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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549


FORM 10-Q


ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                              

Commission File Number 0-22531


PANAMSAT CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  95-4607698
(I.R.S. Employer Identification No.)

20 Westport Road, Wilton, Connecticut
(Address of principal executive offices)

 

06897
(Zip Code)

(203) 210-8000
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)


        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 ý No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

        As of November 8, 2005, an aggregate of 548 shares of our common stock were outstanding.





PANAMSAT CORPORATION

INDEX

Part I   FINANCIAL INFORMATION    
 
Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

5
    Condensed Consolidated Statements of Operations Three months ended September 30, 2004 and 2005   5
    Condensed Consolidated Statements of Operations Nine months ended September 30, 2004 and 2005   6
    Condensed Consolidated Balance Sheets December 31, 2004 and September 30, 2005 (Unaudited)   7
    Condensed Consolidated Statement of Changes in Stockholder's Equity and Comprehensive Income (Loss) Nine months ended September 30, 2005   8
    Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2004 and 2005   9
    Notes to Condensed Consolidated Financial Statements   10
  Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   46
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk   75
  Item 4.   Controls and Procedures   75

Part II

 

OTHER INFORMATION

 

 
 
Item 1.

 

Legal Proceedings

 

76
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   76
  Item 3.   Defaults Upon Senior Securities   76
  Item 4.   Submission of Matters to a Vote of Security Holders   76
  Item 5.   Other Information   76
  Item 6.   Exhibits   76

Signature

 

77

2


        In this Quarterly Report on Form 10-Q, unless the context otherwise requires or it is otherwise indicated, all references to (1) "we", "us" and "our" refer to PanAmSat Corporation and its subsidiaries and (2) "Holdco" refers to our parent company, PanAmSat Holding Corporation.


CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

        This Quarterly Report on Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and service development efforts. 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 Quarterly Report on Form 10-Q, the words "may", "might", "should", "estimate", "project", "plan", "anticipate", "expect", "intend", "outlook", "believe" and other similar expressions are intended to identify forward-looking statements and information. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Reference is also made to such other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission ("SEC").

        The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:

3


        We caution you that the foregoing list of important factors is not exclusive. In light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this quarterly report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. Reference is also made to such risks and uncertainties detailed from time to time in our filings with the SEC.


WEBSITE ACCESS TO COMPANY'S REPORTS

        Our Internet website address is www.panamsat.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.

4



PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS.

PANAMSAT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2005
(IN THOUSANDS)

 
  September 30,
2004

  September 30,
2005

 
REVENUES:              
  Operating leases, satellite services and other   $ 203,268   $ 205,637  
  Outright sales and sales-type leases     3,827     3,481  
   
 
 
    Total revenues     207,095     209,118  
   
 
 
OPERATING COSTS AND EXPENSES:              
  Cost of outright sales and sales-type leases     2,224      
  Depreciation and amortization     74,322     68,861  
  Direct operating costs (exclusive of depreciation and amortization)     38,649     30,973  
  Selling, general and administrative expenses     21,509     17,333  
  Gain on undesignated interest rate swap         (18,332 )
  Facilities restructuring and severance costs     2,080     209  
  Transaction-related costs     154,535      
   
 
 
    Total operating costs and expenses     293,319     99,044  
   
 
 
INCOME (LOSS) FROM OPERATIONS     (86,224 )   110,074  
INTEREST EXPENSE—Net     57,794     48,272  
   
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (144,018 )   61,802  
INCOME TAX EXPENSE (BENEFIT)     (67,363 )   10,333  
   
 
 
NET INCOME (LOSS)   $ (76,655 ) $ 51,469  
   
 
 

See notes to condensed consolidated financial statements.

5



PANAMSAT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2005
(IN THOUSANDS)

 
  September 30,
2004

  September 30,
2005

 
REVENUES:              
  Operating leases, satellite services and other   $ 607,165   $ 621,183  
  Outright sales and sales-type leases     12,185     10,595  
   
 
 
    Total revenues     619,350     631,778  
   
 
 

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

 
  Cost of outright sales and sales-type leases     2,224     (4,303 )
  Depreciation and amortization     220,969     205,791  
  Direct operating costs (exclusive of depreciation and amortization)     118,484     99,811  
  Selling, general and administrative expenses     88,814     55,253  
  Loss on undesignated interest rate swap         305  
  Sponsor management fees         10,444  
  Loss on termination of sales-type lease         2,307  
  Transaction-related costs     155,035      
  Facilities restructuring and severance costs     4,508     3,974  
  Satellite impairment loss     99,946      
   
 
 
    Total operating costs and expenses     689,980     373,582  
   
 
 

INCOME (LOSS) FROM OPERATIONS

 

 

(70,630

)

 

258,196

 
INTEREST EXPENSE—Net     122,503     211,875  
   
 
 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(193,133

)

 

46,321

 
INCOME TAX EXPENSE (BENEFIT)     (95,215 )   7,095  
   
 
 

NET INCOME (LOSS)

 

$

(97,918

)

$

39,226

 
   
 
 

See notes to condensed consolidated financial statements.

6



PANAMSAT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

 
  December 31,
2004

  September 30,
2005

 
 
   
  (Unaudited)

 
ASSETS              

CURRENT ASSETS:

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 38,607   $ 87,411  
  Accounts receivable—net     69,380     62,130  
  Net investment in sales-type leases     24,776     15,294  
  Prepaid expenses and other current assets     25,961     28,260  
  Deferred income taxes     7,817     7,817  
  Assets held for sale     3,300      
   
 
 
    Total current assets     169,841     200,912  
SATELLITES AND OTHER PROPERTY AND EQUIPMENT—Net     1,955,664     1,984,222  
NET INVESTMENT IN SALES-TYPE LEASES     74,990     65,046  
GOODWILL     2,244,131     2,244,131  
DEFERRED CHARGES AND OTHER ASSETS—Net     319,869     369,352  
   
 
 
    TOTAL ASSETS   $ 4,764,495   $ 4,863,663  
   
 
 

LIABILITIES AND STOCKHOLDER'S EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 
  Accounts payable and accrued liabilities   $ 68,491   $ 104,410  
  Current portion of long-term debt     4,100     16,550  
  Current portion of satellite incentive obligations     13,148     13,012  
  Accrued interest payable     45,589     17,157  
  Dividends payable         47,507  
  Deferred gains and revenues     26,618     26,839  
   
 
 
    Total current liabilities     157,946     225,475  
LONG-TERM DEBT     3,603,900     2,919,550  
DEFERRED INCOME TAXES     33,790     37,720  
DEFERRED CREDITS AND OTHER (principally customer deposits, satellite incentive obligations and deferred revenue)     271,100     386,461  
   
 
 
    TOTAL LIABILITIES     4,066,736     3,569,206  
   
 
 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

STOCKHOLDER'S EQUITY:

 

 

 

 

 

 

 
  Common stock $0.01 par value; 1,000 shares authorized, at both December 31, 2004 and September 30, 2005, respectively, and 548 shares outstanding at both December 31, 2004 and September 30, 2005, respectively          
  Additional paid-in-capital     129,819     789,704  
  Retained earnings     570,136     508,071  
  Accumulated other comprehensive income     1,222     100  
  Other stockholders' equity     (3,418 )   (3,418 )
   
 
 
    TOTAL STOCKHOLDER'S EQUITY     697,759     1,294,457  
   
 
 
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 4,764,495   $ 4,863,663  
   
 
 

See notes to condensed consolidated financial statements.

7


PANAMSAT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(IN THOUSANDS, EXCEPT SHARE DATA)

 
   
   
   
   
  Accumulated
Other
Comprehensive
Income,
net of tax

   
   
   
 
 
  Common Stock
   
   
   
   
   
 
 
  Additional
Paid-In
Capital

  Retained
Earnings

  Other
Stockholder's
Equity(1)

   
  Comprehensive
Income

 
 
  Shares
  Amount
  Total
 
BALANCE, JANUARY 1, 2005   548   $   $ 129,819   $ 570,136   $ 1,222   $ (3,418 ) $ 697,759        
Additional investment from parent with proceeds from initial public offering           658,350                 658,350        
Foreign currency translation adjustment                   401         401   $ 401  
Unrealized loss on interest rate hedge                   (1,523 )       (1,523 )   (1,523 )
Deferred compensation reclass—deferred stock units           1,535                 1,535      
Dividends to stockholder               (101,291 )           (101,291 )    
Net income               39,226             39,226     39,226  
   
 
 
 
 
 
 
 
 
BALANCE, SEPTEMBER 30, 2005   548   $   $ 789,704   $ 508,071   $ 100   $ (3,418 ) $ 1,294,457   $ 38,104  
   
 
 
 
 
 
 
 
 

(1)
Represents excess of purchase price over historical cost basis of net assets acquired.

See notes to condensed consolidated financial statements

8



PANAMSAT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2005
(IN THOUSANDS)

 
  September 30,
2004

  September 30,
2005

 
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net income (loss)   $ (97,918 ) $ 39,226  
Adjustments to reconcile net iincome (loss) to net cash provided by operating activities:              
  Depreciation and amortization     220,969     205,791  
  Deferred income taxes     (98,457 )   5,027  
  Amortization of debt issuance costs and other deferred charges     7,698     14,338  
  Loss on undesignated interest rate swap         305  
  Provision for uncollectible receivables     31,982     (2 )
  Loss on early extinguishment of debt     20,589     24,161  
  Satellite impairment loss     99,946      
  Loss on Galaxy 10R XIPS anomaly     9,090      
  Facilities restructuring and severance costs     4,309     3,998  
  Reversal of sales-type lease liabilities     (3,727 )   (4,303 )
  Loss on termination of sales-type lease         2,307  
  Gain on disposal of fixed assets     (1,332 )    
  Other non-cash items     (3,950 )   (2,260 )
  Changes in assets and liabilities:              
    Collections on investments in sales-type leases     19,035     19,922  
    Operating leases and other receivables     6,166     6,049  
    Prepaid expenses and other assets     (4,222 )   (1,708 )
    Accounts payable and accrued liabilities     (49,345 )   (7,191 )
    Due from affiliate         (79 )
    Deferred gains and revenues     1,209     (33,173 )
   
 
 
      NET CASH PROVIDED BY OPERATING ACTIVITIES     162,042     272,408  
   
 
 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 
  Capital expenditures (including capitalized interest)     (103,299 )   (142,179 )
  Insurance proceeds from satellite recoveries     286,915      
  Net sales of short-term investments     374,097      
  Proceeds from sale of teleport         3,161  
  Acquisitions, net of cash acquired     (522 )   (41,863 )
   
 
 
      NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES     557,191     (180,881 )
   
 
 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 
  Issuance of long-term debt     3,512,615      
  Repayments of long-term debt     (1,443,459 )   (671,900 )
  Contribution of dividends to parent         (53,785 )
  Capital contribution by parent         658,350  
  Capitalized transaction costs     (152,064 )    
  Capitalized debt issuance costs         (598 )
  New incentive obligations     16,250      
  Repayments of incentive obligations     (9,571 )   (9,464 )
  Funding of capital expenditures by customer         33,464  
  Repurchase of treasury stock     (2,784,556 )    
  Reissuance of treasury shares     757      
  Capital contributed by affiliate     9,200      
  Other equity related transactions     3,384      
   
 
 
      NET CASH USED IN FINANCING ACTIVITIES     (847,444 )   (43,933 )
   
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     328     1,210  
   
 
 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(127,883

)

 

48,804

 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     176,087     38,607  
   
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 48,204   $ 87,411  
   
 
 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 
  Cash received for interest   $ 6,955   $ 2,333  
   
 
 
  Cash paid for interest   $ 134,453   $ 222,111  
   
 
 
  Cash received for taxes   $ 122   $ 69  
   
 
 
  Cash paid for taxes   $ 3,422   $ 7,243  
   
 
 

See notes to condensed consolidated financial statements.

9



PANAMSAT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)    Basis of Presentation

        Within these unaudited condensed consolidated financial statements, PanAmSat Corporation and its subsidiaries are referred to as "PanAmSat", "we", "us" and "our". The term "Holdco" refers to our parent company, PanAmSat Holding Corporation.

        These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The condensed consolidated financial statements include all normal and recurring adjustments that management considers necessary to present fairly the financial position as of September 30, 2005, results of operations for the three and nine months ended September 30, 2004 and 2005 and cash flows for the nine months ended September 30, 2004 and 2005. Certain prior period amounts have been reclassified to conform to the current period's presentation. Operating results for the three and nine months ended September 30, 2004 and 2005 are not necessarily indicative of the operating results for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our audited financial statements for the year ended December 31, 2004 included within our Annual Report on Form 10-K for the year ended December 31, 2004 (the "Form 10-K") filed with the SEC on March 22, 2005, all amendments thereto, and all of our other filings filed with the SEC from March 22, 2005 through the date of this report.

        On August 20, 2004, affiliates of Kohlberg Kravis Roberts & Co. L.P., or KKR, The Carlyle Group, or Carlyle, and Providence Equity Partners, Inc., or Providence, completed a series of transactions resulting in an entity affiliated with KKR owning approximately 44% of our outstanding common stock and entities affiliated with Carlyle and Providence each owning approximately 27% of our common stock, with the remainder held by certain members of management and our board of directors. We collectively refer to KKR, Carlyle and Providence as the "Sponsors" in this quarterly report. We refer to the August 20, 2004 series of transactions through which the Sponsors acquired and recapitalized us as the "Recapitalization".

        On September 22, 2004, Holdco was formed by the then existing stockholders of PanAmSat. On October 8, 2004, all of PanAmSat's outstanding common stock held by its then existing stockholders was contributed to Holdco in exchange for an equal number of shares of Holdco common stock, par value $.01 per share. As a result of and immediately following that contribution, PanAmSat's then existing stockholders owned Holdco in equal proportion to their prior ownership interest in PanAmSat, and PanAmSat became a wholly-owned subsidiary of Holdco.

        The contribution of PanAmSat to Holdco was accounted for as a recapitalization because neither a change in control nor a business combination occurred and Holdco was not a substantive operating entity. Accordingly, there was no change in the basis of the assets and liabilities of PanAmSat. Therefore, all operations of PanAmSat prior to the contribution to Holdco are reflected herein at their historical amounts.

(2)    Holdco Initial Public Offering

        On March 22, 2005, Holdco consummated an initial public offering of 50 million shares of its common stock at $18 per share and used a portion of the proceeds to repay a portion of the borrowings under our Term Loan A Facility, redeem a portion of our 9% senior notes due 2014 and pay a dividend to its pre-existing stockholders. The net proceeds of the initial public offering were approximately $850 million (net of underwriting discounts, fees and expenses associated with the initial

10



public offering). On March 22, 2005, Holdco utilized a portion of these net proceeds to make an equity contribution to us of approximately $658.4 million. We used approximately $265.0 million of these funds to repay a portion of the borrowings under our Term Loan A Facility. On April 1, 2005, we redeemed $353.5 million, or 35%, of our 9% senior notes with a portion of these funds and paid a redemption premium of $31.8 million to holders of these notes. In connection with and contingent upon Holdco's initial public offering, our senior secured credit facilities were amended to, among other things:

(3)    PanAmSat/Intelsat Merger

        On August 29, 2005, Holdco and Intelsat, Ltd. announced that the two companies signed a definitive merger agreement under which Intelsat will acquire Holdco for $25 per share in cash, or $3.2 billion. Under the agreement, which was approved unanimously by the boards of directors of both companies, Intelsat will acquire all of Holdco's outstanding common shares. Also in connection with the merger, our board of directors and the board of directors of Holdco approved the adoption of a severance plan, on terms similar to our existing severance plan, and authorized a retention pool of up to $10 million for non-senior management employees.

        On October 26, 2005, Holdco's shareholders approved and adopted the merger agreement. Consummation of the merger remains subject to various conditions, including satisfaction of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), waiting period, receipt of Federal Communications Commission approvals, receipt of financing and other conditions. Also on October 26, 2005, Holdco received a request from the United States Department of Justice, or DOJ, for additional information and documentary materials in connection with the merger. The effect of this request is to extend the waiting period imposed by the HSR Act until 30 days after the parties have substantially complied with the request, unless that period is terminated earlier by the DOJ or extended voluntarily. If the conditions to the merger are satisfied or waived (to the extent permitted by applicable law), we expect to consummate the merger in the second or third quarter of 2006.

(4)    Dividend Policy

        Our board of directors adopted a dividend policy that became effective upon the closing of Holdco's initial public offering. Our dividend policy reflects an intention to distribute a substantial

11



portion of the cash generated by our business in excess of operating expenses and working capital requirements, interest and principal payments on our indebtedness and capital expenditures as regular quarterly dividends to our sole stockholder, Holdco, for payment as a dividend to its stockholders. On March 21, 2005, our board of directors declared a dividend to Holdco of approximately $5.28 million. This dividend was paid in April 2005. On June 20, 2005, our board of directors declared a dividend to Holdco of approximately $47.5 million, which was paid on July 14, 2005. On September 19, 2005, our board of directors declared a dividend to Holdco of approximately $47.5 million, which was paid on October 13, 2005. Also, in September 2005, we recorded a dividend of $1.0 million related to amounts funded to Holdco for the payment of certain expenses.

(5)    Stock Split, Reverse Stock Split and Amended and Restated Certificate of Incorporation

        In connection with the Recapitalization, on August 20, 2004, our board of directors effected an approximately 4.37 for 1 stock split of our common stock. On December 17, 2004, we amended and restated our certificate of incorporation to effect a 1 for 200,000 reverse stock split of our common stock. Unless otherwise indicated, all share and per share amounts, as well as the par value amount and additional paid in capital amount related to these shares within these condensed consolidated financial statements, have been restated for all periods presented to give retroactive effect to the stock split and the reverse stock split.

(6)    Long-Term Debt

        With a portion of the proceeds from its initial public offering, Holdco made an equity contribution to us of approximately $658.4 million, which we used to repay approximately $265.0 million of the borrowings under our Term Loan A Facility on March 22, 2005, redeem $353.5 million, or 35%, of our 9% senior notes and pay a redemption premium of $31.8 million to holders of these notes on April 1, 2005. We also repaid an additional $25.0 million of the Term Loan A facility with cash on hand on March 22, 2005. On June 17, 2005 we made a voluntary prepayment of $28.4 million under our Term Loan A facility from available cash on hand.

        During the nine months ended September 30, 2005, we recorded non-cash charges totaling approximately $24.2 million for unamortized debt issuance costs written off as a result of the $353.5 redemption of our 9% senior notes and the $318.4 million of voluntary debt repayments made on our Term Loan A facility during this period.

12



        As of December 31, 2004 and September 30, 2005, long-term debt consisted of the following (in thousands):

 
  December 31,
2004

  September 30,
2005

63/8% Notes due 2008   $ 150,000   $ 150,000
81/2% Notes due 2012     1,190     1,190
67/8% Notes due 2028     125,000     125,000

Transaction Related Financing:

 

 

 

 

 

 
Revolving Credit Facility        
Term Loan A due 2009     674,310     355,910
Term Loan B/Term Loan B-1 due 2011     1,647,500     1,647,500
9% Senior Notes due 2014     1,010,000     656,500
   
 
      3,608,000     2,936,100
Less: current maturities     4,100     16,550
   
 
Total Long-Term Debt   $ 3,603,900   $ 2,919,550
   
 

        At September 30, 2005, we had total debt outstanding of approximately $2.9 billion, including current maturities of $16.6 million related to our Term Loan B-1 facility due 2011.

        Holdco's primary source of liquidity is cash flow generated from the operations of its subsidiaries. We are Holdco's only subsidiary. Holdco's ability to pay dividends on its common stock and make payments on its 103/8% senior discount notes due 2014 is dependent on the earnings and the distribution of funds from us. The agreements governing our senior secured credit facilities and 9% senior notes are the two contractual obligations of ours that significantly restrict our ability to pay dividends or otherwise transfer assets to Holdco. Payment of dividends is also subject to compliance with Delaware law.

        Concurrent with the completion of Holdco's initial public offering, we amended our senior secured credit facilities. Borrowings under our senior secured credit facilities bear interest at the borrower's option at either adjusted LIBOR plus an applicable margin or the alternate base rate plus an applicable margin. Borrowings under the senior secured credit facilities are subject to adjustment based on a pricing grid.

        Our senior secured credit facilities are comprised of a $250.0 million revolving credit facility, which will terminate in August 2009, an $800.0 million Term Loan A Facility, which matures in August 2009, and a $1,647.5 million Term Loan B-1 Facility, which matures in August 2011. At September 30, 2005, the interest rate on the Term Loan A Facility was 1 month LIBOR of 3.82% plus 1.75%. At September 30, 2005, the Term Loan B-1 facility was split into two tranches in order to provide for the principal payment of $4.1 million which is due on November 18, 2005. The first tranche in the amount of $4.1 million, which is subject to the principal paydown, had an interest rate of 2 month LIBOR of 3.80% plus 2.00%. The remaining tranche, in the amount of $1,643.4 million, had an interest rate of 3 month LIBOR of 3.86% plus 2.00%. The revolving credit facility was undrawn. These rates are subject to change based upon our total leverage ratio. In addition, we are required to pay a commitment fee for the unused commitments under the revolving credit facility, if any, which, as of September 30, 2005, on an annual basis was 0.25%. As of September 30, 2005, we had outstanding

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letters of credit totaling $49.2 million. Outstanding letters of credit reduce our ability to borrow against the revolving credit facility by an equivalent amount. Any amounts borrowed under the revolving credit facility would bear interest at 1 month LIBOR plus 1.75% as of September 30, 2005, although this interest rate is subject to adjustment based on our total leverage ratio.

        Obligations under the senior secured credit facilities are, or will be, as the case may be, unconditionally and irrevocably guaranteed jointly and severally by our current and future domestic subsidiaries and are secured by substantially all of our assets and substantially all of the assets of each of our current and future domestic subsidiaries.

        The 9% senior notes require interest payments to be made semi-annually, mature on August 15, 2014, are unsecured, and are, or will be, as the case may be, unconditionally guaranteed by each of our existing and certain subsequently acquired or organized domestic restricted subsidiaries.

        In connection with the Recapitalization, in August 2004, we completed a tender offer for substantially all of our $275 million 61/8% Notes due 2005 and our $800 million 81/2% Senior Notes due 2012. We completed the redemption of our remaining 61/8% Notes due 2005 in October 2004. In September 2004, we repaid the outstanding balance under our revolving credit facility.

        As of September 30, 2005, we had outstanding 10 and 30-year fixed rate notes totaling $275.0 million which were issued in January 1998. The outstanding principal balances, interest rates and maturity dates for these notes as of September 30, 2005, are $150.0 million at 63/8% due 2008 and $125.0 million at 67/8% due 2028, respectively. Principal on these notes is payable at maturity, while interest is payable semi-annually.

        As of September 30, 2005, we also had outstanding $1.2 million of our 81/2% senior notes due 2012. These notes are unsecured, and are unconditionally guaranteed by each of our domestic restricted subsidiaries existing prior to the Recapitalization.

        We are required to maintain certain financial covenants and are also subject to restrictive covenants under our borrowings. As of September 30, 2005, we were in compliance with all such covenants.

(7)    Interest Rate Swap Agreements

        In accordance with the agreement governing our old senior secured credit facilities that were repaid in 2004, we were party to an interest rate swap agreement for a fixed rate payment of 5.64% on $100.0 million through August 30, 2005. In June of 2004, in connection with the repayment of the term loan B-1 facility of our old credit facility, our cash flow hedge became undesignated and therefore changes in the fair value of the interest rate swap have been recorded within our consolidated statement of operations from that time. In August 2005, this agreement expired.

        On March 14, 2005, we entered into a five year interest rate swap agreement to hedge interest expense on a notional amount of $1.25 billion. The notional amount will amortize down to $625 million on March 14, 2008 until expiration on March 15, 2010. In relation to this swap agreement, we exchanged our floating-rate obligation on $1.25 billion of our Term Loan B-1 facility for a fixed-rate obligation, subject to scheduled rate increases based on the LIBOR rate used.

        The counterparties to this agreement are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swap agreement, our exposure is

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limited to the interest rate differential on the notional amount at each quarterly settlement period over the life of the agreements. We do not anticipate non-performance by the counterparties.

        The fair value of the interest rate swap agreement is the estimated amount that we would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates, the market expectation for future interest rates and our current creditworthiness. From the inception of the interest rate swap agreement through May 24, 2005, the interest rate swap was undesignated and the increase in the fair value of the related obligation of approximately $18.6 million was recorded within loss on undesignated interest rate swap in our consolidated statement of operations for the quarter ended June 30, 2005, in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133. Between May 25, 2005 and June 30, 2005, the interest rate swap was designated as a cash flow hedge and deemed effective, and therefore qualified for hedge accounting treatment under SFAS No. 133. In accordance with SFAS No. 133, changes in the hedged asset or liability representing the effectiveness of the hedge were recorded within comprehensive income (loss) in our consolidated balance sheet. The ineffective portion of the hedge (approximately $630 thousand) was recorded as an adjustment to interest expense in the consolidated statement of operations for the quarter ended June 30, 2005.

        Pursuant to SFAS No. 133 we are required to perform a quarterly analysis of the effectiveness of the hedge. Under SFAS No.133 in order to maintain the effectiveness of the hedge, an effectiveness rate of between 80% and 125% must be maintained. This effectiveness rate is calculated by dividing the cumulative change in the hedge liability by the cumulative change in the cash flows of the debt being hedged. As a result of this test, it was determined that the interest rate swap agreement was no longer an effective hedge, and therefore did not qualify for hedge accounting treatment under SFAS No. 133. As a result, the interest rate swap was undesignated and therefore pursuant to the guidance within SFAS No. 133, the reduction in the fair value of the interest rate swap obligation of approximately $18.3 million was recorded as a gain on undesignated interest rate swap in our consolidated statement of operations for the three months ended September 30, 2005. The net loss on undesignated interest rate swap for the nine months ended September 30, 2005 was $0.3 million. As of September 30, 2005 the liability related to this interest rate swap of $3.2 million was included in deferred credits and other within our condensed consolidated balance sheet.

        On the interest rate reset date of September 14, 2005, the interest rate which the counterparties will utilize on December 14, 2005 to compute interest due to us was determined to be 3.857%. This will result in our paying the counterparties approximately $206 thousand on December 14, 2005 (the difference between the rate we must pay of 3.922% and the rate we will receive from the counterparties of 3.857%).

(8)    Facilities Restructuring and Severance Costs

        Facilities restructuring and severance costs were $2.1 million and $0.2 million for the three months ended September 30, 2004 and 2005, and $4.5 million and $4.0 million for the nine months ended September 30, 2004 and 2005, respectively.

        In January 2003, our management approved a plan to consolidate certain of our teleports in order to improve customer service and reduce operating costs. This teleport consolidation plan included the closure of certain owned teleports and the reduction of services at our Fillmore and Castle Rock teleports. Under this plan, our Homestead, Florida teleport was closed in 2003 and our Spring Creek,

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New York teleport was closed in June 2004. Our Spring Creek teleport was sold on October 28, 2004. On June 3, 2005, we completed the sale of our Homestead teleport for approximately $3.2 million, net of associated selling costs. During the three months ended September 30, 2004 and 2005, we recorded credits of $0.2 million and charges of $0, respectively, and during the nine months ended September 30, 2004 and 2005 we recorded charges of $0.8 million and $2.5 million, respectively, related to this teleport consolidation plan, representing severance costs in 2004 and certain costs incurred in relation to equipment transferred to other locations in 2005.

        On March 29, 2002, our management approved a plan to restructure several of our United States locations and close certain facilities, some of which are currently being leased through 2011. In an effort to further streamline our operations, in the first quarter of 2004, we consolidated our Manhattan Beach, El Segundo and Long Beach, California facilities. As a result, we recorded a non-cash charge of $1.4 million during the first quarter of 2004 reflecting future lease costs related to approximately 18,000 square feet of unused facilities in Manhattan Beach. Additionally, in the third quarter of 2004 we recorded a non-cash charge of approximately $2.3 million due to a reduction in future anticipated sublease income related to one of our idle facilities. We recorded a non-cash charge of approximately $0.5 million in the nine months ended September 30, 2005, in relation to increased future lease costs related to one of our idle facilities.

        In October 2003 and October 2004, our management approved plans to reduce our workforce by approximately 45 employees and 25 employees, respectively. During the three months ended September 30, 2004 and 2005, we recorded severance charges of $0 and $0.2 million, respectively, and during the nine months ended September 30, 2004 and 2005, we recorded charges of $0 and $1.0 million, respectively, in relation to these plans. These severance costs were primarily related to employee compensation, benefits and outplacement services.

        The following table summarizes the recorded accruals and activity related to our teleport consolidation, facilities restructuring and severance charges during the nine months ended September 30, 2005 (in millions):

 
  Facilities
Restructuring

  Teleport
Consolidation

  Severance
Costs

  Total
 
Balance as of January 1, 2005   $ 6.3   $ 0.3   $ 0.5   $ 7.1  
Restructuring charges     0.5     2.5     1.0     4.0  
Less: non-cash items         (2.5 )       (2.5 )
Less: net cash payments     (1.2 )   (0.2 )   (1.0 )   (2.4 )
   
 
 
 
 
Balance as of September 30, 2005   $ 5.6   $ 0.1   $ 0.5   $ 6.2  
   
 
 
 
 

        We expect to pay the $0.6 million of liabilities related to our severance costs and teleport consolidation plans within the next year and we expect to pay the $5.6 million of liabilities related to our facilities restructuring plan over the next six years.

(9)    Interest Expense—Net

        Interest expense for the three months ended September 30, 2004 and 2005 is recorded net of capitalized interest of $2.0 million and $7.3 million, respectively, and interest income of $1.7 million and $0.8 million, respectively. Interest expense for the nine months ended September 30, 2004 and 2005 is recorded net of capitalized interest of $4.3 million and $18.3 million, respectively, and interest

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income of $6.8 million and $2.1 million, respectively. Included in interest expense for the three and nine months ended September 30, 2004 is approximately $15.1 million and $20.6 million, respectively, for the write-off of unamortized debt issuance costs related to the June 2004 prepayment under the term loan B facility of our old credit facility and August 2004 repayments of certain indebtedness. Included in interest expense for the three and nine months ended September 30, 2005 is approximately $0 million and $56.0 million, respectively, of unamortized debt issuance costs which were written-off as a result of the prepayment of $290.0 million on our senior secured credit facilities on March 22, 2005, the redemption of $353.3 million, or 35%, of our 9% senior notes on April 1, 2005, including a redemption premium of $31.8 million paid to the holders of these notes, and the voluntary prepayment of $28.4 million on June 17, 2005 under our Term Loan A facility from available cash on hand.

(10)    Acquisitions

        On August 31, 2005, PanAmSat acquired multiple European orbital slots, as well as a satellite with European, Middle Eastern, African and Asian coverage from Alcatel, a French communications company, for a purchase price of approximately $60.2 million plus liabilities and costs incurred in relation to the acquisition of approximately $13.3 million, including $9.0 million of contingent performance payments due to Alcatel in addition to the purchase price. This acquisition was accomplished in order to strengthen our presence in these markets and expand our global reach into key growth regions. Through September 30, 2005, we paid $41.9 million of this aggregate purchase price from cash on hand. The satellite acquired, formerly known as Europe*Star 1, was renamed PAS-12, and is capable of providing a broad range of enhanced services to European customers for program distribution, broadcast contribution and enterprise networking. The agreement provides for purchase price installments and performance payment installments contingent on the future performance of the satellite.

        The results of this acquisition have been included in our fixed satellite services segment from the date of acquisition.

        The purchase price allocation for this acquisition has been prepared on a preliminary basis, and reasonable changes are expected as additional information becomes available. The $60.2 million purchase price represents $73.5 million allocated to assets acquired less $13.3 million allocated to liabilities and costs incurred. Of the assets acquired, $2.0 million was allocated to intangible assets, of which approximately $1.8 million allocated to orbital slots was determined to have an indefinite life. The remaining tangible assets acquired include the PAS-12 satellite, non-satellite equipment and a 51% investment in an entity affiliated with Alcatel. The $13.3 million of liabilities and costs incurred primarily represents $9.0 million of contingent performance incentive obligations.

(11)    Commitments and Contingencies

Satellite Incentive Obligations

        Satellite contracts typically require that we make progress payments during the period of the satellite's construction and orbital incentive payments (plus interest) over the orbital life of the satellite. The incentive obligations may be subject to reduction if the satellite fails to meet specific technical operating standards. Certain of our satellite construction contracts also provide that certain amounts paid by us during the construction phase are subject to refund (with interest) if the satellite fails to

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meet these technical operating standards. As of September 30, 2005, we had $110.1 million of liabilities recorded in relation to these satellite incentive obligations.

Satellite Commitments

        As of September 30, 2005, we had approximately $184.6 million of expenditures remaining under existing satellite construction contracts and $83.0 million remaining under existing satellite launch contracts. Satellite launch and in-orbit insurance contracts related to future satellites to be launched are cancelable up to thirty days prior to the satellite's launch. As of September 30, 2005, we did not have any non-cancelable commitments related to existing launch insurance or in-orbit insurance contracts for satellites to be launched.

        In April 2004, we committed to construct a new satellite, Galaxy 16, and in February 2005, we entered into an agreement for the construction of Galaxy 18. These satellites, together with our Galaxy 17 satellite already under construction, will serve as replacements for Galaxy 4R, Galaxy 10R and Galaxy 11. The construction program contemplates the availability of one of these satellites as an on-ground backup against launch failure or substantial delay of either of the other two satellites. Construction of Galaxy 18 began in 2005 and we plan to launch this satellite in the second quarter of 2007.

        The manufacturer of Galaxy 16 and Galaxy 18 is in the process of emerging from Chapter 11 bankruptcy. Both the Galaxy 16 and Galaxy 18 construction contracts have been approved by the bankruptcy court. Our agreements for the construction of Galaxy 16 and Galaxy 18 contain financial covenants applicable to the manufacturer, including a requirement that all payments made or to be made to the manufacturer be utilized for the construction of these satellites. We also have a security interest in the satellites under construction by this manufacturer. In June 2005, we entered into launch agreements for these two satellites. Pursuant to these agreements, $65.8 million previously paid for the launch of Galaxy 8-iR will be applied to the launch of our Galaxy 16 satellite.

        On April 12, 2005, we entered into an agreement for the construction of PAS-11, which will be located at 43 degrees west longitude and will serve as a replacement for our PAS 6-B Ku-band satellite and the C-band portion of our PAS-3R satellite. In July 2005, PanAmSat Corporation signed an agreement for the launch of this satellite in the first quarter of 2007.

        On August 1, 2005, we formed our second 50-50 joint venture with JSAT International, Inc., or JSAT, a leading satellite operator in the Asia-Pacific region, that will build and launch a Ku-band satellite to replace our SBS-6 satellite at 74 degrees west longitude. The joint venture is named Horizons-2. The satellite will support digital video, high-definition television (HDTV) and IP-based content distribution networks to broadband Internet and satellite news gathering services (SNG) in the United States. This Horizons-2 satellite will be constructed over the next two years and is expected to be in service by late 2007. The total investment in this joint venture is expected to be approximately $160 million, of which each of the joint venture partners is required to fund their 50% share beginning in early 2008. Our investment in this joint venture is being accounted for using the equity method. As of September 30, 2005 we have recorded a liability of $79.8 million within our condensed consolidated financial statements in relation to the future funding of this investment.

        On August 14, 2005, we successfully launched our Galaxy 14 satellite into orbit. This satellite will be co-located with Galaxy 12 at 125 degrees west longitude.

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Satellite Insurance

        In December 2003, we reached a final settlement of insurance claims on our PAS-1R and Galaxy 11 satellites for payment of $260.0 million, which related to solar panel anomalies on those satellites. We will continue to own and operate these satellites free and clear of any claims of these insurers. We offset the proceeds from this settlement against the carrying value of the satellites. In the first quarter of 2004, we received the $260.0 million settlement amount.

        In July 2003, we filed a proof of loss under the insurance policy for our Galaxy 4R satellite after the secondary xenon-ion propulsion system, or XIPS, on this satellite ceased working. Later in 2003, we settled an insurance claim on this satellite related to the failure of its propulsion system and received $102.6 million from insurers representing approximately 83% of the insurance coverage on the satellite. In March 2004, we reached an agreement with, and received $26.9 million from, the insurer representing the remaining 17% of the insurance coverage on this satellite. The settlement with the insurer representing 17% coverage includes a future sharing of revenues actually received from the satellite. We proportionately offset the proceeds from these settlements against the insured carrying value of the satellite and the net investment in sales-type lease. We are constructing a replacement satellite for Galaxy 4R, which is scheduled to be launched in 2006, prior to the end of Galaxy 4R's useful life.

        As of September 30, 2005, we had in effect launch and in-orbit insurance policies covering five satellites in the aggregate amount of approximately $458.7 million. As of such date, these insured satellites had an aggregate net book value and other insurable costs of $596.1 million. We had 19 uninsured satellites in orbit as of September 30, 2005. In July 2005, the insurance policy on our PAS-9 satellite expired and was not replaced. As a result, PAS-9 is no longer insured. As of September 30, 2005, PAS-9 had approximately $99 million of net book value and other insurable costs. Our HGS-5 satellite, which had been operating in an inclined orbit, was de-orbited on September 29, 2005. HGS-5 had a net book value and other insurable costs of $0. Our currently uninsured satellites are: PAS-4, which is used as a backup satellite; PAS-5 and PAS-7, for which we received insurance proceeds for constructive total losses; Galaxy 1R, Galaxy 3R, and SBS-6, which are approaching the end of their useful lives; Galaxy 4R, Galaxy 10R, Galaxy 11 and PAS-1R, for which we received insurance proceeds for partial losses; PAS-2, PAS-3R, PAS-6B, PAS-8, PAS-9, Galaxy 9 and Galaxy 12, for which we determined that insurance was not available on commercially reasonable terms; and HGS-3 and Leasat, which have an aggregate book value of approximately $0.5 million. Our Galaxy 9 and Galaxy 14 satellites currently serve as in-orbit backups for the C-band portions of Galaxy 1R, Galaxy 3C, Galaxy 4R, Galaxy 10R, Galaxy 11, Galaxy 12 and Galaxy 13/Horizons 1. The C-band portion of the satellites that are currently covered by C-band in-orbit backups had an aggregate net book value of approximately $314.6 million as of September 30, 2005.

        Of the insured satellites, as of September 30, 2005, one was covered by policies with substantial exclusions or exceptions to coverage for failures of specific components identified by the underwriters as at risk for possible failure, or Significant Exclusion Policies. The exclusions reduce the probability of an insurance recovery in the event of a loss on this satellite. Galaxy 13/Horizons 1, which was placed in service in January 2004 and is insured by a policy with an exclusion for XIPS related anomalies, continues to have available redundant XIPS as its primary propulsion system. Certain enhancements have been made to the XIPS on this satellite to make the systems more robust. In addition, Galaxy 13/Horizons 1 has available backup bi-propellant of approximately 11.3 years as of September 30, 2005.

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        At September 30, 2005, the uninsured satellites and the satellites insured by Significant Exclusion Policies had a total net book value and other insurable costs of approximately $986.7 million. Of this amount, $894.2 million related to uninsured satellites and $92.5 million related to satellites insured by Significant Exclusion Policies.

        Upon the expiration of the insurance policies, there can be no assurance that we will be able to procure new policies on commercially reasonable terms. New policies may only be available with higher premiums or with substantial exclusions or exceptions to coverage for failures of specific components.

        An uninsured failure of one or more of our satellites could have a material adverse effect on our financial condition and results of operations. In addition, higher premiums on insurance policies will increase our costs, thereby reducing our income from operations by the amount of such increased premiums.

Operating Leases

        We have commitments for operating leases primarily relating to our executive office facilities in Wilton, Connecticut and other locations. These leases contain escalation provisions that call for increased payments in the event of increases in real estate taxes and operating expenses. As of September 30, 2005, minimum annual rentals of all leases, exclusive of potential increases in real estate taxes, operating assessments and future sub-lease income aggregated $29.3 million.

Customer and Vendor Obligations

        We have contracts with certain of our customers which require us to provide equipment, services and other support during the term of the related contracts with us. As of September 30, 2005, we had commitments to provide equipment, services and other support under these customer contracts, which aggregated approximately $39.2 million.

        In July 2005, we signed an agreement with a customer in which PanAmSat is a subcontractor and the customer is the prime contractor to its end user customer. In exchange for PanAmSat's engagement as a subcontractor on this project, we agreed to guarantee the prime contractor's $8.8 million performance bond.

        We have long-term contractual obligations with service providers primarily for the operation of certain of our satellites. As of September 30, 2005, we had commitments under these vendor contracts which aggregated approximately $57.6 million related to the provision of equipment, services and other support.

Change-in-Control Obligations

        Certain of our senior executives are party to change-in-control severance agreements which provide for payment of severance and other benefits in the event of an involuntary termination of the executive's employment (as defined in such agreements) within three years after a change in control. The requisite changes of control required under these agreements have occurred and these agreements will apply if an involuntary termination of an executive occurs during the periods specified by the agreements. Based upon current compensation levels, if all of these executives receive the termination related benefits as specified by their respective agreements, the aggregate cost to us would be up to $11.1 million (net of tax benefits of $6.4 million).

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        In connection with Holdco's pending merger with Intelsat, our board of directors approved the adoption of a 2005 Severance Pay Plan on terms similar to our existing 2003 Severance Pay Plan and authorized a retention pool of up to $10 million for employees. As of the current date, retention bonuses totaling approximately $8.0 million have been designated for employees. The 2005 Severance Pay Plan allows for the payment of enhanced severance to employees who are laid off or who resign for good reason (as defined in such plan) due to, and within 18 months following, a change in control (as defined in such plan). We are currently unable to estimate the amount of future severance which would be payable pursuant to the 2005 Severance Pay Plan in the event of a change in control.

        We and Holdco granted stock options to certain employees subsequent to the Recapitalization. The options granted by us were assumed by Holdco in October 2004. In addition, certain employees also acquired common stock of Holdco. The vesting of the stock options accelerates in the event of certain changes in control of Holdco. Pursuant to contractual obligations, we could be obligated to make payments for vested options and to repurchase shares held by certain employees in the event of the death or qualifying disability of any such employee. In all other circumstances, Holdco has the right, but not the obligation, to call the common stock held by employees and, therefore, no contingent obligation would exist for us.

        Upon the consummation of Holdco's pending merger with Intelsat, based upon the $25 per share merger consideration, assuming the acceleration of all outstanding options and other equity based arrangements and their conversion into a right to receive cash, each as required by the merger agreement, and assuming that the holders of such equity based arrangements receive the amounts described in the merger agreement, we will be required to recognize an expense of between $100 million and $110 million.

        We estimate that the maximum tax costs related to these obligations, including reimbursement of employee excise taxes and lost income tax deductions, would be approximately $40 million.

Foreign Withholding Taxes

        We have outstanding tax claims related to withholding taxes assessed on revenues derived from broadcasters inside and outside of India who broadcast from or into India. The total amount assessed for all periods from March 31, 1996 through March 31, 2002 is approximately $56.9 million. We are contesting the imposition of such taxes. While this contest proceeds, we have been required to advance cash and provide a bank guarantee for a total of approximately $49.2 million. As of September 30, 2005, we had paid cash of approximately $1.2 million related to these assessment years. If unsuccessful in our contest, we could be subject to comparable claims for subsequent years. In connection with the Recapitalization, The DIRECTV Group, which controlled us prior to the Recapitalization, agreed to indemnify us for these and certain other taxes related to any periods or portions of such periods ending on or prior to the day of the closing of the Recapitalization in amounts equal to 80% of the first $75.0 million of such taxes and 100% of such taxes in excess of the first $75.0 million. As a result, our net tax liability related to these periods is capped at $15.0 million.

(12)    Certain Relationships and Related Transactions Prior to and as a Result of the Completion of the Recapitalization

Transactions with The DIRECTV Group and its Affiliates

        Until the consummation of the Recapitalization on August 20, 2004, The DIRECTV Group and its affiliates were related parties of ours.

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        In relation to the tax separation agreement we entered into with The DIRECTV Group as part of the Recapitalization, we have recorded an $84.3 million receivable related to foreign withholding tax claims made against us by the Indian government, the related payments made to date by us on those claims, and for certain other foreign and domestic tax claims against us and tax payments made by us.

        We provide satellite capacity, telemetry, tracking and control, or TT&C, and other related services and facilities to several subsidiaries of The DIRECTV Group and purchase certain services and equipment from a subsidiary of The DIRECTV Group. Additionally, for the period prior to the consummation of the Recapitalization, we reimbursed The DIRECTV Group for the allocated costs of certain jointly incurred expense items, principally relating to administrative and other expenses. Revenues derived from The DIRECTV Group and its affiliates were $31.6 million and $95.4 million for the three and nine months ended September 30, 2004, respectively, or 15.3% and 15.4% of our total revenues for the respective periods.

        In addition, The DIRECTV Group leases office space to us in Long Beach, California and land for our teleport in Castle Rock, Colorado, and permits the participation by us and our employees in certain discount programs. Prior to the Recapitalization, The DIRECTV Group provided general liability insurance and certain administrative services to us, including the provision of certain advisory and audit services. During the three and nine months ended September 30, 2004, we incurred expenses related to such arrangements with The DIRECTV Group of approximately $0.7 and $1.7 million. In addition, during the three and nine months ended September 30, 2004, we purchased services and equipment from the DIRECTV Group of approximately $0.7 million and $1.6 million, respectively.

Transactions with The News Corporation and its Affiliates (Other than The DIRECTV Group)

        Until the consummation of the Recapitalization on August 20, 2004, The News Corporation and its affiliates were related parties of ours.

        We are a party to agreements with The News Corporation and certain of its subsidiaries and affiliates pursuant to which we provide satellite capacity, TT&C and other related services. Revenues derived from The News Corporation and its affiliates were $24.4 million and $65.4 million for the three and nine months ended September 30, 2004, respectively, or 11.8% and 10.6% of our total revenues for the respective periods.

Effect of the Recapitalization

        As a result of the Recapitalization, effective August 20, 2004, The DIRECTV Group and The News Corporation were no longer related parties of ours and the Sponsors and their affiliates became related parties of ours.

Transactions with The Sponsors and Their Affiliates

        The Sponsors provided management and advisory services to us pursuant to management services agreements executed at the closing of the Recapitalization. The Sponsors charged us an aggregate management fee of $2.0 million annually for the provision of these services, subject to an annual increase of three percent. In connection with, and effective upon completion of, our initial public offering on March 22, 2005, each of the Sponsors terminated their respective management services agreements for an aggregate consideration of $10.0 million. For the period from January 1, 2005 through March 22, 2005, we recorded approximately $10.4 million of expense for these management fees (including the termination payment). The annual advisory fee did not include, and the Sponsors

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may receive, additional compensation for providing investment banking or other advisory services provided in connection with any specific acquisition or divestiture transactions or in the event the Sponsors perform services above and beyond those previously called for by the agreements. For the period August 20, 2004 through September 30, 2004, we accrued $231 thousand of expense for these management fees. In addition, during the three and nine months ended September 30, 2005, we reimbursed the Sponsors for $0.1 million and $0.2 million, respectively, for expenses incurred.

        During 2004, we retained Capstone Consulting to provide us with consulting services, primarily to identify and advise on potential opportunities to reduce our costs and identify other potential opportunities to grow our business. Although neither KKR nor any entity affiliated with KKR owns any of the equity of Capstone, KKR has provided financing to Capstone. We recorded approximately $0.1 million and $0.6 million of expenses during the three and nine months ended September 30, 2005, respectively, related to Capstone Consulting, all of which was paid through September 30, 2005.

        Certain members of our board of directors whose services are compensated are principals of or are affiliated with the Sponsors.

        We provide satellite capacity, TT&C and other related services to affiliates of one of the Sponsors. Revenues for these services were $0.5 million and $1.7 million for the three and nine months ended September 30, 2005, respectively. As of September 30, 2005, we had customer receivables related to these affiliates of approximately $0.2 million.

        Included in our total contracted backlog of $4.54 billion as of September 30, 2005 is approximately $3.6 million of contracted backlog from these affiliates of the Sponsors. Contracted backlog represents future cash payments expected from customers under all long-term contractual agreements.

        During the three and nine months ended September 30, 2005, we procured $0 million and $0.9 million, respectively, of insurance and insurance-related services from an affiliate of one of the Sponsors.

(13)    Operating Segments

        SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131") establishes standards for reporting information about operating segments in annual financial statements of public business enterprises and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Operating segments are components of an enterprise about which separate financial information is available and regularly evaluated by the chief operating decision maker(s) of an enterprise. We have organized our company into two operating segments based upon the types of customers served, services provided and the economic characteristics of each segment. Our operating segments are:

        Fixed Satellite Services ("FSS"): Through FSS, we lease transponder capacity to customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and Direct-to-Home, or DTH, television and provide TT&C and network services to customers.

        Government Services ("G2"): Through G2, we provide global satellite and related telecommunications services to the federal government, international government entities, and their contractors.

        The DIRECTV Group and The News Corporation, which are customers of our FSS segment, comprised approximately 15.7% and 12.5% respectively, of our total revenues for the three months

23



ended September 30, 2005 and approximately 15.8% and 12.4%, respectively, of our total revenues for the nine months ended September 30, 2005.

        As a result of the Recapitalization, we began utilizing Segment EBITDA as a measure of performance for our operating segments beginning in the third quarter of 2004. We evaluate the performance of our operating segments based on several factors, of which the primary financial measure is segment net income (loss) plus net interest expense, income tax expense (benefit) and depreciation and amortization, further adjusted to exclude non-recurring items and other non-cash adjustments largely outside of the segment operating managers' control ("Segment EBITDA"). Segment EBITDA is presented herein because our chief operating decision maker evaluates and measures each business unit's performance based on its Segment EBITDA results.

        Selected information for our operating segments is as follows (in thousands):

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2005
  2004
  2005
 
Revenues:                          
FSS   $ 191,945   $ 195,878   $ 570,154   $ 588,195  
G2     20,497     19,737     64,918     62,718  
Eliminations     (5,347 )   (6,497 )   (15,722 )   (19,135 )
   
 
 
 
 
Total Revenues   $ 207,095   $ 209,118   $ 619,350   $ 631,778  
   
 
 
 
 
Depreciation and Amortization Expense:                          
FSS   $ 74,011   $ 68,564   $ 219,878   $ 204,914  
G2     311     297     1,091     877  
   
 
 
 
 
Total Depreciation and Amortization Expense   $ 74,322   $ 68,861   $ 220,969   $ 205,791  
   
 
 
 
 
Income (loss) from Operations:                          
FSS   $ (88,909 ) $ 105,644   $ (78,640 ) $ 247,262  
G2     2,685     4,430     8,010     10,934  
   
 
 
 
 
Total Income (loss) from Operations   $ (86,224 ) $ 110,074   $ (70,630 ) $ 258,196  
   
 
 
 
 
Segment EBITDA:                          
FSS   $ 156,236   $ 162,978   $ 459,254   $ 486,343  
   
 
 
 
 
G2   $ 2,996   $ 4,798   $ 9,101   $ 12,288  
   
 
 
 
 
Capital Expenditures:                          
FSS   $ 19,527   $ 74,172   $ 103,277   $ 140,641  
G2     22     291     22     1,538  
   
 
 
 
 
Total Capital Expenditures   $ 19,549   $ 74,463   $ 103,299   $ 142,179  
   
 
 
 
 

24


 
  December 31,
2004

  September 30,
2005

 
Assets:              
FSS   $ 4,736,428   $ 4,840,659  
G2     39,531     44,967  
Eliminations     (11,464 )   (21,963 )
   
 
 
Total Assets   $ 4,764,495   $ 4,863,663  
   
 
 

        The following table sets forth a reconciliation of Income from operations to Segment EBITDA for our FSS operating segment and our G2 operating segment for the periods indicated (in thousands):

 
  Three Months Ended September 30,
  Nine Months Ended September 30,
 
 
  2004
  2005
  2004
  2005
 
FSS Operating Segment:                          
Reconciliation of income from operations to Segment EBITDA:                          
Income (loss) from operations   $ (88,909 ) $ 105,644   $ (78,640 ) $ 247,262  
Depreciation and amortization     74,011     68,564     219,878     204,914  
   
 
 
 
 
EBITDA     (14,898 )   174,208     141,238     452,176  
Adjustment of sales-type leases to operating leases(a)     6,608     6,702     19,035     19,912  
Loss on termination of sales-type leases(b)                 2,307  
Effect of Galaxy 10R anomaly (c)     9,090         9,090      
Satellite impairment(d)             99,946      
Restructuring charges(e)     2,080     138     4,508     3,497  
Reserves for long-term receivables and sales-type leases(f)     (3,727 )       24,419     (4,303 )
Reversal of allowance for customer credits(g)     1,800         7,200      
Transaction-related costs(h)     154,535         155,035     10,545  
(Gain) loss on undesignated interest rate swap(i)         (18,332 )       305  
Other items(j)     748     262     (1,217 )   1,904  
   
 
 
 
 
Segment EBITDA   $ 156,236   $ 162,978   $ 459,254   $ 486,343  
   
 
 
 
 
G2 Operating Segment:                          
Reconciliation of income from operations to Segment EBITDA:                          
Income from operations   $ 2,685   $ 4,430   $ 8,010   $ 10,934  
Depreciation and amortization     311     297     1,091     877  
   
 
 
 
 
EBITDA     2,996     4,727     9,101     11,811  
Restructuring charges(e)         71         477  
   
 
 
 
 
Segment EBITDA   $ 2,996   $ 4,798   $ 9,101   $ 12,288  
   
 
 
 
 

25


26


(14)    Short-Term Investments

        For all periods presented herein investments in auction rate certificates have been reclassified from cash and cash equivalents to short-term investments on the consolidated balance sheet. The reclassification was effected because the certificates had stated maturities beyond three months. The amounts of the investments in auction rate certificates as of December 31, 2003 were $335.2 million and $0 at December 31, 2004 and September 30, 2004 and 2005, respectively. The reclassification resulted in changes in the 2004 consolidated statement of cash flows within the net sales (purchases) of short-term investments and the cash and cash equivalents balances.

(15)    New Accounting Pronouncements

        In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No. 154 "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB Opinion No. 20 and FASB Statement No. 3. This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It requires retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 will not have a material impact on our consolidated financial statements.

(16)    Stock-Based Compensation

        Effective January 1, 2003, we adopted the fair value recognition provision of FASB Statement No. 123, "Accounting for Stock Based Compensation," prospectively, to all employee awards granted on or after January 1, 2003, pursuant to FASB Statement No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure", as revised by FASB Statement No. 123(R) "Share Based Payment" issued in December 2004.

27


        PanAmSat issued stock options to purchase its common stock to certain employees and directors subsequent to the Recapitalization. All in-the-money employee stock options and all restricted stock units granted prior to the Recapitalization, other than stock options and restricted stock units held by certain members of management, were cashed out in the Recapitalization. All out-of-the-money stock options were cancelled without payment. Certain members of our management agreed not to have certain of their equity interests cashed out in the Recapitalization; existing options, restricted shares and restricted stock units granted to such individuals remained outstanding as options and deferred stock units following the Recapitalization and were converted into options and deferred stock units of Holdco upon the contribution of our common stock to Holdco.

        On October 8, 2004, all of our outstanding common stock held by our then existing stockholders was contributed to Holdco in exchange for an equal number of shares of Holdco common stock, par value $0.01 per share. In addition, in connection with the contribution of our common stock to Holdco, Holdco assumed the 1997 Stock Plan and the 2004 Stock Plan, the outstanding stock options under these plans were converted into options to purchase shares in Holdco common stock and other equity rights for our common stock were converted to similar rights for Holdco common stock.

        Employee stock options granted prior to the Recapitalization in August 2004 were scheduled to vest ratably over three years. Compensation expense for these nonqualified stock options is based on the fair value of the options at the respective grant dates utilizing the Black-Scholes model for estimating fair value and the amount of compensation is charged to expense over the vesting period of the options. We recorded compensation expense related to our outstanding stock options of approximately $114 thousand and $0 for the three months ended September 30, 2004 and 2005, respectively and $196 thousand and $0 for the nine months ended September 30, 2004 and 2005, respectively.

        Prior to the consummation of the Recapitalization, restricted stock units granted in 2003 and 2004 were scheduled to vest 50% on the second anniversary of the grant date and the remaining 50% on the third anniversary. Stock compensation expense was being recognized over the vesting period based on our stock price on the grant date. We recorded compensation expense related to the restricted stock units of approximately $0.4 million and $1.7 million during the three and nine months ended September 30, 2004.

        In connection with, and as a result of, the Recapitalization, 202,213 deferred stock units were granted to certain of our employees. These deferred stock units were granted under our deferred compensation plan and are payable in common stock of Holdco. As of September 30, 2005, all of these deferred stock units were outstanding. We recorded compensation expense related to these deferred stock units of approximately $0.1 million and $0.7 million, respectively, during the three and nine months ended September 30, 2005.

        On June 8, 2005, the Compensation Committee of our board of directors and that of Holdco approved a combined compensation program for non-employee directors, which is payable in cash and restricted stock of Holdco. Costs of this compensation program are shared by us and Holdco. During the three and nine months ended September 30, 2005, we recorded expense of approximately $44 thousand and $0.1 million, respectively, related to this compensation program.

28


(17)    Subsequent Events

        On October 13, 2005, we successfully launched our Galaxy 15 satellite into orbit. This satellite will be co-located with Galaxy 1R at 133 degrees west longitude.

(18)    Condensed Consolidating Financial Information

        Our 81/2% senior notes due 2012 and our 9% senior notes due 2014 are unconditionally guaranteed by certain of our domestic subsidiaries. The following disclosures reflect our condensed consolidating financial information for the periods presented.

81/2% Senior Notes due 2012

        Obligations under our 81/2% senior notes due 2012 are unconditionally guaranteed on a joint and several basis by certain of our existing domestic subsidiaries. In the first quarter of 2004, we reorganized portions of our subsidiary structure so that certain of our government sales activities operate through a wholly owned subsidiary, G2 Satellite Solutions Corp. As a result, we are required to present consolidating financial information for our company and our subsidiaries within the notes to our condensed consolidated financial statements in accordance with the criteria established for parent companies in Rule 3-10(f) of Regulation S-X. In the second quarter of 2004, we determined that our non-guarantor subsidiaries, which at that time only included our foreign subsidiaries which do not guarantee the 81/2% senior notes due 2012, were no longer minor (as defined in Rule 3-10 (h) of Regulation S-X). Our satellite operating companies, which were formed during 2004, are also considered non-guarantor subsidiaries under our 81/2% senior notes due 2012, as all domestic subsidiaries formed subsequent to the consummation of the offering of these notes are not considered guarantors under these notes. Therefore, these non-guarantor subsidiaries are included within the following condensed consolidating financial statements for our 81/2% senior notes due 2012.

        The following condensed consolidating financial information presents the results of operations and cash flows of PanAmSat Corporation, the Guarantor Subsidiaries, the Non-guarantor Subsidiaries (which are our international subsidiaries and our satellite operating companies) and the eliminations necessary to arrive at the information for our company on a consolidated basis as of December 31, 2004 and September 30, 2005 and for the three and nine months ended September 30, 2004 and 2005. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

29



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
REVENUES:                                
  Operating leases, satellite services and other   $ 190,988   $ 21,858   $ 84,855   $ (94,433 ) $ 203,268  
  Outright sales and sales-type leases     3,827                 3,827  
   
 
 
 
 
 
    Total revenues     194,815     21,858     84,855     (94,433 )   207,095  
   
 
 
 
 
 
OPERATING COSTS AND EXPENSES:                                
  Cost of outright sales and sales-type leases     2,224                 2,224  
  Depreciation and amortization     54,445     841     19,036         74,322  
  Direct operating costs (exclusive of depreciation and amortization)     100,839     17,404     14,839     (94,433 )   38,649  
  Selling, general and administrative expenses     18,779     1,478     1,252         21,509  
  Facilities restructuring and severance cost     2,080                 2,080  
  Transaction-related costs     154,535                 154,535  
   
 
 
 
 
 
    Total operating costs and expenses     332,902     19,723     35,127     (94,433 )   293,319  
   
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS     (138,087 )   2,135     49,728         (86,224 )
INTEREST EXPENSE (INCOME)—Net     48,728     (65 )   9,131         57,794  
   
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (186,815 )   2,200     40,597         (144,018 )
INCOME TAX EXPENSE (BENEFIT)     (86,610 )   924     18,323         (67,363 )
   
 
 
 
 
 
NET INCOME (LOSS)   $ (100,205 ) $ 1,276   $ 22,274   $   $ (76,655 )
   
 
 
 
 
 

30



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
REVENUES:                                
  Operating leases, satellite services and other   $ 201,444   $ 20,956   $ 205,471   $ (222,234 ) $ 205,637  
  Outright sales and sales-type leases     3,481                 3,481  
   
 
 
 
 
 
    Total revenues     204,925     20,956     205,471     (222,234 )   209,118  
   
 
 
 
 
 
OPERATING COSTS AND EXPENSES:                                
  Cost of outright sales and sales-type leases                      
  Depreciation and amortization     7,920     447     60,494         68,861  
  Direct operating costs (exclusive of depreciation and amortization)     210,996     14,579     27,632     (222,234 )   30,973  
  Selling, general and administrative expenses     14,473     1,355     1,505         17,333  
  Gain on undesignated interest rate swap     (18,332 )               (18,332 )
  Facilities restructuring and severance cost     177     32             209  
   
 
 
 
 
 
    Total operating costs and expenses     215,234     16,413     89,631     (222,234 )   99,044  
   
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS     (10,309 )   4,543     115,840         110,074  
INTEREST EXPENSE (INCOME)—Net     29,270     (1 )   19,003         48,272  
   
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (39,579 )   4,544     96,837         61,802  
INCOME TAX EXPENSE (BENEFIT)     (26,351 )   1,503     35,181         10,333  
   
 
 
 
 
 
NET INCOME (LOSS)   $ (13,228 ) $ 3,041   $ 61,656   $   $ 51,469  
   
 
 
 
 
 

31



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
REVENUES:                                
  Operating leases, satellite services and other   $ 559,337   $ 68,308   $ 94,470   $ (114,950 ) $ 607,165  
  Outright sales and sales-type leases     12,185                 12,185  
   
 
 
 
 
 
    Total revenues     571,522     68,308     94,470     (114,950 )   619,350  
   
 
 
 
 
 

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cost of outright sales and sales-type leases     2,224                 2,224  
  Depreciation and amortization     199,930     1,788     19,251         220,969  
  Direct operating costs (exclusive of depreciation and amortization)     162,450     54,933     16,051     (114,950 )   118,484  
  Selling, general and administrative expenses     78,086     5,287     5,441         88,814  
  Transaction-related costs     155,035                 155,035  
  Facilities restructuring and severance cost     4,508                 4,508  
  Satellite impairment loss     99,946                 99,946  
   
 
 
 
 
 
    Total operating costs and expenses     702,179     62,008     40,743     (114,950 )   689,980  
   
 
 
 
 
 

INCOME (LOSS) FROM OPERATIONS

 

 

(130,657

)

 

6,300

 

 

53,727

 

 


 

 

(70,630

)
INTEREST EXPENSE (INCOME)—Net     113,572     (195 )   9,126         122,503  
   
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (244,229 )   6,495     44,601         (193,133 )
INCOME TAX EXPENSE (BENEFIT)     (116,274 )   2,486     18,573         (95,215 )
   
 
 
 
 
 
NET INCOME (LOSS)   $ (127,955 ) $ 4,009   $ 26,028   $   $ (97,918 )
   
 
 
 
 
 

32



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
REVENUES:                                
  Operating leases, satellite services and other   $ 604,535   $ 66,790   $ 618,258   $ (668,400 ) $ 621,183  
  Outright sales and sales-type leases     10,595                 10,595  
   
 
 
 
 
 
    Total revenues     615,130     66,790     618,258     (668,400 )   631,778  
   
 
 
 
 
 

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cost of outright sales and sales-type leases     (4,303 )               (4,303 )
  Depreciation and amortization     22,119     1,438     182,234         205,791  
  Direct operating costs (exclusive of depreciation and amortization)     635,609     49,432     83,170     (668,400 )   99,811  
  Selling, general and administrative expenses     47,171     4,448     3,634         55,253  
  Loss on undesignated interest rate swap     305                 305  
  Sponsor management fees     10,444                 10,444  
  Loss on termination of sales-type lease     2,307                 2,307  
  Facilities restructuring and severance costs     3,547     427             3,974  
   
 
 
 
 
 
    Total operating costs and expenses     717,199     55,745     269,038     (668,400 )   373,582  
   
 
 
 
 
 

INCOME (LOSS) FROM OPERATIONS

 

 

(102,069

)

 

11,045

 

 

349,220

 

 


 

 

258,196

 
INTEREST EXPENSE (INCOME)—Net     155,542     (62 )   56,395         211,875  
   
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (257,611 )   11,107     292,825         46,321  
INCOME TAX EXPENSE (BENEFIT)     (101,359 )   4,273     104,181         7,095  
   
 
 
 
 
 
NET INCOME (LOSS)   $ (156,252 ) $ 6,834   $ 188,644   $   $ 39,226  
   
 
 
 
 
 

33



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
AT DECEMBER 31, 2004 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
ASSETS                                

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 29,897   $   $ 8,710   $   $ 38,607  
  Accounts receivable—net     38,807     26,686     3,887         69,380  
  Net investment in sales-type leases     24,776                 24,776  
  Prepaid expenses and other current assets     47,075     6,949     105     (28,168 )   25,961  
  Deferred income taxes     7,817                 7,817  
  Assets held for sale     3,300                 3,300  
   
 
 
 
 
 
    Total current assets     151,672     33,635     12,702     (28,168 )   169,841  
SATELLITES AND OTHER PROPERTY AND EQUIPMENT—Net     533,141     3,836     1,418,687         1,955,664  
NET INVESTMENT IN SALES-TYPE LEASES     74,990                 74,990  
GOODWILL     2,237,107     7,024             2,244,131  
DEFERRED CHARGES AND OTHER ASSETS—Net     1,157,120     1,322     1,427     (840,000 )   319,869  
INVESTMENT IN AFFILIATES     1,815,112             (1,815,112 )    
DUE FROM AFFILIATES     1,375     7,911     2,081,700     (2,090,986 )    
   
 
 
 
 
 
    TOTAL ASSETS   $ 5,970,517   $ 53,728   $ 3,514,516   $ (4,774,266 ) $ 4,764,495  
   
 
 
 
 
 

LIABILITIES AND STOCKHOLDER'S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Accounts payable and accrued liabilities   $ 55,784   $ 10,814   $ 1,893   $   $ 68,491  
  Current portion of long-term debt     4,100                 4,100  
  Current portion of satellite incentive obligations     13,148                 13,148  
  Accrued interest payable     45,589         28,168     (28,168 )   45,589  
  Deferred gains and revenues     18,953     7,665             26,618  
   
 
 
 
 
 
    Total current liabilities     137,574     18,479     30,061     (28,168 )   157,946  
LONG-TERM DEBT     3,603,900         840,000     (840,000 )   3,603,900  
DEFERRED INCOME TAXES     33,723     67             33,790  
DEFERRED CREDITS AND OTHER (principally customer deposits, satellite incentive obligations and deferred revenue)     (4,019 )   542     274,577         271,100  
DUE TO AFFILIATES     2,081,700     9,286         (2,090,986 )    
   
 
 
 
 
 
    TOTAL LIABILITIES     5,852,878     28,374     1,144,638     (2,959,154 )   4,066,736  
   
 
 
 
 
 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDER'S EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Common stock, $0.01 par value                      
  Additional paid-in capital     129,817     10,070     1,805,044     (1,815,112 )   129,819  
  Retained earnings     (13,400 )   18,702     564,834         570,136  
  Accumulated other comprehensive income     1,222                 1,222  
  Other stockholder's equity         (3,418 )           (3,418 )
   
 
 
 
 
 
    TOTAL STOCKHOLDER'S EQUITY     117,639     25,354     2,369,878     (1,815,112 )   697,759  
   
 
 
 
 
 
    TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY   $ 5,970,517   $ 53,728   $ 3,514,516   $ (4,774,266 ) $ 4,764,495  
   
 
 
 
 
 

34



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
AT SEPTEMBER 30, 2005 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
ASSETS                                

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 81,674   $   $ 5,737   $   $ 87,411  
  Accounts receivable—net     40,675     18,696     2,759         62,130  
  Net investment in sales-type leases     15,294                 15,294  
  Prepaid expenses and other current assets     104,395     8,426     152     (84,713 )   28,260  
  Deferred income taxes     7,817                 7,817  
   
 
 
 
 
 
    Total current assets     249,855     27,122     8,648     (84,713 )   200,912  
   
 
 
 
 
 
SATELLITES AND OTHER PROPERTY AND EQUIPMENT—Net     676,671     4,229     1,303,322         1,984,222  
NET INVESTMENT IN SALES-TYPE LEASES     65,046                 65,046  
GOODWILL     2,238,676     5,455             2,244,131  
DEFERRED CHARGES AND OTHER ASSETS—NET     1,202,557     2,207     4,329     (840,000 )   369,093  
INVESTMENT IN AFFILIATES     655,830             (655,830 )    
DUE FROM AFFILIATES     (11,923 )   20,266     678,916     (687,000 )   259  
   
 
 
 
 
 
TOTAL ASSETS   $ 5,076,712   $ 59,279   $ 1,995,215   $ (2,267,543 ) $ 4,863,663  
   
 
 
 
 
 

LIABILITIES AND STOCKHOLDER'S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Accounts payable and accrued liabilities   $ 92,256   $ 11,059   $ 1,095   $   $ 104,410  
  Current portion of long-term debt     16,550                 16,550  
  Current portion of satellite incentive obligations     13,012                 13,012  
  Accrued interest payable     17,157         84,713     (84,713 )   17,157  
  Dividends payable     47,507                 47,507  
  Deferred gains and revenues     19,520     7,319             26,839  
   
 
 
 
 
 
    Total current liabilities     206,002     18,378     85,808     (84,713 )   225,475  
   
 
 
 
 
 
  LONG-TERM DEBT     2,919,550         840,000     (840,000 )   2,919,550  
  DEFERRED INCOME TAXES     37,653     67             37,720  
  DEFERRED CREDITS AND OTHER (principally customer deposits and deferred revenue)     205,030     565     180,866         386,461  
  DUE TO AFFILIATES     678,917     8,083         (687,000 )    
   
 
 
 
 
 
    TOTAL LIABILITIES     4,047,152     27,093     1,106,674     (1,611,713 )   3,569,206  
   
 
 
 
 
 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDER'S EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Common stock, $0.01 par value                      
  Additional paid-in-capital     789,704     10,069     645,761     (655,830 )   789,704  
  Retained earnings     239,756     25,535     242,780         508,071  
  Accumulated other comprehensive income     100                 100  
  Other stockholder's equity         (3,418 )           (3,418 )
   
 
 
 
 
 
  TOTAL STOCKHOLDER'S EQUITY     1,029,560     32,186     888,541     (655,830 )   1,294,457  
   
 
 
 
 
 
  TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY   $ 5,076,712   $ 59,279   $ 1,995,215   $ (2,267,543 ) $ 4,863,663  
   
 
 
 
 
 

35



PANAMSAT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
CASH FLOWS FROM OPERATING ACTIVITIES:                                
  Net income (loss)   $ (127,955 ) $ 4,009   $ 26,028   $   $ (97,918 )
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:                                
    Depreciation and amortization     199,930     1,788     19,251         220,969  
    Deferred income taxes     (116,643 )       18,186         (98,457 )
    Amortization of debt issuance costs and other deferred charges     7,698                 7,698  
    Provision for uncollectible receivables     31,982                 31,982  
    Loss on early extinguishment of debt     20,589                 20,589  
    Satellite impairment loss     99,946                 99,946  
    Loss on Galaxy 10R XIPS anomaly     9,090                 9,090  
    Facilities restructuring and severance costs     4,309                 4,309  
    Reversal of sales-type lease liabilities     (3,727 )               (3,727 )
    Gain on disposal of fixed assets     (1,332 )               (1,332 )
    Other non-cash items     (3,668 )   (139 )   (143 )       (3,950 )
  Changes in assets and liabilities:                                
    Collections on investments in sales-type leases     19,035                 19,035  
    Operating leases and other receivables     (13,286 )   11,331     (992 )   9,113     6,166  
    Prepaid expenses and other assets     (835,572 )   (8,831 )   181     840,000     (4,222 )
    Due from affiliates     4,065         89     (4,154 )    
    Accounts payable and accrued liabilities     (48,743 )   (472 )   8,983     (9,113 )   (49,345 )
    Deferred gains and revenues     4,402     (3,193 )           1,209  
    Due to affiliates     64,973     (4,154 )   (64,973 )   4,154      
   
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     (684,907 )   339     6,610     840,000     162,042  
   
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:                                
  Capital expenditures (including capitalized interest)     (103,277 )   (22 )   (1,250,712 )   1,250,712     (103,299 )
    Insurance proceeds from satellite recoveries     286,915                 286,915  
    Net sales of short-term investments     374,097                 374,097  
    Investment in affiliates     (410,712 )           410,712      
    Net proceeds from sale of fixed assets     1,250,712             (1,250,712 )    
    Acquisitions, net of cash acquired         (522 )           (522 )
   
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES     1,397,735     (544 )   (1,250,712 )   410,712     557,191  
   
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:                                
    Repayments of long-term debt     (1,443,459 )               (1,443,459 )
    Issuance of new long-term debt     3,512,615         840,000     (840,000 )   3,512,615  
    Capitalized transaction costs     (152,064 )               (152,064 )
    New incentive obligations     16,250                 16,250  
    Repayments of incentive obligations     (9,571 )               (9,571 )
    Repurchase of common stock     (2,784,556 )               (2,784,556 )
    Re-issuance of treasury stock     757                 757  
    Capital contributed by affiliate     9,200                 9,200  
    Other equity related transactions     3,384         410,712     (410,712 )   3,384  
   
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     (847,444 )       1,250,712     (1,250,712 )   (847,444 )
   
 
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     328                 328  
   
 
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS     (134,288 )   (205 )   6,610         (127,883 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     174,363     342     1,382         176,087  
   
 
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 40,075   $ 137   $ 7,992   $   $ 48,204  
   
 
 
 
 
 

36



PANAMSAT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
CASH FLOWS FROM OPERATING ACTIVITIES:                                
  Net income (loss)   $ (156,252 ) $ 6,834   $ 188,644   $   $ 39,226  
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:                                
    Depreciation and amortization     22,119     1,438     182,234         205,791  
    Deferred income taxes     (97,819 )       102,846         5,027  
    Amortization of debt issuance costs and other deferred charges     14,338                 14,338  
    Loss on undesignated interest rate swap     305                 305  
    Provision for uncollectible receivables     (2 )               (2 )
    Loss on early extinguishment of debt     24,161                 24,161  
    Facilities restructuring and severance costs     3,521     477             3,998  
    Reversal of sales-type lease liabilities     (4,303 )               (4,303 )
    Loss on termination of sales-type lease     2,307                 2,307  
    Other non-cash items     12,247     555     (15,062 )       (2,260 )
  Changes in assets and liabilities:                                
    Collections on investments in sales-type leases     19,922                 19,922  
    Operating leases and other receivables     (58,442 )   7,989     (43 )   56,545     6,049  
    Prepaid expenses and other assets     1,841     (1,477 )   (2,072 )       (1,708 )
    Accounts payable and accrued liabilities     (6,261 )   244     55,371     (56,545 )   (7,191 )
    Due from affiliates     (58,906 )   (461 )   72,862     (13,574 )   (79 )
    Due to affiliates     519,113     (13,574 )   (519,113 )   13,574      
    Deferred gains and revenues     (32,616 )   (557 )           (33,173 )
   
 
 
 
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES     205,273     1,468     65,667         272,408  
   
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:                                
  Capital expenditures (including capitalized interest)     (140,711 )   (1,468 )           (142,179 )
  Acquisitions/divestitures, net of cash acquired/paid     26,777         (68,640 )       (41,863 )
  Proceeds from sale of teleport     3,161                 3,161  
   
 
 
 
 
 
NET CASH USED IN INVESTING ACTIVITIES     (110,773 )   (1,468 )   (68,640 )       (180,881 )
   
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:                                
  Repayments of long-term debt     (671,900 )               (671,900 )
  Contribution of dividends to parent     (53,785 )               (53,785 )
  Capital contribution by parent     658,350                 658,350  
  Funding of capital expenditures by customer     33,464                 33,464  
  Capitalized debt issuance costs     (598 )               (598 )
  Repayments of incentive obligations     (9,464 )               (9,464 )
   
 
 
 
 
 
NET CASH USED IN FINANCING ACTIVITIES     (43,933 )               (43,933 )
   
 
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     1,210                 1,210  
   
 
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS     51,777         (2,973 )       48,804  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     29,897         8,710         38,607  
   
 
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 81,674   $   $ 5,737   $   $ 87,411  
   
 
 
 
 
 

37


9% Senior Notes Due 2014

        Our 9% senior notes due 2014 are unsecured, and are, or will be, as the case may be, unconditionally guaranteed by each of our existing and certain subsequently acquired or organized domestic restricted subsidiaries. In the third and fourth quarters of 2004, we formed new domestic subsidiaries, which own our satellites. These subsidiaries are guarantors of our 9% senior notes due 2014. As a result, we are now required to present condensed consolidating financial information for our company and these domestic restricted subsidiaries within the notes to our consolidated financial statements in accordance with the criteria established for parent companies in Rule 3-10(f) of Regulation S-X. Prior to the second quarter of 2004, all of our subsidiaries, other than the subsidiary guarantors that guarantee the 9% senior notes due 2014, were minor (as defined in Rule 3-10(h) of Regulation S-X). Accordingly, financial information for these other non-guarantor subsidiaries is not separately presented for periods prior to April 1, 2004.

        The following condensed consolidating financial information presents the results of operations, financial position and cash flows of PanAmSat Corporation, the Guarantor Subsidiaries (including our recently formed satellite operating companies) and the eliminations necessary to arrive at the information for our company on a consolidated basis as of December 31, 2004 and September 30, 2005 and for the three and nine months ended September 30, 2004 and 2005. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.


PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
REVENUES:                                
  Operating leases, satellite services and other   $ 190,988   $ 202,885   $ 5,829   $ (196,434 ) $ 203,268  
  Outright sales and sales-type leases     3,827                 3,827  
   
 
 
 
 
 
    Total revenues     194,815     202,885     5,829     (196,434 )   207,095  
   
 
 
 
 
 

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cost of outright sales and sales-type leases     2,224                 2,224  
  Depreciation and amortization     9,370     64,888     64         74,322  
  Direct operating costs (exclusive of depreciation and amortization)     181,387     52,910     786     (196,434 )   38,649  
  Selling, general and administrative expenses     603     19,654     1,252         21,509  
  Facilities restructuring and severance cost     2,080                 2,080  
  Transaction-related costs     154,535                 154,535  
   
 
 
 
 
 
    Total operating costs and expenses     350,199     137,452     2,102     (196,434 )   293,319  
   
 
 
 
 
 

INCOME (LOSS) FROM OPERATIONS

 

 

(155,384

)

 

65,433

 

 

3,727

 

 


 

 

(86,224

)
INTEREST EXPENSE (INCOME)—Net     48,728     9,048     18         57,794  
   
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (204,112 )   56,385     3,709         (144,018 )
INCOME TAX EXPENSE (BENEFIT)     (95,137 )   27,637     137         (67,363 )
   
 
 
 
 
 
NET INCOME (LOSS)   $ (108,975 ) $ 28,748   $ 3,572   $   $ (76,655 )
   
 
 
 
 
 

38



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
REVENUES:                                
  Operating leases, satellite services and other   $ 201,444   $ 220,751   $ 5,676   $ (222,234 ) $ 205,637  
  Outright sales and sales-type leases     3,481                 3,481  
   
 
 
 
 
 
    Total revenues     204,925     220,751     5,676     (222,234 )   209,118  
   
 
 
 
 
 

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cost of outright sales and sales-type leases                      
  Depreciation and amortization     7,920     60,328     613         68,861  
  Direct operating costs (exclusive of depreciation and amortization)     210,996     42,030     181     (222,234 )   30,973  
  Selling, general and administrative expenses     14,473     1,355     1,505         17,333  
  Gain on undesignated interest rate swap     (18,332 )               (18,332 )
  Facilities restructuring and severance cost     177     32             209  
   
 
 
 
 
 
    Total operating costs and expenses     215,234     103,745     2,299     (222,234 )   99,044  
   
 
 
 
 
 

INCOME (LOSS) FROM OPERATIONS

 

 

(10,309

)

 

117,006

 

 

3,377

 

 


 

 

110,074

 
INTEREST EXPENSE (INCOME)—Net     29,270     19,054     (52 )       48,272  
   
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (39,579 )   97,952     3,429         61,802  
INCOME TAX EXPENSE (BENEFIT)     (26,351 )   35,597     1,087         10,333  
   
 
 
 
 
 
NET INCOME (LOSS)   $ (13,228 ) $ 62,355   $ 2,342   $   $ 51,469  
   
 
 
 
 
 

39



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
REVENUES:                                
  Operating leases, satellite services and other   $ 559,337   $ 609,761   $ 15,443   $ (577,376 ) $ 607,165  
  Outright sales and sales-type leases     12,185                 12,185  
   
 
 
 
 
 
    Total revenues     571.522     609,761     15,443     (577,376 )   619,350  
   
 
 
 
 
 

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cost of outright sales and sales-type leases     2,224                 2,224  
  Depreciation and amortization     29,910     190,780     279         220,969  
  Direct operating costs (exclusive of depreciation and amortization)     536,438     157,425     1,997     (577,376 )   118,484  
  Selling, general and administrative expenses     1,959     81,414     5,441         88,814  
  Transaction-related costs     155,035                 155,035  
  Facilities restructuring and severance cost     4,508                 4,508  
  Satellite impairment loss         99,946             99,946  
   
 
 
 
 
 
    Total operating costs and expenses     730,074     529,565     7,717     (577,376 )   689,980  
   
 
 
 
 
 

INCOME (LOSS) FROM OPERATIONS

 

 

(158,552

)

 

80,196

 

 

7,726

 

 


 

 

(70,630

)
INTEREST EXPENSE (INCOME)—Net     113,572     8,918     13         122,503  
   
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (272,124 )   71,278     7,713         (193,133 )
INCOME TAX EXPENSE (BENEFIT)     (130,026 )   34,424     387         (95,215 )
   
 
 
 
 
 
NET INCOME (LOSS)   $ (142,098 ) $ 36,854   $ 7,326   $   $ (97,918 )
   
 
 
 
 
 

40



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
REVENUES:                                
  Operating leases, satellite services and other   $ 604,535   $ 668,154   $ 16,894   $ (668,400 ) $ 621,183  
  Outright sales and sales-type leases     10,595                 10,595  
   
 
 
 
 
 
    Total revenues     615,130     668,154     16,894     (668,400 )   631,778  
   
 
 
 
 
 

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cost of outright sales and sales-type leases     (4,303 )               (4,303 )
  Depreciation and amortization     22,119     182,916     756         205,791  
  Direct operating costs (exclusive of depreciation and amortization)     635,609     131,683     919     (668,400 )   99,811  
  Selling, general and administrative expenses     47,171     4,448     3,634         55,253  
  Loss on undesignated interest rate swap     305                 305  
  Sponsor management fees     10,444                 10,444  
  Loss on termination of sales-type lease     2,307                 2,307  
  Facilities restructuring and severance costs     3,547     427             3,974  
   
 
 
 
 
 
    Total operating costs and expenses     717,199     319,474     5,309     (668,400 )   373,582  
   
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS     (102,069 )   348,680     11,585         258,196  
INTEREST EXPENSE (INCOME)—Net     155,542     56,483     (150 )       211,875  
   
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES     (257,611 )   292,197     11,735         46,321  
INCOME TAX EXPENSE (BENEFIT)     (101,359 )   106,871     1,583         7,095  
   
 
 
 
 
 
NET INCOME (LOSS)   $ (156,252 ) $ 185,326   $ 10,152   $   $ 39,226  
   
 
 
 
 
 

41



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
AT DECEMBER 31, 2004 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
ASSETS                                

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 29,897   $   $ 8,710   $   $ 38,607  
  Accounts receivable—net     38,807     26,686     3,887         69,380  
  Net investment in sales-type leases     24,776                 24,776  
  Prepaid expenses and other current assets     47,075     6,949     105     (28,168 )   25,961  
  Deferred income taxes     7,817                 7,817  
  Assets held for sale     3,300                 3,300  
   
 
 
 
 
 
    Total current assets     151,672     33,635     12,702     (28,168 )   169,841  
SATELLITES AND OTHER PROPERTY AND EQUIPMENT—Net     533,141     1,421,834     689         1,955,664  
NET INVESTMENT IN SALES-TYPE LEASES     74,990                 74,990  
GOODWILL     2,237,107     7,024             2,244,131  
DEFERRED CHARGES AND OTHER ASSETS—Net     1,157,120     1,322     1,427     (840,000 )   319,869  
INVESTMENT IN AFFILIATES     1,815,112             (1,815,112 )    
DUE FROM AFFILIATES     1,375     2,081,653     7,958     (2,090,986 )    
   
 
 
 
 
 
    TOTAL ASSETS   $ 5,970,517   $ 3,545,468   $ 22,776   $ (4,774,266 ) $ 4,764,495  
   
 
 
 
 
 

LIABILITIES AND STOCKHOLDER'S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Accounts payable and accrued liabilities   $ 55,784   $ 10,814   $ 1,893   $   $ 68,491  
  Current portion of long-term debt     4,100                 4,100  
  Current portion of satellite incentive obligations     13,148                 13,148  
  Accrued interest payable     45,589     28,168         (28,168 )   45,589  
  Deferred gains and revenues     18,953     7,665             26,618  
   
 
 
 
 
 
    Total current liabilities     137,574     46,647     1,893     (28,168 )   157,946  
   
 
 
 
 
 
LONG-TERM DEBT     3,603,900     840,000         (840,000 )   3,603,900  
DEFERRED INCOME TAXES     33,723     67             33,790  
DEFERRED CREDITS AND OTHER (principally customer deposits, satellite incentive obligations and deferred revenue)     (4,019 )   274,794     325         271,100  
DUE TO AFFILIATES     2,081,700     9,286         (2,090,986 )    
   
 
 
 
 
 
    TOTAL LIABILITIES     5,852,878     1,170,794     2,218     (2,959,154 )   4,066,736  
   
 
 
 
 
 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDER'S EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 
Common stock, $0.01 par value

 

 


 

 


 

 


 

 


 

 


 
  Additional paid-in capital     129,817     1,816,126     (1,012 )   (1,815,112 )   129,819  
  Retained earnings     (13,400 )   561,966     21,570         570,136  
  Accumulated other comprehensive income     1,222                 1,222  
  Other stockholder's equity         (3,418 )           (3,418 )
   
 
 
 
 
 
    TOTAL STOCKHOLDER'S EQUITY     117,639     2,374,674     20,558     (1,815,112 )   697,759  
   
 
 
 
 
 
    TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY   $ 5,970,517   $ 3,545,468   $ 22,776   $ (4,774,266 ) $ 4,764,495  
   
 
 
 
 
 

42



PANAMSAT CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
AT SEPTEMBER 30, 2005 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
ASSETS                                

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 81,674   $   $ 5,737   $   $ 87,411  
  Accounts receivable—net     40,675     18,696     2,759         62,130  
  Net investment in sales-type leases     15,294                 15,294  
  Prepaid expenses and other current assets     104,395     8,426     152     (84,713 )   28,260  
  Deferred income taxes     7,817                 7,817  
   
 
 
 
 
 
    Total current assets     249,855     27,122     8,648     (84,713 )   200,912  
   
 
 
 
 
 
SATELLITES AND OTHER PROPERTY AND EQUIPMENT—Net     676,671     1,238,596     68,955         1,984,222  
NET INVESTMENT IN SALES-TYPE LEASES     65,046                 65,046  
GOODWILL     2,238,676     5,455             2,244,131  
DEFERRED CHARGES AND OTHER ASSETS—NET     1,202,557     2,207     4,329     (840,000 )   369,093  
INVESTMENT IN AFFILIATES     655,830             (655,830 )    
DUE FROM AFFILIATES     (11,923 )   764,074     (64,892 )   (687,000 )   259  
   
 
 
 
 
 
    TOTAL ASSETS   $ 5,076,712   $ 2,037,454   $ 17,040   $ (2,267,543 ) $ 4,863,663  
   
 
 
 
 
 

LIABILITIES AND STOCKHOLDER'S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Accounts payable and accrued liabilities   $ 92,256   $ 11,059   $ 1,095   $   $ 104,410  
  Current portion of long-term debt     16,550                 16,550  
  Current portion of satellite incentive obligations     13,012                 13,012  
  Accrued interest payable     17,157     84,713         (84,713 )   17,157  
  Dividends payable     47,507                 47,507  
  Deferred gains and revenues     19,520     7,319             26,839  
   
 
 
 
 
 
    Total current liabilities     206,002     103,091     1,095     (84,713 )   225,475  
   
 
 
 
 
 
LONG-TERM DEBT     2,919,550     840,000         (840,000 )   2,919,550  
DEFERRED INCOME TAXES     37,653     67             37,720  
DEFERRED CREDITS AND OTHER (principally customer deposits and deferred revenue)     205,030     181,333     98         386,461  
DUE TO AFFILIATES     678,917     8,083         (687,000 )    
   
 
 
 
 
 
    TOTAL LIABILITIES     4,047,152     1,132,574     1,193     (1,611,713 )   3,569,206  
   
 
 
 
 
 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDER'S EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Common stock, $0.01 par value                      
  Additional paid-in-capital     789,704     656,643     (813 )   (655,830 )   789,704  
  Retained earnings     239,756     251,655     16,660         508,071  
  Accumulated other comprehensive income     100                 100  
  Other stockholder's equity         (3,418 )           (3,418 )
   
 
 
 
 
 
    TOTAL STOCKHOLDER'S EQUITY     1,029,560     904,880     15,847     (655,830 )   1,294,457  
   
 
 
 
 
 
    TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY   $ 5,076,712   $ 2,037,454   $ 17,040   $ (2,267,543 ) $ 4,863,663  
   
 
 
 
 
 

43



PANAMSAT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
CASH FLOWS FROM OPERATING ACTIVITIES:                                
  Net income (loss)   $ (142,098 ) $ 36,854   $ 7,326   $   $ (97,918 )
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:                                
    Depreciation and amortization     29,910     190,780     279         220,969  
    Deferred income taxes     (130,395 )   31,938             (98,457 )
    Amortization of debt issuance costs and other deferred charges     7,698                 7,698  
    Provision for uncollectible receivables     31,982                 31,982  
    Loss on early extinguishment of debt     20,589                 20,589  
    Satellite impairment loss         99,946             99,946  
    Loss on Galaxy 10R XIPS anomaly     9,090                 9,090  
    Facilities restructuring and severance costs     4,309                 4,309  
    Reversal of sales-type lease liabilities     (3,727 )               (3,727 )
    Gain on disposal of fixed assets     (1,332 )               (1,332 )
    Other non-cash items     (3,667 )   (139 )   (144 )       (3,950 )
  Changes in assets and liabilities:                                
    Collections on investments in sales-type leases     19,035                 19,035  
    Operating leases and other receivables     (13,286 )   11,331     (992 )   9,113     6,166  
    Prepaid expenses and other assets     (835,573 )   (8,831 )   182     840,000     (4,222 )
    Due from affiliates     4,065         89     (4,154 )    
    Accounts payable and accrued liabilities     (48,743 )   8,641     (130 )   (9,113 )   (49,345 )
    Deferred gains and revenues     4,402     (3,193 )           1,209  
    Due to affiliates     362,834     (366,988 )       4,154      
   
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     (684,907 )   339     6,610     840,000     162,042  
   
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:                                
  Capital expenditures (including capitalized interest)     (103,277 )   (1,250,734 )       1,250,712     (103,299 )
  Insurance proceeds from satellite recoveries     286,915                 286,915  
  Net sales of short-term investments     374,097                 374,097  
  Investment in affiliates     (712,610 )   301,898         410,712      
  Net proceeds from sale of fixed assets     1,552,610     (301,898 )       (1,250,712 )    
  Acquisitions, net of cash acquired         (522 )           (522 )
   
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES     1,397,735     (1,251,256 )       410,712     557,191  
   
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:                                
  Repayments of long-term debt     (1,443,459 )               (1,443,459 )
  Issuance of new long-term debt     3,512,615     840,000         (840,000 )   3,512,615  
  Capitalized transaction costs     (152,064 )               (152,064 )
  New incentive obligations     16,250                 16,250  
  Repayments of incentive obligations     (9,571 )               (9,571 )
  Repurchase of common stock     (2,784,556 )               (2,784,556 )
  Re-issuance of treasury stock     757                 757  
  Capital contributed by affiliate     9,200                 9,200  
  Other equity related transactions     3,384     410,712         (410,712 )   3,384  
   
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     (847,444 )   1,250,712         (1,250,712 )   (847,444 )
   
 
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     328                 328  
   
 
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS     (134,288 )   (205 )   6,610         (127,883 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     174,362     343     1,382         176,087  
   
 
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 40,074   $ 138   $ 7,992   $   $ 48,204  
   
 
 
 
 
 

44



PANAMSAT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(IN THOUSANDS)

 
  PanAmSat
Corporation

  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Eliminations
  Consolidated
 
CASH FLOWS FROM OPERATING ACTIVITIES:                                
  Net income (loss)   $ (156,252 ) $ 185,326   $ 10,152   $   $ 39,226  
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:                                
    Depreciation and amortization     22,119     182,916     756         205,791  
    Deferred income taxes     (97,819 )   102,598     248         5,027  
    Amortization of debt issuance costs and other deferred charges     14,338                 14,338  
    Loss on undesignated interest rate swap     305                 305  
    Provision for uncollectible receivables     (2 )               (2 )
    Loss on early extinguishment of debt     24,161                 24,161  
    Facilities restructuring and severance costs     3,521     477             3,998  
    Reversal of sales-type lease liabilities     (4,303 )               (4,303 )
    Loss on termination of sales-type lease     2,307                 2,307  
    Other non-cash items     12,247     555     (15,062 )       (2,260 )
  Changes in assets and liabilities:                                
    Collections on investments in sales-type leases     19,922                 19,922  
    Operating leases and other receivables     (58,442 )   7,989     (43 )   56,545     6,049  
    Prepaid expenses and other assets     1,841     (1,477 )   (2,072 )       (1,708 )
    Accounts payable and accrued liabilities     (6,261 )   56,789     (1,174 )   (56,545 )   (7,191 )
    Due from affiliates     (58,906 )   (461 )   72,862     (13,574 )   (79 )
    Due to affiliates     519,113     (532,687 )       13,574      
    Deferred gains and revenues     (32,616 )   (557 )           (33,173 )
   
 
 
 
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES     205,273     1,468     65,667         272,408  
   
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:                                
  Capital expenditures (including capitalized interest)     (140,711 )   (1,468 )           (142,179 )
  Acquisitions/divestitures, net of cash acquired/paid     26,777         (68,640 )       (41,863 )
  Proceeds from sale of teleport     3,161                 3,161  
   
 
 
 
 
 
NET CASH USED IN INVESTING ACTIVITIES     (110,773 )   (1,468 )   (68,640 )       (180,881 )
   
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:                                
  Repayments of long-term debt     (671,900 )               (671,900 )
  Contribution of dividends to parent     (53,785 )               (53,785 )
  Capital contribution by parent     658,350                 658,350  
  Funding of capital expenditures by customer     33,464                 33,464  
  Capitalized debt issuance costs     (598 )               (598 )
  Repayments of incentive obligations     (9,464 )               (9,464 )
   
 
 
 
 
 
NET CASH USED IN FINANCING ACTIVITIES     (43,933 )               (43,933 )
   
 
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     1,210                 1,210  
   
 
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS     51,777         (2,973 )       48,804  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     29,897         8,710         38,607  
   
 
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 81,674   $   $ 5,737   $   $ 87,411  
   
 
 
 
 
 

45


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

        The following management's discussion and analysis should be read in conjunction with our management's discussion and analysis included in our Annual Report on Form 10-K filed with the SEC on March 22, 2005, all amendments thereto, and all of our other filings filed with the SEC from March 22, 2005 through the date of this report.

Management Overview

        On March 22, 2005, Holdco consummated an initial public offering of 50 million shares of its common stock and used the net proceeds to make an equity contribution to us of approximately $658.4 million and to pay a $200 million dividend to its then pre-existing stockholders. We used this equity contribution to repay approximately $265.0 million of the borrowings under our Term Loan A Facility and on April 1, 2005, we redeemed $353.5 million, or 35%, of our 9% senior notes and paid a redemption premium of $31.8 million to holders of those notes.

        Our board of directors adopted a dividend policy that became effective upon the closing of Holdco's initial public offering. Our dividend policy reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating expenses and working capital requirements, interest and principal payments on our indebtedness and capital expenditures as regular quarterly dividends to our sole stockholder, Holdco, for payment as a dividend to its stockholders. On March 21, 2005 our board of directors declared a dividend to Holdco of approximately $5.28 million. This dividend was paid in April 2005. On June 20, 2005, our board of directors declared a dividend to Holdco of approximately $47.5 million, which was paid on July 14, 2005. On September 19, 2005 our board of directors declared a dividend to Holdco of approximately $47.5 million, which was paid on October 13, 2005. Also, in September 2005, we recorded a dividend of $1.0 million related to amounts funded to Holdco for the payment of certain expenses.

        On August 31, 2005, we acquired multiple European orbital slots, as well as a satellite with European, Middle Eastern, African and Asian coverage from Alcatel, a French communications company, for a purchase price of approximately $60.2 million plus liabilities and costs incurred in relation to the acquisition of approximately $13.3 million, including $9.0 million of contingent performance payments due to Alcatel in addition to the purchase price. This acquisition was accomplished in order to strengthen our presence in these markets and expand our global reach into key growth regions. Through September 30, 2005, we paid $41.9 million of this aggregate purchase price from cash on hand. The satellite acquired, formerly known as Europe*Star 1, was renamed PAS-12, and is capable of providing a broad range of enhanced services to European customers for program distribution, broadcast contribution and enterprise networking. The agreement provides for purchase price installments and performance payment installments contingent on the future performance of the satellite.

        The results of this acquisition have been included in our fixed satellite services segment from the date of acquisition.

        On August 1, 2005, we formed our second 50-50 joint venture with JSAT, a leading satellite operator in the Asia-Pacific region, that will build and launch a Ku-band satellite to replace our SBS-6 satellite at 74 degrees west longitude. The joint venture is named Horizons-2. The satellite will support digital video, high-definition television (HDTV) and IP-based content distribution networks to broadband Internet and satellite news gathering services (SNG) in the United States. This Horizons-2 satellite will be constructed over the next two years and is expected to be in service by late 2007. The total investment in this joint venture is expected to be approximately $160 million, of which each of the joint venture partners is required to fund their 50% share beginning in early 2008. Our investment in this joint venture is being accounted for using the equity method.

46



        On August 29, 2005, Holdco and Intelsat, Ltd. announced that the two companies signed a definitive merger agreement under which Intelsat will acquire Holdco for $25 per share in cash, or $3.2 billion. Under the agreement, which was approved unanimously by the boards of directors of both companies, Intelsat will acquire all of Holdco's outstanding common shares. Also in connection with the merger, Holdco and our boards of directors approved the adoption of a severance plan, on terms similar to our existing severance plan, and authorized a retention pool of up to $10 million for non-senior management employees.

        On October 26, 2005, Holdco's shareholders approved and adopted the merger agreement. Consummation of the merger remains subject to various conditions, including satisfaction of the HSR Act waiting period, receipt of Federal Communications Commission approvals, receipt of financing and other conditions. Also on October 26, 2005, Holdco received a request from the DOJ for additional information and documentary materials in connection with the merger. The effect of this request is to extend the waiting period imposed by the HSR Act until 30 days after the parties have substantially complied with the request, unless that period is terminated earlier by the DOJ or extended voluntarily. If the conditions to the merger are satisfied or waived (to the extent permitted by applicable law), we expect to consummate the merger in the second or third quarter of 2006.

Stock Split and Reverse Stock Split

        In connection with the Recapitalization, on August 20, 2004, our board of directors effected an approximately 4.37 for 1 stock split of our common stock. In addition, on December 17, 2004, we amended and restated our certificate of incorporation to effect a 1 for 200,000 reverse stock split of our common stock. Unless otherwise indicated, all share and per share amounts, as well as the par value amounts and additional paid-in-capital amounts related to our shares, contained in this quarterly report have been adjusted to give retroactive effect to the stock split and the reverse stock split.

Results of Operations—Three Months Ended September 30, 2004 and 2005

 
  Three Months Ended
September 30,

   
   
 
 
  Dollar
Change

  Percentage
Change

 
 
  2004
  2005
 
 
  (In thousands, except per share data and percentages)

 
Revenues                        
  Operating leases, satellite services and other   $ 203,268   $ 205,637   $ 2,369   1.2 %
  Outright sales and sales-type leases     3,827     3,481     (346 ) (9.0 )%
   
 
 
     
    Total revenues     207,095     209,118     2,023   1.0 %
   
 
 
     
Costs and expenses                        
  Cost of outright sales and sales-type leases     2,224         (2,224 ) (100.0 )%
  Depreciation and amortization expense     74,322     68,861     (5,461 ) (7.3 )%
  Direct operating costs (exclusive of depreciation and amortization)     38,649     30,973     (7,676 ) (19.9 )%
  Selling, general and administrative expenses     21,509     17,333     (4,176 ) (19.4 )%
  Gain on undesignated interest rate swap         (18,332 )   (18,332 )  
  Facilities restructuring and severance costs     2,080     209     (1,871 ) (90.0 )%
  Transaction-related costs     154,535         (154,535 ) (100.0 )%
   
 
 
     
    Total operating costs and expenses     293,319     99,044     (194,275 ) (66.2 )%
   
 
 
     
  Income (loss) from operations     (86,224 )   110,074     196,298   (227.7 )%
  Interest expense—net     57,794     48,272     (9,522 ) (16.5 )%
   
 
 
     
  Income (loss) before income taxes     (144,018 )   61,802     205,820   142.9 %
  Income tax expense (benefit)     (67,363 )   10,333     77,696   115.3 %
   
 
 
     
Net income (loss)   $ (76,655 ) $ 51,469   $ 128,124   167.1 %
   
 
 
     

47


        Certain prior period FSS segment revenue amounts have been reclassified to different revenue service classifications to conform with the current period's presentation. In-orbit back-up service revenues and TT&C services revenues, which were classified within other services revenues during the third quarter of 2004, have been reclassified to video services revenues and network services revenues based upon the nature of the related customers' services. Additionally, consulting/technical services revenues, which were also classified within other services revenues during the third quarter of 2004, have been reclassified to its own service classification. See explanations of changes in FSS segment revenue classifications within "FSS Segment—FSS Revenue By Service-Type" below.

        Total Revenues—The increase in total revenues was primarily attributable to higher video services revenues of $9.2 million, partially offset by a $5.4 million reduction in network services revenues, lower consulting/technical services revenues of $1.0 million and lower government services revenues of $0.8 million. (See "Operating Segments" below).

        Cost of Outright Sales and Sales-Type Leases—The decrease in cost of sales-type leases from September 30, 2004 primarily relates to an adjustment of certain costs for outright sales and sales-type leases recorded during the third quarter 2004 related to the XIPS anomaly on Galaxy 10R. During the third quarter of 2004, an increase to cost of sales-type leases of approximately $5.9 million was partially offset by the reversal of approximately $3.7 million of in-orbit insurance liabilities related to sales-type leases that are no longer insured.

        Depreciation and Amortization Expense—The decrease in depreciation and amortization expense is due primarily to the following:

        These decreases were partially offset by higher depreciation of $6.9 million resulting from reduced end of life estimates for our Galaxy 11, PAS-1R and PAS-9 satellites, and additional depreciation resulting from the acquisition of PAS-12 as part of the Europe*Star acquisition.

        Direct Operating Costs (exclusive of depreciation and amortization)—The decrease in total direct operating costs, as compared to the third quarter of 2004, is due primarily to lower G2 direct operating costs of $3.7 million resulting from a shift in the composition of G2 revenues to services/products with higher margins during the third quarter of 2005 as compared to the same period in 2004, lower engineering and operational costs of $1.9 million resulting from reduced headcount/operational efficiencies obtained since the third quarter of 2004, and lower in-orbit insurance costs of $1.8 million as a result of reduced or expired satellite insurance policies since the second quarter of 2004. (See "Operating Segments" below).

        Selling, General & Administrative Expenses—The decrease in selling, general and administrative expenses was primarily due to lower bad-debt expense of $1.7 million.

        Gain on Undesignated Interest Rate Swap—As of September 30, 2005, we completed our effectiveness test in relation to its $1.25 billion interest rate swap agreement. As a result of this test, it was determined that the interest rate swap agreement was no longer an effective hedge, and therefore,

48



did not qualify for hedge accounting treatment under SFAS No. 133. As a result, the interest rate swap was undesignated and therefore the reduction in the fair value of the interest rate swap obligation of approximately $18.3 million was recorded as a gain on undesignated interest rate swap in our consolidated statement of operations for the three months ended September 30, 2005. (See "—Interest Rate Swap Agreements" below)

        Facilities Restructuring and Severance Costs—Facilities restructuring and severance costs decreased $1.9 million during the three months ended September 30, 2005, as compared to the same period in 2004. This decrease was primarily due to a non-cash charge of $2.3 million that was recorded during the third quarter of 2004 as a result of a reduction in future anticipated sub-lease income related to one of our idle facilities. (See "—Liquidity and Capital Resources—Facilities Restructuring and Severance Costs" below).

        Transaction-related Costs—The decrease in transaction-related costs is due to costs incurred during the third quarter 2004 in relation to the Recapitalization. There were no such costs recorded during the three months ended September 30, 2005.

        Income From Operations—The increase in income from operations of $196.3 million during the three months ended September 30, 2005, as compared to the same period last year, was primarily due to the $154.5 million of the transaction related costs recorded during the third quarter of 2004, the $18.3 million gain on undesignated interest rate swap recorded during the third quarter of 2005 as well as an increase of $22.4 million resulting from the other items described above.

        Interest Expense—Net Interest expense—net consisted of the following (in thousands):

 
  Three Months Ended
September 30,

   
 
 
  Dollar
Change

 
 
  2004
  2005
 
Gross interest expense   $ 61,545   $ 56,367   $ (5,178 )
Less: Interest income     1,702     790     (912 )
Less: Capitalized interest     2,049     7,305     5,256  
   
 
 
 
Total interest expense, net   $ 57,794   $ 48,272   $ (9,522 )
   
 
 
 

        Interest expense—net decreased primarily as a result of:


        These decreases were partially offset by lower interest income of $0.9 million, due primarily to lower cash balances maintained during the third quarter of 2005, as compared to the same period in 2004.

        Income Tax Expense (Benefit)—The increase in 2005 income tax expense from 2004 is due primarily to the change in the effective income tax rates in effect for the quarter and the one-time income tax benefit on the $154.5 million of transaction costs incurred during the third quarter of 2004. After excluding the impact of this discrete item, all other income and expense for the three months ended September 30, 2005 were tax effected at an effective rate of 16.72 percent compared to an effective tax rate as of September 30, 2004 of (104.19) percent. The effective tax rate in 2005 reflects the effects of the undesignated interest rate swaps recorded during the third quarter of 2005, combined with the effect of the extraterritorial income exclusion benefit recorded in both years.

49


Results of Operations—NineMonths Ended September 30, 2004 and 2005

 
  Nine Months Ended
September 30,

   
   
 
 
  Dollar
Change

  Percentage
Change

 
 
  2004
  2005
 
 
  (In thousands, except per share data and
percentages)

 
Revenues                        
Operating leases, satellite services and other   $ 607,165   $ 621,183   $ 14,018   2.3 %
  Outright sales and sales-type leases     12,185     10,595     (1,590 ) (13.0 )%
   
 
 
     
    Total revenues     619,350     631,778     12,428   2.0 %
   
 
 
     
Costs and expenses                        
  Cost of outright sales and sales-type leases     2,224     (4,303 )   (6,527 ) (293.5 )%
  Depreciation and amortization expense     220,969     205,791     (15,178 ) (6.9 )%
  Direct operating costs (exclusive of depreciation and amortization)     118,484     99,811     (18,673 ) (15.8 )%
  Selling, general and administrative expenses     88,814     55,253     (33,561 ) (37.8 )%
  Loss on undesignated interest rate swap         305     305    
  Sponsor management fees         10,444     10,444    
  Loss on termination of sales-type leases         2,307     2,307    
  Transaction-related costs     155,035         (155,035 ) (100.0 )%
  Facilities restructuring and severance costs     4,508     3,974     (534 ) (11.8 )%
  Satellite impairment loss     99,946         (99,946 ) (100.0 )%
   
 
 
     
    Total operating costs and expenses     689,980     373,582     (316,398 ) (45.9 )%
   
 
 
     
  Income (loss) from operations     (70,630 )   258,196     328,826   465.6 %
  Interest expense—net     122,503     211,875     89,372   73.0 %
   
 
 
     
  Income (loss) before income taxes     (193,133 )   46,321     239,454   124.0 %
  Income tax expense (benefit)     (95,215 )   7,095     102,310   107.5 %
   
 
 
     
  Net income (loss)   $ (97,918 ) $ 39,226   $ 137,144   140.1 %
   
 
 
     

        Certain prior period FSS segment revenue amounts have been reclassified to different revenue service classifications to conform with the current period's presentation. In-orbit back-up service revenues and TT&C services revenues, which were classified within other services revenues during the first nine months of 2004, have been reclassified to video services revenues and network services revenues based upon the nature of the related customers' services. Additionally, consulting/technical services revenues, which were also classified within other services revenues during the first nine months of 2004, have been reclassified to its own service classification. See explanations of changes in FSS segment revenue classifications within "FSS Segment—FSS Revenue By Service-Type" below.

        Total Revenues—The increase in total revenues was primarily attributable to higher video services revenues of $29.2 million and higher consulting/technical services revenues of $0.8 million, partially offset by an $15.3 million reduction in network services revenues and a reduction in government services revenues of $2.2 million, as compared to 2004. (See "Operating Segments" below).

        Cost of Outright Sales and Sales-Type Leases—The decrease in cost of sales-type leases during the nine months ended September 30, 2005 was due to the reversal of approximately $4.3 million of in-orbit insurance liabilities, representing previously recorded expenses for sales-type leases on our Galaxy 4R and Galaxy 10R satellites that are no longer insured. These insurance policies expired during the nine months ended September 30, 2005, were not replaced and, as a result, these satellites and their related assets are no longer insured. The increase in cost of sales-type leases during the nine

50



months ended September 30, 2004 primarily relates to an adjustment of certain costs for outright sales and sales-type leases recorded during the third quarter 2004 related to the XIPS anomaly on our Galaxy 10R satellite. During the third quarter of 2004, an increase to cost of sales-type leases of approximately $5.9 million was partially offset by the reversal of approximately $3.7 million of in-orbit insurance liabilities related to sales-type leases that are no longer insured.

        Depreciation and Amortization Expense—The decrease in depreciation and amortization is due primarily to the following:


        These decreases were partially offset by increased depreciation of $19.2 million resulting from reduced end of life estimates for Galaxy 11, PAS-1R and PAS-9 satellites.

        Direct Operating Costs (exclusive of depreciation and amortization)—The decrease in total direct operating costs, as compared to the nine months ended September 30, 2004, is due primarily to lower in-orbit insurance costs of $5.0 million as a result of reduced or expired satellite insurance policies since January 2004, reduced engineering and operations costs of approximately $5.5 million resulting from reduced headcount/operational efficiencies obtained since January 2004 and a decrease in G2 direct operating costs of approximately $8.7 million as compared to the nine months ended September 30, 2004. The decrease in G2 operating costs was due primarily to a shift in the composition of G2 revenues to services/products with higher margins during the nine months ended September 30, 2005, as compared to the same period in 2004. (See "Operating Segments" below).

        Selling, General & Administrative Expenses—The decrease in selling, general and administrative expenses was primarily due to $32.1 million of bad debt expense recorded during the nine months ended September 30, 2004 as compared to the same period in 2005. In July of 2004, we terminated our transponder lease agreements with a customer due to non-payment of the customer's obligations to us through June 30, 2004. As a result, in the second quarter 2004 we recorded a pre-tax charge of approximately $29.6 million related to the current and long-term receivable balances due from this customer, which was recorded within our provision for uncollectible receivables.

        Loss on Undesignated Interest Rate Swap—On March 14, 2005, we entered into a five year interest rate swap agreement to hedge interest expense on a notional amount of $1.25 billion. The notional amount will amortize down to $625 million from March 14, 2008 until expiration on March 14, 2010. From March 14, 2005 through May 24, 2005, the interest rate swap was undesignated and changes in its fair value of approximately $18.6 million through May 24, 2005 were recorded within operating costs and expenses in our consolidated statement of operations. Between May 25, 2005 and June 30, 2005, the interest rate swap was designated as a cash flow hedge and deemed effective, and therefore qualified for hedge accounting treatment under SFAS No. 133. As of September 30, 2005, we completed our effectiveness assessment in relation to this swap agreement. As a result of this test, it was determined that the interest rate swap agreement was no longer an effective hedge, and therefore, did not qualify for hedge accounting treatment under SFAS-133. As a result, the interest rate swap was undesignated and therefore the reduction in the fair value of the interest rate swap obligation of

51



approximately $18.3 million was recorded as a gain on undesignated interest rate swap in our consolidated statement of operations for the three months ended September 30, 2005. The net loss on undesignated interest rate swap for the nine months ended September 30, 2005 was $0.3 million. (See "—Interest Rate Swap Agreements" below).

        Sponsor Management Fees—The Sponsors provided management and advisory services to us pursuant to management services agreements executed at the closing of the Recapitalization in August 2004. The Sponsors charged us an aggregate management fee of $2.0 million annually for the provision of these services, subject to an annual increase of three percent. In connection with, and effective upon completion of, our initial public offering on March 22, 2005, each of the Sponsors terminated their respective management services agreements with us for an aggregate consideration of $10.0 million. During the nine months ended September 30, 2005, we recorded approximately $10.4 million of expense for these management fees, including the termination payment.

        Loss on Termination of Sales-Type Leases—In the first quarter of 2005 we recorded a loss of $2.3 million in relation to the amendment of a customer's sales-type lease agreement, which resulted in a new operating lease agreement for that customer. As a result of this amendment, during the first quarter of 2005, we wrote off the remaining net investment in sales-type lease balance of $2.3 million related to this agreement.

        Facilities Restructuring and Severance Costs—Facilities restructuring and severance costs were $4.5 million and $4.0 million for the nine months ended September 30, 2004 and 2005, respectively. The decrease in these costs during the first nine months of 2005 was primarily due to the following:

        (See "—Liquidity and Capital Resources—Facilities Restructuring and Severance Costs" below).

        Transaction-related Costs—The decrease in transaction-related costs is due to costs incurred during the third quarter of 2004 in relation to the Recapitalization. There were no such costs recorded during the nine months ended September 30, 2005.

        Satellite Impairment Loss—In the first quarter of 2004, we recorded a non-cash charge of $99.9 million in relation to the impairment and subsequent de-orbiting of our PAS-6 satellite. This resulted in an approximate $63.3 million non-cash charge to net income after taxes during this period. PAS-6 had been previously replaced and was being used as a backup for another satellite prior to de-orbiting.

        Income from Operations—The increase in income from operations was primarily due to the non-recurrence of certain expenses, including the $155.0 million of transaction related costs recorded during the third quarter of 2004, the $99.9 million satellite impairment loss recorded during the first quarter of 2004, the $29.6 million charge recorded during the second quarter of 2004 described above and the other changes in revenues and operating expenses discussed above, including $10.4 million of Sponsor management fees recorded during the first quarter of 2005.

52



        Interest Expense—Net    Interest expense—net consisted of the following (in thousands):

 
  Nine Months Ended
September 30,

   
 
 
  Dollar
Change

 
 
  2004
  2005
 
Gross interest expense   $ 133,542   $ 232,225   $ 98,683  
Less: Interest income     6,789     2,091     (4,698 )
Less: Capitalized interest     4,250     18,259     14,009  
   
 
 
 
Total interest expense, net   $ 122,503   $ 211,875   $ 89,372  
   
 
 
 

        Interest expense—net increased primarily as a result of:

        These increases were partially offset by higher capitalized interest expense of $14.0 million during the first nine months of 2005 as a result of higher satellite construction in progress balances and higher interest rates, as compared to the first nine months of 2004.

        Income Tax Expense (Benefit)—The increase in income tax expense during the nine months ended September 30, 2005, as compared to the same period in 2004, is primarily due to the following discrete items impacting the 2004 income tax benefit (i) the $99.9 million PAS-6 satellite impairment loss recorded during the first quarter of 2004 and (ii) the $155.0 million of transaction costs incurred during the second and third quarters of 2004. The impact of these discrete items was partially offset by the 2005 tax benefit related to the $10 million sponsor management agreement termination fee.

        After excluding the impact of these discrete items, all other income and expense for the first nine months of 2005 were tax effected at an effective rate of 17.65 percent compared to an effective tax rate as of September 30, 2004 of (3.47) percent. The effective tax rate in 2005 reflects the lower earnings before taxes in 2005 that are attributable primarily to higher interest costs in 2005 combined with the effect of the extraterritorial income exclusion benefit recorded in both years.

53



Operating Segments

Selected segment data

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2005
  2004
  2005
 
 
   
  (In thousands)

   
 
Revenues:                          
FSS   $ 191,945   $ 195,878   $ 570,154   $ 588,195  
G2     20,497     19,737     64,918     62,718  
Eliminations     (5,347 )   (6,497 )   (15,722 )   (19,135 )
   
 
 
 
 
Total revenues   $ 207,095   $ 209,118   $ 619,350   $ 631,778  
   
 
 
 
 
Income (loss) from operations:                          
FSS   $ (88,909 ) $ 105,644   $ (78,640 ) $ 247,262  
G2     2,685     4,430     8,010     10,934  
   
 
 
 
 
Total income (loss) from operations   $ (86,224 ) $ 110,074   $ (70,630 ) $ 258,196  
   
 
 
 
 
Segment EBITDA:                          
FSS   $ 156,236   $ 162,978   $ 459,254   $ 486,343  
   
 
 
 
 
G2   $ 2,996   $ 4,798   $ 9,101   $ 12,288  
   
 
 
 
 

        As a result of the Recapitalization, we began utilizing Segment EBITDA (as defined above) as a measure of performance for our operating segments during the third quarter of 2004. We evaluate the performance of our operating segments based on several factors, of which the primary financial measure is Segment EBITDA. Segment EBITDA is presented because our chief operating decision maker evaluates and measures each business unit's performance based on its Segment EBITDA results. See Note 13 "Operating Segments" to our condensed consolidated financial statements appearing elsewhere in this quarterly report for a reconciliation of income (loss) from operations to Segment EBITDA for our FSS operating segment and our G2 operating segment.

        Our operations are comprised of the following two segments:

        Fixed Satellite Services—Through FSS, we lease transponder capacity to customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and DTH and provide TT&C and network services to customers.

        Government Services—Through G2, we provide global satellite and related telecommunications services to the U.S. government, international government entities, and their contractors.

54



FSS Segment


FSS Revenue by Service-Type

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
  2004
  2005
  2004
  2005
 
   
  (In Thousands)

   
FSS Revenues:                        
Video Services   $ 126,246   $ 133,855   $ 375,996   $ 405,128
Network Services     54,658     50,863     165,433     150,108
Government Services     5,347     6.500     15,722     19,135
Consulting/Technical Services     5,694     4,660     13,003     13,824
   
 
 
 
Total FSS revenues   $ 191,945   $ 195,878   $ 570,154   $ 588,195
   
 
 
 

Three Months Ended September 30, 2004 and 2005:

        Revenues.    The $3.9 million increase in FSS revenues for the three months ended September 30, 2005 was primarily attributable to higher video services revenues of $7.6 million and, higher government services revenues of $1.2 million, offset partially by a $3.8 million reduction in network services revenues as follows:

        Video Services. The increase in video services revenues was primarily due to higher program distribution services revenues of approximately $8.4 million. This increase in program distribution services revenues was due primarily to new customer arrangements on our Galaxy 12 satellite and the impact of the contractual arrangements entered into with affiliates of The DIRECTV Group in connection with the Recapitalization as compared to the same period in 2004.

        Network Services. The decrease in network services revenues was primarily attributable to the expiration of a lease associated with a non-core satellite that was used by a network services customer during the nine months ended September 30, 2004. This lease expiration resulted in a $2.9 million reduction in network services revenues during the third quarter of 2005, as compared to the third quarter of 2004.

        Government Services. The increase in government services revenues as compared to the third quarter of 2004 represents an increase in satellite capacity leased to our G2 segment by our FSS segment. This revenue eliminates in consolidation.

        Income from Operations.    The increase in income from operations of $194.6 million was primarily due to the non-recurrence of $154.5 million of the transaction related costs recorded during the third quarter of 2004, the $18.3 million gain on undesignated interest rate swap recorded during the third quarter of 2005, lower depreciation and amortization of $5.4 million, lower selling, general and administrative expenses of $4.2 million, lower direct operating costs of $3.9 million, increased revenues of $3.9 million, lower costs of sales and sales-type leases of $2.2 million and lower facilities structuring and severance costs of $1.9 million.

        Segment EBITDA.    The increase in FSS Segment EBITDA of $6.7 million for the three months ended September 30, 2005 is due to the increased FSS revenues of $3.9 million and lower operating costs and expenses of $2.8 million.

55



Nine Months Ended September 30, 2004 and 2005:

        Revenues.    The $18.0 million increase in FSS revenues for the nine months ended September 30, 2005 was primarily attributable to higher video services revenues of $29.1 million, and higher government services revenues of $3.4 million, offset partially by $15.3 million reduction in network services revenues as follows:

        Video Services. The increase in video services revenues was primarily due to higher program distribution and DTH services revenues of approximately $26.4 million and higher occasional use services revenues of approximately $2.1 million. This increase in program distribution and DTH services revenues was due primarily to new customer arrangements on our Galaxy 12 satellite and the impact of the contractual arrangements entered into with affiliates of The DIRECTV Group in connection with the Recapitalization, offset partially by reduced revenue as a result of an international DTH customer termination that occurred during the second quarter of 2004. The increase in occasional use services revenues is due primarily to multi-year minimum commitment agreements entered into with video resellers during the nine months ended September 30, 2005, as well as various special events which occurred during the nine months ended September 30, 2005.

        Network Services. The decrease in network services revenues was primarily attributable to the expiration of a lease associated with a non-core satellite that was used by a network services customer during nine months ended September 30, 2004. This lease expiration resulted in a $10.1 million reduction in network services revenues during the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. The remaining $5.2 million decrease in network services revenues is primarily due to customer contract expirations and customer credit related issues.

        Government Services. The increase in government services revenues as compared to the nine months ended September 30, 2004 represents an increase in satellite capacity leased to our G2 segment by our FSS segment. This revenue eliminates in consolidation.

        Income from Operations.    The $325.9 million increase in income from operations for the nine months ended September 30, 2005 was primarily due to the non-recurrance of certain costs, including the $155.0 million of the transaction related costs recorded during the third quarter of 2004, the $99.9 million satellite impairment loss recorded during the first quarter of 2004, the $29.6 million charge recorded during the second quarter of 2004 described above, the increase in FSS revenues of $18.0 million described above and a decrease in depreciation and amortization expense of approximately $15.0 million, which resulted primarily from satellites that were fully depreciated or de-orbited, lower direct operating costs of $9.9 million, lower costs of sales and sales-type lease expense of $6.5 million, lower selling general and administrative expenses of $4.0 million and lower facilities restructuring and severance costs of $1.0 million. These increases were partially offset by the $10.4 million of Sponsor management fees recorded during the first quarter of 2005.

        Segment EBITDA.    The increase in FSS Segment EBITDA of $27.1 million for the nine months ended September 30, 2005 is due to the increased FSS revenues of $18.0 million and lower operating costs and expenses of $9.1 million.

G2 Segment

        Revenue.    G2 segment revenues decreased by $0.8 million for the three months ended September 30, 2005, as compared to the same period in 2004. Reflected in this decrease was a change in the mix of revenues between these two periods. Revenues related to the construction of an L-Band payload on Galaxy 15 decreased $0.8 million due to the timing of completion of certain milestones on this construction project, equipment sales decreased by $2.6 million, and the lease of non-PanAmSat FSS provided satellite capacity decreased $0.4 million. These decreases in G2 revenue were partially

56


offset by increases in Managed Network Services of $1.3 million and increases in revenues related to the lease of PanAmSat FSS provided satellite capacity of $1.8 million.

        G2 segment revenues decreased $2.2 million for the nine months ended September 30, 2005, as compared to the same period in 2004. Reflected in this decrease was a significant change in the composition of revenues. Revenue related to the construction of an L-Band payload on Galaxy 15 decreased $5.7 million, the lease of non-PanAmSat FSS provided satellite capacity decreased $3.5 and the sale of equipment and other non-satellite products decreased $3.8 million. This decrease was partially offset by an increase in revenues related to managed network services of $4.5 million and an increase in revenues related to the lease of PanAmSat FSS provided satellite capacity of $6.3 million.

        Income from Operations and Segment EBITDA.    Income from operations increased by $1.7 million and Segment EBITDA increased by $1.8 million for the three months ended September 30, 2005, as compared to the same period in 2004. These changes were primarily due to a shift in revenue, as described above. The focus on higher margin products and services resulted in these increases.

        Income from operations and segment EBITDA increased by $2.9 million and $3.2 million, respectively, for the nine months ended September 30, 2005, as compared to the same period in 2004. These increases were primarily due to the shift in the composition of revenue as described above. The focus on higher margin products and services resulted in these increases. Restructuring charges of $0.5 million were included in income from operations for the nine months ended September 30, 2005. These charges were excluded from segment EBITDA for that same period.

Contracted backlog

        Contracted backlog represents the actual dollar amount (without discounting to present value) of the expected future cash payments to be received from customers under all long-term contractual agreements, including operating leases, sales-type leases and related service agreements, which may extend to the end of the life of the satellite or beyond to a replacement satellite. Contracted backlog is attributable both to satellites currently in orbit and those planned for future launch. Our contracted backlog for future services as of June 30, 2005 and September 30, 2005 was $4.68 billion and $4.54 billion, respectively. The change in contracted backlog of approximately $139 million was the result of customer contract activity during the third quarter of 2005 (approximately $209 million of customer billings during the three months partially offset by net new contracted backlog of approximately $70 million as a result of the execution of customer contracts). Our contracted backlog as of September 30, 2005 also included approximately $1.45 billion relating to future services on satellites we expect to launch.

Satellite Deployment Plan

        In January 2005, we replaced Galaxy 5 at 125 degrees west longitude with Galaxy 12 and subsequently de-orbited Galaxy 5.

        In April 2004, we committed to construct a new satellite, Galaxy 16, and in February 2005, we entered into an agreement for the construction of Galaxy 18. These satellites, together with our Galaxy 17 satellite already under construction, will serve as replacements for Galaxy 4R, Galaxy 10R and Galaxy 11. The construction program contemplates the availability of one of these satellites as an on-ground backup against launch failure or substantial delay of either of the other two satellites. Construction of Galaxy 18 began in 2005 and we plan to launch this satellite in the second quarter of 2007.

        The manufacturer of Galaxy 16 and Galaxy 18 is in the process of emerging from Chapter 11 bankruptcy. Both the Galaxy 16 and Galaxy 18 construction contracts have been approved by the bankruptcy court. Our agreements for the construction of Galaxy 16 and Galaxy 18 contain financial

57



covenants applicable to the manufacturer, including a requirement that all payments made or to be made to the manufacturer be utilized for the construction of these satellites. We also have a security interest in the satellites under construction by this manufacturer. In June 2005 we entered into launch agreements for these two satellites. Pursuant to these agreements, $65.8 million previously paid for the launch of Galaxy 8-iR will be applied to the launch of our Galaxy 16 satellite.

        On April 12, 2005, we entered into an agreement for the construction of PAS-11, which will be located at 43 degrees west longitude and will serve as a replacement for our PAS 6B Ku-band satellite and the C-band portion of our PAS-3R satellite. See "Commitments and Contingencies—Satellite Commitments" below.

        On August 14, 2005, we successfully launched our Galaxy 14 satellite into orbit. This satellite will be co-located with Galaxy 12 at 125 degrees west longitude.

        Our HGS-5 satellite, which had been operating in an inclined orbit, was de-orbited on September 29, 2005. HGS-5 had a net book value of $0.

        On October 13, 2005, we successfully launched our Galaxy 15 satellite into orbit. This satellite will be co-located with Galaxy 1R at 133 degrees west longitude.

        We expect to launch three satellites by the end of 2007 as follows:

Satellite

  Expected Launch Date

Galaxy 16

 

Second quarter of 2006

PAS-11

 

First quarter of 2007

Galaxy 18

 

Second quarter of 2007

        Assuming satellites under development are successfully launched and services on the satellites commence on schedule, we believe that amounts available under our revolving credit facility, vendor financing, future cash flows from operations and cash on hand will be sufficient to fund our operations and our remaining costs for the construction and launch of satellites currently under development. There can be no assurance, however, that our assumptions with respect to costs for future construction and launch of our satellites will be correct, or that amounts available under our revolving credit facility, vendor financing, future cash flows from operations and cash on hand will be sufficient to cover any shortfalls in funding for (i) launches caused by uninsured launch or in-orbit failures, (ii) cost overruns, (iii) delays, (iv) capacity shortages, or (v) other unanticipated expenses.

Liquidity and Capital Resources

Initial Public Offering

        On March 22, 2005, Holdco consummated an initial public offering of 50 million shares of its common stock at $18 per share and used the net proceeds to make an equity contribution to us of approximately $658.4 million and to pay a $200 million dividend to its then pre-existing stockholders. We used this equity contribution to repay approximately $265.0 million of the borrowings under our Term Loan A Facility and on April 1, 2005, we redeemed $353.5 million, or 35%, of our 9% senior notes and paid a redemption premium of $31.8 million to holders of those notes. In connection with and contingent upon Holdco's initial public offering, our senior secured credit facilities were amended to, among other things:

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Dividend Policy

        Our board of directors adopted a dividend policy that became effective upon the closing of Holdco's initial public offering. Our dividend policy reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating expenses and working capital requirements, interest and principal payments on our indebtedness and capital expenditures as regular quarterly dividends to our sole stockholder, Holdco, for payment as a dividend to its stockholders. On March 21, 2005, our board of directors declared a dividend to Holdco of approximately $5.28 million. This dividend was paid in April 2005. On June 20, 2005, our board of directors declared a dividend to Holdco of approximately $47.5 million which was paid on July 14, 2005. On September 19, 2005 our board of directors declared a dividend to Holdco of approximately $47.5 million, which was paid on October 13, 2005. Also, in September 2005, we recorded a dividend of $1.0 million related to amounts funded to Holdco for the payment of certain expenses.

Cash and Cash Equivalents

        At September 30, 2005, we had cash and cash equivalents of $87.4 million, compared to $38.6 million at December 31, 2004. On March 22, 2005, Holdco consummated an initial public offering of 50 million shares of its common stock and used the net proceeds to make an equity contribution to us of approximately $658.4 million and to pay a $200 million dividend to its then pre-existing stockholders. We used this equity contribution to repay approximately $265.0 million of the borrowings under our Term Loan A Facility and on April 1, 2005, we redeemed $353.5 million, or 35%, of our 9% senior notes and paid a redemption premium of $31.8 million to holders of those notes.

        During the nine months ended September 30, 2005, we recorded the following other significant transactions impacting cash and cash equivalents:

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  Nine Months Ended September 30,
   
 
 
  Dollar
Change

 
 
  2004
  2005
 
 
  (In thousands)

 
Net cash provided by operating activities   $ 162,042   $ 272,408   $ 110,366  
Net cash provided by (used in) investing activities     557,191     (180,881 )   (738,072 )
Net cash used in financing activities     (847,444 )   (43,933 )   803,511  
Effect of exchange rate changes on cash     328     1,210     882  

        The increase in the net cash provided by operating activities was primarily due to the non-recurrence of $155.0 million of transaction-related costs expensed and paid during the nine months ended September 30, 2004, a decrease in cash used within accounts payable and accrued liabilities of $42.2 million and other increases in cash from operations of approximately $11.3 million during the first nine months of 2005 as compared with the same period in 2004. These increases were partially offset by $10.4 million of Sponsor management fees paid and an increase of $87.7 million of cash paid for interest during the nine months ended September 30, 2005.

        The increase in net cash used in investing activities was primarily due to a reduction in net sales of short-term investments of approximately $374.1 million, the receipt of insurance proceeds of $286.9 million in the first nine months of 2004, higher capital expenditures of $38.9 million and additional cash paid for acquisitions of $41.3 million, partially offset by cash proceeds of $3.2 million from the sale of our Homestead teleport, as compared to the first nine months of 2004.

        The decrease in net cash used in financing activities was primarily due to the proceeds of Holdco's initial public offering of $900 million, and the funding of capital expenditures by a customer of $33.5 million in 2005. These increases were largely offset by the repayments of long-term debt of $671.9 million, dividends paid to our stockholders of $252.8 million, capitalized IPO costs of $40.9 million and repayments of satellite incentive obligations of $9.5 million during the nine months ended September 30, 2005. In the first nine months of 2004, as part of the Recapitalization, we issued new debt of $3.5 billion, terminated and repaid our old credit facilities and completed a tender offer for substantially all of our 61/8% Notes due 2005 and 81/2% Notes due 2012 for $1.4 billion and repurchased treasury stock of $2.8 billion. We also incurred new incentive obligations of $16.3 million and paid $9.6 million of incentive obligations during this period.

        We expect that for the year ended December 31, 2005 cash payments in respect of capital expenditures, including approximately $23 million of incentive payments and interest on satellites in service, will be in the range of $155 million to $170 million and that cash interest on our debt obligations will be in the range of $200 million to $215 million. Dividend payments to our stockholder for the period following the completion of Holdco's initial public offering through December 31, 2005, are expected to be approximately $100 million. Based upon the current level of operations, we believe that cash flows from operations, available cash and cash equivalents, together with borrowings available under our senior secured credit facilities, will be adequate to meet these expected payments. Our acquisition of Europe*Star closed on August 31, 2005 and was funded from cash on hand. This acquisition is not expected to impact our ability to pay future dividends, service our debt or fund future capital expenditures.

        Our ability to make scheduled payments of principal, or to pay the interest on, or to refinance our indebtedness, to make dividend payments to Holdco, or to fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

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Long-term Debt

        With a portion of the proceeds from its initial public offering, Holdco made an equity contribution to us of approximately $658.4 million, which we used to repay approximately $265.0 million of the borrowings under our Term Loan A Facility on March 22, 2005, redeem $353.5 million, or 35%, of our 9% senior notes and pay a redemption premium of $31.8 million to holders of these notes on April 1, 2005. We also repaid an additional $25.0 million of the Term Loan A facility with cash on hand on March 22, 2005. On June 17, 2005 we made a voluntary prepayment of $28.4 million under our Term Loan A facility from available cash on hand.

        As of September 30, 2005, long-term debt consisted of the following (in thousands):

 
  September 30,
2005

63/8% Notes due 2008   $ 150,000
81/2% Notes due 2012     1,190
67/8% Notes due 2028     125,000

Transaction Related Financing:

 

 

 
Revolving Credit Facility    
Term Loan A due 2009     355,910
Term Loan B-1 due 2011     1,647,500
9% Senior Notes due 2014     656,500
   
      2,936,100
Less: current maturities     16,550
   
Total Long-Term Debt   $ 2,919,550
   

        At September 30, 2005, we had total debt outstanding of approximately $2.9 billion, including current maturities of $16.6 million related to our Term Loan B-1 facility due 2011.

        Holdco's primary source of liquidity is cash flow generated from the operations of its subsidiaries. We are Holdco's only subsidiary. Holdco's ability to pay dividends on its common stock and make payments on its senior discount notes is dependent on the earnings and the distribution of funds from us. The agreements governing our senior secured credit facilities and 9% senior notes are the two contractual obligations of ours that significantly restrict our ability to pay dividends or otherwise transfer assets to Holdco. Payment of dividends is also subject to compliance with Delaware law.

        Concurrent with the completion of Holdco's initial public offering, we amended our senior secured credit facilities. Borrowings under our senior secured credit facilities bear interest at the borrower's option at either adjusted LIBOR plus an applicable margin or the alternate base rate plus an applicable margin. Borrowings under the senior secured credit facilities are subject to adjustment based on a pricing grid.

        Our senior secured credit facilities are comprised of a $250.0 million revolving credit facility, which will terminate in August 2009, an $800.0 million Term Loan A Facility, which matures in August 2009, and a $1,647.5 million Term Loan B-1 Facility, which matures in August 2011. At September 30, 2005, the Term Loan B-1 facility was split into two tranches in order to provide for the principal payment of $4.1 million which is due on November 18, 2005. The first tranche in the amount of $4.1 million, which is subject to the principal paydown, had an interest rate of 2 month LIBOR of 3.80% plus 2.00%. The remaining tranche, in the amount of $1,643.4 million, had an interest rate of 3 month LIBOR of 3.86% plus 2.00%. The revolving credit facility was undrawn. These rates are subject to change based upon our total leverage ratio. In addition, we are required to pay a commitment fee for the unused commitments under the revolving credit facility, if any, which, as of September 30, 2005 on an annual basis was 0.25%. As of September 30, 2005 we had outstanding letters of credit totaling $49.2 million.

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Outstanding letters of credit reduce our ability to borrow against the revolving credit facility by an equivalent amount. Any amounts borrowed under the revolving credit facility would bear interest at 1 month LIBOR plus 1.75% as of September 30, 2005, although this interest rate is subject to adjustment based on our total leverage ratio.

        Obligations under the senior secured credit facilities are, or will be, as the case may be, unconditionally and irrevocably guaranteed jointly and severally by our current and future domestic subsidiaries and are secured by substantially all of our assets and substantially all of the assets of each of our current and future domestic subsidiaries.

        The 9% senior notes require interest payments to be made semi-annually, mature on August 15, 2014, are unsecured, and are, or will be, as the case may be, unconditionally guaranteed by each of our existing and certain subsequently acquired or organized domestic restricted subsidiaries.

        In connection with the Recapitalization, in August 2004, we completed a tender offer for substantially all of our $275 million 61/8% Notes due 2005 and our $800 million 81/2% Senior Notes due 2012. We completed the redemption of our remaining 61/8% Notes due 2005 in October 2004. In September 2004, we repaid the outstanding balance under our revolving credit facility.

        As of September 30, 2005, we had outstanding 10 and 30-year fixed rate notes totaling $275.0 million which were issued in January 1998. The outstanding principal balances, interest rates and maturity dates for these notes as of September 30, 2005, are $150.0 million at 63/8% due 2008 and $125.0 million at 67/8% due 2028, respectively. Principal on these notes is payable at maturity, while interest is payable semi-annually.

        As of September 30, 2005, we also had outstanding $1.2 million of 81/2% senior notes due 2012. These notes are unsecured, and are unconditionally guaranteed by each of our domestic restricted subsidiaries, existing prior to the Recapitalization.

        We are required to maintain certain financial covenants and are also subject to restrictive covenants under our borrowings. As of September 30, 2005, we were in compliance with all such covenants.

        The indenture governing our 9% senior notes and our senior secured credit facilities contain financial covenant ratios, specifically total leverage and interest coverage ratios, that are calculated by reference to Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) plus net interest expense, income tax expense (benefit) and depreciation and amortization, further adjusted to give effect to unusual items, non-cash items and other adjustments specifically required in calculating covenant ratios and compliance under the indenture governing our 9% senior notes due 2014 and our senior secured credit facilities. These adjustments include unusual items such as severance, relocation costs and one-time compensation charges, non-cash charges such as non-cash compensation expense and the other adjustments shown below. Adjusted EBITDA is a material component of these covenants. For instance, non-compliance with the financial ratio maintenance covenants contained in the senior secured credit facilities could result in the requirement that we immediately repay all amounts outstanding under such facilities and a prohibition on our paying dividends to Holdco, and non compliance with the debt incurrence ratios contained in our 9% senior notes could prohibit us from being able to incur additional indebtedness or make restricted payments, including payments of dividends on our common stock, other than pursuant to specified exceptions. In addition, under the restricted payments covenants contained in the indentures, our ability to pay dividends is restricted by a formula based on the amount of Adjusted EBITDA. We believe the adjustments listed below are in accordance with the covenants discussed above.

        Adjusted EBITDA is not a presentation made in accordance with GAAP, and does not purport to be an alternative to net income (loss) determined in accordance with GAAP or as a measure of operating performance or to cash flows from operating activities determined in accordance with GAAP

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as a measure of liquidity. Additionally, Adjusted EBITDA is not intended to be a measure of cash flow for management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, this presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. The following table sets forth a reconciliation of Adjusted EBITDA and EBITDA to net income (loss) and to net cash provided by operating activities for the periods indicated (in thousands):

 
  Three Months Ended
September 30,

  Nine Months Ended
September 30,

 
 
  2004
  2005
  2004
  2005
 
Reconciliation of Net Cash Provided by Operating Activities to Net Income (Loss):                          
Net cash provided by (used in) operating activities   $ (60,217 ) $ 104,301   $ 162,042   $ 272,408  
Depreciation and amortization     (74,322 )   (68,861 )   (220,969 )   (205,791 )
Deferred income taxes     67,929     (9,971 )   98,457     (5,027 )
Amortization of debt issue costs and other deferred charges     (3,736 )   (4,589 )   (7,698 )   (14,338 )
Provision for uncollectible receivables     (1,526 )   35     (31,982 )   2  
Other non-cash items     742     596     3,950     2,260  
Satellite impairment loss             (99,946 )    
Loss on Galaxy 10R XIPS anomaly     (9,090 )       (9,090 )    
Loss on termination of sales-type leases                 (2,307 )
Facilities restructuring and severance costs     (2,288 )   (233 )   (4,309 )   (3,998 )
Reversal of sales-type lease liabilities     3,727         3,727     4,303  
Gain on disposal of fixed assets     1,332         1,332      
Loss on early extinguishment of debt     (15,134 )       (20,589 )   (24,161 )
Gain (loss) on undesignated interest rate swap         18,332         (305 )
Changes in assets and liabilities, net of acquired assets and liabilities     15,928     11,859     27,157     16,180  
   
 
 
 
 
Net income (loss)   $ (76,655 ) $ 51,469   $ (97,918 ) $ 39,226  
   
 
 
 
 
Reconciliation of Net Income (Loss) to EBITDA:                          
Net income (loss)   $ (76,655 ) $ 51,469   $ (97,918 ) $ 39,226  
Interest expense, net     57,794     48,272     122,503     211,875  
Income tax expense (benefit)     (67,363 )   10,333     (95,215 )   7,095  
Depreciation and amortization     74,322     68,861     220,969     205,791  
   
 
 
 
 
EBITDA   $ (11,902 ) $ 178,935   $ 150,339   $ 463,987  
   
 
 
 
 
                           

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Reconciliation of EBITDA to Adjusted EBITDA:                          
EBITDA   $ (11,902 ) $ 178,935   $ 150,339   $ 463,987  
Adjustment of sales-type leases to operating leases(a)     6,608     6,702     19,035     19,912  
Effect of Galaxy 10R anomaly(b)     9,090         9,090      
Loss on termination of sales-type leases(c)                 2,307  
Satellite impairment(d)             99,946      
Restructuring charges(e)     2,080     209     4,508     3,974  
Reserves for long-term receivables and sales-type
leases(f)
    (3,727 )       24,419     (4,303 )
Reversal of allowance for customer credits(g)     1,800         7,200      
Transaction-related costs(h)     154,535         155,035     10,545  
Loss on undesignated interest rate swap(i)         (18,332 )       305  
Other items(j)     748     262     (1,217 )   1,904  
   
 
 
 
 
Adjusted EBITDA   $ 159,232   $ 167,776   $ 468,355   $ 498,631  
   
 
 
 
 

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        Future principal debt repayments are expected to be paid out of cash flows from operations, borrowings under PanAmSat's revolving credit facility, future refinancing of our debt and any future insurance proceeds received.

Interest Rate Swap Agreements

        In accordance with the agreement governing our old senior secured credit facilities that were repaid in 2004, we were party to an interest rate swap agreement for a fixed rate payment of 5.64% on $100.0 million through August 30, 2005. In June of 2004, in connection with the repayment of the term loan B-1 facility of our old credit facility, our cash flow hedge became undesignated and therefore changes in the fair value of the interest rate swap have been recorded within our consolidated statement of operations from that time. In August 2005, this agreement expired.

        On March 14, 2005, we entered into a five year interest rate swap agreement to hedge interest expense on a notional amount of $1.25 billion. The notional amount will amortize down to $625 million from March 14, 2008 until expiration on March 15, 2010. In relation to this swap agreement, we exchanged its floating-rate obligation on $1.25 billion of our Term Loan B-1 facility for a fixed-rate

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obligation, subject to scheduled rate increases based on the LIBOR rate used as described in the following table:

Start Date

  End Date
  Total Notional
Amount

  PanAmSat
Corporation
pays banks

  Banks pay
PanAmSat
Corporation

   
  3/14/2005     6/14/2005   $ 1,250,000,000   3.000 % 3.000%    
  6/14/2005     9/14/2005   $ 1,250,000,000   3.548 % 3.400%    
  9/14/2005   12/14/2005   $ 1,250,000,000   3.922 % 3.857%    
12/14/2005     3/14/2006   $ 1,250,000,000   4.178 % 3 Month LIBOR    
  3/14/2006     6/14/2006   $ 1,250,000,000   4.316 % 3 Month LIBOR    
  6/14/2006     9/14/2006   $ 1,250,000,000   4.422 % 3 Month LIBOR    
  9/14/2006   12/14/2006   $ 1,250,000,000   4.523 % 3 Month LIBOR    
12/14/2006     3/14/2007   $ 1,250,000,000   4.610 % 3 Month LIBOR    
  3/14/2007     6/14/2007   $ 1,250,000,000   4.646 % 3 Month LIBOR    
  6/14/2007     9/14/2007   $ 1,250,000,000   4.681 % 3 Month LIBOR    
  9/14/2007   12/14/2007   $ 1,250,000,000   4.714 % 3 Month LIBOR    
12/14/2007     3/14/2008   $ 1,250,000,000   4.763 % 3 Month LIBOR    
  3/14/2008     6/14/2008   $ 625,000,000   4.802 % 3 Month LIBOR    
  6/14/2008     9/14/2008   $ 625,000,000   4.839 % 3 Month LIBOR    
  9/14/2008   12/14/2008   $ 625,000,000   4.876 % 3 Month LIBOR    
12/14/2008     3/14/2009   $ 625,000,000   4.912 % 3 Month LIBOR    
  3/14/2009     6/14/2009   $ 625,000,000   4.943 % 3 Month LIBOR    
  6/14/2009     9/14/2009   $ 625,000,000   4.970 % 3 Month LIBOR    
  9/14/2009   12/14/2009   $ 625,000,000   4.997 % 3 Month LIBOR    
12/14/2009     3/14/2010   $ 625,000,000   5.023 % 3 Month LIBOR    

        The counterparties to this agreement are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swap agreement, our exposure is limited to the interest rate differential on the notional amount at each quarterly settlement period over the life of the agreements. We do not anticipate non-performance by the counterparties.

        The fair value of the interest rate swap agreement is the estimated amount that we would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates, the market expectation for future interest rates and our current creditworthiness. From the inception of the interest rate swap agreement through May 24, 2005, the interest rate swap was undesignated and the increase in the fair value of the related obligation of approximately $18.6 million was recorded within loss on undesignated interest rate swap in our consolidated statement of operations for the quarter ended June 30, 2005, in accordance with the provisions of SFAS No. 133. Between May 25, 2005 and June 30, 2005, the interest rate swap was designated as a cash flow hedge and deemed effective, and therefore qualified for hedge accounting treatment under SFAS No. 133. In accordance with SFAS No. 133, changes in the hedged asset or liability representing the effectiveness of the hedge were recorded within comprehensive income (loss) in our consolidated balance sheet. The ineffective portion of the hedge (approximately $630 thousand) was recorded as an adjustment to interest expense in the consolidated statement of operations for the quarter ended June 30, 2005.

        Pursuant to SFAS No. 133 we are required to perform a quarterly analysis of the effectiveness of the hedge. Under SFAS No.133 in order to maintain the effectiveness of the hedge, an effectiveness rate of between 80% and 125% must be maintained. This effectiveness rate is calculated by dividing the cumulative change in the hedge liability by the cumulative change in the cash flows of the debt being hedged. As a result of this test, it was determined that the interest rate swap agreement was no longer an effective hedge, and therefore did not qualify for hedge accounting treatment under SFAS No. 133. As a result, the interest rate swap was undesignated and pursuant to the guidance within SFAS

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No. 133, the reduction in the fair value of the interest rate swap obligation of approximately $18.3 million was recorded as a gain on undesignated interest rate swap in our consolidated statement of operations for the three months ended September 30, 2005. The net loss on undesignated interest rate swap for the nine months ended September 30, 2005 was $0.3 million. As of September 30, 2005 the liability related to this interest rate swap of $3.2 million was included in deferred credits and other within our condensed consolidated balance sheet.

        On the interest rate reset date of September 14, 2005, the interest rate which the counterparties will utilize on December 14, 2005 to compute interest due to us was determined to be 3.857%. This will result in ourt paying the counterparties approximately $206 thousand on December 14, 2005 (the difference between the rate we must pay of 3.922% and the rate we will receive from the counterparties of 3.857%).

Facilities Restructuring and Severance Costs

        Facilities restructuring and severance costs were $2.1 million and $0.2 million for the three months ended September 30, 2004 and 2005, and $4.5 million and $4.0 million for the nine months ended September 30, 2004 and 2005, respectively.

        In January 2003, our management approved a plan to consolidate certain of our teleports in order to improve customer service and reduce operating costs. This teleport consolidation plan included the closure of certain owned teleports and the reduction of services at our Fillmore and Castle Rock teleports. Under this plan, our Homestead, Florida teleport was closed in 2003 and our Spring Creek, New York teleport was closed in June 2004. Our Spring Creek teleport was sold on October 28, 2004. On June 3, 2005, we completed the sale of our Homestead teleport for approximately $3.2 million, net of associated selling costs. During the three months ended September 30, 2004 and 2005, we recorded credits of $0.2 million and charges of $0, respectively, and during the nine months ended September 30, 2004 and 2005 we recorded charges of $0.8 million and $2.5million, respectively, related to this teleport consolidation plan, representing severance costs in 2004 and certain costs incurred in relation to equipment transferred to other locations in 2005.

        On March 29, 2002, our management approved a plan to restructure several of our United States locations and close certain facilities, some of which are currently being leased through 2011. In an effort to further streamline our operations, in the first quarter of 2004, we consolidated our Manhattan Beach, El Segundo and Long Beach, California facilities. As a result, we recorded a non-cash charge of $1.4 million during the first quarter of 2004 reflecting future lease costs related to approximately 18,000 square feet of unused facilities in Manhattan Beach. Additionally, in the third quarter of 2004 we recorded a non-cash charge of approximately $2.3 million due to a reduction in future anticipated sublease income related to one of our idle facilities. We recorded a non-cash charge of approximately $0.5 million in the nine months ended September 30, 2005, in relation to increased future lease costs related to one of our idle facilities.

        In October 2003 and October 2004, our management approved plans to reduce our workforce by approximately 45 employees and 25 employees, respectively. During the three months ended September 30, 2004 and 2005, we recorded severance charges of $0 and $0.2 million, respectively, and during the nine months ended September 30, 2004 and 2005, we recorded charges of $0 and $1.0 million, respectively, in relation to these plans. These severance costs were primarily related to employee compensation, benefits and outplacement services.

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        The following table summarizes the recorded accruals and activity related to our teleport consolidation, facilities restructuring and severance charges during the nine months ended September 30, 2005 (in millions):

 
  Facilities
Restructuring

  Teleport
Consolidation

  Severance
Costs

  Total
 
Balance as of January 1, 2005   $ 6.3   $ 0.3   $ 0.5   $ 7.1  
Restructuring charges     0.5     2.5     1.0     4.0  
Less: non-cash items         (2.5 )       (2.5 )
Less: net cash payments     (1.2 )   (0.2 )   (1.0 )   (2.4 )
   
 
 
 
 
Balance as of September 30, 2005   $ 5.6   $ 0.1   $ 0.5   $ 6.2  
   
 
 
 
 

        We expect to pay the $0.6 million of liabilities related to our severance costs and teleport consolidation plans within the next year and we expect to pay the $5.6 million of liabilities related to our facilities restructuring plan over the next six years.

Commitments and Contingencies

        The following schedule summarizes our contractual obligations and commercial commitments as of September 30, 2005:

 
  Payments Due by Period
Contractual Obligations

  Total
  One Year
or Less

  2–3 Years
  4–5 Years
  After 5
Years

 
  (In Thousands)

Total Debt:                              
  Senior Secured Credit Facility   $ 2,003,410   $ 16,550   $ 129,110   $ 293,200   $ 1,564,550
  9% Senior Notes Due 2014     656,500                 656,500
  Other Notes(1)     276,190         150,000         126,190
   
 
 
 
 
    Total     2,936,100     16,550     279,110     293,200     2,347,240
Interest Payments(2)     1,507,849     220,753     443,891     396,467     446,738
Satellite Incentive Obligations     110,102     13,012     26,654     24,100     46,336
Horizons Contributions Obligations     79,836         12,767     24,351     42,718
Europe*Star Purchase Price Obligation     20,150     20,150            
Operating Leases     29,270     5,506     10,309     8,680     4,775
Satellite Construction and Launch Contracts     267,618     154,691     71,030     4,017     37,880
Customer Contracts     39,228     18,065     7,410     5,743     8,010
Vendor Contracts     57,631     11,930     16,567     13,156     15,978
   
 
 
 
 
  Total Contractual Obligations   $ 5,047,784   $ 460,657   $ 867,738   $ 769,714   $ 2,949,675
   
 
 
 
 

(1)
Consists of $150.0 million of 63/8% senior notes due 2008, $1.2 million of 81/2% senior notes due 2012 and $125.0 million of 67/8% senior debentures due 2028.

(2)
Represents estimated interest payments to be made on our fixed and variable rate debt and incentive obligations. All interest payments assume that principal payments are made as originally scheduled. Interest rates utilized to determine interest payments for variable rate debt and incentive obligations are based upon our estimate of future interest rates.

        Cash to be paid for income taxes is excluded from the table above.

        Satellite launch and in-orbit insurance contracts related to future satellites to be launched are cancelable up to 30 days prior to the satellite's launch. As of September 30, 2005, we did not have any

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non-cancelable commitments related to existing launch insurance or in-orbit insurance contracts for satellites to be launched.

Satellite Incentive Obligations

        Satellite contracts typically require that we make progress payments during the period of the satellite's construction and orbital incentive payments (plus interest) over the orbital life of the satellite. The incentive obligations may be subject to reduction if the satellite fails to meet specific technical operating standards. Certain of our satellite construction contracts also provide that certain amounts paid by us during the construction phase are subject to refund (with interest) if the satellite fails to meet these technical operating standards. As of September 30, 2005, we had $110.1 million of liabilities recorded in relation to these satellite incentive obligations.

Satellite Commitments

        As of September 30, 2005, we had approximately $184.6 million of expenditures remaining under existing satellite construction contracts and $83.0 million remaining under existing satellite launch contracts. Satellite launch and in-orbit insurance contracts related to future satellites to be launched are cancelable up to thirty days prior to the satellite's launch. As of September 30, 2005, we did not have any non-cancelable commitments related to existing launch insurance or in-orbit insurance contracts for satellites to be launched.

        In April 2004, we committed to construct a new satellite, Galaxy 16, and in February 2005, we entered into an agreement for the construction of Galaxy 18. These satellites, together with our Galaxy 17 satellite already under construction, will serve as replacements for Galaxy 4R, Galaxy 10R and Galaxy 11. The construction program contemplates the availability of one of these satellites as an on-ground backup against launch failure or substantial delay of either of the other two satellites. Construction of Galaxy 18 began in 2005 and we plan to launch this satellite in the second quarter of 2007.

        The manufacturer of Galaxy 16 and 18 is in the process of emerging from Chapter 11 bankruptcy. Both the Galaxy 16 and Galaxy 18 construction contracts have been approved by the bankruptcy court. Our agreements for the construction of Galaxy 16 and Galaxy 18 contain financial covenants applicable to the manufacturer, including a requirement that all payments made or to be made to the manufacturer be utilized for the construction of these satellites. We also have a security interest in the satellites under construction by this manufacturer. In June 2005, we entered into launch agreements for these two satellites. Pursuant to these agreements, $65.8 million previously paid for the launch of Galaxy 8-iR will be applied to the launch of our Galaxy 16 satellite.

        On April 12, 2005, we entered into an agreement for the construction of PAS-11, which will be located at 43 degrees west longitude and will serve as a replacement for our PAS 6-B Ku-band satellite and the C-band portion of our PAS-3R satellite. In July 2005, we signed an agreement for the launch of this satellite in the first quarter of 2007.

        On August 1, 2005, we formed our second 50-50 joint venture with JSAT, a leading satellite operator in the Asia-Pacific region, that will build and launch a Ku-band satellite to replace our SBS-6 satellite at 74 degrees west longitude. The joint venture is named Horizons-2. The satellite will support digital video, high-definition television (HDTV) and IP-based content distribution networks to broadband Internet and satellite news gathering services (SNG) in the United States. This Horizons-2 satellite will be constructed over the next two years and is expected to be in service by late 2007. The total investment in this joint venture is expected to be approximately $160 million, of which each of the joint venture partners is required to fund their 50% share beginning in early 2008. Our investment in this joint venture is being accounted for using the equity method.

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Satellite Insurance

        In December 2003, we reached a final settlement of insurance claims on our PAS-1R and Galaxy 11 satellites for payment of $260.0 million, which related to solar panel anomalies on those satellites. We will continue to own and operate these satellites free and clear of any claims of these insurers. We offset the proceeds from this settlement against the carrying value of the satellites. In the first quarter of 2004, we received the $260.0 million settlement amount.

        In July 2003, we filed a proof of loss under the insurance policy for our Galaxy 4R satellite after the XIPS on this satellite ceased working. Later in 2003, we settled an insurance claim on this satellite related to the failure of its propulsion system and received $102.6 million from insurers representing approximately 83% of the insurance coverage on the satellite. In March 2004, we reached an agreement with, and received $26.9 million from, the insurer representing the remaining 17% of the insurance coverage on this satellite. The settlement with the insurer representing 17% coverage includes a future sharing of revenues actually received from the satellite. We proportionately offset the proceeds from these settlements against the insured carrying value of the satellite and the net investment in sales-type lease. We are constructing a replacement satellite for Galaxy 4R, which is scheduled to be launched in 2006, prior to the end of Galaxy 4R's useful life.

        As of September 30, 2005, we had in effect launch and in-orbit insurance policies covering five satellites in the aggregate amount of approximately $458.7 million. As of such date, these insured satellites had an aggregate net book value and other insurable costs of $596.1 million. We had 19 uninsured satellites in orbit as of September 30, 2005. In July 2005, the insurance policy on our PAS-9 satellite expired and was not replaced. As a result, PAS-9 is no longer insured. As of September 30, 2005, PAS-9 had approximately $99 million of net book value and other insurable costs. Our HGS-5 satellite, which had been operating in an inclined orbit, was de-orbited on September 29, 2005. HGS-5 had a net book value and other insurable costs of $0. Our currently uninsured satellites are: PAS-4, which is used as a backup satellite; PAS-5 and PAS-7, for which we received insurance proceeds for constructive total losses; Galaxy 1R, Galaxy 3R, and SBS-6, which are approaching the end of their useful lives; Galaxy 4R, Galaxy 10R, Galaxy 11 and PAS-1R, for which we received insurance proceeds for partial losses; PAS-2, PAS-3R, PAS-6B, PAS-8, PAS-9, Galaxy 9, and Galaxy 12, for which we determined that insurance was not available on commercially reasonable terms; and HGS-3 and Leasat, which have an aggregate book value of approximately $0.5 million. Our Galaxy 9 and Galaxy 14 satellites currently serve as in-orbit backups for the C-band portions of Galaxy 1R, Galaxy 3C, Galaxy 4R, Galaxy 10R, Galaxy 11, Galaxy 12 and Galaxy 13/Horizons 1. The C-band portion of the satellites that are currently covered by C-band in-orbit backups had an aggregate net book value of approximately $314.6 million as of September 30, 2005.

        Of the insured satellites, as of September 30, 2005, one was covered by policies with substantial exclusions or exceptions to coverage for failures of specific components identified by the underwriters as at risk for possible failure, or Significant Exclusion Policies. The exclusions reduce the probability of an insurance recovery in the event of a loss on this satellite. Galaxy 13/Horizons 1, which was placed in service in January 2004 and is insured by a policy with an exclusion for XIPS related anomalies, continues to have available redundant XIPS as its primary propulsion system. Certain enhancements have been made to the XIPS on this satellite to make the systems more robust. In addition, Galaxy 13/Horizons 1 has available backup bi-propellant of approximately 11.3 years as of September 30, 2005.

        At September 30, 2005, the uninsured satellites and the satellites insured by Significant Exclusion Policies had a total net book value and other insurable costs of approximately $986.7 million. Of this amount, $894.2 million related to uninsured satellites and $92.5 million related to satellites insured by Significant Exclusion Policies.

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        Upon the expiration of the insurance policies, there can be no assurance that we will be able to procure new policies on commercially reasonable terms. New policies may only be available with higher premiums or with substantial exclusions or exceptions to coverage for failures of specific components.

        An uninsured failure of one or more of our satellites could have a material adverse effect on our financial condition and results of operations. In addition, higher premiums on insurance policies will increase our costs, thereby reducing our income from operations by the amount of such increased premiums.

Operating Leases

        We have commitments for operating leases primarily relating to our executive office facilities in Wilton, Connecticut and other locations. These leases contain escalation provisions for increases as a result of increases in real estate taxes and operating expenses. As of September 30, 2005, minimum annual rentals of all leases, exclusive of potential increases in real estate taxes, operating assessments and future sub-lease income aggregated $29.3 million.

Customer and Vendor Obligations

        We have contracts with certain of our customers which require us to provide equipment, services and other support during the term of the related contracts with us. As of September 30, 2005, we had commitments to provide equipment, services and other support under these customer contracts, which aggregated approximately $39.2 million.

        In July 2005, PanAmSat signed an agreement with a customer in which PanAmSat is a subcontractor and the customer is the prime contractor to its end user customer. In exchange for PanAmSat's engagement as a subcontractor on this project, PanAmSat has agreed to guarantee the prime contractor's $8.8 million performance bond.

        We have long-term contractual obligations with service providers primarily for the operation of certain of our satellites. As of September 30, 2005, we have commitments under these vendor contracts which aggregated approximately $57.6 million related to the provision of equipment, services and other support.

Change-in-Control Obligations

        Certain of our senior executives are party to change-in-control severance agreements which provide for payment of severance and other benefits in the event of an involuntary termination of the executive's employment (as defined in such agreements) within three years after a change in control. The requisite changes of control required under these agreements have occurred and these agreements will apply if an involuntary termination of an executive occurs during the periods specified by the agreements. Based upon current compensation levels, if all of these executives receive the termination related benefits as specified by their respective agreements, the aggregate cost to us would be up to $11.1 million (net of tax benefits of $6.4 million).

        In connection with the merger, our board of directors approved the adoption of a 2005 Severance Pay Plan on terms similar to our existing 2003 Severance Pay Plan and authorized a retention pool of up to $10 million for employees. As of the current date, retention bonuses totaling approximately $8.0 million have been designated for employees. The 2005 Severance Pay Plan, adopted in connection with the merger, allows for the payment of enhanced severance to employees laid off or who resign for good reason (as defined in such plan) due to, and within 18 months following, a change in control (as defined in such plan). We are currently unable to estimate the amount of future severance to be paid pursuant to the 2005 Severance Pay Plan which would result from a change in control upon the closing of the merger.

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        We and Holdco granted stock options to certain employees subsequent to the Recapitalization. The options granted by us were assumed by Holdco in October 2004. In addition, certain employees also acquired common stock of Holdco. The vesting of these stock options accelerates in the event of certain changes in control of Holdco. Pursuant to contractual obligations, we could be obligated to make payments for vested options and to repurchase shares held by certain employees in the event of the death or qualifying disability of any such employee. In all other circumstances, Holdco has the right, but not the obligation, to call the common stock held by employees and, therefore, no contingent obligation would exist for us.

        Upon the consummation of Holdco's pending merger with Intelsat, based upon the $25 per share merger consideration, assuming the acceleration of all outstanding options and other equity based arrangements and their conversion into a right to receive cash, each as required by the merger agreement, and assuming that the holders of such equity based arrangements receive the amounts described in the merger agreement, we will be required to recognize an expense of between $100 million and $110 million.

        The Company estimates maximum tax costs related to these obligations, including reimbursement of employee excise taxes and lost income tax deductions, to be approximately $40 million.

Foreign Withholding Taxes

        We have outstanding tax claims related to withholding taxes assessed on revenues derived from broadcasters inside and outside of India who broadcast from or into India. The total amount assessed for all periods from March 31, 1996 through March 31, 2002 is approximately $56.9 million. We are contesting the imposition of such taxes. While this contest proceeds, we have been required to advance cash and provide a bank guarantee for a total of approximately $49.2 million. As of September 30, 2005, we had paid cash of approximately $1.2 million related to these assessment years. If unsuccessful in our contest, we could be subject to comparable claims for subsequent years. In connection with the Recapitalization, The DIRECTV Group, which controlled us prior to the Recapitalization, agreed to indemnify us for these and certain other taxes related to any periods or portions of such periods ending on or prior to the day of the closing of the Recapitalization in amounts equal to 80% of the first $75.0 million of such taxes and 100% of such taxes in excess of the first $75.0 million. As a result, our net tax liability related to these periods is capped at $15.0 million.

Critical Accounting Policies

        For a description of our Critical Accounting Policies refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" within our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 22, 2005. There have been no significant changes to our critical accounting policies during 2005.

New Accounting Pronouncements

        In May 2005, FASB issued SFAS No. 154. SFAS No. 154 replaces APB Opinion No. 20 and FASB Statement No. 3. This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It requires retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 will not have a material impact on our consolidated financial statements.

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Market Risks

        We manage our exposure to market risks through internally established policies and procedures and, when we deem appropriate, through the use of derivative financial instruments, including interest rate hedges. See "—Liquidity and Capital Resources—Long-term debt" above. The objective of our policies is to mitigate potential statement of operations, cash flow and fair value exposures resulting from possible future adverse fluctuations in interest rates. We evaluate our exposure to market risks by assessing the anticipated near-term and long-term fluctuations in interest rates on a periodic basis. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions and the review of market projections as to expected future interest rates. We utilize this information to determine our own investment strategies as well as to determine if the use of derivative financial instruments is appropriate to mitigate any potential future interest rate exposure that we may face. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives.

        We determine the impact of changes in interest rates on the fair value of our financial instruments based on a hypothetical 10% adverse change in interest rates from the rates in effect as of the end of the period for these financial instruments. We use different methodologies to determine the impact of these hypothetical changes on our fixed rate public debt and sales-type leases and on our variable rate debt.

        In accordance with the agreement governing our old senior secured credit facilities, we were party to an interest rate swap agreement for a fixed rate payment of 5.64% on $100.0 million through August 30, 2005. In August 2005, this hedge agreement expired. On March 14, 2005, we entered into a five year interest rate swap agreement to hedge interest expense on a notional amount of $1.25 billion. The notional amount will amortize down to $625 million from March 14, 2008 until expiration on March 14, 2010. In relation to this swap agreement, we exchanged our floating-rate obligation on $1.25 billion of our Term Loan B-1 facility for a fixed-rate obligation. See "—Interest Rate Swap Agreements" above.

        We have effectively mitigated our cash interest exposure in relation to $1.25 billion of our Term Loan B-1 facility as a result of entering into the interest rate swap agreements described above. The remaining balance of our senior secured credit facilities of approximately $753 million, which is subject to variable interest rates, will be subject to changes in interest rates based upon economic conditions. Other than entering into the new $1.25 billion interest rate swap agreement, our strategies and procedures to manage exposure to interest rates have not changed in comparison to prior periods.

        We are subject to fluctuating interest rates on our floating rate debt and any changes in interest rates would impact cash flows and results of operations. The potential effect of a hypothetical 10% adverse fluctuation in interest rates for one year on our floating rate debt outstanding at September 30, 2005 would be a reduction in cash flows of approximately $4.4 million and a decrease in net income of approximately $2.8 million.

        As of September 30, 2005, long-term debt consisted of fixed-rate borrowings of approximately $933 million and floating rate debt of approximately $2.0 billion. In addition, we had a fixed interest rate swap agreement on a notional amount of $1.25 billion, as described above. Fluctuations in interest rates may affect the fair values of fixed-rate borrowings and fixed-rate net investments in sales-type lease receivables. Any changes in interest rates would also impact results of operations and cash flows as described above. At September 30, 2005, outstanding fixed-rate borrowings bore interest at rates ranging from 63/8% to 9% and sales type lease receivables bore interest at rates between 8% and 12%. The potential fair value change resulting from a hypothetical 10% adverse fluctuation in interest rates related to our outstanding fixed-rate debt, including our interest rate swap, and our fixed-rate net

73



investment in sales-type lease receivable balances would be approximately $50.0 million and $2.5 million, respectively, as of September 30, 2005.

Certain Relationships and Related Transactions Prior to and as a Result of the Completion of the Recapitalization

Transactions with The DIRECTV Group and its Affiliates

        Until the consummation of the Recapitalization on August 20, 2004, The DIRECTV Group and its affiliates were related parties of ours.

        In relation to the tax separation agreement we entered into with The DIRECTV Group as part of the Recapitalization, we have recorded an $84.3 million receivable related to foreign withholding tax claims made against us by the Indian government, the related payments made to date by us on those claims, and for certain other foreign and domestic tax claims against us and tax payments made by us.

        We provide satellite capacity, TT&C and other related services and facilities to several subsidiaries of The DIRECTV Group and purchase certain services and equipment from a subsidiary of The DIRECTV Group. Additionally, for the period prior to the consummation of the Recapitalization, we reimbursed The DIRECTV Group for the allocated costs of certain jointly incurred expense items, principally relating to administrative and other expenses. Revenues derived from The DIRECTV Group and its affiliates were $31.6 million and $95.4 million for the three and nine months ended September 30, 2004, respectively, or 15.3% and 15.4% of our total revenues for the respective periods.

        In addition, The DIRECTV Group leases office space to us in Long Beach, California and land for our teleport in Castle Rock, Colorado, and permits the participation by us and our employees in certain discount programs. Prior to the Recapitalization, The DIRECTV Group provided general liability insurance and certain administrative services to us, including the provision of certain advisory and audit services. During the three and nine months ended September 30, 2004, we incurred expenses related to such arrangements with The DIRECTV Group of approximately $0.7 and $1.7 million. In addition, during the three and nine months ended September 30, 2004, we purchased services and equipment from the DIRECTV Group of approximately $0.7 million and $1.6 million, respectively.

Transactions with The News Corporation and its Affiliates (Other than The DIRECTV Group)

        Until the consummation of the Recapitalization on August 20, 2004, The News Corporation and its affiliates were related parties of ours.

        We are a party to agreements with The News Corporation and certain of its subsidiaries and affiliates pursuant to which we provide satellite capacity, TT&C and other related services. Revenues derived from The News Corporation and its affiliates were $24.4 million and $65.4 million for the three and nine months ended September 30, 2004, respectively, or 11.8% and 10.6% of our total revenues for the respective periods.

Effect of the Recapitalization

        As a result of the Recapitalization, effective August 20, 2004, The DIRECTV Group and The News Corporation were no longer related parties of ours and the Sponsors and their affiliates became related parties of ours.

Transactions with The Sponsors and Their Affiliates

        The Sponsors provided management and advisory services to us pursuant to management services agreements executed at the closing of the Recapitalization. The Sponsors charged us an aggregate management fee of $2.0 million annually for the provision of these services, subject to an annual

74



increase of three percent. In connection with, and effective upon completion of, our initial public offering on March 22, 2005, each of the Sponsors terminated their respective management services agreements for an aggregate consideration of $10.0 million. For the period from January 1, 2005 through March 22, 2005, we recorded approximately $10.4 million of expense for these management fees (including the termination payment). The annual advisory fee did not include, and the Sponsors may receive, additional compensation for providing investment banking or other advisory services provided in connection with any specific acquisition or divestiture transactions or in the event the Sponsors perform services above and beyond those previously called for by the agreements. For the period August 20, 2004 through September 30, 2004, we accrued $231 thousand of expense for these management fees. In addition, during the three and nine months ended September 30, 2005, we reimbursed the Sponsors for $0.1 million and $0.2 million, respectively, for expenses incurred.

        During 2004, we retained Capstone Consulting to provide us with consulting services, primarily to identify and advise on potential opportunities to reduce our costs and identify other potential opportunities to grow our business. Although neither KKR nor any entity affiliated with KKR owns any of the equity of Capstone, KKR has provided financing to Capstone. We recorded approximately $0.1 million and $0.6 million of expenses during the three and nine months ended September 30, 2005, respectively, related to Capstone Consulting, all of which was paid through September 30, 2005.

        Certain members of our board of directors whose services are compensated are principals of or are affiliated with the Sponsors.

        We provide satellite capacity, TT&C and other related services to affiliates of one of the Sponsors. Revenues for these services were $0.5 million and $1.7 million for the three and nine months ended September 30, 2005, respectively. As of September 30, 2005, we had customer receivables related to these affiliates of approximately $0.2 million.

        Included in our total contracted backlog of $4.54 billion as of September 30, 2005 is approximately $3.6 million of contracted backlog from these affiliates of the Sponsors. Contracted backlog represents future cash payments expected from customers under all long-term contractual agreements.

        During the three and nine months ended September 30, 2005, we procured $0 million and $0.9 million, respectively, of insurance and insurance-related services from an affiliate of one of the Sponsors.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risks."

ITEM 4.    CONTROLS AND PROCEDURES.

        Based upon the required evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")), our Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that as of September 30, 2005 our disclosure controls and procedures were adequate and effective to ensure that information was gathered, analyzed and disclosed on a timely basis.

        There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PANAMSAT CORPORATION
PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

        We have outstanding tax claims related to withholding taxes assessed on revenues derived from broadcasters inside and outside of India who broadcast from or into India. The total amount assessed for all periods from March 31, 1996 through March 31, 2002 is approximately $56.9 million. We are contesting the imposition of such taxes. While this contest proceeds, we have been required to advance cash and provide a bank guarantee for a total of approximately $49.2 million. As of September 30, 2005, we had paid cash of approximately $1.2 million related to these assessment years. If unsuccessful in our contest, we could be subject to comparable claims for subsequent years. In connection with the Recapitalization, The DIRECTV Group, which controlled us prior to the Recapitalization, agreed to indemnify us for these and certain other taxes related to any periods or portions of such periods ending on or prior to the day of the closing of the Recapitalization in amounts equal to 80% of the first $75.0 million of such taxes and 100% of such taxes in excess of the first $75.0 million. As a result, our net tax liability related to these periods is capped at $15.0 million.

        We periodically become involved in various claims and lawsuits that are incidental to our business. Other than the matter described above, we believe that no matters currently pending would, in the event of an adverse outcome, be material.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

        None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

        None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        None.

ITEM 5. OTHER INFORMATION.

        None.

ITEM 6. EXHIBITS

Exhibit
Number

  Exhibit Description
31.1   Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended*

31.2

 

Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended*

32.1

 

Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350*

32.2

 

Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350*

*
Filed herewith

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SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

        PANAMSAT CORPORATION

November 9, 2005

 

 

 

/s/  
MICHAEL J. INGLESE      
Michael J. Inglese
Executive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company

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PANAMSAT CORPORATION INDEX
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WEBSITE ACCESS TO COMPANY'S REPORTS
PART I. FINANCIAL INFORMATION
PANAMSAT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2005 (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2005 (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
PANAMSAT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2005 (IN THOUSANDS)
PANAMSAT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PANAMSAT CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING BALANCE SHEETS AT DECEMBER 31, 2004 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING BALANCE SHEETS AT SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
PANAMSAT CORPORATION CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING BALANCE SHEETS AT DECEMBER 31, 2004 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
PANAMSAT CORPORATION CONDENSED CONSOLIDATING BALANCE SHEETS AT SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
PANAMSAT CORPORATION CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) (IN THOUSANDS)
PANAMSAT CORPORATION CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS)
FSS Revenue by Service-Type
PANAMSAT CORPORATION PART II—OTHER INFORMATION
SIGNATURE