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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT ON FORM 10-K
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER COMMISSION FILE NO. 0-22531
31, 2000
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PANAMSAT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4607698
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE PICKWICK PLAZA, GREENWICH, CONNECTICUT 06830
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 622-6664
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 16, 2001, the registrant had outstanding 149,723,522 shares of
Common Stock. As of such date, the aggregate market value of voting stock held
by non-affiliates of the registrant was approximately $736,467,841.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting
of Stockholders of PanAmSat Corporation, a Delaware corporation ("PanAmSat" or
the "Company") scheduled to be held on June 1, 2001 (to be filed not later
than 120 days after the end of the Company's fiscal year) is incorporated by
reference into Part III hereof.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain forward-looking
information under the captions "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
certain forward-looking statements so long as such information is identified
as forward-looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the information. When used in this Annual
Report on Form 10-K, the words "estimate," "project," "plan," "anticipate,"
"expect," "intend," "outlook," "believe," and other similar expressions are
intended to identify forward-looking statements and information. Actual
results may differ materially from anticipated results due to certain risks
and uncertainties, including without limitation: (i) risks of launch failures,
launch and construction delays and in-orbit failures or reduced performance,
(ii) risks of government regulation, (iii) risks of doing business
internationally, (iv) risk of uninsured loss, (v) risks associated with the
business of NET/36, Inc., a wholly-owned subsidiary of the Company ("NET-36")
and (vi) litigation. Such factors are more fully described under the caption
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." PanAmSat cautions that the foregoing list of important
factors is not exclusive. Further, PanAmSat operates in an industry sector
where securities values may be volatile and may be influenced by economic and
other factors beyond the Company's control.
ITEM 1. BUSINESS
OVERVIEW
PanAmSat is a leading provider of global video and data broadcasting
services via satellite. The Company builds, owns and operates satellite-based
networks that deliver entertainment and information to cable television
systems, television broadcast affiliates, direct-to-home satellite television
operators ("DTH"), Internet Service Providers ("ISPs"), telecommunications
companies and other corporations. PanAmSat was formed on May 16, 1997 by the
merger and consolidation (the "Merger") of PanAmSat Corporation and the Galaxy
satellite service operations of Hughes Communications, Inc. (a subsidiary of
Hughes Electronics Corporation) into a new publicly held company, which
retained the PanAmSat name. At December 31, 2000, Hughes Electronics
Corporation beneficially owned approximately 81% of the Company's outstanding
common stock.
Both PanAmSat and Hughes were pioneers in the satellite-based distribution
of video. Prior to the formation of PanAmSat and the Hughes Galaxy satellite
service, communications satellites were used primarily by governments and
telephone companies for voice communications and international telephony
services. PanAmSat and Hughes pursued similar missions to leverage the
broadcasting capabilities of geostationary satellites to serve the needs of
video broadcasters. In 1983, the first Hughes Galaxy satellite was launched,
changing the U.S. television industry by delivering television channels to
cable service providers throughout the country. The Hughes satellite, Galaxy
I, became the first United States satellite cable neighborhood. In the
following year, Rene Anselmo founded PanAmSat as a commercial alternative to
the government-owned international satellite monopoly, Intelsat. In 1988, the
former broadcaster used his personal funds to launch the world's first
privately owned international satellite, PAS-1, which serviced the Latin
America market. In the years that followed, Hughes became a leading provider
of U.S. video distribution services, and PanAmSat became a leading provider of
international video distribution services, making the 1997 combination of the
two a global leader of the satellite-based communications services industry.
With 20 satellites, and the expected addition of two more by the end of
2001, PanAmSat now has the world's largest geostationary satellite ("GEO")
network, and is one of only three companies capable of servicing a global
footprint via its own fleet. The Company's network is capable of reaching over
98% of the world's population. PanAmSat uses its satellite-based network to
provide video program distribution, video contribution of news and special
events, and VSAT (very small aperture terminal) data networks, all supported
by an experienced engineering and operations team. In addition, ISPs and
others rely on PanAmSat networks for hundreds of connections to the U.S.
Internet backbone. In the United States, PanAmSat's fleet delivers more than
100 of the leading cable television channels to over 11,000 cable headends and
65 million cable households. Finally, PanAmSat provides the platform for six
DTH service providers around the world.
PanAmSat has built a premier customer base for each of its service lines.
Full-time video distribution service customers include AOL TimeWarner, AT&T
Broadband, the BBC, China Central Television, Cisneros Television Group,
Disney, Doordarshan (India), ESPN, Fox, Sony and Viacom. In addition to
DIRECTV Latin America, PanAmSat provides high-power Ku-band services to DTH
providers MultiChoice, Pacific Digital Media (Taiwan), Sky Latin America,
South African Broadcasting Corp./Sentech and TVB (Australia). PanAmSat carrier
service customers include ImpSat, Sprint, Telstra and WorldCom, and its
private business services customers include the Associated Press, Hughes
Network Systems ("HNS"), IBM, Reuters and Wal-Mart.
PanAmSat has substantial ground infrastructure networks available to
support the needs of its customers. The Company owns teleports in six U.S.
locations, each of which provides transmission, monitoring and control. It
leases teleport services from providers outside of the U.S. to support the
remainder of its fleet. PanAmSat also performs the telemetry, tracking and
control ("TT&C") for most of its satellites. The Company-owned network
operations and customer service plant currently can accommodate:
. 25 satellites
. 750,000 service calls/year
3
. 50 million hours/year of 24/7 video services
. 80,000 hours/year of special events video services
. 5,600 data links
. 1,200 terabits of digital data transmitted per year
. 110 channels of compressed digital video
. 250 PanAmSat-provided transmit chains
PanAmSat's early market entry, global coverage and customer service
initiatives have enabled it to develop a steady flow of revenue by signing its
customers to long-term leases. At December 31, 2000, the Company had a
contractual backlog of future services of approximately $6.0 billion.
Since 1991, PanAmSat has been a leader in compressed digital video services
for the distribution of television programming. The Company's digital channels
(multi-channel per carrier ("MCPCs") and single channel per carrier ("SCPCs")
offer a cost-effective means for programmers to break into new markets or
introduce additional channels. Digital compression technology offers
television viewers expanded and high quality program offerings through their
cable systems or DTH service providers.
The Company also offers enhanced digital services, bundled terrestrial
solutions and other value-added services to meet the needs of its rapidly
evolving broadcasting customer base. The most extensive and recent of these
initiatives was announced in September 2000, with the commercial availability
of its new Internet broadcast service, NET-36. NET-36 is a high-speed
satellite-based network capable of delivering streaming video to broadband
ISPs by using satellites to multicast video streams, avoiding the congestion
of terrestrial networks and improving on both the quality and cost of
traditional Internet Protocol ("IP") content delivery services. Local "edge"
servers strategically deployed at Digital Subscriber Line ("DSL"), cable modem
and DirecPC data centers, deliver live or "on-demand" video streams that
provide broadcasters and other Internet content providers with a quality of
service currently unavailable through the traditional Internet. In March 2001,
the NET-36 footprint reached over 3 million broadband enabled households in
the United States. NET-36 expects to enter into additional agreements with
broadband ISPs to further expand the NET-36 footprint among broadband end
users.
SERVICES
PanAmSat operates its business as a single operating segment. PanAmSat
primarily provides video and data network services to major broadcasting, DTH
providers and telecommunications companies worldwide. For the years ended
December 31, 2000, 1999 and 1998, PanAmSat's revenues of $1.024 billion,
$810.6 million and $767.3 million, respectively, were derived from the
following service areas:
PERCENTAGE PERCENTAGE PERCENTAGE
OF 2000 OF 1999 OF 1998
SERVICES REVENUES REVENUES REVENUES
-------- ---------- ---------- ----------
Video Services........................... 69% 72% 73%
Network Services......................... 26% 23% 21%
Other Services........................... 5% 5% 6%
Total.................................... 100% 100% 100%
Revenues derived from Hughes Electronics, the Company's majority
stockholder, and its affiliates (including HNS, DIRECTV Latin America and
DIRECTV) comprised approximately 14% of PanAmSat's revenues in 2000, making
Hughes Electronics and its affiliates the Company's largest customer. See
"Notes to Consolidated Financial Statements"--Note 2 "Business Segments and
Geographic Information".
4
VIDEO SERVICES
PanAmSat's video services provide long-term, full-time, part-time and
occasional satellite services for the transmission of news, sports,
entertainment and educational programming worldwide. PanAmSat's video services
are comprised of four categories: (i) video distribution services, (ii) DTH
services, (iii) special events services and (iv) contribution services.
Video Distribution Services. PanAmSat's primary video distribution service
is the full-time transmission of television programming to cable systems,
network affiliates and other redistribution systems. Certain PanAmSat
satellites contain broad C-band beams that deliver dozens of television
channels to these redistribution systems. PanAmSat generally provides video
distribution services under long-term contracts for full or partial
transponder usage and digital channels. The Company also offers bundled,
value-added services that include satellite capacity, digital encoding of
video channels and, if required, uplinking and downlinking services to and
from PanAmSat satellites and from the Company's teleport facilities.
PanAmSat currently operates satellites for the distribution of television
programming to cable and other redistribution systems in the United States,
Latin America, Africa, Australia and the Asia-Pacific region. The Company
creates "video neighborhoods" (an extension of the cable neighborhood concept)
on these satellites with dozens of popular television channels. Cable and
other redistribution systems then install antennas to access the popular
channels for their subscribers. Several of the Company's Galaxy satellites
deliver television programming to substantially all of the United States'
cable systems. The Ku-band beams on several of the Company's satellites are
also used for video distribution to cable systems and network affiliates.
PanAmSat's customers for full-time video distribution services include AOL
TimeWarner, AT&T Broadband, the BBC, China Central Television, Cisneros Group,
Disney, Doordarshan, ESPN, Fox, Sony and Viacom.
DTH Services. PanAmSat creates high-power Ku-band transmission beams on
several satellites that serve as platforms for the delivery of multiple
television channels for household reception using 60-90 centimeter antennas.
PanAmSat believes there is significant demand for digital DTH services because
of limited available terrestrial television channels or cable television
service in many international markets, and in the United States, limited
ethnic or niche programming. PanAmSat's customers for DTH services include
DIRECTV Latin America, MultiChoice, Pacific Digital Media, Sky Latin America,
South African Broadcasting Corp./Sentech and TVB (Australia).
Special Events Services. PanAmSat provides broadcasters with satellite
transmission services for the timely broadcast of news, sports and events
coverage on a short-term basis. This service is designed to enable
broadcasters to conduct on-the-scene transmissions using small, portable
antennas and to receive the transmissions at their broadcast centers or
affiliate stations. PanAmSat conducted approximately 80,000 hours of total
special events transmissions in 2000. In addition, PanAmSat delivered over
12,500 hours of live coverage of the Summer Olympic games in Sydney, Australia
to 25 broadcasters in two dozen countries.
In addition to short-term services for special events coverage, PanAmSat
has long-term transponder service agreements with certain satellite brokers in
the United States. These customers package domestic U.S. transponder capacity
for their broadcast, business, educational and government users.
Contribution Services. PanAmSat provides broadcasters with satellite
transmission services for the full-time transmission of news, sports and
entertainment segments to their network affiliates or broadcast centers within
the United States or around the world. PanAmSat's full-time contribution
service customers include Australian Broadcasting Corporation, CBS, CNN and
NHK (Japan).
5
NETWORK SERVICES
PanAmSat's Network Services utilize satellite-based networks that relay
voice, video and data communications within individual countries, throughout
regions and around the world. PanAmSat has designed virtually all of its
satellites for high-power, bandwidth-intensive applications that relay large
amounts of digital information among multiple sites using small, cost-
effective antennas. PanAmSat's Network Services are comprised of three
categories: (i) private business networks (through the use of VSATs), (ii)
Internet access (through ISPs) and (iii) carrier services.
Private Business Networks. PanAmSat provides satellite services directly to
network suppliers for the development and operation of private business
networks in the United States, Latin America, Europe, Africa and Asia. These
rooftop-to-rooftop VSAT networks provide dedicated, proprietary one-way and
two-way communications links among multiple business sites. VSAT network end
users include retail chains for rapid credit card authorization and inventory
control, banks for the connection of automated teller machines with processing
computers and news agencies for the timely dissemination of news and financial
information. The Company's largest single network services customer is HNS, an
affiliate of the Company, which uses PanAmSat capacity to create and operate
VSAT networks for its business customers. Other PanAmSat private business
network customers include the Associated Press, GMAC, IBM, Reuters and the
University of Southern California.
Internet Access. PanAmSat provides satellite services for the full-time
delivery of Internet information from the United States and other countries to
various locations around the world. PanAmSat's customers consist of
educational organizations, telecommunications companies, ISPs and businesses
providing direct-to-consumer Internet applications. PanAmSat believes that its
satellites are well suited for Internet service because of their ability to
deliver reliable, high-speed access to the U.S. Internet backbone, where
approximately 80% of all Internet data currently resides. PanAmSat's Internet
services customers include HNS, Microcom Systems (Nigeria) and Planet Internet
(New Zealand).
PanAmSat also provides SPOTbytes, a value-added, bundled Internet service
that offers an integrated package of services including international
satellite capacity, uplinking services from a PanAmSat teleport and dedicated
links from the teleport to the U.S. Internet backbone. PanAmSat's SPOTbytes
service is marketed primarily to non-U.S. ISPs and corporations that require
high-speed access to the U.S. Internet backbone. The service is configured in
a variety of ways to provide easily scaleable, cost-effective Internet access.
Carrier Services. PanAmSat provides satellite services to
telecommunications carriers licensed by one or more countries to provide
voice, video and data communications networks for businesses, governments and
other users. The Company's high-power satellites, which facilitate high
information throughput and the ability to use VSATs on the ground, have
enabled emerging carriers to introduce competitive new telecommunications
services in Latin America, Africa and Asia. In addition, PanAmSat offers
value-added satellite services for telecommunications customers that include
satellite capacity and teleport services that connect customers to U.S.
terrestrial networks. PanAmSat's carrier service customers include ImpSat,
Microspace, Sprint, Telstra and WorldCom.
OTHER SERVICES
Telemetry, Tracking and Control. PanAmSat provides TT&C services for more
than 20 satellites owned by either PanAmSat or by other satellite operators.
PanAmSat personnel maintain proper orbital location and altitude, monitor on-
board housekeeping systems, adjust transponder levels and remotely "rewire"
satellites, if necessary, to bring backup systems on-line in the event of a
subsystem failure. The necessary TT&C satellite commands are initiated from
PanAmSat's operations control center in Long Beach, California and are
transmitted to the satellites from PanAmSat teleport facilities located in New
York, Florida, Georgia, Colorado and California.
6
In-Orbit Backup Capacity and Replaced Satellites. PanAmSat maintains a
separate in-orbit spare for its fleet. The Galaxy VI satellite is an in-orbit
spare for the C-band capacity in the U.S. cable arc. PAS-6 serves to provide
backup protection for the Sky Latin American DTH service on PAS-6B, and upon
the launch of Galaxy IIIC in 2001, Galaxy VIII-i will provide both expansion
and backup capacity for the DIRECTV Latin America DTH service. Certain of the
Company's satellites that have been replaced may also be used for backup
capacity.
STRATEGY
PanAmSat's strategic mission is to be the global leader in providing the
highest quality, most reliable, satellite-based broadcast networks that
deliver entertainment, data and communications to everyone, everywhere.
PanAmSat's strategy to achieve its mission is based on four initiatives:
. Expanding network reach and capacity
. Providing superior customer service
. Opening new markets
. Offering new services
Each of the Company's strategic initiatives are designed to provide revenue
growth by expanding PanAmSat's leadership position in the fixed satellite
services industry ("FSS"), and leveraging that leadership position by
expanding its range of service offerings as a solutions provider meeting
customer needs.
EXPANDING THE NETWORK
PanAmSat's primary source of revenue is from the sale of satellite
bandwidth or services that rely on satellite bandwidth. PanAmSat is the
world's largest commercial provider of global satellite-based communications
services. PanAmSat, a leader in distribution of cable and broadcast
television, operates DTH platforms that deliver more than 500 television
channels worldwide. As a global leader, PanAmSat intends to continue to grow
its inventory of bandwidth to support its customers' demands.
According to a February 2001 Merrill Lynch research report, the fixed
satellite services industry is currently an approximate $8.1 billion per year
market, with an estimated growth potential to approximately $13.3 billion per
year by 2004. The Company expects demand for its services will grow, fueled by
the increasing amount of video programming, growing congestion in the
transmission of television channels over terrestrial lines, ongoing expansion
of private business networks and rapid proliferation of the Internet with its
need for faster and ever-higher bandwidth connections. In addition, the
Company anticipates that the trend towards High Definition Television ("HDTV")
will increase demand for its satellite services.
PanAmSat expects to continue to benefit from the high barriers to entry
that exist in the FSS market. In the United States, new applicants for
licenses must generally prove their concept, show plausible funding and have a
tight timeline by which they plan to get their satellites up and running.
However, the United States has access to only a portion of the available slots
around the globe. Orbital slots and related ground coverage opportunities are
administered by the International Telecommunications Union, which in turn
grants priorities to certain orbital slots to specific countries. Different
countries may have different requirements for the granting of licenses and the
development of orbital locations. PanAmSat has a group of regulatory
professionals dedicated to pursuing orbital slot opportunities on a global
basis. As a result of these activities, the Company recently has obtained the
opportunity to develop one new slot through the Australian government, and is
pursuing other opportunities around the world both through the Federal
Communications Commission ("FCC") and through other non-U.S. regulatory
authorities.
Since December 1999, PanAmSat has successfully launched five new
satellites, bringing its total fleet to 20 after eliminating satellites that
have been retired from service. During 2001, PanAmSat expects to launch one
satellite to serve the Indian Ocean Region (PAS-10) and another to serve the
U.S. and Latin America (Galaxy III-C).
7
PanAmSat is licensed to operate on C-band frequencies at 16 orbital slots,
on Ku-band frequencies at 13 slots and on Ka-band frequencies at seven slots.
Of these, the Company has not yet developed two C-band slots, two Ku-band
slots and any of its seven Ka-band slots, providing for substantial growth
opportunities. See "Risk Factors--Risk of Government Regulation."
The Importance of Fiber
PanAmSat recognizes the importance of emerging technologies and
telecommunications methods, and as a result, has not limited its inventory
growth initiative to satellite capacity. The proliferation of inexpensive
optical fiber provides the Company with the opportunity to examine each
customer's particular service requirements to determine when a hybrid
satellite-fiber bundled service would be most efficient both from a fleet-
loading standpoint, as well as from a competitive pricing standpoint. PanAmSat
has historically used fiber to supplement its domestic U.S. network, and plans
to procure fiber over key international routes to supplement its network.
CUSTOMER FIRST--MARKET DRIVEN
PanAmSat's customers represent some of the largest media companies in the
world, including ABC, AOL TimeWarner, the BBC, CCTV, Disney, ESPN, Fox, NHK
and Viacom. The Company recognizes the value of its customers and places a
strong strategic emphasis on offering customized services, providing personal
attention and taking extra steps to ensure a reliable service.
Emphasis on Reliability
Along with others in the FSS industry, PanAmSat has experienced several
satellite anomalies over the past few years with the result that a significant
portion of the new satellite capacity recently and projected to be placed in
orbit is for either replacement or backup capacity. PanAmSat believes that it
has taken significant steps to mitigate the risk of launch failure by insuring
the satellite launches for an amount sufficient to construct, launch and
insure a replacement satellite. PanAmSat enters into satellite procurements
that provide for expedited construction and delivery of a replacement
satellite in the event of a failure. In addition, PanAmSat has contracted with
multiple launch providers to minimize the risk that an entire launch program
will be delayed in the event of a failure of a particular launch vehicle.
In response to the satellite performance issues that PanAmSat has
experienced, the Company has implemented operational procedures designed to
improve the reliability of its spacecraft and provide backup service to its
customers in the event of a catastrophic failure. Pre-launch, PanAmSat has a
team of professionals dedicated to the spacecraft and launch procurement
process. This spacecraft acquisition team is responsible for all aspects of
monitoring the procurement and design process. PanAmSat engineers are
frequently on-site at the satellite manufacturer's facility to monitor quality
and timeliness during all phases of construction and testing. Post-launch, the
Company's engineers have analyzed various failure scenarios and proposed
customer restoration plans. Finally, PanAmSat maintains an in-orbit spare for
immediate backup to protect its U.S. video customers. Despite the failures of
Galaxy IV and Galaxy VII, customer service has been interrupted only once for
a catastrophic in-orbit failure (Galaxy IV--1998), and service was restored to
almost all of the Company's Galaxy IV video customers within hours. Other
failures since Galaxy IV have resulted in no material interruption of customer
service, including the failure of Galaxy VII in 2000.
Ground Infrastructure and Customer Support Center
PanAmSat believes that its ground infrastructure and customer support
center distinguish the quality of its service from other global or regional
solutions providers. PanAmSat's ground facilities are available to support the
needs of its video, data, Internet and NET-36 customers. PanAmSat operates
seven facilities (six teleports and one TT&C facility), providing a range of
technical services for customers. Each teleport and operations center, staffed
24 hours a day, is designed to:
. Monitor signal quality for both data and broadcast customers
. Protect bandwidth from piracy or other interference that could degrade
signal quality
. Maintain customer-installed equipment
8
PanAmSat maintains two network operations centers, one in Long Beach,
California, and the other in Ellenwood, Georgia, outside Atlanta, which will
be consolidated in Ellenwood during 2001. The operations center near Atlanta
is also a full-service teleport along with PanAmSat facilities in Fillmore and
Napa, California, Castle Rock, Colorado, Homestead, Florida, and Spring Creek,
New York. The teleports operate nearly 100 antennas and are equipped to offer
customers a range of services, including:
. Full-service facilities with access to all domestic and international
satellites within arc
. Analog and digital transmissions for video/data services
. C and Ku-band turnaround service
. Tape play-out and time delay services
. Occasional and full-time transmissions
. Design, installation and operation services
. Monitoring of customer-furnished equipment
. Downlinking and routing of Internet services
. Compressed digital video systems management
. Connectivity to terrestrial link circuits
. IRD authorization
. 24-hour network and/or subscriber management
. Network Operation Center (NOC) for 24-hour ad hoc service
. Carrier monitoring system (manual remote monitoring and remote spectrum
analysis)
Customer-Driven Service Offerings
PanAmSat believes its strategic loading of satellites and customer-driven
service offerings have made it a leader in program delivery to cable systems.
For instance, PanAmSat's strategy for the broadcast distribution market has
been to populate new satellites with several quality content providers in
order to create "video neighborhoods." Once premier programmers, such as AOL
TimeWarner, Disney and Viacom, enter into long-term agreements for capacity on
a particular satellite, PanAmSat can charge higher rates for subsequent
capacity on that satellite. Because cable systems and other distribution
platforms have already incurred the cost of pointing their dishes so that they
can receive the existing programming, content providers are willing to pay
higher rates for capacity on the satellite.
The Company has been a leader in compressed digital video services for the
distribution of television programming. PanAmSat's global resources enable
programmers to use two digital transmission services. The Company's MCPC
service allows several digital channels to be transmitted to the satellite
from a central site, such as a PanAmSat teleport accessing the Asia-Pacific,
Latin America, Europe or Africa. This approach is cost-effective for the
programmer because less bandwidth is required to broadcast its programming. It
also maximizes usage of the satellite resource and transmission power, and
allows for signal reception using small antennas. The SCPC service, in which
broadcasters have the freedom to transmit to the satellite from virtually any
location within the satellite's coverage area, is particularly useful for news
organizations or networks that are providing live, on-the-scene coverage of an
event. SCPC channels also permit broadcasters to relay programming directly
from their facilities around the world.
The Company continues to develop new service offerings designed to address
its customers' changing needs. Some of these new offerings are discussed in
"Offer New Services" below.
9
ACCESS NEW MARKETS
The Company's fleet has a footprint capable of reaching over 98% of the
world's population. Although PanAmSat has customers throughout the world and
distributes content on a global basis, the Company believes that certain
regions where the Company has only a limited presence, represent opportunities
for growth. In its most recent evaluations, Mexico, Brazil, India and China
were identified as presenting opportunities for business expansion for
PanAmSat. The Company currently has satellites deployed that are capable of
reaching these key markets, but either regulatory, political, technical or
other obstacles (or a combination of any or all of the foregoing), have
prevented the Company from fully realizing the opportunities. The Company
believes that incremental growth could be realized through the opening of one
or all of these markets in the near term.
On February 26, 2001, PanAmSat announced the creation of a new company,
PanAmSat de Mexico, that will enable the introduction of PanAmSat video, data
and Internet services to the Mexican telecommunications market. PanAmSat de
Mexico is the result of a joint venture between PanAmSat and a Grupo Pegaso
affiliate owned by Mr. Alejandro Burillo Azcarraga, a majority owner of the
private equity investment firm Grupo Pegaso. The new company has filed for a
concession with the Mexican government that will permit it to serve as the
reseller of PanAmSat services that require a satellite uplink within Mexico.
PanAmSat de Mexico was formed in late 2000 through a partnership between
PanAmSat International Sales, Inc. (49 percent), a subsidiary of PanAmSat, and
Corporativo W.com SA de CV (51 percent), a holding company created by Mr.
Burillo.
OFFER NEW SERVICES
PanAmSat recognizes that telecommunications is rapidly evolving.
Convergence forecasts for television and computers/Internet indicate trends
that will affect our customers' businesses and offer PanAmSat the opportunity
to provide new and enhanced services. PanAmSat has embraced new technologies
and is offering and developing new applications in consultation with its
customers to improve service and meet customer needs. These services include,
but are not limited to:
. Internet Backbone Connectivity Via Satellite (SPOTbytes)
. Broadband Distribution of IP Video Content (NET-36)
. Analog to Digital File Transfer Services (SPOTpath)
. Ka-band based Broadband Services
Internet Backbone Connectivity Via Satellite (SPOTbytes)
PanAmSat offers a bundled Internet connection package, SPOTbytes, to
international ISPs and corporate customers. With this bundled service,
PanAmSat custom designs direct links between its customers' points-of-presence
and the U.S. Internet backbone that can transmit at speeds ranging from 64
kbps to 45 Mbps or higher. Customers choose SPOTbytes to increase network
diversity, flexibility and efficiency, as well as to obtain direct,
uninterrupted access to the U.S. Internet backbone.
SPOTbytes offers several advantages over terrestrial fiber. Satellite
services can be installed and upgraded faster. The Company's SPOTbytes service
bypasses shared and congested terrestrial links and connects directly into the
Internet backbone, which enhances network performance. Satellite transmission
can also reduce expenses, especially for international ISPs, by enabling
simultaneous delivery of content to wide geographic areas without requiring
additional terrestrial infrastructure. In addition, through an enhanced
service called SPOTbytes DVB, PanAmSat is capable of providing targeted
content delivery to enterprises or ISPs, along with standard backbone
connectivity. For instance, the top web sites accessed by a particular ISPs'
customers can be cached locally and updated on a regular basis providing
decreased costs and higher performance. SPOTbytes DVB employs a versatile
digital video broadcasting (DVB) platform to offer flexible, cost-effective
U.S. backbone access to international ISPs. Benefits include low startup and
recurring costs, flexible and scalable bandwidth as well as support for
multiple points-of-presence ("POPs"). The new service, which was introduced in
Latin America in April 2000, is being marketed throughout Asia and Latin
America.
10
Strategically, PanAmSat views SPOTbytes and SPOTbytes (DVB) as
opportunities to demonstrate the IP capabilities of satellite networks and to
continue to expand the footprint of PanAmSat's terrestrial network. The
Company intends to use this footprint to eventually offer content distribution
services, which will provide PanAmSat's content customers the opportunity to
distribute high-quality content directly to ISPs (via services such as NET-36,
discussed below), while providing PanAmSat with an additional revenue stream
from an existing relationship.
Broadband Distribution of IP Video Content (NET-36)
A May 2000 report by Euroconsult predicts that the growth of the Internet
will generate approximately 33% of transponder capacity demand by 2009. To
capitalize on such expected growth, PanAmSat is implementing a strategy to
become a leading provider of IP multicasting via satellite.
In September 2000, PanAmSat announced the commercial availability of its
new Internet broadcast service, NET-36. NET-36 is an innovative broadband
satellite-based network capable of delivering streaming video to broadband
ISPs by using satellites to multicast video streams, avoiding the congestion
of terrestrial networks and improving on both the quality and cost of
traditional IP content delivery services. Local "edge" servers strategically
deployed at DSL, cable modem and DirecPC data centers, deliver live or "on-
demand" video streams that provide broadcasters and other Internet content
providers with a quality of service currently unavailable through the
traditional Internet. In March 2001, the NET-36 footprint reached over 3
million broadband households in the United States. NET-36 expects to enter
into additional agreements with broadband ISPs to further expand the NET-36
footprint. NET-36's footprint currently covers all end users who have
broadband Internet access through Qwest, BellSouth, Excite@Home, and DirecPC
POPs enabled with NET-36 edge servers. While NET-36 currently provides its
services in beta testing to several well-known content providers, NET-36 has
not yet generated revenues from its service offerings as the commercial
availability of its services only recently occurred.
Traditional land-based distribution of content to the edge of the Internet
consumes significant bandwidth, but it also results in the degradation of the
content quality. When this data is transmitted over the Internet, it is
divided into many packets. As those packets traverse the land-based Internet
backbone, each packet typically crosses multiple networks that are connected
to each other at a limited number of connections called peering points. These
peering points are frequently congested, which often results in transmission
delays and lost data. According to a December 1999 study by Dataquest,
streaming media travels through an average of 20 routers and experiences
average packet loss of 25%. When data is lost, either the data transmission
process is repeated until all of the data is transmitted successfully, or the
data arrives corrupted. As content distributors increasingly attempt to
distribute live streaming media, these difficulties are magnified. Packet loss
and transmission delays are particularly problematic with live streaming media
because lost data cannot be resent and packets arriving out of sequence due to
transmission delays may not be accessed in their original sequence. Packet
loss and transmission delays cause video images to be jerky and often cause
the transmission to stop and start while the end user's computer is waiting
for the necessary packets to arrive. This degradation in quality is among the
fundamental causes of unsatisfactory performance of many Internet-based
applications.
NET-36's solution circumvents the congested terrestrial networks by using
PanAmSat's satellite fleet and satellite-enabled servers linked to broadband
ISPs (such as Qwest, BellSouth, Excite@Home, and DirecPC). NET-36 collects
streaming media from Internet content providers and then broadcasts it via the
PanAmSat fleet to its network of servers, located in the facilities of these
ISPs and last-mile providers. The content is then either cached locally at the
server, or if live, sent directly to an end user. When a user attempts to
access information from a web site, the web cache intercepts the request and
checks to see if the information is stored locally. If local, the information
is delivered to the user from the local cache rather than having users pull
content from the content provider's actual Web server, resulting in faster
responses for users. By circumventing the need to pull data each time a user
has a request through the terrestrial network, NET-36 improves reliability,
speed and consistency for end users. NET-36 expects that most of its edge
servers will be located so that streaming media delivered to an end user over
NET-36's network will traverse through a maximum of three routers and zero
peering points before reaching the end user.
11
For streaming, NET-36 leverages on the technological advantage offered by
satellites: specifically, the capability of taking a single piece of data up
to a satellite, and delivering it simultaneously to multiple locations,
without any impact on quality or cost if data is delivered to many or fewer
locations. This concept is the basic premise for the use of satellites to
deliver video to cable headends, and the Company believes it is also an
effective strategy for the delivery of high demand, high traffic IP-based
content. Geostationary satellites, like those operated by PanAmSat, are
currently the most efficient and cost-effective delivery medium for
"multicasting."
NET-36 is a natural extension of PanAmSat's current business as NET-36 uses
the Company's existing satellites. No new orbital assets are currently
projected for the service. In addition, PanAmSat has extensive experience in
building digital video networks. Initially, NET-36 will target PanAmSat's
existing video customer base. PanAmSat believes that it can bundle and sell
NET-36 services to its existing video and other customers that have come to
rely on the Company's superior quality of service.
PanAmSat believes that current market trends show that streaming media and
other rich video and data are becoming integral components of any media
company's interactive service offerings. An October 2000 Paul Kagan &
Associates report estimated that the market for streaming media will reach $9
billion by 2010. However, the current terrestrial infrastructure cannot
support the effective delivery of this content, which results in grainy, jerky
images and lost connections for Internet users. Using traditional terrestrial
IP delivery systems, streaming is limited to a typical transmission sweet spot
of 28 or 56 kbps, but in the future, the Company believes that content
providers may require 300 kbps streams, such as those delivered by NET-36.
Streaming is the first application that will utilize the multicasting
capabilities of satellites over the NET-36 network, but the Company is working
on other uses that that will leverage the unique advantages of its network.
NET-36 has entered into agreements with last mile providers Qwest,
Excite@Home, DirecPC and BellSouth; they will use NET-36 for IP content
delivery to their Internet subscribers. Currently, these arrangements require
NET-36 to pay the last mile provider to allow NET-36 to deploy its servers at
the broadband ISP POPs. NET-36 will look to enter into more ISP relationships
to solidify its offering and expand its footprint. NET-36 is pursuing
arrangements with additional last mile providers so that the NET-36 network is
able to reach a high volume of broadband enabled end users, which, in turn, is
expected to attract content providers as NET-36 customers.
Broadcasters in the U.S. and Europe have had difficulty reaching
international markets with their content. In addition, many competing content
distribution networks have been slow to roll out streaming service in
developed markets in Asia and Latin America. Internet limitations are
magnified outside of the U.S. and Europe. Therefore, PanAmSat believes that
NET-36 will be appealing to ISPs and network providers in the countries where
consumers have broadband access but little high fidelity video and audio
content to consume. The Company believes that the rollout of SPOTbytes and
SPOTbytes DVB will provide PanAmSat with an opportunity to build a footprint
for NET-36 in markets as they evolve to the service.
PanAmSat believes that NET-36 provides the capability to generate more
revenue per transponder than currently received from leasing satellite
capacity alone. PanAmSat would charge a particular customer based on content
delivered and consumed, in terms of megabits. When NET-36 delivers content to
a network of servers, the content provider will pay based on the content
consumed. As such, each satellite has the ability to generate greater revenue
and earnings.
NET-36's business plan is based upon charging the content provider for NET-
36 service, as opposed to the ISP. PanAmSat believes that ISPs may be
unwilling or unable to pay for a satellite-based service. Instead, PanAmSat
has opted to enter into revenue sharing agreements with ISPs and offer the
service free to ISPs, while charging content providers for content delivered.
This strategy is intended to ensure both network build-out and revenue
maximization. As demand rises among content providers for content distribution
services, NET-36 intends to position its service offerings to be able to tap
into this increasingly lucrative market. PanAmSat believes that NET-36
ultimately will be a platform from which PanAmSat will launch additional
services, with streaming media being just the first service.
12
Analog to Digital File Transfer Services (SPOTpath)
PanAmSat, in partnership with Pathfire, Inc.'s software engine, recently
introduced a new-satellite based international video delivery service that is
intended to improve how news, entertainment and feature programming is managed
by broadcast, cable and other media companies worldwide. The Company does not
expect to generate significant revenue from this joint service in 2001.
The new service combines PanAmSat's global satellite infrastructure with
Pathfire's media management tools. The service will encode any programming
content into digital IP formatted files, which are transmitted via satellite
to broadcast, cable, media and entertainment companies around the world. This
new automated approach offers an alternative to "live" or prescheduled
satellite feeds by processing high volumes of media through Pathfire's Media
Commerce Network.
The Company expects this service to provide customers with a more
economical and flexible way to move non-realtime video and data, while
allowing PanAmSat to better manage the quality of service its customers
expect. PanAmSat's global infrastructure, combined with Pathfire's media
traffic management solutions, creates a total end-to-end solution for
distributing and managing media content. The alliance reflects PanAmSat's
continuing commitment to pursue value-added services that benefit its
broadcasting and telecommunications customers.
By eliminating much of the line-up and coordination time, the Company
believes that SPOTpath will provide a more efficient means of delivering
television programming, video clips, advertisements and other media. In
addition, the Company expects the service will reduce production and
distribution costs.
Ka-band Based Broadband Services
PanAmSat is pursuing Ka-band solutions for its customers. Ka-band systems
are intended for high-speed bandwidth-on-demand applications such as high-
speed Internet access, video conferencing, multimedia entertainment services,
file transfer, medical imaging, as well as traditional voice and data
communications. Recently, the FCC licensed PanAmSat to operate on the Ka-band
frequencies in seven orbital slots. PanAmSat intends to pursue the use of Ka-
band delivered services, as the Company believes it offers potential to
provide additional valuable services to its customers. The Company does not
expect to generate revenue from Ka-band services in 2001.
THE SATELLITE NETWORK
Each of the Company's satellites is custom-designed to provide high
transmission power and comprehensive coverage over specific geographic areas.
Several of the Company's satellites are designed to provide greater power and
carry larger payloads, including in most cases the ability to offer "hybrid"
services in both the C-band and Ku-band. C-band is a range of relatively low
frequencies used for commercial satellite services. In the United States, C-
band is used primarily for analog cable and broadcast distributions and also
is used for broadband networks and telecommunications in other regions of the
world. C-band requires the use of relatively large antennas to receive signals
on the ground. Ku-band is a range of relatively high frequencies used for
commercial satellite communications. Ku-band is widely used for distribution
of digital broadcast television and DTH services, as well as business
communications, and allows the use of relatively small antennas to receive the
signals.
Each of the Company's new satellites has been constructed with a design
life of 15 years, although there can be no assurance that the contractual
design life of any individual satellite will be 15 years. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Risk of In-Orbit Failure or Reduced Performance."
The Company's launch and construction strategy is to replace existing
satellites as they approach the end of their useful lives or encounter other
reductions to their useful lives with technologically advanced satellites that
meet customer needs. In addition, the Company seeks to expand its global
coverage, capacity and service offerings by deploying satellites into new
orbital locations. In most instances, a "retired" satellite should be capable
of continuing to offer services beyond the time that its replacement is
deployed. In these cases, the Company typically seeks to co-locate the older
satellite with the new satellite or to move the older satellite to an interim
location, in each case subject to applicable U.S. and
13
non-U.S. regulatory approvals. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors--Risks
of Government Regulation."
GLOBAL COVERAGE
The Company's satellites are distributed in a global network that provides
coverage in the four regions of the world: (i) the North America Region
("NAR"), (ii) the Atlantic Ocean Region ("AOR"), (iii) the Pacific Ocean
Region ("POR") and (iv) the Indian Ocean Region ("IOR").
North America Region
Nine satellites currently serve this region: Galaxy IR, Galaxy IIIR, Galaxy
IVR, Galaxy V, Galaxy VI, Galaxy IX, Galaxy XR, Galaxy XI and SBS-6. These
satellites offer services in either the Ku-band or C-band, or both. SBS-6
offers services solely in the Ku-band. Galaxy IR, Galaxy V, Galaxy VI and
Galaxy IX provide services solely in the C-band. Galaxy IIIR, Galaxy IVR,
Galaxy XI and Galaxy XR provide services in both the C-band and the Ku-band.
Some of the Company's satellites, including Galaxy IR, Galaxy V, Galaxy IX,
Galaxy XR and Galaxy XI, act as "cable neighborhoods." PanAmSat pioneered the
concept of "cable neighborhood" in the satellite services industry when it
secured key cable programming for Galaxy I, its first satellite. This prompted
cable operators to invest in ground equipment focused on Galaxy I's orbital
position. Once a core group of cable operators aligned their dishes with the
satellite, incremental capacity could be sold at higher rates to new
programmers that wanted to enter the market. This "cable neighborhood" concept
continues to be an important business strategy for the Company.
Atlantic Ocean Region
Seven satellites currently serve this region: PAS-lR, PAS-3, PAS-5, PAS-6,
PAS-6B, PAS-9 and Galaxy VIII-i. Each of these satellites provides services in
the C-band and the Ku-band, with the exception of PAS-6, PAS-6B and Galaxy
VIII-i, which are Ku-band only satellites. PAS-6 currently serves as back up
for PAS-6B. The Company has created cable neighborhoods on PAS-3 and PAS-9.
PAS-5, which was replaced by PAS-9, represents a revenue opportunity to
develop an additional orbital slot or to provide fleet backup. In 1999, PAS-5
was declared a total constructive loss and insurance was collected by the
Company. As a result, 50% of any net revenues generated by PAS-5 will be paid
to the Company's insurers.
Pacific Ocean Region
PanAmSat currently has two satellites in this region: PAS-2 and PAS-8. Each
of these satellites contains C-band and Ku-band transponders. The Company has
created a cable neighborhood on PAS-2 and operates two DTH platforms on PAS-8.
Indian Ocean Region
PanAmSat currently has two satellites in this region: PAS-4 and PAS-7. Each
of these satellites contains C-band and Ku-band transponders. The Company has
created a cable neighborhood on PAS-4 and operates two DTH platforms on PAS-7.
New Satellites in 2001
PanAmSat currently intends to launch PAS-10 in the second quarter of 2001
and Galaxy IIIC in the third quarter of 2001. PAS-10 will replace PAS-4 in the
IOR, and Galaxy IIIC will replace Galaxy IIIR and supplement Galaxy VIII-i in
the NAR and AOR, respectively. Each of PAS-4 and Galaxy VIII-i have suffered
from in-orbit anomalies which have shortened their expected useful lives. For
a more detailed discussion on the Company's planned satellites and prior in-
orbit failures, see "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations--Planned Satellites" and "--Risk Factors--
Risk of In-Orbit Failure or Reduced Performance."
14
SATELLITE PROCUREMENT AND LAUNCH ARRANGEMENTS
Satellite Procurement. The Company has three satellites under construction
and development with Boeing Satellite Systems, Inc., formerly Hughes Space and
Communications Company. In March 2001, the Company signed an agreement with
Orbital Sciences Corporation for construction of one satellite plus an option
for two additional satellites. The normal delivery time for a satellite is
approximately 12 to 24 months. Purchase agreements generally require the
Company to pay the majority of the total contract price for each satellite
during the period of the satellite's construction, with the remainder of the
contract price payable in the form of incentive payments based on orbital
performance over the design life of the satellite following launch. The
contracts also provide for price reductions or payments by the manufacturer in
the event of late delivery due to the fault of the manufacturer. Each contract
provides for a limited warranty. The contracts contain provisions that would
enable the Company to terminate them with or without cause. If terminated
without cause, the Company would be subject to substantial termination
liabilities that escalate with the passage of time. If terminated for cause,
the Company would be entitled to recover any payments it made under the
contracts and certain additional damages as specified in the contracts.
Launch Arrangements. The Company has entered into launch contracts for the
launch of both specified and unspecified future satellites. Each of the
Company's launch contracts provides that the Company may terminate the
contract at its option, subject to payment by the Company of a specified
termination fee that increases in magnitude as the applicable launch date
approaches. In addition, in the event of the failure of any launch, the
Company may exercise the right to obtain a replacement launch within a
specified period following the Company's request for re-launch.
CONTROL OF SATELLITES AFTER LAUNCH
Once a satellite is placed at its orbital location, ground stations control
it until the end of its in-orbit lifetime. PanAmSat generally provides TT&C
services for its own satellites, as well as for certain satellites owned or
operated by other entities. Third parties provide TT& C services for five of
the Company's satellites currently in orbit.
INSURANCE
Satellite Insurance
As a general philosophy, PanAmSat has historically carried satellite
insurance coverage that tracked with the book value of these assets in an
attempt to prevent any adverse financial reporting effects from satellite
health issues. The last few years of unusual satellite in-orbit anomalies have
begun to alter the in-orbit insurance coverage levels and rates that are
available to satellite operators today. In December 2000, PanAmSat executed a
new, master in-orbit insurance policy that covers 12 of its satellites. Five
of the 12 satellites are initially covered under the new policy, with the
remaining seven attaching to the policy at various dates in 2001 as their
existing policies expire (three of which are still covered under their
original launch policies). Five of the remaining satellites in the fleet are
still covered under their original launch policies; four of which have
policies covering launch plus five years and the remaining one of this group
is covered for launch plus three years. The remaining two satellites, PAS-6
and Galaxy VIII-i, are self insured today. PAS-5 was declared a total
constructive loss in 1999 and is currently not insured.
Launch Insurance
PanAmSat maintains launch insurance on each of its satellites in an amount
approximately equal to the unamortized construction, launch and launch
insurance costs for the satellite at the initial date of coverage. PanAmSat's
existing launch insurance policies cover claims arising after a launch for a
period of three to five years, with newer policies having longer coverage
periods than older policies. Such coverage includes not only catastrophic loss
of a satellite during launch, but also the failure of a satellite to obtain
proper orbit, or to perform in accordance with design specifications once in
orbit. The terms of the policies generally provide for payment of the full
insured amount if 50% or more of a satellite's communications capacity is lost
within the policy period, and, subject to certain deductibles, partial payment
for losses of less than 50% of the satellite's communications capacity within
the coverage period.
15
The insurance policies have standard commercial launch insurance provisions
and customary exclusions for (i) military or similar actions, (ii) laser,
directed-energy or nuclear anti-satellite devices, (iii) insurrection and
similar acts or governmental action to prevent such acts, (iv) governmental
confiscation, (v) nuclear reaction or radiation contamination, (vi) willful or
intentional acts of PanAmSat or its contractors, (vii) loss of market, loss of
revenue, extra expenses, incidental and consequential damages, and (viii)
third-party claims against PanAmSat.
In-orbit Insurance
PanAmSat typically obtains in-orbit insurance in advance of the expiration
of the relevant launch insurance policy. Coverage under these in-orbit
policies commences on the expiration of the launch insurance policy. Typical
in-orbit insurance periods run for periods of one to three years. PanAmSat
generally obtains in-orbit insurance with respect to its satellites in an
initial amount approximately equal to the unamortized construction, launch and
insurance costs for each of its satellites. The amount of in-orbit insurance
in force with respect to each of PanAmSat's satellites generally decreases
over time, typically based on the declining book value of the satellite.
PanAmSat generally does not insure against lost revenues in the event of a
total or partial loss of the communications capacity of a satellite. The
Company does, however, purchase insurance to cover sales-type lease
receivables when revenues have been recognized in connection with sales-type
lease arrangements and to cover its obligations with respect to performance
warranty provisions related to transponders sold outright.
Coverage under PanAmSat's in-orbit insurance policies includes claims
arising from occurrences after the expiration of the relevant launch insurance
policy. The insurance coverage includes the failure of a satellite to continue
to perform in accordance with design specifications. Payments in respect of
lost communications capacity are calculated in the same manner as under the
launch insurance policies. Partial failures or anomalies which occur during a
policy period that do not give rise to a claim may be excluded in renewal
policies. PanAmSat's in-orbit policies typically include customary commercial
satellite insurance exclusions similar to those contained in its launch
policies. Insurance may not be available for conditions detected in a prior
policy period that do not result in losses during the policy period.
Exclusions
As of December 31, 2000, PanAmSat's satellites had a net book value of
approximately $3.1 billion. The book value of the satellites that were either
self-insured or had some health exclusion at that time was approximately $290
million. Under the terms of its new master in-orbit policy, which commenced
December 1, 2000, several satellites that have existing technical anomalies
will have certain coverage exclusions when they attach to the master policy in
May 2001 (they are currently covered without exclusions under existing in-
orbit policies). When these satellites attach to the new policy, the book
value of satellites that will have certain exclusions related to their
coverage will be approximately $510 million. Additionally, at that time, the
book value of the self-insured satellites will be approximately $220 million.
Any failure not related to the exclusion will still be covered.
The primary subject of the exclusion is the satellite control processor
(SCP) on the four satellites in this category. One of them (PAS-4) is
operating on its backup SCP as a result of the failure of the primary SCP in
November 1998. This satellite is scheduled to be replaced by PAS 10, which is
scheduled for launch in the second quarter of 2001. The other three satellites
with SCP exclusions, (PAS-2, PAS-3R, and Galaxy IIIR) have both SCPs
functioning properly today.
For more information on insurance matters, including the risks relating to
certain exclusions, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "--Risk Factors--Risk of Uninsured Loss."
16
SALES AND MARKETING
PanAmSat's sales and marketing activities are separated into three general
service areas: (i) full-time program distribution; (ii) part-time and ad hoc
broadcast; and (iii) network services which includes VSAT, Internet, data
services and telephony.
PanAmSat's headquarters has a sales and marketing department for each
service area. PanAmSat and its subsidiaries also have sales and marketing
offices in Manhattan Beach, California; Coral Gables, Florida; Sydney,
Australia; London, England; Tokyo, Japan; Johannesburg, South Africa; Seoul,
South Korea; and China. The Company also maintains a representative sales
office in Mexico City, Mexico. The senior executive officers of PanAmSat are
directly involved in marketing to key broadcasting and business communications
customers.
COMPETITION
PanAmSat primarily competes with companies and organizations that own or
utilize satellite or terrestrial transmission facilities.
SATELLITE COMPETITORS
PanAmSat's satellite competitors are divided among four categories: (i)
companies with global GEO satellite systems; (ii) companies with proposed
global GEO satellite systems; (iii) regional or domestic GEO satellite
operators; and (iv) companies with non-GEO satellite systems. Many of the
Company's satellite competitors have also introduced and expanded value-added
services and bundled service offerings, which compete with the Company's
services. To a lesser extent, PanAmSat may face competition from (a) companies
who have proposed regional or transoceanic GEO satellite systems, (b) value-
added service providers and (c) optical fiber cable companies.
Global GEO Satellite Systems
PanAmSat's principal global competitor is Intelsat.
Intelsat is an international treaty organization of over 140 member nations
based in Washington, D.C. that provides global satellite capacity primarily
through its members, called "signatories." Comsat Corporation, which is a
subsidiary of Lockheed Martin Corporation, is the U.S. signatory and is the
only U.S. company permitted to have an investment interest in the Intelsat
system.
Intelsat competes with PanAmSat primarily on price and access. Intelsat
sells its services to its common carrier signatories, including Comsat, who
re-sell the services based on a tariff that may be below commercially
reasonable prices. In addition, Intelsat and its signatories can effectively
block PanAmSat from entering certain non-U.S. domestic markets.
Intelsat's mandate is to provide international satellite capacity on a non-
discriminatory basis to countries around the world. Since its formation in
1964, Intelsat's primary business has been the provision of satellite capacity
for long-distance telephony circuits. In recent years, Intelsat has launched
higher-powered satellites that are capable of providing video distribution,
DTH and private business network services. Intelsat traditionally has provided
capacity directly to its signatories, which then market such capacity to their
customers. Over 95 countries, however, now permit some form of direct access
to the Intelsat system and as of December 1999, the FCC began to permit
limited direct access in the United States. PanAmSat has filed a notification
with the FCC for limited direct access authority.
In March 1998, Intelsat approved the creation of an affiliate company that
would market satellite services directly to end-users. In November 1998,
Intelsat transferred to this affiliate, known as New Skies Satellites N.V.,
five operating satellites plus a sixth satellite that was under construction.
New Skies consummated a public offering of its equity securities in 2000 and
is increasingly independent of Intelsat. The New Skies satellite network
permits it to compete with the Company globally.
17
In May 1998, the FCC granted in part and denied in part a request by
Comsat, Intelsat's U.S. signatory, to be regulated as a non-dominant carrier.
The FCC reclassified Comsat as non-dominant in the provision of full-time
video and earth station services. The FCC determined, however, that Comsat
retains market power and should continue to be regulated as dominant in the
provision of switched voice and private line service to 63 countries and in
the provision of occasional-use video services to 142 markets. In February
1999, the FCC changed the manner in which it regulated Comsat's pricing for
these dominant carrier markets, switching from rate of return regulation to an
incentive-based pricing policy.
In early 1999, Congress enacted the Open-Market Reorganization for the
Betterment of International Telecommunications Act ("ORBIT"). This legislation
addressed the specific parameters and timetables to ensure the pro-competitive
privatization of Intelsat and the deregulation of Comsat. Intelsat filed on
January 18, 2000, an application requesting FCC authorization and associated
waivers, post-privatization, for its satellite system. The FCC conditionally
granted the application and waivers, subject to a determination whether
Intelsat's privatization plans conform to ORBIT. Intelsat has announced its
intention to convert from an intergovernmental organization to a privately
owned company in July 2001.
Proposed Global GEO Satellite Systems
PanAmSat competes with companies that have announced plans to create global
GEO satellite systems, primarily through acquisitions, partnerships or equity
interests in domestic or regional satellite systems. These companies include
Loral Space and Communications Ltd., GE American Communications, Inc. and
Lockheed Martin through its investment in Comsat. In addition, Societe
Europeenne des Satellites ("SES"), a Luxembourg-based operator of ASTRA, is a
leading satellite system for DTH, radio and multimedia services in Europe.
Each of these proposed systems has entered into substantial arrangements with
regional service providers to attempt to create a global system. Each of these
companies also offer value added services similar to those being offered by
the Company. PanAmSat believes that these companies would compete with it
primarily on price and level of service.
Regional GEO Satellite Systems
PanAmSat also competes with numerous companies and/or governments that
operate domestic or regional satellite systems in the United States, Latin
America, Europe, the Middle East, Africa and Asia. Competition from these
satellite operators is limited to service within one country or region,
depending on the operator's satellite coverage and market activities. In the
United States, GE Americom, Loral and Comsat all currently provide fixed
satellite services on a regional or domestic basis, and are the Company's
primary competitors in this market. Other important regional competitors of
the Company include Satellites Mexicanos, S.A. de C.V., an affiliate of Loral,
in Latin America and AsiaSat, a partially owned subsidiary of SES, in Asia.
These regional operators compete with PanAmSat primarily on price because
many are subsidized by local governments. In addition, some countries limit
PanAmSat's access in order to protect their national satellite systems.
Proposed and Operational Non-GEO Satellite Systems
The Company believes that operational non-geostationary telephony and data
systems are not currently competitors of PanAmSat. These non-geostationary
systems are designed primarily for mobile telephony and data services and are
not expected to serve the fixed point-to-multipoint video and
telecommunications markets. Certain other non-GEO systems under development,
such as Skybridge, Spaceway and Teledesic, are designed to offer fixed
satellite services such as data and Internet access, and they may compete with
services offered or planned to be offered by the Company.
18
OTHER COMPETITORS
Proposed Regional or Transoceanic GEO Satellite Systems
Other companies have announced plans to operate regional or transoceanic
satellite systems. Entry into the international satellite communication
industry can be expensive and difficult. The construction and launch of a
satellite comparable to PanAmSat's new satellites typically takes
approximately two or more years and costs approximately $200 million to $250
million or more. In addition, there are a limited number of orbital slots. The
operation of an international satellite communications system also requires
approvals from national telecommunications authorities and Intelsat and, in
certain cases, from regional satellite authorities. See "Item 7. Management's
Discussion and Analysis of Financial Condition and results of Operations--Risk
Factors--Risks of Government Regulation." While the trend around the world is
to liberalize these regulatory requirements, obtaining the necessary licenses
presently involves significant time, expense and expertise.
Value-Added Service Providers
In some cases, PanAmSat competes with companies to provide value-added
satellite services. These companies typically lease large amounts of satellite
capacity from satellite operators and then use that capacity to provide value-
added communications networks for their customers. For instance, several
carriers operate VSAT networks for businesses that PanAmSat also could provide
VSAT networks. In addition, brokers in the United States offer value-added
special events services to broadcasters, businesses and educational
institutions that also could be provided by PanAmSat. These companies may also
compete with NET-36 and PanAmSat's SPOTpath services. Many of these value-
added service providers and brokers use PanAmSat's services to meet their
customers' demands for satellite capacity.
Optical Fiber Cables
Optical fiber cables, considered to be a reliable method of transmitting
data and telephony, generally do not compete with PanAmSat's current services.
The primary use of optical fiber cables is to carry high-volume telephony and
data/Internet communications on a point-to-point basis, although video-based
point to multi-point projects are being investigated. Transcontinental and
intercontinental optical fiber cables currently carry video traffic, but this
service is largely for point-to-point traffic (e.g., New York to London).
Optical fiber cables are not readily usable for point-to-multipoint broadcast
applications or for the transmission of ad hoc events that require
transportable uplink earth stations. However, optical fiber is being deployed
at a rapid pace by several major companies, including Qwest Communications,
Global Crossing, Enron Corp. and Level 3 Communications, and as fiber networks
are deployed it is possible that the additional bandwidth may be marketed on a
point-to-multipoint basis. If this occurs, PanAmSat may face competition from
optical fiber companies, especially for Internet and data delivery services.
For certain services, particularly point-to-point, optical fiber is less
expensive than satellite services. As a result, any competition that PanAmSat
faces from optical fiber companies is likely to be based primarily on price
and reliability.
NET-36 COMPETITORS
The market for Internet broadcasting of high-bandwidth content is new,
intensely competitive and rapidly evolving. The Company expects that
competition will increase and that many of NET-36's competitors may not yet
have entered the market. Many of NET-36's competitors and potential
competitors may have greater name recognition, longer operating histories,
greater financial resources and larger customer bases. Increased and existing
competition could result in high barriers to market entry, price reductions,
fewer customer orders and the inability to gain market share, any of which
would cause the projected operating results of the NET-36 business to suffer.
NET-36's competitors primarily come from five market segments:
. Internet content distribution networks that accelerate delivery of web
pages, such as Akamai, Enron Communications and Digital Island;
19
. Internet webcasting companies that deliver streaming media through
terrestrial networks, such as Akamai's InterVu business;
. Internet software vendors that reduce the cost of delivery of content to
users by storing content closer to the end user, such as Inktomi;
. Internet production and event services companies, such as Broadcast.com
and Akamai's Network24 Communications business; and
. Companies that deliver streaming video and other data through satellite
networks, such as iBEAM and Cidera.
NET-36 competes on price, quality of service and network features. Certain
competitors that feature satellite based networks are dependent on the costly
transmission capacity of third-party satellite service providers (such as
PanAmSat). These competitors pay a fixed charge to utilize a third party's
satellite capacity regardless of how much capacity is actually used. By
leveraging PanAmSat's existing worldwide satellite network, NET-36 (i) obtains
cost savings on the satellite capacity it needs, (ii) has the flexibility to
obtain additional capacity as it attracts more customers, and (iii) is able to
procure more robust back-up capacity in the event of satellite failures,
resulting in less potential down time to its customers. NET-36 believes it can
successfully compete with ground based network providers on the quality of the
streaming video and audio services it delivers to the end user.
GOVERNMENT REGULATION
As an operator of a privately owned global satellite system, PanAmSat is
subject to: (i) the regulatory authority of the U.S. government; (ii) the
regulatory authority of other countries in which PanAmSat operates; and (iii)
the frequency coordination process of the International Telecommunications
Union ("ITU").
U.S. REGULATION
The ownership and operation of PanAmSat's satellite system is regulated by
the FCC. PanAmSat is subject to the FCC's jurisdiction primarily for: (i) the
licensing of satellites and U.S.-based earth stations in the United States;
(ii) avoidance of interference with other radio stations; and (iii) compliance
with FCC rules governing U.S.-licensed satellite systems. Violations of the
FCC's rules can result in various sanctions including fines, loss of
authorizations, or the denial of applications for new authorizations or to
renew existing authorizations. PanAmSat is not regulated as a common carrier
and, therefore, is not subject to rate regulation or the obligation not to
discriminate among customers, and operates with minimal governmental scrutiny
of its business decisions. PanAmSat must pay FCC filing fees in connection
with its space station and earth station applications; annual regulatory fees
that are intended to defray the FCC's regulatory expenses; and, to the extent
PanAmSat is deemed to be providing interstate or international
telecommunications services, universal service contributions.
Authorization to Launch and Operate Satellites. The FCC authorizes
satellite operators who meet its legal, technical and financial qualification
requirements to launch and operate satellites. Under the FCC's financial
qualification rules, an applicant must demonstrate that it has sufficient
funds to construct, launch, and operate each requested satellite for one year.
Licenses are issued for an initial ten-year term and the FCC gives licensees a
"replacement expectancy" with respect to the replacement of their satellites.
At the end of a ten-year license term, a satellite that has not been replaced,
or that has been re-located to another orbital location following its
replacement, may be able to continue operating under a grant of special
temporary authority. These operations, however, are secondary, and there can
be no assurance that the satellite will be permitted to continue operating
after the expiration of the initial ten-year license term. The FCC's rules and
policies limit the number of expansion satellite authorizations that may be
granted for the same frequency band at one time.
PanAmSat has final FCC authorization for sixteen satellites operating in
the C-band, the Ku-band, or both bands. PanAmSat has final FCC authorization
for one additional satellite, but the authorization does not cover certain
design changes that are the subject of a pending modification application.
PanAmSat has special
20
temporary authority to operate the satellite as modified on an interim basis.
In addition, PanAmSat has a final authorization to operate seven satellites in
the Ka-band: (two in the POR, to be located at 149 (degrees) E.L. and 173
(degrees) E.L.; four in the IOR, to be located at 36 (degrees) E.L., 40
(degrees) E.L., 48 (degrees) E.L., and 124.5 (degrees) E.L.; and one in the
United States, to be located at l03 (degrees) W.L.). PanAmSat has also
requested authority to operate eleven satellites in the broadcast satellite
services frequency ("BSS") band. If the Company does not meet certain FCC due
diligence requirements or does not place a satellite in service in an orbital
slot by a specified deadline, the Company's rights to such orbital slot may be
subject to revocation or expiration. For example, in 2000, the FCC revoked two
authorizations for the Company to operate in Ka-band slots. PanAmSat has filed
an application for review requesting the FCC to reconsider such revocations.
In addition to the above final authorizations, PanAmSat has a conditional
authorization for an IOR satellite in the C-band and Ku-band, to be located at
72 (degrees) E.L. In order to finalize this authorization, PanAmSat must make
a full financial showing.
Except as noted, none of PanAmSat's final or conditional authorizations is
subject to further administrative or judicial reconsideration or review. The
FCC reserves the right to require relocation of a satellite to a different
orbital location if it determines that relocation is in the public interest.
PanAmSat operates additional satellites under interim or special temporary
authority. PanAmSat operates PAS-7 at 68.5 (degrees) E.L. pursuant to a grant
of special temporary authority. PanAmSat is authorized to operate the Ku-band
transponders and only a portion of the C-band transponders on the satellite.
Brasilsat Al, a satellite owned by Embratel and operated and leased by
PanAmSat, previously provided U.S. domestic service from 79 (degrees) W.L.
under an interim authorization that expired on December 31, 1997. PanAmSat has
requested, but has not yet received, an extension of this authority. Pursuant
to a grant of special temporary authority, the Company has relocated Brasilsat
A1 to 144 (degrees) W.L. and it is operating there. The Company also has
amended its request for an extension of interim authority to specify the 144
(degrees) W.L. orbital location. PanAmSat also has requested a license
modification or special temporary authority to continue operating SBS-6 and
Galaxy VI beyond the end of their license terms. PanAmSat operates the HGS-1
satellite at 60 (degrees) W.L. under a grant of special temporary authority
from the FCC, and may continue such operations until 30 days before a
satellite operating on the same frequencies and serving the same geographic
area, and that has filed a valid prior coordination request with the ITU, is
launched to within one degree of 60 (degrees) W.L. PanAmSat has requested
special temporary authority to relocate PAS-5 to 155.5 (degrees) W.L. and to
operate the satellite at that orbital location. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--Risks of Government Regulation."
PanAmSat has filed applications for additional or replacement satellites in
the C-band and/or the Ku-band at 133 (degrees) W.L., 127 (degrees) W.L., 125
(degrees) W.L., 95 (degrees) W.L., 93 (degrees) W.L., 91 (degrees) W.L., 79
(degrees) W.L., and 68.5 (degrees) E.L. In order to grant two of the U.S.
additional satellite applications, the FCC would have to assign different
orbital locations than those requested by PanAmSat (79 (degrees) W.L. and 93
(degrees) W.L.) because, after PanAmSat's applications were filed, the FCC
assigned these orbital locations to other entities. PanAmSat has requested
that the 79 (degrees) W.L. application be associated with the 83 (degrees)
W.L. orbital location as a C-band only satellite.
In 1996, the FCC modified its rules for processing international satellite
system applications. PanAmSat has requested a waiver of these rules in
connection with one IOR application and one U.S. application.
PanAmSat has filed applications for six additional Ka-band satellites (two
in the AOR, two in the POR and two in the IOR), that will be processed in the
second Ka-band satellite processing round. Finally, PanAmSat has applied for
twelve V-band satellites (two in the AOR, six in the IOR and four in the
U.S.), but the FCC has not yet accepted these applications for filing.
Under the FCC's rules, unless an applicant has received an authorization to
launch and operate, it must notify the FCC in writing prior to commencing
satellite construction, and any construction engaged in is at the applicant's
own risk. While PanAmSat may proceed with the construction of planned
satellites without prior FCC approval, it must accept the risk that the FCC
may not grant the application, may not assign the satellite to its
21
proposed orbital location, or otherwise may act in a manner that limits or
eliminates some or all of the value of the construction previously done on the
satellite.
Other FCC Authorizations. Under the FCC's rules, an entity that provides
international telecommunications services on a common carrier basis must first
receive authorization, pursuant to Section 214 of the Communications Act of
1934, as amended, to provide such services. The FCC has granted PanAmSat
Carrier Services, Inc. ("PCSI") and PanAmSat Communications Carrier Services,
Inc. ("PCCS"), wholly-owned subsidiaries of the Company, Section 214 authority
to provide international private line and public switched services. As common
carriers, PCSI and PCCS are subject to rate regulation, tariffing and
nondiscrimination requirements.
Scope of Services Authorized. In 1996, the FCC eliminated the regulatory
distinction between U.S. domestic satellites and U.S.-licensed international
satellites. As a result, each of PanAmSat's satellites may be used, to the
extent technically feasible, to provide service in the United States and
internationally. Due to a restriction in the FCC's rules, however, the
transponders on PAS-9 and Galaxy XI that operate in the 10.7-11.7 GHz and
12.75-13.25 GHz frequency bands may be used solely for international service.
Coordination Requirements. The FCC requires applicants to demonstrate that
their proposed satellites would be compatible with the operations of adjacent
U.S.-licensed satellites. The FCC expects adjacent satellite operators to
coordinate with one another to minimize frequency conflicts, and it does not
become involved unless the operators are unable to resolve their conflicts.
Other U.S. Government Regulation. The U.S. Congress has added
communications satellites to the munitions list governed by The International
Traffic in Arms Regulations ("ITAR"), and transferred responsibility from the
Commerce Department to the State Department for licensing the export of
satellites and technical information related to satellites to non-U.S. launch
providers, insurers, customers, potential customers, employees, and other non-
U.S. persons. The State Department's interpretation of the regulations as they
would be applied to PanAmSat is not clear, and it is possible that these
regulations could adversely affect or delay the Company's ability to launch
and insure its satellites and to sell capacity to non-U.S. customers.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors--Risks of Government Regulation"
generally and for a description of certain frequency coordination issues
affecting PAS-6, PAS-7 and Galaxy VIII-i.
REGULATION BY NON-U.S. NATIONAL TELECOMMUNICATIONS AUTHORITIES
The United States is the licensing jurisdiction for all of PanAmSat's
operating satellites. PanAmSat has filed with the Australian Communications
Authority for a new satellite that would be operated in the POR.
Foreign laws and regulatory practices governing the provision of satellite
services to licensed entities and directly to end users vary substantially.
Most countries in which PanAmSat operates are signatories of Intelsat and, as
a result, may require PanAmSat to confirm that it has successfully completed
coordination with Intelsat before providing services on a given satellite. See
"--Intelsat Coordination." In addition, PanAmSat may be subject to national
communications and/or broadcasting laws with respect to its provision of
international satellite service. While these vary from country to country,
national telecommunications authorities, with limited exceptions, typically
have not required satellite operators to obtain licenses or regulatory
authorizations in order to provide space segment capacity to licensed
entities. "Space segment capacity" consists solely of capacity on a given
satellite without any uplink, downlink or other value-added services.
Many countries, particularly in Latin America, and increasingly in Europe,
Africa and Asia, have liberalized their regulations to permit multiple
entities to seek licenses to: (i) provide voice, data or video services for
their own use or for third-party use; (ii) own and operate private earth
station equipment; and (iii) to choose a provider of satellite capacity. This
trend should accelerate with the commitments by many World Trade Organization
("WTO") members, in the context of the WTO Agreement on Basic
Telecommunications Services, to open their
22
satellite markets to competition. Many countries allow licensed radio and
television broadcasters and cable television providers to own their own
transmission broadcast facilities and purchase satellite capacity without
restriction. In such environments, customer access to PanAmSat's services can
be a relatively simple procedure. Other countries, however, have maintained
strict monopoly regimes. In these markets, a single entity, often the
government-owned posts, telephone and telegraph authorities, may hold a
monopoly on the ownership and operation of facilities or on the provision of
communications and/or broadcasting services to, from, and within the country,
including via satellite, making it more difficult for PanAmSat and other
companies to provide services on U.S.-licensed satellites.
Most countries permit satellite carriers to provide space segment capacity
without any prior licensing or authorization. In others, however, a license is
required to provide space segment capacity. PanAmSat has obtained such
licenses in Argentina, Colombia, Ecuador, Guatemala, Honduras, Pakistan,
Paraguay and Peru. Additionally, the Company has sought service-type licenses,
in order to provide certain space segment capacity directly to end users.
PanAmSat has obtained such licenses in Australia and Japan. PanAmSat does not
yet, however, have authorization in Mexico, which effects its ability to use
certain portions of its satellite capacity. However, PanAmSat de Mexico (a
joint venture between PanAmSat and a Grupo Pegaso affiliate) filed for a
concession in Mexico that will permit the joint venture to serve as the
reseller of PanAmSat services in Mexico. PanAmSat's satellites also have only
limited authorization in Brazil and India that limit the opportunities for use
of some capacity in those countries.
Intelsat Coordination. In connection with its international satellite
services, PanAmSat must coordinate with Intelsat to assure that the use by
PanAmSat of any new satellite will not cause Intelsat technical harm. The FCC
is responsible for ensuring that PanAmSat has undergone the necessary
coordinations and that it operates in accordance with the technical parameters
forming the basis for each coordination. If PanAmSat changes the terms (either
technical or service) of its operation in a significant manner, it may need to
re-coordinate with Intelsat.
The ITU Frequency Coordination Process. Each ITU member nation is required
to register its proposed use of orbital slots with the ITU's Radio Regulations
Board. Other nations then may give notice of any use or intended use of the
radio spectrum that would conflict with the proposal. The nations then are
obligated to seek to coordinate the proposed uses and resolve interference
concerns. If all disputes are resolved, the ITU notifies the proposed use
which, at least theoretically, protects it from subsequent or nonconforming
interfering uses. The ITU Radio Regulations Board has no dispute resolution or
enforcement mechanisms, however, and international law provides no clear
remedies if this voluntary process fails.
While the right to use most frequencies is determined on a "first-come,
first-served" basis, the ITU has "planned" the use of certain frequency bands
in a manner that effectively reserves for various countries the right to use
those frequencies in accordance with certain technical parameters at a given
orbital location. PanAmSat's proposed use of BSS frequencies on eleven
satellites is subject to unresolved issues concerning the ITU's BSS band plan.
All of the registrations for PanAmSat's satellites are or will be subject
to the ITU coordination process. Certain entities have filed notices of
intended use with respect to certain orbital slots which conflict with
PanAmSat's registered orbital slots for PAS-2, PAS-4, PAS-7 and PAS-8, and
PAS-10. Such filings may delay the receipt of final registration of such
orbital slots with the ITU Radio Regulations Board. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--Risks of Government Regulation."
EMPLOYEES
At December 31, 2000, PanAmSat had approximately 805 full-time employees.
PanAmSat believes that its relations with its employees are good.
23
ITEM 2. PROPERTIES
PanAmSat's executive offices currently are located in Greenwich,
Connecticut. PanAmSat leases its executive offices pursuant to a lease that
will expire on March 31, 2003. In August 1999, the Company announced its
purchase of a new office facility in Stamford, Connecticut to serve as its
corporate headquarters. The Company subsequently sold the Stamford office
facility and entered into a ten year lease for a facility in Wilton,
Connecticut to serve as its corporate headquarters. The Company will move its
headquarters to Wilton when renovations at the new facility are complete. The
move is expected to occur in 2001.
PanAmSat currently operates seven teleports and operations control centers
in conjunction with its global satellite network. PanAmSat operates its
primary teleport in Ellenwood, Georgia and operates regional teleports in
Castle Rock, Colorado; Fillmore, California; Homestead, Florida; Napa,
California; and Spring Creek, New York. PanAmSat's operations control centers
located in Ellenwood and Long Beach provide other services, such as customer
service support in addition to teleport operations. PanAmSat owns its
teleports in Ellenwood, Georgia; Homestead, Florida; Spring Creek, New York;
Napa, California; and Fillmore, California. The Company owns its operations
control centers in Ellenwood, Georgia and Long Beach, California and leases
offices in Manhattan Beach. PanAmSat leases its teleport in Castle Rock,
Colorado.
PanAmSat also leases office space for its offices in Manhattan Beach,
California; Washington, D.C.; Coral Gables, Florida; Sydney, Australia;
Johannesburg, South Africa; London, England; Tokyo, Japan; Seoul, South Korea;
and Hong Kong, China. PanAmSat's leases for its foreign offices have been
entered into upon terms that PanAmSat believes to be reasonable and customary.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2000, no matters were submitted to a
vote of stockholders through the solicitation of proxies or otherwise.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PanAmSat Common Stock is listed on the Nasdaq National Market and commenced
trading on May 19, 1997 under the symbol "SPOT."
The following table sets forth, for the calendar periods indicated, the
high and low closing sales price per share for PanAmSat Common Stock, as
reported by the Nasdaq National Market.
2000 HIGH LOW
---- --------- ---------
First Quarter......................................... $72 1/8 $41 11/16
Second Quarter........................................ $50 15/16 $35 5/16
Third Quarter......................................... $44 1/16 $28 9/16
Fourth Quarter........................................ $41 9/16 $26 1/16
1999 HIGH LOW
---- --------- ---------
First Quarter......................................... $45 7/16 $31 1/8
Second Quarter........................................ $38 15/16 $26 9/16
Third Quarter......................................... $42 3/8 $34
Fourth Quarter........................................ $63 1/4 $35
As of March 16, 2001, there were approximately 136 holders of record of
PanAmSat Common Stock.
To date, the Company has not declared or paid cash dividends on PanAmSat
Common Stock. The Company presently intends to retain future earnings to
support the growth of its business and, therefore, does not anticipate paying
cash dividends in the near future. The payment of any future dividends on
PanAmSat Common Stock will be determined by the Company's Board of Directors
in light of conditions then existing, including the Company's earnings,
financial condition and capital requirements, restrictions in financing
agreements, business conditions and other factors.
25
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the year ended December
31, 1996 has been derived from the audited financial statements of Galaxy,
which changed its name to PanAmSat Corporation concurrent with its May 1997
acquisition of PanAmSat International (See Note 1 to the Consolidated
Financial Statements). The selected financial data as of December 31, 2000,
1999, 1998 and 1997 and for each year of the four-year periods ended December
31, 2000 has been derived from the audited consolidated financial statements
of PanAmSat appearing elsewhere in this Annual Report, and should be read in
conjunction with such consolidated financial statements and notes related
thereto and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
2000 1999 1998 1997(1) 1996
---------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DA-
TA:
Total revenues.......... $1,023,570 $ 810,617 $ 767,263 $ 629,939 $ 482,770
---------- --------- --------- ---------- ---------
Costs and expenses
Cost of outright sales
and sales-type leases.. 85,776 -- -- 20,476 52,969
Leaseback expense, net
of deferred gains...... -- 15,391 47,223 61,907 59,927
Depreciation and amorti-
zation................. 337,450 280,472 234,945 149,592 58,523
Direct operating costs.. 149,681 103,973 96,510 61,199 34,794
Selling, general and ad-
ministrative........... 97,462 72,415 70,251 42,561 34,119
Gain on Galaxy VII in-
surance claim.......... (3,362) -- -- -- --
---------- --------- --------- ---------- ---------
Operating income........ 356,563 338,366 318,334 294,204 242,438
Interest expense,
net(2)................. 128,205 112,002 97,788 30,973 4,903
Other income............ -- -- -- (385) (2,184)
---------- --------- --------- ---------- ---------
Income before taxes, mi-
nority interest and
extraordinary item..... 228,358 226,364 220,546 263,616 239,719
Income tax expense...... 102,761 104,127 95,940 117,325 89,895
Minority interest....... -- -- -- 12,819 --
Extraordinary item(3)... -- -- -- 20,643 --
---------- --------- --------- ---------- ---------
Net income.............. $ 125,597 $ 122,237 $ 124,606 $ 112,829 $ 149,824
========== ========= ========= ========== =========
OTHER FINANCIAL DATA:
EBITDA(4)............... $ 694,013 $ 618,838 $ 553,279 $ 444,181 $ 303,145
EBITDA margin(4)........ 68% 76% 72% 71% 63%
Net cash provided by op-
erating activities..... $ 418,713 $ 500,582 $ 628,119 $ 201,944 $ 165,851
Net cash used in invest-
ing activities......... (394,185) (560,199) (636,465) (1,720,440) (56,735)
Net cash provided by
(used in) financing
activities............. (12,442) (666) 94,149 1,610,206 (109,122)
Capital expenditures.... 449,560 586,910 738,540 622,347 308,735
Total assets............ 6,178,351 5,984,709 5,890,497 5,682,434 1,275,516
Total long-term obliga-
tions.................. 3,130,086 3,025,577 3,058,480 3,016,680 394,187
Total stockholders' eq-
uity................... 2,954,695 2,815,989 2,688,415 2,560,836 --
- --------
(1) Results for the year ended December 31, 1997 include financial data for
PanAmSat International from May 16, 1997 (the effective date of the
Merger). See Note 1 to the Consolidated Financial Statements for a
description of the Merger.
(2) Net of capitalized interest of $56.1 million, $60.7 million, $59.9
million, $80.5 million and $14.6 million for the years ended December 31,
2000, 1999, 1998, 1997 and 1996, respectively, and net of interest income
of $6.8 million, $3.2 million, $10.4 million and $28.0 million in 2000,
1999, 1998 and 1997, respectively.
(3) Represents loss on early extinguishment of debt, net of tax.
(4) Represents earnings before net interest expense, income tax expense,
depreciation and amortization. EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. EBITDA should not be considered as a
measure of profitability or liquidity as determined in accordance with
generally accepted accounting principles in the statements of income and
cash flows. EBITDA margin is EBITDA divided by revenues and is expressed
as a percentage.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto
appearing elsewhere in this Annual Report.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
--------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
REVENUES
Operating leases, satellite services and other... $ 780,256 $787,509 $736,624
Outright sales and sales-type leases............. 243,314 23,108 30,639
--------- -------- --------
Total revenue.................................. 1,023,570 810,617 767,263
--------- -------- --------
COSTS AND EXPENSES
Cost of outright sales and sales-type leases..... 85,776 -- --
Leaseback expense, net of deferred gains......... -- 15,391 47,223
Direct operating and SG&A costs.................. 247,143 176,388 166,761
Gain on Galaxy VII insurance claim............... (3,362) -- --
Depreciation and amortization.................... 337,450 280,472 234,945
--------- -------- --------
Total.......................................... 667,007 472,251 448,929
--------- -------- --------
Income from operations........................... 356,563 338,366 318,334
Interest expense, net............................ 128,205 112,002 97,788
--------- -------- --------
Income before income taxes....................... 228,358 226,364 220,546
Income tax expense............................... 102,761 104,127 95,940
--------- -------- --------
Net income....................................... $ 125,597 $122,237 $124,606
========= ======== ========
Net income per share--basic and diluted.......... $ 0.84 $ 0.82 $ 0.83
========= ======== ========
27
CONSOLIDATED RESULTS
2000 COMPARED TO 1999
Revenues. Revenues increased $213.0 million, or 26%, to $1,023.6 million
for the year ended December 31, 2000 from $810.6 million for the same period
in 1999. This increase was primarily due to $219.2 million of additional
revenues during 2000 from new outright sales and sales-type leases of
satellite transponders for which there were no comparable transactions in
1999. The Company records certain contractual transactions as sales-type
leases in accordance with Generally Accepted Accounting Principles ("GAAP").
Most of the revenues from these agreements are recognized at service
commencement, whereas revenues from operating lease agreements are recognized
monthly over the term of the lease agreement. Video services revenues,
excluding new sales-type lease agreements were $541.4 million for the year
ended December 31, 2000, a decrease of 7% from the same period in 1999. The
decrease was primarily due to customer conversions from operating lease
agreements into sales-type lease agreements during the first half of 2000 and
the termination of a contract for a DTH platform in India in 1999. Network
services (formerly telecommunications services) revenues, excluding new
outright sales, were $207.9 million for the year ended December 31, 2000, an
increase of 11% from the same period in 1999. The increase was due primarily
to growth in data and Internet-related service agreements.
Revenues from outright sales and sales-type leases increased to $243.3
million for the year ended December 31, 2000, from $23.1 million for the same
period in 1999. The increase is attributable to the new outright sales and
sales-type lease transactions discussed above. Revenues from operating leases
of transponders, satellite services and other decreased $7.3 million, or 1%,
to $780.3 million for the year ended December 31, 2000, from $787.5 million
for the same period in 1999. The decrease was primarily due to customer
conversions from operating lease agreements into sales-type lease agreements
during the first half of 2000 and the termination of a contract for a DTH
platform in India in 1999.
Cost of Outright Sales and Sales-Type Leases of Transponders. The Company
recorded $85.8 million of costs of outright sales and sales-type leases of
transponders for the year ended December 31, 2000 for which there were no
comparable transactions in 1999.
Leaseback Expense, Net of Deferred Gains. The exercise of all remaining
early buy-out opportunities on sale-leaseback agreements was completed in
1999. As a result, the Company recorded no leaseback expense, net of deferred
gains, for the year ended December 31, 2000, as compared to $15.4 million for
the same period in 1999.
Direct Operating and Selling, General and Administrative Costs. Direct
operating and selling, general and administrative costs increased $70.8
million, or 40%, to $247.1 million for the year ended December 31, 2000, from
$176.4 million for the same period in 1999. The increase was primarily due to
direct costs associated with the Company's continued fleet expansion, costs
associated with its NET-36 initiative, additional staffing to support other
growth initiatives and a $6.1 million one-time charge associated with a sale
of real estate.
Depreciation and Amortization. Depreciation and amortization increased
$57.0 million, or 20%, to $337.5 million for the year ended December 31, 2000
from $280.5 million for the same period in 1999, due primarily to depreciation
expense associated with the addition of four new satellites placed in service
in 2000, depreciation expense on transponders acquired through the exercise of
sale-leaseback early buy-outs and the acceleration of depreciation on the
Galaxy VIII-i satellite, which began in the fourth quarter of 2000.
Income from Operations. Income from operations increased $18.2 million, or
5%, to $356.6 million for the year ended December 31, 2000 from $338.4 million
for the same period in 1999. The increase was primarily due to the gross
profit associated with the new outright sales and sales-type lease activity in
2000 offset by increased depreciation expense and direct operating and
selling, general and administrative costs.
Interest Expense, Net. Interest expense, net increased $16.2 million, or
14%, to $128.2 million for the year ended December 31, 2000 from $112.0
million for the same period in 1999. The increase was due primarily to the
increase in interest rates associated with the Company's floating rate debt
during 2000 partially offset by lower borrowing levels in 2000.
28
Income Tax Expense. Income tax expense decreased $1.4 million, or 1%, to
$102.8 million for the year ended December 31, 2000 from $104.1 million for
the same period in 1999. The Company's effective tax rate was 45% in the year
ended December 31, 2000, compared to 46% in the same period in 1999. The
decrease was due to increased tax benefits related to the Company's foreign
sales corporation.
1999 COMPARED TO 1998
Revenues. Revenues increased $43.3 million, or 6%, to $810.6 million for
the year ended December 31, 1999 from $767.3 million for the same period in
1998. Video services revenues were $580.2 million for the year ended December
31, 1999, an increase of 3% from the same period in 1998. The increase was
primarily due to new service agreements on satellites placed in service in
1999, as well as continued growth in special events service revenues as
compared to the same period in 1998. Network services revenues were $186.7
million for the year ended December 31, 1999, an increase of 17% from the same
period in 1998. The increase was due primarily to the growth in data and
Internet-related service agreements.
Revenue results can also be analyzed based on the type of agreement.
Revenues from sales and sales-type leases decreased to $23.1 million for the
year ended December 31, 1999, from $30.6 million for the same period in 1998.
The decrease is attributable to a lower volume in 1999 relative to 1998 of
outright sales and sales-type leases. Revenues from operating leases of
transponders, satellite services and other increased $50.9 million, or 7%, to
$787.5 million for the year ended December 31, 1999, from $736.6 million for
the same period in 1998. The increase was primarily due to the commencement of
commercial service on new international satellites, as well as continued
growth in special events service revenues in 1999.
Leaseback Expense, Net of Deferred Gain. Leaseback expense, net of deferred
gain, decreased $31.8 million, or 67%, to $15.4 million for the year ended
December 31, 1999, from $47.2 million for the same period in 1998. The
decrease was primarily attributable to the exercise by the Company of early
buy-out opportunities on sale-leaseback agreements during 1999.
Direct Operating and Selling, General and Administrative Costs. Direct
operating and selling, general and administrative costs increased $9.6
million, or 6%, to $176.4 million for the year ended December 31, 1999, from
$166.8 million for the same period in 1998. The increase was primarily due to
direct costs associated with additional satellites placed in service and
operating costs associated with the normal growth of the Company attributable
to the growth in the size of the satellite network.
Depreciation and Amortization. Depreciation and amortization increased
$45.6 million, or 19%, to $280.5 million for the year ended December 31, 1999
from $234.9 million for the same period in 1998, due primarily to depreciation
expense associated with additional satellites placed in service.
Income from Operations. Income from operations increased $20.1 million, or
6%, to $338.4 million for the year ended December 31, 1999 from $318.3 million
for the same period in 1998. The increase was primarily due to increased
revenue generated by the expanded satellite network and decreased leaseback
expense, net of deferred gain as a result of the exercise by the Company of
early buy-out opportunities, offset by increased depreciation and direct
operating costs associated with the Company's expanded satellite network.
Interest Expense, Net. Interest expense, net increased $14.2 million, or
15%, to $112.0 million for the year ended December 31, 1999 from $97.8 million
for the same period in 1998. The increase was due primarily to higher interest
expense resulting from new debt assumed in connection with the exercise of an
early buy-out opportunity under a sale-leaseback transaction during 1999 as
well as increased borrowing levels during the year.
Income Tax Expense. Income tax expense increased $8.2 million, or 9%, to
$104.1 million for the year ended December 31, 1999 from $95.9 million for the
same period in 1998. The Company's effective tax rate was 46% in 1999 compared
to 44% in 1998. The increase resulted from a reduction in foreign sales
corporation tax benefits in 1999.
29
SATELLITE DEPLOYMENT PLAN AND PLANNED SATELLITES
Satellite Deployment Plan
PanAmSat's satellite deployment plan is intended to enable the Company to
provide back-up and replacement capacity as well as expanded satellite
services on an expedited basis in the United States and worldwide. PanAmSat
launched five satellites since December 1999, Galaxy XI, Galaxy XR, Galaxy
IVR, PAS-9 and PAS-1R, on December 21, 1999, January 24, 2000, April 18, 2000,
July 28, 2000 and November 15, 2000, respectively. PanAmSat also retired two
satellites, SBS-5 and SBS-4, and experienced the failure of Galaxy VII during
2000. PanAmSat expects to launch four additional satellites by early 2003,
consisting of Galaxy III-C (which will replace Galaxy IIIR) for the NAR and
the AOR, Galaxy VIII-iR (which will replace Galaxy VIII-i) for the AOR, PAS 10
for the IOR and a new satellite for the NAR (yet to be named). This will
result in a planned total fleet of 23 satellites, including multiple
satellites in each ocean region worldwide and one in-orbit spare satellite
(Galaxy VI) for the United States. The Company also has options to procure
three additional satellites.
Planned Satellites
PAS-10. This satellite will be a Boeing 601 HP spacecraft. It is scheduled
for launch in the second quarter of 2001 on a Proton launch vehicle and is
expected to occupy an orbital position in the IOR at 68.5 (degrees) E.L. Some
of the Company's key customers on PAS-4 have contracted to migrate to PAS-10
upon its deployment.
Galaxy III-C. This satellite will be a Boeing 702 spacecraft, designed to
cover the United States and Latin America. It is scheduled to be launched in
the third quarter of 2001 and it is expected to occupy an orbital position
located at 95 (degrees) W.L.
Galaxy VIII-iR. This satellite will be a Boeing 601 HP spacecraft designed
to cover Latin America and serve as an on-ground spare as back-up for the
launch of Galaxy IIIC, and then a replacement for Galaxy VIII-i. It is
scheduled to be launched in the third quarter of 2002 and it is expected to
occupy an orbital position located at 95 (degrees) W.L. The Company has
entered into a contract with an affiliate of DIRECTV Latin America (which is
an affiliate of the Company) for the lease of capacity on Galaxy VIII-iR, but
such contract may be terminated by the customer following the successful
launch of Galaxy III-C. If the lease were terminated, the Company would either
modify Galaxy VIII-iR for another use or terminate its contract with Boeing
for the construction of Galaxy VIII-iR. The Company would also postpone or
terminate the launch service contracted for Galaxy VIII-iR. In such event, the
custo