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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 25, 1999, the registrant had outstanding 149,244,362 shares of
Common Stock. As of such date, the aggregate market value of voting stock held
by non-affiliates of the registrant was approximately $613,190,264.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting
of Stockholders of PanAmSat Corporation, a Delaware corporation ("PanAmSat" or
the "Company") scheduled to be held on May 5, 1999 (to be filed not later than
120 days after the end of the Company's fiscal year) is incorporated by
reference into Part III hereof.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain forward-looking information
under the captions "Item 1. Business" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain
forward-looking statements so long as such information is identified as
forward-looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the information. When used in this Annual
Report on Form 10-K, the words "estimate," "project," "plan," "anticipate,"
"expect," "intend," "outlook," "believe," and other similar expressions are
intended to identify forward-looking statements and information. Actual
results may differ materially from anticipated results due to certain risks
and uncertainties, including without limitation: (i) risks associated with
technology (including without limitation delayed launches, launch failures and
in-orbit failures), (ii) regulatory risks, (iii) risks associated with the
year 2000 issue, 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." PanAmSat cautions that the foregoing
list of important factors is not exclusive. Further, PanAmSat operates in an
industry sector where securities values may be volatile and may be influenced
by economic and other factors beyond the Company's control.
ITEM 1. BUSINESS
OVERVIEW
PanAmSat is the world's largest commercial provider of global satellite-
based communications services. The Company commenced operations on May 16,
1997 upon the Merger (as defined below). Unless the context otherwise
requires, the terms "Company" and "PanAmSat" are used to refer collectively to
the parent company and the subsidiaries through which its various businesses
are actually conducted, including PanAmSat International Systems, Inc., a
Delaware corporation ("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 19 satellites provides state-of-the-art video
distribution and telecommunications services for customers worldwide.
Currently, an aggregate of more than 125 million households worldwide are
capable of receiving television programming carried by PanAmSat satellites.
PanAmSat satellites also serve as the transmission platforms for six 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
125,000 VSATs worldwide relay communications over PanAmSat satellites, and
nearly 50 ISPs in non-U.S. countries access the U.S. Internet backbone via
PanAmSat satellites.
The Company operates its business as a single operating segment and
maintains comprehensive and discrete financial information only for this
single operating segment. However, the Company does compile summary revenue
information by geographical region and for the three communications services
areas that it serves, namely: video services, telecommunications services and
other services, and has included such information herein for additional
analysis. See "--Services" and Note 1 to the Consolidated Financial
Statements.
THE MERGER
On May 16, 1997 PAS Merger Corp., a Delaware corporation, merged with and
into PanAmSat International (then operating under its previous name, PanAmSat
Corporation) and the Galaxy Satellite Services division ("Galaxy") of Hughes
Communications, Inc. ("HCI") was contributed to PanAmSat, with the result that
PanAmSat International became a wholly-owned subsidiary of PanAmSat (the
"Merger"). The aggregate consideration paid to PanAmSat International
stockholders consisted of approximately $1.5 billion in cash and approximately
42.5 million shares of PanAmSat Common Stock having an approximate value of
$1.3 billion based upon a per share price of $30. Following the Merger, the
shares of PanAmSat Common Stock owned by HCI constituted approximately 71.5%
of the outstanding shares of PanAmSat Common Stock. On May 1, 1998, HCI
increased its ownership of PanAmSat Common Stock to approximately 81% of the
outstanding shares.
At the time of the Merger, Galaxy was a leading provider of commercial
satellite services in the United States, with a fleet consisting of ten
satellites. 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.
THE SATELLITES
GENERAL
PanAmSat operates the world's largest commercial network of geostationary
earth orbit ("GEO") communications satellites. The Company's fleet currently
consists of 19 satellites and is expected to consist of 24 satellites by the
end of 2000, with the launch of six additional satellites planned for 1999 and
2000 and the retirement of one existing satellite. PanAmSat's fleet covers
more than 98% of the world's population. The
Company's satellite coverage falls into four regional categories--U.S.
domestic, Atlantic Ocean Region ("AOR"), Pacific Ocean Region ("POR") and
Indian Ocean Region ("IOR")--that comprise its global satellite network.
Virtually complete global coverage and a comprehensive offering of end-to-end
services including satellite capacity, teleport services and network services
enable the Company to offer one-stop shopping for global communications
customers.
GEO satellites are located in orbit approximately 22,300 miles above earth
and can blanket large geographic areas with signal coverage. GEO satellites
can be accessed through an uplink station virtually anywhere within the
satellite's footprint.
Communications satellites typically are evaluated on (i) their coverage
area, (ii) the quality of the signal transmitted to the coverage area and
(iii) the availability of the transponders. Footprint is a measurement of the
breadth of a satellite's coverage. A key measurement of signal quality is the
intensity of transmission power in the coverage area. Higher power signal
enables a customer to use smaller, lower-cost antennas on the ground.
Availability is determined by considering a satellite's operational "lifetime"
as well as the number of transponders capable of providing service.
Each of the Company's satellites is custom-designed to provide high
transmission power and comprehensive coverage over specific geographic areas.
The Company's satellites under development are designed to provide greater
power and carry larger payloads, including in most cases the ability to offer
"hybrid" services in both the C and Ku-bands. C-band is a range of relatively
low frequencies used for commercial satellite services. In the United States,
C-band is used primarily for analog cable and broadcast distributions and in
other regions of the world also is used for broadband networks and
telecommunications. C-band requires the use of relatively large receive
antennas on the ground. Ku-band is a range of relatively high frequencies used
for commercial satellite communications. Ku-band is widely used for
distribution of digital broadcast television and DTH services, as well as
business communications, and allows the use of relatively small receive
antennas.
Each of the Company's new satellites has been constructed with a design life
ranging from 12-15 years, although there can be no assurance that the
contractual design life of any individual satellite will be met. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Spacecraft Developments" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors--Risks
Associated with Technology." The Company's launch and construction strategy is
to replace existing satellites as they approach the end of their useful lives
or encounter other reductions to their useful lives with technologically
advanced satellites that meet customer needs. In addition, the Company seeks
to expand the Company's global coverage, capacity and service offerings by
deploying satellites into new orbital locations. In most instances, a
"retired" satellite should be capable of continuing to offer services beyond
the time that its replacement is deployed. In such case, the Company intends
either to co-locate the older satellite with the new satellite or to move the
older satellite to an interim location, in each case subject to applicable
approvals. The exact location and intended use of each of PanAmSat's
satellites is subject to various U.S. and non-U.S. governmental approvals,
coordination issues and other regulatory risks. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--Regulatory Risks."
U.S. FOCUSED FLEET
PanAmSat is a leading provider of video satellite services in the United
States. The Company's U.S. fleet provides cable and television broadcasting,
business communications, and DTH capacity, including video and data
communications applications. PanAmSat's current U.S. fleet consists of nine
satellites. Four satellites, Galaxy I-R, Galaxy V, Galaxy VI and Galaxy IX,
provide solely C-band video services and are dedicated to the cable sector,
carrying most of the major television networks and full-time cable programming
in the United States. SBS-4 has exceeded its design life and continues to
provide services from an inclined orbit. SBS-5 provides solely Ku-band data
services and is expected to be taken out of service in 1999. Galaxy VII is a
"hybrid" satellite capable of providing both video and data services. Galaxy
III-R is a hybrid satellite capable of providing video, data and DTH services.
Galaxy VI provides C-band video and data services and currently serves as an
interim in-orbit back-up satellite for Galaxy IV, which was declared a total
loss in May 1998. See
2
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Spacecraft Developments." With global coverage,
PanAmSat can offer its large U.S. customers the ability to meet their
geographically diverse programming needs.
PanAmSat's first satellite, Galaxy I, was launched in 1983, becoming the
first satellite to be dedicated solely to cable television programming
distribution. The Company pioneered the "cable neighborhood" concept in the
satellite services industry. The Company secured key cable programming for
Galaxy I, which prompted cable operators to invest in ground equipment focused
on Galaxy I's orbital position. Once a core group of cable operators had
aligned their dishes with the satellite, Galaxy's incremental capacity could
be sold at higher rates to new programmers that wanted to enter the market.
This "cable neighborhood" concept continues to be a major business strategy
for the Company, and PanAmSat has created cable neighborhoods on its other
U.S. satellites, Galaxy I-R, Galaxy V, Galaxy VII and Galaxy IX. When
deployed, the Company anticipates that a cable neighborhood will be created on
Galaxy X-R. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Spacecraft Developments," "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Satellite Deployment Plan" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk Factors--
Risks Associated with Technology."
PanAmSat's U.S. fleet also delivers telecommunications services for private
business networks (VSATs) and Internet applications (ISPs). Carriers and
network operators use PanAmSat's U.S. satellites as transmission pipelines for
their customers' communications networks.
INTERNATIONAL FLEET
Outside of the United States, PanAmSat primarily provides satellite services
in the video and telecommunications markets and, to a lesser extent, the long-
distance telephony market. PanAmSat's current international fleet consists of
PAS-1, PAS-3, PAS-5, PAS-6, PAS-6B and Galaxy VIII-i, providing coverage of
the AOR, PAS-2 and PAS-8, providing coverage of the POR and PAS-4 and PAS-7,
providing coverage of the IOR. PanAmSat has Ku-band DTH capacity on most of
its non-U.S. satellites.
The Company's international satellites contain C-band and Ku-band
transponders, with the exception of PAS-6, PAS-6B and Galaxy VIII-i, which are
Ku-band satellites dedicated to DTH services in Latin America. The Company has
created cable neighborhoods on PAS-1, PAS-3 and PAS-5 for Latin America, PAS-2
for the Asia-Pacific region and PAS-4 for South Asia. The Company's
international satellites also serve as platforms for current or planned DTH
services in Latin America, South Africa and India. In addition, the Company's
international satellites are used to provide carrier services to more than 35
countries and international Internet access to nearly 50 ISPs in non-U.S.
countries. The coverage areas of the non-U.S. satellites are determined by the
shape of the satellite beams, and with minor exception are not alterable after
launch. PAS-5 has a movable beam that can be focused over different regions,
and certain of its transponders may be transferred from one beam to another if
market conditions warrant. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Spacecraft Developments" and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Risks Associated with Technology."
PLANNED SATELLITES/SATELLITE DEPLOYMENT PLAN
Over the past eighteen months, various technical issues have affected
certain satellites (PAS-6, Galaxy VII, PAS-4, PAS-5 and Galaxy VIII-i) and
resulted in the complete loss of one satellite in orbit (Galaxy IV) and one
during launch (Galaxy X). For further information on these technical issues,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Spacecraft Developments." In response to these
developments, the Company has modified its previously announced expansion and
restoration strategy to provide additional support for its existing fleet and
customers while also providing additional capacity (the "Satellite Deployment
Plan"). See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Satellite Deployment Plan."
Pursuant to the Satellite Deployment Plan, PanAmSat expects to launch six
additional satellites by late 2000, consisting of three new satellites for
Latin America (PAS-1R, PAS-9 and Galaxy III-C) and three new satellites
3
for the United States (Galaxy XI, Galaxy IV-R and Galaxy X-R) by the end of
2000. Each of these satellites, described further below, is expected to be a
"hybrid" satellite capable of offering C-band and Ku-band services. In
addition, certain of the Company's existing satellites will be relocated upon
the commencement of service of certain of these new satellites.
Galaxy XI. Galaxy XI will be an HS-702 model spacecraft, designed to serve
both the U.S. market and Latin America. It is scheduled to be launched in the
third quarter of 1999 from an Ariane 4 launch vehicle and is scheduled to be
the first HS-702 placed into operation by any commercial satellite operator.
As part of the Satellite Deployment Plan, the Company has modified the
configuration of Galaxy XI to operate in several of PanAmSat's orbital slots
covering the United States. Galaxy XI will ultimately be located at
91(degrees) W.L., replacing Galaxy VII, which will be moved to a location to
be determined.
PAS-1R. PAS-1R will be an HS-702 spacecraft. PAS-1R will be launched at the
Company's option on either an Ariane 4 or Ariane 5 launcher. The Ariane 5 has
not yet been used by any commercial satellite operator. The Company plans to
use PAS-1R in the Americas, Europe and Africa. It is scheduled for launch in
the third or fourth quarter of 1999. PAS-1R is intended to replace and
significantly expand upon the capacity offered by PAS-1, which has reached the
end of its design life but may be used to back up PAS-1R or moved to another
orbital location to be determined.
Galaxy X-R. Galaxy X-R, a replacement for Galaxy X, will be an HS-601 HP
model spacecraft, designed to cover the United States. It is scheduled to be
launched during the fourth quarter of 1999 aboard an Ariane 4 or Ariane 5
launch vehicle and to occupy an orbital position located at 123(degrees) W.L.
Upon the commencement of Galaxy X-R operation, Galaxy IX, a C-band satellite
temporarily operating at 123(degrees) W.L., will be relocated to 127(degrees)
W.L. SBS-5 will then be taken out of service.
Galaxy IV-R. Galaxy IV-R will be an HS-601 HP model spacecraft. It is
scheduled for launch during the fourth quarter of 1999 on a Proton launch
vehicle. Galaxy IV-R will serve at 99(degrees) W.L. as the replacement for
Galaxy IV. 99(degrees) W.L. is the current location of Galaxy VI, which will
then be moved to 74(degrees) W.L., where it will continue to provide back-up
services.
PAS-9 (formerly announced as an undesignated international satellite). This
satellite will be an HS-601 HP, and will be located in the AOR. The Company
anticipates that it will be launched aboard the Sea Launch launch vehicle in
the first quarter of 2000, subject to certain conditions. The Sea Launch
successfully completed a demonstration launch but has not been used by any
governmental or commercial satellite operator. The orbital location of PAS-9
has not yet been determined. The Company's Mexico DTH customer which had
contracted for service on PAS-5 instead has contracted to take service on PAS-
9. The Ku-band transponders on PAS-5 will not be resold on a full-time basis,
and the Company anticipates that this will minimize potential disruptions to
PAS 5's C-band customers related to the battery cell anomalies affecting
PAS-5.
Galaxy III-C (formerly known as PAS-9). This satellite will be an HS-702
spacecraft, designed to cover the United States and Latin America. It is
scheduled to be launched in the third quarter of 2000 and to occupy an orbital
position located at 95(degrees) W.L. Upon the commencement of operation of
Galaxy III-C, the Company currently intends to move Galaxy III-R to another
orbital location over the United States.
One of the Company's existing satellites, SBS-5, has reached the end of its
expected life, and is expected to be removed from service by mid-2000,
resulting in a planned total fleet of 24 satellites, including multiple
satellites in each ocean region worldwide and one in-orbit spare satellite
(Galaxy VI) for the United States. Upon the successful transition of services
from PAS-6 to PAS-6B, it is anticipated that the PAS-6 satellite will be used
for backup or other services from a location to be determined.
4
The implementation of the plan is subject to regulatory approval by the
Federal Communications Commission (the "FCC"). The Company expects that after
the successful launch of the previously described satellites, the revenues
attributable to the Galaxy VI, Galaxy VII, PAS-5 and PAS-6 satellites will be
at reduced levels compared to the Company's other satellites. The Company has
not yet determined whether revenue will be adversely impacted on Galaxy III-R
after completion of the Satellite Deployment Plan. No assurance can be given
that commercially suitable orbital locations will be obtained for all of these
satellites. Successful implementation of the Satellite Deployment Plan is
subject to risks attendant to the Company's business and the requirement of
additional capital. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors."
For a discussion of the technological and regulatory risks associated with
the Company's planned satellites, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors."
There can be no assurance that the Company will successfully implement the
Satellite Deployment Plan. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
SATELLITE PROCUREMENT AND LAUNCH ARRANGEMENTS
Satellite Procurement. The Company currently has six 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 XI, Galaxy IV-R, Galaxy X-R, PAS-1R, Galaxy III-C and PAS-9. In
addition, the Company has an option to order up to three additional satellites
from HSC on an expedited delivery schedule, anticipated to be seven months
from exercise of the option (subject to certain conditions). The normal
delivery time for a satellite is approximately 12 to 24 months. 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
payments in the event of late delivery due to the fault of the manufacturer.
Each contract provides for a limited warranty. 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 be subject to substantial termination liabilities that escalate
with the passage of time. If terminated for cause, the Company would be
entitled to recover any payments it made under the contracts and certain
additional damages as specified in such contracts. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
generally and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Risks Associated with
Technology." For a discussion of the Company's Satellite Deployment Plan, see
"--The Satellites," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Satellite Deployment Plan" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Launch Arrangements. The Company has entered into launch contracts for the
launch of both specified and unspecified future satellites. Each of the
Company's launch contracts provides that the Company may terminate 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 other entities.
5
INSURANCE
Launch Insurance. PanAmSat generally maintains launch insurance with respect
to its satellites in an amount approximately equal to the unamortized
construction, launch and launch insurance costs for each of such satellites at
the initial date of coverage.
Coverage under PanAmSat's launch insurance includes claims arising from
occurrences up to three years after launch, except for PAS-6 and Galaxy VIII-
i. 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 PanAmSat. 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 received 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 to the
spacecraft for any reason (other than normal policy exclusions). The launch
insurance policy for Galaxy VIII-i includes claims arising from occurrences up
to two years after launch. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Spacecraft Developments" and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Risks Associated with Technology."
The Company has not yet obtained launch insurance for any of its planned
launches. There can be no assurance that the Company will be able to obtain
insurance for its future satellites on terms comparable to its existing
satellites. Insurance may not be available for conditions detected in a policy
period that do not result in losses during the policy period.
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. Under
the 1997 program, typical in-orbit insurance periods run for three years.
PanAmSat generally obtains in-orbit insurance with respect to its satellites
in an initial amount approximately equal to the unamortized construction,
launch and insurance costs for each of such satellites. The amount of in-orbit
insurance in force with respect to each of PanAmSat's satellites generally
decreases over time, typically based on a declining book value for 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.
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. Partial failures or anomalies which occur
during a policy period that do not give rise to a claim may be excluded in
renewal policies.
PanAmSat's in-orbit policies typically include similar customary commercial
satellite insurance exclusions as those contained in its launch policies.
6
SALE-LEASEBACK ARRANGEMENTS
The Company entered into sale-leaseback arrangements with respect to certain
transponders on Galaxy VII and Galaxy III-R in September 1993 and February
1996, respectively. Pursuant to such arrangements, Galaxy sold 16 Ku-band and
14 C-band transponders on Galaxy VII and 24 Ku-band transponders on Galaxy
III-R. Concurrently with such sales, Galaxy agreed to lease back such
transponders on terms that required it to make scheduled semiannual lease
payments and operate and maintain such transponders and the applicable
satellites for terms of 11 years and 6.9 years, respectively. 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 Corporation ("GM") (as successor-in-interest to Hughes Electronics
Corporation ("Hughes Electronics")). In connection with the Merger, the
Company agreed to pay and indemnify GM for performing any of its obligations
under such guarantees.
The Company has options under the sale-leaseback arrangements to repurchase
the transponders prior to the end of the respective lease terms. In January
1999, the Company repurchased 12 C-band and 10 Ku-band transponders on the
satellite for approximately $141.3 million (including a make-whole premium of
$2.7 million) pursuant to such an option. The Company has the right to
repurchase the remaining transponders on Galaxy VII and the transponders on
Galaxy III-R in July 1999 for approximately $57.3 million and $170.3 million,
respectively, plus a make-whole premium (on the Galaxy VII transaction only)
in the event notes issued by the owners of the transponders are prepaid by the
Company rather than assumed at the time of repurchase. In the event that the
notes related to Galaxy VII are assumed, the Company's purchase price for the
transponders on Galaxy VII will be paid by (i) cash payment of $32.8 million
and (ii) assumption of 6.90% notes with a final maturity of July 2002 in an
aggregate principal amount of $24.5 million. In the event that the notes
related to Galaxy III-R are assumed, the Company's purchase price for the
transponders on Galaxy III-R will be paid by (i) cash payment of $46.2 million
and (ii) assumption of floating rate notes with a final maturity of January
2002 in an aggregate principal amount of $124.1 million.
Each of the sale-leaseback arrangements 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.
SERVICES
The Company operates its business as a single operating segment and
maintains comprehensive and discrete financial information only for this
single operating segment. However, the Company does compile summary revenue
information by geographical region and for the three communications services
areas that it serves, namely: video services, telecommunications services and
other services, and has included such information herein for additional
analysis. In the years ended December 31, 1998 and December 31, 1997,
PanAmSat's revenues of $767.3 million and pro forma revenues of $756.0
million, respectively, were derived from such service areas as follows:
PERCENTAGE PERCENTAGE
OF 1998 OF 1997
SERVICES REVENUES REVENUES
- -------- ---------- ----------
Video Services............................................ 73% 80%
Telecommunications Services............................... 21% 16%
Other Services............................................ 6% 4%
--- ---
Total..................................................... 100% 100%
Revenues derived from Hughes Electronics and its affiliates comprised
approximately 16% of PanAmSat's revenues in 1998, making Hughes Electronics
and its affiliates the Company's largest customer.
7
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 long-term, full-time, part-time and
occasional satellite services for the transmission of news, sports,
entertainment and educational programming worldwide. PanAmSat's Video Services
are comprised of four categories: (i) video distribution services, (ii) DTH
services, (iii) special events services and (iv) contribution services.
Video Distribution Services. PanAmSat's primary video distribution service
is the full-time transmission of television programming to cable systems,
network affiliates and other redistribution systems. Certain PanAmSat
satellites contain broad C-band beams that deliver dozens of television
channels to these redistribution systems. PanAmSat generally provides video
distribution services under long-term contracts for full or partial
transponder usage and digital channels. The Company also offers bundled,
value-added services that include satellite capacity, digital encoding of
video channels and, if required, uplinking and downlinking services to
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" (an extension of the cable neighborhood concept)
on these satellites with dozens of popular television channels. Cable and
other redistribution systems then install antennas to access the popular
channels for their subscribers. Several of the Company's Galaxy satellites
deliver television programming to virtually all of the United States' 11,500
cable systems, consisting of 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 U.S. and international
satellites are also used for video distribution to cable systems and network
affiliates. PanAmSat customers for full-time video distribution services
include the BBC, Disney, Doordarshan (India), China Central Television,
Cisneros Group (Venezuela), ESPN, NBC, Fox, Sony, Tele-Communications, Inc.,
Turner Broadcasting and Viacom.
U.S. law has mandated that television broadcasters begin to broadcast their
signals both conventionally and in High Definition Television ("HDTV") format.
HDTV provides a higher quality video and audio signal than conventional analog
broadcasts and requires special television and decoder equipment to be viewed.
The Company anticipates that as HDTV becomes more prevalent, its satellites
will be used for the full-time distribution of HDTV signals to cable systems,
network affiliates, DTH customers and other redistribution systems.
DTH Services. PanAmSat creates high-power Ku-band transmission beams on
several satellites that serve as platforms for the delivery of multiple
television channels for household reception using 60-90 centimeter antennas.
PanAmSat believes there is significant demand for digital DTH services because
of limited available terrestrial television channels or cable television
service in many international markets, and in the United States, limited
ethnic or niche programming. PanAmSat's customers for DTH services include
DIRECTV, Galaxy Latin America, MultiChoice/Orbicom, Sky Latin America and
South African Broadcasting Corp./Sentech.
PanAmSat has arrangements with customers to operate platforms on five
satellites for six current or planned DTH services in Latin America, South
Africa, 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 24,000 hours of total
special events transmissions in 1998. In early 1998, the Company transmitted
hundreds of hours of coverage and more than 500 video feeds of the Winter
Olympic Games in Nagano, Japan, for more than 30 broadcasters and news
agencies. The Company offered C-band and Ku-band satellite capacity worldwide
and access to a state-of-the-art production and transmission facility in
Nagano for compressed digital video and other transmission
8
services. PanAmSat customers during the Olympics included CBS, CNN, ESPN,
Organizacion de la Television Iberoamericana (the Latin American broadcast
union representing more than 20 countries), Premier Sports Australia, Reuters
and Televisa (Mexico). In addition to short-term services for special events
coverage, PanAmSat has long-term transponder service agreements with certain
satellite brokers in the United States. These customers package domestic U.S.
transponder capacity for their broadcast, business, educational and government
users.
Contribution Services. PanAmSat provides broadcasters with satellite
transmission services for the full-time transmission of news, sports and
entertainment segments to their network affiliates or broadcast centers within
the United States or around the world. PanAmSat's full-time contribution
service customers include Australian Broadcasting Corporation, CBS, CNN, NBC
and NHK (Japan).
TELECOMMUNICATIONS SERVICES
PanAmSat's Telecommunications Services support 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 (VSATs),
(iii) Internet access (ISPs) 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 connect customers to U.S. terrestrial networks. PanAmSat's
carrier service customers include ImpSat, MCI-Worldcom, Microspace, Pagenet,
Sprint and Telstra (Australia).
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 125,000 VSAT antennas worldwide
currently relay communications over PanAmSat satellites. The Company's largest
single telecommunications customer is Hughes Network Systems, Inc. ("HNS"), an
affiliate of the Company, which uses the equivalent of more than 22 U.S.
domestic satellite transponders to create and operate VSAT networks for its
business customers. Other PanAmSat private business network customers include
the Associated Press, Citicorp, GMAC, IBM, Reuters and the University of
Southern California.
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.
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
9
Internet data internationally at nearly 20 times the speed of traditional
telephone links. PanAmSat currently provides Internet services to nearly 50
non-U.S. ISPs. PanAmSat's Internet services customers include HNS, Microcom
Systems (Nigeria) and Planet Internet (New Zealand).
PanAmSat also provides SPOTbytes SM, a value-added, bundled Internet
service, that offers an integrated package of services including international
satellite capacity, uplinking services from a PanAmSat teleport and dedicated
links from the teleport to the U.S. Internet backbone. PanAmSat's SPOTbytes SM
service is marketed primarily to non-U.S. ISPs and corporations that require
high-speed access to the U.S. Internet backbone. The service is configured in
a variety of ways to provide easily scaleable, cost-effective Internet access.
The Company also is pursuing the development of shared carrier and multiple
channel services which are designed to use Internet-protocol ("IP") based
broadcasting platforms to deliver broadband IP and video services to regional
users as well as specially addressed user groups.
Telephony. The Company provides domestic and international satellite
services for public switched telephone network ("PSTN") transmissions.
PanAmSat currently offers international satellite based telephony services to
and from Latin America. These services include (i) delivering calls from Latin
America via a PanAmSat satellite to a U.S. telephone carrier that routes the
call to its final destination within or outside of the United States, and (ii)
delivering calls delivered to PanAmSat from U.S. telephone carriers to their
final destinations within Latin America via a PanAmSat satellite. In addition,
PanAmSat has implemented a secondary telephony service platform which is based
on Demand-Assigned-Multiple Access ("DAMA") technology to terminate more
efficiently voice traffic by routing the traffic to its intended destination
directly from the satellite, rather than a PanAmSat teleport.
The Company provides this service primarily to customers who deliver traffic
to a wide variety of locations and have relatively low volume between any two
points. The Company believes that DAMA provides customers with low cost
routing of their telephone calls. PanAmSat intends to extend these services
from Latin America to Europe and other regions of the world, especially in
locations where traditional telephone networks are limited. 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. PanAmSat
charges on a per minute basis for these services. The Company believes
competition for long-distance services and significant deregulation in several
countries could create new service opportunities.
PanAmSat's ability to provide domestic and international PSTN services is
restricted by various telecommunications regulations in most countries. See
"--Government Regulation."
OTHER SERVICES
Telemetry, Tracking and Control. PanAmSat provides TT&C services for 20
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 back-up 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 offered its customers a premium service that
included back-up C-band capacity on the Galaxy VI satellite. Generally,
subject to the 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 capacity were available on their current
satellite. As a result of the failure of Galaxy IV, certain customers on that
satellite became entitled to the use of Galaxy VI as a back-up satellite.
Shortly after the failure of Galaxy IV, the Company obtained special temporary
authority from the FCC to move Galaxy VI from its original location to
99(degrees) W.L., the former location of Galaxy IV. Galaxy VI now provides C-
band transponder capacity to customers that previously used Galaxy IV. Galaxy
VI served as an in-orbit spare because the previous Galaxy VI customers
10
were subject to preemption if their capacity was required to serve as a back-
up transponder. In connection with the failure of Galaxy IV, all of the
Company's existing customers on Galaxy VI were preempted and most were
provided capacity on other PanAmSat satellites to use until a new back-up
satellite becomes available. Currently, these customers are not required to
pay for the backup service until Galaxy XI is launched and Galaxy VI becomes
available as a back-up satellite. PanAmSat intends to return Galaxy VI to its
status as an in-orbit spare satellite upon the launch of Galaxy XI to
99(degrees) W.L. during the third quarter of 1999. For a discussion of the
recent developments affecting Galaxy IV and Galaxy VI, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Spacecraft Developments." For a discussion of the Company's
Satellite Deployment Plan, see "--The Satellites," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Satellite Development Plan" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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:
A 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 provides
broadcast and telecommunications services worldwide. The network currently
consists of 19 satellites, seven teleport or TT&C facilities and more than 555
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, private business networks and Internet-related services.
PanAmSat's core resources are its global fleet of satellites and its
experienced staff of professionals. 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 2000. These new satellites are designed to
provide replacement and 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--Spacecraft Developments" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Risks Associated With Technology." For a discussion
of the Company's Satellite Deployment Plan, see "--The Satellites," "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Satellite Development Plan" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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 12 V-band slots and six additional Ka-
band slots. There can be no assurance that the Company will be successful in
obtaining authorizations to operate at all or a portion of the locations for
which applications have been submitted. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk Factors--
Regulatory Risks."
11
Programmers and broadcasters that use PanAmSat satellites for their global
transmission requirements include the BBC, China Central Television, Discovery
Communications, NHK, Time Warner and Viacom.
The Company may seek to expand its global service offerings through
corporate acquisitions, joint ventures and other strategic transactions.
One-Stop Shopping
While PanAmSat has designed each satellite to reflect specific market
requirements, its global satellite network serves as a single resource for a
customer's worldwide transmission requirements. PanAmSat customers can send
their information to virtually any area on the planet using solely PanAmSat
satellites. 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
provide 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;
The provision of broadcast studios for video preparation and
transmission to PanAmSat satellites from 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. In addition, the Company's SPOTbytes SM bundled Internet
service offers international satellite transmission capacity and uplinking
services from a PanAmSat teleport and dedicated links from the teleport to the
U.S. Internet backbone.
Satellite Broadcasting and Telecommunications Neighborhoods
A key element of PanAmSat's strategy is the creation of service franchises
that enable the Company to maintain and build its customer base. The
neighborhoods attract large numbers of ground antennas that depend on the
PanAmSat satellite for the delivery of their television programming or
communications traffic. The resulting infrastructure of ground antennas
creates a premium value for satellite transmission capacity.
PanAmSat neighborhoods 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. A popular anchor tenant will
draw many cable head-ends to point their receive dishes at a satellite. This
attracts additional programmers that want to join the programming neighborhood
with knowledge that many cable head-ends will be capable of receiving their
signal with the same dish used for the anchor tenant.
Long-Term Customer Relationships
PanAmSat builds long-term relationships with its customers by understanding
their business objectives and providing 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.
12
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 and its subsidiaries also have sales and marketing
offices in Long Beach, California, Coral Gables, Florida, Sydney, Australia,
London, England, Tokyo, Japan, Johannesburg, South Africa, Seoul, Korea and a
representative office in Mexico City, Mexico, 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 principal global competitor is Intelsat, an international treaty
organization of over 140 member nations based in Washington, D.C. that
provides global satellite capacity primarily through its members, called
"signatories." Comsat Corporation ("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. In recent years, Intelsat has launched
higher-powered satellites that are capable of providing video distribution,
DTH and private business network services. According to Intelsat's 1997 annual
report, video services comprised 29 percent of Intelsat's operating revenue.
Intelsat traditionally has provided capacity directly to its signatories,
which then market such capacity to their customers. Over 95 countries,
however, now permit some form of direct access to the Intelsat system and the
FCC has proposed permitting direct access, rather than through Comsat, in the
United States.
In March 1998, Intelsat approved the creation of an affiliate company that
would market satellite services directly to end users. In November 1998,
Intelsat transferred to this affiliate, known as New Skies Satellites N.V.
("New Skies"), five operating satellites plus a sixth satellite that was under
construction. Although ostensibly independent of Intelsat, New Skies is owned
by Intelsat and Intelsat's signatories. In light of this common ownership and
other continuing connections between the two organizations, PanAmSat has asked
the FCC to evaluate whether New Skies satisfies the FCC's requirements for
entry to the U.S. market by affiliates of Intelsat.
In May 1998, the FCC granted in part and denied in part a request by Comsat
to be regulated as a non-dominant carrier. The FCC reclassified Comsat as non-
dominant in the provision of full-time video and earth station services. The
FCC determined, however, that Comsat retains market power and should continue
to be regulated as dominant in the provision of switched voice and private
line service to 63 countries and in the provision of occasional-use video
services to 142 markets. In February 1999, the FCC changed the manner in which
it regulates Comsat's pricing for these dominant carrier markets, switching
from rate of return regulation to an incentive-based pricing policy.
On May 5, 1998, the U.S. House of Representatives passed H.R. 1872, the
Communications Satellite Competition and Privatization Act of 1997. The
legislation, sponsored by Reps. Thomas Bliley (R-VA) and
13
Edward Markey (D-MA), sets specific parameters and timetables to ensure the
pro-competitive privatization of Intelsat and deregulation of Comsat. The
legislation was supported by PanAmSat as part of the Company's belief that the
pro-competitive privatization of Intelsat would benefit the satellite
industry. While the bill may benefit the Company by opening certain markets,
it is not essential to successful implementation of the Company's business
plan. There can be no assurance that similar legislation will be passed by the
U.S. Senate or a that final bill, if approved by House and Senate, will be
signed into law by President Clinton.
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. ("Lockheed Martin"). For instance, Loral acquired AT&T Skynet (a
domestic U.S. satellite operator) in 1997, acquired Orion Network Systems (a
transatlantic satellite operator with plans to launch additional international
satellites in other regions) in 1998 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) in 1997. An
application has been filed requesting the FCC's approval for Lockheed Martin
to acquire up to 49 percent of Comsat's stock. PanAmSat has opposed the
application, arguing that the proposed transaction would, among other things,
violate the Communications Satellite Act, give Lockheed Martin de facto
control of Comsat, and lessen competition. Comsat and Lockheed Martin also are
seeking changes to the Communications Satellite Act that would enable Lockheed
Martin to purchase the remaining 51 percent of Comsat's stock.
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 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 typically takes
approximately three or more years and costs approximately $200 million to $250
million or more. In addition, there are a limited number of orbital slots. The
operation of an international satellite communications system also requires
approvals from national telecommunications authorities and Intelsat and, in
certain cases, from regional satellite authorities. See "--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 non-geostationary systems under development, such
as Globalstar and Iridium, are not currently competitors of PanAmSat. These
non-geostationary systems are designed primarily for mobile telephony and data
services and are not expected to serve the fixed point-to-multipoint video and
telecommunications markets. Certain other non-geostationary systems under
development, such as Skybridge and Teledesic/Celestri, are also not expected
to be direct competitors of PanAmSat. However, because these systems are
designed to offer fixed satellite services such as data and Internet access,
they may compete with services offered or planned to be offered by the
Company.
Skybridge, Teledesic/Celestri, and other proposed non-geostationary systems
are designed to use frequencies that are already in use by geostationary
satellites, including PanAmSat's satellites. Although the proponents of these
systems claim that they will not interfere with geostationary systems, the
interference issue is under review by the FCC and the International
Telecommunications Union (the "ITU"), and there can be no assurance that the
standards for sharing frequencies that ultimately are adopted will adequately
protect geostationary operations such as PanAmSat's.
14
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 current
services. The primary use of optical fiber cables is to carry high-volume
telephony communications on a point-to-point basis. Transcontinental and
intercontinental optical fiber cables currently carry video traffic, but this
service is largely for point-to-point traffic (e.g., New York to London).
Optical fiber cables are not readily usable for point-to-multipoint broadcast
applications or for the transmission of ad hoc events which require
transportable uplink earth stations. When PanAmSat begins to offer Internet-
related services on a larger scale, it may encounter competition from
companies offering optical fiber cable services, including Quest
Communications and Global Crossing.
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 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 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 Launch and Operate Satellites. The FCC grants
authorizations to satellite operators that 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 the FCC gives licensees a
"replacement expectancy" with respect to the replacement of their satellites.
At the end of a ten-year license term, a satellite that has not been replaced,
or that has been relocated to another orbital location following its
replacement, may be able to continue operating under a grant of special
temporary authority. Such operations, however, are secondary, and there can be
no assurance that the satellite will be permitted to continue operating after
the expiration of the initial ten-year license term. The FCC's rules and
policies limit the number of expansion satellite authorizations that may be
granted for the same frequency band at one time.
PanAmSat has final FCC authorization for seventeen satellites operating in
the C-band, the Ku-band, or both bands. PanAmSat has final FCC authorization
for one additional satellite, but the authorization does not cover certain
design changes that are the subject of a pending modification application.
PanAmSat has special temporary authority to operate the satellite as modified
on an interim basis. In addition, PanAmSat has a final authorization to
operate nine satellites in the Ka-band (one AOR, to be located at 58(degrees)
W.L.; two POR, to be
15
located at 149(degrees) E.L. and 173(degrees) E.L.; four 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 l03(degrees) W.L. and 125(degrees) W.L.).
PanAmSat has also requested authority to operate five of these satellites in
the BSS band, and to operate six 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.
Except as noted, none of PanAmSat's final or conditional authorizations is
subject to further administrative or judicial reconsideration or review. The
FCC reserves the right to require 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 additional satellites under interim or special temporary
authority. PanAmSat operates PAS-7 at 68.5(degrees) E. L. pursuant to a grant
of special temporary authority. PanAmSat is authorized to operate only the Ku-
band transponders on the satellite. Brasilsat Al previously was 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. Pursuant to a grant of special
temporary authority, the Company has relocated Brasilsat A1 to 144(degrees)
W.L. and it is operating there. The Company also has amended its request for
an extension of interim authority to specify the 144(degrees) W.L. orbital
location. Another 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. SBS-4 must be relocated once the U.S.
satellite assigned to 77(degrees) W.L. is launched. There can be no assurance
that SBS-4 will be authorized to operate at another orbital location. PanAmSat
also has requested a license modification or special temporary authority to
continue operating PAS-1 beyond the conclusion of its license term. In
addition, following the loss of Galaxy IV, the FCC granted the Company special
temporary authority to relocate Galaxy VI from 74(degrees) W.L. to 99(degrees)
W.L., to provide replacement C-band capacity. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Spacecraft Developments" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors--Risks Associated
with Technology."
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 (in the U.S.), (2) an application for a hybrid C/Ku-band
satellite to replace its separate C-band and Ku-band satellites at 74(degrees)
W.L.; and (3) an application to replace PAS-1 with PAS-1R. In order to grant
two of the U.S. additional satellite applications, the FCC would have to
assign different orbital locations than those requested by PanAmSat
(79(degrees) W.L. and 93(degrees) W.L.) because, after PanAmSat's applications
were filed, the FCC assigned these orbital locations to other entities.
PanAmSat has requested that the 79(degrees) W.L. application be associated
with the 83(degrees) W.L. orbital location as a C-band only satellite.
In 1996, the FCC modified its rules for processing international satellite
system applications. 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.
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.
16
Other FCC Authorizations. Under the FCC's rules, an entity that provides
international telecommunications services on a common carrier basis must first
receive authorization, pursuant to Section 214 of the Communications Act of
1934, as amended, to provide such services. The FCC has granted PanAmSat
Carrier Services, Inc. ("PCSI") and PanAmSat Communications Carrier Services,
Inc. ("PCCS"), wholly owned subsidiaries of the Company, Section 214 authority
to provide international private line and public switched services. As common
carriers, PCSI and PCCS are subject to rate regulation, tariffing and
nondiscrimination requirements.
Scope of Services Authorized. In 1996, the FCC eliminated the regulatory
distinction between U.S. domestic satellites and U.S.-licensed international
satellites. As a result, each of PanAmSat's satellites may be used, to the
extent technically feasible, to provide 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. The FCC requires applicants to demonstrate that
their proposed satellites would be compatible with the operations of adjacent
satellites. The FCC expects adjacent satellite operators to coordinate with
one another to minimize frequency conflicts, and it does not become involved
unless the operators are unable to resolve their conflicts. FCC involvement is
rare.
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, PAS-7,
and Galaxy VIII-i.
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. "Space segment capacity" consists solely of capacity on a
given satellite without any uplink, downlink or other value-added services.
Many countries--particularly in Latin America and, increasingly, in Europe,
Africa and Asia--have liberalized their regulations to permit multiple
entities to seek licenses to 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.
Most countries permit satellite carriers to provide space segment capacity
without any prior licensing or authorization. In others, however, a license is
required for provision of space segment capacity. PanAmSat has obtained such
licenses in Argentina, Colombia, Ecuador and Pakistan. Additionally, the
Company has sought
17
service-type licenses, in order to provide certain space segment capacity
directly to end users. PanAmSat has obtained such licenses in Australia,
France, Germany Japan and the United Kingdom.
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 consult with Intelsat.
The ITU Frequency Coordination Process. Each ITU member nation is required
to register its proposed use of orbital slots with the ITU's Radio Regulations
Board. Other nations then may give notice of any use or intended use of the
radio spectrum that would conflict with the proposal. The nations then are
obligated to seek to coordinate the proposed uses and resolve interference
concerns. If all disputes are resolved, the ITU "notifies" the proposed use
which, at least theoretically, protects it from subsequent or nonconforming
interfering uses. The ITU Radio Regulations Board has no dispute resolution or
enforcement mechanisms, however, and international law provides no clear
remedies if this voluntary process fails.
While the right to use most frequencies is determined on a "first-come,
first-served" basis, the ITU has "planned" the use of certain frequency bands
in a manner that effectively reserves for various countries the right to use
those frequencies in accordance with certain technical parameters at a given
orbital location. PanAmSat's proposed use of BSS frequencies on eleven
satellites is subject to unresolved issues concerning the ITU's BSS band plan.
All of the registrations for PanAmSat's satellites are or will be subject to
the ITU coordination process. Certain entities have filed notices of intended
use with respect to certain orbital slots which conflict with PanAmSat's
registered orbital slots for PAS-2, PAS-4, PAS-7 and PAS-8. 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."
EMPLOYEES
At December 31, 1998, PanAmSat had approximately 555 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
Ellenwood, Georgia; Homestead, Florida; Spring Creek, New York; Napa,
California; and Fillmore, California teleports. PanAmSat leases its Castle
Rock, Colorado teleport. The
18
Company owns its teleport in Long Beach, California and leases offices in Long
Beach where its network operations center is located.
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; Tokyo, Japan; Seoul, Korea; and Mexico City,
Mexico. PanAmSat's leases for its foreign offices have been entered into upon
terms that PanAmSat believes to be reasonable and customary.
ITEM 3. LEGAL PROCEEDINGS
On or about October 25, 1996, an action was commenced by Comsat against
PanAmSat, News Corporation Limited ("News") and Grupo Television, 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 PanAmSat, the complaint alleges that PanAmSat, alone and
in conspiracy with Televisa, intentionally interfered with the alleged
agreement and with Comsat's economic relationship with News. Comsat had
previously filed a similar action in the United States District Court for the
District of Maryland. By order dated October 10, 1996, the Maryland District
Court dismissed without prejudice the complaint in that action on the ground
that the court lacked personal jurisdiction over all of the defendants. The
complaint in the present action seeks actual and consequential damages, and
punitive or exemplary damages in an amount to be determined at trial.
Following the completion of pretrial discovery, all defendants moved for
summary judgment dismissing the case. These motions are awaiting decision.
PanAmSat believes this action is without merit. It 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 PanAmSat.
On May 21, 1998, a class action was commenced by Ullman Electric Company and
others similarly situated against Paging Network, Inc., Paging Network of
Ohio, Inc. (the "Paging Companies") and the Company in the Court of Common
Pleas for Cuyahoga County, Ohio. The complaint alleges breach of contract
against the Paging Companies relating to a disruption of paging services
provided by the Paging Companies to the plaintiffs. As to the Company, the
complaint alleges that PanAmSat was negligent as to the plaintiffs in its
operation of the Galaxy IV satellite, which provided satellite capacity to the
Paging Companies. For a discussion of recent developments involving Galaxy IV,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Spacecraft Developments." The Company has filed a
motion to dismiss the case for lack of personal jurisdiction, which is pending
with the court. The complaint seeks compensatory damages in an amount not to
exceed $70,000 per plaintiff. The Company believes that the foregoing action
is frivolous and without merit, and PanAmSat intends to vigorously contest
this matter although there can be no assurance that PanAmSat will prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1998, no matters were submitted to a
vote of stockholders through the solicitation of proxies or otherwise.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PanAmSat Common Stock is listed on the Nasdaq National Market and commenced
trading on May 19, 1997 under the symbol "SPOT".
The following table sets forth, for the calendar periods indicated, the high
and low closing sales price per share for PanAmSat Common Stock, as reported
by the Nasdaq National Market 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
1998
----
First Quarter................................................ $60 7/8 $ 37 7/16
Second Quarter............................................... $64 7/8 $ 51
Third Quarter................................................ $57 7/8 $ 35 1/8
Fourth Quarter............................................... $42 $ 28 7/8
At March 25, 1999, there were approximately 105 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.
20
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data 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 (which changed its
name to PanAmSat Corporation concurrent with its May 1997 acquisition of
PanAmSat International). The selected financial data as of December 31, 1998
and 1997 and for each year of the two year period ended December 31, 1998 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 consolidated financial statements and notes related thereto and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
YEAR ENDED DECEMBER
31, YEAR ENDED DECEMBER 31,
1998 1997(1) 1996 1995 1994
---------- ----------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DA-
TA:
Total revenues.......... $ 767,263 $ 629,939 $ 482,770 $ 386,126 $ 328,243
---------- ----------- ---------- ---------- ---------
Costs and expenses
Cost of outright sales
and sales-type leases.. -- 20,476 52,969 49,616 45,747
Leaseback expense, net
of deferred gain....... 47,223 61,907 59,927 36,597 36,617
Depreciation and amorti-
zation................. 234,945 149,592 58,523 76,522 54,126
Direct operating costs.. 96,510 61,199 34,794 29,931 33,627
Selling, general & ad-
ministrative........... 70,251 42,561 34,119 30,146 51,595
---------- ----------- ---------- ---------- ---------
Operating income........ 318,334 294,204 242,438 163,314 106,531
Interest expense,
net(2)................. (97,788) (30,973) (4,903) (5,828) (6,826)
Other income............ -- 385 2,184 7,892 3,885
---------- ----------- ---------- ---------- ---------
Income before taxes,
minority interest and
extraordinary item..... 220,546 263,616 239,719 165,378 103,590
Income tax expense...... 95,940 117,325 89,895 62,017 38,846
Minority interest....... -- 12,819 -- -- --
Extraordinary item(3)... -- 20,643 -- -- --
---------- ----------- ---------- ---------- ---------
Net income.............. $ 124,606 $ 112,829 $ 149,824 $ 103,361 $ 64,744
========== =========== ========== ========== =========
OTHER FINANCIAL DATA:
EBITDA (4).............. $ 553,279 $ 444,181 $ 303,145 $ 247,728 $ 164,542
EBITDA margin (4)....... 72% 71% 63% 64% 50%
Net cash provided by op-
erating activities..... $ 568,173 $ 121,476 $ 151,238 $ 83,690 $ 110,490
Net cash used in invest-
ing activities......... (576,518) (1,639,972) (42,122) (270,396) (109,560)
Net cash provided by
(used in) financing
activities............. 94,148 1,610,206 (109,122) 186,720 (1,126)
Capital expenditures.... 678,593 541,879 294,122 280,543 114,660
Total assets............ 5,890,497 5,682,434 1,275,516 1,137,978 868,408
Total long-term obliga-
tions.................. 3,058,480 3,016,680 394,187 290,963 319,620
Total stockholders' eq-
uity................... 2,688,415 2,560,836 -- -- --
- --------
(1) 1997 results include 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 $59.9 million, $80.5 million, $14.6
million, $10.1 million, and $5.1 million for the years ended December 31,
1998, 1997, 1996, 1995 and 1994, respectively, and net of interest income
of $10.4 million and $28.0 million in 1998 and 1997, respectively.
(3) Represents loss on early extinguishment of debt, net of tax.
(4) Represents earnings before net interest expense, income tax expense,
depreciation and amortization. EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. EBITDA should not be considered as a
measure of profitability or liquidity as determined in accordance with
generally accepted accounting principles in the statements of income and
cash flows.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto and the pro
forma financial information appearing elsewhere in this Annual Report.
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 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 nonrecurring 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
AS REPORTED (UNAUDITED)
------------------------------ -------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
1998 1997 1996 1997 1996
--------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Operating leases, satel-
lite services and oth-
er..................... $ 736,624 $ 558,622 $ 319,084 $ 684,663 $566,027
Outright sales and
sales-type leases...... 30,639 71,317 163,686 71,317 163,686
--------- --------- --------- --------- --------
Total revenue......... 767,263 629,939 482,770 755,980 729,713
--------- --------- --------- --------- --------
COSTS AND EXPENSES
Cost of outright sales
and sales-type leases.. -- 20,476 52,969 20,476 52,969
Leaseback expense, net
of deferred gain....... 47,223 61,907 59,927 61,907 59,927
Direct operating and
SG&A costs............. 166,761 l03,760 68,913 130,076 136,116
Depreciation and amorti-
zation................. 234,945 149,592 58,523 197,116 181,100
--------- --------- --------- --------- --------
Total................. 448,929 335,735 240,332 409,575 430,112
--------- --------- --------- --------- --------
Income from operations.. 318,334 294,204 242,438 346,405 299,601
Interest expense, net... 97,788 30,973 4,903 68,981 125,308
Other income............ -- (385) (2,184) (385) (2,184)
--------- --------- --------- --------- --------
Income before income
taxes, minority inter-
est and extraordinary
item................... 220,546 263,616 239,719 277,809 176,477
Income tax expense...... 95,940 117,325 89,895 134,343 92,549
--------- --------- --------- --------- --------
Income before minority
interest and extraordi-
nary item.............. 124,606 146,291 149,824 143,466 83,928
Minority interest, sub-
sidiary preferred stock
dividend............... -- 12,819 -- 24,838 28,474
--------- --------- --------- --------- --------
Income before extraordi-
nary item.............. 124,606 133,472 149,824 118,628 55,454
Extraordinary item: loss
on extinguishment of
debt, net of tax....... -- 20,643 -- 20,643 --
--------- --------- --------- --------- --------
Net income.............. $ 124,606 $ 112,829 $ 149,824 $ 97,985 $ 55,454
========= ========= ========= ========= ========
Net income per share--
basic and diluted...... $ 0.83 N/A N/A $ 0.66 $ 0.37
22
CONSOLIDATED RESULTS
1998 (AS REPORTED) COMPARED TO 1997 (PRO FORMA AND AS REPORTED)
The following discussion of 1998 versus 1997 performance is primarily based
on pro forma results. Pro forma results for 1997 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. Revenues increased $11.3 million, or 1%, to $767.3 million for the
year ended December 31, 1998 from $756.0 million for the same pro forma period
in 1997. Video services revenues were $560.7 million for the year ended
December 31, 1998, a decrease of 8% from the same pro forma period in 1997.
The decrease was primarily due to less sales and sales-type lease activity as
compared to the same pro forma period in 1997. Telecommunications services
revenues were $159.1 million for the year ended December 31, 1998, an increase
of 29% from the same pro forma period in 1997. The increase was due primarily
to the growth in data and Internet-related service agreements.
Revenue results can also be analyzed based on the type of agreement.
Revenues from sales and sales-type leases decreased to $30.6 million for the
year ended December 31, 1998, from $71.3 million for the same pro forma period
in 1997. The decrease is attributable to a lower volume in 1998 relative to
1997 of outright sales and sales-type leases. Revenues from operating leases
of transponders, satellite services and other increased $51.9 million, or 8%,
to $736.6 million for the year ended December 31, 1998, from $684.7 million
for the same pro forma period in 1997. The increase was primarily due to the
commencement of commercial service on two new satellites, PAS-5 and Galaxy
VIII-i, which were launched in the latter part of 1997 and generated a full
year of operating lease revenues in 1998.
As reported revenues increased $137.3 million, or 22%, to $767.3 million in
1998 from $629.9 million in 1997, 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. The Company
recorded no cost of outright sales and sales-type leases of transponders for
the year ended December 31, 1998, as compared to $20.5 million for the same
pro forma period in 1997. The pro forma cost of outright sales and sales-type
leases of transponders for the year ended December 31, 1997 are related to
several outright sales and sales-type leases executed during that period.
Leaseback Expense, Net of Deferred Gain. Leaseback expense, net of deferred
gain, decreased $14.7 million, or 24%, to $47.2 million for the year ended
December 31, 1998, from $61.9 million for the same pro forma period in 1997.
The decrease was primarily attributable to the exercise by the Company of
early buy-out opportunities on sale-leaseback agreements during 1998.
Direct Operating and Selling, General and Administrative Costs. Direct
operating and selling, general and administrative costs increased $36.7
million, or 28%, to $166.8 million for the year ended December 31, 1998, from
$130.1 million for the same pro forma period in 1997. The increase primarily
was due to direct costs associated with additional satellites placed in
service and operating costs associated with the normal growth of the Company
attributable to the growth in the size of the satellite fleet.
Depreciation and Amortization. Depreciation and amortization increased $37.8
million, or 19%, to $234.9 million for the year ended December 31, 1998 from
$197.1 million for the same pro forma period in 1997, due primarily to
depreciation expense associated with additional satellites placed in service.
As reported depreciation and amortization increased $85.3 million, or 57%,
to $234.9 million in 1998, from $149.6 million in 1997. In addition to the
impact of the Merger, the increase was a result of depreciation expense
associated with additional transponder capacity placed in service.
23
Income from Operations. Income from operations decreased $28.1 million, or
8%, to $318.3 million for the year ended December 31, 1998 from $346.4 million
for the same pro forma period in 1997. The decrease was primarily due to
increased depreciation and direct operating costs associated with the
Company's expanded satellite fleet, offset by increased revenue generated by
the expanded satellite fleet.
Interest Expense, Net. Interest expense, net increased $28.8 million, or
42%, to $97.8 million for the year ended December 31, 1998 from $69.0 million
for the same pro forma period in 1997. The increase was due primarily to
higher average borrowing levels during 1998 as well as less interest income
earned as a result of the Company's smaller investment portfolio and a lower
amount of capitalized interest cost for the satellites under construction
resulting from the lower borrowing rate in 1998.
Income Tax Expense. Income tax expense decreased $38.4 million, or 29%, to
$95.9 million for the year ended December 31, 1998 from $134.3 million for the
same pro forma period in 1997. The decrease was due to the decrease in income
before income taxes as well as to a lower effective tax rate in 1998
principally as a result of utilization of foreign sales corporation tax
benefits.
Minority Interest. Minority interest, representing preferred stock dividends
of PanAmSat International, were $0 for the year ended December 31, 1998 as
compared to $24.8 million for the same pro forma period in 1997. 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. Approximately 99% of the 12 3/4%
Senior Subordinated Notes were subsequently retired in connection with the
tender offer and restructuring program described above.
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.
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.
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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 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.
SPACECRAFT DEVELOPMENTS
PAS-7 and PAS-8 were launched during the second half of 1998 and cover the
IOR and POR, respectively. PAS-6B was launched during the fourth quarter of
1998 and is located in the AOR.
As a result of technical problems that occurred on certain of the Company's
satellites in the last 18 months, the Company has modified its previously
announced expansion and restoration strategy to support its existing
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fleet and customers and provide additional capacity. The following recent
technical events have affected PanAmSat's satellite fleet:
Following the launch of PAS-6 in late 1997, an anomaly was detected in its
solar arrays. The satellite experienced several circuit failures in its solar
arrays and may experience additional failures in the future. The circuit
failures require the Company to forego the use of some transponders initially
and to turn off additional transponders in later years. The Company submitted
an insurance claim for this partial loss and $29.1 million was received during
1998. The ability of transponders to provide transmission power for DTH signal
reception using 60-centimeter dishes is not affected.
During 1998, three of the Company's satellites experienced what is believed
to be a related anomaly in their on-board SCPs. On May 19, 1998, all customer
services on Galaxy IV were permanently lost when the satellite experienced an
SCP failure that caused the satellite to rotate and lose its fixed orientation
with the Earth. The spare SCP was unavailable due to an earlier unrelated
event that had not been previously detected. The Company submitted an
insurance claim for this loss and received $162.5 million in 1998. For non-
pre-emptable customers, service was restored with the use of capacity on other
Company satellites, including capacity previously used by certain customers
whose service was subject to preemption and terminated in accordance with
their agreements. Subsequently, two other satellites (Galaxy VII and PAS-4)
had primary SCP failures but are operating normally on back-up systems.
An investigation of the anomaly, conducted by HSC, the manufacturer of the
three affected satellites, identified electrical short circuits involving tin-
plated relay switches as the most probable cause of the SCP failures. The
report concluded that the short circuits can occur only when several factors
are concurrently present. Of the 14 satellites owned by PanAmSat that were
constructed by HSC, five satellites (including PAS-4 and Galaxy VII) are the
same model spacecraft as the affected satellites, and have tin-plated relay
switches similar to the switches on the failed SCPs. No assurance can be given
that additional SCP failures will not occur.
On August 26, 1998, the Company's Galaxy X satellite was destroyed during
the inaugural launch of the Boeing Delta III rocket which exploded shortly
after liftoff. The Company plans to launch a replacement for Galaxy X, Galaxy
X-R, by the fourth quarter of 1999. The Company received $250 million in
insurance proceeds as a result of the failure.
In March 1998, two cells failed in the battery system of PAS-5. The
batteries' sole purpose is to power the payload and spacecraft operations
during the daily eclipse periods (having a duration of one minute to a maximum
of 75 minutes per day) which occur during two 40-day periods around each of
March 21 and September 21. During the autumn eclipse season in 1998,
additional full and partial cell failures occurred on the satellite. In future
eclipse seasons, service to one or more existing full-time customers may be
interrupted for brief periods which, depending upon their extent, could result
in a claim by affected customers for termination of their agreements. The
Company intends to submit an insurance claim for this partial loss. The
Company intends to use PAS-9, an international satellite scheduled for launch
in January 2000, to migrate its largest Ku-band customer from PAS-5. This will
result in fewer transponders being utilized on a full-time basis on PAS-5. The
Company believes that this will reduce the likelihood that full-time C-band
customers on PAS-5 will experience service interruptions during upcoming
eclipse seasons, although there can be no assurance that additional battery
cell failures will not occur in the future.
Also in the autumn eclipse season of 1998, a battery problem similar to the
PAS-5 anomaly was detected on Galaxy VIII-i, which is the same model satellite
as PAS-5. The incident resulted in the shut-off of