UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File No. 0-22531
PanAmSat Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4607698
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
20 Westport Road, Wilton, CT 06897
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 203-210-8000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of May 1, 2002, an aggregate of 149,911,947 shares of the Company's Common
Stock were outstanding.
Unless the context otherwise requires, in this Quarterly Report on Form 10-Q,
the terms "we", the "Company" and "PanAmSat" refer to PanAmSat Corporation and
its subsidiaries.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains certain forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. When used in this Quarterly Report on
Form 10-Q, the words "estimate," "plan," "project," "anticipate," "expect,"
"intend," "outlook," "believe," and other similar expressions are intended to
identify forward-looking statements and information. Actual results may differ
materially from any results which might be projected, forecasted, estimated or
budgeted by PanAmSat Corporation ("PanAmSat" or the "Company") due to certain
risks and uncertainties, including without limitation: (i) risks of launch
failures, launch and construction delays and in-orbit failures or reduced
performance, (ii) risk that we may not be able to obtain new or renewal
satellite insurance policies on commercially reasonable terms or at all, (iii)
risks related to domestic and international government regulation, (iv) risks of
doing business internationally, (v) risks related to possible future losses on
satellites that are not adequately covered by insurance, (vi) risks of
inadequate access to capital for growth, (vii) risks related to competition,
(viii) risks related to the Company's Internet-related business, (ix) risks
associated with the Company's recently completed refinancing and other
indebtedness, (x) risks related to control by our majority stockholder and (xi)
litigation. Such risks are more fully described in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Quarterly Report on Form 10-Q and under the caption "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001
(the "Form 10-K"). Reference is also made to such other risks and uncertainties
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. The Company cautions that the foregoing list of important
factors is not exclusive. Furthermore, the Company operates in an industry
sector where securities values may be volatile and may be influenced by economic
and other factors beyond the Company's control.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended March 31, 2002 and 2001
(In Thousands, Except Share Data)
March 31, March 31,
2002 2001
------------- -------------
REVENUES:
Operating leases, satellite services and other $ 201,369 $ 199,503
Outright sales and sales-type leases 5,770 5,724
------------- -------------
Total revenues 207,139 205,227
------------- -------------
OPERATING COSTS AND EXPENSES:
Depreciation and amortization 93,955 98,896
Direct operating costs 32,489 37,460
Selling, general and administrative expenses 32,483 27,718
Facilities restructuring costs 11,224 --
Gain on PAS-7 insurance claim (40,063) --
Loss on conversion of sales-type leases 18,690 --
Severance costs 1,295 --
------------- -------------
Total operating costs and expenses 150,073 164,074
------------- -------------
INCOME FROM OPERATIONS 57,066 41,153
INTEREST EXPENSE, net 25,729 32,308
------------- -------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 31,337 8,845
INCOME TAXES 7,834 3,848
------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM $ 23,503 $ 4,997
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
net of income taxes 2,482 --
------------- -------------
NET INCOME $ 21,021 $ 4,997
------------- -------------
EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM -
basic and diluted $ 0.16 $ 0.03
EARNINGS PER SHARE - EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT - basic and diluted .02 --
------------- -------------
NET INCOME PER COMMON SHARE - basic and diluted $ 0.14 $ 0.03
------------- -------------
Weighted average common shares outstanding 149,886,000 149,705,000
------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, December 31,
2002 2001
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 655,888 $ 443,266
Accounts receivable-net 30,869 34,468
Net investment in sales-type leases 23,964 24,887
Prepaid expenses and other (principally prepaid insurance) 25,721 34,375
Deferred income taxes 17,102 8,181
Insurance claim receivable 41,309 --
---------- ----------
Total current assets 794,853 545,176
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 2,951,952 3,152,082
NET INVESTMENT IN SALES-TYPE LEASES 183,623 227,014
GOODWILL-Net of amortization 2,238,659 2,238,659
DEFERRED CHARGES 165,964 133,880
---------- ----------
TOTAL ASSETS $6,335,051 $6,296,810
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
4
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (continued)
(In Thousands, Except Share Data)
March 31, December 31,
2002 2001
---------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 78,097 $ 88,269
Current portion of long-term debt 200,000 46,542
Accrued interest payable 22,126 23,988
Deferred revenues 16,097 10,554
---------- ----------
Total current liabilities 316,320 169,353
DUE TO AFFILIATES (merger-related
indebtedness) -- 1,725,000
LONG-TERM DEBT 2,350,000 750,000
DEFERRED INCOME TAXES 397,439 381,754
DEFERRED CREDITS AND OTHER (principally
customer deposits and deferred revenue) 256,962 278,143
---------- ----------
TOTAL LIABILITIES $3,320,721 $3,304,250
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (continued)
(In Thousands, Except Share Data)
March 31, December 31,
2002 2001
---------- ----------
(Unaudited)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value -- 400,000,000
shares authorized; 149,905,297 and 149,871,260
outstanding at March 31, 2002 and December 31,
2001, respectively $ 1,499 $ 1,499
Additional paid-in-capital 2,530,765 2,530,016
Retained earnings 482,066 461,045
---------- ----------
Total stockholders' equity 3,014,330 2,992,560
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,335,051 $6,296,810
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
6
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 2002 and 2001
(In Thousands)
March 31, March 31,
2002 2001
--------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 21,021 $ 4,997
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 93,955 98,896
Deferred income taxes 6,764 11,617
Amortization of debt issuance costs 2,129 1,527
Provision for uncollectible receivables 10,000 5,876
Gain on PAS-7 settlement (40,063) --
Loss on conversion of sales-type leases 18,690 --
Facilities restructuring costs 11,224 --
Loss on early extinguishment of debt 2,482 --
Changes in assets and liabilities:
Collections on investments in sales-type leases 5,979 5,385
Operating leases and other receivables (1,401) (14,266)
Prepaid expenses and other assets 9,402 (20,724)
Accounts payable and accrued liabilities (19,506) 7,568
Deferred gains and revenues 3,992 16,271
--------- ---------
Net cash provided by operating activities $ 124,668 $ 117,147
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
7
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (continued)
For the Three Months Ended March 31, 2002 and 2001
(In Thousands)
March 31, March 31,
2002 2001
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including capitalized interest) $ (73,979) $ (67,218)
Insurance proceeds from satellite recoveries 173,691 132,435
----------- -----------
Net cash provided by investing activities 99,712 65,217
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings 1,800,000 --
Repayments of long-term debt (1,771,542) (21,216)
Debt issuance costs (38,360) --
Repayments of incentive obligations (2,696) (2,017)
Stock issued in connection with employee benefit plans 840 1,596
----------- -----------
Net cash used in financing activities (11,758) (21,637)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 212,622 160,727
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 443,266 129,345
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 655,888 $ 290,072
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received for interest $ 2,949 $ 3,118
----------- -----------
Cash paid for interest $ 33,787 $ 56,069
----------- -----------
Cash paid for taxes $ 366 $ 92
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
8
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments which are of a normal recurring nature necessary to present
fairly the financial position, results of operations and cash flows as of
and for the three month periods ended March 31, 2002 and 2001 have been
made. Certain prior period amounts have been reclassified to conform with
the current period's presentation. Operating results for the three months
ended March 31, 2002 and 2001 are not necessarily indicative of the
operating results for the full year. For further information, refer to
the financial statements and footnotes thereto included in the Form 10-K.
On October 28, 2001, General Motors ("GM"), Hughes Electronics
Corporation ("Hughes Electronics") and EchoStar Communications
Corporation ("EchoStar") announced the signing of definitive agreements
that, subject to stockholder approval, regulatory clearance, the receipt
of a favorable ruling from the IRS that the separation of Hughes
Electronics (or a newly formed holding company holding all of the
capital stock of Hughes Electronics) from GM will be tax-free to GM and
its stockholders for U.S. federal income tax purposes and certain other
conditions, provide for the split-off of Hughes Electronics (or such
newly formed holding company) from GM and the subsequent merger of the
Hughes Electronics and EchoStar businesses. EchoStar is a leading
provider of direct broadcast satellite television services in the United
States through its DISH Network business unit. The transactions are
currently expected to close in the second half of 2002.
GM, Hughes Electronics and EchoStar have agreed that, in the event the
transactions do not occur because certain specified regulatory clearances
or approvals have not been obtained or other conditions have not been
satisfied, EchoStar will be required to purchase all of the shares of
Common Stock of PanAmSat beneficially owned by Hughes Electronics
(approximately 81% of PanAmSat's outstanding Common Stock) for $22.47 per
share or an aggregate purchase price of approximately $2.7 billion, which
is payable, depending on the circumstances, solely in cash or in a
combination of cash and either debt or equity securities of EchoStar.
EchoStar has the option to structure its purchase of Hughes Electronics'
interest in PanAmSat as a merger or tender offer so that it can attempt
to acquire 100% of PanAmSat in one transaction, in which case Hughes
Electronics must receive at least the same amount of consideration that
it would have received in the PanAmSat stock sale. EchoStar has agreed
that, unless it has previously completed a merger with PanAmSat or a
tender offer for all of the outstanding
9
PanAmSat shares, it will commence a tender offer for all PanAmSat shares
that remain outstanding following the completion of the PanAmSat stock
sale to EchoStar for a purchase price of at least $22.47 per share (or
approximately $675 million in the aggregate) payable, at the option of
the holder, either in cash or shares of EchoStar Class A Common Stock.
Any such sale of PanAmSat would be subject to a number of conditions
which must be satisfied before the transaction could be completed,
including, among other things, the expiration or termination of the
waiting period applicable to the sale under the Hart-Scott-Rodino Act and
the lack of any effective injunction or order for the transfer of
licenses in connection with any such PanAmSat sale.
(2) New Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which was
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the identification of reporting
units for purposes of assessing potential future impairments of goodwill.
SFAS 142 also requires us to complete a transitional goodwill impairment
test within six months from the date of adoption and further requires us
to evaluate the carrying value of goodwill for impairment annually
thereafter. The adoption of SFAS 142 resulted in the elimination of
goodwill amortization beginning January 1, 2002. Our annual goodwill
amortization was approximately $65 million. We do not believe that the
adoption of the other provisions of SFAS 142 will have a significant
impact on our financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations". This statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies
to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset, except for certain obligations of
lessees. This standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period incurred. When
the liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. We adopted the provisions of SFAS No. 143 at the beginning of
2002. The adoption of SFAS 143 did not have a significant impact on our
financial statements.
10
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". This
statement also amends ARB No. 51, "Consolidated Financial Statements", to
eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. This statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This statement also
broadens the presentation of discontinued operations to include more
disposal transactions. We adopted the provisions of this statement at the
beginning of 2002. The adoption of SFAS 144 did not have a significant
impact on our financial statements.
(3) Satellite Developments
Reference is made to "Item 1. Business - Overview - Our Business Strategy
and Our Satellite Network and Ground Infrastructure" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations - Satellite Deployment Plan and Planned Satellites" in the
Form 10-K for a detailed description of the Company's satellite network
and its satellite deployment plan.
In October 2001, we filed a proof of loss under the insurance policy on
PAS-7 related to circuit failures which occurred in September 2001 and
resulted in a reduction of 28.9% of the satellite's total power available
for communications. During the three months ended March 31, 2002, our
insurers confirmed to us their agreement to settle the claim by payment
to the Company of $215 million in relation to the PAS-7 insurance claim.
(See Note 5).
The Company expects to launch up to six satellites by 2006. Galaxy IIIC
is scheduled to be launched in the second quarter of 2002 and will
replace Galaxy IIIR in the North American Region and supplement Galaxy
VIII-i in Latin America and the Caribbean. Galaxy VIIIi-R will be ready
for launch in the third quarter of 2002 and will cover Latin America.
This satellite is being built first to serve as an on-ground spare for
Galaxy IIIC in the event of a launch failure or as possible supplemental
capacity for Galaxy IIIC if it is successfully deployed. We have entered
into a contract with an affiliate of DirecTV Latin America, one of our
affiliates, for the lease of capacity on Galaxy VIII-iR, but the customer
may terminate that contract following the commencement of service on
Galaxy IIIC. If the customer were to terminate the contract, we would
either modify Galaxy VIII-iR for other use at another orbital location or
terminate our contract with Boeing for the construction of Galaxy
VIII-iR. In such event, the customer
11
would be obligated to pay us over time for all of our contractual
liabilities to Boeing and the launch services provider for such
modification, postponement and/or termination.
The Company, through its joint-venture with JSAT Corporation, a Japanese
satellite services provider, expects to launch the Galaxy XIII/Horizons
satellite to 127 degrees west longitude in early 2003. The Company also
expects to launch Galaxy VR (formerly named Galaxy XII) in early 2003 to
74 degrees west longitude. The Company also has two additional satellites
that are under construction for United States coverage. We are currently
scheduled to launch one of these additional satellites to replace Galaxy
1R prior to the end of its useful life in 2006. The other additional
satellite would be available to us as a replacement or an in-orbit spare.
Ten of the Company's satellites are either uninsured or insured with
significant exclusions as of March 31, 2002. The net book value of these
uninsured satellites and those satellites with insurance policies subject
to significant exclusions as of March 31, 2002 aggregated $896 million.
(4) Long-Term Debt and Due to Affiliates
Long-term debt and due to affiliates consisted of the following (in
thousands):
March 31, December 31,
2002 2001
---------- ----------
LONG-TERM DEBT:
6% Notes due 2003 $ 200,000 $ 200,000
6 1/8% Notes due 2005 275,000 275,000
6 3/8% Notes due 2008 150,000 150,000
6 7/8% Notes due 2028 125,000 125,000
Galaxy IIIR Notes due 2002 -- 46,542
8 1/2% Senior Notes due 2012 800,000 --
Term loan A facility 300,000 --
Term loan B facility 700,000 --
---------- ----------
2,550,000 796,542
Less current maturities 200,000 46,542
---------- ----------
$2,350,000 $ 750,000
========== ==========
DUE TO AFFILIATES: $ -- $1,725,000
========== ==========
In February 2002, we completed a private placement debt offering pursuant
to Rule 144A under the Securities Act of 1933, as amended, in an
aggregate principal amount of $800.0 million (the "Senior Notes") and
entered into a credit facility in an aggregate principal amount of up to
$1.25 billion (the "Senior Secured Credit
12
Facility"). We refer to these transactions as the "Refinancing." Our net
proceeds from the Senior Notes and borrowings of $1.0 billion under the
Senior Secured Credit Facility were approximately $1.76 billion after
underwriting fees and other expenses of the transactions. We used $1.725
billion of the proceeds to repay in full the $1.725 billion of
indebtedness owed under the term loan to Hughes Electronics, with the
balance to be used for general corporate purposes. The Senior Notes bear
interest at an annual rate of 8.5%, are payable semi-annually, mature in
2012 and are unsecured. The Senior Notes are guaranteed on a senior
unsecured basis by all of our domestic restricted subsidiaries.
The Senior Secured Credit Facility is comprised of a $250.0 million
revolving credit facility, which is presently undrawn and will terminate
on December 31, 2007 (the "Revolving Facility"), a $300.0 million term
loan A facility which matures on December 31, 2007 (the "Term A
Facility"), and a $700.0 million term loan B facility which matures on
December 31, 2008 (the "Term B Facility"). The Term A Facility and Term B
Facility were fully drawn in connection with the Refinancing. At March
31, 2002, $300 million was outstanding under the Term A Facility and $700
million was outstanding under the Term B Facility. The interest rates
applicable to loans under the Senior Secured Credit Facility will be, at
the Company's option, the alternate base rate or adjusted LIBOR plus, in
each case, an applicable margin. The applicable margin for loans under
the Revolving Facility and the Term A Facility is subject to adjustment
based on the Company's total leverage ratio. The applicable margin under
the Term B Facility is fixed. The alternate base rate is a fluctuating
interest rate equal to the higher of (1) the prime rate and (2) the
federal funds effective rate plus 50 basis points. In addition, the
Company is required to pay to the lenders under the Revolving Facility a
commitment fee in respect of the unused commitments thereunder at a rate
that is subject to adjustment based on the Company's total leverage
ratio. At March 31, 2002, the applicable interest rate on the Term A
Facility was 4.96%, the applicable interest rate on the Term B Facility
was 5.46%, and the unused commitment fee for the period from February 25,
2002 through March 31, 2002 was $163 thousand.
Obligations under the Senior Secured Credit Facility are, or will be, as
the case may be, unconditionally guaranteed by each of our existing and
subsequently acquired or organized domestic and, to the extent no adverse
tax consequences would result therefrom, foreign restricted subsidiaries.
In addition, such obligations are equally and ratably secured by
perfected first priority security interests in, and mortgages on,
substantially all of the tangible and intangible assets of the Company
and its subsidiaries, including its satellites. The agreement governing
the Senior Secured Credit Facility requires the Company to enter into
interest rate hedge agreements with respect to at least 10% of the
aggregate borrowings under the Term A Facility and Term B Facility
within 360 days of securing the facility. These interest rate hedge
agreements will effectively enable the Company to protect itself against
three month London Interbank offered rates which exceed 5% per annum.
13
The indenture governing the Senior Notes and the agreement governing the
Senior Secured Credit Facility contain various covenants which impose
significant restrictions on our business. These covenants limit our
ability to, among other things: incur or guarantee additional
indebtedness; make certain payments, including dividends; create or
permit to exist certain liens; enter into business combinations and asset
sale transactions; reduce or eliminate insurance on our satellites; make
investments and enter into transactions with affiliates and enter into
new businesses. The Senior Secured Credit Facility also limits the
Company's ability to sell certain assets of the Company.
The Company issued five, seven, ten and thirty-year fixed rate notes
totaling $750 million in January 1998. The outstanding principal
balances,interest rates and maturity dates for these notes as of March
31, 2002 were $200 million at 6.0% due 2003, $275 million at 6.125% due
2005, $150 million at 6.375% due 2008 and $125 million at $6.875% due
2028, respectively. Principal on the notes is payable at maturity, while
interest is payable semi-annually. At March 31, 2002, $750 million was
outstanding in relation to these notes. In connection with the
Refinancing, these notes have been ratably secured by substantially all
of our assets on a pari-passu basis with the security interests covering
our obligations under the Senior Secured Credit Facility.
As of December 31, 2001, the Company had $46.5 million principal amount
outstanding under notes assumed in connection with our exercise in July
1999 of an early buy-out opportunity for certain transponders under a
sale-leaseback transaction relating to our Galaxy IIIR satellite (the
"Galaxy IIIR Notes"). The Galaxy IIIR Notes, which bore interest at LIBOR
plus 0.25%, matured on January 2, 2002 and were repaid in full on that
date from available cash.
(5) Gain on PAS-7 Insurance Claim
In October 2001, we filed a proof of loss under the insurance policy on
PAS-7 related to circuit failures which occurred in September 2001 and
resulted in a reduction of 28.9% of the satellite's total power available
for communications. Service to existing customers was not affected, and
we expect that PAS-7 will continue to serve these customers. The
insurance policy was in the amount of $253.4 million and included a
provision for us to share 25% of future revenues on PAS-7 with the
insurers. During the three months ended March 31, 2002, our insurers
confirmed to us their agreement to settle the claim by payment to the
Company of $215 million in relation to the PAS-7 insurance claim. These
net proceeds reflect the insurance policy amount of $253.4 million less
the expected future revenue share that would have been paid to the
insurers under the PAS-7 insurance policy adjusted by a negotiated
discount. Pursuant to this agreement, no future revenue share payments
will be required to be made in relation to PAS-7. The Company received
$173.7 million of the net proceeds from this insurance settlement as of
March 31, 2002 and received the remaining $41.3 million of net proceeds
in April 2002. During the three months ended March 31, 2002, the Company
recorded a gain of approximately $40.1 million related to the PAS-7
14
insurance claim, which reflects the net proceeds agreed to by the
insurers less the net book value of the PAS-7 satellite, including
incentive obligations.
(6) Loss on Conversion of Sales-Type Leases
On March 29, 2002, the Company entered into an agreement with one of its
customers regarding the revision of the customer's sales-type lease
agreements as well as certain other trade receivables. This agreement
resulted in the termination of the customer's sales-type leases and the
establishment of new operating leases in their place. As a result, the
Company recorded a non-cash charge in its consolidated income statement
for the three months ended March 31, 2002 of $18.7 million.
(7) Facilities Restructuring Costs
On March 29, 2002, the Company's management approved a plan to
restructure several of its United States locations and close certain
facilities which are currently being leased through 2011. Upon approval
of this plan, the Company recorded a non-cash charge in its consolidated
income statement for the three months ended March 31, 2002 of $11.2
million. This charge reflects future lease costs, net of estimated future
sublease revenue, of $8.9 million related to approximately 98,000 square
feet of unused facilities and the write-off of approximately $2.3 million
of leasehold improvements related to these facilities.
(8) Severance Costs
The Company recorded severance costs of $8.2 million for the year ended
December 31, 2001 and severance costs of $1.3 million for the three
months ended March 31, 2002. These costs were related to the Company's
expense reduction and NET-36 restructuring plan that began in the third
quarter of 2001 and were primarily comprised of employee compensation and
employee benefits, outplacement services and legal and consulting
expenses associated with the cumulative reduction in workforce of 164
employees. Included in the 2001 severance costs was approximately $3.3
million that relates to costs associated with the resignation of the
former Chief Executive Officer of PanAmSat in August 2001. Approximately
$6 million of the $9.5 million of total severance costs have been paid
through March 31, 2002 and approximately $3.5 million were recorded
within accrued liabilities on the consolidated balance sheet at March 31,
2002. Substantially all of the remaining accrued severance costs at March
31, 2002 are expected to be paid during 2002.
(9) Extraordinary Loss on Early Extinguishment of Debt
On February 25, 2002, the Company completed its Refinancing and repaid
the $1.725 billion of indebtedness owed under the term loan to Hughes
Electronics. (See Note 4). In conjunction with this repayment, the
Company was required to write-off the remaining unamortized debt issuance
costs of approximately $3.3 million related to the Hughes term loan, net
of related income taxes of $0.8 million.
15
This $2.5 million charge was recorded within the Company's consolidated
income statement for the three months ended March 31, 2002 as an
extraordinary loss on early extinguishment of debt.
(10) Interest Expense-Net
Interest expense for the three months ended March 31, 2002 and 2001 is
recorded net of capitalized interest of $5.4 million and $9.3 million,
respectively and interest income of $2.6 million and $3.1 million,
respectively.
(11) Revenue By Service Type
PanAmSat operates its business as a single operating segment. PanAmSat
primarily provides video and data network services to major broadcasting,
direct-to-home television providers and telecommunications companies
worldwide. For the three months ended March 31, 2002 and 2001, PanAmSat's
revenues were $207.1 million and $205.2 million, respectively. These
revenues were derived from the following service areas:
Percentage of Revenues
Three Months Ended
------------------------
March 31, March 31,
2002 2001
------ ------
Services:
Video Services 67.3% 66.6%
Network Services 25.4% 26.5%
Other Services 7.3% 6.9%
------ ------
Total: 100.0% 100.0%
------ ------
16
PANAMSAT CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On October 28, 2001, General Motors ("GM"), Hughes Electronics
Corporation ("Hughes Electronics")and EchoStar Communications Corporation
("EchoStar") announced the signing of definitive agreements that, subject to
stockholder approval, regulatory clearance, the receipt of a favorable ruling
from the IRS that the separation of Hughes Electronics (or a newly formed
holding company holding all of the capital stock of Hughes Electronics) from GM
will be tax-free to GM and its stockholders for U.S. federal income tax purposes
and certain other conditions, provide for the split-off of Hughes Electronics
(or such newly formed holding company) from GM and the subsequent merger of the
Hughes Electronics and EchoStar businesses. EchoStar is a leading provider of
direct broadcast satellite television services in the United States through its
DISH Network business unit. The transactions are currently expected to close in
the second half of 2002.
GM, Hughes Electronics and EchoStar have agreed that, in the event the
transactions do not occur because certain specified regulatory clearances or
approvals have not been obtained or other conditions have not been satisfied,
EchoStar will be required to purchase all of the shares of Common Stock of
PanAmSat beneficially owned by Hughes Electronics (approximately 81% of
PanAmSat's outstanding Common Stock) for $22.47 per share or an aggregate
purchase price of approximately $2.7 billion, which is payable, depending on the
circumstances, solely in cash or in a combination of cash and either debt or
equity securities of EchoStar. EchoStar has the option to structure its purchase
of Hughes Electronics' interest in PanAmSat as a merger or tender offer so that
it can attempt to acquire 100% of PanAmSat in one transaction, in which case
Hughes Electronics must receive at least the same amount of consideration that
it would have received in the PanAmSat stock sale. EchoStar has agreed that,
unless it has previously completed a merger with PanAmSat or a tender offer for
all of the outstanding PanAmSat shares, it will commence a tender offer for all
PanAmSat shares that remain outstanding following the completion of the PanAmSat
stock sale to EchoStar for a purchase price of at least $22.47 per share (or
approximately $675 million in the aggregate) payable, at the option of the
holder, either in cash or shares of EchoStar Class A Common Stock.
Any such sale of PanAmSat would be subject to a number of conditions
which must be satisfied before the transaction could be completed, including,
among other things, the expiration or termination of the waiting period
applicable to the sale under the Hart-Scott-Rodino Act and the lack of any
effective injunction or order for the transfer of licenses in connection with
any such PanAmSat sale.
17
RESULTS OF OPERATIONS
The Company's selected operating data shown below is not necessarily indicative
of future results.
SELECTED OPERATING DATA
Three Months Ended
March 31,
---------------------------
(Unaudited, in thousands)
2002 2001
--------- ---------
Operating leases, satellite services and other $ 201,369 $ 199,503
Outright sales and sales-type leases 5,770 5,724
Total revenues 207,139 205,227
Cost of outright sales and sales-type leases -- --
Depreciation and amortization 93,955 98,896
Direct operating costs 32,489 37,460
Selling, general and administrative expenses 32,483 27,718
Facilities restructuring costs 11,224 --
Gain on PAS-7 insurance claim (40,063) --
Loss on conversion of sales-type leases 18,690 --
Severance costs 1,295 --
Income from operations 57,066 41,153
Interest expense, net 25,729 32,308
Income taxes 7,834 3,848
Income before extraordinary item 23,503 4,997
Extraordinary loss on early extinguishment of debt,
net of taxes 2,482 --
Net income 21,021 4,997
Earnings per common share before extraordinary item
-basic and diluted $ 0.16 $ 0.03
Earnings per common share - extraordinary loss on early
extinguishment of debt - basic and diluted 0.02 --
Net income per common share - basic and diluted $ 0.14 $ 0.03
18
PANAMSAT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues - Revenues were $207.1 million for the three months ended
March 31, 2002, compared to revenues of $205.2 million for the same period in
2001. Operating lease revenues, which were 97 percent of total revenues for the
first quarter of 2002, increased by 1 percent to $201.4 million from $199.5
million for the same period in 2001. Included in operating lease revenues for
the three months ended March 31, 2002 was a termination fee related to one of
the Company's video customers, offset partially by reduced operating lease
revenues. The net effect of this customer termination was an increase to
operating lease revenues for the three months ended March 31, 2002 of
approximately $6.4 million. Sales and sales-type lease revenues for the quarter
ended March 31, 2002 and 2001 represented interest income related to sales-type
leases of $5.8 million and $5.7 million, respectively.
The Company provides video services which are primarily full-time,
part-time and occasional satellite services for the transmission of news,
sports, entertainment and educational programming worldwide. The Company also
provides network services which support satellite-based networks that relay
voice, video and data communications within individual countries, throughout
regions and on a global basis. Operating lease revenues from video services
increased by 1.9 percent to $133.5 million during the first quarter of 2002,
compared to $131.1 million for the first quarter of 2001. The increase was due
to the termination fee revenues recorded during the first quarter of 2002
related to video customers, offset partially by a reduction in revenues related
to video customer agreements. Overall video services revenues were $139.3
million in the first quarter of 2002, an increase of 1.8 percent as compared to
the first quarter of 2001. Operating lease revenues from network services
decreased by 3.1 percent to $52.7 million for the first quarter of 2002,
compared to the same period in 2001. The decrease was due to reduced revenue
recorded during the first quarter of 2002 as a result of customer credit
issues, offset partially by an increase in revenues related to network services
and Internet customer agreements.
Depreciation and Amortization - Depreciation and amortization decreased
$4.9 million, or 5 percent, to $94.0 million for the three months ended March
31, 2002 from $98.9 million for the same period in 2001. The decrease in
depreciation and amortization for the three months ended March 31, 2002 is due
primarily to the elimination of goodwill amortization as a result of the
adoption of SFAS No. 142 during the first quarter of 2002 (approximately $16
million) and $2.4 million of lower depreciation expense recorded during the
first quarter of 2002 as a result of one satellite (PAS-1) that is no longer
in-service. These decreases were partially offset by additional depreciation
expense related to two satellites placed in service since March 2001 of
approximately $6.1 million and additional non-satellite depreciation of
approximately $7 million recorded during the first quarter of 2002.
19
Direct Operating Costs - Direct operating costs decreased $5.0 million
or 13 percent, to $32.5 million for the three months ended March 31, 2002 from
$37.5 million for the same period in 2001. This decrease is due primarily to
lower webcast services direct operating expenses of $2.8 million due to cost
cutting measures implemented in the third quarter of 2001, lower third party
expenses of $1.7 million, reduced insurance expense of $1 million related to
the self-insuring of satellites, lower satellite coordination fees related to
PAS-4 and PAS-7 of $1.4 million, and lower consulting and engineering costs of
$1.9 million. These decreases were partially offset by increased direct
operating costs related to new satellites placed in service during 2001 of $2
million and higher insurance rates on certain of the Company's satellites of
$1.2 million.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased $4.8 million, or 17 percent, to $32.5 million
for the three months ended March 31, 2002 from $27.7 million for the same
period in 2001. This increase is primarily due to the recording of customer bad
debt expense and sales-type lease reserves of approximately $10 million during
the three months ended March 31, 2002, a $4.1 million increase over the $5.9
million of bad debt expense recorded during the same period in 2001.
Facilities Restructuring Costs - On March 29, 2002, the Company's
management approved a plan to restructure several of its United States
locations and close certain facilities which are currently being leased through
2011. Upon approval of this plan, the Company recorded a non-cash charge in its
consolidated income statement for the three months ended March 31, 2002 of
$11.2 million. This charge reflects future lease costs, net of estimated future
sublease revenues, of $8.9 million related to approximately 98,000 square feet
of unused facilities and the write-off of approximately $2.3 million of
leasehold improvements related to these facilities. There was no comparable
transaction during the three months ended March 31, 2001.
Gain on PAS-7 Insurance Claim - During the three months ended March 31,
2002, the Company recorded a gain of approximately $40.1 million related to the
PAS-7 insurance claim, which reflects the net proceeds agreed to by the
insurers of $215 million less the net book value of the PAS-7 satellite,
including incentive obligations. (See "Satellite Developments" below). There
was no comparable transaction during the three months ended March 31, 2001.
Loss on Conversion of Sales-Type Leases - On March 29, 2002, the
Company entered into an agreement with one of its customers regarding the
revision of the customer's sales-type lease agreements as well as certain other
trade receivables. This agreement resulted in the termination of the customer's
sales-type leases and the establishment of new operating leases in their place.
As a result, the Company recorded a non-cash charge in its consolidated income
statement for the three months ended March 31, 2002 of $18.7 million. There
were no comparable transactions during the three months ended March 31, 2001.
Severance Costs - Severance costs were $1.3 million for the three
months ended March 31, 2002. These severance costs reflect employee reductions
which were
20
implemented during the three months ended March 31, 2002 in connection with the
Company's expense reduction and NET-36 restructuring plan, which commenced in
the third quarter of 2001. There were no comparable severance costs during the
three months ended March 31, 2001.
Income from Operations - Income from operations was $57.1 million for
the three months ended March 31, 2002, an increase of $15.9 million, or 39
percent, from $41.2 million for the same period in 2000. The increase in income
from operations for the three month period ended March 31, 2002 was driven
primarily by the Company's continued focus on operational efficiencies and
several significant transactions which were recorded during the three months
ended March 31, 2002. These significant transactions included termination fee
revenue of approximately $6.4 million related to one of the Company's video
customers; the recording of a $40.1 million gain in relation to the settlement
of the PAS-7 insurance claim; the recording of an $11.2 million facilities
restructuring charge related to several of the Company's U.S. locations; the
recording of an $18.7 million loss on the conversion of several sales-type
leases to operating leases by one of the Company's customers; and the recording
of additional customer bad debt expense and sales-type lease reserves of $10
million.
Interest Expense, Net - Interest expense, net was $25.7 million for the
three months ended March 31, 2002, a decrease of $6.6 million, or 20 percent,
from $32.3 million for the same period in 2001. The decrease in interest
expense, net for the three months ended March 31, 2002 was due primarily to
lower interest rates related to the Company's variable rate borrowings during
the first quarter of 2002, as compared to the first quarter of 2001, and the
repayment of the Galaxy IIIR Notes on January 2, 2002. Capitalized interest was
$4 million lower during the first quarter of 2002, as compared to the same
period in 2001, due to lower construction in progress balances maintained
related to satellites under construction. Interest income was relatively flat
between the first quarter of 2002 and the first quarter of 2001 as a result of
higher cash balances maintained during the first quarter of 2002, offset by
lower interest rates during the same quarter.
Income Taxes - Income taxes were $7.8 million for the three months
ended March 31, 2002, an increase of $4.0 million or 105 percent, from $3.8
million for the three months ended March 31, 2001. The increase in income taxes
is primarily a result of the increase in income from operations and the
decrease in interest expense described above. The reduction in the Company's
effective income tax rate from 43.5 percent in 2001 to 25 percent in 2002 was
primarily a result of the elimination of goodwill amortization due to the
adoption of Statement of Financial Accounting Standards No.142.
Extraordinary Loss on Early Extinguishment of Debt - On February 25,
2002, the Company completed its Refinancing and repaid the $1.725 billion
indebtedness owed under the term loan to Hughes Electronics. (See "- Financial
Condition" ). In conjunction with this repayment, the Company was required to
write-off the remaining unamortized debt issuance costs of approximately $3.3
million related to the Hughes term loan, net of related income taxes of $0.8
million. This $2.5 million charge was recorded within the Company's
consolidated income statement for the three months ended March 31, 2002 as
21
an extraordinary loss on early extinguishment of debt. There were no comparable
transactions during the three months ended March 31, 2001.
Satellite Developments - Refer to "Item 1. Business - Overview -Our
Satellite Network and Ground Infrastructure" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Satellite Deployment Plan and Planned Satellites" in the Form 10-K for a
detailed description of the Company's satellite network and its satellite
deployment plan.
In October 2001, we filed a proof of loss under the insurance policy on
PAS-7 related to circuit failures which occurred in September 2001 and resulted
in a reduction of 28.9% of the satellite's total power available for
communications. Service to existing customers was not affected, and we expect
that PAS-7 will continue to serve these customers. The insurance policy was in
the amount of $253.4 million and included a provision for us to share 25% of
future revenues on PAS-7 with the insurers. During the three months ended March
31, 2002, our insurers confirmed to us their agreement to settle the claim by
payment to the Company of approximately $215 million in relation to the PAS-7
insurance claim. These net proceeds reflect the insurance policy amount of
$253.4 million less the expected future revenue share that would have been paid
to the insurers under the PAS-7 insurance policy adjusted by a negotiated
discount. Pursuant to this agreement, no future revenue share payments will be
required to be made in relation to PAS-7. The Company received $173.7 million
of the net proceeds from this insurance settlement as of March 31, 2002 and
received the remaining $41.3 million of net proceeds in April 2002. During the
three months ended March 31, 2002, the Company recorded a gain of approximately
$40.1 million related to the PAS-7 insurance claim, which reflects the net
proceeds agreed to by the insurers less the net book value of the PAS-7
satellite, including incentive obligations.
The Company expects to launch up to six satellites by 2006. Galaxy IIIC
is scheduled to be launched in the second quarter of 2002 and will replace
Galaxy IIIR in the North American Region and supplement Galaxy VIII-i in Latin
America and the Caribbean. Galaxy VIIIi-R will be ready for launch in the third
quarter of 2002 and will cover Latin America. This satellite is being built
first to serve as an on-ground spare for Galaxy IIIC in the event of a launch
failure or as possible supplemental capacity for Galaxy IIIC if it is
successfully deployed. We have entered into a contract with an affiliate of
DirecTV Latin America, one of our affiliates, for the lease of capacity on
Galaxy VIII-iR, but the customer may terminate that contract following the
commencement of service on Galaxy IIIC. If the customer were to terminate the
contract, we would either modify Galaxy VIII-iR for other use at another
orbital location or terminate our contract with Boeing for the construction of
Galaxy VIII-iR. In such event, the customer would be obligated to pay us over
time for all of our contractual liabilities to Boeing and the launch services
provider for such modification, postponement and/or termination.
The Company, through its joint-venture with JSAT Corporation, a
Japanese satellite services provider, expects to launch the Galaxy
XIII/Horizons satellite to 127 degrees west longitude in early 2003. The
Company also expects to launch Galaxy VR (formerly named Galaxy XII) in early
2003 to 74 degrees west longitude. The Company also has
22
two additional satellites that are under construction for United States
coverage. We are currently scheduled to launch one of these additional
satellites to replace Galaxy 1R prior to the end of its useful life in 2006. The
other additional satellite would be available to us as a replacement or an
in-orbit spare.
Ten of the Company's satellites are either uninsured or insured with
significant exclusions as of March 31, 2002. The net book value of these
uninsured satellites and those satellites with insurance policies subject to
significant exclusions as of March 31, 2002 aggregated $896 million.
Financial Condition
In February 2002, we completed a private placement debt offering
pursuant to Rule 144A under the Securities Act of 1933, as amended, in an
aggregate principal amount of $800.0 million (the "Senior Notes") and entered
into a credit facility in an aggregate principal amount of up to $1.25 billion
(the "Senior Secured Credit Facility"). We refer to these transactions as the
"Refinancing." Our net proceeds from the Senior Notes and borrowings of $1.0
billion under the Senior Secured Credit Facility were approximately $1.76
billion after underwriting fees and other expenses of the transactions. We used
$1.725 billion of the proceeds to repay in full the $1.725 billion of
indebtedness owed under the term loan to Hughes Electronics, with the balance
to be used for general corporate purposes. The Senior Notes bear interest at an
annual rate of 8.5%, are payable semi-annually, mature in 2012 and are
unsecured. The Senior Notes are guaranteed on a senior unsecured basis by all
of our domestic restricted subsidiaries. At March 31, 2002, $800 million of
Senior Notes were outstanding.
The Senior Secured Credit Facility is comprised of a $250.0 million
revolving credit facility, which is presently undrawn and will terminate on
December 31, 2007 (the "Revolving Facility"), a $300.0 million term loan A
facility which matures on December 31, 2007 (the "Term A Facility"), and a
$700.0 million term loan B facility which matures on December 31, 2008 (the
"Term B Facility"). The Term A Facility and Term B Facility were fully drawn in
connection with the Refinancing. At March 31, 2002, $300 million was
outstanding under the Term A Facility and $700 million was outstanding under
the Term B Facility. The interest rates applicable to loans under the Senior
Secured Credit Facility will be, at the Company's option, the alternate base
rate or adjusted LIBOR plus, in each case, an applicable margin. The applicable
margin for loans under the Revolving Facility and the Term A Facility is
subject to adjustment based on the Company's total leverage ratio. The
applicable margin under the Term B Facility is fixed. The alternate base rate
is a fluctuating interest rate equal to the higher of (1) the prime rate and
(2) the federal funds effective rate plus 50 basis points. In addition, the
Company is required to pay to the lenders under the Revolving Facility a
commitment fee in respect of the unused commitments thereunder at a rate that
is subject to adjustment based on the Company's total leverage ratio. At March
31, 2002, the applicable interest rate on the Term A Facility was 4.96%, the
applicable interest rate on the Term B Facility was 5.46%, and the unused
commitment fee for the period from February 25, 2002 through March 31, 2002 was
$163 thousand.
23
Obligations under the Senior Secured Credit Facility are, or will be,
as the case may be, unconditionally guaranteed by each of our existing and
subsequently acquired or organized domestic and, to the extent no adverse tax
consequences would result therefrom, foreign restricted subsidiaries. In
addition, such obligations are equally and ratably secured by perfected first
priority security interests in, and mortgages on, substantially all of the
tangible and intangible assets of the Company and its subsidiaries, including
its satellites. The agreement governing the Senior Secured Credit Facility
requires the Company to enter into interest rate hedge agreements with respect
to at least 10% of the aggregate borrowings under the Term A Facility and Term
B Facility within 360 days of securing the facility. These interest rate hedge
agreements will effectively enable the Company to protect itself against three
month London Interbank offered rates which exceed 5% per annum.
The indenture governing the Senior Notes and the agreement governing
the Senior Secured Credit Facility contain various covenants which impose
significant restrictions on our business. These covenants limit our ability to,
among other things: incur or guarantee additional indebtedness; make certain
payments, including dividends; create or permit to exist certain liens; enter
into business combinations and asset sale transactions; reduce or eliminate
insurance on our satellites; make investments and enter into transactions with
affiliates and enter into new businesses. The Senior Secured Credit Facility
also limits the Company's ability to sell certain assets of the Company.
The Company issued five, seven, ten and thirty-year fixed rate notes
totaling $750 million in January 1998. The outstanding principal
balances,interest rates and maturity dates for these notes as of March 31, 2002
were $200 million at 6.0% due 2003, $275 million at 6.125% due 2005, $150
million at 6.375% due 2008 and $125 million at $6.875% due 2028, respectively.
Principal on the notes is payable at maturity, while interest is payable
semi-annually. At March 31, 2002, $750 million was outstanding in relation to
these notes. In connection with the Refinancing, these notes have been ratably
secured by substantially all of our assets on a pari-passu basis with the
security interests covering our obligations under the Senior Secured Credit
Facility.
As of December 31, 2001, the Company had $46.5 million principal amount
outstanding under notes assumed in connection with our exercise in July 1999 of
an early buy-out opportunity for certain transponders under a sale-leaseback
transaction relating to our Galaxy IIIR satellite (the "Galaxy IIIR Notes").
The Galaxy IIIR Notes, which bore interest at LIBOR plus 0.25%, matured on
January 2, 2002 and were repaid in full on that date from available cash.
The Company recorded severance costs of $8.2 million for the year ended
December 31, 2001 and severance costs of $1.3 million for the three months
ended March 31, 2002. These costs were related to the Company's expense
reduction and NET-36 restructuring plan that began in the third quarter of 2001
and were primarily comprised of employee compensation and employee benefits,
outplacement services and legal and consulting expenses associated with the
cumulative reduction in workforce of 164 employees. Included in the 2001
severance costs was approximately $3.3 million that
24
relates to costs associated with the resignation of the former Chief Executive
Officer of PanAmSat in August 2001. Approximately $6.0 million of the $9.5
million of total severance costs have been paid through March 31, 2002 and
approximately $3.5 million were recorded within accrued liabilities on the
consolidated balance sheet at March 31, 2002. Substantially all of the remaining
accrued severance costs at March 31, 2002 are expected to be paid during 2002.
The Company expects its significant cash outlays will continue to be
primarily capital expenditures related to the construction and launch of
satellites and debt service costs. The Company has satellites under various
stages of development, for which the Company has budgeted capital expenditures.
PanAmSat currently expects to spend approximately $310 million to $340 million
on capital expenditures during 2002, which will primarily be comprised of costs
to construct, insure and launch satellites.
Assuming satellites under development are successfully launched and
services on the satellites commence on the schedule currently contemplated,
PanAmSat believes that amounts available under the Revolving Facility, vendor
financing, future cash flows from operations and cash on hand will be
sufficient to fund its operations and its remaining costs for the construction
and launch of satellites currently under development. There can be no
assurance, however, that PanAmSat's assumptions with respect to costs for
future construction and launch of its satellites will be correct, or that
amounts available under the Revolving Facility, vendor financing, future cash
flows from operations and cash on hand will be sufficient to cover any
shortfalls in funding for (i) launches caused by launch failures, (ii) cost
overruns, (iii) delays, (iv) capacity shortages, or (v) other unanticipated
expenses.
In addition, if the Company were to consummate any strategic
transactions or undertake any other projects requiring significant capital
expenditures, the Company may be required to seek additional financing. If
circumstances were to require PanAmSat to incur such additional indebtedness,
the ability of PanAmSat to incur any such additional indebtedness would also be
subject to the terms of PanAmSat's outstanding indebtedness. The failure to
obtain such financing or the failure to obtain such financing on terms
considered reasonable by the Company could have a material adverse effect on
PanAmSat's operations and its ability to accomplish its business plan.
Net cash provided by operating activities increased to $124.7 million
for the three months ended March 31, 2002, from $117.1 million for the three
months ended March 31, 2001. The increase in 2002 was primarily attributable
to: (1) the decrease in cash used within operating leases and other receivables
of $12.9 million due primarily to the timing of customer payments; (2) the
decrease in cash used within prepaid expenses and other of $30.1 million
primarily resulting from a decrease in prepaid in-orbit insurance of
approximately $13.3 million related to fewer satellites placed in-service in
2002 as compared to 2001 and a decrease in prepaid taxes of approximately $8
million. These increases in cash provided by operating activities were
partially offset by a decrease in cash provided within accounts payable and
accrued expenses of $27.1 million primarily resulting from the timing of
payments to vendors and a decrease in cash provided within
25
deferred gains and revenues of $12.3 million related to a smaller increase in
accruals for in-orbit and pre-launch insurance of $6.8 million during 2002 as
compared to 2001.
Net cash provided by investing activities was $99.7 million for the
three months ended March 31, 2002, compared to net cash provided by investing
activities of $65.2 million for the three months ended March 31, 2001. The
increase in net cash provided by investing activities in 2002 was primarily due
to the receipt of $41.3 million of additional proceeds from insurance claims
during the three months ended March 31, 2002 as compared to the three months
ended March 31, 2001, offset partially by an increase in capital expenditures
of $6.8 million in 2002 as compared to 2001, primarily related to non-satellite
capital expenditures.
Net cash used in financing activities decreased to $11.8 million for
the three months ended March 31, 2002, from $21.6 million for the three months
ended March 31, 2001. The decrease in net cash used in financing activities in
2002 was primarily due to: repayments of long-term debt of $1.772 billion under
the Hughes Electronics term loan which was completed in February 2002 and the
repayment of the Galaxy IIIR Notes in January 2002, as well as debt issuance
costs paid during 2002 of $38.4 million related to the Refinancing. The
decrease in net cash used in financing activities was partially offset by $1.8
billion of new borrowings obtained in the Refinancing.
Market Risks
The Company manages its exposure to market risks through internally
established policies and procedures and, when deemed appropriate, through the
use of derivative financial instruments. The objective of the Company's
policies is to mitigate potential income statement, cash flow and fair value
exposures resulting from possible future adverse fluctuations in interest
rates. The Company evaluates its exposure to market risk by assessing the
anticipated near-term and long-term fluctuations in interest rates on a daily
basis. This evaluation includes the review of leading market indicators,
discussions with financial analysts and investment bankers regarding current
and future economic conditions and the review of market projections as to
expected future interest rates. The Company utilizes this information to
determine its own investment strategies as well as to determine if the use of
derivative financial instruments is appropriate to mitigate any potential
future interest rate exposure that the Company may face. The Company's policy
does not allow speculation in derivative instruments for profit or execution of
derivative instrument contracts for which there are no underlying exposures.
The Company does not use financial instruments for trading purposes and is not
a party to any leveraged derivatives.
The Company determines the impact of changes in interest rates on the
fair value of its financial instruments based on a hypothetical 10% adverse
change in interest rates from the rates in effect as of the end of the year for
these financial instruments. The Company uses separate methodologies to
determine the impact of these hypothetical changes on its sales-type leases,
fixed rate public debt and variable rate debt as follows:
26
- For the Company's sales-type leases, a discount rate based on a
30-year bond is applied to future cash flows from sales-type
leases to arrive at a base rate present value for sales-type
leases. This discount rate is then adjusted for a negative 10%
change and then applied to the same cash flows from sales-type
leases to arrive at a present value based on the negative change.
The base rate present value and the present value based on the
negative change are then compared to arrive at the potential
negative fair value change as a result of the hypothetical change
in interest rates.
- For the Company's fixed rate public debt, the current market rate
of each public debt instrument is applied to each principal amount
to arrive at a current yield to maturity for each public debt
instrument as of the end of the year. The current market rate is
then reduced by a factor of 10% and this revised market rate is
applied to the principal amount of each public debt instrument to
arrive at a yield to maturity based on the adverse interest rate
change. The two yields to maturity are then compared to arrive at
the potential negative fair value change as a result of the
hypothetical change in interest rates.
- For the Company's variable rate debt, the effect in annual cash
flows and net income is calculated as a result of the potential
effect of a hypothetical 10% adverse fluctuation in interest
rates. The current LIBOR rate plus applicable margin as of the end
of the year is applied to the applicable principal outstanding at
the end of the year to determine an annual interest expense based
on year-end rates and principal balances. This calculation is then
performed after increasing the LIBOR rate plus applicable margin
by a factor of 10%. The difference between the two annual interest
expenses calculated represents the reduction in annual cash flows
as a result of the potential effect of a hypothetical 10% adverse
fluctuation in interest rates. This amount is then tax effected
based on the Company's effective tax rate to yield the reduction
in net income as a result of the potential effect of a
hypothetical 10% adverse fluctuation in interest rates.
The only potential limitations of the respective models are in the
assumptions utilized in the models such as the hypothetical adverse fluctuation
rate and the discount rate. The Company believes that these models and the
assumptions utilized are reasonable and sufficient to yield proper market risk
disclosure.
The Company has not experienced any material changes in interest rate
exposures during the three months ended March 31, 2002. Based upon economic
conditions and leading market indicators at March 31, 2002, the Company does
not foresee a significant adverse change in interest rates in the near future.
As a result, the Company's strategies and procedures to manage exposure to
interest rates have not changed in comparison to the prior year.
The potential fair value change resulting from a hypothetical 10%
adverse fluctuation in interest rates related to PanAmSat's outstanding
fixed-rate debt and fixed-rate net investments in sales-type lease receivable
balances would be approximately $69.1 million and $5.3 million, respectively,
as of March 31, 2002. The potential effect of a
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hypothetical 10% adverse fluctuation in interest rates for one year on
PanAmSat's floating rate debt outstanding at March 31, 2002 would be a reduction
in cash flows of approximately $5.3 million and a reduction in net income of
approximately $2.9 million.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risks."
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PANAMSAT CORPORATION
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.82 PanAmSat Corporation Executive Change In Control
Severance Agreement Between PanAmSat Corporation and
James B. Frownfelter, Dated November 8, 2001. *
10.83 Form of PanAmSat Corporation Executive Change of
Control Severance Agreement, effective as of October
15, 2001 and entered into between PanAmSat
Corporation and each of James W. Cuminale, Thomas E.
Eaton, Jr., James B. Frownfelter and Michael J.
Inglese in March 2002. *
(b) Reports on Form 8-K.
None.
* Exhibit indicated is an executive contract.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PanAmSat Corporation
Date: May 6, 2002 /s/ Michael J. Inglese
----------------------------
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
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