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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR
15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF NOVEMBER 2002
COMMISSION FILE NO. 333-8880
SATELITES MEXICANOS, S.A. DE C.V.
BLVD. M. AVILA CAMACHO NO. 40
COL. LOMAS DE CHAPULTEPEC
11000 MEXICO, D.F.
MEXICO
(52) 55-5201-0800
The registrant files annual reports under cover of Form 20-F.
The registrant is not furnishing the information contained in this form to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
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SATELITES MEXICANOS, S.A. de C.V.
FINANCIAL INFORMATION
INDEX
<Table>
<Caption>
PAGE
----
Financial Statements (Unaudited):
Condensed Balance Sheets as of September 30, 2002 and
December 31, 2001...................................... 2
Condensed Statements of Operations for the three and nine
months ended September 30, 2002 and 2001............... 3
Condensed Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001...................... 4
Notes to Unaudited Condensed Financial Statements......... 5
Operating and Financial Review and Prospects................ 8
</Table>
1
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
CONDENSED BALANCE SHEETS
(Amounts in thousands of U.S. dollars )
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,755 $ 26,194
Restricted and segregated cash............................ 24,467 155,496
Accounts receivable, net.................................. 5,622 2,042
Prepaid insurance......................................... 4,200 7,414
Due from related parties.................................. 5,053 7,200
Deferred income taxes..................................... 2,627 2,161
---------- ----------
Total current assets.............................. 46,724 200,507
Satellites and equipment, net............................... 297,745 320,725
Construction in process -- Satmex 6 (Note 1)................ 207,309 95,092
Concessions, net............................................ 453,842 463,521
Prepaid insurance, non current.............................. 610 3,172
Deferred financing costs, net............................... 4,253 5,929
Other assets................................................ 575 332
---------- ----------
Total assets...................................... $1,011,058 $1,089,278
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 1,000 $ 13,626
Accounts payable.......................................... 5,041 4,227
Accrued expenses (Note 1)................................. 6,538 18,759
Interest payable.......................................... 5,678 14,196
Due to related parties.................................... 3,811 4,370
Deferred revenue -- customers............................. 55 39
Deferred revenue -- Mexican government.................... 2,200 2,200
---------- ----------
Total current liabilities......................... 24,323 57,417
Accrued expenses, non current (Note 1)...................... 4,337 4,337
Deferred revenue -- Mexican government...................... 75,085 76,735
Deferred income taxes....................................... 7,018 19,807
Long-term debt.............................................. 523,624 542,374
---------- ----------
Total liabilities................................. 634,387 700,670
---------- ----------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock.............................................. 384,678 383,547
Preferred stock........................................... 31,886 31,886
Accumulated deficit....................................... (39,893) (26,825)
---------- ----------
Total stockholders' equity........................ 376,671 388,608
---------- ----------
Total liabilities and stockholders' equity........ $1,011,058 $1,089,278
========== ==========
</Table>
- ---------------
Note: The December 31, 2001 balance sheet has been derived from the audited
financial statements at that date.
See notes to unaudited condensed financial statements.
2
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S. dollars)
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2002 2001 2002 2001
------- -------- -------- --------
Service revenue....................................... $19,424 $ 30,906 $ 62,433 $ 97,610
------- -------- -------- --------
Operating expenses:
Satellite operations................................ 3,720 4,906 13,343 14,881
Selling and administrative expenses................. 4,810 5,793 13,503 16,457
License and management fees......................... 270 765 844 2,764
Depreciation expense and amortization of
concessions...................................... 11,846 11,859 35,498 35,388
------- -------- -------- --------
20,646 23,323 63,188 69,490
------- -------- -------- --------
Operating income (loss)............................... (1,222) 7,583 (755) 28,120
Gain on in-orbit failure of Solidaridad 1............. 3,301 3,301
Interest income....................................... 282 1,948 1,842 7,752
Interest expense and amortization of deferred
financing costs..................................... (8,870) (13,188) (29,620) (43,838)
Net foreign exchange gain............................. 34 124 40 100
------- -------- -------- --------
Loss before income taxes.............................. (6,475) (3,533) (25,192) (7,866)
Deferred income tax benefit........................... 2,278 9,268 13,255 5,986
------- -------- -------- --------
Net (loss) income..................................... (4,197) 5,735 (11,937) (1,880)
Preferred stock dividend requirement.................. (377) (377) (1,131) (1,131)
------- -------- -------- --------
Net (loss) income applicable to common stockholders... $(4,574) $ 5,358 $(13,068) $ (3,011)
======= ======== ======== ========
</Table>
See notes to unaudited condensed financial statements.
3
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. dollars)
(Unaudited)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
--------- --------
OPERATING ACTIVITIES
Net loss.................................................... $(11,937) $(1,880)
Adjustments to reconcile net loss to operating cash flow:
Depreciation expense and amortization of concessions...... 35,498 35,388
Amortization of deferred financing costs.................. 1,733 1,726
Deferred revenue -- customers............................. 16 (2,938)
Deferred revenue -- Mexican Government.................... (1,650) (1,650)
Deferred income taxes..................................... (13,255) (5,986)
Interest income from restricted and segregated cash....... (1,264) (6,273)
Use of restricted and segregated cash for interest
payments............................................... 11,877 5,221
Changes in assets and liabilities:
Accounts receivable....................................... (3,580) 4,109
Prepaid insurance......................................... 5,776 5,717
Accounts payable and accrued expenses..................... (11,407) (3,033)
Interest payable.......................................... (8,518) (9,182)
Due from/to related parties............................... 1,588 (8,753)
Deferred financing costs and other assets................. (300) (232)
--------- --------
Cash flow provided by operating activities.................. 4,577 12,234
--------- --------
INVESTING ACTIVITIES
Use of restricted and segregated cash....................... 107,040 54,312
Construction in progress -- Satmex 6........................ (112,217) (59,062)
Acquisition of equipment, net............................... (2,839) (788)
--------- --------
Cash flow used in investing activities...................... (8,016) (5,538)
--------- --------
FINANCING ACTIVITIES
Use of restricted and segregated cash....................... 13,376 250
Repayment of senior secured notes........................... (31,376) (750)
Repayment of revolving credit facility...................... (15,000)
--------- --------
Cash flow used in financing activities...................... (18,000) (15,500)
--------- --------
Decrease in cash and cash equivalents....................... (21,439) (8,804)
Cash and cash equivalents -- beginning of period............ 26,194 24,625
--------- --------
Cash and cash equivalents -- end of period.................. $4,755 $15,821
========= ========
SUPPLEMENTAL DISCLOSURE
Interest paid............................................... $45,847 $52,480
========= ========
</Table>
See notes to unaudited condensed financial statements.
4
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Amounts in U.S. dollars)
1. THE COMPANY
Satelites Mexicanos, S.A. de C.V. ("Satmex" or the "Company") owns and
operates two geosynchronous communications satellites, Solidaridad 2 and Satmex
5. Satmex also owns another satellite, Morelos 2, which is in an inclined orbit.
Satmex operates in one business segment and is the leading provider of fixed
satellite services ("FSS") to broadcasting and telecommunications customers in
Mexico. Satmex has landing rights to provide broadcasting and telecommunications
transmission capacity in Mexico, the United States, Canada and 36 nations and
territories in the Latin American region.
On November 17, 1997, Loral Space & Communications Ltd. (together with its
subsidiaries "Loral") and Principia, S.A. de C.V. ("Principia"), acquired 75% of
the issued and outstanding capital stock of Satmex from the government of Mexico
for $647 million through Firmamento Mexicano, S. de R. L. de C.V.
("Firmamento"). Loral owns 65% of Firmamento and Principia owns 35%. Principia
holds 51% of Firmamento's voting interests. The remaining 25% of the capital
stock of Satmex was retained by the Mexican government.
In August 2000, the Company's Solidaridad 1 satellite ceased operating and
was considered irretrievably lost. The loss was caused by the failure of the
back-up control processor on board the satellite. Solidaridad 1 was insured for
$250 million. At the date of the loss, Solidaridad 1 had a net book value of
approximately $109.6 million. After deducting prepaid insurance of $1.6 million,
the unpaid insurance premiums of $12.5 million and on-going monitoring costs and
the excess of the estimated cost over revenue for the currently committed
transponder capacity to be provided to customers of $23.2 million, the net gain
on the in-orbit failure of Solidaridad 1 was approximately $103.1 million. In
December 2001, Satmex reduced the liability for the cost over revenue for the
committed transponder capacity to be provided to customers by $7.3 million. In
September 2002, the Company received $3.3 million from the satellite
manufacturer under the Solidaridad 1 performance guarantee. These transactions
were recorded as additional gain on the in-orbit failure of Solidaridad 1 in the
applicable periods. In January 2001, Satmex received insurance proceeds of
approximately $235.3 million, net of the unpaid insurance premiums and related
value added tax. Satmex is using the net insurance proceeds towards the
construction, launch and insurance of a replacement satellite, Satmex 6, as well
as for debt service. Satmex has contracted with Space Systems/Loral, Inc., a
wholly owned subsidiary of Loral, to build Satmex 6, which is designed to
provide broader coverage and higher power levels than any other satellite
currently in the Satmex fleet. Certain manufacturing and testing procedures have
resulted in the launch of Satmex 6 being extended to the second quarter of 2003.
On August 10, 2001, the Mexican government granted licenses to provide
satellite service in Mexico to PanAmSat, SES Global, Televisa and Enlaces
Integra. PanAmSat registered 12 satellites and SES Global registered seven
satellites to provide satellite service in Mexico.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of results of
operations, financial position and cash flows. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed as permitted pursuant to such SEC rules. The Company believes that the
disclosures made are adequate to keep the information presented from being
misleading. The results of operations for the three and nine months ended
September 30, 2002, are not necessarily indicative of the results to be expected
for the year. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto of Satmex,
included in Satmex's Annual Report on Form 20-F for the year ended December 31,
2001.
5
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Customers................................................... $5,193 $3,827
Value added tax recoverable................................. 757
Other....................................................... 1,177 261
Allowance for uncollectible accounts........................ (1,505) (2,046)
------ ------
$5,622 $2,042
====== ======
</Table>
4. SATELLITES AND EQUIPMENT
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Satellites.................................................. $409,119 $409,119
Equipment................................................... 28,207 25,647
Furniture and fixtures...................................... 6,400 6,321
Leasehold improvements...................................... 2,846 2,772
Construction in progress.................................... 4,188 4,245
-------- --------
450,760 448,104
Accumulated depreciation.................................... (153,015) (127,379)
-------- --------
$297,745 $320,725
======== ========
</Table>
5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
AMOUNTS RECEIVABLE:
Enlaces..................................................... $2,931 $3,672
Mexican government agencies................................. 2,004 2,557
Principia................................................... 386
Loral....................................................... 118 517
Service companies........................................... 68
------ ------
$5,053 $7,200
====== ======
AMOUNTS PAYABLE:
Loral....................................................... $1,620 $ 768
Principia................................................... 130 109
Service companies........................................... 2,061 3,493
------ ------
$3,811 $4,370
====== ======
</Table>
Transactions with related parties, not otherwise disclosed, are as follows:
Enlaces
Enlaces Integra ("Enlaces"), a company owned by Principia and Loral, leases
transponder capacity from Satmex. Service revenue from this lease was $398,000
for the nine months ended September 30, 2002. Also, Satmex agreed to loan
Enlaces up to $5 million. The loan to Enlaces matures January 4, 2006 and
accrues interest at a rate equal to Satmex's weighted average interest cost plus
1%. The maximum available borrowing
6
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
is $5 million including accrued interest. At September 30, 2002, there were no
outstanding borrowings under this loan. Further, Enlaces uses services provided
from Satmex's affiliated companies to perform its activities. In June 2002,
Satmex purchased approximately $718,000 of equipment from Enlaces and in July
2002, Satmex purchased $1.6 million of equipment and paid $2.9 million as an
advance payment on one of the concessions held by Enlaces. Enlaces used the
proceeds from the sale to repay its outstanding loan from Satmex.
Revenue
Revenue from related parties, primarily the Mexican government, was $7.1
million and $11.4 million for the nine months ended September 30, 2002 and 2001,
respectively.
Replacement Capacity
Loral Skynet, a wholly owned subsidiary of Loral, billed Satmex $3.6
million and $5.0 million for the nine months ended September 30, 2002 and 2001,
respectively, for providing capacity on Loral Skynet satellites.
Management fee
Loral and Principia are responsible for managing the Company. Loral and
Principia receive a management fee, based on a sliding scale, up to a maximum of
3.75% of the Company's quarterly gross revenue, as defined. For the nine months
ended September 30, 2002, no management fee was earned. For the nine months
ended September 30, 2001 the management fee was $2.0 million, of which $588,000
was offset against accrued expenses.
License fee
Loral has licensed certain intellectual property to the Company for an
annual fee of 1.5% of the Company's gross revenue, as defined. For the nine
months ended September 30, 2002 and 2001, the fee was $899,000 and $1.4 million
respectively, of which $56,000 and $79,000, respectively, was offset against
accrued expenses.
Rent
The equipment in the satellite control centers is owned by the Company,
while the buildings and land that house these centers are property of the
Mexican government. The Company pays rent to the Mexican government for the use
of the buildings and land equal to 7.5% of appraised value. The rent expense
under this agreement was $243,000 and $235,000 for the nine months ended
September 30, 2002 and 2001, respectively.
Service companies
Satmex uses external services from affiliated companies to perform its
activities. Satmex pays these companies for the actual personnel costs incurred
plus a fee. For the nine months ended September 30, 2002 and 2001, the fee was
$365,000 and $787,000, respectively.
Guarantee arrangements
In connection with the loan agreements certain related parties have
provided and continue to provide guarantees on behalf of the Company.
6. CONTINGENCIES
The Company is currently soliciting consents from the holders of its
10 1/8% Senior Notes due 2004, referred to as the "fixed rate notes," to the
proposed amendments to the insurance covenant contained in those notes. The
indenture governing the fixed rate notes currently requires the Company to
maintain in-orbit insurance coverage on certain terms that presently cannot be
obtained in the market at commercially
7
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
reasonable rates. On November 29, 2002, the Company's insurance policy covering
one of its satellites will expire, and if the insurance covenant has not been
amended by that date, a default will occur with respect to the fixed rate notes.
In addition to soliciting the consents, the Company is seeking waivers from the
holders of its Senior Secured Floating Rate Notes due 2004 and the lenders under
its revolving credit facility of the provisions contained in the agreements
governing these debt obligations that obligate the Company not to amend the
terms of the fixed rate notes. If the Company does not receive waivers from the
requisite holders of the senior secured notes and the requisite lenders under
its revolving credit facility, the Company will not be able to affect the
proposed amendments. A copy of the consent solicitation statement with respect
to the fixed rate notes accompanies this report.
On January 1, 2002, the Mexican government amended the tax law to broaden
the scope of telecommunications services subject to a 10% tax. The Company
believes that its services do not fall within the scope of this tax. However,
there is a risk that the tax authorities will not agree with the Company's
interpretation. Final resolution of this matter will be determined by the
Mexican courts.
8
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Except for the historical information contained herein, the matters
discussed in the following Operating and Financial Review and Prospects of
Satelites Mexicanos, S.A. de C.V. ("Satmex" or the "Company") are not historical
facts, but are "forward-looking statements," as that term is defined in the
Private Securities Litigation Reform Act of 1995. In addition, the Company or
its representatives have made and may continue to make forward-looking
statements, orally or in writing, in other contexts, such as in reports filed
with the SEC, press releases or statements made with the approval of an
authorized executive officer of the Company. These forward-looking statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "plans," "may," "will," "would," "could," "should," "anticipates,"
"estimates," "projects," "intend," or "outlook" or the negative of these words
or other variations of these words or other comparable words, or by discussion
of strategy that involve risks and uncertainties. These forward-looking
statements are only predictions, and actual events or results may differ
materially as a result of a wide variety of factors and conditions, many of
which are beyond the Company's control. Some of these factors and conditions
include: partial or total failure of the Company's in-orbit satellites; the
Company's reliance on certain customers; the Company's operations are located in
Mexico; competition in the Company's industry; and the Company owes significant
amounts of money. For a detailed discussion of these factors and conditions,
please refer to the periodic reports filed by the Company with the SEC. In
addition, the Company operates in an industry sector where securities values may
be volatile and may be influenced by economic and other factors beyond the
Company's control. The Company undertakes no obligation to update any forward-
looking statements.
The following should be read in conjunction with the unaudited condensed
financial statements of the Company for the three and nine months ended
September 30, 2002 and 2001 and the audited financial statements and notes
thereto of Satmex, included in Satmex's Annual Report on Form 20-F for the year
ended December 31, 2001.
OVERVIEW
Satmex owns and operates two geosynchronous communications satellites,
Solidaridad 2 and Satmex 5. Satmex also owns another satellite, Morelos 2, which
is in an inclined orbit. Satmex operates in one business segment and is the
leading provider of fixed satellite services ("FSS") to broadcasting and
telecommunications customers in Mexico. Satmex has landing rights to provide
broadcasting and telecommunications transmission capacity in Mexico, the United
States, Canada and 36 nations and territories in the Latin American region.
In August 2000, the Company's Solidaridad 1 satellite ceased operating and
was considered irretrievably lost. The loss was caused by the failure of the
back-up control processor on board the satellite. Solidaridad 1 was insured for
$250 million. At the date of the loss, Solidaridad 1 had a net book value of
approximately $109.6 million. After deducting prepaid insurance of $1.6 million,
the unpaid insurance premiums of $12.5 million and on-going monitoring costs and
the excess of the estimated cost over revenue for the currently committed
transponder capacity to be provided to customers of $23.2 million, the net gain
on the in-orbit failure of Solidaridad 1 was approximately $103.1 million. In
December 2001, Satmex reduced the liability for the cost over revenue for the
committed transponder capacity to be provided to customers by $7.3 million. In
September 2002, the Company received $3.3 million from the satellite
manufacturer under the Solidaridad 1 performance guarantee. These transactions
were recorded as additional gain on the in-orbit failure of Solidaridad 1 in the
applicable periods. In January 2001, Satmex received insurance proceeds of
approximately $235.3 million, net of the unpaid insurance premiums and related
value added tax. Satmex is using the net insurance proceeds towards the
construction, launch and insurance of a replacement satellite, Satmex 6, as well
as for debt service. Satmex has contracted with Space Systems/Loral, Inc., a
wholly owned subsidiary of Loral, to build Satmex 6, which is designed to
provide broader coverage and higher power levels than any other satellite
currently in the Satmex fleet. Certain manufacturing and testing procedures have
resulted in the launch of Satmex 6 being extended to the second quarter of 2003.
9
In order to provide expanded satellite services in the United States with
the Satmex 6 satellite, a new coordination agreement would need to be negotiated
between the governments of Mexico and Canada, as well as the affected satellite
operators. New coordination agreements are often negotiated to accommodate the
operation of new satellites. An existing coordination agreement between the
governments of Mexico and Canada, as well as the affected satellite operators,
provides for the operation of Mexican and Canadian satellites, including Satmex
6, in the 107.3 degreesW.L. to 118.7 degreesW.L. orbital arc. There can be no
assurance that negotiation of a new coordination agreement between the
governments of Mexico and Canada and the affected satellite operators will be
successful. The scheduled launch of Satmex 6 will proceed whether or not a new
coordination agreement has been negotiated. However, the inability to conclude a
satisfactory agreement may negatively impact our ability to provide expanded
services in the United States and could adversely affect our business.
On August 10, 2001, the Mexican government granted licenses to provide
satellite service in Mexico to PanAmSat, SES Global, Televisa and Enlaces
Integra. PanAmSat registered 12 satellites and SES Global registered seven
satellites to provide satellite service in Mexico.
RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
SEPTEMBER 30, 2001
Revenue
Revenue for the third quarter of 2002 was $19.4 million, as compared to
$30.9 million for the third quarter of 2001. The decrease is due to lower
utilization of Solidaridad 2 and Satmex 5 caused by contract cancellations and
non-renewals. As previously disclosed, the transponder lease for the Company's
largest customer, Innova, ended on March 31, 2002. Innova represented
approximately 20% of service revenue for the quarter ended September 30, 2001.
The Company has, during 2001 and 2002, experienced significant
terminations, and has been unable to renew contracts with certain customers upon
expiration. The rate of termination slowed during the third quarter of 2002, and
the Company does not expect terminations and non-renewals to continue at the
rate experienced in the first two quarters of 2002. However, given the state of
the telecommunications industry, the Company believes that terminations and
non-renewals may continue to have a negative impact on its results of
operations. Additionally, approximately 25 customers account for approximately
80% of Satmex's current revenue base. Cancellation or non-renewal of service
contracts for these customers would have an adverse effect on the Company's
results of operations.
Operating expenses
Operating expenses decreased to $20.6 million in the third quarter of 2002,
from $23.3 million in the third quarter of 2001, as described below.
Satellite operations. Satellite operations costs, which consist primarily
of satellite insurance and the personnel costs related to the operation of the
satellites, were $3.7 million for the third quarter of 2002, as compared to $4.9
million in the third quarter of 2001. The decrease is primarily due to a lower
cost for replacement capacity on other satellites for customers previously on
Solidaridad 1.
Selling and administrative expenses. Selling and administrative expenses
in the third quarter of 2002 were $4.8 million as compared to $5.8 million in
the third quarter of 2001. The decrease is primarily due to expense and
personnel reductions.
License and management fees. Loral and Principia are responsible for
managing the Company. Loral and Principia receive a management fee, based on a
sliding scale, up to a maximum of 3.75% of the Company's quarterly gross
revenue, as defined. For the three months ended September 30, 2002, no
management fee was earned. For the three months ended September 30, 2001, the
management fee was $522,000, of which $183,000 was offset against accrued
expenses. Loral has licensed certain intellectual property to the Company for an
annual fee of 1.5% of the Company's gross revenue, as defined. For the three
months ended September 30, 2002 and 2001, the fee was $279,000 and $453,000,
respectively, of which
10
$9,000 and $27,000, respectively, was offset against accrued expenses. The
license fee decreased due to the Company's lower revenue.
Depreciation and amortization. Depreciation expense was $8.6 million in
each quarter. Amortization expense relating to the concessions was $3.2 million
in each quarter.
Interest income
Interest income for the third quarter of 2002 was $0.3 million as compared
to $1.9 million for 2001. The decrease is primarily due to lower levels of
restricted and segregated cash available for investment, as well as lower
interest rates.
Interest cost
Total interest cost, including $4.2 million of capitalized interest related
to the construction of Satmex 6, was $13.0 million in the third quarter of 2002
as compared to $14.3 million, including $1.1 million of capitalized interest
related to the construction of Satmex 6, for the third quarter of 2001. Total
interest cost decreased due to lower average outstanding debt during 2002 and
lower interest rates on the Company's variable rate debt.
Net foreign exchange gain
The Company recorded a net foreign exchange gain of $34,000 in the third
quarter of 2002 as compared to a foreign exchange gain of $124,000 in the third
quarter of 2001.
Deferred income tax benefit
Income tax is determined following interperiod allocation procedures under
the liability method. Under this method, deferred income taxes are recognized
for the estimated future tax effects attributable to temporary differences,
including tax losses and tax credit carryforwards, using enacted rates.
On January 1, 2002, the Mexican government enacted a new income tax law
that reduces the 35% statutory income tax rate by 1% per year beginning January
1, 2003 through January 1, 2005. The Company recorded a deferred income tax
benefit of $1.8 million in the first quarter of 2002 for the effect of this
change on its deferred tax assets and liabilities.
For the three months ended September 30, 2002, the Company recorded a
deferred income tax benefit of $2.3 million on a loss before income taxes of
$6.5 million and a benefit of $9.3 million on a loss of $3.5 million for 2001.
The change from 2001 to 2002 relates primarily to an additional valuation
allowance recorded against the Company's deferred tax assets and the Mexican
income tax effect of inflation and currency remeasurement in the current period.
Preferred stock dividend requirement
The preferred stock dividend requirement was $377,000 in each quarter.
RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER
30, 2001
Revenue
Revenue for the first nine months of 2002 was $62.4 million, as compared to
$97.6 million for the first nine months of 2001. The decrease is due to lower
utilization of Solidaridad 2 and Satmex 5 caused by contract cancellations and
non-renewals. As previously disclosed, the transponder lease with the Company's
largest customer, Innova, ended on March 31, 2002. Innova represented
approximately 2% and 19% of service revenue for the nine months ended September
30, 2002 and 2001, respectively.
The Company has, during 2001 and 2002, experienced significant
terminations, and has been unable to renew contracts with certain customers upon
expiration. The rate of termination slowed during the third quarter of 2002, and
the Company does not expect terminations and non-renewals to continue at the
rate experienced in the first two quarters of 2002. However, given the state of
the telecommunications industry, the
11
Company believes that terminations and non-renewals may continue to have a
negative impact on its results of operations. Additionally, approximately 25
customers account for approximately 80% of Satmex's current revenue base.
Cancellation or non-renewal of service contracts for these customers would have
an adverse effect on the Company's results of operations.
Operating expenses
Operating expenses decreased to $63.2 million in the first nine months of
2002, from $69.5 million in the first nine months of 2001, as described below.
Satellite operations. Satellite operations costs, which consist primarily
of satellite insurance and the personnel costs related to the operation of the
satellites, were $13.3 million for the first nine months of 2002, as compared to
$14.9 million in the first nine months of 2001. The decrease is primarily due to
a lower cost for replacement capacity on other satellites for customers
previously on Solidaridad 1.
Selling and administrative expenses. Selling and administrative expenses
in the first nine months of 2002 were $13.5 million as compared to $16.5 million
in the first nine months of 2001. The decrease is primarily due to expense and
personnel reductions.
License and management fees. Loral and Principia are responsible for
managing the Company. Loral and Principia receive a management fee, based on a
sliding scale, up to a maximum of 3.75% of the Company's quarterly gross
revenue, as defined. For the nine months ended September 30, 2002, no management
fee was earned. For the nine months ended September 30, 2001, the management fee
was $2.0 million, of which $588,000 was offset against accrued expenses. Loral
has licensed certain intellectual property to the Company for an annual fee of
1.5% of the Company's gross revenue, as defined. For the nine months ended
September 30, 2002 and 2001, the fee was $899,000 and $1.4 million,
respectively, of which $55,000 and $79,000, respectively, was offset against
accrued expenses.
Depreciation and amortization. Depreciation expense for the first nine
months of 2002 was $25.8 million as compared to $25.7 million during the first
nine months of 2001. Amortization expense relating to the concessions was $9.7
million in each period.
Interest income
Interest income for the first nine months of 2002 was $1.8 million as
compared to $7.8 million for the first nine months of 2001. The decrease is
primarily due to lower levels of restricted and segregated cash available for
investment, as well as lower interest rates.
Interest cost
Total interest cost, including $9.8 million of capitalized interest related
to the construction of Satmex 6, was $39.4 million in the first nine months of
2002 as compared to $45.5 million, including $1.7 million of capitalized
interest related to the construction of Satmex 6, in 2001. Total interest cost
decreased due to lower average outstanding debt in the first nine months of 2002
and lower interest rates on the Company's variable rate debt.
Net foreign exchange gain
The Company recorded a net foreign exchange gain of $40,000 in the first
nine months of 2002 as compared to a net foreign exchange gain of $100,000 in
the first nine months of 2001.
Deferred income tax benefit
On January 1, 2002, the Mexican government enacted a new income tax law
that reduces the 35% statutory income tax rate by 1% per year beginning January
1, 2003 through January 1, 2005. The Company recorded a deferred income tax
benefit of $1.8 million in 2002 for the effect of this change on its deferred
tax assets and liabilities.
12
For the nine months ended September 30, 2002, the Company recorded a
deferred income tax benefit of $11.5 million, excluding the deferred income tax
benefit of $1.8 million relating to the change in the statutory rate, on a loss
before income taxes of $25.2 million as compared to a benefit of $6.0 million on
a loss of $7.9 million for 2001. The change from 2001 to 2002 relates primarily
to an additional valuation allowance recorded against the Company's deferred tax
assets and the Mexican income tax effect of inflation and currency remeasurement
in the current period.
Preferred stock dividend requirement
The preferred stock dividend requirement was $1.1 million in each period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had total debt of $524.6 million. At
December 31, 2001, a technical default existed with respect to the Company's
senior secured notes due to the failure to make a principal prepayment from
excess cash flow for the year ended December 31, 2000, as defined under the
senior secured note indenture. On April 23, 2002, the Company made the required
principal prepayment of $11.9 million, plus accrued interest of $228,000, as
well as a principal prepayment for 2001 excess cash flow of $749,000.
Concurrently with these payments, the Company retroactively reduced the amount
available for borrowing under its revolving credit facility by $34.2 million.
The Company believes that the payment on April 23, 2002 cured the technical
default of the senior secured notes. As of December 31, 2001, the Company
classified $12.6 million, representing the 2001 and 2000 principal payments, as
current maturities of long-term debt. At September 30, 2002, the Company was in
compliance with all covenants governing its debt agreements.
The Company is currently soliciting consents from the holders of its
10 1/8% Senior Notes due 2004, referred to as the "fixed rate notes," to the
proposed amendments to the insurance covenant contained in those notes. The
indenture governing the fixed rate notes currently requires the Company to
maintain in-orbit insurance coverage on certain terms that presently cannot be
obtained in the market at commercially reasonable rates. On November 29, 2002,
the Company's insurance policy covering one of its satellites will expire, and
if the insurance covenant has not been amended by that date, a default will
occur with respect to the fixed rate notes. In addition to soliciting the
consents, the Company is seeking waivers from the holders of its Senior Secured
Floating Rate Notes due 2004 and the lenders under its revolving credit facility
of the provisions contained in the agreements governing these debt obligations
that obligate the Company not to amend the terms of the fixed rate notes. If the
Company does not receive waivers from the requisite holders of the senior
secured notes and the requisite lenders under its revolving credit facility, the
Company will not be able to affect the proposed amendments. A copy of the
consent solicitation statement with respect to the fixed rate notes accompanies
this report.
The Company's primary source of liquidity for working capital purposes is
cash flow from operations. At September 30, the Company had cash and cash
equivalents of $4.8 million and following the retroactive reduction, $15.8
million available under its revolving credit facility. At September 30, 2002,
Satmex had $24.5 million of restricted and segregated cash of which $16.9
million is available for debt service on the senior secured notes and revolving
credit facility and $7.6 million is available for the construction and launch of
Satmex 6. The Company believes that the funds available in the restricted and
segregated cash account allocated for the construction and launch and cash flow
from operations will not be sufficient to fund the in-orbit delivery of the
Satmex 6 satellite unless the Company obtains other financing or negotiates
satisfactory payment terms for delivery of Satmex 6 in-orbit. The Company is
currently pursuing loans supported by export credit agencies, the terms of which
will likely require the Company to extend the maturities of the fixed rate
notes. The Company has hired a financial advisor to assist it. As part of the
Company's overall financing goals, the senior secured notes would be repaid
prior to maturity. If the Company is unable to obtain financing arrangements on
satisfactory terms, there can be no assurance that the Company will be able to
complete and launch Satmex 6 and the Company's financial condition and results
of operations may be materially adversely affected. In addition, if the senior
secured notes are not repaid, or the financial covenants in those notes are not
13
amended, the Company can provide no assurance that it will meet the financial
covenants contained in the senior secured notes beginning in the first quarter
of 2003.
Cash used and provided
Net cash provided by operating activities for the nine months ended
September 30, 2002 of $4.6 million, consisted primarily of $21.0 million of
funds generated by earnings before non-cash items, interest income on the
restricted and segregated cash and the use of restricted and segregated cash for
interest payments, a net decrease in amounts due from related parties, net, of
$1.6 million and a decrease in prepaid insurance of $5.8 million, offset by a
decrease in accounts payable and accrued expenses of $11.4 million, a decrease
in interest payable of $8.5 million, an increase in accounts receivable of $3.6
million and an increase in deferred financing costs and other assets of $0.3
million. During the first nine months of 2002, Satmex used $25.3 million of the
restricted and segregated cash for debt service.
Cash used in investing activities in the first nine months of 2002 was $8.0
million. Capital expenditures for the first nine months of 2002 were $115.1
million, which included $112.2 million for the construction of Satmex 6. $107.0
million of the expenditures for Satmex 6 in the first nine months of 2002, was
funded from restricted and segregated cash. Substantially all capital
expenditures are denominated in U.S. dollars.
Cash used in financing activities for the first nine months of 2002 was
$18.0 million. A repayment of $31.4 million of the Company's senior secured
notes was partially funded with $13.4 million from restricted and segregated
cash.
OTHER MATTERS
Officers Certification
A certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
accompanies this report.
Insurance Costs
The Company, like others in the satellite industry, is faced with
significantly higher premiums for launch and in-orbit insurance and
significantly shorter coverage periods than those that have been available in
the past, which is due in part to the events of September 11, 2001. This
development in the insurance industry will increase the cost of doing business
for the Company. The Company intends to pass on such increased cost to its
customers. There can be no assurance, however, that it will be able to do so.
Insurance market conditions have historically been cyclical in nature. While the
Company anticipates that these conditions will improve in the future, there can
be no assurance that they will.
RELATED PARTY TRANSACTIONS
See Footnote 5 -- Balances and Transactions With Related Parties in the
notes to unaudited condensed financial statements for a discussion of related
party transactions.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standard Board ("FASB") issued
Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that all
business combinations initiated after June 30, 2001, be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives not be amortized, but will rather be
tested at least annually for impairment. The adoption of SFAS 142 on January 1,
2002 did not have an effect on the Company's financial position or results of
operations.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to legal
obligations
14
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and the normal operations of a long-lived
asset, except for certain obligations of lessees. The Company is required to
adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact
that the adoption of SFAS 143 will have on the Company's financial position or
results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment of disposal of long-lived
assets. It supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and
provisions of APB 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of a segment
or a business. The adoption of SFAS 144 on January 1, 2002 did not have an
effect on the Company's financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). SFAS 145 generally requires that any gains or losses
on extinguishment of debt in current or prior periods be classified as other
income (expense), beginning in fiscal 2003, with early adoption encouraged. The
Company is currently evaluating the impact of adopting the provisions of SFAS
No. 145 on its financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"), SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
replaces EITF Issue No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
15
EXHIBITS
<Table>
<Caption>
EXHIBIT NO.
- -----------
99.1 Certification signed by Lauro Gonzalez Moreno
99.2 Certification signed by Cynthia Pelini
99.3 Solicitation of Consents by Satelites Mexicanos, S.A. de
C.V. to Proposed Amendments to the Indenture for its 10 1/8%
Senior Notes due November 1, 2004
</Table>
SIGNATURES
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.
SATELITES MEXICANOS, S.A. de C.V.
By: Cynthia Pelini
-------------------------------------
Cynthia Pelini
Chief Financial Officer
Date: November 15, 2002