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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 COMMISSION FILE NO. 0-22531 PANAMSAT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE
    
    95-4607698(STATE OR OTHER JURISDICTION OF INCORPORATION
OR ORGANIZATION)
    
    (I.R.S. EMPLOYER IDENTIFICATION
NO.)
 20 WESTPORT ROAD, WILTON, CT 06897
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: 203-210-8000 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o As of May 3, 2004, an aggregate of 150,250,883 shares of our common stock
were outstanding.




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Unless the context otherwise requires, in this Quarterly Report on Form 10-Q,
the terms we, our, the company and PanAmSat refer to PanAmSat
Corporation and its subsidiaries. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q contains certain forward-looking
statements. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for certain forward-looking statements 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 estimate, project,
plan, anticipate, expect, intend, outlook, believe and other
similar expressions are intended to identify forward-looking statements and
information. Actual results may differ materially from any results which
might be projected, forecasted, estimated or budgeted due to certain risks
and uncertainties, including without limitation: (i) risks of satellite
launch failures, satellite launch and construction delays and in-orbit
failures or reduced performance, (ii) risks that we may not be able to obtain
new or renewal satellite insurance policies on commercially reasonable terms
or at all, (iii) risks related to domestic and international government
regulation, (iv) risks of doing business internationally, (v) risks related
to possible future losses on satellites that are not adequately covered by
insurance, (vi) risks of inadequate access to capital for growth, (vii) risks
related to competition, (viii) risks related to our contracted backlog for
future services, (ix) risks associated with our indebtedness, (x) risks
related to control by our majority stockholder, and (xi) litigation. Such
risk factors are more fully described under the caption Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
Reference is also made to such other risks and uncertainties detailed from
time to time in our filings with the United States Securities and Exchange
Commission. WEBSITE ACCESS TO COMPANYS REPORTS PanAmSats 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 Securities and Exchange Commission. 2




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS.CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)CONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.ITEM 4. CONTROLS AND PROCEDURES.PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS.ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.SIGNATURETRANSACTION AGREEMENTSECTION 302 CERTIFICATION FOR THE CEOSECTION 302 CERTIFICATION FOR THE CFOSECTION 906 CERTIFICATION FOR THE CEOSECTION 906 CERTIFICATION FOR THE CFO    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS. 
 PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA) March 31,
    
    March 31,2004
    
    2003REVENUESOperating leases, satellite services and other
    
    $
    201,165
    
    
    $
    195,420Outright sales and sales-type leases
    
    
    4,265
    
    
    
    4,336Total revenues
    
    
    205,430
    
    
    
    199,756OPERATING COSTS AND EXPENSES:Depreciation and amortization
    
    
    75,335
    
    
    
    72,267Direct operating costs (exclusive of depreciation and amortization)
    
    
    39,668
    
    
    
    33,188Selling, general and administrative expenses
    
    
    17,549
    
    
    
    18,026PAS-6 impairment loss
    
    
    99,946
    
    
    
    Facilities restructuring and severance costs
    
    
    1,855
    
    
    
    Total operating costs and expenses
    
    
    234,353
    
    
    
    123,481INCOME (LOSS) FROM OPERATIONS
    
    
    (28,923
    )
    
    
    76,275INTEREST EXPENSE- net
    
    
    31,086
    
    
    
    34,275INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (60,009
    )
    
    
    42,000INCOME TAX EXPENSE (BENEFIT)
    
    
    (28,080
    )
    
    
    11,142NET INCOME (LOSS)
    
    $
    (31,929
    )
    
    $
    30,858NET INCOME (LOSS) PER COMMON SHARE  basic and diluted
    
    $
    (0.21
    )
    
    $
    0.21Weighted average common shares outstanding
    
    
    150,167,000
    
    
    
    150,004,000
 The accompanying notes are an integral part of these consolidated financial statements. 3




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PANAMSAT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) March 31,
    
    December 31,2004
    
    2003(UNAUDITED)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    612,339
    
    
    $
    511,248Short-term investments
    
    
    10,013
    
    
    
    38,936Accounts receivable-net
    
    
    71,008
    
    
    
    77,006Net investment in sales-type leases
    
    
    23,707
    
    
    
    23,068Prepaid expenses and other current assets
    
    
    21,931
    
    
    
    20,428Insurance claim receivable
    
    
    
    
    
    
    260,000Deferred income taxes
    
    
    6,940
    
    
    
    7,688Total current assets
    
    
    745,938
    
    
    
    938,374SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net
    
    
    2,105,976
    
    
    
    2,306,705NET INVESTMENT IN SALES-TYPE LEASES
    
    
    106,841
    
    
    
    116,653GOODWILL
    
    
    2,244,553
    
    
    
    2,243,611RESTRICTED CASH
    
    
    287,041
    
    
    
    DEFERRED CHARGES AND OTHER ASSETS-Net
    
    
    172,591
    
    
    
    129,534TOTAL ASSETS
    
    $
    5,662,940
    
    
    $
    5,734,877LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued liabilities
    
    $
    60,125
    
    
    $
    71,794Current portion of long-term debt
    
    
    278,500
    
    
    
    3,500Current portion of satellite incentive obligations
    
    
    13,476
    
    
    
    12,654Accrued interest payable
    
    
    19,660
    
    
    
    45,462Deferred gains and revenues
    
    
    24,322
    
    
    
    22,436Total current liabilities
    
    
    396,083
    
    
    
    155,846LONG-TERM DEBT
    
    
    1,420,625
    
    
    
    1,696,500DEFERRED INCOME TAXES
    
    
    399,261
    
    
    
    430,512DEFERRED CREDITS AND OTHER (principally customer
deposits and deferred revenue)
    
    
    296,807
    
    
    
    273,261TOTAL LIABILITIES
    
    
    2,512,776
    
    
    
    2,556,119COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $0.01 par value - 400,000,000 shares
authorized; 150,241,430 and 150,120,864 shares outstanding
at March 31, 2004 and December 31, 2003, respectively
    
    
    1,502
    
    
    
    1,501Additional paid-in-capital
    
    
    2,544,060
    
    
    
    2,541,333Accumulated other comprehensive loss
    
    
    (1,492
    )
    
    
    (1,567
    )Retained earnings
    
    
    613,696
    
    
    
    645,625Other stockholders equity
    
    
    (7,602
    )
    
    
    (8,134
    )TOTAL STOCKHOLDERS EQUITY
    
    
    3,150,164
    
    
    
    3,178,758TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    5,662,940
    
    
    $
    5,734,877
 The accompanying notes are an integral part of these consolidated financial statements. 4




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PANAMSAT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS, EXCEPT SHARE DATA) Common Stock
    
    
    
    
    
    AccumulatedAdditional
    
    Other
    
    
    

    OtherPar Value
    
    Paid-in
    
    Comprehensive
    
    Retained
    
    Stockholders
    
    
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Loss
    
    Earnings
    
    Equity
    
    Total
    
    Income (Loss)BALANCE,
JANUARY 1, 2004
    
    
    150,120,864
    
    
    $
    1,501
    
    
    $
    2,541,333
    
    
    $
    (1,567
    )
    
    $
    645,625
    
    
    $
    (8,134
    )
    
    $
    3,178,758Additional issuance
of common stock
    
    
    120,566
    
    
    
    1
    
    
    
    2,708
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,709Unrealized loss
on cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    $
    (106
    )Unrealized gain on
short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    172Deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (197
    )
    
    
    (197
    )
    
    
    Amortization of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    729
    
    
    
    748
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,929
    )
    
    
    
    
    
    
    (31,929
    )
    
    
    (31,929
    )BALANCE,
MARCH 31, 2004
    
    
    150,241,430
    
    
    $
    1,502
    
    
    $
    2,544,060
    
    
    $
    (1,492
    )
    
    $
    613,696
    
    
    $
    (7,602
    )
    
    $
    3,150,164
    
    
    $
    (31,854
    )
 Other Stockholders Equity: March 31,
    
    January 1,2004
    
    2004Excess of purchase price over historical cost basis of net
assets acquired
    
    $
    (3,418
    )
    
    $
    (3,418
    )Deferred compensation, net
    
    
    (4,184
    )
    
    
    (4,716
    )TOTAL OTHER STOCKHOLDERS EQUITY
    
    $
    (7,602
    )
    
    $
    (8,134
    )
 The accompanying notes are an integral part of these consolidated financial statements. 5




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PANAMSAT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS) March 31,
    
    March 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (31,929
    )
    
    $
    30,858Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    75,335
    
    
    
    72,267Deferred income taxes
    
    
    (30,446
    )
    
    
    10,750Amortization of debt issuance costs and other deferred charges
    
    
    1,991
    
    
    
    2,471Provision for uncollectible receivables
    
    
    194
    
    
    
    2,112PAS-6 impairment loss
    
    
    99,946
    
    
    
    Facilities restructuring and severance costs
    
    
    1,855
    
    
    
    Other non-cash items
    
    
    (3,236
    )
    
    
    4,253Changes in assets and liabilities:Collections on investments in sales-type leases
    
    
    6,113
    
    
    
    5,497Operating leases and other receivables
    
    
    2,459
    
    
    
    (1,507
    )Prepaid expenses and other assets
    
    
    (1,776
    )
    
    
    9,727Accounts payable and accrued liabilities
    
    
    (42,577
    )
    
    
    (54,166
    )Deferred gains and revenues
    
    
    1,886
    
    
    
    (3,143
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    79,815
    
    
    
    79,119CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures (including capitalized interest)
    
    
    (21,684
    )
    
    
    (33,081
    )Net sales (purchases) of short-term investments
    
    
    28,939
    
    
    
    (830
    )Acquisitions, net of cash acquired
    
    
    (522
    )
    
    
    (8,216
    )NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
    
    6,733
    
    
    
    (42,127
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of debt
    
    
    (875
    )
    
    
    (200,000
    )New incentive obligations
    
    
    16,250
    
    
    
    Repayments of incentive obligations
    
    
    (3,413
    )
    
    
    (2,829
    )Stock issued in connection with employee benefit plans
    
    
    2,615
    
    
    
    1,008NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    14,577
    
    
    
    (201,821
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (34
    )
    
    
    NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    101,091
    
    
    
    (164,829
    )CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD
    
    
    511,248
    
    
    
    783,998CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    612,339
    
    
    $
    619,169SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash received for interest
    
    $
    2,004
    
    
    $
    3,494Cash paid for interest
    
    $
    59,423
    
    
    $
    72,248Cash received for taxes
    
    $
    109
    
    
    $
    Cash paid for taxes
    
    $
    818
    
    
    $
    720
 The accompanying notes are an integral part of these consolidated financial statements. 6




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PANAMSAT CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (1)
    
    Basis of PresentationThese unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments that are of a normal recurring nature necessary to present fairly
the financial position as of March 31, 2004 and results of operations and
cash flows for the three-month periods ended March 31, 2004 and 2003 have
been made. Certain prior period amounts have been reclassified to conform to
the current periods presentation. Operating results for the three months
ended March 31, 2004 and 2003 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 Annual Report on
Form 10-K for the year ended December 31, 2003 (the Form 10-K) filed with
the Securities and Exchange Commission (SEC) on March 15, 2004, all
amendments thereto, and all of our other filings filed with the SEC from
March 15, 2004 through the date of this report.The DIRECTV Group, Inc. (The DIRECTV Group, formerly known as Hughes
Electronics Corporation) owns 80.4% of our outstanding common stock. Fox
Entertainment Group, Inc. (Fox Entertainment), a subsidiary of The News
Corporation Limited (the News Corporation), owns approximately 34% of The
DIRECTV Groups outstanding common stock.On April 20, 2004, we entered into a transaction agreement with The DIRECTV
Group, PAS Merger Sub, Inc. (PAS Merger Sub), a wholly-owned subsidiary of
The DIRECTV Group, and Constellation, LLC (Constellation), an affiliate of
Kohlberg Kravis Roberts & Co. L.P. (KKR) for the merger of our company with
PAS Merger Sub (the Merger) and subsequent sale to Constellation (the
PanAmSat Sale). The transaction is subject to certain conditions,
including, among other things, obtaining applicable regulatory approvals,
including the approval of the Federal Communications Commission and our
stockholders. The transaction is expected to be completed in the second half
of 2004. However, no assurance can be given that the approvals will be
obtained or the transaction will be completed. The agreement requires that,
during the period prior to the closing, we conduct our business in the
ordinary course, consistent with past practice, and that we obtain the
consent of KKR before entering into certain strategic and other transactions.(2)
    
    SegmentsStatement of Financial Accounting Standard No. 131, Disclosures About
Segments of an Enterprise and Related Information (FAS 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
television and provide telemetry, tracking and control services (TT&C)
and network services to customers. Government Services (G2 Satellite Solutions, G2): Through G2, we
provide global satellite and related telecommunications services to the
Federal government, international government entities, and their
contractors. 7




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Selected information for our operating segments is as follows (in
thousands): Three Months Ended:March 31,
    
    March 31,2004
    
    2003Revenues:FSS
    
    $
    189,427
    
    
    $
    195,672G2
    
    
    21,816
    
    
    
    9,631Eliminations
    
    
    (5,813
    )
    
    
    (5,547
    )Total
Revenues
    
    $
    205,430
    
    
    $
    199,756Depreciation and Amortization Expense:FSS
    
    $
    74,897
    
    
    $
    72,257G2
    
    
    438
    
    
    
    10Eliminations
    
    
    
    
    
    
    Total Depreciation and Amortization Expense
    
    $
    75,335
    
    
    $
    72,267Income (Loss) from Operations:FSS
    
    $
    (30,673
    )
    
    $
    74,414G2
    
    
    1,750
    
    
    
    1,861Eliminations
    
    
    
    
    
    
    Total Income (Loss) from Operations
    
    $
    (28,923
    )
    
    $
    76,275Capital Expenditures:FSS
    
    $
    21,684
    
    
    $
    33,081G2
    
    
    
    
    
    
    Eliminations
    
    
    
    
    
    
    Total Capital Expenditures
    
    $
    21,684
    
    
    $
    33,081
 As of March 31,2004
    
    2003Assets:FSS
    
    $
    5,644,625
    
    
    $
    6,267,118G2
    
    
    34,559
    
    
    
    19,683Eliminations
    
    
    (16,244
    )
    
    
    (10,164
    )Total Assets
    
    $
    5,662,940
    
    
    $
    6,276,637
 (3)
    
    New Accounting PronouncementsIn January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. In December 2003, the FASB issued FIN No. 46 (Revised) (FIN
46-R) to address certain FIN 46 implementation issues. This interpretation
clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements,for companies that have interests in
entities that are Variable Interest Entities (VIE) as defined under FIN 46.
According to this interpretation, if a company has an interest in a VIE and
is at risk for a majority of the VIEs expected losses or receives a majority
of the VIEs expected gains it shall consolidate the VIE. FIN 46-R also
requires additional disclosures by primary beneficiaries and other
significant variable interest holders. The adoption of the provisions of
this interpretation had no effect on our Consolidated Financial Statements.(4)
    
    Satellite Deployment PlansIn January 2004, we and Horizons LLC (Horizons) commenced service on the
Galaxy 13/Horizons 1 satellite. The satellite is a Boeing 601HP with 24
C-band and 24 Ku-band transponders and is operated at 127 degrees west
longitude. Horizons, a 50-50 joint venture between us and JSAT International
Inc. (JSAT), the U.S. subsidiary of a Japanese satellite services provider, owns the Ku-band
payload on the satellite, which is separately designated Horizons 1. Using
this capacity, Horizons offers a variety of digital video, Internet and data
services. Effective upon the in-service date of Galaxy 13/Horizons 1, JSAT
and we contributed our investments 8




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in the Ku-band transponders to Horizons. Our investment in Horizons of $44.8
million as of March 31, 2004 is classified within Deferred Charges and Other
Assets-Net on our Consolidated Balance Sheet as of such date and is being
accounted for under the equity method.The C-band capacity on this satellite is designated as Galaxy 13. It is
owned, developed and marketed solely by us and is utilized to provide High
Definition Television (HDTV), as well as other services within the United
States. This satellite is a part of our Power of Five antenna program,
which provides qualified cable operators with simultaneous access to five
Galaxy neighborhood satellites. The spacecraft took over for Galaxy 9, which
is now utilized as a domestic C-band in-orbit spare.We expect to launch three satellites by the end of 2006. We are scheduled to
launch Galaxy 14 in the second half of 2004 to replace Galaxy 5 at 125
degrees west longitude. We plan to launch Galaxy 15 in the first quarter of
2005 to replace Galaxy 1R at 133 degrees west longitude. This satellite will
include an additional L-band payload. We plan to launch Galaxy 16 in 2006 to
replace Galaxy 4R at 99 degrees west longitude (See Note 11 Commitments and
Contingencies below).During the second quarter of 2004, we expect to commence construction of
Galaxy 17, an on-ground spare for Galaxy 11, which will also serve as a spare
to protect against launch failure of Galaxy 16. In addition, we may
construct and launch a replacement satellite for PAS-6B prior to the end of
its useful life. No commitments have been made for the procurement of these
satellites at this time.(5)
    
    Long-term DebtAt March 31, 2004, we had total debt outstanding of approximately $1.7
billion, including current maturities of $278.5 million related to both our
$275 million 6.125% notes due in 2005 and quarterly principal payments on our
term loan B-1 facility under our Senior Secured Credit Facility (the Term
B-1 Facility).Our Senior Secured Credit Facility is comprised of a $250.0 million revolving
credit facility, which is currently undrawn and will terminate on December
31, 2007 (the Revolving Facility), and a $349 million Term B-1 Facility.
The Term B-1 Facility has scheduled annual maturities of principal as of
March 31, 2004 as follows (in thousands): Year Ending December 31,
    
    Amount DueRemainder of 2004
    
    $
    2,6252005
    
    
    3,5002006
    
    
    3,5002007
    
    
    3,5002008
    
    
    3,5002009
    
    
    85,0942010
    
    
    247,406$
    349,125
 With an interest rate of LIBOR plus 2.50%, as of March 31, 2004, the
applicable interest rate on the Term B-1 Facility was 3.59%. We are also
required to pay a commitment fee for the unused commitments under the
Revolving Facility, which, as of March 31, 2004, on an annualized basis was
0.375%. We had outstanding letters of credit totaling $1.1 million, which
reduce our ability to borrow against the Revolving Facility by such amount.
Any amounts borrowed under the Revolving Facility would bear interest at
LIBOR plus 2.25% as of March 31, 2004, although this interest rate is subject
to adjustment based on our total leverage ratio. In accordance with the agreement governing the Senior Secured Credit
Facility, we are a party to an interest rate hedge agreement on $100.0
million of our Term B-1 Facility for a fixed-rate payment obligation of 5.64%
on $100.0 million through August 30, 2005. This interest rate hedge is
designated as a cash flow hedge. During the three months ended March 31,
2004, no ineffectiveness was recognized in the statement of operations on
this hedge. The fair value of the outstanding interest-rate hedge agreement
as of March 31, 2004, based upon quoted market prices from the counterparty,
reflected a hedge liability of approximately $2.3 million. Upon expiration
of the current agreement on August 30, 2005, we will not be required to enter
into an interest rate hedge agreement under the Senior Secured Credit
Facility. 9




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As of March 31, 2004, we also had outstanding $800 million Senior Notes due
in 2012 with a stated interest rate of 8.5% (the Senior Notes).
Obligations under the Senior Notes are, or will be, as the case may be,
unconditionally guaranteed by each of our existing and subsequently acquired
or organized domestic and, to the extent no adverse tax consequences would
result therefrom, foreign restricted subsidiaries. See condensed
consolidating financial information in Note 14, as required by the SECs
Regulation S-X, Rule 3-10(f).We also had outstanding seven, ten and thirty-year fixed rate notes totaling
$550 million issued in January 1998. The outstanding principal balances,
interest rates and maturity dates for these notes as of March 31, 2004 were
$275 million at 6.125% due January 2005, $150 million at 6.375% due 2008 and
$125 million at 6.875% due 2028, respectively. Principal on these notes is
payable at maturity, while interest is payable semi-annually.We are required to maintain certain financial covenants and are also subject
to restrictive covenants under our borrowings. As of March 31, 2004, we were
in compliance with all such covenants.(6)
    
    AcquisitionsOn March 7, 2003, we acquired substantially all of the assets of Hughes
Global Services, Inc. (HGS) from our affiliate, The DIRECTV Group, for
approximately $8.4 million in cash and the assumption of certain liabilities.
On August 27, 2003, we acquired Esatel Communications, Inc. (Esatel) and
its related entity, Silver Springs Teleport, LC. In November 2003, we
purchased substantially all of the assets of Sonic Telecommunications
International Ltd. (Sonic). The aggregate purchase price for the Esatel
and Sonic acquisitions was approximately $12.3 million, of which $0.5 million
was paid in the first quarter of 2004.The results of these acquisitions are included within our consolidated income
statements from the date of each respective acquisition.(7)
    
    Stock-Based CompensationEffective 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. During 2004 and 2003, we issued the following
awards under our Long-Term Incentive Plan: Employee Stock
    
    Restricted StockGrant date:
    
    Options Granted
    
    Units GrantedMarch 31, 2003
    
    
    11,900
    
    
    
    June 30, 2003
    
    
    11,550
    
    
    
    398,500September 30, 2003
    
    
    21,350
    
    
    
    December 31, 2003
    
    
    4,400
    
    
    
    2,000March 31, 2004
    
    
    48,350
    
    
    
    2,000
 The employee stock options granted in 2004 and 2003 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. We recorded compensation
expense related to these options of approximately $19 thousand and $0 during
the three months ended March 31, 2004 and 2003, respectively. Under the
intrinsic value method used for reporting prior to January 1, 2003, no
compensation expense had been recognized on options granted through December
31, 2002, as the exercise price of the options granted equaled the market
price of our common stock on the date of grant for all prior grants. The restricted stock units granted in 2004 and 2003 vest 50% on the second
anniversary of the grant date and the remaining 50% on the third anniversary.
Stock compensation expense is 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 $0.7 million and $0
during the three months ended March 31, 2004 and 2003, respectively. See
Note 11 Commitments and
Contingencies  Change-in-Control Obligations for the impact the PanAmSat Sale will have on
employee stock options and restricted stock units. 10




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The following table illustrates the effect on net income and earnings per
share as if the fair value based method had been applied to all outstanding
and unvested awards in each period (in thousands except per share
amounts): Three Months Ended:March 31,
    
    March 31,2004
    
    2003Net income (loss), as reported
    
    $
    (31,929
    )
    
    $
    30,858Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects
    
    
    440
    
    
    
    Deduct: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related
tax effects
    
    
    (979
    )
    
    
    (2,377
    )Pro forma net income (loss)
    
    $
    (32,468
    )
    
    $
    28,481Earnings (loss) per share:Basic and Diluted  as reported
    
    $
    (0.21
    )
    
    $
    0.21Basic and Diluted  pro forma
    
    $
    (0.22
    )
    
    $
    0.19
  The pro forma amounts for compensation cost may not necessarily be indicative
of the effects on operating results for future periods.(8)
    
    Facilities Restructuring and Severance CostsFacilities restructuring and severance costs were $1.9 million and $0 for the
three months ended March 31, 2004 and 2003, 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.
Under this plan, our Homestead, Florida teleport was closed in 2003 and we
expect to close our Spring Creek, New York teleport during 2004. This
teleport consolidation plan will include the disposal of land, buildings and
equipment located at these teleports and severance related costs for
approximately 40 employees that will be required to perform future services.
During the year ended December 31, 2003 and the first quarter of 2004, we
recorded charges of $4.2 million and $0.5 million, respectively, related to
this teleport consolidation plan, primarily representing severance costs.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 reflecting future lease costs related to
approximately 18,000 square feet of unused facilities in Manhattan Beach.The following table summarizes the recorded accruals and activity related to
our teleport consolidation, facilities restructuring and severance charges
(in millions): Facilities
    
    Teleport
    
    SeveranceRestructuring
    
    Consolidation
    
    Costs
    
    TotalBalance as of January 1, 2003
    
    $
    7.6
    
    
    $
    
    
    
    $
    
    
    
    $
    7.62003 restructuring charges
    
    
    (1.4
    )
    
    
    4.2
    
    
    
    1.4
    
    
    
    4.2Less: net cash payments in 2003
    
    
    (1.6
    )
    
    
    (2.4
    )
    
    
    (0.7
    )
    
    
    (4.7
    )Balance as of December 31, 2003
    
    $
    4.6
    
    
    $
    1.8
    
    
    $
    0.7
    
    
    $
    7.12004 restructuring charges
    
    
    1.4
    
    
    
    0.5
    
    
    
    
    
    
    
    1.9Less: net cash payments in 2004
    
    
    (0.2
    )
    
    
    (1.0
    )
    
    
    (0.3
    )
    
    
    (1.5
    )Balance as of March 31, 2004
    
    $
    5.8
    
    
    $
    1.3
    
    
    $
    0.4
    
    
    $
    7.5
 (9)
    
    PAS-6 Impairment LossOn March 17, 2004, our PAS-6 satellite, an FS 1300 model satellite built by
Space Systems/Loral, suffered an anomaly resulting in a loss of power.
Following that event, we moved the satellite to a storage orbit while we
evaluated the problem with the manufacturer. On April 1, 2004, this
satellite experienced another anomaly and more significant loss of power.
Neither of these losses was anticipated. We maintained communications with,
and control of, this satellite and, as a result of the second anomaly, took
the necessary steps to deorbit it. 11




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PAS-6 had previously been taken out of primary service and was used as a
backup for another satellite, PAS-6B. Accordingly, these events have not
affected service to any of our customers and we anticipate that they will not
affect our revenues in 2004. We do not plan to replace this satellite. As a
result of the March 17 event, we recorded a non-cash impairment charge within
income from operations of approximately $99.9 million in the first quarter of
2004. This resulted in a non-cash charge to net income after taxes of
approximately $63.3 million. PAS-6 was uninsured and we will not collect
insurance proceeds as a result of these events.(10)
    
    Interest Expense  NetInterest expense for the three months ended March 31, 2004 and 2003 is
recorded net of capitalized interest of $0.3 million and $4.9 million,
respectively, and interest income of $1.9 million and $3.2 million,
respectively.(11)
    
    Commitments and ContingenciesSatellite Incentive ObligationsSatellite 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 or refund if the satellite fails to
meet specific technical operating standards. As of March 31, 2004, we had
$138.2 million of liabilities recorded in relation to these satellite
incentive obligations.Satellite CommitmentsAs of March 31, 2004, we had approximately $16.0 million of expenditures
remaining under existing satellite construction contracts and $42.7 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 March 31,
2004, we did not have any commitments related to existing launch insurance or
in-orbit insurance contracts for satellites to be launched.In October 2003, The DIRECTV Group committed to acquire a new satellite from
Space Systems/Loral, which would replace our Galaxy 4R satellite and would be
known as Galaxy 16. In April 2004, we executed a definitive agreement for
the procurement of this satellite. As the manufacturer is currently in
Chapter 11 bankruptcy proceedings, this agreement has been executed subject
to bankruptcy court approval. Upon approval we will be obligated to
reimburse The DIRECTV Group for amounts paid to the manufacturer on our
behalf.Satellite InsuranceOn February 19, 2003, we filed proofs of loss under the insurance policies
for two of our BSS 702 spacecraft, Galaxy 11 and PAS-1R, for constructive
total losses based on degradation of the solar panels. On December 29, 2003,
we reached a settlement of these insurance claims for payment of $260 million
with no future revenue share. We offset the proceeds from this settlement
against the carrying value of the satellites. In the first quarter of 2004,
we received the $260 million settlement amount. We plan on using these
proceeds to replace existing satellites over the next several years.On July 31, 2003, we filed a proof of loss under the insurance policy for our
Galaxy 4R spacecraft after the secondary Xenon Ion Propulsion System (XIPS)
on this satellite ceased working. In 2003, we settled with and received
$102.6 million from insurers representing approximately 83 percent 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 percent of the insurance coverage on this satellite. The settlement with
the insurer representing 17 percent 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 developing
plans to replace this satellite prior to the end of its useful life using the
insurance proceeds and a spare launch service contract that we had purchased
previously.The availability and use of the $260 million in proceeds from the Galaxy 11
and PAS-1R insurance claims and the $26.9 million received in March 2004
related to the Galaxy 4R insurance claim are restricted by the agreements
governing our debt obligations 12




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##### Table of Contents



which, generally, permit the use of such funds for capital expenditures.
Until available, these proceeds will be held in a collateral account. As of
March 31, 2004, these proceeds plus interest earned are classified within
Restricted Cash on our Consolidated Balance Sheet. As of March 31, 2004, we had in effect launch and in-orbit insurance policies
covering 11 satellites in the aggregate amount of approximately $1.0 billion.
As of such date, these insured satellites had an aggregate net book value and
other insurable costs of $1.3 billion. We have 13 uninsured satellites in
orbit. The uninsured satellites are: PAS-4, which is used as backup
satellite; PAS-5 and PAS-7, for which we received insurance proceeds for
constructive total losses; Galaxy 1R, Galaxy 3R, Galaxy 5 and SBS-6, which
are approaching the ends of their useful lives; Galaxy 11 and PAS-1R, for
which we received insurance proceeds for partial losses; Galaxy 9, for which
we determined that insurance was not available on commercially reasonable
terms; and HGS-3, HGS-5 and Leasat, which have an aggregate book value of
less than $1 million. Our Galaxy 12 and Galaxy 9 satellites
serve as
in-orbit backups for the C-band portions of Galaxy 1R, Galaxy 4R, Galaxy 5,
Galaxy 10R, Galaxy 11 and Galaxy 13/Horizons 1. Of the insured satellites, as of March 31, 2004, seven were 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 (Significant Exclusion Policies). The exclusions reduce the
probability of an insurance recovery in the event of a loss on these
satellites. Four of these satellites, PAS-2, PAS-3R, PAS-8 and PAS-9 have
operational redundancies available for the systems on which exclusions have
been imposed. We believe that these redundancies allow for uninterrupted
operation of the satellite in the event of a failure of the component subject
to the insurance exclusion. The fifth such satellite, PAS-6B, has a policy
exclusion for XIPS related anomalies and is currently operating on its backup
bi-propellant propulsion system. The sixth such satellite, Galaxy 4R, for
which we have received insurance proceeds, has a remaining policy covering
$20.3 million of investments in sales-type leases that also has a policy
exclusion for XIPS related anomalies. Galaxy 4R is currently operating on its
backup bi-propellant propulsion system. The seventh 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
fully 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, this satellite has available backup bi-propellant of
approximately 11.9 years. At March 31, 2004, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other insurable
costs of approximately $1.1 billion. Of this amount, $453 million related to
uninsured satellites and $688 million related to satellites insured by
Significant Exclusion Policies. Change-in-Control Obligations Upon consummation of the PanAmSat Sale, all outstanding employee stock
options which have not yet vested will vest and become exercisable, and all
outstanding restricted shares and restricted stock units will vest
immediately prior to the Merger. We
currently estimate that upon the consummation of the PanAmSat Sale, we will
be required to record a charge of up to $6
million in relation to the acceleration of vesting of these options,
restricted shares and restricted stock units. Holders of options and
restricted stock units will be entitled to receive (i) with respect to
in-the-money options, cash equal to the difference between the exercise price and
the $23.50 per share price to be paid in the PanAmSat Sale, and
(ii) with respect to
restricted shares and restricted stock units, cash in the amount of $23.50 per
share, except for any stock options, restricted shares and restricted stock
units held by certain employees who have agreed not to have their equity
interests cashed out in the Merger or the PanAmSat Sale, as applicable. All
out-of-the-money stock options will be cancelled without payment. In
addition, our Severance Pay Plan allows for the payment of enhanced severance
to employees laid off or who resign for good reason (as defined in such plan)
as a result of, and within two years after, a change-in-control. One of our executives is party to an employment agreement which provides for,
among other things, the payment of severance and other benefits upon the
termination of the executive without cause or for good reason (as defined in
such agreement) or if we decline to extend such agreement. Certain other
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 of The DIRECTV
Group. As a change in control of The DIRECTV Group occurred on December 22,
2003, these agreements will apply if an involuntary termination of the
executive occurs on or before December 22, 2006. 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 in the range of $9.0 million to $11.0 million. 13




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Certain of our other executives have change-in-control severance agreements,
which provide for, among other things, the payment of severance and other
benefits upon the termination of the executive without cause or for good
reason within three years after a change in control of PanAmSat, as defined
in their respective agreements. The PanAmSat Sale would result in a
change-in-control under these 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 approximately $5 million in addition to the
costs described above with respect to our senior executives. These
agreements expire if no change in control of PanAmSat has occurred on or
before December 31, 2004.Foreign Withholding TaxesWe 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 Indian government has assessed approximately $8.9
million (reduced from an initial assessment of $15.2 million) against one of
our subsidiaries for the Indian tax year ended March 31, 1997. This
assessment is being appealed to the Income Tax Appeals Tribunal. For Indian
tax years ended March 31, 1996, 1998, 1999, 2000 and 2001, the Indian
government has assessed approximately $36.0 million in the aggregate against
us. This assessment has been appealed to the Commissioner of Income Tax
(Appeals). We are contesting the imposition of such taxes. While this
contest proceeds, we may be required to advance cash or provide a bank
guarantee for amounts up to the total assessment. If unsuccessful in our
contest, we could be subject to comparable claims for subsequent years.(12)
    
    Related Party TransactionsTransactions with The DIRECTV Group and its AffiliatesWe 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, we
reimburse The DIRECTV Group for the allocated costs of certain expense items
we jointly incur with The DIRECTV Group, principally relating to
administrative and other expenses. Revenues derived from The DIRECTV Group
and its affiliates were $30.5 million for the three months ended March 31,
2004, or 15% of our revenues. As of March 31, 2004, we had receivables due
from The DIRECTV Group and its affiliates of approximately $11.2 million.During 2003, we transferred an authorization for a Ka-band orbital slot to
Hughes Network Systems, Inc. (HNS), an affiliate, in exchange for a
contingent payment of approximately $2.1 million. The payment is payable upon
the launch of a satellite by HNS to such orbital slot. The Federal
Communications Commission has approved the transfer of this authorization.During the fourth quarter of 2003, we agreed to amend our transponder lease
agreements with DIRECTV Latin America LLC (DTVLA). This amendment became
effective in February 2004 upon DTVLAs emergence from the Chapter 11
bankruptcy process. In conjunction with these amendments we agreed to accept
reduced cash payments in the early years, most of which we expect to
recapture in later years, and The DIRECTV Group has agreed to guarantee all
of the transponder lease agreements with DTVLA for a period of five years.We have a contingent obligation to reimburse The DIRECTV Group for amounts
paid on our behalf to a satellite manufacturer for the construction of a
replacement satellite (See Note 11 Commitments and Contingencies  Satellite
Commitments above).On April 20, 2004, we, together with The DIRECTV Group, announced the signing
of a definitive transaction agreement with an affiliate of KKR for the sale
of PanAmSat (See Note 1 Basis of Presentation above).Transactions with News Corporation and its Affiliates (Other than The
DIRECTV Group)We are a party to agreements with 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, other than The DIRECTV Group, were $20.7 million for the
three months ended March 31, 2004, or 10% of our revenues. As of March 31,
2004, we had receivables due from News Corporation and its affiliates of
approximately $29.9 million. This receivable balance is primarily comprised
of a long-term receivable related to an operating lease with escalating
payment terms that is being recognized on a straight-line basis into revenue
over the lease term. 14




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##### Table of Contents



In January 2004, Fox Entertainment and we signed a multi-year,
multi-satellite agreement, the terms of which provide that Fox Entertainment
will consolidate its entire suite of U.S. cable and broadcast programming
onto our global fleet for 15 years and move a significant portion of its
international traffic onto the fleet for the next decade. Fox Entertainment
will now be one of our largest media customers and one of our top five global
customers.Included in our total backlog of $4.73 billion as of March 31, 2004 is $1.53
billion of backlog from The DIRECTV Group, News Corporation and their
affiliates. Backlog represents future cash payments expected from customers
under all long-term contractual agreements.(13)
    
    Condensed Consolidating Financial StatementsObligations under our Senior Notes are, or will be, as the case may be, fully
and unconditionally guaranteed on a joint and several basis by us (PanAmSat
Corporation, the issuer of the Senior Notes) and certain of our existing and
subsequently acquired or organized domestic subsidiaries (the Guarantor
Subsidiaries, each a Guarantor).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 Corporation. As a result,
we are now required to present consolidating financial information for our
company and our subsidiaries within the notes to our consolidated financial
statements in accordance with the criteria established for parent companies
in the SECs Regulation S-X, Rule 3-10(f). The remaining subsidiaries, which
include all of our foreign subsidiaries and do not guarantee the Senior
Notes, are minor (as defined in the SECs Regulation S-X, Rule 3-10(h)) and
therefore are combined with the Guarantor Parent within the attached
consolidating financial statements.The following condensed consolidating financial information present the
results of operations, financial position and cash flows of PanAmSat
Corporation, the Guarantor Subsidiaries and the eliminations necessary to
arrive at the information for our company on a consolidated basis as of and
for the three months ended March 31, 2004. The principal elimination entries
eliminate investments in subsidiaries and intercompany balances and
transactions. PANAMSAT CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA) PanAmSat
    
    GuarantorCorporation
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedREVENUES:Operating leases, satellite services and other
    
    $
    184,071
    
    
    $
    22,907
    
    
    $
    (5,813
    )
    
    $
    201,165Outright sales and sales-type leases
    
    
    4,265
    
    
    
    
    
    
    
    
    
    
    
    4,265Total revenues
    
    
    188,336
    
    
    
    22,907
    
    
    
    (5,813
    )
    
    
    205,430OPERATING COSTS AND EXPENSES:Depreciation and amortization
    
    
    74,814
    
    
    
    521
    
    
    
    
    
    
    
    75,335Direct operating costs (exclusive of depreciation
and amortization)
    
    
    26,172
    
    
    
    19,309
    
    
    
    (5,813
    )
    
    
    39,668Selling, general and administrative expenses
    
    
    15,229
    
    
    
    2,320
    
    
    
    
    
    
    
    17,549PAS-6 impairment loss
    
    
    99,946
    
    
    
    
    
    
    
    
    
    
    
    99,946Facilities restructuring and severance cost
    
    
    1,855
    
    
    
    
    
    
    
    
    
    
    
    1,855Total operating costs and expenses
    
    
    218,016
    
    
    
    22,150
    
    
    
    (5,813
    )
    
    
    234,353INCOME (LOSS) FROM OPERATIONS
    
    
    (29,680
    )
    
    
    757
    
    
    
    
    
    
    
    (28,923
    )INTEREST
EXPENSE (INCOME), net
    
    
    31,148
    
    
    
    (62
    )
    
    
    
    
    
    
    31,086INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (60,828
    )
    
    
    819
    
    
    
    
    
    
    
    (60,009
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    (28,356
    )
    
    
    276
    
    
    
    
    
    
    
    (28,080
    )NET INCOME (LOSS)
    
    $
    (32,472
    )
    
    $
    543
    
    
    $
    
    
    
    $
    (31,929
    )
 15




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PANAMSAT CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2004 (UNAUDITED)
(IN THOUSANDS) PanAmSat
    
    GuarantorCorporation
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    611,875
    
    
    $
    464
    
    
    $
    
    
    
    $
    612,339Short-term investments
    
    
    10,013
    
    
    
    
    
    
    
    
    
    
    
    10,013Accounts receivable-net
    
    
    48,639
    
    
    
    22,369
    
    
    
    
    
    
    
    71,008Net investment in sales-type leases
    
    
    23,707
    
    
    
    
    
    
    
    
    
    
    
    23,707Prepaid expenses and other current assets
    
    
    17,391
    
    
    
    4,540
    
    
    
    
    
    
    
    21,931Deferred income taxes
    
    
    6,940
    
    
    
    
    
    
    
    
    
    
    
    6,940Total current assets
    
    
    718,565
    
    
    
    27,373
    
    
    
    
    
    
    
    745,938SATELLITES AND OTHER PROPERTY AND
EQUIPMENT-Net
    
    
    2,100,868
    
    
    
    5,108
    
    
    
    
    
    
    
    2,105,976NET INVESTMENT IN SALES-TYPE LEASES
    
    
    106,841
    
    
    
    
    
    
    
    
    
    
    
    106,841GOODWILL
    
    
    2,238,660
    
    
    
    5,893
    
    
    
    
    
    
    
    2,244,553RESTRICTED CASH
    
    
    287,041
    
    
    
    
    
    
    
    
    
    
    
    287,041DEFERRED CHARGES AND OTHER ASSETS  NET
    
    
    185,061
    
    
    
    2,835
    
    
    
    (15,305
    )
    
    
    172,591TOTAL ASSETS
    
    $
    5,637,036
    
    
    $
    41,209
    
    
    $
    (15,305
    )
    
    $
    5,662,940LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued liabilities
    
    $
    48,701
    
    
    $
    11,424
    
    
    $
    
    
    
    $
    60,125Current portion of long-term debt
    
    
    278,500
    
    
    
    
    
    
    
    
    
    
    
    278,500Current portion of satellite incentives
    
    
    13,476
    
    
    
    
    
    
    
    
    
    
    
    13,476Accrued interest payable
    
    
    19,660
    
    
    
    
    
    
    
    
    
    
    
    19,660Deferred revenues
    
    
    20,049
    
    
    
    4,273
    
    
    
    
    
    
    
    24,322Total current liabilities
    
    
    380,386
    
    
    
    15,697
    
    
    
    
    
    
    
    396,083LONG-TERM DEBT
    
    
    1,420,625
    
    
    
    
    
    
    
    
    
    
    
    1,420,625DEFERRED INCOME TAXES
    
    
    399,194
    
    
    
    67
    
    
    
    
    
    
    
    399,261DEFERRED CREDITS AND OTHER (principally
customer deposits and deferred revenue)
    
    
    296,256
    
    
    
    5,786
    
    
    
    (5,235
    )
    
    
    296,807TOTAL LIABILITIES
    
    
    2,496,461
    
    
    
    21,550
    
    
    
    (5,235
    )
    
    
    2,512,776COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common Stock, $0.01 par value
    
    
    1,502
    
    
    
    1
    
    
    
    (1
    )
    
    
    1,502Additional paid-in-capital
    
    
    2,544,060
    
    
    
    10,069
    
    
    
    (10,069
    )
    
    
    2,544,060Accumulated other comprehensive loss
    
    
    (1,492
    )
    
    
    
    
    
    
    
    
    
    
    (1,492
    )Retained earnings
    
    
    600,689
    
    
    
    13,007
    
    
    
    
    
    
    
    613,696Other stockholders equity
    
    
    (4,184
    )
    
    
    (3,418
    )
    
    
    
    
    
    
    (7,602
    )TOTAL STOCKHOLDERS EQUITY
    
    
    3,140,575
    
    
    
    19,659
    
    
    
    (10,070
    )
    
    
    3,150,164TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY
    
    $
    5,637,036
    
    
    $
    41,209
    
    
    $
    (15,305
    )
    
    $
    5,662,940
 16




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##### Table of Contents



PANAMSAT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
(IN THOUSANDS) PanAmSat
    
    GuarantorCorporation
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (32,472
    )
    
    $
    543
    
    
    $
    
    
    
    $
    (31,929
    )Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    74,814
    
    
    
    521
    
    
    
    
    
    
    
    75,335Deferred income taxes
    
    
    (30,446
    )
    
    
    
    
    
    
    
    
    
    
    (30,446
    )Amortization of debt issuance costs and other deferred charges
    
    
    1,991
    
    
    
    
    
    
    
    
    
    
    
    1,991Provision for uncollectible receivables
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    194PAS-6 impairment loss
    
    
    99,946
    
    
    
    
    
    
    
    
    
    
    
    99,946Facilities restructuring and severance costs
    
    
    1,855
    
    
    
    
    
    
    
    
    
    
    
    1,855Other non-cash items
    
    
    (2,895
    )
    
    
    (341
    )
    
    
    
    
    
    
    (3,236
    )Changes in assets and liabilities:Collections on investments in sales-type leases
    
    
    6,113
    
    
    
    
    
    
    
    
    
    
    
    6,113Operating leases and other receivables
    
    
    (5,180
    )
    
    
    7,639
    
    
    
    
    
    
    
    2,459Prepaid expenses and other assets
    
    
    4,486
    
    
    
    (2,130
    )
    
    
    (4,132
    )
    
    
    (1,776
    )Accounts payable and accrued liabilities
    
    
    (44,129
    )
    
    
    (2,580
    )
    
    
    4,132
    
    
    
    (42,577
    )Deferred gains and revenues
    
    
    4,894
    
    
    
    (3,008
    )
    
    
    
    
    
    
    1,886NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    79,171
    
    
    
    644
    
    
    
    
    
    
    
    79,815CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures (including capitalized interest)
    
    
    (21,684
    )
    
    
    
    
    
    
    
    
    
    
    (21,684
    )Sale of short-term investments
    
    
    28,939
    
    
    
    
    
    
    
    
    
    
    
    28,939Acquisitions, net of cash acquired
    
    
    
    
    
    
    (522
    )
    
    
    
    
    
    
    (522
    )NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
    
    7,255
    
    
    
    (522
    )
    
    
    
    
    
    
    6,733CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of debt
    
    
    (875
    )
    
    
    
    
    
    
    
    
    
    
    (875
    )New incentive obligations
    
    
    16,250
    
    
    
    
    
    
    
    
    
    
    
    16,250Repayments of incentive obligations
    
    
    (3,413
    )
    
    
    
    
    
    
    
    
    
    
    (3,413
    )Stock issued in connection with employee benefit plans
    
    
    2,615
    
    
    
    
    
    
    
    
    
    
    
    2,615NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    14,577
    
    
    
    
    
    
    
    
    
    
    
    14,577EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    (34
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    100,969
    
    
    
    122
    
    
    
    
    
    
    
    101,091CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD
    
    
    510,906
    
    
    
    342
    
    
    
    
    
    
    
    511,248CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    611,875
    
    
    $
    464
    
    
    $
    
    
    
    $
    612,339
 17




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##### Table of Contents



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 for the year ended December 31, 2003 filed with the
Securities and Exchange Commission (SEC) on March 15, 2004, all amendments
thereto, and all of our other filings filed with the SEC from March 15, 2004
through the date of this report. Management Overview In evaluating our financial condition and operating performance, we consider
many factors. The following updates certain subjects more completely discussed
in Managements Discussion and Analysis of Financial Condition and Results of
Operations  Management Overview of our Form 10-K for the year ended December
31, 2003, filed with the Securities and Exchange Commission (SEC) on March
15, 2004. The DIRECTV Group, Inc. (The DIRECTV Group, formerly known as Hughes
Electronics Corporation) owns 80.4% of our outstanding common stock. Fox
Entertainment Group, Inc. (Fox Entertainment), a subsidiary of The News
Corporation Limited (the News Corporation), owns approximately 34% of The
DIRECTV Groups outstanding common stock. On April 20, 2004, we entered into a transaction agreement with The DIRECTV
Group, PAS Merger Sub, Inc. (PAS Merger Sub), a wholly-owned subsidiary of
The DIRECTV Group, and Constellation, LLC (Constellation), an affiliate of
Kohlberg Kravis Roberts & Co. L.P. (KKR) for the merger of our company with
PAS Merger Sub (the Merger) and subsequent sale to Constellation (the
PanAmSat Sale). The transaction is subject to certain conditions, including,
among other things, obtaining applicable regulatory approvals, including the
approval of the Federal Communications Commission and our stockholders. The
transaction is expected to be completed in the second half of 2004. However,
no assurance can be given that the approvals will be obtained or the
transaction will be completed. The agreement requires that, during the period
prior to the closing, we conduct our business in the ordinary course,
consistent with past practice, and that we obtain the consent of KKR for us to
enter into certain strategic and other transactions. We believe this transaction will give us the opportunity to enhance our
competitive position and expand our capabilities. In furtherance of our
mission of servicing a strong customer base in the entertainment,
communications and government sectors, we believe KKR will support our efforts
to grow by developing new products and services, forging strategic alliances
and developing new markets. In January 2004, we signed a multi-year, multi-satellite agreement with Fox
Entertainment under which it will consolidate its entire suite of U.S. cable
and broadcast programming onto our global fleet for 15 years and move a
significant portion of its international traffic onto our fleet for the next
decade. Fox Entertainment will now be one of our largest media customers and
one of our top five global customers. In the first quarter of 2004, we received an aggregate of $286.9 million in
satellite insurance proceeds for claims filed in 2003 for Galaxy 11, PAS-1R and
Galaxy 4R. We plan to use these proceeds to replace existing satellites over
the next several years. The availability and use of these funds are restricted
by the agreements governing our debt obligations, which generally permit their
use for capital expenditures. On March 17, 2004, our PAS-6 satellite suffered an anomaly resulting in a loss
of power. On April 1, 2004, this satellite experienced another and more
significant loss of power. Following that event, we commenced deorbiting the
satellite. As a result of the March 17 event, we recorded a non-cash impairment
charge of $99.9 million within income from operations in the first quarter of
2004. This resulted in an approximate $63.3 million non-cash charge to net
income after taxes. PAS-6 had been previously replaced and was used as a
backup for another satellite. Accordingly, this event has not affected service
to any of our customers and we anticipate that it will not affect our revenues
in 2004. We do not plan to replace this satellite. During the fourth quarter of 2003, we entered into an agreement with DIRECTV
Latin America LLC (DTVLA) and The DIRECTV Group that restructured our prior
agreements related to that direct-to-home business. That agreement became
effective in February 2004 upon DTVLAs emergence from bankruptcy. As a
result, we agreed to accept reduced cash payments in the early years of our
existing transponder agreements with this customer, most of which we expect to
recapture in later years, and The DIRECTV Group has agreed to guarantee all of
the transponder lease agreements with DTVLA for a period of five years. We
believe this eliminates a major risk in our contractual backlog. 18




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##### Table of Contents



Beginning with this quarterly report, we report our operations in two operating
segments: our traditional fixed satellite services business and G2 Satellite
Solutions (G2), which includes government services. As G2 becomes a more
significant portion of our business, segment reporting will allow us to report
in the way we manage our business. Following is a more detailed discussion of the items and a comprehensive
analysis of our results of operations, segments, contracted backlog, satellite
technology, liquidity and capital resources and commitments and contingencies.
Also following is a discussion of our satellite deployment plans, new
accounting pronouncements and market risks. Results of Operations Three Months Ended March 31,Dollar
    
    Percentage2004
    
    2003
    
    Change
    
    Change(In thousands, except per share data)RevenuesOperating leases, satellite services and other
    
    $
    201,165
    
    
    $
    195,420
    
    
    $
    5,745
    
    
    
    2.9
    %Outright sales and sales-type leases
    
    
    4,265
    
    
    
    4,336
    
    
    
    (71
    )
    
    
    (1.6
    %)Total revenues
    
    
    205,430
    
    
    
    199,756
    
    
    
    5,674
    
    
    
    2.8
    %Costs and expensesDepreciation and amortization expense
    
    
    75,335
    
    
    
    72,267
    
    
    
    3,068
    
    
    
    4.2
    %Direct operating costs (exclusive of
depreciation and amortization)
    
    
    39,668
    
    
    
    33,188
    
    
    
    6,480
    
    
    
    19.5
    %Selling, general and administrative expenses
    
    
    17,549
    
    
    
    18,026
    
    
    
    (477
    )
    
    
    (2.6
    %)PAS-6 impairment loss
    
    
    99,946
    
    
    
    
    
    
    
    99,946Facilities restructuring and severance costs
    
    
    1,855
    
    
    
    
    
    
    
    1,855Total operating cost and expenses
    
    
    234,353
    
    
    
    123,481
    
    
    
    110,872
    
    
    
    89.8
    %Income (loss) from operations
    
    
    (28,923
    )
    
    
    76,275
    
    
    
    (105,198
    )
    
    
    (137.9
    %)Interest expense, net
    
    
    31,086
    
    
    
    34,275
    
    
    
    (3,189
    )
    
    
    (9.3
    %)Income (loss) before income taxes
    
    
    (60,009
    )
    
    
    42,000
    
    
    
    (102,009
    )
    
    
    (242.9
    %)Income tax expense (benefit)
    
    
    (28,080
    )
    
    
    11,142
    
    
    
    (39,222
    )
    
    
    (352.0
    %)Net income (loss)
    
    $
    (31,929
    )
    
    $
    30,858
    
    
    $
    (62,787
    )
    
    
    (203.5
    %)Earnings (loss) per share  basic and diluted
    
    $
    (0.21
    )
    
    $
    0.21
    
    
    $
    (0.42
    )
    
    
    (200.0
    %)
 Revenues  The increase in total revenues was primarily attributable to
additional government services revenues related to G2 Satellite Solutions and
an increase in network services revenues. These increases were partially
offset by lower video revenues recorded primarily as a result of customer
credit related issues and capacity reductions largely associated with two
customers (See Segments below). Depreciation and Amortization
Expense  The increase in depreciation and
amortization is due primarily to accelerated depreciation of $5.1 million due
to reduced end of life estimates for Galaxy 4R and PAS-6B for Xenon Ion
Propulsion Systems (XIPS) failures and depreciation of $3.0 million on Galaxy
12 and Galaxy 13, which were recently placed in service. These increases were
partially offset by lower depreciation on Galaxy 11 and PAS-1R of $5.4 million,
as a result of the allocation of insurance proceeds against the carrying values
of these satellites during December 2003 (See -Commitments and Contingencies -
Satellite Insurance below). Direct Operating Costs (exclusive of depreciation and amortization)  The
increase in direct operating costs is primarily due to additional direct
operating costs related to G2, which was formed after the March 7, 2003
acquisition of Hughes Global Services (HGS). This increase was partially
offset by reduced satellite insurance expense of $2.6 million and a $3.1
million write-off of deferred charges as a result of the termination of certain
vendor contracts during the first quarter of 2003. Selling, General & Administrative Expenses  The $0.5 million decrease in
selling, general and administrative expenses is due primarily to lower bad debt
expense of $1.9 million and cost reductions as a result of operational
efficiencies. These decreases were partially offset by expenses related to our
2003 acquisitions. Facilities Restructuring and Severance Costs  In the first quarter of 2004, we
recorded a charge of $1.4 million related to our facilities restructuring plan
and $0.5 million related to our teleport consolidation plan (See Liquidity and
Capital Resources  Facilities Restructuring and Severance Costs below). PAS-6 Impairment Loss  In the first quarter of 2004, we recorded a non-cash
charge of $99.9 million related to the impairment of our 19




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##### Table of Contents



PAS-6 satellite (See
-Satellite Technology below). Income (Loss) from Operations  The decrease in income from operations was
primarily due to the loss on the impairment of PAS-6 and an increase in direct
operating costs related to G2 Satellite Solutions. These decreases were
partially offset by an increase in revenues. Interest Expense, Net  Interest Expense, net consisted of the following (in
thousands): Three Months Ended March 31,2004
    
    2003
    Dollar ChangeGross interest expense
    
    $
    33,239
    
    
    $
    42,448
    
    $
    (9,209
    )Less: Interest income
    
    
    1,880
    
    
    
    3,244
    
    
    (1,364
    )Less: Capitalized interest
    
    
    273
    
    
    
    4,929
    
    
    (4,656
    )Total interest expense, net
    
    $
    31,086
    
    
    $
    34,275
    
    $
    (3,189
    )
 Gross interest expense decreased primarily as a result of our July and December
2003 prepayments of $350 million and $300 million, respectively, under our
Senior Secured Credit Facility. Interest income decreased by $1.4 million due
to lower average cash balances. Capitalized interest decreased primarily due
to the launches of Galaxy 12 and Galaxy 13. Income Tax Expense (Benefit)  The decrease in income tax expense was due
primarily to the PAS-6 impairment loss recorded during the first quarter of
2004 which resulted in an income tax benefit of approximately $36.6 million.
We estimate that our effective income tax rate will be a tax benefit of
approximately 11% for 2004 as compared to an effective tax rate of 26% for
2003. The change in our effective tax rate from 2003 to 2004 is primarily due
to the income tax effect of the PAS-6 impairment loss recorded during the first
quarter of 2004. Segments Selected Segment Data: Three Months EndedMarch 31,
    
    Dollar
    
    Percentage2004
    
    2003
    
    Change
    
    Change(In thousands)RevenuesFSS
    
    $
    189,427
    
    
    $
    195,672
    
    
    $
    (6,245
    )
    
    
    (3.2
    %)G2
    
    
    21,816
    
    
    
    9,631
    
    
    
    12,185
    
    
    
    126.5
    %Eliminations
    
    
    (5,813
    )
    
    
    (5,547
    )
    
    
    (266
    )
    
    
    4.8
    %Total revenues
    
    $
    205,430
    
    
    $
    199,756
    
    
    $
    5,674
    
    
    
    2.8
    %Income (loss) from operationsFSS
    
    $
    (30,673
    )
    
    $
    74,414
    
    
    $
    (105,087
    )
    
    
    (141.2
    %)G2
    
    
    1,750
    
    
    
    1,861
    
    
    
    (111
    )
    
    
    (6.0
    %)Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total income (loss) from operations
    
    $
    (28,923
    )
    
    $
    76,275
    
    
    $
    (105,198
    )
    
    
    (137.9
    %)
 Our operations are comprised of the following two segments: 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 television (DTH) and provide
telemetry, tracking and control services (TT&C) and network services to
customers. Government Services (G2 Satellite Solutions or G2) Through G2, we provide
global satellite and related telecommunications services to the Federal
government, international government entities, and their contractors. 20




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##### Table of Contents



FSS Segment: FSS Revenue by Service-Type Three Months EndedMarch 31,
    
    Dollar
     
    Percentage2004
    
    2003
    
    Change
    
    Change(In thousands)FSS
RevenuesVideo
    
    $
    115,676
    
    
    $
    126,780
    
    
    $
    (11,104
    )
    
    
    (8.8
    %)Network
    
    
    55,079
    
    
    
    50,422
    
    
    
    4,657
    
    
    
    9.2
    %Government
    
    
    5,813
    
    
    
    5,547
    
    
    
    266
    
    
    
    4.8
    %Other
    
    
    12,859
    
    
    
    12,923
    
    
    
    (64
    )
    
    
    (0.5
    %)Total FSS revenues
    
    $
    189,427
    
    
    $
    195,672
    
    
    $
    (6,245
    )
    
    
    (3.2
    %)
 Revenues  The decrease in FSS revenues was primarily due to lower program
distribution and DTH video revenues attributable to lower net new business and
customer credit issues, partially offset by higher network services and
revenues related to satellite capacity leased to the G2 operating
segment. Our FSS segment is comprised of the following: Video Services- We provide video services that are primarily full-time,
part-time and occasional satellite services for the transmission of news,
sports, entertainment and educational programming worldwide. The decrease in
revenues for video services was primarily a result of lower DTH revenues as a
result of customer credit issues and capacity reductions largely associated
with two customers. Network Services- We provide network services, which support satellite-based
networks that relay voice, video and data communications within individual
countries, throughout regions and on a global basis. The increase in
revenues from network services is primarily a result of net new business
recorded from network resellers. These increases were partially offset by
lower Internet related revenues as a result of contract expirations. Government Services- We provide our G2 segment with satellite capacity.
This revenue eliminates in consolidation. Other- We provide TT&C, in-orbit back-up service and other services. Income from operations  The decrease in FSS income from operations is
primarily due to the loss on the impairment of PAS-6 of $99.9 million and lower
revenue as described above. G2 Segment: Revenue  The increase in G2 segment revenues of $12.2 million in 2004 reflects
a full quarter of revenue related to our 2003 acquisitions of HGS and Esatel
Communications, Inc. (Esatel), as well as an increase in equipment-based
sales as compared to the same period in 2003. Income from operations  Income from operations remained relatively flat as
compared to the three months ended March 31, 2003. Higher revenues during the
first quarter 2004 included a larger mix of equipment and non-satellite
bandwidth sales, which carry lower margins. This increase was offset by a full
quarter of depreciation in 2004 on the Silver Spring Teleport acquired with the
Esatel business. Contracted Backlog Contracted backlog represents expected future cash payments to be received from
customers under executed operating leases or sales-type leases. Contracted
backlog is attributable to both satellites currently in orbit and those planned
for launch. Our contracted backlog for future services at March 31, 2004 and
December 31, 2003 was $4.73 billion and $4.56 billion, respectively. The
increase in backlog is primarily the result of new agreements executed during
the first quarter of 2004 including the multi-year agreement signed with Fox
Entertainment in January 2004 (See Note 12 Related Party Transactions within
our Consolidated Financial Statements). This increase was partially offset by
customer contract activity during 2004. 21




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Satellite Technology On March 17, 2004, our PAS-6 satellite, an FS 1300 model satellite built by
Space Systems/Loral, suffered an anomaly resulting in a loss of power.
Following that event, we moved the satellite to a storage orbit while we
evaluated the problem with the manufacturer. On April 1, 2004, this satellite
experienced another anomaly and more significant loss of power. Neither of
these losses was anticipated. We maintained communications with, and control
of, this satellite and, as a result of the second anomaly, took the necessary
steps to deorbit it. PAS-6 had previously been taken out of primary service and was used as a backup
for another satellite, PAS-6B. Accordingly, these events have not affected
service to any of our customers and we anticipate that they will not affect our
revenues in 2004. We do not plan to replace this satellite. As a result of
the March 17 event, we recorded a non-cash impairment charge within income from
operations of approximately $99.9 million in the first quarter of 2004. This
resulted in a non-cash charge to net income after taxes of approximately $63.3
million. PAS-6 was uninsured and we will not collect insurance proceeds as a
result of these events. Further, as a result of this impairment, we will no
longer depreciate this asset and will not record $9.3 million of depreciation
expense during the remainder of 2004. Galaxy 8-i was fully depreciated in July 2002 and was deorbited in February
2004. Satellite Deployment Plans We expect to launch three satellites by the end of 2006. We are scheduled to
launch Galaxy 14 in the second half of 2004 to replace Galaxy 5 at 125 degrees
west longitude. We plan to launch Galaxy 15 in the first quarter of 2005 to
replace Galaxy 1R at 133 degrees west longitude. This satellite will include an
additional L-band payload. We plan to launch Galaxy 16 in 2006 to replace
Galaxy 4R at 99 degrees west longitude (See - Commitments and Contingencies -
Satellite Commitments below). During the second quarter of 2004, we expect to commence construction of Galaxy
17, an on-ground spare for Galaxy 11, which will also serve as a spare to
protect against launch failure of Galaxy 16. In addition, we may construct and
launch a replacement satellite for PAS-6B prior to the end of its useful life.
No commitments have been made for the procurement of these satellites at this
time. Assuming satellites under development are successfully launched and services on
the satellites commence on schedule, we believe that amounts available under
the Revolving 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 the Revolving 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 Cash and Cash Equivalents At March 31, 2004, we had cash and cash equivalents of $612.3 million, compared
to $511.2 million at December 31, 2003. During the three months ended March 31,
2004 we recorded the following significant transactions impacting cash and cash
equivalents:  
    
    Generated $79.8 million of cash flows from operations
    
    Increased cash by $28.9 million from net sales of short-term investments
    
    Made $21.7 million of capital expenditures during 2003
    
    Included in the increase in cash flows from operations is $59.4
million of interest payments made during the first quarter of 2004
relating to our debt and incentive obligations As of March 31, 2004, we received $286.9 million related to our Galaxy 11, PAS
1R and Galaxy 4R insurance claims. These proceeds are classified within
Restricted Cash on our Consolidated Balance Sheet. The availability and use
of these funds are restricted by the agreements governing our debt obligations
which, generally, permit their use for capital expenditures (See -Commitments
and Contingencies  Satellite Insurance below). 22




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Three Months Ended
    
    Three Months Ended
    
    DollarMarch 31, 2004
    
    March 31, 2003
    
    Change(In thousands)Net cash provided by operating activities
    
    $
    79,815
    
    
    $
    79,119
    
    
    $
    696Net cash provided by (used in) investing activities
    
    
    6,733
    
    
    
    (42,127
    )
    
    
    48,860Net cash provided by (used in) financing activities
    
    
    14,577
    
    
    
    (201,821
    )
    
    
    216,398
 The change in the net cash provided by operating activities is primarily
attributable to a decrease of $9.0 million from net income adjusted for
non-cash items and the following changes:  
    
    A decrease in cash provided from prepaid expenses and other assets of
$11.5 million, resulting primarily from reductions in prepaid operating
expenses including prepaid satellite insurance.
    
    A decrease in the cash used within accounts payable and accrued
liabilities of $11.6 million. The decrease in cash provided from
accounts payable and accrued liabilities is primarily a result of
changes in accrued interest and scheduled interest payments after the
repayment of $850 million in debt during 2003.
    
    An increase in the cash provided by deferred gains and revenues of
$5.0 million as a result of additional deferred revenues recorded
related to customer agreements since the first quarter of 2003.
    
    An increase in the cash provided by operating leases and other
receivables of $4.0 million due to additional collections of receivables
during the first quarter of 2004 as compared to the same period in 2003. The increase in net cash provided by investing activities was primarily due to:  
    
    A decrease in capital expenditures of $11.4 million.
    
    A change of $29.7 million related to short-term investments. During
the first quarter of 2004, we had net sales of short-term investments of
$28.9 million as compared to net purchases of short-term investments of
$0.8 million during 2003.
    
    A decrease in cash paid for acquisitions of $7.7 million. The decrease in cash used within financing activities was primarily due to:  
    
    The $200 million debt repayment made in the first quarter of 2003.
    
    New satellite incentive obligations related to the Galaxy 13/Horizons 1 satellite of $16.2 million recorded in January 2004. Long-term Debt At March 31, 2004, we had total debt outstanding of approximately $1.7 billion,
including current maturities of $278.5 million related to both our $275 million
6.125% notes due in 2005 and quarterly principal payments on our term loan B-1
facility under our Senior Secured Credit Facility (the Term B-1 Facility). Our Senior Secured Credit Facility is comprised of a $250.0 million revolving
credit facility, which is currently undrawn and will terminate on December 31,
2007 (the Revolving Facility), and a $349 million Term B-1 Facility. The
Term B-1 Facility has scheduled annual maturities of principal as of March 31,
2004 as follows (in thousands): Year Ending December 31,
    
    Amount DueRemainder of 2004
    
    $
    2,6252005
    
    
    3,5002006
    
    
    3,5002007
    
    
    3,5002008
    
    
    3,5002009
    
    
    85,0942010
    
    
    247,406$
    349,125
 With an interest rate of LIBOR plus 2.50%, as of March 31, 2004, the applicable
interest rate on the Term B-1 Facility was 3.59%. We are also required to pay
a commitment fee for the unused commitments under the Revolving Facility,
which, as of March 31, 2004, on an annualized basis was 0.375%. We had
outstanding letters of credit totaling $1.1 million, which reduce our ability
to 23




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borrow against the Revolving Facility by such amount. Any amounts borrowed
under the Revolving Facility would bear interest at LIBOR plus 2.25% as of
March 31, 2004, although this interest rate is subject to adjustment based on
our total leverage ratio. In accordance with the agreement governing the Senior Secured Credit Facility,
we are a party to an interest rate hedge agreement on $100.0 million of our
Term B-1 Facility for a fixed-rate payment obligation of 5.64% on $100.0
million through August 30, 2005. This interest rate hedge is designated as a
cash flow hedge. During the three months ended March 31, 2004, no
ineffectiveness was recognized in the statement of operations on this hedge.
The fair value of the outstanding interest-rate hedge agreement as of March 31,
2004, based upon quoted market prices from the counterparty, reflected a hedge
liability of approximately $2.3 million. Upon expiration of the current
agreement on August 30, 2005, we will not be required to enter into an interest
rate hedge agreement under the Senior Secured Credit Facility. As of March 31, 2004, we also had outstanding $800 million Senior Notes due in
2012 with a stated interest rate of 8.5% (the Senior Notes). Obligations
under the Senior Notes are, or will be, as the case may be, unconditionally
guaranteed by each of our existing and subsequently acquired or organized
domestic and, to the extent no adverse tax consequences would result therefrom,
foreign restricted subsidiaries. We also had outstanding seven, ten and thirty-year fixed rate notes totaling
$550 million issued in January 1998. The outstanding principal balances,
interest rates and maturity dates for these notes as of March 31, 2004 were
$275 million at 6.125% due January 2005, $150 million at 6.375% due 2008 and
$125 million at 6.875% due 2028, respectively. Principal on these notes is
payable at maturity, while interest is payable semi-annually. We are required to maintain certain financial covenants and are also subject to
restrictive covenants under our borrowings. As of March 31, 2004, we were in
compliance with all such covenants. Capital Expenditures We expect our significant cash outlays will continue to be primarily capital
expenditures related to the construction and launch of satellites and debt
service costs. We have satellites under various stages of development, for
which we have budgeted capital expenditures. We currently expect to spend
between $165 million and $195 million on capital expenditures during 2004,
which will primarily be comprised of costs to construct, insure and launch
satellites. Facilities Restructuring and Severance Costs 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 includes 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 we expect to close
our Spring Creek, New York teleport during 2004. During the year ended
December 31, 2003 and the first quarter of 2004, we recorded charges of $4.2
million and $0.5 million, respectively, related to this teleport consolidation
plan, primarily representing severance costs. We estimate that this teleport consolidation plan will result in approximately
$7 million of costs through the end of 2004 and a gain on the disposal of land,
buildings, and equipment of approximately $11 million that will be recorded
upon the sale. These costs primarily consist of severance-related costs for
which the employees will be required to perform future services.
Severance-related costs associated with this consolidation plan include
compensation and benefits, outplacement services and legal and consulting
expenses related to the reduction in workforce of approximately 40 employees. 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 reflecting future lease costs related to approximately 18,000 square
feet of unused facilities in Manhattan Beach (See Note 8 Facilities
Restructuring and Severance Costs within our Consolidated Financial
Statements). 24




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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 or refund if the satellite fails to meet specific
technical operating standards. As of March 31, 2004, we had $138.2 million of
liabilities recorded in relation to these satellite incentive obligations. Satellite Commitments As of March 31, 2004, we had approximately $16.0 million of expenditures
remaining under existing satellite construction contracts and $42.7 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 March 31,
2004, we did not have any commitments related to existing launch insurance or
in-orbit insurance contracts for satellites to be launched. In October 2003, The DIRECTV Group committed to acquire a new satellite from
Space Systems/Loral, which would replace our Galaxy 4R satellite and would be
known as Galaxy 16. In April 2004, we executed a definitive agreement for the
procurement of this satellite. As the manufacturer is currently in Chapter 11
bankruptcy proceedings, this agreement has been executed subject to bankruptcy
court approval. Upon approval we will be obligated to reimburse The DIRECTV
Group for amounts paid to the manufacturer on our behalf. Satellite Insurance On February 19, 2003, we filed proofs of loss under the insurance policies for
two of our BSS 702 spacecraft, Galaxy 11 and PAS-1R, for constructive total
losses based on degradation of the solar panels. On December 29, 2003, we
reached a settlement of these insurance claims for payment of $260 million with
no future revenue share. We offset the proceeds from this settlement against
the carrying value of the satellites. In the first quarter of 2004, we received
the $260 million settlement amount. We plan on using these proceeds to replace
existing satellites over the next several years. On July 31, 2003, we filed a proof of loss under the insurance policy for our
Galaxy 4R spacecraft after the secondary XIPS on this satellite ceased working.
In 2003, we settled with and received $102.6 million from insurers representing
approximately 83 percent 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 percent of the insurance coverage on this
satellite. The settlement with the insurer representing 17 percent 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 developing plans to replace this satellite prior to the end of its useful
life using the insurance proceeds and a spare launch service contract that we
had purchased previously. The availability and use of the $260 million in proceeds from the Galaxy 11 and
PAS-1R insurance claims and the $26.9 million received in March 2004 related to
the Galaxy 4R insurance claim are restricted by the agreements governing our
debt obligations which, generally, permit the use of such funds for capital
expenditures. Until available, these proceeds will be held in a collateral
account. As of March 31, 2004, these proceeds plus interest earned are
classified within Restricted Cash on our Consolidated Balance Sheet. As of March 31, 2004, we had in effect launch and in-orbit insurance policies
covering 11 satellites in the aggregate amount of approximately $1.0 billion.
As of such date, these insured satellites had an aggregate net book value and
other insurable costs of $1.3 billion. We have 13 uninsured satellites in
orbit. The uninsured satellites are: PAS-4, which is used as backup satellite;
PAS-5 and PAS-7, for which we received insurance proceeds for constructive
total losses; Galaxy 1R, Galaxy 3R, Galaxy 5 and SBS-6, which are approaching
the ends of their useful lives; Galaxy 11 and PAS-1R, for which we received
insurance proceeds for partial losses; Galaxy 9, for which we determined that
insurance was not available on commercially reasonable terms; and HGS-3, HGS-5
and Leasat, which have an aggregate book value of less than $1 million. Our
Galaxy 12 and Galaxy 9 satellites serve as in-orbit backups for the C-band
portions of Galaxy 1R, Galaxy 4R, Galaxy 5, Galaxy 10R, Galaxy 11 and Galaxy
13/ Horizons 1. Of the insured satellites, as of March 31, 2004, seven were 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
(Significant Exclusion Policies). The 25




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exclusions reduce the probability of an insurance recovery in the event of a
loss on these satellites. Four of these satellites, PAS-2, PAS-3R, PAS-8 and
PAS-9 have operational redundancies available for the systems on which
exclusions have been imposed. We believe that these redundancies allow for
uninterrupted operation of the satellite in the event of a failure of the
component subject to the insurance exclusion. The fifth such satellite, PAS-6B,
has a policy exclusion for XIPS related anomalies and is currently operating on
its backup bi-propellant propulsion system. The sixth such satellite, Galaxy
4R, for which we have received insurance proceeds, has a remaining policy
covering $20.3 million of investments in sales-type leases that also has a
policy exclusion for XIPS related anomalies. Galaxy 4R is currently operating
on its backup bi-propellant propulsion system. The seventh 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 fully
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, this satellite has available backup bi-propellant of approximately
11.9 years. At March 31, 2004, the uninsured satellites and the satellites insured by
Significant Exclusion Policies had a total net book value and other insurable
costs of approximately $1.1 billion. Of this amount, $453 million related to
uninsured satellites and $688 million related to satellites insured by
Significant Exclusion Policies. Change-in-Control Obligations Upon consummation of the PanAmSat Sale, all outstanding employee stock options
which have not yet vested will vest and become exercisable, and all outstanding
restricted shares and restricted stock units will vest immediately prior to the Merger. We currently estimate
that upon the consummation of the PanAmSat Sale, we will be required to record
a charge of up to $6 million in relation to the
acceleration of vesting of these options, restricted shares and restricted
stock units. Holders of options and restricted stock units will be
entitled to receive (i) with respect to in-the-money options, cash equal to the difference between
the exercise price and the $23.50 per share price to be paid in the PanAmSat
Sale, and (ii) with respect to restricted shares and restricted
stock units, cash in the amount of
$23.50 per share, except for any stock options, restricted shares and
restricted stock units held by certain employees who have agreed not to have
their equity interests cashed out in the Merger or the PanAmSat Sale, as
applicable. All out-of-the-money stock options will be cancelled without
payment. In addition, our Severance Pay Plan allows for the payment of
enhanced severance to employees laid off or who resign for good reason (as
defined in such plan) as a result of, and within two years after, a
change-in-control. One of our executives is party to an employment agreement which provides for,
among other things, the payment of severance and other benefits upon the
termination of the executive without cause or for good reason (as defined in
such agreement) or if we decline to extend such agreement. Certain other 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 of The DIRECTV Group. As a change
in control of The DIRECTV Group occurred on December 22, 2003, these agreements
will apply if an involuntary termination of the executive occurs on or before
December 22, 2006. 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 in the range of $9.0
million to $11.0 million. Certain of our other executives have change-in-control severance agreements,
which provide for, among other things, the payment of severance and other
benefits upon the termination of the executive without cause or for good reason
within three years after a change in control of PanAmSat, as defined in their
respective agreements. The PanAmSat Sale would result in a change-in-control
under these 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 approximately $5 million in addition to the costs described
above with respect to our senior executives. These agreements expire if no
change in control of PanAmSat has occurred on or before December 31, 2004. 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 Indian government has assessed approximately $8.9
million (reduced from an initial assessment of $15.2 million) against one of
our subsidiaries for the Indian tax year ended March 31, 1997. This assessment
is being appealed to the Income Tax Appeals Tribunal. For Indian tax years
ended March 31, 1996, 1998, 1999, 2000 and 2001, the Indian government has
assessed approximately $36.0 million in the aggregate against us. This
assessment has been appealed to the Commissioner of Income Tax (Appeals). We
are contesting the imposition of such taxes. While this contest proceeds, we
may be required to advance cash or provide a bank guarantee for amounts up to
the total assessment. If unsuccessful in our contest, we could be subject to
comparable claims for subsequent years. 26




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New Accounting Pronouncements There are no issued statements awaiting implementation that are expected to
have a material impact on our financial statements. 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. We use derivative financial instruments, including
interest rate hedges, to manage market risks. Additional information regarding
our interest rate hedge is contained within Liquidity and Capital Resources -
Long-term Debt above. The objective of our policies is to mitigate potential
income statement, 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 daily 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 separate methodologies to determine the impact of these
hypothetical changes on our sales-type leases, fixed rate public debt and
variable rate debt as follows:  
    
    For our sales-type leases, a discount rate based on a 10-year
U.S.
Treasury bond is applied to future cash flows from sales-type leases to
arrive at a base rate present value for sales-type leases. This discount
rate is then adjusted for a negative 10% change and then applied to the
same cash flows from sales-type leases to arrive at a present value
based on the negative change. The base rate present value and the
present value based on the negative change are then compared in order to
arrive at the potential negative fair value change as a result of the
hypothetical change in interest rates.
    
    For our fixed rate public debt, the current market price, coupon and
maturity are used to determine the yield for each public debt instrument
as of the end of the period. The yield is then adjusted by a factor of
10% and this revised yield is then compared to the original yield to
determine the potential negative fair value change as a result of the
hypothetical change in interest rates.
    
    For our variable rate debt, the effect in annual cash flows and net
income is calculated as a result of the potential effect of a
hypothetical 10% adverse fluctuation in interest rates. The current
LIBOR rate plus applicable margin as of the end of the year is applied
to the applicable principal outstanding at the end of the year to
determine an annual interest expense based on year-end rates and
principal balances. This calculation is then performed after increasing
the LIBOR rate plus applicable margin by a factor of 10%. The difference
between the two annual interest expenses calculated represents the
reduction in annual cash flows as a result of the potential effect of a
hypothetical 10% adverse fluctuation in interest rates. This amount is
then tax effected based on our effective tax rate to yield the reduction
in net income as a result of the potential effect of a hypothetical 10%
adverse fluctuation in interest rates. The only potential limitations of the respective models are in the assumptions
utilized in the models such as the hypothetical adverse fluctuation rate and
the discount rate. We believe that these models and the assumptions utilized
are reasonable and sufficient to yield proper market risk disclosure. We did not experience any material changes in interest rate exposures during
the three months ended March 31, 2004. Based upon economic conditions and
leading market indicators at March 31, 2004, we do not foresee a significant
adverse change in interest rates in the near future. As a result, our
strategies and procedures to manage exposure to interest rates have not changed
in comparison to the prior year. As of March 31, 2004, long-term debt consisted of fixed-rate borrowings of
approximately $1.35 billion, $249 million of floating rate debt, and $100
million of floating rate debt that has been exchanged for a fixed-rate
obligation on $100 million through August 30, 2005 (refer to Liquidity and
Capital Resources  Long-term Debt above). We are subject to fluctuating
interest rates on our floating 27




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rate debt and any changes in interest rates would impact results of operations
and cash flows. The potential effect of a hypothetical 10% adverse fluctuation
in interest rates for one year on our floating rate debt outstanding at March
31, 2004 would be a reduction in cash flows of approximately $0.9 million and a
reduction in net income of approximately $0.7 million. Fluctuations in interest rates may also affect the fair values of fixed-rate
borrowings and fixed-rate net investments in sales-type lease receivables. At
March 31, 2004, outstanding fixed-rate borrowings bore interest at rates
ranging from 6.125% to 8.5%, and sales type lease receivables bore interest
between 8.0% and 12.0%. The potential fair value change resulting from a
hypothetical 10% adverse fluctuation in interest rates related to our
outstanding fixed-rate debt and fixed-rate net investment in sales-type lease
receivable balances would be approximately $48.6 million and $3.1 million as of
March 31, 2004. 
 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 Exchange Act
of 1934, as amended (the Exchange Act)), our Chief Executive Officer and our
Executive Vice President and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of March 31, 2004. 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 March 31, 2004, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting. 28




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##### Table of Contents



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 Indian government has assessed approximately $8.9
million (reduced from an initial assessment of $15.2 million) against one of
our subsidiaries for the Indian tax year ended March 31, 1997. This assessment
is being appealed to the Income Tax Appeals Tribunal. For Indian tax years
ended March 31, 1996, 1998, 1999, 2000 and 2001, the Indian government has
assessed approximately $36.0 million in the aggregate against us. This
assessment has been appealed to the Commissioner of Income Tax (Appeals). We
are contesting the imposition of such taxes. While this contest proceeds, we
may be required to advance cash or provide a bank guarantee for amounts up to
the total assessment. If unsuccessful in our contest, we could be subject to
comparable claims for subsequent years. 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 6. EXHIBITS AND REPORTS ON FORM 8-K. (a)
    
    
    10.86
    
    
    Transaction Agreement, dated as of April 20, 2004, among
Constellation, LLC, PanAmSat Corporation, The DIRECTV Group, Inc. and PAS Merger Sub, Inc. *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.  (b)
    
    Reports on Form 8-K.On February 3, 2004, we furnished a Current Report on Form 8-K with Items 7,
9 and 12 disclosures with the Securities and Exchange Commission. 29




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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 CorporationMay 6, 2004
    
    /s/ Michael J. IngleseMichael J. IngleseExecutive Vice President and
Chief Financial Officer
and a Duly Authorized
Officer of the Company
 30