, 2006 through July 1, 2006, and the Successor period July 1, 2006, through September 30, 2006, we recorded revenues of approximately $0.5 million, $0.3 million and $0.2 million, respectively.
Transactions with the Prior Sponsors and their Affiliates
The Prior Sponsors provided management and advisory services to us pursuant to management services agreements executed at the closing of the Recapitalization. The Prior Sponsors charged us an aggregate management fee of $2.0 million annually for the provision of these services, subject to an annual increase of three percent. In connection with, and effective upon completion of, Holdcos initial public offering on March 22, 2005, each of the Prior Sponsors terminated their respective management services agreements for an aggregate consideration of $10.0 million. For the period from January 1, 2005 through March 22, 2005, we recorded approximately $10.4 million of expense for these management fees (including the termination payment). The annual advisory fee did not include, and the Prior Sponsors were entitled to receive, additional compensation for providing investment banking or other advisory services provided in connection with any specific acquisition or divestiture transactions or in the event the Prior Sponsors perform services above and beyond those previously called for by the agreements. During the three months ended September 30, 2005, we reimbursed the Prior Sponsors for approximately $57 thousand, and during the nine months ended September 30, 2005 and the six months ended June 30, 2006, we reimbursed the Prior Sponsors for approximately $155 thousand and $48 thousand, respectively, for expenses incurred. Certain members of our former board of directors whose services were compensated were principals of or were affiliated with the Prior Sponsors.
We provide satellite capacity, TT&C and other related services to affiliates of the Prior Sponsors. Revenues for these services during the Predecessor three and nine month periods ended September 30, 2005 were $0.5 million and $1.7 million, respectively. For the Predecessor period January 1, 2006 through July 1, 2006, these revenues totaled $1.5 million. As of December 31, 2005 and June 30, 2006, we had customer receivables related to these affiliates of approximately $550 thousand and $28 thousand, respectively. Included in our total contracted backlog of $4.4 billion as of June 30, 2006 was approximately $13.5 million of contracted backlog from these affiliates of the Prior Sponsors. Contracted backlog represents revenue to be earned from customers under all long-term contractual agreements.
During the Predecessor nine months ended September 30, 2005, we procured $0.9 million of insurance and insurance-related services from an affiliate of one of the Prior Sponsors. This company was no longer an affiliate of the Prior Sponsor in 2006.
Other Relationships
We utilize the consulting and lobbying services of R. Thompson & Co., which is owned by Robert J. Thompson, Chairman of Jefferson Consulting Group. Mr. Wright, our former Chief Executive Officer and the Chairman of the Board of Intelsat, Ltd., owns a minority interest in Jefferson Consulting Group. Mr. Wright does not have any ownership or financial interest directly or indirectly in R. Thompson & Co. During the Predecessor nine months ended September 30, 2005 and the Predecessor period January 1, 2006 to July 1, 2006, the Predecessor paid approximately $126 thousand and $61 thousand, respectively, in expenses for services provided by R. Thompson & Co. The Successor paid approximately $20 thousand during the period from July 1, 2006 through September 30, 2006.
32
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During 2004, we retained Capstone Consulting to provide us with consulting services, primarily to identify and advise on potential opportunities to reduce our costs and identify other potential opportunities to grow our business. Although neither KKR nor any entity affiliated with KKR owns any of the equity of Capstone, KKR has provided financing to Capstone. We recorded approximately $0.1 million of expense during the Predecessor three months ended September 30, 2005 and $0.6 million of expense for the Predecessor nine months ended September 30, 2005, related to Capstone Consulting.
15. Condensed Consolidating Financial Information
Our 8 1/2% senior notes due 2012 and our 2014 senior notes are unconditionally guaranteed by certain of our domestic subsidiaries. The following disclosures reflect our Condensed Consolidating Financial Information for the periods presented.
8 1/2% Senior Notes due 2012
Obligations under our 8 1/2% senior notes due 2012 are unconditionally guaranteed on a joint and several basis by certain of our existing domestic subsidiaries. As a result, we are required to present consolidating financial information for our company and our subsidiaries within the notes to our condensed consolidated financial statements in accordance with the criteria established for parent companies in Rule 3-10(f) of Regulation S-X. In the second quarter of 2004, we determined that our non-guarantor subsidiaries, which at that time only included our foreign subsidiaries which do not guarantee the 8 1/2% senior notes due 2012, were no longer minor (as defined in Rule 3-10 (h) of Regulation S-X). Our satellite operating companies, which were formed during 2004, are also considered non-guarantor subsidiaries under our 8 1/2% senior notes due 2012, as all domestic subsidiaries formed subsequent to the consummation of the offering of these notes are not considered guarantors under these notes. Therefore, these non-guarantor subsidiaries are included within the following condensed consolidating financial statements for our 8 1/2% senior notes due 2012.
The following condensed consolidating financial information presents the results of operations and cash flows of Intelsat Corp, the guarantor subsidiaries (which are certain of our existing domestic subsidiaries existing at the time the 8 1/2% senior notes due 2012 were issued), the non-guarantor subsidiaries (which are our international subsidiaries, our satellite operating companies and certain of our other domestic subsidiaries) and the eliminations necessary to arrive at the information for our company on a consolidated basis as of December 31, 2005 and September 30, 2006 and for the Predecessor three and nine months ended September 30, 2005 and the Predecessor period January 1, 2006 to July 1, 2006 and the Successor period July 1, 2006 to September 30, 2006. All of the expenses and cash flows recorded during the Predecessor period July 1, 2006 are expenses of Intelsat Corp and therefore separate condensed consolidating financial information for this period has not been presented as it is not meaningful for this period.
33
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The principal elimination entries eliminate investments in subsidiaries and inter-company balances and transactions. All expenses related to the Predecessor period July 1, 2006 are from PanAmSat Opco. The consolidating information is not meaningful for that period.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Revenues: |
|||||||||||||||||||
Operating leases, satellite services and other |
$ | 201,444 | $ | 20,956 | $ | 205,471 | $ | (222,234 | ) | $ | 205,637 | ||||||||
Outright sales and sales-type leases |
3,481 | | | | 3,481 | ||||||||||||||
Total revenues |
204,925 | 20,956 | 205,471 | (222,234 | ) | 209,118 | |||||||||||||
Operating costs and expenses: |
|||||||||||||||||||
Depreciation and amortization |
7,920 | 447 | 60,494 | | 68,861 | ||||||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
210,996 | 14,579 | 27,632 | (222,234 | ) | 30,973 | |||||||||||||
Selling, general and administrative expenses |
15,852 | 1,432 | 1,647 | | 18,931 | ||||||||||||||
Restructuring and transaction costs |
177 | 32 | | | 209 | ||||||||||||||
Gain on undesignated interest rate swap |
(18,332 | ) | | | | (18,332 | ) | ||||||||||||
Total operating costs and expenses |
216,613 | 16,490 | 89,773 | (222,234 | ) | 100,642 | |||||||||||||
Income (loss) from operations |
(11,688 | ) | 4,465 | 115,698 | | 108,476 | |||||||||||||
Interest (income) expensenet |
29,270 | (1 | ) | 19,003 | | 48,272 | |||||||||||||
Other income (expense)net |
1,379 | 78 | 142 | | 1,598 | ||||||||||||||
Income (loss) before income taxes |
(39,579 | ) | 4,544 | 96,837 | | 61,802 | |||||||||||||
Income tax expense (benefit) |
(26,351 | ) | 1,503 | 35,181 | | 10,333 | |||||||||||||
Equity in earnings of subsidiaries |
64,697 | | | (64,697 | ) | | |||||||||||||
Net income |
$ | 51,469 | $ | 3,041 | $ | 61,656 | $ | (64,697 | ) | $ | 51,469 | ||||||||
(Certain totals may not add due to the effects of rounding)
34
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SUCCESSOR PERIOD JULY 1, 2006 TO SEPTEMBER 30, 2006 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Revenues: |
|||||||||||||||||||
Operating leases, satellite services and other |
$ | 221,206 | $ | 3,576 | $ | 157,242 | $ | (181,847 | ) | $ | 200,177 | ||||||||
Revenues from affiliates |
51,227 | | | | 51,227 | ||||||||||||||
Total revenues |
272,433 | 3,576 | 157,242 | (181,847 | ) | 251,404 | |||||||||||||
Operating costs and expenses: |
|||||||||||||||||||
Depreciation and amortization |
8,880 | 374 | 62,612 | | 71,866 | ||||||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
197,485 | (477 | ) | 29,143 | (181,847 | ) | 44,304 | ||||||||||||
Costs from affiliates |
18,468 | | | | 18,468 | ||||||||||||||
Selling, general and administrative expenses |
23,295 | 169 | 1,604 | | 25,068 | ||||||||||||||
Restructuring and transaction costs |
5,213 | | | | 5,213 | ||||||||||||||
Loss on undesignated interest rate swap |
14,328 | | | | 14,328 | ||||||||||||||
Total operating costs and expenses |
267,669 | 66 | 93,359 | (181,847 | ) | 179,247 | |||||||||||||
Income from operations |
4,764 | 3,510 | 63,883 | | 72,157 | ||||||||||||||
Interest expensenet |
51,726 | 1 | 18,983 | | 70,710 | ||||||||||||||
Other income (expense)net |
1,390 | 148 | (95 | ) | | 1,443 | |||||||||||||
Income (loss) before income taxes |
(45,572 | ) | 3,657 | 44,805 | | 2,890 | |||||||||||||
Income tax expense (benefit) |
(23,414 | ) | 317 | 23,624 | | 527 | |||||||||||||
Equity in earnings of subsidiaries |
24,521 | | | (24,521 | ) | | |||||||||||||
Net income |
$ | 2,363 | $ | 3,340 | $ | 21,181 | $ | (24,521 | ) | $ | 2,363 | ||||||||
All of the expenses recorded during the Predecessor period July 1, 2006 are expenses of Intelsat Corp and therefore separate condensed consolidating financial information for this period has not been presented as it is not meaningful for this period.
(Certain totals may not add due to the effects of rounding)
35
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Revenues: |
|||||||||||||||||||
Operating leases, satellite services and other |
$ | 604,535 | $ | 66,790 | $ | 618,258 | $ | (668,400 | ) | $ | 621,183 | ||||||||
Outright sales and sales-type leases |
10,595 | | | | 10,595 | ||||||||||||||
Total revenues |
615,130 | 66,790 | 618,258 | (668,400 | ) | 631,778 | |||||||||||||
Operating costs and expenses: |
|||||||||||||||||||
Cost of outright sales and sales-type leases |
(4,303 | ) | | | | (4,303 | ) | ||||||||||||
Depreciation and amortization |
22,119 | 1,438 | 182,234 | | 205,791 | ||||||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
635,609 | 49,432 | 83,170 | (668,400 | ) | 99,811 | |||||||||||||
Selling, general and administrative expenses |
48,592 | 4,516 | 3,669 | | 56,777 | ||||||||||||||
Prior Sponsor management fees |
10,444 | | | | 10,444 | ||||||||||||||
Restructuring and transaction costs |
3,547 | 427 | | | 3,974 | ||||||||||||||
Loss on termination of sales-type lease |
2,307 | | | | 2,307 | ||||||||||||||
Loss on undesignated interest rate swap |
305 | | | | 305 | ||||||||||||||
Total operating costs and expenses |
718,620 | 55,813 | 269,073 | (668,400 | ) | 375,106 | |||||||||||||
Income (loss) from operations |
(103,490 | ) | 10,977 | 349,185 | | 256,672 | |||||||||||||
Interest (income) expensenet |
155,542 | (62 | ) | 56,395 | | 211,875 | |||||||||||||
Other income (expense)net |
1,421 | 68 | 35 | | 1,524 | ||||||||||||||
Income (loss) before income taxes |
(257,611 | ) | 11,107 | 292,825 | | 46,321 | |||||||||||||
Income tax expense (benefit) |
(101,359 | ) | 4,273 | 104,181 | | 7,095 | |||||||||||||
Equity in earnings of subsidiaries |
195,478 | | | (195,478 | ) | | |||||||||||||
Net income |
$ | 39,226 | $ | 6,834 | $ | 188,644 | $ | (195,478 | ) | $ | 39,226 | ||||||||
(Certain totals may not add due to the effects of rounding)
36
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE PREDECESSOR PERIOD JANUARY 1, 2006 TO JULY 1, 2006 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Revenues: |
|||||||||||||||||||
Operating leases, satellite services and other |
$ | 446,977 | $ | 64,216 | $ | 419,031 | $ | (493,360 | ) | $ | 436,864 | ||||||||
Outright sales and sales-type leases |
5,895 | | | | 5,895 | ||||||||||||||
Total revenues |
452,872 | 64,216 | 419,031 | (493,360 | ) | 442,759 | |||||||||||||
Operating costs and expenses: |
|||||||||||||||||||
Cost of outright sales and sales-type leases |
(1,943 | ) | | | | (1,943 | ) | ||||||||||||
Depreciation and amortization |
12,136 | 959 | 125,560 | | 138,655 | ||||||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
469,679 | 34,106 | 60,552 | (493,360 | ) | 70,977 | |||||||||||||
Selling, general and administrative expenses |
31,886 | 3,170 | 2,977 | | 38,033 | ||||||||||||||
Restructuring and transaction costs |
145,186 | | | | 145,186 | ||||||||||||||
Gain on undesignated interest rate swap |
(23,140 | ) | | | | (23,140 | ) | ||||||||||||
Total operating costs and expenses |
633,804 | 38,235 | 189,089 | (493,360 | ) | 367,768 | |||||||||||||
Income (loss) from operations |
(180,932 | ) | 25,981 | 229,942 | | 74,991 | |||||||||||||
Interest (income) expensenet |
70,247 | (10 | ) | 37,364 | | 107,601 | |||||||||||||
Other income (expense)net |
(4,363 | ) | 291 | 1,393 | | (2,679 | ) | ||||||||||||
Income (loss) before income taxes |
(255,542 | ) | 26,282 | 193,971 | | (35,289 | ) | ||||||||||||
Income tax expense (benefit) |
(63,763 | ) | 3,278 | 68,492 | | 8,007 | |||||||||||||
Equity in earnings of subsidiaries |
148,483 | | | (148,483 | ) | | |||||||||||||
Net income (loss) |
$ | (43,296 | ) | $ | 23,004 | $ | 125,479 | $ | (148,483 | ) | $ | (43,296 | ) | ||||||
(Certain totals may not add due to the effects of rounding)
37
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
AT DECEMBER 31, 2005
(in thousands, except share data)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 121,181 | $ | | $ | 4,764 | $ | | $ | 125,945 | ||||||||||
Accounts receivablenet |
44,028 | 23,226 | 3,532 | | 70,786 | |||||||||||||||
Net investment in sales-type leases |
12,260 | | | | 12,260 | |||||||||||||||
Due From Affiliates |
(15,803 | ) | 24,023 | 859,078 | (867,298 | ) | | |||||||||||||
Prepaid expenses and other |
119,391 | 156 | (3 | ) | (103,769 | ) | 15,775 | |||||||||||||
Deferred income taxes |
16,711 | | | | 16,711 | |||||||||||||||
Total current assets |
297,768 | 47,405 | 867,371 | (971,067 | ) | 241,477 | ||||||||||||||
Satellites and other property and equipmentnet |
494,299 | 4,774 | 1,450,487 | | 1,949,560 | |||||||||||||||
Net investment in sales-type leases |
64,913 | | | | 64,913 | |||||||||||||||
Goodwill |
2,238,676 | 5,455 | | | 2,244,131 | |||||||||||||||
Amortizable intangible assetsnet |
| 244 | | | 244 | |||||||||||||||
Non-amortizable intangible assetsnet |
| | 2,614 | | 2,614 | |||||||||||||||
Deferred charges and other assetsnet |
1,163,510 | 1,580 | 52 | (840,000 | ) | 325,142 | ||||||||||||||
Investment in affiliates and subsidiaries |
1,194,042 | | | (1,194,042 | ) | | ||||||||||||||
Total assets |
$ | 5,453,208 | $ | 59,458 | $ | 2,320,524 | $ | (3,005,109 | ) | $ | 4,828,081 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 75,474 | $ | 8,778 | $ | 1,009 | $ | | $ | 85,261 | ||||||||||
Due to affiliates |
50,233 | | | | 50,233 | |||||||||||||||
Current portion of long-term debt |
16,600 | | | | 16,600 | |||||||||||||||
Current portion of satellite incentives obligations |
13,240 | | | | 13,240 | |||||||||||||||
Accrued interest payable |
37,103 | | 103,769 | (103,769 | ) | 37,103 | ||||||||||||||
Deferred gains and revenues |
18,027 | 6,487 | | | 24,514 | |||||||||||||||
Total current liabilities |
210,677 | 15,265 | 104,778 | (103,769 | ) | 226,951 | ||||||||||||||
Long-term debt, net of current portion |
2,915,400 | | 840,000 | (840,000 | ) | 2,915,400 | ||||||||||||||
Deferred income taxes |
(192,514 | ) | | 216,826 | | 24,312 | ||||||||||||||
Deferred satellite incentive obligations, net of current portion |
98,112 | | | | 98,112 | |||||||||||||||
Deferred revenue, net of current portion |
48,400 | 127 | 2,316 | | 50,843 | |||||||||||||||
Deferred credits and other |
201,525 | 392 | (1,984 | ) | | 199,933 | ||||||||||||||
Due to affiliates |
859,078 | 8,220 | | (867,298 | ) | | ||||||||||||||
Total liabilities |
4,140,678 | 24,004 | 1,161,936 | (1,811,067 | ) | 3,515,551 | ||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock, $0.01 par value |
| | | | | |||||||||||||||
Paid-in capital |
803,545 | 10,069 | 855,152 | (865,221 | ) | 803,545 | ||||||||||||||
Retained earnings |
512,500 | 28,803 | 303,436 | (332,239 | ) | 512,500 | ||||||||||||||
Accumulated other comprehensive loss |
(97 | ) | | | | (97 | ) | |||||||||||||
Other stockholders equity |
(3,418 | ) | (3,418 | ) | | 3,418 | (3,418 | ) | ||||||||||||
Total stockholders equity |
1,312,530 | 35,454 | 1,158,588 | (1,194,042 | ) | 1,312,530 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 5,453,208 | $ | 59,458 | $ | 2,320,524 | $ | (3,005,109 | ) | $ | 4,828,081 | |||||||||
(Certain totals may not add due to the effects of rounding)
38
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
AT SEPTEMBER 30, 2006
(in thousands, except share data)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||
ASSETS | ||||||||||||||||||
Current assets: |
||||||||||||||||||
Cash and cash equivalents |
$ | 135,648 | $ | | $ | 7,088 | $ | | $ | 142,736 | ||||||||
Accounts receivablenet |
63,952 | 2,792 | 4,297 | | 71,041 | |||||||||||||
Due from affiliates |
7,850 | 77,305 | 1,249,832 | (1,295,021 | ) | 39,966 | ||||||||||||
Prepaid expenses and other |
29,601 | | 2,826 | (19,055 | ) | 13,372 | ||||||||||||
Deferred income taxes |
16,820 | | | | 16,820 | |||||||||||||
Total current assets |
253,871 | 80,097 | 1,264,043 | (1,314,076 | ) | 283,935 | ||||||||||||
Satellites and other property and equipmentnet |
666,822 | 1,189 | 1,166,029 | | 1,834,040 | |||||||||||||
Goodwill |
3,750,514 | | | | 3,750,514 | |||||||||||||
Amortizable intangible assetsnet |
23,046 | 317,715 | | 340,761 | ||||||||||||||
Non-amortizable intangible assetsnet |
| 1,116,000 | 4,000 | | 1,120,000 | |||||||||||||
Deferred charges and other assetsnet |
1,021,282 | 1,286 | 3,290 | (840,001 | ) | 185,857 | ||||||||||||
Investment in affiliates and subsidiaries |
2,180,771 | | | (2,180,772 | ) | | ||||||||||||
Total assets |
$ | 7,896,306 | $ | 1,198,572 | $ | 2,755,077 | $ | (4,334,849 | ) | $ | 7,515,107 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||
Current liabilities: |
||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 112,890 | $ | 146 | $ | 1,648 | | $ | 114,684 | |||||||||
Due to affiliates |
1,199,523 | 26,694 | 68,804 | (1,295,021 | ) | | ||||||||||||
Current portion of long-term debt |
39,237 | | | | 39,237 | |||||||||||||
Current portion of satellite incentive obligations |
14,534 | | | | 14,534 | |||||||||||||
Accrued interest payable |
63,085 | | 19,055 | (19,055 | ) | 63,085 | ||||||||||||
Deferred gains and revenues |
27,603 | 3,718 | 163 | | 31,484 | |||||||||||||
Total current liabilities |
1,456,872 | 30,558 | 89,670 | (1,314,076 | ) | 263,024 | ||||||||||||
Long-term debt, net of current portion |
3,462,800 | | 840,000 | (840,000 | ) | 3,462,800 | ||||||||||||
Deferred income taxes |
(313,117 | ) | 420,134 | 390,872 | | 497,889 | ||||||||||||
Deferred satellite incentive obligations, net of current portion |
103,274 | | | | 103,274 | |||||||||||||
Deferred revenue, net of current portion |
46,087 | 113 | 1,530 | | 47,730 | |||||||||||||
Accrued retirement benefits |
38,235 | | | | 38,235 | |||||||||||||
Deferred credits and other |
150,736 | | | | 150,736 | |||||||||||||
Total liabilities |
4,944,887 | 450,805 | 1,322,072 | (2,154,076 | ) | 4,563,688 | ||||||||||||
Commitments and contingencies |
||||||||||||||||||
Stockholders equity: |
||||||||||||||||||
Common stock, $0.01 par value |
| | | | | |||||||||||||
Additional paid-in capital |
2,949,428 | 693,617 | 988,163 | (1,681,780 | ) | 2,949,428 | ||||||||||||
Retained earnings |
2,363 | 54,150 | 444,842 | (498,992 | ) | 2,363 | ||||||||||||
Accumulated other comprehensive income |
(372 | ) | | | | (372 | ) | |||||||||||
Total stockholders equity |
2,951,419 | 747,767 | 1,433,005 | (2,180,772 | ) | 2,951,419 | ||||||||||||
Total liabilities and stockholders equity |
$ | 7,896,306 | $ | 1,198,572 | $ | 2,755,077 | $ | (4,334,848 | ) | $ | 7,515,107 | |||||||
(Certain totals may not add due to the effects of rounding)
39
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Cash flows from operating activities |
$ | 205,273 | $ | 1,468 | $ | 65,667 | $ | | $ | 272,408 | |||||||||
Cash flows from investing activities: |
|||||||||||||||||||
Capital expenditures (including capitalized interest) |
(140,711 | ) | (1,468 | ) | | | (142,179 | ) | |||||||||||
Proceeds from sale of teleport |
3,161 | | | | 3,161 | ||||||||||||||
Acquisitions and divestitures, net of cash acquired/paid |
26,777 | | (68,640 | ) | | (41,863 | ) | ||||||||||||
Net cash used in investing activities |
(110,773 | ) | (1,468 | ) | (68,640 | ) | | (180,881 | ) | ||||||||||
Cash flows from financing activities: |
|||||||||||||||||||
Capital contributed by parent |
658,350 | | | | 658,350 | ||||||||||||||
Repayments of long-term debt |
(671,900 | ) | | | | (671,900 | ) | ||||||||||||
Dividends to stockholder |
(53,785 | ) | | | | (53,785 | ) | ||||||||||||
Capitalized debt issuance costs |
(598 | ) | | | | (598 | ) | ||||||||||||
Funding of capital expenditures by customer |
33,464 | | | | 33,464 | ||||||||||||||
Repayments of incentive obligations |
(9,464 | ) | | | | (9,464 | ) | ||||||||||||
Net cash used in financing activities |
(43,933 | ) | | | | (43,933 | ) | ||||||||||||
Effect of exchange rate changes on cash |
1,210 | | | | 1,210 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
51,777 | | (2,973 | ) | | 48,804 | |||||||||||||
Cash and cash equivalents, beginning of period |
29,897 | | 8,710 | | 38,607 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 81,674 | $ | | $ | 5,737 | $ | | $ | 87,411 | |||||||||
(Certain totals may not add due to the effects of rounding)
40
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
INTELSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE PREDECESSOR PERIOD JANUARY 1, 2006 TO JULY 1, 2006 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Cash flows from operating activities |
$ | 246,720 | $ | 2,146 | $ | 1,522 | $ | | $ | 250,389 | |||||||||
Cash flows from investing activities: |
|||||||||||||||||||
Capital expenditures (including capitalized interest) |
(129,379 | ) | (122 | ) | 236 | | (129,265 | ) | |||||||||||
Distribution from equity investment |
1,796 | | | 1,796 | |||||||||||||||
Acquisitions and divestitures, net of cash acquired/paid |
(4,530 | ) | (1,012 | ) | (1 | ) | | (5,543 | ) | ||||||||||
Net cash used in investing activities |
(132,113 | ) | (1,134 | ) | 235 | | (133,012 | ) | |||||||||||
Cash flows from financing activities: |
|||||||||||||||||||
Repayments of long-term debt |
(8,300 | ) | | | | (8,300 | ) | ||||||||||||
Dividends to stockholder |
(186,481 | ) | | | | (186,481 | ) | ||||||||||||
Funding of capital expenditures by customer |
30,172 | | | | 30,172 | ||||||||||||||
Repayments of incentive obligations |
(5,683 | ) | | | | (5,683 | ) | ||||||||||||
Net cash used in financing activities |
(170,292 | ) | | | | (170,292 | ) | ||||||||||||
Effect of exchange rate changes on cash |
27 | | | | 27 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(55,658 | ) | 1,012 | 1,757 | | (52,888 | ) | ||||||||||||
Cash and cash equivalents, beginning of period |
121,181 | | 4,764 | | 125,945 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 65,523 | $ | 1,012 | $ | 6,521 | $ | | $ | 73,057 | |||||||||
(Certain totals may not add due to the effects of rounding)
41
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
INTELSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SUCCESSOR PERIOD JULY 1, 2006 TO SEPTEMBER 30, 2006 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Cash Flows from operating activities |
$ | 62,324 | $ | (222 | ) | $ | 802 | $ | | $ | 62,904 | ||||||||
Cash flows from investing activities: |
|||||||||||||||||||
Capital expenditures (including capitalized interest) |
(27,832 | ) | (790 | ) | (236 | ) | | (28,858 | ) | ||||||||||
Acquisitions and divestitures, net of cash acquired/paid |
56,670 | | | | 56,670 | ||||||||||||||
Net cash used in investing activities |
28,838 | (790 | ) | (236 | ) | | 27,812 | ||||||||||||
Cash flows from financing activities: |
|||||||||||||||||||
Issuance of new long-term debt |
575,000 | | | | 575,000 | ||||||||||||||
Capital contribution by parent |
| ||||||||||||||||||
Repayments of long-term debt |
(180 | ) | | | | (180 | ) | ||||||||||||
Dividends to stockholder |
(565,656 | ) | | | | (565,656 | ) | ||||||||||||
Capitalized debt issuance costs |
(28,602 | ) | | | | (28,602 | ) | ||||||||||||
Funding of capital expenditures by customer |
857 | | | | 857 | ||||||||||||||
Repayments of incentive obligations |
(2,971 | ) | | | | (2,971 | ) | ||||||||||||
Net cash used in financing activities |
(21,552 | ) | | | | (21,552 | ) | ||||||||||||
Effect of exchange rate changes on cash |
516 | | | | 516 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
70,126 | (1,012 | ) | 566 | | 69,680 | |||||||||||||
Cash and cash equivalents, beginning of period |
65,522 | 1,012 | 6,522 | | 73,056 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 135,648 | $ | | $ | 7,088 | $ | | $ | 142,736 | |||||||||
(Certain totals may not add due to the effects of rounding)
42
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2014 Senior Notes
Our 2014 senior notes are unsecured, and are, or will be, as the case may be, unconditionally guaranteed by each of our existing and certain subsequently acquired or organized domestic restricted subsidiaries. In the third and fourth quarters of 2004, we formed new domestic subsidiaries, which own our satellites. These subsidiaries are guarantors of our 2014 senior notes. As a result, we are now required to present condensed consolidating financial information for our company and these domestic restricted subsidiaries within the notes to our consolidated financial statements in accordance with the criteria established for parent companies in Rule 3-10(f) of Regulation S-X.
The following condensed consolidating financial information presents the results of operations, financial position and cash flows of Intelsat Corp, the guarantor subsidiaries (including our recently formed satellite operating companies which are certain of our existing domestic subsidiaries) and the eliminations necessary to arrive at the information for our company on a consolidated basis as of December 31, 2005 and September 30, 2006 and for the Predecessor three and nine months ended September 30, 2005 and the Predecessor periods January 1, 2006 to July 1, 2006 and the Successor period July 1, 2006 to September 30, 2006. All of the expenses and cash flows recorded during the Predecessor period July 1, 2006 are expenses of Intelsat Corp and therefore separate condensed consolidating financial information for this period has not been presented as it is not meaningful for this period.
The principal elimination entries eliminate investments in subsidiaries and inter-company balances and transactions. All expenses related to the Predecessor period July 1, 2006 are from Panamsat Opco. The consolidating information is not meaningful for that period.
43
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Revenues: |
|||||||||||||||||||
Operating leases, satellite services and other |
$ | 201,444 | $ | 220,751 | $ | 5,676 | $ | (222,234 | ) | $ | 205,637 | ||||||||
Outright sales and sales-type leases |
3,481 | | | | 3,481 | ||||||||||||||
Total revenues |
204,925 | 220,751 | 5,676 | (222,234 | ) | 209,118 | |||||||||||||
Operating costs and expenses: |
|||||||||||||||||||
Depreciation and amortization |
7,920 | 60,328 | 613 | | 68,861 | ||||||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
210,996 | 42,030 | 181 | (222,234 | ) | 30,973 | |||||||||||||
Selling, general and administrative expenses |
15,852 | 1,432 | 1,647 | | 18,931 | ||||||||||||||
Restructuring and transaction costs |
177 | 32 | | | 209 | ||||||||||||||
Gain on undesignated interest rate swap |
(18,332 | ) | | | | (18,332 | ) | ||||||||||||
Total operating costs and expenses |
216,613 | 103,822 | 2,441 | (222,234 | ) | 100,642 | |||||||||||||
Income (loss) from operations |
(11,688 | ) | 116,928 | 3,235 | | 108,476 | |||||||||||||
Interest (income) expensenet |
29,270 | 19,054 | (52 | ) | | 48,272 | |||||||||||||
Other income (expense)net |
1,379 | 78 | 142 | | 1,598 | ||||||||||||||
Income (loss) before income taxes |
(39,579 | ) | 97,952 | 3,429 | | 61,802 | |||||||||||||
Income tax expense (benefit) |
(26,351 | ) | 35,597 | 1,087 | | 10,333 | |||||||||||||
Equity in earnings of subsidiaries |
64,697 | | | (64,697 | ) | | |||||||||||||
Net income |
$ | 51,469 | $ | 62,355 | $ | 2,342 | $ | (64,697 | ) | $ | 51,469 | ||||||||
(Certain totals may not add due to the effects of rounding)
44
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SUCCESSOR PERIOD JULY 1, 2006 TO SEPTEMBER 30, 2006 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||
Revenues: |
||||||||||||||||||
Operating leases, satellite services and other |
$ | 221,206 | $ | 152,066 | $ | 10,615 | $ | (183,710 | ) | $ | 200,177 | |||||||
Revenues from affiliates |
51,227 | | | | 51,227 | |||||||||||||
Total revenues |
272,433 | 152,066 | 10,615 | (183,710 | ) | 251,404 | ||||||||||||
Operating costs and expenses: |
||||||||||||||||||
Depreciation and amortization |
8,880 | 60,646 | 2,340 | | 71,866 | |||||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
197,485 | 27,717 | 2,812 | (183,710 | ) | 44,304 | ||||||||||||
Costs from affiliates |
18,468 | | | | 18,468 | |||||||||||||
Selling, general and administrative expenses |
23,295 | 355 | 1,418 | | 25,068 | |||||||||||||
Restructuring and transaction costs |
5,213 | | | | 5,213 | |||||||||||||
Loss on undesignated interest rate swap |
14,328 | | | | 14,328 | |||||||||||||
Total operating costs and expenses |
267,669 | 88,718 | 6,570 | (183,710 | ) | 179,247 | ||||||||||||
Income from operations |
4,764 | 63,348 | 4,045 | | 72,157 | |||||||||||||
Interest (income) expensenet |
51,726 | 19,088 | (104 | ) | | 70,710 | ||||||||||||
Other income (expense)net |
1,390 | 148 | (95 | ) | | 1,443 | ||||||||||||
Income (loss) before income taxes |
(45,572 | ) | 44,408 | 4,054 | | 2,890 | ||||||||||||
Income tax expense (benefit) |
(23,414 | ) | 23,393 | 548 | | 527 | ||||||||||||
Equity in earnings of subsidiaries |
24,521 | | | (24,521 | ) | | ||||||||||||
Net income |
$ | 2,363 | $ | 21,015 | $ | 3,506 | $ | (24,521 | ) | $ | 2,363 | |||||||
All of the expenses recorded during the Predecessor period July 1, 2006 are expenses of Intelsat Corp and therefore separate condensed consolidating financial information for this period has not been presented as it is not meaningful for this period.
(Certain totals may not add due to the effects of rounding)
45
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Revenues: |
|||||||||||||||||||
Operating leases, satellite services and other |
$ | 604,535 | $ | 668,154 | $ | 16,894 | $ | (668,400 | ) | $ | 621,183 | ||||||||
Outright sales and sales-type leases |
10,595 | | | | 10,595 | ||||||||||||||
Total revenues |
615,130 | 668,154 | 16,894 | (668,400 | ) | 631,778 | |||||||||||||
Operating costs and expenses: |
|||||||||||||||||||
Cost of outright sales and sales-type leases |
(4,303 | ) | | | | (4,303 | ) | ||||||||||||
Depreciation and amortization |
22,119 | 182,916 | 756 | | 205,791 | ||||||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
635,609 | 131,683 | 919 | (668,400 | ) | 99,811 | |||||||||||||
Selling, general and administrative expenses |
48,592 | 4,516 | 3,669 | | 56,777 | ||||||||||||||
Prior Sponsor management fees |
10,444 | | | | 10,444 | ||||||||||||||
Restructuring and transaction costs |
3,547 | 427 | | | 3,974 | ||||||||||||||
Loss on termination of sales-type lease |
2,307 | | | | 2,307 | ||||||||||||||
Loss on undesignated interest rate swap |
305 | | | | 305 | ||||||||||||||
Total operating costs and expenses |
718,620 | 319,542 | 5,344 | (668,400 | ) | 375,106 | |||||||||||||
Income (loss) from operations |
(103,490 | ) | 348,612 | 11,550 | | 256,672 | |||||||||||||
Interest (income) expensenet |
155,542 | 56,483 | (150 | ) | | 211,875 | |||||||||||||
Other income (expense)net |
1,421 | 68 | 35 | | 1,524 | ||||||||||||||
Income (loss) before income taxes |
(257,611 | ) | 292,197 | 11,735 | | 46,321 | |||||||||||||
Income tax expense (benefit) |
(101,359 | ) | 106,871 | 1,583 | | 7,095 | |||||||||||||
Equity in earnings of subsidiaries |
195,478 | | | (195,478 | ) | | |||||||||||||
Net income |
$ | 39,226 | $ | 185,326 | $ | 10,152 | $ | (195,478 | ) | $ | 39,226 | ||||||||
(Certain totals may not add due to the effects of rounding)
46
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE PREDECESSOR PERIOD JANUARY 1, 2006 TO JULY 1, 2006 (UNAUDITED)
(in thousands)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Revenues: |
|||||||||||||||||||
Operating leases, satellite services and other |
$ | 446,977 | $ | 468,810 | $ | 17,022 | $ | (495,945 | ) | $ | 436,864 | ||||||||
Outright sales and sales-type leases |
5,895 | | | | 5,895 | ||||||||||||||
Total revenues |
452,872 | 468,810 | 17,022 | (495,945 | ) | 442,759 | |||||||||||||
Operating costs and expenses: |
|||||||||||||||||||
Cost of outright sales and sales-type leases |
(1,943 | ) | | | | (1,943 | ) | ||||||||||||
Depreciation and amortization |
12,136 | 123,024 | 3,495 | | 138,655 | ||||||||||||||
Direct operating costs (exclusive of depreciation and amortization) |
469,679 | 94,300 | 2,943 | (495,945 | ) | 70,977 | |||||||||||||
Selling, general and administrative expenses |
31,886 | 3,287 | 2,860 | | 38,033 | ||||||||||||||
Restructuring and transaction costs |
145,186 | | | | 145,186 | ||||||||||||||
Gain on undesignated interest rate swap |
(23,140 | ) | | | | (23,140 | ) | ||||||||||||
Total operating costs and expenses |
633,804 | 220,611 | 9,298 | (495,945 | ) | 367,768 | |||||||||||||
Income (loss) from operations |
(180,932 | ) | 248,199 | 7,724 | | 74,991 | |||||||||||||
Interest (income) expensenet |
70,247 | 37,479 | (125 | ) | | 107,601 | |||||||||||||
Other income (expense)net |
(4,363 | ) | 283 | 1,401 | | (2,679 | ) | ||||||||||||
Income (loss) before income taxes |
(255,542 | ) | 211,003 | 9,250 | | (35,289 | ) | ||||||||||||
Income tax expense (benefit) |
(63,763 | ) | 70,801 | 969 | | 8,007 | |||||||||||||
Equity in earnings of subsidiaries |
148,483 | | | (148,483 | ) | | |||||||||||||
Net income (loss) |
$ | (43,296 | ) | $ | 140,202 | $ | 8,281 | $ | (148,483 | ) | $ | (43,296 | ) | ||||||
(Certain totals may not add due to the effects of rounding)
47
INTELSAT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
AT DECEMBER 31, 2005
(in thousands, except share data)
Intelsat Corporation |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 121,181 | $ | | $ | 4,764 | $ | | $ | 125,945 | ||||||||||
Accounts receivablenet |
44,028 | 23,226 | 3,532 | | 70,786 | |||||||||||||||
Net investment in sales-type leases |
12,260 | | | | 12,260 | |||||||||||||||
Due from affiliates |
(15,803 | ) | 946,284 | (63,183 | ) | (867,298 | ) | | ||||||||||||
Prepaid expenses and other |
119,391 | 156 | (3 | ) | (103,769 | ) | 15,775 | |||||||||||||
Deferred income taxes |
16,711 | | | | 16,711 | |||||||||||||||
Total current assets |
297,768 | 969,666 | (54,890 | ) | (971,067 | ) | 241,477 | |||||||||||||
Satellites and other property and equipmentnet |
494,299 | 1,388,587 | 66,674 | | 1,949,560 | |||||||||||||||
Net investment in sales-type leases |
64,913 | | | | 64,913 | |||||||||||||||
Goodwill |
2,238,676 | 5,455 | | | 2,244,131 | |||||||||||||||
Amortizable intangible assetsnet |
| 244 | | | 244 | |||||||||||||||
Non-amortizable intangible assetsnet |
| 2,614 | | | 2,614 | |||||||||||||||
Deferred charges and other assetsnet |
1,163,510 | (1,034 | ) | 2,666 | (840,000 | ) | 325,142 | |||||||||||||
Investment in affiliates and subsidiaries |
1,194,042 | | | (1,194,042 | ) | | ||||||||||||||
Total assets |
$ | 5,453,208 | $ | 2,365,532 | $ | 14,450 | $ | (3,005,109 | ) | $ | 4,828,081 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 75,474 | $ | 8,778 | $ | 1,009 | $ | | $ | 85,261 | ||||||||||
Due to affiliates |
50,233 | | | | 50,233 | |||||||||||||||
Current portion of long-term debt |
16,600 | | | | 16,600 | |||||||||||||||
Current portion of satellite incentives obligations |
13,240 | | | | 13,240 | |||||||||||||||
Accrued interest payable |
37,103 | 103,769 | | (103,769 | ) | 37,103 | ||||||||||||||
Deferred gains and revenues |
18,027 | 6,487 | | | 24,514 | |||||||||||||||
Total current liabilities |
210,677 | 119,034 | 1,009 | (103,769 | ) | 226,951 | ||||||||||||||