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 June 30, 2001
Commission File No. 0-22531
PanAmSat Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4607698
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
20 Westport Road, Wilton, CT 06897
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 203-210-8000
One Pickwick Plaza, Greenwich, CT 06830
(Previous Address of Principal Executive Offices)
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 August 2, 2001, an aggregate of 149,817,285 shares of the Company's Common
Stock were outstanding.
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q contains certain forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. When used in this Quarterly Report on
Form 10-Q, the words "estimate," "plan," "project," "anticipate," "expect,"
"intend," "outlook," "believe," and other similar expressions are intended to
identify forward-looking statements and information. Actual results may differ
materially from any results which might be projected, forecasted, estimated or
budgeted by PanAmSat Corporation ("PanAmSat" or the "Company") due to certain
risks and uncertainties, including without limitation: (i) risks of launch
failures, launch and construction delays and in-orbit failures or reduced
performance, (ii) risks of government regulation, (iii) risks of doing business
internationally, (iv) risks of uninsured loss, (v) risks associated with the
business of NET/36, Inc., a wholly-owned subsidiary of the Company ("NET-36")
and (vi) risks of inadequate access to capital for growth. Such risks are more
fully described in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Quarterly Report on Form 10-Q and
under the caption "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 (the "Form 10-K"). Reference is also
made to such other risks and uncertainties detailed from time to time in the
Company's filings with the Securities and Exchange Commission. The Company
cautions that the foregoing list of important factors is not exclusive.
Furthermore, the Company operates in an industry sector where securities values
may be volatile and may be influenced by economic and other factors beyond the
Company's control.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended June 30, 2001 and 2000
(In Thousands, Except Share Data)
June 30, June 30,
2001 2000
----------- -----------
REVENUES:
Operating leases, satellite services and other $ 202,937 $ 192,691
Outright sales and sales-type leases 5,293 129,558
---------------- ----------------
Total revenues 208,230 322,249
---------------- ----------------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases - 40,524
Depreciation and amortization 101,724 81,618
Direct operating costs 43,518 36,913
Selling, general and administrative expenses 30,266 23,400
---------------- ----------------
Total operating costs and expenses 175,508 182,455
---------------- ----------------
INCOME FROM OPERATIONS 32,722 139,794
INTEREST EXPENSE, net 27,543 32,104
---------------- ----------------
INCOME BEFORE INCOME TAXES 5,179 107,690
INCOME TAXES 2,253 48,461
---------------- ----------------
NET INCOME $ 2,926 $ 59,229
---------------- ----------------
NET INCOME PER COMMON SHARE - basic $ 0.02 $ 0.40
---------------- ----------------
NET INCOME PER COMMON SHARE - diluted $ 0.02 $ 0.39
---------------- ----------------
Weighted average common shares outstanding 149,763,139 150,005,960
---------------- ----------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Six Months Ended June 30, 2001 and 2000
(In Thousands, Except Share Data)
June 30, June 30,
2001 2000
----------- -----------
REVENUES:
Operating leases, satellite services and other $ 402,440 $ 392,718
Outright sales and sales-type leases 11,017 228,635
---------------- ----------------
Total revenues 413,457 621,353
---------------- ----------------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases - 85,776
Depreciation and amortization 200,620 155,285
Direct operating costs 80,978 68,807
Selling, general and administrative expenses 57,984 44,411
---------------- ----------------
Total operating costs and expenses 339,582 354,279
---------------- ----------------
INCOME FROM OPERATIONS 73,875 267,074
INTEREST EXPENSE, net 59,851 56,557
---------------- ----------------
INCOME BEFORE INCOME TAXES 14,024 210,517
INCOME TAXES 6,101 94,733
---------------- ----------------
NET INCOME $ 7,923 $ 115,784
---------------- ----------------
NET INCOME PER COMMON SHARE - basic and
diluted $ 0.05 $ 0.77
---------------- ----------------
Weighted average common shares outstanding 149,733,287 150,112,916
---------------- ----------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 308,612 $129,345
Accounts receivable-net 56,027 52,912
Net investment in sales-type leases 21,184 24,959
Prepaid expenses and other (principally prepaid insurance) 48,521 30,360
Deferred income taxes 2,767 3,220
Insurance claim receivable - 132,435
----------- -----------
Total current assets 437,111 373,231
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 3,167,280 3,156,944
NET INVESTMENT IN SALES-TYPE LEASES 196,785 221,039
GOODWILL-Net of amortization 2,271,139 2,303,619
DEFERRED CHARGES 134,876 123,518
----------- -----------
TOTAL ASSETS $ 6,207,191 $ 6,178,351
----------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
5
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (continued)
(In Thousands, Except Share Data)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 119,659 $ 79,518
Deferred revenues 10,907 14,052
------------- -------------
Total current liabilities 130,566 93,570
DUE TO AFFILIATES (merger-related indebtedness) 1,725,000 1,725,000
LONG-TERM DEBT 750,000 796,542
DEFERRED INCOME TAXES 379,099 365,982
DEFERRED CREDITS AND OTHER (principally customer deposits and deferred
revenue) 255,904 242,562
------------- ------------
TOTAL LIABILITIES 3,240,569 3,223,656
------------- ------------
COMMITMENTS AND CONTINGENCIES
The accompanying notes are an integral part of these consolidated financial
statements.
6
PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS - (continued)
(In Thousands, Except Share Data)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value -- 400,000,000
shares authorized; 149,802,401 and 149,675,117
outstanding at June 30, 2001 and December 31, 2000, respectively 1,498 1,497
Additional paid-in-capital 2,526,759 2,522,757
Retained earnings 438,365 430,441
----------- -----------
Total stockholders' equity 2,966,622 2,954,695
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,207,191 $ 6,178,351
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
7
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2001 and 2000
(In Thousands)
June 30, June 30,
2001 2000
----------- ----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 7,923 $ 115,784
Adjustments to reconcile net income to
net cash provided by operating activities:
Gross profit on sales and sales-type leases - (131,407)
Depreciation and amortization 200,620 155,285
Deferred income taxes 13,570 84,334
Amortization of debt issuance costs 3,054 3,054
Provision for uncollectible receivables 7,339 (1,489)
Changes in assets and liabilities:
Collections on investments in sales-type leases 10,339 12,981
Operating leases and other receivables (10,454) 23,460
Prepaid expenses and other assets (32,573) (35,426)
Accounts payable and accrued liabilities 14,117 (3,930)
Deferred gains and revenues 15,362 13,849
------------ ------------
Net cash provided by operating activities 229,297 236,495
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
8
PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (continued)
For the Six Months Ended June 30, 2001 and 2000
(In Thousands)
June 30, June 30,
2001 2000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including capitalized interest) (161,446) (208,165)
Insurance proceeds from satellite recoveries 132,435 36,200
------------ ------------
Net cash used in investing activities (29,011) (171,965)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (21,216) (44,300)
Repayments of incentive obligations (3,970) (3,141)
Stock issued in connection with employee benefit plans 4,167 9,799
------------ ------------
Net cash used in financing activities (21,019) (37,642)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 179,267 26,888
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 129,345 117,259
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 308,612 $ 144,147
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received for interest $ 8,386 $ 2,603
------------ ------------
Cash paid for interest $ 82,079 $ 89,894
------------ ------------
Cash paid for taxes $ 883 $ 26,078
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
9
PANAMSAT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments which are of a
normal recurring nature necessary to present fairly the financial position,
results of operations and cash flows as of and for the three and six month
periods ended June 30, 2001 and 2000 have been made. Certain prior period
amounts have been reclassified to conform with the current year's
presentation. Operating results for the three and six months ended June 30,
2001 and 2000 are not necessarily indicative of the operating results for
the full year. For further information, refer to the financial statements
and footnotes thereto included in the Form 10-K.
(2) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which is effective July 1, 2001. SFAS 141 requires the
purchase method of accounting for business combinations initiated after June
30, 2001 and eliminates the pooling-of-interests method. The Company does
not believe that the adoption of SFAS 141 will have a significant impact on
its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142
also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption and requires the Company to
evaluate the carrying value of goodwill for impairment annually thereafter.
The Company is currently assessing but has not yet determined the impact of
SFAS 142 on its financial position and results of operations.
10
(3) Satellite Developments
Reference is made to "Item 1. - Business - Strategy - Expanding the Network
and - The Satellite Network" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Satellite
Deployment Plan and Planned Satellites" in the Form 10-K for a detailed
description of the Company's satellite network and its satellite deployment
plan.
In July 2001, the Company announced that the Galaxy IIIC satellite is
scheduled to be launched in the first quarter of 2002. As a result, Galaxy
IIIC is expected to commence service in the second quarter of 2002, two
quarters later than previously anticipated. The schedule has been revised
due to manufacturing delays required to remedy certain issues discovered
during factory testing by the manufacturer, Boeing Satellite Systems, Inc.
Galaxy IIIC is intended to serve as the replacement for Galaxy IIIR at 95
degrees west longitude. Upon the deployment of Galaxy IIIC, Galaxy IIIR will
be moved for service at a new orbital location to be determined.
Also, in July 2001, the Company commenced service on its PAS-10 satellite
that was launched in May 2001. PanAmSat's total fleet of satellites in orbit
now stands at 21. PAS-10 succeeded PAS-4 at 68.5 degrees east longitude
within the Company's Indian Ocean Region cable neighborhood and it will
enable the delivery of new digital and IP-based services across Africa,
Asia, Europe and the Indian subcontinent. Upon the deployment of PAS-10,
PAS-4 will be moved for service at a new orbital location to be determined.
In August 2001, the Company announced that it had formed a new joint-venture
with Japan's JSAT Corporation ("JSAT") to expand digital services in North
America. Through this strategic relationship, called "Horizons," PanAmSat
and JSAT will jointly own, develop and market Ku-band video, data and
Internet satellite services at 127 degrees west longitude and will share
revenues on a 50/50 basis for the Ku-band services. Together PanAmSat and
JSAT will invest more than $100 million to develop the Ku-band payload for
the new Boeing Satellite Systems, Inc. model 601 HP satellite that is
scheduled for launch in late 2002 to 127 degrees west longitude. PanAmSat
will separately own, develop and market the C-band capacity on this new
satellite as part of the Company's Galaxy cable neighborhood. The C-band
payload will replace the Galaxy IX satellite in PanAmSat's domestic U.S.
fleet. Galaxy IX will then migrate to a new orbital location where it will
continue to provide C-band services as part of PanAmSat's Galaxy fleet.
During the first quarter of 2001, the Company commenced service on its
PAS-1R satellite, which was launched in November 2000. PAS-1R offers
expanded and enhanced video and data broadcasting, as well as broadband
Internet services throughout the Americas, the Caribbean, Europe and Africa.
The Company expects to launch four satellites by early 2003. Galaxy IIIC is
scheduled to be launched in the first quarter of 2002. Galaxy VIIIi-R is
scheduled
11
to be launched in 2002. The PanAmSat and JSAT joint-venture expects to
launch a satellite to 127 degrees west longitude in late 2002. The Company
also expects to launch Galaxy XII (a previously announced but unnamed
domestic satellite) in late 2002 or early 2003 to 74 degrees west longitude.
(4) Operating Expense Reduction And NET-36 Restructuring Plan
On July 12, 2001, the Company announced its plans to reduce future operating
expenses as a result of the Company's revised revenue expectations. The
Company believes that these actions will have the effect of increasing its
annualized earnings before interest, taxes, depreciation and amortization
("EBITDA") margin by approximately two percentage points based on current
revenue levels. These operating expense reductions will be made in various
expense categories Company-wide. In conjunction with this expense reduction
plan, the Company will be restructuring its NET-36 organization and will be
integrating the NET-36 product with the Company's other value added service
offerings. This consolidation will result in a reduction in operating
expenses associated with NET-36. Additionally, capital expenditures related
to NET-36 will be reduced to reflect current market conditions.
The Company expects to incur costs of approximately $3 million to $5 million
to implement this operating expense reduction and NET-36 restructuring plan.
These costs, which are primarily related to employee severance, will be
recorded in the third quarter of 2001.
12
PANAMSAT CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's selected operating data shown below is not necessarily indicative
of future results.
SELECTED OPERATING DATA
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
(unaudited; in thousands) (unaudited, in thousands)
2001 2000 2001 2000
---- ---- ---- ----
Operating leases, satellite services and other $202,937 $192,691 $402,440 $392,718
Outright sales and sales-type leases 5,293 129,558 11,017 228,635
Total revenues 208,230 322,249 413,457 621,353
Cost of outright sales and sales-type leases - 40,524 - 85,776
Depreciation and amortization 101,724 81,618 200,620 155,285
Direct operating costs 43,518 36,913 80,978 68,807
Selling, general and administrative expenses 30,266 23,400 57,984 44,411
Income from operations 32,722 139,794 73,875 267,074
Interest expense, net 27,543 32,104 59,851 56,557
Income taxes 2,253 48,461 6,101 94,733
13
PANAMSAT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues - Revenues were $208.2 million for the three months ended June
30, 2001, compared to revenues of $322.2 million for the same period in 2000.
This decrease was primarily due to $123.4 million of new sales-type lease
transactions completed in the second quarter of 2000 for which there were no
comparable transactions in the second quarter of 2001. Total sales and
sales-type lease revenues were $5.3 million for the quarter ended June 30, 2001,
compared to $129.6 million for the same period in 2000. Operating lease
revenues, which were 97 percent of total revenues for the second quarter of
2001, increased by 5 percent to $202.9 million from $192.7 million for the same
period in 2000. This increase was primarily due to new direct-to-home video
services and growth in Internet-related services. Revenues for the six months
ended June 30, 2001 were $413.4 million compared to revenues of $621.4 million
for the six months ended June 30, 2000, which included $217.2 million of new
outright sales and sales-type leases for which there were no comparable
transactions in 2001. Revenues, excluding new sales and sales-type leases,
increased by $9.2 million or 2 percent to $413.4 million for the six months
ended June 30, 2001 from $404.2 million for the six months ended June 30, 2000.
This increase was primarily due to increased operating lease revenues from new
direct-to-home video services and growth in Internet-related services. Outright
sales and sales-type leases represent substantial long-term commitments for
services. However, the net present value of the payments due to the Company over
the life of these agreements are recorded as revenues in the period that such
services begin. Therefore, revenues from these transactions are subject to
greater variation from period to period than are operating lease revenues.
The Company provides video services which are primarily full-time,
part-time and occasional satellite services for the transmission of news,
sports, entertainment and educational programming worldwide. The Company also
provides network services which support satellite-based networks that relay
voice, video and data communications within individual countries, throughout
regions and on a global basis. Operating lease revenues from video services
increased 7 percent to $136.4 million for the three months ended June 30, 2001
compared to $127.1 million for the three months ended June 30, 2000. Operating
lease revenues from network services were flat at $52.2 million for second
quarter of 2001, as compared to the same period in 2000. For the six months
ended June 30, 2001, operating lease revenues from video services were $267.5
million, an increase of 2 percent over $262.9 million for the same period in
2000. The increase in operating lease revenues from video services for both the
three and six month periods ended June 30, 2001 is primarily due to new
direct-to-home services that commenced in the second half of 2000. Operating
lease revenues from network services for the six months ended June 30, 2001 were
$106.5 million, an increase of 3 percent from the same period in 2000. The
increase in network services revenues for the six month period ended June 30,
2001 was primarily due to growth in data and Internet-related service
agreements.
14
Cost of Outright Sales and Sales-Type Leases - Cost of outright sales
and sales-type leases were $40.5 million for the three months ended June 30,
2000 due to the execution of new sales-type lease agreements during the second
quarter of 2000. For the six months ended June 30, 2000, costs of outright sales
and sales-type leases were $85.8 million due to the execution of new outright
sales and sales-type leases during the first half of 2000. There were no
comparable costs for the three month or six month periods ended June 30, 2001.
Depreciation and Amortization - Depreciation and amortization increased
$20.1 million, or 25 percent, to $101.7 million for the three months ended June
30, 2001 from $81.6 million for the same period in 2000. Depreciation and
amortization for the six months ended June 30, 2001 increased $45.3 million, or
29 percent, to $200.6 million from $155.3 million for the same period in 2000.
The increase in depreciation and amortization for the three and six month
periods ended June 30, 2001 is due primarily to depreciation expense associated
with the addition of four new satellites placed in service during 2000 and one
new satellite placed in service during the first quarter of 2001 and the
reduction in the remaining useful life of Galaxy VIII-i, resulting in
approximately $15.0 million of additional incremental quarterly depreciation.
Direct Operating Costs - Direct operating costs increased $6.6 million
or 18 percent, to $43.5 million for the three months ended June 30, 2001 from
$36.9 million for the same period in 2000. Direct operating costs increased
$12.2 million or 18 percent to $81.0 million for the six months ended June 30,
2001 from $68.8 million for the same period in 2000. The three month and six
month increases in direct operating costs are primarily related to one-time
customer service transition costs, increased repairs and maintenance expenses,
additional headcount to support the Company's services and the development of
the NET-36 initiative.
Selling, general and administrative costs increased $6.9 million, or 29
percent, to $30.3 million for the three months ended June 30, 2001 from $23.4
million for the same period in 2000. Selling, general and administrative costs
increased $13.6 million, or 31 percent to $58.0 million for the six months ended
June 30, 2001 from $44.4 million for the same period in 2000. The three month
and six month increases in selling, general and administrative costs are
primarily related to the development of the NET-36 initiative and additional
headcount to support the Company's services.
On July 12, 2001, the Company announced its plans to reduce future
operating expenses as a result of the Company's revised revenue expectations.
The Company believes that these actions will have the effect of increasing its
annualized EBITDA margin by approximately two percentage points based on current
revenue levels. These operating expense reductions will be made in various
expense categories Company-wide. In conjunction with this expense reduction
plan, the Company will be restructuring its NET-36 organization and will be
integrating the NET-36 product with the Company's other value added service
offerings. This consolidation will result in a reduction in operating expenses
associated with NET-36. Additionally, capital expenditures related to NET-36
will be reduced to reflect current market conditions.
15
The Company expects to incur costs of approximately $3 million to $5
million to implement this expense reduction and NET-36 restructuring plan. These
costs, which are primarily related to employee severance, will be recorded in
the third quarter of 2001.
Income from Operations - Income from operations was $32.7 million for
the three months ended June 30, 2001 a decrease of $107.1 million or 77 percent,
from $139.8 million for the same period in 2000. The decrease in income from
operations for the three month period ended June 30, 2001 is due primarily to
the gross profit associated with the new sales-type lease agreements that were
executed in the second quarter of 2000 for which there were no comparable
transactions in 2001 and the increases in direct operating and selling, general
and administrative costs and depreciation expense noted above. Income from
operations was $73.9 million for the six months ended June 30, 2001, a decrease
of $193.2 million or 72 percent, from $267.1 million for the same period in
2000. The decrease in income from operations for the six month period ended June
30, 2001 is due primarily to the gross profit associated with the new outright
sales and sales-type lease agreements that were executed in the first half of
2000 for which there were no comparable transactions in 2001 and the increases
in direct operating and selling, general and administrative costs and
depreciation expense noted above.
Interest Expense, Net - Interest expense, net was $27.5 million for the
three months ended June 30, 2001, a decrease of $4.6 million or 14 percent from
$32.1 million for the same period in 2000. The decrease in interest expense, net
was due primarily to lower interest expense as a result of decreased interest
rates related to the Company's variable rate borrowings, which was partially
offset by a reduction in capitalized interest in the three months ended June 30,
2001 due to fewer satellites under construction as compared to the three months
ended June 30, 2000. Interest expense, net was $59.9 million for the six months
ended June 30, 2001, an increase of $3.3 million or 6 percent from $56.6 million
for the same period in 2000. The increase in interest expense, net for the six
months ended June 30, 2001 was primarily due to a reduction in capitalized
interest for the six months ended June 30, 2001 due to fewer satellites under
construction as compared to the six months ended June 30, 2000, which was
partially offset by lower interest expense as a result of lower interest rates
in 2001.
Income Taxes - Income taxes were $2.3 million for the three months
ended June 30, 2001, a decrease of $46.2 million or 95 percent, from $48.5
million for the three months ended June 30, 2000. Income taxes were $6.1 million
for the six months ended June 30, 2001, a decrease of $88.6 million or 94
percent, from $94.7 million for the six months ended June 30, 2000. The decrease
in income taxes for the three and six month periods ended June 30, 2001 is due
to the items noted above, which resulted in a decrease in taxable income of
$102.5 million for the three months ended June 30, 2001, and a decrease in
taxable income of $196.5 million for the six months ended June 30, 2001, as well
as a decrease in the Company's effective tax rate to 43.5 percent as a result of
the greater beneficial effects of the Foreign Sales Corporation ("FSC")
replacement legislation known as the Exclusion for Extraterritorial Income.
16
Satellite Developments - Reference is made to "Item 1. - Business -
Strategy - Expanding the Network and - The Satellite Network" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Satellite Deployment Plan and Planned Satellites " in the Form 10-K
for a detailed description of the Company's satellite network and its satellite
deployment plan.
In July 2001, the Company announced that the Galaxy IIIC satellite is
scheduled to be launched in the first quarter of 2002. As a result, Galaxy IIIC
is expected to commence service in the second quarter of 2002, two quarters
later than previously anticipated. The schedule has been revised due to
manufacturing delays required to remedy certain issues discovered during factory
testing by the manufacturer, Boeing Satellite Systems, Inc. Galaxy IIIC is
intended to serve as the replacement for Galaxy IIIR at 95 degrees west
longitude. Upon the deployment of Galaxy IIIC, Galaxy IIIR will be moved for
service at a new orbital location to be determined.
Also, in July 2001, the Company commenced service on its PAS-10
satellite that was launched in May 2001. PanAmSat's total fleet of satellites
now stands at 21. PAS-10 succeeds PAS-4 at 68.5 degrees east longitude within
the Company's Indian Ocean Region cable neighborhood and it will enable the
delivery of new digital and IP-based services across Africa, Asia, Europe and
the Indian subcontinent. Upon the deployment of PAS-10, PAS-4 will be moved for
service at a new orbital location to be determined.
In August 2001, the Company announced that it had formed a new
joint-venture with Japan's JSAT Corporation ("JSAT") to expand digital services
in North America. Through this strategic relationship, called "Horizons,"
PanAmSat and JSAT will jointly own, develop and market Ku-band video, data and
Internet satellite services at 127 degrees west longitude and will share
revenues on a 50/50 basis for the Ku-band services. Together PanAmSat and JSAT
will invest more than $100 million to develop the Ku-band payload for the new
Boeing Satellite Systems, Inc. model 601 HP satellite that is scheduled for
launch in late 2002 to 127 degrees west longitude. PanAmSat will separately own,
develop and market the C-band capacity on this new satellite as part of the
Company's Galaxy cable neighborhood. The C-band payload will replace the Galaxy
IX satellite in PanAmSat's domestic U.S. fleet. Galaxy IX will then migrate to a
new orbital location where it will continue to provide C-band services as part
of PanAmSat's Galaxy fleet.
During the first quarter of 2001, the Company commenced service on its
PAS-1R satellite, which was launched in November 2000. PAS-1R offers expanded
and enhanced video and data broadcasting, as well as broadband Internet services
throughout the Americas, the Caribbean, Europe and Africa.
The Company expects to launch four satellites by early 2003. Galaxy
IIIC is scheduled to be launched in the first quarter of 2002. Galaxy VIIIi-R is
scheduled to be launched in 2002. The PanAmSat and JSAT joint-venture expects to
launch a satellite to 127 degrees west longitude in late 2002. The Company
expects to launch Galaxy XII (a previously announced but unnamed domestic
satellite) in late 2002 or early 2003 at 74 degrees west longitude.
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Financial Condition - The Company has an outstanding term loan in the
amount of $1.725 billion from Hughes Electronics Corporation, an affiliate of
the Company ("Hughes Electronics"). The term loan matures in June 2003 and bears
interest at a rate equal to that of the Company's revolving credit facility
discussed below. Hughes Electronics has the right to request that the Company
use its best efforts to replace the term loan with another credit facility on
terms that may then be available to the Company. As of June 30, 2001, Hughes
Electronics had not requested the Company to replace the borrowings. The term
loan is subordinate to the $750 million of notes, the revolving credit facility
and the commercial paper program discussed below.
The Company issued five, seven, ten and thirty-year fixed rate notes
totaling $750 million in January 1998. The outstanding principal balances and
interest rates for these notes as of June 30, 2001 were $200 million at 6.0%,
$275 million at 6.125%, $150 million at 6.375% and $125 million at $6.875%,
respectively. Principal on the notes is payable at maturity, while interest is
payable semi-annually. At June 30, 2001, $750 million was outstanding in
relation to these notes.
In July 1999, in connection with the early buy-out of satellite
sale-leasebacks, the Company assumed $124.1 million of variable rate notes, of
which $46.5 million was outstanding at June 30, 2001. The weighted average
interest rate on the notes was 4.92% at June 30, 2001. These notes mature in
January 2002.
The Company maintains a $500 million multi-year revolving credit
facility that provides for short-term and long-term borrowings and a $500
million commercial paper program. Borrowings under the credit facility bear
interest at a rate equal to LIBOR plus a spread based on PanAmSat's credit
rating. The multi-year revolving credit facility provides for a commitment
through December 24, 2002. Borrowings under the credit facility and commercial
paper program are limited to $500 million in the aggregate. No amounts were
outstanding under either the multi-year revolving credit facility or the
commercial paper program at June 30, 2001.
The significant cash outlays for the Company will continue to be
primarily capital expenditures related to the construction and launch of
satellites and debt service costs. The Company has satellites under various
stages of development, for which the Company has budgeted capital expenditures.
According to the Company's capital plan, PanAmSat currently expects to spend
approximately $450 million to $480 million on capital expenditures during 2001,
which will primarily be comprised of costs to construct, insure and launch
satellites.
Assuming satellites in development are successfully launched and
services on the satellites commence on the schedule currently contemplated,
PanAmSat believes that amounts available under its revolving credit facility,
vendor financing, future cash flow from operations and cash on hand will be
sufficient to fund its operations and its remaining costs for the construction
and launch of satellites currently under development. There can be no assurance,
however, that PanAmSat's assumptions with respect to costs for future
construction and launch of its satellites will be correct, or that amounts
available under its revolving credit facility, vendor financing, future cash
flow from
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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, or if
Hughes Electronics were to require the Company to use its best efforts to
replace the Hughes term loan, the Company may be required to seek additional
financing. If circumstances were to require PanAmSat to incur additional
indebtedness, the ability of PanAmSat to incur any such additional indebtedness
would be subject to the terms of PanAmSat's outstanding indebtedness. The
failure to obtain such financing 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 decreased to $229.3 million
for the six months ended June 30, 2001, from $236.5 million for the six months
ended June 30, 2000. The decrease in 2001 was primarily attributable to the
increase in direct operating and selling, general and administrative expenses
noted above, which was partially offset by the profit earned on additional
operating lease revenues recorded in 2001 as compared to 2000.
Net cash used in investing activities was $29.0 million for the six
months ended June 30, 2001, compared to net cash used in investing activities of
$172.0 million for the six months ended June 30, 2000. The decrease in net cash
used in investing activities in 2001 was primarily due to the receipt of
proceeds from an insurance claim receivable during the three months ended March
31, 2001 and lower capital expenditures for satellite systems under development
compared to 2000.
Net cash used in financing activities decreased to $21.0 million for
the six months ended June 30, 2001, from $37.6 million for the six months ended
June 30, 2000. The decrease in net cash used in financing activities in 2001 was
primarily attributable to lower scheduled repayments of long term debt during
2001, partially offset by a reduction in stock issued in connection with
employee benefit plans in 2001 as compared to 2000.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk - 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 $31.5 million and $7.1 million,
respectively, as of June 30, 2001. The potential effect of a hypothetical 10%
adverse fluctuation in interest rates for one year on PanAmSat's floating rate
debt outstanding at June 30, 2001 would be a reduction in cash flows of
approximately $7.7 million and a reduction in net income of approximately $4.2
million.
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PANAMSAT CORPORATION
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Stockholders was held on June 1, 2001 (the "Annual
Meeting"). Three matters were submitted to a vote of the shareholders at
the Annual Meeting, each as described in the Company's Proxy Statement. The
results of the vote on each matter submitted to shareholders are set forth
below in clauses (b), (c) and (d).
(b) The Company's Certificate of Incorporation provides that nominees to the
Company's Board of Directors shall be elected to serve as directors until
the next annual meeting of stockholders or until their successors are
elected and have qualified. The nine nominees for director, Mr. Michael T.
Smith, Ms. Roxanne S. Austin, Mr. Patrick J. Costello, Mr. Dennis F.
Hightower, Mr. James M. Hoak, Mr. R. Douglas Kahn, Mr. Stephen R. Kahn, Mr.
Jack A. Shaw and Mr. Joseph R. Wright, Jr., were elected by plurality of
the votes cast by the holders of the Company's Common Stock voting thereon:
(A) Mr. Smith: 142,470,733 votes for and 116,555 votes withheld;
(B) Ms. Austin: 142,469,968 votes for and 117,320 votes withheld;
(C) Mr. Costello: 142,470,932 votes for and 116,356 votes withheld;
(D) Mr. Hightower: 142,471,442 votes for and 115,846 votes withheld;
(E) Mr. Hoak: 142,471,242 votes for and 116,046 votes withheld;
(F) Mr. R. Douglas Kahn: 142,468,675 votes for and 118,613 votes withheld;
(G) Mr. Stephen R. Kahn: 142,468,971 votes for and 118,317 votes withheld;
(H) Mr. Shaw: 142,466,885 votes for and 120,403 votes withheld;
(I) Mr. Wright: 142,471,742 votes for and 115,546 votes withheld;
(c) A proposal (designated Proposal 2 and set forth in the Company's Proxy
Statement), approved by the Board of Directors, to elect Deloitte & Touche LLP
as the Company's independent accountants for 2001, was approved by a majority of
the votes cast by the holders of the Company's Common Stock voting thereon:
142,260,913 affirmative votes; 89,417 negative votes; 236,958 votes abstained.
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(d) A proposal (designated Proposal 3 and set forth in the Company's Proxy
Statement), approved by the Board of Directors, to amend and restate the
Corporation's Long-Term Stock Incentive Plan, was approved by a majority of the
votes cast by the holders of the Company's Common Stock voting thereon:
132,424,713 affirmative votes; 5,302,842 negative votes; 237,479 votes
abstained; 4,622,254 broker non-votes.
ITEM 5 - OTHER MATTERS
On June 12, 2001, the Company announced that Jack A. Shaw, Chief Executive
Officer of Hughes Electronics Corporation, was appointed to serve as Chairman of
the Board of Directors of the Company. Mr. Shaw, who prior to this announcement
was a member of the Company's Board of Directors, succeeds Michael T. Smith, who
retired as Hughes Chairman and Chief Executive Officer and as the Company's
Chairman of the Board of Directors in May 2001. The Company also announced on
June 12, 2001 that Eddy W. Hartenstein, Corporate Senior Executive Vice
President of Hughes Electronics Consumer Sector, and Michael J. Gaines,
Corporate Vice President and Chief Financial Officer of Hughes Electronics
Corporation, were appointed to the Company's Board of Directors. Mr. Hartenstein
and Mr. Gaines were appointed to PanAmSat's Board of Directors to fill vacancies
created by the departure of former Hughes executives prior to 2001.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.33.6 Second Amended and Restated PanAmSat Corporation Long-Term
Stock Incentive Plan, establised in 1997, effective as of
June 1, 2001.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter
for which this report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities 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: August 13, 2001 /s/ Michael J. Inglese
----------------------------
Michael J. Inglese
Senior Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
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