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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 31, 1997 COMMISSION FILE NO. 0-22531
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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 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 24, 1998, the registrant had outstanding 149,149,008 shares of
Common Stock. As of such date, the aggregate market value of voting stock held
by non-affiliates of the registrant was approximately $2,352,000,000.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting
of Stockholders of Registrant to be held on May 4, 1998 (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 Conditions 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," "anticipate," "expect,"
"intend," "believe," and other similar expressions are intended to identify
forward-looking statements and information. PanAmSat identifies the following
important factors which could cause PanAmSat's actual results to differ
materially from any results which might be projected, forecasted, estimated or
budgeted by PanAmSat in forward-looking information: (i) risks associated with
technology, (ii) regulatory risks, (iii) effect of loss of key personnel, and
(iv) litigation. Such factors are more fully described under the caption "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors," and such descriptions are incorporated herein by
reference. 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.
PART I
ITEM 1. BUSINESS
OVERVIEW
PanAmSat Corporation, a Delaware corporation ("PanAmSat" or the "Company"),
is the world's largest commercial provider of global satellite-based
communications services. The Company commenced operations on May 16, 1997 upon
the merger (the "Merger") of PanAmSat International Systems, Inc. (then
operating under its previous name, PanAmSat Corporation) ("PanAmSat
International") and the Galaxy Satellite Services division ("Galaxy") of
Hughes Communications, Inc. ("HCI"). As a result of the Merger and the
consummation of a separate but related stock contribution, HCI became the
owner of approximately 71.5% of the outstanding shares of Common Stock, par
value $.01 per share, of PanAmSat (the "PanAmSat Common Stock"). For further
information on the Merger, see "--The Merger" below and Note 1 to the
Consolidated Financial Statements included in Item 8 hereof. Unless the
context otherwise requires, the term "Company" is used to refer collectively
to the parent company and the subsidiaries through which its various
businesses are actually conducted, including PanAmSat International.
The Company is a leading provider of satellite capacity for television
program distribution to network, cable and other redistribution sources in the
United States, Latin America, Africa, south Asia and the Asia-Pacific region.
PanAmSat's global network of 17 satellites (excluding Brasilsat A1, which is
in inclined orbit and does not provide the Company with a significant source
of revenues) provide state-of-the-art video distribution and
telecommunications services for customers worldwide. Currently, an aggregate
of more than 120 million households worldwide are capable of receiving
television programming carried by PanAmSat satellites. PanAmSat satellites
also serve as the transmission platforms for seven planned or operational
direct-to-home ("DTH") services worldwide. The Company also provides satellite
services and related technical support for live transmissions for news and
special events coverage.
In addition, PanAmSat provides satellite services to telecommunications
carriers, corporations and Internet service providers ("ISPs") for the
provision of satellite-based communications networks, including private
corporate networks employing very small aperture terminals ("VSATs") and
international access to the U.S. Internet backbone. Currently, more than
100,000 VSATs worldwide relay communications over PanAmSat satellites, and
ISPs in 29 countries access the U.S. Internet backbone via PanAmSat
satellites.
The Company, together with its subsidiaries, provides global satellite
services in three areas: Video Services, Telecommunications Services and Other
Services.
THE MERGER
The Merger was the result of an Agreement and Plan of Reorganization dated
September 20, 1996 (as amended April 4, 1997) (the "Reorganization Agreement")
entered into among HCI, Hughes Communications Galaxy, Inc., Hughes
Communications Satellite Services, Inc., Hughes Communications Services, Inc.,
Hughes Communications Carrier Services, Inc., Hughes Communications Japan,
Inc., PanAmSat International and the Company. In addition, an Agreement and
Plan of Merger dated April 4, 1997 (the "Merger Agreement") was entered into
among PanAmSat International, PanAmSat and PAS Merger Corp., a subsidiary of
PanAmSat ("PAS Merger Corp.").
As a result of the transactions contemplated by the Reorganization Agreement
and the Merger Agreement, on May 16, 1997, among other things, PAS Merger
Corp. merged with and into PanAmSat International and Galaxy was contributed
to PanAmSat, with the result that (a) PanAmSat International became a wholly-
owned subsidiary of PanAmSat; (b) each issued and outstanding share of
PanAmSat International's Class A Common Stock, par value $.01 per share, and
Common Stock, par value $.01 per share, was converted into, at the election of
each holder, either (i) an amount in cash equal to $15, plus one-half ( 1/2)
share of PanAmSat Common Stock,
1
(ii) one share of PanAmSat Common Stock or (iii) an amount equal to
approximately $16.38 in cash plus 0.45 shares of PanAmSat Common Stock, in
each case subject to proration; (c) PanAmSat became Galaxy's owner and
operator; and (d) HCI and certain of its subsidiaries received an aggregate of
106,622,807 shares of PanAmSat Common Stock. Following the Merger, the shares
of PanAmSat Common Stock owned by HCI constitute approximately 71.5% of the
outstanding shares of PanAmSat Common Stock.
Prior to the Merger, PanAmSat International operated the world's first
privately owned global (excluding domestic U.S.) satellite communications
system, consisting of four satellites serving Latin America, the Caribbean,
Europe, Asia, the Middle East and Africa. Galaxy was the leading provider of
commercial satellite services in the United States, with a fleet consisting of
10 satellites.
SERVICES
In the year ended December 31, 1997, PanAmSat's pro forma revenues of $756.0
million were derived from the following service areas:
SERVICES 1997 REVENUES
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Video Services............................................. 80%
Telecommunications Services................................ 16%
Other Services............................................. 4%
----
Total...................................................... 100%
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
VIDEO SERVICES
PanAmSat's Video Services provide for the long-term, part-time and
occasional use of PanAmSat satellite services for the transmission of news,
sports, entertainment and education 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,
valued-added services that include satellite capacity, digital encoding of
video channels and, if required, uplinking and downlinking services to
PanAmSat satellites 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, south Asia and the Asia-Pacific region. The Company
creates "video neighborhoods" 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 virtually all of
the United States' 11,000 cable systems, approximately 70 million cable
television households, as well as nearly two million households using C-band
backyard dishes. The Ku-band beams on several of the Company's domestic U.S.
and international satellites are also used for video distribution to cable
systems and network affiliates.
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
2
terrestrial television channels or cable television service in many
international markets, and in the United States, limited ethnic or niche
programming.
PanAmSat has arrangements with customers to operate platforms on five
satellites for seven current or planned DTH services in Latin America, South
Africa, the Middle East, India and the United States. PanAmSat also designs
many of these platforms to facilitate DTH service expansion through the launch
of multiple satellites in the same orbital location.
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 58,000 hours of total
special events transmissions in 1997. 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.
TELECOMMUNICATIONS SERVICES
PanAmSat's Telecommunications Services support the creation of 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 Telecommunications
Services are comprised of four categories: (i) carrier services, (ii) private
business networks, (iii) Internet access and (iv) telephony.
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 can connect customers to U.S. terrestrial networks.
Private Business Networks. PanAmSat provides satellite services directly to
network suppliers and businesses 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 customers 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. More than 100,000 VSAT antennas worldwide
currently relay communications over PanAmSat satellites. The Company's largest
single telecommunications customer is Hughes Network Systems, Inc., an
affiliate of the Company ("HNS"), which uses the equivalent of more than 20
U.S. domestic satellite transponders to create and operate VSAT networks for
its business customers.
In addition, PanAmSat provides satellite services directly to businesses.
These include value-added satellite communications services, such as the
purchase and installation of on-site antennas and the design, integration,
management, operation and maintenance of business networks. These services are
provided via PanAmSat's teleports in the United States or through
subcontractors.
3
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, ISPs and companies providing direct-to-consumer
Internet applications. PanAmSat believes that its high-power domestic U.S. and
international satellites are well-suited for Internet service because of the
tremendous demand for reliable, high-speed access to the U.S. Internet
backbone, where approximately 80 percent of all Internet data currently
resides. In many cases, PanAmSat's satellites are capable of delivering
Internet data internationally at nearly 20 times the speed of traditional
telephone links. PanAmSat currently provides Internet services in
approximately 30 countries.
PanAmSat also provides SPOTbytesSM, 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.
Telephony. The Company provides domestic and international satellite
services for public switched telephone network ("PSTN") transmissions. PSTN
services represented less than one percent of total combined pro forma
revenues in 1997.
PanAmSat's ability to provide domestic and international PSTN services are
restricted by various telecommunications regulations in most countries. See
"Item 1. Business--Government Regulation." The Company believes competition
for long-distance services and significant deregulation in several countries
could create new service opportunities for the Company. In addition, the
Company believes that its international satellites are particularly well-
suited for thin-route PSTN applications in developing countries or remote
areas where fiber-optic telephone systems are not feasible or cost-effective.
OTHER SERVICES
Telemetry, Tracking and Control. PanAmSat provides telemetry, tracking and
control ("TT&C") services for 21 satellites owned by PanAmSat and other
satellite operators. PanAmSat personnel maintain proper orbital location and
attitude, 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.
Galaxy Backup Capacity. As part of its video distribution service on certain
Galaxy satellites, PanAmSat offers customers a premium service that includes
backup C-band capacity on the Galaxy VI satellite. Generally, subject to the
specific terms of individual contracts, these customers are entitled to
replacement capacity on Galaxy VI if a transponder failure occurs and no spare
amplifier or reserved transponder is available on their current satellite.
Galaxy VI can meet a customer's immediate needs by providing transponder
capacity at Galaxy VI's current orbital location or, subject to Federal
Communications Commission ("FCC") approval, from a relocated orbital position.
Galaxy VI serves as the in-orbit spare satellite because current Galaxy VI
customers are subject to preemption if their capacity is required to serve as
a backup transponder. As of December 31, 1997, PanAmSat had not been required
to preempt an existing full-time customer on Galaxy VI.
4
BUSINESS STRATEGY
PanAmSat's business strategy is based on more than 15 years of experience
providing satellite-based communications services and the Company's ongoing
analysis of expected worldwide market demand for its services. PanAmSat's
strategy is based on five key elements:
. Global satellite network;
. One-stop-shopping;
. Value-added services;
. Satellite broadcasting and telecommunications franchises; and
. Long-term customer relationships.
GLOBAL SATELLITE NETWORK
PanAmSat has created a global satellite communications network that is
designed to provide broadcast and telecommunications services worldwide. The
network currently consists of 17 satellites, seven teleport or TT&C facilities
in the United States and more than 450 PanAmSat professionals on five
continents. In addition, teleports operated by third parties in Europe, Latin
America, the United States and Asia also provide access to PanAmSat
satellites. PanAmSat's global satellite network is focused on the point-to-
multipoint communications market, which includes the distribution of
television channels to cable and other redistribution systems, DTH and private
business networks.
PanAmSat's core resource is its growing fleet of satellites. The Company has
designed many of its satellites to provide high-power transmissions that
reflect specific market demographics and customer service requirements. The
Company intends to launch six additional satellites by late 1999 that employ
the most advanced satellite technology commercially available. These new
satellites are designed to provide additional transmission capacity, higher
power, expanded coverage and/or extended operational life. Satellites are
subject to significant risks related to delayed and failed launches and in-
orbit failures. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Risks Associated With
Technology."
PanAmSat's geostationary C-band and/or Ku-band satellites each provide
coverage over specific geographic areas, such as in the United States or
across ocean regions. To facilitate continued network expansion, PanAmSat has
received authorization from the FCC to use additional orbital slots for C-band
and/or Ku-band satellites and nine slots for Ka-band satellites. The Company
also has requested authorization for 11 V-band slots and six additional Ka-
band slots. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Regulatory Risks."
ONE-STOP-SHOPPING
While PanAmSat has designed each satellite to reflect specific market
requirements, its global satellite network also serves as a single resource
for a customer's worldwide transmission requirements. PanAmSat is the only
commercial company that offers global satellite services on a one-stop-
shopping basis.
VALUE-ADDED SERVICES
The Company employs its satellites, teleports and professional staff to
offer value-added services that are market driven and responsive to customer
needs. In addition to satellite transmission capacity, PanAmSat's service
offerings include:
. Network design and systems engineering;
. Transmission of video channels and management of private business
network traffic from PanAmSat teleports;
5
. The provision of broadcast studios for video preparation and
transmission to PanAmSat satellites during major sporting and special
events sites; and
. Development of new service applications.
PanAmSat's value-added services also include bundled packages of PanAmSat
resources. In an effort to provide cost-effective digital video services
particularly for smaller programmers, for instance, PanAmSat offers a multi-
channel per carrier service in which several television channels are digitally
encoded and transmitted from a PanAmSat teleport to a specific cable
television market. The Company's SPOTbytesSM bundled Internet service consists
of international satellite transmission capacity, and if required, uplinking
services from a PanAmSat teleport and dedicated links from the teleport to the
U.S. Internet backbone.
SATELLITE BROADCASTING AND TELECOMMUNICATIONS FRANCHISES
A key element of PanAmSat's strategy is the creation of "service franchises"
that help the Company to maintain and build its customer base. These
franchises are based on large numbers of users who aim their ground antennas
at PanAmSat satellites for the delivery of their television programming or
communications traffic. The resulting infrastructure of ground antennas
creates neighborhoods that bring added value to the Company's satellite
transmission capacity.
PanAmSat franchises include the distribution of premier television channels
to cable systems and network affiliates; DTH television services to subscriber
households; and private business networks to multiple corporate sites.
PanAmSat initially enters into service agreements with several key programmers
that serve as anchor tenants offering popular television channels on the
satellite's cable television "neighborhood." These anchor broadcasters seed
the ground infrastructure accessing the programming and also attract
additional programmers that want to join the programming neighborhood.
LONG-TERM CUSTOMER RELATIONSHIPS
PanAmSat's strategy is to build long-term relationships with its customers
by understanding their business objectives and offering long-term solutions to
their satellite transmission needs. Most of PanAmSat's revenues result from
long-term contracts with its customers. In many cases, programmers,
corporations and ISPs have incrementally increased usage of PanAmSat
satellites based on their service experience.
6
THE SATELLITES
The following tables describe the Company's operational and anticipated fleet
of satellites:
SUMMARY SATELLITE DATA
OPERATIONAL SATELLITES
PAS-1 PAS-2 PAS-3 PAS-4 PAS-5
-------------------- --------------------- ------------------- --------------------- -------------------
Region Covered.. Atlantic Ocean Pacific Ocean Atlantic Ocean Indian Ocean Atlantic Ocean
Satellite....... GE 3000 HS 601 HS 601 HS 601 HS 601
Expected End of
Useful Life(2). 2001 2009 2008 2011 2012(3)
Orbital Loca-
tion........... 45(degrees) W.L. 191(degrees) W.L. 43(degrees) W.L. 68.5(degrees) E.L.(4) 58(degrees) W.L.
Transponders(5)
Ku-band(6)..... 6 @ 72 MHz 12 @ 54 MHz 12 @ 54 MHz 16 @ 27 MHz 24 @ 36 MHz
4 @ 64 MHz 4 @ 64 MHz 6 @ 54 MHz
C-band(7)...... 6 @ 72 MHz 12 @ 54 MHz 12 @ 54 MHz 12 @ 54 MHz 24 @ 36 MHz
12 @ 36 MHz 4 @ 64 MHz 4 @ 64 MHz 4 @ 64 MHz
Usable Band-
width(8)....... 1,296 MHz 1,808 MHz 1,808 MHz 1,768 MHz 1,728 MHz
Output Power(9)
Ku-band......... 6 @ 16 Watts 16 @ 63 Watts 16 @ 63 Watts 24 @ 60 Watts 18 @110 Watts
6 @ 60 Watts
C-band.......... 6 @ 16 Watts 16 @ 30 Watts 16 @ 34 Watts 16 @ 30 Watts 24 @ 50 Watts
12 @ 8.5 Watts
Total Output
Power.......... 294 Watts 1,488 Watts 1,552 Watts 1,920 Watts 3,540 Watts
GALAXY I-R GALAXY III-R GALAXY IV GALAXY V GALAXY VI
-------------------- --------------------- ------------------- --------------------- -------------------
Latin America/
Region Covered.. United States United States United States United States United States
Satellite....... HS 376 HS 601 HS 601 HS 376 HS 376
Expected End of
Useful Life(10).. 2006 2004 2005 2004 2003
Orbital Loca-
tion........... 133(degrees) W.L.(4) 95(degrees) W.L. 99(degrees) W.L. 125(degrees) W.L. 74(degrees) W.L.(4)
Transponders(5)
Ku-band(6)..... -- 16 @ 27 MHz 16 @ 27 MHz -- --
8 @ 54 MHz 8 @ 54 MHz
C-band(7)...... 24 @ 36 MHz 24 @ 36 MHz 24 @ 36 MHz 24 @ 36 MHz 24 @ 36 MHz
Usable Band-
width(8)....... 864 MHz 1,728 MHz 1,728 MHz 864 MHz 864 MHz
Output Power(9)
Ku-band........ -- 24 @ 63 Watts 24 @ 50 Watts -- --
C-band......... 24 @ 16 Watts 24 @ 16 Watts 24 @ 16 Watts 24 @ 16 Watts 24 @ 10 Watts
Total Output
Power.......... 384 Watts 1,896 Watts 1,584 Watts 384 Watts 240 Watts
GALAXY VIII-I GALAXY IX SBS-4 SBS-5 SBS-6
-------------------- --------------------- ------------------- --------------------- -------------------
Region Covered.. Latin America United States United States United States United States
Satellite....... HS 601HP HS 376 HS 376 HS 376 HS 393
Expected End of
Useful Life(10) 2012(12) 2010 (inclined)(13) 1999 2007
Orbital Loca-
tion........... 95(degrees) W.L. 123(degrees) W.L.(14) 77(degrees) W.L.(4) 123(degrees) W.L.(14) 74(degrees) W.L.(4)
Transponders(5)
Ku-band(6)...... 32 @ 24 MHz -- 10 @ 43 MHz 10 @ 43 MHz 19 @ 43 MHz
4 @ 110 MHz
C-band(7)....... -- 24 @ 36 MHz -- -- --
Usable Band-
width(8)....... 768 MHz 864 MHz 430 MHz 870 MHz 817 MHz
Output Power(9).
Ku-band......... 32 @ 115 Watts -- 10 @ 20 Watts 14 @ 20 Watts 19 @ 41 Watts
C-band.......... -- 24 @ 16 Watts -- -- --
Total Output
Power.......... 3,680 Watts 384 Watts 200 Watts 280 Watts 779 Watts
PAS-6(1)
----------------
Region Covered.. Atlantic Ocean
Satellite....... SS/L FS-1300
Expected End of
Useful Life(2). 2012(3)
Orbital Loca-
tion........... 43(degrees) W.L.
Transponders(5)
Ku-band(6)..... 36 @ 36 MHz
2 @ 64 MHz
C-band(7)...... --
Usable Band-
width(8)....... 1,296 MHz
Output Power(9)
Ku-band......... 24 @ 100 Watts
12 @ 110 Watts
C-band..........
Total Output
Power.......... 3,720 Watts
GALAXY VII
----------------
Region Covered.. United States
Satellite....... HS 601
Expected End of
Useful Life(10).. 2006
Orbital Loca-
tion........... 91(degrees) W.L.
Transponders(5)
Ku-band(6)..... 16 @ 27 MHz
8 @ 54 MHz
C-band(7)...... 24 @ 36 MHz
Usable Band-
width(8)....... 1,728 MHz
Output Power(9)
Ku-band........ 24 @ 50 Watts
C-band......... 24 @ 16 Watts
Total Output
Power.......... 1,584 Watts
BRASILSAT A1(11)
----------------
Region Covered.. United States
Satellite....... HS 376
Expected End of
Useful Life(10) (inclined)(13)
Orbital Loca-
tion........... 79(degrees) W.L.
Transponders(5)
Ku-band(6)...... --
C-band(7)....... 24 @ 36 MHz
Usable Band-
width(8)....... 864 MHz
Output Power(9).
Ku-band......... --
C-band.......... 24 @ 10 Watts
Total Output
Power.......... 240 Watts
7
SATELLITES UNDER DEVELOPMENT
PAS-6B(1) PAS-7(1) PAS-8(1) GALAXY X GALAXY XI
---------------- --------------------- -------------------- --------------------- -------------------
Region Covered.. Atlantic Ocean Indian Ocean Pacific Ocean United States United States
Expected
Launch(15)..... 1998 1998 1998 1998 1998
Satellite....... HS 601HP SS/L FS-1300(1) SS/L FS-1300(1) HS 601HP HS 702
Expected End of
Useful Life(13).. 2013(3) 2011(1) 2013(3) 2010 2013
Orbital Loca-
tion........... 43(degrees) W.L. 68.5(degrees) E.L.(4) 166(degrees) E.L.(4) 123(degrees) W.L.(14) 74(degrees) W.L.(4)
Transponders(5)
Ku-band(6)..... 32 @ 36 MHz 30 @ 36 MHz 24 @ 36 MHz 24 @ 36 MHz 16 @ 27 MHz
24 @ 36 MHz
C-band(7)...... -- 14 @ 36 MHz (4) 24 @ 36 MHz 24 @ 36 MHz 24 @ 36 MHz
Usable Band-
width(8)....... 1,152 MHz 1,584 MHz 1,728 MHz 1,728 MHz 2,160 MHz
Output Power(9)
Ku-band........ To be determined 30 @ 100 Watts 24 @ 100 Watts 24 @ 63 Watts 16 @ 140 Watts
24 @ 75 Watts
C-band......... -- 14 @ 50 Watts 24 @ 50 Watts 24 @ 20 Watts 24 @ 20 Watts
Total Output
Power.......... To be determined 3,700 Watts 3,600 Watts 1,992 Watts 4,520 Watts
PAS-9 PAS-1R
---------------- -------------------
Region Covered.. Indian Ocean United States
Expected
Launch(15)..... 1999 1999
Satellite....... HS 702 HS 702
Expected End of
Useful Life(13).. 2014(3) 2014(2)
Orbital Loca-
tion........... To be determined 45(degrees) W.L.(4)
Transponders(5)
Ku-band(6)..... 48 @ 36 MHz 36 @ 36 MHz
C-band(7)...... 12 @ 36 MHz 36 @ 36 MHz
Usable Band-
width(8)....... 2,160 MHz 2,592 MHz
Output Power(9)
Ku-band........ To be determined To be determined
C-band......... To be determined To be determined
Total Output
Power.......... To be determined To be determined
- --------
(1) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors."
(2) The information for PAS-1, PAS-2, PAS-3 and PAS-4 is based on fuel level
estimates at October 31, 1997. The information for PAS-5 and PAS-6 is
based on the terms of their satellite contracts and their launch
contracts. Anomalies have begun to occur on PAS-1, which is beyond its
construction design life. As a cautionary measure, PAS-1R, a replacement
satellite for PAS-1, is planned for launch in 1999.
(3) The use of certain launch vehicles may yield significantly longer fuel
life for these satellites. The chart shows the conservative design life
for such satellites. Actual life may be longer in such cases. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors" for a discussion of recent events affecting PAS-
6.
(4) PanAmSat has received conditional regulatory approval for the orbital slot
of 72(degrees) E.L. from the FCC, which approval is subject to a full
financial showing and demonstration of consultation with Intelsat, an
international treaty organization of 142 member nations ("Intelsat"). In
addition, PanAmSat has requested approval to co-locate a satellite with
PAS-4 at 68.5(degrees) E.L. PanAmSat intends to locate PAS-7 at the
68.5(degrees) E.L. orbital location if its application for such orbital
location is granted, in which case the 72(degrees) E.L. orbital slot could
be used for another satellite. If PAS-7 is to be co-located with PAS-4, it
is unlikely that PAS-7 will be permitted to operate its C-band
transponders for transmitting to or from Russia until certain coordination
issues are resolved with the Russian Federation. PanAmSat tentatively
plans to locate PAS-8 at 166(degrees) E.L. and has an application for that
orbital slot pending with the FCC. The Company has not yet filed an
application with the FCC for PAS-1R. The FCC gives a "replacement
expectancy" with respect to the use of the same orbital location at the
same frequencies for replacement satellites. This replacement expectancy
may increase the likelihood that PanAmSat will be able to expand the
frequencies or coverages employed by PAS-1 at 45(degrees) W.L.; however,
no assurance can be given that the Company will be successful at expanding
such frequencies and coverages. SBS-4's FCC license expired in 1994, and
the satellite is operated pursuant to grants of special temporary
authority that are renewed periodically. PanAmSat has filed an application
with the FCC for Galaxy II (H) (to be known as Galaxy XI), a hybrid
satellite that will replace Galaxy VI (a C-band satellite) and SBS-6 (a
Ku-band satellite) at 74(degrees) W.L. Currently, the Company has not
identified any future orbital locations for Galaxy VI and SBS-6. Once
slots have been identified, the Company plans to apply for temporary
authority to operate at such slots until other satellites are authorized
for, and commence operations at, such slots.
(5) Satellite transponders receive transmissions from Earth and relay them
back to Earth. Transponders are composed of receivers, preamplifiers,
power amplifiers, frequency shifters and a host of other electronics.
(6) Ku-band is a range of relatively high frequencies (between approximately
12 GHz and 14 GHz) used for commercial satellite communications. Ku-band
is widely used for distribution of broadcast television and DTH services,
as well as business communications, and allows the use of relatively small
receive antennas.
8
(7) C-band is a range of relatively low frequencies (between approximately 4
GHz and 6 GHz) used for commercial satellite communications. C-band is
used primarily for cable and broadcast distribution and requires the use
of relatively large receive antennas on the ground.
(8) Bandwidth is one measure of the information carrying capacity of a
transponder. A transponder's bandwidth and power together primarily
determine the amount of information that can be carried.
(9) Output power is the transmitter power of each transponder and is not a
measure of the signal power received on Earth. Total output power is the
aggregate power of all the transponders on the satellite. High output
power allows for the use of smaller and less expensive receiving antennas
to obtain a satellite signal. See footnote 1.
(10) The expected end of useful life for each of the Galaxy operational
satellites (other than SBS-4) is based on fuel level estimates at October
30, 1997.
(11) On September 28, 1995, PanAmSat's predecessor-in-interest, Hughes
Communications Galaxy, Inc. ("HCG"), filed an application for interim
authority to use C-band capacity on Brasilsat A1 for a two-year period to
help alleviate a shortage of C-band capacity in the United States. At
that time, Brasilsat A1 was located at 63(degrees) W.L., operating in
inclined orbit, and carrying no traffic. HCG also asked that the FCC
allow all U.S. earth station licensees to communicate with the Brasilsat
A1 satellite during the period of its interim authority pursuant to the
ALSAT designation in their licenses. On June 14, 1996, HCG filed an
amendment to its application for interim authority to use C-band capacity
on Brasilsat A1. As HCG explained at that time, many of its customers
were unable to communicate with Brasilsat A1 because the 63(degrees) W.L.
orbital location did not provide good elevation angles for earth stations
located on the west coast of the U.S. and because some earth stations
could not be steered to communicate with satellites as far east as
63(degrees) W.L. Consequently, HCG asked that the FCC grant it interim
authority to use C-band capacity on Brasilsat A1 from the 79(degrees)
W.L. orbital location rather than the 63(degrees) W.L. location
originally requested. To accommodate the future launch of GE Americom's
GE-5 satellite, which the FCC has authorized to use the 79(degrees) W.L.
orbital location, HCG agreed to cease operations on Brasilsat A1 at that
location upon the launch of GE-5. On December 24, 1996, the FCC granted
HCG interim authority to use C-band capacity on Brasilsat A1 at
79(degrees) W.L. as requested in HCG's amended application, until
December 31, 1997, or the launch of the GE-5 satellite, whichever comes
first. On December 11, 1997, PanAmSat requested an extension of the
interim authority for Brasilsat A1.
(12) The expected end of useful life for each of the indicated satellites is
based on the terms of the relevant satellite construction contract and
the terms (with respect to Galaxy VIII-i, Galaxy X and Galaxy XI) or
anticipated terms (with respect to PAS-1R or PAS-9) of the relevant
satellite launch arrangement.
(13) Satellite operators may opt to extend the life of a satellite beyond its
useful life by allowing it to move into a fuel-conserving mode called
"inclined orbit." When a satellite is put into inclined orbit, only east-
west station-keeping is continued. While in this mode, the satellite
moves in a figure-8 crossing the equator twice daily. The uncorrected
north-south inclination increases over time and customers must retrofit
their existing ground equipment or purchase new equipment to enable them
to track the movement of the satellite. After reaching a certain degree
of north-south inclination, tracking antennas can no longer reliably
follow the movement of the satellite and its useful life ends.
(14) Galaxy X (a C-band/Ku-band hybrid) will replace SBS-5 (a Ku-band
satellite) at 123(degrees) W.L. Galaxy IX (a C-band satellite) is an
expansion satellite that is authorized to operate at 127(degrees) W.L.
The FCC has authorized Galaxy IX to operate temporarily at 123(degrees)
W.L. until Galaxy X is launched and occupies that orbital location. The
decision granting the Galaxy IX application was conditioned on
relinquishing any right to the continued operation of SBS-5 once Galaxy X
begins commercial operations. The Company plans to request that the FCC
grant PanAmSat interim authority to move SBS-5 to 127(degrees) W.L. when
Galaxy IX relocates there, subject to coordination with satellites in
adjacent locations. The interim authority would permit SBS-5 to occupy
127(degrees) W.L. until the FCC licenses another satellite for
127(degrees) W.L. and the satellite commences operations at that orbital
location. There can be no assurance that the FCC will grant PanAmSat's
request to relocate SBS-5 to 127(degrees) W.L. on such basis.
(15) Future launch dates are based on PanAmSat estimates.
9
SATELLITE PROCUREMENT
The Company currently has seven satellites under construction and
development. The Company has agreements with Hughes Space and Communications
Company ("HSC"), an affiliate of the Company, for construction of Galaxy X,
Galaxy XI, PAS-1R, PAS-6B and PAS-9, and with Space Systems/Loral, Inc.
("SS/Loral") for the construction of PAS-7 and PAS-8. These 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 such contract price to be paid 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 liquidated damage
payments in the event of late delivery due to the fault of the manufacturer.
Each contract provides for a limited pre-launch warranty that a satellite will
be free from any defects and conform to technical specifications. The
satellite construction contracts contain provisions that would enable the
Company to terminate such contracts both with and without cause. If terminated
without cause, the Company would forfeit its progress payments and be subject
to termination payments 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 liquidated damages as specified in such contracts.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Risks Associated with Technology."
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 provide that the Company may terminate such contract at its option,
subject to payment by the Company of a specified termination liability 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 relaunch. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors--Risks
Associated with Technology."
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 others.
INSURANCE
Launch Insurance. Under PanAmSat's satellite construction contracts, the
contractor generally bears the risk of loss of a satellite during the
construction phase up to delivery, at which time risk of loss passes to
PanAmSat and launch insurance coverage begins. PanAmSat generally maintains
launch insurance with respect to its satellites in an amount approximately
equal to the construction, launch and insurance costs for each of such
satellites.
Coverage under PanAmSat's launch insurance includes claims arising from
occurrences up to three years after launch, except for PAS-6. 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 such three-year period, and, subject to
certain deductibles, partial payment for losses of less than 50% of the
satellite's communications capacity within such period. Such insurance
policies include standard commercial launch insurance provisions and customary
exclusions including (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
10
PanAmSat. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Risks Associated with
Technology" for a description of certain insurance arrangements with respect
to PAS-6.
In-orbit Insurance. PanAmSat typically obtains in-orbit insurance in advance
of the expiration of the relevant launch insurance policy, and coverage
thereunder commences upon expiration of such launch insurance policy. PanAmSat
generally obtains in-orbit insurance with respect to its satellites in an
initial amount approximately equal to the construction, launch and insurance
costs for each of such satellites. The amount of in-orbit insurance in force
with respect to each of PanAmSat's satellites generally decreases over time,
usually on straight line basis over the estimated useful life of such
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 revenues from a satellite
when revenues have been recognized in connection with an outright sale, sales-
type lease or other arrangement with performance warranty provisions with
respect to such satellite.
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
losses of communications capacity are calculated in the same manner as under
the launch insurance policies.
PanAmSat's in-orbit policies typically include customary commercial
satellite insurance exclusions, including, among other things, damage or loss
caused by military actions or acts of war, anti-satellite devices, government
action, frequency interference or nuclear reaction.
SALE LEASEBACK ARRANGEMENTS
The Company entered into sale-leaseback arrangements with respect to certain
transponders on SBS-6, Galaxy VII and Galaxy IIIR in December 1991, September
1993 and February 1996, respectively. Pursuant to such arrangements, Galaxy
sold 19 Ku-band transponders on SBS-6, 16 Ku-band and 14 C-band transponders
on Galaxy VII and 24 Ku-band transponders on Galaxy IIIR. Concurrently with
such sales, Galaxy agreed to lease back such transponders on terms that
required it to make scheduled semi-annual lease payments and operate and
maintain such transponders and the applicable satellites for terms of 11.2
years, 11 years and 6.9 years, respectively. As a result of the Merger,
PanAmSat succeeded to these arrangements. At the end of each lease's initial
term, the Company has the option to renew such lease through the end of the
applicable satellite's useful life. The Company's obligations under each sale-
leaseback arrangement are guaranteed by General Motors Acceptance Corporation
(as successor in interest to Hughes Electronics Corporation) ("GMAC"). In
connection with the Merger, the Company agreed to pay and indemnify GMAC for
performing any of its obligations under such guarantees.
The Company has an option under such leases to repurchase such transponders
prior to the end of the respective lease terms as follows: $152 million in
1998 (for which an early buy-out option for $96.6 million relating to
transponders on SBS-6 was exercised by the Company in January 1998) and $366
million in 1999.
Each of the sale-leaseback leases imposes limits on the Company's ability to
move the applicable satellite to a different orbital location other than in
certain specified situations and imposes limitations on the Company's ability
to consolidate or merge with another entity unless certain circumstances are
satisfied. The Company is also required under the terms of each such lease to
maintain in-orbit insurance on the applicable satellite. In addition, upon the
loss of one or more transponders, the Company is required either to pay a
specified loss amount or provide replacement transponder capacity to the
relevant lessor.
11
SALES AND MARKETING
PanAmSat's sales and marketing activities are separated into three general
service areas: full-time program distribution; part-time and ad hoc broadcast;
and business communications and long-distance telephony.
PanAmSat's Greenwich headquarters has a sales and marketing department for
each service area. PanAmSat also has sales and marketing offices in Long
Beach, California, Coral Gables, Florida, Sydney, Australia, London, England,
Tokyo, Japan and Johannesburg, South Africa, which provide integrated sales
and marketing for all three service areas in their respective regions. The
senior executive officers of PanAmSat have been 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.
OTHER SATELLITE OPERATORS
PanAmSat's satellite competitors are divided among three categories: (i)
global competitors; (ii) companies that intend to create global satellite
systems; and (iii) regional or domestic satellite operators.
PanAmSat's only global competitor is Intelsat, an international treaty
organization of 142 member nations based in Washington, D.C. that provides
global satellite capacity primarily through its members called signatories.
Comsat Corporation ("Comsat") is the U.S. signatory and is the only company
permitted to provide Intelsat satellite capacity in the United States.
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. According to Intelsat's 1996 annual
report, video services comprised 26 percent of Intelsat's operating revenue.
Intelsat generally provides capacity directly to its signatories which then
market such capacity to their customers.
In recent years, Intelsat has launched higher-powered satellites that are
capable of providing video distribution, DTH and private business network
services. In addition, many countries now permit companies other than the
Intelsat signatory to market Intelsat satellite capacity in that country.
Intelsat and its signatories have announced an intention to create an
affiliate company that will own and operate high-power satellites designed for
DTH and other high-growth services and that will directly market those
services to end users. In February 1998, Intelsat announced a plan that would
spin off six satellites and related resources to a new commercial company that
would effectively be controlled by current Intelsat signatories. Comsat has
also requested approval from the FCC to be regulated as a non-dominant
carrier.
In addition to Intelsat, PanAmSat experiences competition from companies
that have announced plans to create global satellite systems, primarily
through acquisitions, partnerships or equity interests in domestic or regional
satellite systems. These companies include Loral Space and Communications Ltd.
("Loral"), GE American Communications, Inc. ("GE Americom") and Lockheed
Martin Corp. For instance, in 1997 Loral acquired AT&T Skynet (a domestic U.S.
satellite operator), announced plans to acquire Orion Network Systems (a
transatlantic satellite operator with plans to launch additional international
satellites in other regions) and entered into a strategic partnership to own
and operate Satelites Mexicanos, S.A. de C.V. (a Mexican satellite system that
provides satellite capacity in Latin America).
PanAmSat also experiences competition from 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
12
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
such market.
PROPOSED 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 usually takes approximately
three or more years and costs approximately $200 million to $250 million. 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 "--Government Regulation." While the
trend around the world is to liberalize these regulatory requirements, at
present obtaining the necessary licenses involves significant time, expense
and expertise.
The Company believes that low-earth-orbit satellite systems under
development, such as Celestri, Globalstar, Iridium, Skybridge and Teledesic,
are not competitors of PanAmSat. These low-earth-orbit 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.
SERVICE PROVIDERS
In some cases, PanAmSat experiences competition for its value-added
satellite services from companies that also provide value-added 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 as a
value-added service. In addition, brokers in the United States provide value-
added special events services to broadcasters, businesses and educational
institutions that also could be provided by PanAmSat. Many of these value-
added service providers and brokers are PanAmSat customers for their satellite
capacity.
OPTICAL FIBER CABLES
Optical fiber cables generally do not compete with PanAmSat's services. The
primary use of optical fiber cables is to carry high-volume telephony
communications on a point-to-point basis. Transcontinental 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 which require transportable uplink earth
stations.
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; (iii) the
Intelsat consultation process; and (iv) the frequency coordination process of
the International Telecommunications Union (the "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 earth stations; (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
13
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; must pay annual regulatory fees that
are intended to defray the FCC's regulatory expenses; and, to the extent
PanAmSat is deemed to be providing interstate telecommunications, must
contribute to funds used to support universal service.
Authorization to Construct, Launch, and Operate Satellites. The FCC grants
authorizations to satellite operators who meet its legal, technical and
financial qualification requirements. Under the FCC's financial qualification
rules, an applicant must demonstrate that it has sufficient funds to
construct, launch, and operate for one year each requested satellite. Licenses
are issued for an initial ten-year term, and may be extended by the FCC,
although it may not be possible for satellites operating beyond their initial
ten-year term to remain in the same orbital location or even, in all cases, to
be provided a new orbital location. 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 seventeen satellites operating in
the C-band, the Ku-band, or both bands. In addition, PanAmSat has a final
authorization to operate nine satellites in the Ka-band (one Atlantic Ocean
Region ("AOR"), to be located at 58(degrees) W.L.; two Pacific Ocean Region
("POR"), to be located at 149(degrees) E.L. and 173(degrees) E.L.; four Indian
Ocean Region ("IOR"), to be located at 36(degrees) E.L., 40(degrees) E.L.,
48(degrees) E.L., and 124.5(degrees) E.L.; and two U.S., to be located at
103(degrees) W.L. and 125(degrees) W.L.). PanAmSat has requested authority
also to operate five of these satellites in the BSS band, and to operate three
other satellites exclusively in the BSS band, but FCC processing of PanAmSat's
requests must await the resolution of issues concerning the ITU's BSS band
plan.
In addition to the above final authorizations, PanAmSat has a conditional
authorization for an IOR satellite, to be located at 72(degrees) E.L. In order
to finalize this authorization, PanAmSat must make a full financial showing
and complete its consultation with Intelsat for the satellite.
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 a satellite to be relocated to a different orbital location
if it determines that such a change is in the public interest, but the FCC has
rarely used this authority.
PanAmSat operates two additional satellites under interim or special
temporary authority. The first of these satellites, Brasilsat A1, is providing
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. The second satellite, SBS-4,
exceeded its regular license term in 1994 and, since that time, has operated
at 77(degrees) W.L. under successive grants of special temporary authority.
Both Brasilsat A1 and SBS-4 must be relocated once the U.S. satellites
assigned to 79(degrees) W.L. and 77(degrees) W.L., respectively, are launched.
Although PanAmSat has requested authority to relocate SBS-4 to 79(degrees)
W.L., there can be no assurance that either of the satellites will be
authorized to operate at another orbital location.
PanAmSat has filed the following applications for additional or replacement
satellites in the C-band and/or the Ku-band: (1) applications for two hybrid
C/Ku-band satellites (one POR and one U.S.), and one Ku-band satellite (U.S.),
that are now ripe for FCC action; (2) applications for two hybrid C/Ku-band
satellites (one IOR and one U.S.); and (3) an application for a hybrid C/Ku-
band satellite to replace its separate C-band and Ku-band satellites at
74(degrees) W.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 81(degrees) W.L. orbital location.
In 1996, the FCC modified its rules for processing international satellite
system applications. Under the new rules, FCC action on one IOR application
and one U.S. application would be substantially delayed. PanAmSat has
requested a waiver of these rules.
14
PanAmSat has filed applications for six additional Ka-band satellites (two
AOR; two POR; and two IOR), which will be processed in the second Ka-band
satellite processing round. Finally, PanAmSat has applied for twelve V-band
satellites (two AOR, six IOR, and four 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 therefore 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
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 non-
discrimination requirements.
Other Authorizations. PanAmSat Asia Carrier Services, Inc. ("PACS"), a
wholly owned subsidiary of the Company, intends to apply for a common carrier
license in Australia. If such license is granted, PACS will be subject to rate
regulation, tariffing and other possible 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 both U.S. domestic and international
services. Due to a restriction in the FCC's rules, however, the transponders
on PAS-5 that operate in the 10.7-11.7 GHz and 12.75-13.25 GHz frequency bands
may be used solely for international service. PanAmSat has requested a waiver
of this restriction.
Coordination Requirements. Orion Satellite Corporation ("Orion") has an FCC
authorization for the orbital location adjacent to PAS-1. Orion has taken the
position that PanAmSat must accept interference from Orion's satellite because
PAS-1 does not have "full frequency reuse," while PanAmSat has disputed this
position. The FCC has suggested that Orion's position is incorrect, but stated
that it will not rule definitively on the issue unless the parties are unable
to resolve their differences by frequency coordination. Orion announced in
1993 that it had cancelled its contract for construction of the satellite
which was intended for this orbital slot but reaffirmed its intention to build
such satellite at an unspecified later date.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Regulatory Risks" generally and for a
description of certain frequency coordination issues affecting PAS-6 and PAS-
7.
REGULATION BY NON-U.S. NATIONAL TELECOMMUNICATIONS AUTHORITIES
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
technical consultation with Intelsat before providing services on a given
satellite. See "--Intelsat Consultation." 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.
15
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 provide voice, data or video services for their
own use or for third-party use; to own and operate private earth station
equipment; and 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 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 such markets, a single
entity (often the government-owned Posts, Telephone and Telegraph authority)
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, rendering the provision of service from
PanAmSat and other U.S.-licensed satellites more complicated.
Many countries also permit satellite carriers to provide services directly
to end users. In others, however, a license is required. PanAmSat has obtained
licenses in Argentina, Columbia, Ecuador, France, Germany, Japan, Pakistan and
the United Kingdom to provide certain services directly to end users. Through
its wholly-owned subsidiary, PACS, the Company intends to apply for a carrier
license in Australia.
Notwithstanding the wide variety of regulatory regimes extant in the
countries in which PanAmSat provides service, PanAmSat believes that it and
its customers are in compliance in all material respects with all applicable
laws and regulations.
Intelsat Consultation. In connection with its international satellite
services, PanAmSat must complete a consultation process with Intelsat under
Article XIV of the Intelsat Agreement to assure that use of any new satellite
will not cause Intelsat technical harm. To provide domestic satellite services
in any country, PanAmSat must complete a technical consultation.
The FCC is responsible for ensuring that PanAmSat has undergone the
necessary consultations and that it operates in accordance with the technical
parameters forming the basis for each Article XIV consultation. If PanAmSat
changes the terms (either technical or service) of its operation in a
significant way, it may need to reconsult 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 and PAS-8. 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--Regulatory Risks."
16
EMPLOYEES
At December 31, 1997, PanAmSat had approximately 450 full-time employees.
PanAmSat believes that its relations with its employees are good.
ITEM 2. PROPERTIES
PanAmSat's executive offices are located in Greenwich, Connecticut. PanAmSat
leases its executive offices pursuant to a lease that will expire on March 31,
2003. PanAmSat currently operates seven teleports and operations 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; Long Beach, California;
Napa, California; and Spring Creek, New York. PanAmSat's operations centers
located in Ellenwood and Long Beach provide other services, such as customer
service support, in addition to teleport operations. PanAmSat owns its
Homestead, Florida; Spring Creek, New York; Napa, California; and Fillmore,
California teleports. PanAmSat leases its Castle Rock, Colorado and Ellenwood,
Georgia teleports, and its Long Beach, California teleport and operations
center.
PanAmSat also leases office space for its sales and marketing offices in
Washington, D.C.; Coral Gables, Florida; Sydney, Australia; Johannesburg,
South Africa; London, England; and Tokyo, Japan. PanAmSat's leases for its
foreign offices have been entered into upon terms that PanAmSat deems to be
reasonable and customary.
ITEM 3. LEGAL PROCEEDINGS
On or about October 25, 1996, an action was commenced by Comsat against the
Company, News Corporation, Ltd. ("News") and Grupo Televisa, S.A.,
("Televisa") in the United States District Court for the Central District of
California. The complaint alleges that News wrongfully terminated an agreement
with Comsat for the lease of transponders on an Intelsat satellite over the
term of a five year lease, breached certain alleged promises related to such
agreement, and breached its alleged obligations under a tariff filed by Comsat
with the FCC. As to the Company, the complaint alleges that the Company, alone
and in conspiracy with Televisa, intentionally interfered with the alleged
agreement and with Comsat's economic relationship with News. The complaint in
the present action seeks actual and consequential damages, and punitive or
exemplary damages, in an amount to be determined at trial. On December 11,
1996 the Company, News and Televisa filed motions to dismiss the action on
various grounds, including that the FCC has primary jurisdiction over the
dispute, that Federal law preempts the claims asserted against the Company and
Televisa, that the claims asserted against Televisa and the Company are not
recognized by Federal law, that the claims against the Company and Televisa
fail to state a cause of action and that because the claims against the
Company and Televisa depend upon the existence of enforceable rights under the
tariff Comsat filed with the FCC, the claims fail if the FCC determines that
Comsat has no such rights. In this regard, in April 1996, News filed a
complaint with the FCC challenging Comsat's tariff. By order adopted September
15, 1997, the FCC dismissed that complaint without prejudice. On January 27,
1997, the court denied defendants' motions to dismiss the action. The trial is
scheduled to begin on November 17, 1998. The Company believes this action is
without merit and intends to vigorously contest this matter, although there
can be no assurance that PanAmSat will prevail. If PanAmSat were not to
prevail, the amounts involved could be material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1997, no matters were submitted to a
vote of stockholders through the solicitation of proxies or otherwise.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PanAmSat Common Stock was listed on the Nasdaq National Market in connection
with the Merger 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 and the Dow Jones News Retrieval Service.
1997 HIGH LOW
---- -------- --------
Second Quarter (from May 19, 1997)........................... $30- 3/8 $27- 1/2
Third Quarter................................................ $44- 1/2 $29- 1/4
Fourth Quarter............................................... $46- 1/4 $36- 7/8
At March 24, 1998, there were approximately 85 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.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of Galaxy (as predecessor) as of
December 31, 1996, 1995 and 1994 and for each year of the three year period
ended December 31, 1996 have been derived from the audited financial
statements of Galaxy. The selected financial data set forth below as of
December 31, 1993 and for the year ended December 31, 1993 have been derived
from the unaudited financial statements of Galaxy which, in the opinion of
management, include all adjustments necessary (consisting only of normal
recurring adjustments) for a fair and consistent presentation of such
information. The selected financial data as of and for the year ended December
31, 1997 have been derived from the audited consolidated financial statements
of PanAmSat appearing elsewhere in this Annual Report, and should be read in
conjunction with such financial statements and notes related thereto and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PANAMSAT
HISTORICAL GALAXY HISTORICAL DATA
DATA(1) (AS PREDECESSOR)
------------ -------------------------------------------
YEAR ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
------------ ---------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DA-
TA:
Total revenues.......... $ 629,939 $ 482,770 $ 386,126 $ 328,243 $220,247
----------- ---------- ---------- --------- --------
Costs and expenses
Cost of outright sales
and sales-type leases.. 20,476 52,969 49,616 45,747 34,530
Leaseback expense, net
of deferred gain....... 61,907 59,927 36,597 36,617 36,576
Depreciation and amorti-
zation................. 149,592 58,523 76,522 54,126 52,025
Direct operating costs.. 61,199 34,794 29,931 33,627 35,034
Selling, general & ad-
ministrative........... 42,561 34,119 30,146 51,595 19,278
----------- ---------- ---------- --------- --------
Operating income........ 294,204 242,438 163,314 106,531 42,804
Interest expense,
net(2)................. (30,973) (4,903) (5,828) (6,826) (5,848)
Other income............ 385 2,184 7,892 3,885 44,876
----------- ---------- ---------- --------- --------
Income before taxes, mi-
nority interest
and extraordinary item. 263,616 239,719 165,378 103,590 81,832
Income tax expense...... 117,325 89,895 62,017 38,846 30,687
Minority interest....... 12,819 -- -- -- --
Extraordinary item(3)... 20,643 -- -- -- --
----------- ---------- ---------- --------- --------
Net income.............. $ 112,829 $ 149,824 $ 103,361 $ 64,744 $ 51,145
=========== ========== ========== ========= ========
OTHER FINANCIAL DATA:
EBITDA(4)............... $ 444,181 $ 303,145 $ 247,728 $ 164,542 $139,705
EBITDA margin........... 71% 63% 64% 50% 63%
Net cash provided by op-
erating activities..... 286,726 151,238 83,690 110,490 --
Net cash used in invest-
ing activities......... (1,414,972) (42,122) (270,396) (109,560) --
Net cash provided by
(used in) financing
activities............. 1,219,956 (109,122) 186,720 (1,126) --
Capital expenditures.... 541,879 308,735 280,543 114,660 111,104
Total assets............ 5,682,434 1,275,516 1,137,978 868,408 850,640
Total long-term obliga-
tions.................. 3,016,680 394,187 290,963 319,620 342,070
Total stockholders' eq-
uity................... 2,560,836 -- -- -- --
- --------
(1) Includes financial data for PanAmSat International from May 16, 1997 (the
effective date of the Merger). See "Item 1. Business--Overview--The
Merger" for a description of the Merger.
(2) Net of capitalized interest of $80.5 million, $14.6 million, $10.1
million, $5.1 million and $1.6 million for the years ended December 31,
1997, 1996, 1995, 1994 and 1993, respectively, and net of interest income
of $28.0 million in 1997.
(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
communications 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.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of PanAmSat should be read in conjunction with the financial
data and the Consolidated Financial Statements appearing elsewhere in this
Annual Report.
The Company commenced operations on May 16, 1997 upon the Merger. Prior to
the Merger, the Company was an inactive corporation formed solely for the
purpose of consummating the Merger, and each of PanAmSat International and
Galaxy was primarily engaged in the business of providing satellite-based
communication services.
RESULTS OF OPERATIONS
The Company's results of operations as reported incorporate PanAmSat
International's activity commencing May 16, 1997, the effective date of the
Merger. Since this represents only seven and one-half months of activity for
PanAmSat International in 1997, management has determined that for comparative
purposes, it would be more meaningful to present the information shown below
on a "pro forma" basis reflecting the Merger as though it had occurred at the
beginning of the respective periods presented (excluding the impact of
PanAmSat International's $225 million gain on the sale of its direct-to-home
television rights in certain foreign markets (the "DTH Options") to an
affiliate concurrent with the Merger, as well as certain professional and
advisory fees and other expenses incurred in connection with the Merger
totaling $31.6 million, both of which are non-recurring items that are not
indicative of the Company's ordinary course of business). The pro forma
results are not necessarily indicative of the combined results that would have
occurred had the Merger actually occurred at the beginning of 1996.
PRO FORMA
(UNAUDITED) AS REPORTED
------------------ ----------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Operating leases, satellite
services and other......... $684,663 $566,027 $558,622 $319,084 $236,382
Outright sales and sales-
type leases................ 71,317 163,686 71,317 163,686 149,744
-------- -------- -------- -------- --------
Total revenue.............. 755,980 729,713 629,939 482,770 386,126
-------- -------- -------- -------- --------
COSTS AND EXPENSES
Cost of outright sales and
sales-type leases.......... 20,476 52,969 20,476 52,969 49,616
Leaseback expense, net of
deferred gain.............. 61,907 59,927 61,907 59,927 36,597
Direct operating and SG&A
costs...................... 130,076 136,116 103,760 68,913 60,077
Depreciation and amortiza-
tion....................... 197,116 181,100 149,592 58,523 76,522
-------- -------- -------- -------- --------
Total...................... 409,575 430,112 335,735 240,332 222,812
-------- -------- -------- -------- --------
Income from operations...... 346,405 299,601 294,204 242,438 163,314
Interest expense, net....... 68,981 125,308 30,973 4,903 5,828
Other income................ (385) (2,184) (385) (2,184) (7,892)
-------- -------- -------- -------- --------
Income before income taxes,
minority interest and
extraordinary item......... 277,809 176,477 263,616 239,719 165,378
Income tax expense.......... 134,343 92,549 117,325 89,895 62,017
-------- -------- -------- -------- --------
Income before minority
interest and extraordinary
item....................... 143,466 83,928 146,291 149,824 103,361
Minority interest,
subsidiary preferred stock
dividend................... 24,838 28,474 12,819 -- --
-------- -------- -------- -------- --------
Income before extraordinary
item....................... 118,628 55,454 133,472 149,824 103,361
Extraordinary item: loss on
extinguishment of debt, net
of tax..................... 20,643 -- 20,643 -- --
-------- -------- -------- -------- --------
Net income.................. $ 97,985 $ 55,454 $112,829 $149,824 $103,361
-------- -------- -------- -------- --------
Earnings per share--basic
and diluted................ $ 0.66 $ 0.37
20
CONSOLIDATED RESULTS
1997 COMPARED TO 1996 (PRO FORMA AND AS REPORTED)
The following discussion of 1997 versus 1996 performance is primarily based
on pro forma results. Pro forma results for 1997 and 1996 and as reported
results since the Merger date reflect the impact of the acquisition of
PanAmSat International, including the use of purchase accounting. Comparisons
of as reported results reflect significant increases in amortization of
intangible assets, interest expense, the effective income tax rate and shares
outstanding arising from the Merger.
Revenues. Pro forma revenues increased $26.3 million, or 4%, to $756.0
million in 1997 from $729.7 million in 1996. Pro forma video services revenues
increased $88.4 million, or 17%, to $607.6 million in 1997 from $519.2 million
in 1996, principally as a result of increased service agreements associated
with available transponder capacity, increased ad hoc revenue associated with
significant international news events and increased revenues associated with
DTH services. Pro forma telecommunications services revenues decreased $43.1
million, or 26%, to $123.2 million in 1997 from $166.3 million in 1996. The
decrease was primarily due to less outright sales and sales-type lease
activity during 1997. Pro forma satellite services and other revenues
decreased $19.0 million, or 43%, to $25.2 million in 1997 from $44.2 million
in 1996 principally due to a decrease in ground services sales.
The pro forma revenue increase can also be analyzed based on the type of
agreement. Pro forma revenues from sales and sales-type leases decreased to
$71.3 million in 1997 from $163.7 million in 1996. The decrease was
attributable to a lower volume in 1997 relative to 1996 of outright sales and
sales-type leases. Pro forma revenues from operating leases of transponders,
satellite services and other increased $118.7 million, or 21%, to $684.7
million in 1997 from $566.0 million in 1996, due primarily to additional
transponder capacity placed in service.
As reported revenues increased $147.1 million, or 30%, to $629.9 million in
1997 from $482.8 million in 1996, primarily due to the impact of the Merger,
and also due to increased service agreements associated with available
transponder capacity.
Cost of Outright Sales and Sales-Type Leases of Transponders. Pro forma cost
of outright sales and sales-type leases of transponders decreased $32.5
million, or 61%, to $20.5 million in 1997 from $53.0 million in 1996, due to
the decrease in outright sales and sales-type leases.
Leaseback Expense, Net of Deferred Gain. Pro forma leaseback expense, net of
deferred gain, increased $2.0 million, or 3%, to $61.9 million in 1997 from
$59.9 million in 1996.
Direct Operating and Selling, General and Administrative Costs. Pro forma
direct operating and selling, general and administrative costs decreased $6.0
million, or 4%, to $130.1 million in 1997 from $136.1 million in 1996.
Depreciation and Amortization. Pro forma depreciation and amortization
increased $16.0 million, or 9%, to $197.1 million in 1997, from $181.1 million
in 1996, due primarily to depreciation expense associated with additional
transponder capacity placed in service.
As reported depreciation and amortization increased $91.1 million, or 156%,
to $149.6 million in 1997, from $58.5 million in 1996. In addition to the
impact of the Merger, the increase was a result of depreciation expense
associated with additional transponder capacity placed in service.
Income from Operations. Pro forma income from operations increased $46.8
million, or 16%, to $346.4 million in 1997, from $299.6 million in 1996. The
increase was primarily due to the increase in revenues and the decrease in
cost of outright sales and sales-type leases.
Interest Expense, Net. Pro forma interest expense, net decreased $56.3
million, or 45%, to $69.0 million in 1997, from $125.3 million in 1996. The
decrease in pro forma interest expense, net was due to increased
21
interest income earned on marketable securities coupled with reduced interest
expense reflecting larger amounts of interest capitalized on satellites under
construction which are expected to be launched in 1998 and 1999.
Income Tax Expense. Pro forma income tax expense increased $41.8 million, or
45%, to $134.3 million in 1997, from $92.5 million in 1996. The increase in
pro forma income tax expense was principally due to the increase in taxable
income. The pro forma tax rates for 1997 and 1996 of 48% and 52%,
respectively, are higher than the statutory rate due to the fact that goodwill
amortization attributable to the Merger is not deductible for tax purposes.
Minority Interest. Pro forma minority interest, representing preferred stock
dividends of PanAmSat International, decreased $3.7 million to $24.8 million
in 1997 from $28.5 million in 1996. The decrease was due to the conversion of
PanAmSat International's 12 3/4% Mandatorily Exchangeable Senior Redeemable
Preferred Stock due 2005 into 12 3/4% Senior Subordinated Notes due 2005 in
the third quarter of 1997 and the related termination of dividend payment
obligations.
Extraordinary Item. The Company recorded an extraordinary charge of $20.6
million ($34.3 million before taxes) during 1997 related to the early
extinguishment of certain indebtedness of PanAmSat's subsidiaries. The charge
principally represented the excess of the price paid for the debt over its
carrying value, net of any deferred financing costs and fair value adjustments
recognized in connection with the Merger.
1996 COMPARED TO 1995 (AS REPORTED)
Revenues. Revenues increased $96.7 million, or 25%, to $482.8 million in
1996 from $386.1 million in 1995. Video services revenues increased $78.5
million, or 33%, to $314.4 million in 1996 from $235.9 million in 1995,
principally as a result of additional transponder capacity with the successful
launch of Galaxy III-R and Galaxy IX. Telecommunications services revenues
increased $28.0 million, or 28%, to $126.4 million in 1996 from $98.4 million
in 1995. The increase was primarily due to an increase in the full and
occasional use of SBS 6, Galaxy IV and Galaxy VII Ku-band transponders.
Satellite services and other revenues decreased $9.8 million, or 19%, to $42.0
million in 1996 from $51.8 million in 1995 principally due to a decrease in
ground service sales.
The revenue increase can also be analyzed based on the type of agreement.
Revenues from sales and sales-type leases increased to $163.7 million in 1996
from $149.7 million in 1995. The increase was attributable to higher interest
income on sales-type leases offset by a lower volume in 1996 relative to 1995
of outright sales and sales-type leases of transponders previously placed in
service. The lower volume of outright sales and sales-type leases in 1996
primarily reflected a decrease in available in-orbit C-band transponder
capacity, which is typically purchased outright or via sales-type leases by
cable video providers. Revenues from operating leases of transponders,
satellite services and other increased $82.7 million, or 35%, to $319.1
million in 1996 from $236.4 million in 1995, due primarily to additional
transponder capacity placed in service with the launch of Galaxy III-R and
Galaxy IX in 1996, including revenues received from a related party for
certain Galaxy III-R transponder leases.
Cost of Outright Sales and Sales-Type Leases of Transponders. Cost of
outright sales and sales-type leases of transponders increased $3.4 million,
or 7%, to $53.0 million in 1996 from $49.6 million in 1995, reflecting
relatively constant margins on transponder sales and sales-type leases.
Leaseback Expense, Net of Deferred Gain. Leaseback expense, net of deferred
gain, increased $23.3 million, or 64%, to $59.9 million in 1996 from $36.6
million in 1995. This increase in leaseback expense, net of deferred gain, was
due to the sale-leaseback of Galaxy III-R in 1996.
Direct Operating and Selling, General and Administrative Costs. Direct
operating and selling, general and administrative costs increased $8.8
million, or 15%, to $68.9 million in 1996 from $60.1 million in 1995
principally due to an increase in TT&C costs related to Galaxy III-R and
Galaxy IX which were launched in 1996 and an increase in the provision for
doubtful accounts.
22
Depreciation and Amortization. Depreciation decreased $18.0 million, or 24%,
to $58.5 million in 1996, from $76.5 million in 1995, due primarily to
accelerated depreciation in 1995 attributable to a reduction in the expected
useful lifetime of one noncommercial satellite resulting from a customer's
decision not to exercise a lease renewal option, partially offset by
additional depreciation associated with the launch and placement in service of
Galaxy III-R.
Income from Operations. Income from operations increased $79.1 million, or
48%, to $242.4 million in 1996, from $163.3 million in 1995. The increase is
primarily due to the increase in revenues offset by an increase in leaseback
expense, net of deferred gain.
Other Income. Other income decreased $5.7 million to $2.2 million in 1996
from $7.9 million in 1995, primarily due to non-recurring revenue earned in
1995 for providing services to General Motors Corporation.
Income Tax Expense. The effective tax rate for each of 1996 and 1995 was
38%, reflecting the U.S. federal, state and local income taxes reduced for
foreign sales corporation benefits.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the Merger, aggregate consideration paid to PanAmSat
International shareholders consisted of approximately $1.5 billion in cash and
approximately 42.5 million shares of PanAmSat Common Stock. In connection with
the Merger, the Company obtained a term loan in the amount of $1.725 billion
from Hughes Electronics Corporation, an affiliate of the Company ("HE"). In
addition to the $1.725 billion loan, at December 31, 1997 the Company also had
long-term indebtedness of $717 million (comprised primarily of $600 million of
loans under the Original Credit Agreement (as defined below) and $77.2 million
due to affiliates).
The significant cash outlays for the Company will continue to be primarily
capital expenditures related to the construction and launch of satellites and
debt service costs. With the commencement of construction of PAS-6B, the
Company now has seven satellites under various stages of development for which
the Company has budgeted capital expenditures. See "--Risk Factors" below. The
Company will require approximately $900 million to complete the construction,
insurance and launch of PAS-6B, PAS-7, PAS-8, Galaxy X, Galaxy XI, PAS-9, and
PAS-1R, together with related equipment. This amount is expected to be funded
from cash flow from operations, vendor financing and borrowings under the
Credit Agreement (as defined below). In addition to funding the construction
and launch of new satellites, the Company also expects to exercise its
remaining early buy-out options under certain satellite sale-leaseback
transactions entered into in prior years which will require the Company to
fund outlays of approximately $152 million in 1998 (for which an early buy-out
option for $96.6 million relating to transponders on SBS-6 was exercised by
the Company in January 1998) and approximately $366 million in 1999. Such
additional outlays are expected to be funded from cash flow from operations
and borrowings under the Credit Agreement.
On January 16, 1998, PanAmSat completed a private placement pursuant to Rule
144A under the Securities Act of 1933 of $750 million aggregate principal
amount of new debt securities (the "Offering"). The net proceeds from the
Offering were used to repay bank loans incurred partially to finance the
recent tender offer for certain debt securities of PanAmSat's subsidiaries, as
well as for general corporate purposes.
In connection with the Offering, the Company executed a Credit Agreement
(the "Credit Agreement") with certain lenders and Citicorp USA, Inc. as
administrative agent. The Credit Agreement amends and restates the credit
agreement among the parties dated December 24, 1997 (the "Original Credit
Agreement"). The Original Credit Agreement provided the Company with up to
$500 million of revolving credit loans (the "Revolving Credit Loans") for five
years, and up to $300 million in short-term loans maturing on April 30, 1998
(the "Term Loans"). The Credit Agreement amends the Original Credit Agreement
to terminate the Term Loan facility. The Company currently has $500 million of
Revolving Credit Loans available to it under the Credit Agreement.
PanAmSat believes that the Credit Agreement, vendor financing, future cash
flow from operations (assuming satellites in development are successfully
launched and commence service on the schedule currently
23
contemplated) and cash on hand will be sufficient to fund PanAmSat's
operations, anticipated exercise of early buy-out options on certain satellite
sale-leaseback transactions and its remaining costs for the construction and
launch of the satellites currently in development for the next twelve months.
There can be no assurance, however, that PanAmSat's assumptions with respect
to future construction and launch costs will be correct, or that additional
vendor financing, PanAmSat's future cash flow from operations and borrowings
under the Credit Agreement will be sufficient to cover any shortfall in
funding for future launches caused by launch failures, cost overruns, delays
or other unanticipated expenses. If circumstances required PanAmSat to incur
additional indebtedness, the ability of PanAmSat to incur any such additional
indebtedness would be subject to the terms of PanAmSat's outstanding
indebtedness. The failure to obtain such financing could have a material
adverse effect on PanAmSat's operations and its ability to accomplish its
business plan.
Net cash provided by operating activities decreased to $61.7 million in
1997, from $151.2 million in 1996, an increase from $83.7 million in 1995. The
decrease in 1997 was primarily attributable to payments of various liabilities
acquired in the Merger, offset by larger adjustments related to amounts of
depreciation and amortization as a result of the Merger. The increase in 1996
was primarily attributable to increased cash receipts from customers on
additional transponders committed under sales-type and operating leases.
Net cash used in investing activities increased to $1,640.0 million in 1997,
from $42.1 million in 1996, a decrease from $270.4 million in 1995. The
increase in 1997 was primarily attributable to the net cash paid in connection
with the Merger and additional capital expenditures for satellite systems
under development, offset by proceeds from the sale of marketable securities.
The decrease in 1996 was primarily due to proceeds from the sale and leaseback
of Galaxy III-R.
Net cash provided by (used in) financing activities increased to $1,670.0
million in 1997, from $(109.1) million in 1996, a decrease from $186.7 million
in 1995. The increase in 1997 was primarily due to new borrowings (including
$1.725 billion of Merger-related borrowings), offset by repayments of long-
term debt in connection with the tender offer for certain debt securities of
the Company's subsidiaries. The decrease in 1996 (representing distributions
by Galaxy to its parent company) was primarily a result of proceeds from the
sale and leaseback of Galaxy III-R and increased cash collections from
customers.
MARKET RISKS
From time to time the Company is exposed to market risks relating to
interest rate changes. The Company does not enter into derivatives or other
financial instruments for trading or speculative purposes. At December 31,
1997, in connection with its debt refinancing activities, the Company entered
into certain U.S. Treasury rate lock contracts to reduce its exposure to
fluctuations in interest rates. The aggregate nominal value of these contracts
was $375 million and these contracts were accounted for as hedges because they
were applied to a specific refinancing plan that was consummated shortly after
December 31, 1997. The counterparties are major financial institutions. The
fair value of these financial instruments at December 31, 1997 approximated
their contract value. The cost to unwind these instruments in 1998 will be
amortized to expense over the term of the newly placed debt securities to
which such hedges were applied.
YEAR 2000 MATTERS
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to disruption in the U.S. and
internationally. PanAmSat has begun an evaluation of its major business and
operations software systems for Year 2000 compliance and expects to complete
that evaluation in 1998. As a part of that process, the Company is identifying
any applications software which may require further analysis and updating. The
Company's most significant assets, the satellites themselves, do not utilize
year-specific code in their processing systems and hence are not subject to
spontaneous events at the change in year.
Nearly all of the PanAmSat satellites are less than 10 years old, and the
ground-based satellite control software systems were also largely developed in
the last 10 years with many new software systems and
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enhancements added in the last 5 years. Instances where date corrections may
be necessary are anticipated to be far fewer than in the older Cobol-based
systems which have been highlighted in other industries as requiring
significant re-coding. Further, in all cases the satellite control activities
are subject to real-time confirmation by human operators, and any unforeseen
software problems can be potentially identified and bypassed before any
actions are taken which would adversely affect a satellite.
Based upon the facts and circumstances described above, PanAmSat does not
believe that the Year 2000 software issue presents any material risk to the
business or assets of PanAmSat or to the Company's ability to perform its
obligations under its agreements to provide satellite services. As indicated
above, PanAmSat will continue to conduct analysis and take appropriate
remedial action when required with respect to its critical systems. The total
cost to the Company of Year 2000 compliance activities has not been and is not
anticipated to have a material adverse effect on its financial position or
results of operations.
RISK FACTORS
Risks Associated with Technology. Satellites are subject to significant
risks related to delayed and failed launches and in-orbit failures. Of the 25
satellite launches by PanAmSat or its predecessors since 1983, the Company has
experienced three launch failures: on December 1, 1994, the original PAS-3 was
destroyed upon launch as a result of a malfunction of an Ariane IV launch
vehicle; on August 22, 1992, the Company's original Galaxy I-R satellite was
destroyed upon launch as a result of an Atlas launch vehicle malfunction; and
the Company's Leasat 4, which was launched on August 27, 1985, was not placed
in service after launch due to the failure of its communications payload. Each
of the foregoing satellites was insured in an amount sufficient to
substantially recover the Company's investment therein, and each was
subsequently replaced with a satellite that was successfully launched.
Certain launch vehicles present special risks to the Company. Certain launch
vehicles scheduled to be used by PanAmSat have unproven track records and are
susceptible to certain risks associated with new launch vehicles. For example,
Sea Launch and Delta III are two launchers that are scheduled to be used by
PanAmSat to launch satellites within the next two years. These launchers have
no commercial launch history, which poses special risks including potential
launch delays and failures.
The Company expects to launch Galaxy X on a Delta III launch vehicle, Galaxy
XI on a Sea Launch launch vehicle, PAS-7, PAS-6B and PAS-1R on Ariane launch
vehicles, and PAS-8 and PAS-9 on Proton launch vehicles. The Company has
contracts directly with Arianespace S.A. ("Arianespace") and with
International Launch Services (formerly known as Lockheed-Khrunichev-Energia
International, Inc.) ("ILS") for the Ariane and Proton launches, respectively.
The Company has a contract with Hughes Space and Communications International,
Inc. ("HSCI") for one Delta III launch and one Sea Launch launch, such launch
services to be provided by Boeing and Sea Launch LP, respectively, under
contracts between HSCI and such providers.
The Company's contract with ILS provides for launch services on the Proton
launch vehicle. The Proton is built in Russia and launched in Kazakhstan. ILS
suffered a launch failure of a Proton launch vehicle in December 1997; an
investigation into the failure has commenced, but a final report has not been
issued. In addition, there were two Proton launch failures in 1996. Under the
Company's contract with ILS, if the Proton is unavailable due to technical,
regulatory or other factors, ILS would provide launch services for at least
one launch using an alternative launch vehicle. The contract provides for the
launch of three PanAmSat satellites using Proton launch vehicles. PAS 5 was
launched on a Proton in August 1997 and it is anticipated that PAS-8 will be
launched on a Proton in the third quarter of 1998.
The Company plans to launch Galaxy X in June 1998 from Cape Canaveral,
Florida, aboard a Delta III launch vehicle manufactured by Boeing (formerly
McDonnell Douglas). This launch will be the first commercial launch of the
Delta III, the latest generation based in part on the Delta II launch vehicle.
A Delta II launch vehicle carrying an Air Force satellite suffered a launch
failure in January 1997.
The Company plans to launch Galaxy XI in the fourth quarter of 1998 using a
Sea Launch launch vehicle. Sea Launch is a joint venture among Boeing
Commercial Space Co., Kvaerner A.S., RSC-Energia and the NPO-
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Yuzhnoye space concern. This launch will be the first commercial launch of the
Sea Launch service, which will utilize a three-stage launch vehicle launched
from a novel semi-submersible launch platform in the Pacific Ocean near the
equator.
There can be no assurance that PanAmSat's planned launches on Delta III or
using the Sea Launch platform will be successful.
Galaxy XI is scheduled to be a Hughes-manufactured HS-702 model spacecraft.
The HS-702 model has an unproven track record and may be susceptible to
certain risks related to its new technology. There can be no assurance that
PanAmSat's planned use of an HS-702 model spacecraft will be successful.
A significant delay in the delivery or launch of any future satellite would
adversely affect the Company's marketing plan for such satellite. Delays can
result from the construction of satellites and launch vehicles, launch
failures, the periodic unavailability of reliable launch opportunities and
possible delays in obtaining regulatory approvals. If satellite construction
schedules are not met, there can be no assurance that a launch opportunity
will be available at the time a satellite is ready to be launched. The
occurrence of a launch failure results in a significant delay in the
deployment of a particular satellite because of the need both to construct a
replacement satellite and obtain another launch opportunity. A significant
delay in the launch of any of PanAmSat's satellites could enable customers who
pre-purchased or agreed to lease capacity of such satellite to terminate their
contracts.
Satellites are also subject to risks after they have been properly deployed
and operational. The likelihood of in-orbit failure may be heightened by
PanAmSat's use on certain of their satellites of new technology, including a
new xenon ion propulsion system on PAS-5, Galaxy VIII-i and Galaxy XI. In
addition, the Company's planned deployment of new HS-702 model satellites may
increase the risk of in-orbit failure.
Following the launch of PAS-6, an anomaly was detected in its solar arrays.
The satellite has experienced several circuit failures in its solar arrays and
may experience additional failures in the future. The circuit failures will
require the Company to forego the use of some transponders initially and to
turn off additional transponders in later years. However, the ability of
transponders to provide transmission power for DTH signal reception using 60-
centimeter dishes is not affected. In November 1997, the Company negotiated an
extension of the launch insurance policy for PAS-6 to extend the period of
coverage from 181 days from the launch date to one year plus 181 days from the
launch date. In February 1998, the Company filed a proof of loss totaling
approximately $29 million with its launch insurance underwriters based on
certain anomalies discovered in the solar panels on PAS-6 prior to February 5,
1998. The Company expects to receive payment from the insurers pursuant to the
proof of loss in the second quarter of 1998. In connection with the extension
of the launch insurance policy for PAS-6, the Company has agreed to forego any
further claims for partial loss due to subsequent anomalies involving the
spacecraft's solar panels but the endorsement to PAS-6's launch insurance
policy does not otherwise affect the Company's ability to claim a total
constructive launch failure of the spacecraft for any reason (other than
normal policy exclusions).
On March 9, 1998, the Company entered into arrangements with its customers
to build a new satellite to be designated as PAS-6B. In connection with these
arrangements, the Company entered into an amendment to its agreements with its
customers on PAS-6. Under these amendments, PanAmSat will acquire a new Hughes
HS-601HP satellite that is scheduled to be launched on an Ariane IV launch
vehicle in the fourth quarter of 1998. The Company is exploring its options
for the deployment and use of the original PAS-6 satellite and anticipates
either using that satellite as either a backup for PAS-6B, or moving it to
another orbital location for other purposes. Management believes that it will
be able to generate sufficient future revenues on PAS-6 to enable it to
recover the carrying value of its investment in the satellite.
Due to contract performance issues relating to the PAS-7 and PAS-8
construction programs, the Company has informed SS/Loral that SS/Loral is in
default under the construction contracts for such satellites. Such notice
gives the Company the right to terminate in whole or in part its contract for
the construction and delivery of
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PAS-7, PAS-8 and a replacement satellite for either of such satellites or for
PAS-6. The Company believes it