UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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.)
One Pickwick Plaza, Greenwich, CT 06830
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 203-622-6664
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 September 30, 1998, an aggregate of 149,223,572 shares of the Company's
Common Stock were outstanding.
<PAGE>
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," "project," "anticipate," "expect," "intend,"
"believe" and other similar expressions are intended to identify forward-looking
statements and information. The Company identifies the following important
factors which could cause the Company's actual results to differ materially from
any results which might be projected, forecasted, estimated or budgeted by the
Company in forward-looking information: (i) risks associated with technology,
(ii) regulatory risks, (iii) risks associated with the Year 2000 issue and (iv)
litigation. Such factors are more fully described under the caption "Risk
Factors" in the Company's Registration Statement on Form S-4, as amended
(Registration No. 333-56227). Reference is also made to such other risks and
uncertainties detailed from time to time in the Company's other 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.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PanAmSat Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 146,624 $ 91,739
Accounts receivable-net 83,197 41,030
Net investment in sales-type leases 21,927 27,757
Prepaid expenses and other 49,400 77,891
Deferred income taxes 42,761 46,940
Insurance claim receivable 210,445 -
----------- ------------
Total current assets 554,354 285,357
SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net 2,614,142 2,506,082
NET INVESTMENT IN SALES-TYPE LEASES 181,864 324,689
GOODWILL-Net of amortization 2,449,778 2,498,498
DEFERRED CHARGES AND OTHER ASSETS 51,898 67,808
----------- ------------
TOTAL ASSETS $ 5,852,036 $ 5,682,434
----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
PanAmSat Corporation
CONSOLIDATED BALANCE SHEETS - (continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,949 $ 16,398
Accounts payable and accrued liabilities 70,691 26,828
Deferred gains on sale-leasebacks 34,303 42,870
Deferred revenues 17,105 18,822
----------- ------------
TOTAL CURRENT LIABILITIES 126,048 104,918
DUE TO AFFILIATES (PRINCIPALLY MERGER-RELATED
INDEBTEDNESS) 1,779,222 1,802,195
LONG-TERM DEBT 810,056 640,123
DEFERRED GAINS ON SALE-LEASEBACKS 130,053 191,882
DEFERRED INCOME TAXES 215,180 179,267
OTHER LIABILITIES AND DEFERRED CREDITS 96,108 103,029
ACCRUED OPERATING LEASEBACK
EXPENSE 38,833 100,184
----------- ------------
TOTAL LIABILITIES 3,195,500 3,121,598
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value 400,000,000
shares authorized, 149,223,572 and 149,122,807
shares issued and outstanding, respectively 1,492 1,491
Additional paid-in-capital 2,504,013 2,501,344
Retained earnings 151,031 58,001
----------- ------------
Total Stockholders' Equity 2,656,536 2,560,836
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,852,036 $ 5,682,434
----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
PanAmSat Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine Months Ended September 30, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
----------- ------------
<S> <C> <C>
REVENUES:
Operating leases, satellite services and other $ 546,815 $ 370,501
Outright sales and sales-type leases 23,830 61,559
----------- ------------
Total revenues 570,645 432,060
----------- ------------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases - 20,476
Leaseback expense, net of deferred gain 36,404 46,395
Depreciation and amortization 178,199 94,423
Direct operating costs 70,845 27,263
Selling, general and administrative expenses 42,111 43,127
Provision for loss on Galaxy IV 6,314 -
----------- ------------
Total operating costs and expenses 333,873 231,684
----------- ------------
INCOME FROM OPERATIONS 236,772 200,376
INTEREST EXPENSE, NET 70,542 15,599
OTHER INCOME - (385)
----------- ------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 166,230 185,162
INCOME TAXES 73,200 83,172
MINORITY INTEREST - 12,819
----------- ------------
NET INCOME $ 93,030 $ 89,171
----------- ------------
NET INCOME PER COMMON SHARE - BASIC AND DILUTED $ 0.62 $ -
----------- ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 149,635,423 -
----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
PanAmSat Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended September 30, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
----------- ------------
<S> <C> <C>
REVENUES:
Operating leases, satellite services and other $ 179,750 $ 160,940
Outright sales and sales-type leases 6,790 9,375
----------- ------------
Total revenues 186,540 170,315
----------- ------------
OPERATING COSTS AND EXPENSES:
Cost of outright sales and sales-type leases - -
Leaseback expense, net of deferred gain 10,820 15,512
Depreciation and amortization 59,282 48,850
Direct operating costs 24,298 10,916
Selling, general and administrative expenses 13,813 24,271
----------- ------------
Total operating costs and expenses 108,213 99,549
----------- ------------
INCOME FROM OPERATIONS 78,327 70,766
INTEREST (INCOME) EXPENSE, NET 23,902 (1,088)
----------- ------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 54,425 71,854
INCOME TAXES 24,500 35,435
MINORITY INTEREST - 9,003
----------- ------------
NET INCOME $ 29,925 $ 27,416
----------- ------------
NET INCOME PER COMMON SHARE - BASIC AND DILUTED $ 0.20 $ 0.18
----------- ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 149,548,470 149,145,213
----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
PanAmSat Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 93,030 $ 89,171
Adjustments to reconcile net income to
net cash provided by operating activities:
Gross profit on sales-type leases - (33,572)
Depreciation and amortization 178,199 94,423
Deferred income taxes 40,092 (21,855)
Amortization of gains on sale-leasebacks (27,564) (32,152)
Provision for uncollectible receivables - (4,534)
Accretion of interest on senior subordinated discount notes - 16,997
Amortization of step-up in fair value of debt - (11,364)
Interest expense capitalized (45,956) (57,070)
Minority interest - 12,819
Provision for loss on Galaxy IV 6,314 -
Changes in assets and liabilities, net of acquired
assets and liabilities:
Collections on investments in sales-type leases 35,323 21,659
Operating leases and other receivables (44,916) (21,410)
Prepaid expenses and other current assets 6,858 25,174
Accounts payable and accrued liabilities (5,288) 43,330
Accrued operating leaseback expense (34,228) (29,149)
Deferred gains and revenues (12,113) (3,097)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 189,751 89,370
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of PanAmSat International, net of cash acquired - (1,486,266)
Capital expenditures (397,862) (423,393)
Proceeds from sale of marketable securities - 50,628
(Increase) decrease in other assets 15,659 (9,921)
Early buyout of sale-leaseback (155,530) -
Proceeds from insurance claims 231,186 -
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (306,547) (1,868,952)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings 1,165,000 1,725,000
Repayments of long-term debt (995,989) (3,973)
Parent company contributions prior to the Merger - 370,424
Stock issuance 2,670 -
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 171,681 2,091,451
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 54,885 311,869
CASH AND EQUIVALENTS, beginning of period 91,739 29
----------- ------------
CASH AND EQUIVALENTS, end of period $ 146,624 $ 311,898
----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received for interest $ 9,923 $ 10,455
----------- ------------
Cash paid for interest $ 112,976 $ 61,451
----------- ------------
Cash paid for taxes $ 7,844 $ 103,918
----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<PAGE>
PanAmSat Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General.
These unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments which
are of a normal recurring nature necessary to present fairly the
financial position, results of operations and cash flows as of and
for the three and nine month periods ended September 30, 1998 and
1997 have been made. Operating results for the three months and
nine months ended September 30, 1998 and 1997 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 PanAmSat's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(2) Business Combination.
PanAmSat Corporation ("PanAmSat" or the "Company") commenced
operations on May 16, 1997 upon the merger of PanAmSat
International Systems, Inc. (then operating under its previous
name, PanAmSat Corporation) ("PanAmSat International") and the
Galaxy Satellite Services division of Hughes Communications, Inc.
(the "Galaxy Business") (the "Combination"). Pursuant to the
Combination, the aggregate consideration paid to PanAmSat
International shareholders consisted of approximately $1.5 billion
in cash and approximately 42.5 million shares of PanAmSat Common
Stock having an estimated value of $1.3 billion. Concurrent with
the Combination and as an integral part thereof, the Company sold
its direct-to-home television rights in certain foreign markets to
an entity which was then an affiliate of the Company for $225
million (the "DTH Options").
The Company has applied the purchase method of accounting to the
transaction with the Galaxy Business as the acquiror. The purchase
price was allocated to the assets acquired and liabilities assumed
based on estimates of their respective fair values. Assets
acquired totaled $2.0 billion, liabilities assumed were $3.2
billion (including a term loan (the "Hughes Term Loan") in the
amount of $1.725 billion from Hughes Electronics Corporation
("Hughes Electronics"), an affiliate of the Company) and shares
valued at $1.3 billion were issued in the transaction. A total of
$2.5 billion, representing the excess of acquisition value over
the fair value of PanAmSat International's net tangible assets,
was allocated to intangible assets and is being amortized over 40
years.
<PAGE>
PanAmSat Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company's consolidated results of operations incorporate
PanAmSat International's activity commencing upon the effective
date of the Combination. The unaudited pro forma information shown
below for the three and nine month periods ended September 30,
1997, presents combined results of operations as if the
Combination had occurred at the beginning of 1997 (excluding the
impact of the $225 million gain on the sale of the DTH Options as
well as certain professional and advisory fees incurred in
connection with the Combination totaling $31.6 million ($1.8
million of which was incurred during the third quarter), both of
which are non-recurring items that are not indicative of the
Company's ordinary course of business). The unaudited pro forma
information shown below for the three and nine month periods ended
September 30, 1997 is not necessarily indicative of the results of
operations of the combined company had the Combination occurred at
the beginning of 1997, nor is the information shown below
necessarily indicative of future results.
<TABLE>
<CAPTION>
(unaudited; in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1998 1997 1998 1997
(Pro forma) (Pro forma)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 186,540 $ 170,315 $ 570,645 $ 558,101
Net income 29,925 28,754 93,030 75,461
Net income per share
-basic and diluted 0.20 0.19 0.62 0.51
</TABLE>
(3) New Accounting Pronouncements.
In March of 1998, the American Institute of Certified Public
Accountant's (AICPA) Accounting Standards Executive Committee
(ASEC) issued Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.
SOP 98-1 provides guidance on the capitalization of software
developed and/or purchased for internal use. PanAmSat will adopt
SOP 98-1 by January 1, 1999, as required. Management is currently
assessing the impact of this SOP to PanAmSat's consolidated
financial statements.
<PAGE>
PanAmSat Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June of 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. Gains or losses resulting
from changes in the values of those derivatives would be
recognized immediately or deferred depending on the use of the
derivative and if the derivative is a qualifying hedge. PanAmSat
plans to adopt SFAS No. 133 by January 1, 2000, as required.
PanAmSat is currently assessing the impact of this statement on
PanAmSat's consolidated financial statements.
(4) Financing Activities.
On January 16, 1998, PanAmSat completed a private placement
pursuant to Rule 144A under the Securities Act of 1933 for $750
million aggregate principal amount of new debt securities (the
"Offering"). The net proceeds from the Offering were used to repay
bank loans incurred to finance the tender offer for certain debt
securities of PanAmSat's subsidiaries, as well as for general
corporate purposes.
In connection with the Offering, the Company executed a Credit
Agreement (the "Credit Agreement") with certain lenders and
Citicorp USA, Inc. as administrative agent. The Credit Agreement
amended and restated the credit agreement among the parties dated
December 24, 1997 (the "Original Credit Agreement"). The Original
Credit Agreement provided the Company with up to $500 million of
revolving credit loans (the "Revolving Credit Loans") for five
years, and up to $300 million in short-term loans maturing on
April 30, 1998 (the "Term Loans"). The Credit Agreement amended
the Original Credit Agreement to terminate the Term Loan facility.
The Company currently has $500 million of Revolving Credit Loans
available to it under the Credit Agreement, less any amounts
outstanding under the Commercial Paper Program as described below.
Also in connection with the Offering, the Company entered into
certain U.S. Treasury rate lock contracts to reduce its exposure
to fluctuations in interest rates. The aggregate nominal value of
these contracts was $375 million and these contracts were
accounted for as hedges because they were applied to a specific
refinancing plan that was consummated shortly after December 31,
1997. The cost to unwind these instruments during the first
quarter of 1998 was approximately $9 million and will be amortized
to expense over the term of the debt securities to which such
hedges were applied.
On July 27, 1998, the Company initiated a $500 million commercial
paper program (the "Commercial Paper Program"). Borrowings under
the Credit Agreement and the Commercial Paper Program are limited
to $500 million in the aggregate and are expected to be used to
fund the Company's comprehensive satellite expansion and back-up
plan. The Company has established the necessary credit facilities,
through the Credit Agreement, to refinance future commercial paper
borrowings on a long-term basis and, accordingly, classifies such
borrowings as long-term liabilities. As of November 10, 1998, the
Company had approximately $5 million of notes outstanding under
the Commercial Paper Program.
<PAGE>
PanAmSat Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Hughes Term Loan is subordinate to the notes issued in
connection with the Offering, the Revolving Credit Loans and the
notes issued under the Commercial Paper Program.
(5) Hughes Electronics Purchase of PanAmSat Common Stock.
On May 1, 1998, Hughes Electronics increased its beneficial
ownership of the Company from approximately 71.5% to approximately
81% through the purchase for $60 per share in cash of
approximately 11.2 million shares (or 7.5% of the then outstanding
shares of PanAmSat Common Stock) from Grupo Televisa, S.A. and 2.9
million shares (or 2% of the then outstanding shares of PanAmSat
Common Stock) from a group of founding stockholders of PanAmSat,
which includes several members of the family of PanAmSat's late
founder Rene Anselmo and related trusts as well as Frederick A.
Landman, PanAmSat's President and Chief Executive Officer, and
Lourdes Saralegui, an Executive Vice President of PanAmSat.
(6) Satellite Developments.
On August 11, 1998 the Company announced the conclusion of an
investigation by Hughes Space and Communications Co. ("HSC") into
spacecraft control processor (SCP) anomalies that had occurred on
certain of the Company's satellites and other satellites
manufactured by HSC.
The investigation identified electrical shorts involving
tin-plated relay switches as the most probable cause of the SCP
anomalies. The shorts can occur only when several factors are
concurrently present. PanAmSat currently operates an 18-satellite
global communications network. Of these 18 satellites, 14 were
constructed by HSC and five are HS 601 spacecraft with tin-plated
relay switches that were built in the early 1990s. Based on the
investigation's findings, PanAmSat stated that it believed the
probability of future SCP anomalies of this type resulting in the
total failure of any of these five HS 601 satellites is very low.
Electrical shorts are believed to be the cause of the backup SCP
anomaly on the Galaxy IV satellite in June 1997 and the primary
SCP anomaly on Galaxy VII in June 1998. The primary SCP anomaly on
Galaxy IV in May 1998, which resulted in the failure of the
satellite, was also investigated by HSC and was determined to have
been caused by a different, isolated incident. Galaxy VII is
operating normally. Since the Company's announcement of the
investigation of the SCP anomalies, an additional SCP failure has
occurred on one of its satellites. The satellite is operating
normally. The Company continues to believe that the probability of
future SCP anomalies of this type resulting in the total failure
of any of the five identified HS 601 satellites is very low,
however there can be no assurance that there will not be future
failures of individual SCPs.
<PAGE>
PanAmSat Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On August 26, 1998, the Company's Galaxy X satellite was destroyed
during the inaugural launch of the Boeing Delta III rocket which
exploded shortly after liftoff. PanAmSat filed a $250 million
insurance claim which fully covered all of the net asset value
associated with the Galaxy X satellite. All of these insurance
proceeds have been collected. The Company plans to build and
launch a replacement satellite for Galaxy X by the fourth quarter
of 1999.
In March 1998, two cells failed in the battery system of the
Company's PAS-5 satellite. The batteries' sole purpose is to power
the payload and spacecraft operations during daily eclipse periods
(having a duration of one minute to a maximum of 75 minutes per
day) which occur during two 40-day periods around each of March 21
and September 21, which are the dates of the peak daily eclipses.
During the autumn eclipse season in 1998, additional full and
partial cell failures occurred on the satellite. In future eclipse
seasons, service to one or more existing full-time customers may
be interrupted for brief periods which, depending on their extent,
could result in a claim by affected customers for termination of
their transponder agreements. There can be no assurance that
additional battery cell failures will not occur in the future. The
Company is developing solutions for its customers to avoid
disruption of service during future eclipse seasons that may
include the transition of certain customers to other of the
Company's existing satellites or satellites under construction.
Also in the autumn eclipse season of 1998, a battery problem
similar to the PAS-5 anomaly was detected on another of the
Company's satellites, which is the same model satellite as PAS-5.
The anomaly resulted in the shut off of a substantial number of
transponders for brief periods during the eclipses. The Company is
working to provide replacement capacity for the affected number of
transponders on another of the Company's satellites to be launched
in the fourth quarter of 1999. There can be no assurance that
additional battery cell failures will not occur in future eclipse
seasons. The customer on the satellite has priority backup
arrangements on another of the Company's satellites.
<PAGE>
PanAmSat Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company is continuing to investigate the battery anomaly on
these two satellites with the satellite manufacturer. The Company
and the manufacturer are satisfied that the anomaly is limited to
these two satellites in the Company's fleet and will not recur in
future satellites of the same model. Both satellites continue to
operate normally outside of eclipse seasons.
On September 16, 1998, the Company successfully launched its PAS-7
Indian Ocean Region Satellite on an Arianespace launch vehicle.
In-orbit testing has been completed and the Company expects PAS-7
to be available for service before the end of November 1998,
subject to resolution of certain C-band frequency coordination
issues with the Russian Federation.
On November 4, 1998, the Company successfully launched PAS-8, its
second Pacific Ocean Region satellite and its fourth serving Asia,
on a Proton launch vehicle. The Company expects PAS-8 to be
available for service before the end of 1998.
<PAGE>
PanAmSat Corporation
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations. The Company's results of operations
incorporate PanAmSat International's activity commencing on May
16, 1997, the effective date of the Combination. Since the results
of operations for the nine month period ended September 30, 1997
include only four and a half months of activity for PanAmSat
International, management has determined that for comparative
purposes, it would be more meaningful to present the information
shown below on a "pro forma" basis reflecting the Combination as
though it had occurred at the beginning of 1997 (excluding the
impact of the $225 million gain on the sale of the DTH Options as
well as certain professional and advisory fees incurred in
connection with the Combination totaling $31.6 million ($1.8
million of which was incurred during the third quarter), both of
which are non-recurring items that are not indicative of the
Company's ordinary course of business.) The unaudited pro forma
information shown below for the three and nine month periods ended
September 30, 1997 is not necessarily indicative of the results of
operations of the combined company had the Combination occurred at
the beginning of fiscal 1997, nor is the information shown below
necessarily indicative of future results.
<TABLE>
<CAPTION>
(unaudited; in thousands,
except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
(Pro forma) (Pro forma)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Operating leases, satellite services and other $ 179,750 $ 160,940 $ 546,815 $ 496,542
Outright sales and sale-type leases 6,790 9,375 23,830 61,559
---------- ---------- ---------- ----------
Total revenues 186,540 170,315 570,645 558,101
---------- ---------- ---------- ----------
Costs and expenses
Cost of outright sales and sales-
type leases - - - 20,476
Leaseback expense, net of deferred
gain 10,820 15,512 36,404 46,395
Direct operating and SG&A costs 38,111 33,387 112,956 95,277
Depreciation and amortization 59,282 48,850 178,199 141,947
Provision for loss on Galaxy IV - - 6,314 -
---------- ---------- ---------- ----------
Total 108,213 97,749 333,873 304,095
---------- ---------- ---------- ----------
Income from operations 78,327 72,566 236,772 254,006
Interest (income) expense, net 23,902 (1,088) 70,542 58,807
Other income - - - (385)
---------- ---------- ---------- ----------
Income before income taxes and
minority interest 54,425 73,654 166,230 195,584
Income tax expense 24,500 35,897 73,200 95,285
Minority interest - 9,003 - 24,838
---------- ---------- ---------- ----------
Net income $ 29,925 $ 28,754 $ 93,030 $ 75,461
---------- ---------- ---------- ----------
Net income per share - basic and diluted $ 0.20 $ 0.19 $ 0.62 $ 0.51
</TABLE>
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues. Revenues increased $16.2 million, or 10% to $186.5 million
for the three months ended September 30, 1998 from $170.3 million for the same
pro forma period in 1997. Revenues for the nine months ended September 30, 1998
were $570.6 million, an increase of $12.5 million or 2% from $558.1 million for
the same pro forma period in 1997. Video services revenues were $135.8 million
for the three months ended September 30, 1998, an increase of 4% from the same
pro forma period in 1997. Video services revenues were $417.7 million for the
nine months ended September 30, 1998, a decrease of 6% from the same pro forma
period in 1997. The increase in video services revenues for the three months
ended September 30, 1998 was due primarily to the commencement of service
agreements for full-time video distribution services. The decrease in video
services revenues for the nine months ended September 30, 1998 was primarily due
to less sales and sales-type lease activity as compared to the same pro forma
period in 1997. Telecommunications services revenues were $40.7 million for the
three months ended September 30, 1998, an increase of 16% from the same pro
forma period in 1997. Telecommunications services revenues were $118.0 million
for the nine months ended September 30, 1998, an increase of 17% from the same
pro forma period in 1997. The increase in telecommunications services revenues
was due primarily to the commencement of several new carrier and
Internet-related service agreements during 1998.
The revenue results can also be analyzed based on the type of
agreement. Revenues from sales and sales-type leases decreased to $6.8 million
for the three months ended September 30, 1998 from $9.4 million for the same pro
forma period in 1997. Revenues from sales and sales-type leases decreased to
$23.8 million for the nine months ended September 30, 1998 from $61.6 million
for the same pro forma period in 1997. The decrease is attributable to a lower
volume in 1998 relative to 1997 of outright sales and sales-type leases as well
as to the loss of the Galaxy IV satellite. Revenues from operating leases of
transponders, satellite services and other increased $18.8 million, or 12%, to
$179.7 million for the three months ended September 30, 1998 from $160.9 million
for the same pro forma period in 1997. Revenues from operating leases of
transponders, satellite services and other increased $50.3 million, or 10% to
$546.8 million for the nine months ended September 30, 1998 from $496.5 million
for the same pro forma period in 1997. The increase in revenues from operating
leases of transponders, satellite services and other for the three and nine
month periods is due primarily to increased service agreements associated with
available transponder capacity and the provision of short-term, special events
services.
Cost of Outright Sales and Sales-Type Leases of Transponders. The
Company recorded no cost of outright sales and sales-type leases of transponders
for the three and nine month periods ended September 30, 1998, as compared to $0
and $20.5 million for the three month and nine month pro forma periods in 1997,
respectively. The pro forma cost of outright sales and sales-type leases of
transponders for the nine month period ended September 30, 1997 is related to
several outright sales and sales-type lease transactions entered into during
that period.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Leaseback Expense, Net of Deferred Gain. Leaseback expense, net of
deferred gain, decreased $4.7 million, or 30%, to $10.8 million for the three
months ended September 30, 1998 from $15.5 million for the same pro forma period
in 1997. Leaseback expense, net of deferred gain, decreased $10.0 million, or
22%, to $36.4 million for the nine months ended September 30, 1998 from $46.4
million for the same pro forma period in 1997. The decrease for the three and
nine month periods is primarily attributable to the exercise by the Company of
sale-leaseback early buy-out options during 1998.
Direct Operating and Selling, General and Administrative Costs. Direct
operating and selling, general and administrative costs increased $4.7 million,
or 14%, to $38.1 million for the three months ended September 30, 1998 from
$33.4 million for the same pro forma period in 1997. Direct operating and
selling, general and administrative costs increased $17.7 million, or 19%, to
$113.0 million for the nine months ended September 30, 1998 from $95.3 million
for the same pro forma period in 1997. The increase for the three and nine month
periods is due primarily to direct costs associated with additional satellites
placed in service and operating costs associated with the normal growth of the
Company.
Depreciation and Amortization. Depreciation and amortization increased
$10.4 million, or 21%, to $59.3 million for the three months ended September 30,
1998 from $48.9 million for the same pro forma period in 1997. Depreciation and
amortization for the nine months ended September 30, 1998 increased $36.3
million or 26% to $178.2 million from $141.9 million for the same pro forma
period in 1997. The increase in depreciation and amortization for the three and
nine month periods is due primarily to depreciation expense associated with
additional satellites placed in service.
Provision for Loss on Galaxy IV. As discussed in "Satellite
Developments" below, the Company recorded a $6.3 million provision for loss in
connection with the loss of Galaxy IV during the nine months ended September 30,
1998.
Income from Operations. Income from operations increased $5.7 million,
or 8%, to $78.3 million for the three months ended September 30, 1998 from $72.6
million for the same pro forma period in 1997. Income from operations decreased
$17.2 million or 7% to $236.8 million for the nine months ended September 30,
1998 from $254.0 million for the same pro forma period in 1997. The increase in
income from operations for the three months ended September 30, 1998 is due to
higher operating lease revenues coupled with lower leaseback expense resulting
from the exercises by the Company of sale-leaseback early buy-out options during
1998. The decrease in income from operations for the nine months ended September
30, 1998 is due primarily to increased depreciation and direct operating costs
associated with the Company's expanded satellite fleet, as well as the $6.3
million provision for loss on Galaxy IV.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest (Income) Expense, Net. Interest (income) expense, net
increased $25.0 million to $23.9 million for the three months ended September
30, 1998 from $(1.1) million for the same pro forma period in 1997. Interest
(income) expense, net increased $11.7 million to $70.5 million for the nine
months ended September 30, 1998 from $58.8 million for the same pro forma period
in 1997. The increase was due primarily to higher average borrowing levels
during 1998 as well as less interest income earned as a result of the Company's
smaller investment portfolio.
Income Tax Expense. Income tax expense decreased $11.4 million, or
32%, to $24.5 million for the three months ended September 30, 1998 from $35.9
million for the same pro forma period in 1997. Income tax expense decreased
$22.1 million, or 23%, to $73.2 million for the nine months ended September 30,
1998 from $95.3 million for the same pro forma period in 1997. The decrease was
due to the decrease in income before income taxes as well as to a lower
effective tax rate in 1998 principally as a result of utilization of foreign
sales corporation tax benefits.
Minority Interest. Minority interest, representing preferred stock
dividends of PanAmSat International, was $0 for the three and nine month periods
ended September 30, 1998 as compared to $9.0 million and $24.8 million for the
three and nine month pro forma periods in 1997, respectively. The decrease was
due to the conversion of PanAmSat International's 12 3/4% Mandatorily
Exchangeable Senior Redeemable Preferred Stock due 2005 into 12 3/4% Senior
Subordinated Notes due 2005 (the "Exchange Notes") in the third quarter of 1997
and the related termination of dividend payment obligations. Approximately 99%
of the Exchange Notes were subsequently retired in connection with the Company's
debt refinancing which was completed in January, 1998.
Satellite Developments. On August 11, 1998 the Company announced the
conclusion of an investigation by HSC into spacecraft control processor (SCP)
anomalies that had occurred on certain of the Company's satellites and other
satellites manufactured by HSC.
The investigation identified electrical shorts involving tin-plated
relay switches as the most probable cause of the SCP anomalies. The shorts can
occur only when several factors are concurrently present. PanAmSat currently
operates an 18-satellite global communications network. Of these 18 satellites,
14 were constructed by HSC and five are HS 601 spacecraft with tin-plated relay
switches that were built in the early 1990s. Based on the investigation's
findings, PanAmSat stated that it believed the probability of future SCP
anomalies of this type resulting in the total failure of any of these five HS
601 satellites is very low.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Electrical shorts are believed to be the cause of the backup SCP
anomaly on the Galaxy IV satellite in June 1997 and the primary SCP anomaly on
Galaxy VII in June 1998. The primary SCP anomaly on Galaxy IV in May 1998, which
resulted in the failure of the satellite, was also investigated by HSC and was
determined to have been caused by a different, isolated incident and
investigations have been concluded. Galaxy VII is operating normally. Since the
Company's announcement of the investigation of the SCP anomalies, an additional
SCP failure has occurred on one of its satellites. The satellite is operating
normally. The Company continues to believe that the probability of future SCP
anomalies of this type resulting in the total failure of any of the five
identified HS 601 satellites is very low, however there can be no assurance that
there will not be future failures of individual SCPs.
On August 26, 1998, the Company's Galaxy X satellite was destroyed
during the inaugural launch of the Boeing Delta III rocket which exploded
shortly after liftoff. PanAmSat filed a $250 million insurance claim which fully
covered all of the net asset value associated with the Galaxy X satellite. All
of these insurance proceeds have been collected. The Company plans to build and
launch a replacement satellite for Galaxy X by the fourth quarter of 1999.
In March 1998, two cells failed in the battery system of the Company's
PAS-5 satellite. The batteries' sole purpose is to power the payload and
spacecraft operations during daily eclipse periods (having a duration of one
minute to a maximum of 75 minutes per day) which occur during two 40-day periods
around each of March 21 and September 21, which are the dates of the peak daily
eclipses. During the autumn eclipse season in 1998, additional full and partial
cell failures occurred on the satellite. In future eclipse seasons, service to
one or more existing full-time customers may be interrupted for brief periods
which, depending on their extent, could result in a claim by affected customers
for termination of their transponder agreements. There can be no assurance that
additional battery cell failures will not occur in the future. The Company is
developing solutions for its customers to avoid disruption of service during
future eclipse seasons that may include the transition of certain customers to
other of the Company's existing satellites or satellites under construction.
Also in the autumn eclipse season of 1998, a battery problem similar
to the PAS-5 anomaly was detected on another of the Company's satellites, which
is the same model satellite as PAS-5. The anomaly resulted in the shut off of a
substantial number of transponders for brief periods during the eclipses. The
Company is working to provide replacement capacity for the affected number of
transponders on another of the Company's satellites to be launched in the fourth
quarter of 1999. There can be no assurance that additional battery cell failures
will not occur in future eclipse seasons. The customer on the satellite has
priority backup arrangements on another of the Company's satellites.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is continuing to investigate the battery anomaly on these
two satellites with the satellite manufacturer. The Company and the manufacturer
are satisfied that the anomaly is limited to these two satellites in the
Company's fleet and will not recur in future satellites of the same model. Both
satellites continue to operate normally outside of eclipse seasons.
On September 16, 1998, the Company successfully launched its PAS-7
Indian Ocean Region Satellite on an Arianespce launch vehicle. In-orbit testing
has been completed and the Company expects PAS-7 to be available for service
before the end of November 1998, subject to resolution of certain frequency
coordination issues with the Russian Federation.
On November 4, 1998, the Company successfully launched PAS-8, its
second Pacific Ocean Region satellite and its fourth serving Asia, on a Proton
launch vehicle. The Company expects PAS-8 to be available for service before the
end of 1998.
Comprehensive Satellite Expansion and Back-up Plan. On July 13, 1998,
PanAmSat announced a comprehensive plan to construct up to four additional
satellites and to modify the design of two satellites currently under
construction (the "Plan"). On October 12, 1998, in connection with the Plan, the
Company announced that it had ordered three new satellites from HSC, an
affiliate of the Company. Also, the Company has arranged with HSC for up to
three ground spare spacecraft that could be completed as replacement or
supplemental satellites on an expedited basis. The Plan has been approved by the
Company's board of directors, but is still subject to certain regulatory
approvals.
As part of the first phase of the Plan, Galaxy XI will be modified to
allow it to operate in several of the Company's orbital slots covering the
United States. Upon its revised launch date in April 1999, the modified Galaxy
XI will initially be located at 99(degree) W.L., enabling the Company to restore
Galaxy VI to its status as an in-orbit spare satellite.
Also in the first phase, PanAmSat will modify Galaxy 3C (formerly
known as PAS-9) to provide coverage of the United States and Latin America. Upon
its anticipated launch in early 2000, the modified Galaxy 3C will be located at
95(degree) W.L., enabling the Company to offer its customers expanded service
from this location and also to move the Galaxy III-R satellite to another
orbital location over the United States. Galaxy 3C originally was one of three
new satellites under construction to provide service in Asia. The other two Asia
satellites, PAS-7 and PAS-8, were launched on September 16, 1998 and November 4,
1998, respectively.
As part of the second phase of the Plan, PanAmSat has ordered three HS
601HP satellites from Hughes. The three new satellites will be the Galaxy IV
replacement, the Galaxy X replacement and an undesignated international
satellite.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Including the three new satellites, the Company expects to launch
seven satellites over the next 15 months, including two new satellites for Latin
America, four for the United States and one undesignated international
satellite. There can be no assurance that the Plan will be successfully
implemented.
Year 2000. Many of the world's computer systems currently use a
two-digit format, as opposed to a four digit format, to indicate the year. If
not modified, these computer systems will be unable to properly recognize dates
beyond the year 1999, which could lead to system failures and business
disruption in the U.S. and internationally. PanAmSat commenced its Year 2000
planning (the "Y2K Plan") in 1997 and anticipates that it will complete its
evaluation, correction and testing of all company information technology ("IT")
and non-IT systems by mid-1999. The Company's Y2K Plan addresses Year 2000
issues in the following phases:
(i) identification of the Company's systems, equipment and suppliers
that may be vulnerable to Year 2000 issues;
(ii) assessment of the areas identified to determine risks associated
with their failure to be Year 2000 compliant and corrective
actions that would be necessary to prevent such failure;
(iii) correction of affected systems and equipment;
(iv) testing of systems and equipment to determine if Year 2000
compliant; and
(v) contingency planning for reasonably likely worst-case scenarios.
A project team, consisting of members of the operations and software development
groups, meets regularly and is in charge of plan scheduling and implementation.
Except as discussed below, the Y2K Plan is on schedule. Identification
of susceptible Company systems, assessment of Year 2000 risks and the
determination of corrective actions has been completed for all functional areas
within the Company. Test plans are currently being developed with most testing
scheduled for late 1998 and early 1999. Verification requests have been sent to
all identified third-party equipment and system suppliers. Over 80% of such
suppliers have responded to the Company's verification requests with
approximately 75% of them indicating that the systems they provided are Year
2000 compliant. PanAmSat's Y2K Plan team is working with such suppliers to
correct all non-compliant systems. It is expected that all critical systems will
be Year 2000 compliant by mid-1999.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's primary assets, in-orbit satellites, do not utilize
date-dependent processing and the Company believes that the satellites do not
present substantial Year 2000 risks. Modifications are necessary, however, on
Company satellite control and communications software. Updating the control
software represents the largest element of the Y2K Plan (approximately 80% in
terms of both cost and time), and of this portion approximately 60% of the
update effort was assigned to a single third-party software vendor and Y2K
solutions provider. At the present time, the corrective effort on the control
software is approximately six months behind schedule. As a result, the Company
has recently hired an additional Y2K solutions provider to expedite the
modification of the control software. The Company has also dedicated in-house
software staff to begin making certain necessary upgrades and modifications.
Modification of software used to provide communications services to customers
(other than satellite control software) is on schedule. Except with respect to
the third-party activities relating to satellite control software, all project
coordination and systems modifications are being performed by internal
personnel.
The Company has also completed an evaluation of the various management
information systems used by the Company for financial and administrative
functions and has determined that such systems are largely Y2K compliant.
Upgrades are planned for all non-compliant elements, and existing back-up
procedures can be used to perform normal Company financial and administrative
functions in the event of potentially uncorrected problems.
Internal efforts on Y2K projects have had a minimal impact on other
non-Y2K IT and non-IT projects. Any transition of activities currently being
performed by third-party Y2K solutions providers to internal resources could
delay some internal software projects.
The Y2K Plan is funded from cash flows from the Company's operations
and is currently in line with budgeted amounts. Approximately $400,000 has been
incurred to date in connection with the Y2K Plan. Of this amount, approximately
$200,000 was incurred in 1998 and $200,000 during 1997. The total remaining cost
through completion of the Y2K Plan is expected to be approximately $3 million,
including anticipated third-party costs and the addition of two full-time staff
members by the end of 1998 to assist with the effort. If additional Y2K
solutions providers become necessary for remediation of satellite control
software, the cost of the Y2K Plan will increase.
The Company has identified the potential loss of real-time satellite
control software functionality as a reasonably likely worst case scenario.
Preliminary contingency plans are being developed involving the use of
back-dated processors to operate the satellite control systems, which would
result in slightly higher operation costs until any remaining Year 2000 problems
are corrected. The Company expects to complete the preparation of formal
contingency plans by the end of the first quarter of 1999.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based on its current assessment efforts, the Company does not believe
that Year 2000 issues will have a material adverse effect on the financial
condition or results of operations of the Company. The Company's Year 2000
issues, however, and any potential business interruption, costs, damages, or
losses related thereto, are also dependent upon the Year 2000 compliance of
third parties, both domestic and international, such as governmental agencies,
vendors and suppliers. As a result, the Company is unable to determine at this
time whether Year 2000 issues for third parties will materially affect the
Company.
Financial Condition.
Pursuant to the Combination, aggregate consideration paid to PanAmSat
International shareholders consisted of approximately $1.5 billion in cash and
approximately 42.5 million shares of PanAmSat Common Stock. In connection with
the Combination, the Company obtained a term loan (the "Hughes Term Loan") in
the amount of $1.725 billion from Hughes Electronics, an affiliate of the
Company. In addition to the Hughes Term Loan, at September 30, 1998 the Company
also had long-term indebtedness of $864.3 million (comprised primarily of $750
million of bonds under the Offering (as defined below), $60 million of notes
outstanding under the Commercial Paper Program (as defined below) and $54.2
million due to affiliates).
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 now has seven satellites under
various stages of development for which the Company has budgeted capital
expenditures. The Company will require approximately $1.1 billion to complete
the construction, insure and launch such satellites. In addition to funding the
construction and launch of new satellites, the Company may choose to exercise
certain remaining early buy-out options under certain satellite sale-leaseback
transactions entered into in prior years. During 1998, the Company funded
outlays of $155.5 million in connection with the exercise of early buy-out
options relating to transponders on SBS-6. In addition, if the Company were to
elect to exercise its remaining early buy-out options under certain
sale-leaseback transactions, it would be required to fund outlays of
approximately $366 million in 1999.
On January 16, 1998, PanAmSat completed a private placement pursuant
to Rule 144A under the Securities Act of 1933 for $750 million aggregate
principal amount of new debt securities (the "Offering"). The net proceeds from
the Offering were used to repay bank loans incurred to finance the tender offer
for certain debt securities of PanAmSat's subsidiaries, as well as for general
corporate purposes.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In connection with the Offering, the Company executed a Credit
Agreement (the "Credit Agreement") with certain lenders and Citicorp USA, Inc.
as administrative agent. The Credit Agreement amends and restates the credit
agreement among the parties dated December 24, 1997 (the "Original Credit
Agreement"). The Original Credit Agreement provided the Company with up to $500
million of revolving credit loans (the "Revolving Credit Loans") for five years,
and up to $300 million in short-term loans which matured on April 30, 1998 (the
"Term Loans"). The Credit Agreement amends the Original Credit Agreement to
terminate the Term Loan facility. The Company currently has $500 million of
Revolving Credit Loans available to it under the Credit Agreement, less any
amounts outstanding under the Commercial Paper Program as described below.
On July 27, 1998 the Company initiated a $500 million commercial paper
program (the "Commercial Paper Program"). Borrowings under the Credit Agreement
and the Commercial Paper Program are limited to $500 million in the aggregate
and are expected to be used to fund the Company's satellite construction
program. The Company has established the necessary credit facilities, through
the Credit Agreement, to refinance future commercial paper borrowings on a
long-term basis and, accordingly, classifies such borrowings as long-term
liabilities. As of November 10, 1998, the Company had approximately $5 million
of notes outstanding under the Commercial Paper Program.
The Hughes Term Loan is subordinate to the notes issued in connection
with the Offering, the Revolving Credit Loans and the notes issued under the
Commercial Paper Program.
PanAmSat believes that, in addition to the Commercial Paper Program,
Credit Agreement, satellite insurance proceeds, vendor financing, future cash
flow from operations (assuming satellites in development are successfully
launched and commence service on the schedule currently contemplated) and cash
on hand, it will need additional financing of up to $200 million to fund its
operations, anticipated exercise of certain early buy-out options on certain
satellite sale-leaseback transactions and its remaining costs for the
construction and launch of satellites currently under development for the next
twelve months. The Company intends to obtain such additional financing by
increasing its current borrowing facilities or from other financing sources
which may become available. There can be no assurance, however, that PanAmSat's
assumptions with respect to future construction and launch costs will be
correct, or that additional vendor financing, satellite insurance proceeds,
PanAmSat's future cash flow from operations and borrowings under the Commercial
Paper Program and/or Credit Agreement will be sufficient to cover any shortfall
in funding for future launches caused by launch failures, cost overruns, delays
or other unanticipated expenses. In addition, if the Company were to consummate
any strategic transactions or undertake any other projects requiring significant
capital expenditures, it may be required to seek additional financing. If
circumstances were to require PanAmSat to incur additional indebtedness, the
ability of PanAmSat to incur any such additional indebtedness would be subject
to the terms of PanAmSat's outstanding indebtedness. The failure to obtain such
financing could have a material adverse effect on PanAmSat's operations and its
ability to accomplish its business plan.
<PAGE>
PanAmSat Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash provided by operating activities increased to $189.8 million
for the nine months ended September 30, 1998 from $89.4 million for the nine
months ended September 30, 1997. The increase in 1998 was primarily attributable
to larger adjustments related to amounts of depreciation due to the increase in
size of the Company's satellite fleet, amortization of intangibles related to
the Combination and deferred income taxes.
Net cash used in investing activities decreased to $306.5 million for
the nine months ended September 30, 1998, from $1,869.0 million for the nine
months ended September 30, 1997. The decrease in 1998 was primarily attributable
to the acquisition of PanAmSat International during the same period in 1997,
coupled with proceeds from insurance claims received during 1998.
Net cash provided by financing activities decreased to $171.7 million
for the nine months ended September 30, 1998 from $2,091.5 million for the nine
months ended September 30, 1997. The decrease in 1998 was primarily due to
obtaining the Hughes Term Loan during the same period in 1997.
<PAGE>
PanAmSat Corporation
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, concerning the action commenced by Comsat Corporation
("Comsat") against the Company, News Corporation ("News") and Televisa in the
United States District Court for the Central District of California. All
defendants in this action filed summary judgment motions on September 28, 1998,
and at that time Comsat filed a summary judgment motion against News. These
motions have not yet been decided. On November 2, 1998, the Court vacated the
existing trial date for this action, and as yet no new trial date has been set.
The Company believes this action is without merit, and is vigorously contesting
this matter, although there can be no assurance that PanAmSat will prevail. If
PanAmSat were not to prevail, the amounts involved could be material to the
Company.
On May 21, 1998, a class action was commenced by Ullman Electric
Company and others similarly situated against Paging Network, Inc., Paging
Network of Ohio, Inc. (the "Paging Companies") and the Company in the Court of
Common Pleas for Cuyahoga County, Ohio. The complaint alleges breach of contract
against the Paging Companies relating to a disruption of paging services
provided by the Paging Companies to the plaintiffs. As to the Company, the
complaint alleges that PanAmSat was negligent as to the plaintiffs in its
operation of the Galaxy IV satellite, which provided satellite capacity to the
Paging Companies. The complaint seeks compensatory damages in an amount not to
exceed $70,000 per plaintiff. The Company believes that the foregoing action is
frivolous and without merit, and PanAmSat intends to vigorously contest the
matter although there can be no assurance that PanAmSat will prevail. The claim
is fully insured and defense of the action has been assumed by the Company's
insurance carrier. Also on May 21, 1998, a class action was commenced by John
Withers, Jr. and others similarly situated against PageMart Wireless, Inc.
("PageMart Wireless"), Paging Networks, Inc. ("PageNet") and the Company in the
District Court for Dallas County, Texas. The case was dismissed with prejudice
on June 18, 1998.
<PAGE>
PanAmSat Corporation
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
4.3.4 Subordination Agreement dated as of January 16, 1998 between Hughes
Electronics and PanAmSat Corporation
10.44.3 Amendment, dated as of August 31, 1998, to the Agreement dated as of
May 15, 1996 between PanAmSat International and Frederick A. Landman,
as amended, constituting Exhibit 10.11.16 to PanAmSat International's
Quarterly Report on Form 10-Q for the period ended June 30, 1996.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Registrant filed a Current Report on Form 8-K, dated July 21, 1998, in
respect of the Registration Rights Agreement, dated as of January 16,
1998, among Registrant, Morgan Stanley & Co. Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Brothers Inc,
Citicorp Securities, Inc., BancAmerica Robertson Stephens and J.P.
Morgan Securities Inc. relating to certain debt securities of
Registrant (Items 5 and 7 (c)).
<PAGE>
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: November 16, 1998 /s/ Kenneth N. Heintz
----------------------------
Kenneth N. Heintz
Executive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
EXHIBIT 4.3.4
[Hughes Electronics Corporation Letterhead]
October 22, 1998
PanAmSat Corporation
One Pickwick Plaza
Greenwich, Connecticut 06880
Attn: Kenneth N. Heintz
Executive Vice President and
Chief Financial Officer
Dear Mr. Heintz:
Reference is hereby made to that certain Loan Agreement, dated as of
May 15, 1997 between PanAmSat Corporation ("PanAmSat") and Hughes Electronics
Corporation ("Hughes") (as from time to time amended, the "Hughes Loan
Agreement") pursuant to which Hughes has extended a credit facility in the
amount of $1,725,000,000 to PanAmSat evidenced by the promissory note dated May
15, 1997 (as from time to time amended, the "Hughes Note").
Reference is also made to that certain Credit Agreement dated as of
February 20, 1998, with certain financial institutions, each of the
Co-Documentation Agents party thereto, and the Administrative Agent (as from
time to time amended, the "Senior Credit Agreement"), providing among other
things for the making of advances by the Lenders to PanAmSat in an aggregate
principal amount at any one time outstanding up to $500,000,000.
On January 16, 1998, PanAmSat completed a private placement pursuant to
Rule 144A of the Securities Act of 1933, as amended, for $750 million aggregate
principal amount of new debt securities (the "Notes"). The purpose of this
letter is to formalize Hughes' agreement to subordinate its rights under the
Hughes Note to the rights of the holders of the Notes (including any
replacements or exchanges thereof).
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
Hughes hereby confirms and agrees that the obligations represented by
the Hughes Note are and shall be subordinated and subject in right of payment to
the prior payment in full of the Notes.
Notwithstanding the foregoing, PanAmSat may make regularly scheduled
payments of interest on the Hughes Note and PanAmSat may make payments of
principal on the Hughes Note on or after January 1, 2001, in an aggregate amount
not exceeding in any fiscal year of PanAmSat an amount equal to 50% of Excess
Cash Flow (as defined in the Senior Credit Agreement) for the preceding fiscal
year of PanAmSat, as set forth in the annual financial statements of PanAmSat.
In addition, so long as no Event of Default under the indenture has occurred,
PanAmSat may at any time make payments of principal of the Hughes Note (a) out
of the proceeds of any issuance by PanAmSat of shares of capital stock, (b) out
of the proceeds of any issuance by PanAmSat of subordinated debt that is
subordinated on terms substantially the same as the Hughes Note, (c) in exchange
for equity of PanAmSat, or (d) in connection with any refinancing of the Hughes
Note. Hughes agrees that if there shall occur an Event of Default (as such term
is defined in the indenture for the Notes), no payment shall be made on or in
respect of the Hughes Note until such time as the trustee for the holders of the
Notes notifies PanAmSat that such Event of Default has been remedied, after
which PanAmSat may resume making required payments under the Hughes Note.
If you are in agreement with the foregoing, kindly sign this letter on
the line provided below and return a copy to our attention.
HUGHES ELECTRONICS CORPORATION
By: Edward B. Clarkson
Name: Edward B. Clarkson
Title: Assistant Treasurer
Agreed and acknowledged as of January 16, 1998:
PANAMSAT CORPORATION
By: Kenneth N. Heintz
Name: Kenneth N. Heintz
Title: Executive Vice President and Chief Financial Officer
EXHIBIT 10.44.3
PanAmSat Corporation
One Pickwick Plaza
Greenwich, Connecticut 06820
August 31, 1998
Mr. Frederick A. Landman
President and Chief Executive Officer
PanAmSat Corporation
One Pickwick Plaza
Greenwich, Connecticut 06820
Re: Modification of Employment Agreement
Dear Fred:
Reference is made to that certain Employment Agreement, dated
May 15, 1997, as modified on March 6, 1998 (the "Agreement"), between you and
PanAmSat Corporation. This letter will confirm our mutual agreement to the
following amendment:
1. In the third line of paragraph 7(d) on page 8:
~ delete the date "November 15, 1998," and
~ substitute in lieu thereof the date
"December 31, 1998,"
2. In the fourth line of paragraph 7(d) on page 8:
~ delete the number "60," and
~ substitute in lieu thereof the number "30,"
Except as amended hereby, the Agreement remains in full force
and effect.
If the foregoing is acceptable to you, please indicate your
agreement to this amendment by signing and returning the enclosed copy of this
letter.
Sincerely,
By: Michael T. Smith
------------------------
Michael T. Smith
Chairman of the Board
Agreed to:
Frederick A. Landman
- - -------------------------
Frederick A. Landman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information extracted
from the Consolidated Balance Sheet and related Consolidated Statement of
Operations as of and for the nine month period ending September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 146,624
<SECURITIES> 0
<RECEIVABLES> 83,632
<ALLOWANCES> (435)
<INVENTORY> 0
<CURRENT-ASSETS> 554,354
<PP&E> 3,135,886
<DEPRECIATION> (521,744)
<TOTAL-ASSETS> 5,852,036
<CURRENT-LIABILITIES> 126,048
<BONDS> 810,056
0
0
<COMMON> 1,492
<OTHER-SE> 2,655,044
<TOTAL-LIABILITY-AND-EQUITY> 5,852,036
<SALES> 570,645
<TOTAL-REVENUES> 570,645
<CGS> 0
<TOTAL-COSTS> 333,873
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,542
<INCOME-PRETAX> 166,230
<INCOME-TAX> 73,200
<INCOME-CONTINUING> 93,030
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,030
<EPS-PRIMARY> $ .62
<EPS-DILUTED> $ .62
</TABLE>
