1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 AUGUST 1999
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
(525) 201-0800
The registrant files its annual report on Form 20-F.
The registrant is not furnishing the information contained in this form to
the Commission pursuant to Rule 12g3-2(b) of the Securities Exchange Act of
1934.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
\
2
SATELITES MEXICANOS, S.A. de C.V.
FINANCIAL INFORMATION
INDEX
PAGE
----
Financial Statements (Unaudited):
Condensed Balance Sheets as of June 30, 1999 and December
31, 1998............................................... 2
Condensed Statements of Operations for the three and six
months ended June 30, 1999 and 1998.................... 3
Condensed Statements of Cash Flows for the six months
ended June 30, 1999 and 1998........................... 4
Notes to Unaudited Condensed Financial Statements......... 5
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 9
1
3
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 )
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED) (NOTE)
Current assets:
Cash and cash equivalents................................. $ 12,255 $ 11,883
Interest reserve account.................................. 9,765
Accounts receivable....................................... 8,265 7,062
Due from related parties.................................. 20,394 1,954
Prepaid insurance......................................... 19,693 26,673
---------- ----------
Total current assets.............................. 60,607 57,337
Satellites and equipment, net............................... 526,961 557,456
Concessions, net............................................ 495,784 502,237
Deferred financing costs, net............................... 11,084 12,911
Other assets................................................ 183 303
Deferred income tax assets.................................. 7,954 7,720
---------- ----------
Total assets...................................... $1,102,573 $1,137,964
========== ==========
Current liabilities:
Current portion of debt................................... $ 1,000 $ 36,000
Accounts payable and accrued expenses..................... 20,116 38,714
Interest payable.......................................... 13,430 13,770
Deferred income tax liabilities........................... 1,799 3,810
Due to related parties.................................... 1,596 822
---------- ----------
Total current liabilities......................... 37,941 93,116
Long-term debt.............................................. 607,500 608,000
Deferred revenue............................................ 90,394 85,535
---------- ----------
Total liabilities................................. 735,835 786,651
---------- ----------
Commitments and contingencies (Note 5)
Stockholders' equity:
Capital stock............................................. 411,289 379,403
Capital stock issuable.................................... 377
Accumulated deficit....................................... (44,928) (28,090)
---------- ----------
Total stockholders' equity........................ 366,738 351,313
---------- ----------
Total liabilities and stockholders' equity........ $1,102,573 $1,137,964
========== ==========
- ---------------
Note: The December 31, 1998 balance sheet has been derived from the audited
consolidated financial statements at that date.
See notes to unaudited condensed financial statements.
2
4
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)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
Revenue (Note 5)................................. $ 42,034 $26,352 $ 70,011 $ 52,260
-------- ------- -------- --------
Operating expenses:
Cost of transponders under sales-type lease
(Note 5).................................... 9,543 9,543
Satellite operations........................... 4,432 3,702 8,639 7,298
Selling and administrative expenses............ 5,388 1,989 7,441 3,618
License and management fees.................... 337 (486) 731 (70)
Depreciation and amortization.................. 16,229 13,245 30,401 26,782
-------- ------- -------- --------
35,929 18,450 56,755 37,628
-------- ------- -------- --------
Operating income................................. 6,105 7,902 13,256 14,632
Interest expense and amortization of deferred
financing costs................................ (16,110) (12,762) (31,978) (28,620)
Net foreign exchange gain (loss)................. (29) 238 16 (1,379)
-------- ------- -------- --------
Loss before income taxes and extraordinary
item........................................... (10,034) (4,622) (18,706) (15,367)
Deferred income tax credit....................... 2,070 439 2,245 1,460
Extraordinary loss from extinguishment of debt,
net of income tax benefit of $2,840............ (5,513)
-------- ------- -------- --------
Net loss......................................... (7,964) (4,183) (16,461) (19,420)
Preferred stock dividend requirement............. (377) (377)
-------- ------- -------- --------
Net loss applicable to common stockholders....... $ (8,341) $(4,183) $(16,838) $(19,420)
======== ======= ======== ========
See notes to unaudited condensed financial statements.
3
5
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)
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
-------- ---------
OPERATING ACTIVITIES
Net loss.................................................... $(16,461) $ (19,420)
Items not requiring cash:
Depreciation and amortization............................. 30,401 26,782
Amortization of deferred financing costs.................. 2,178 2,738
Deferred income taxes..................................... (2,245) (1,460)
Extraordinary item........................................ 5,513
Changes in assets and liabilities:
Accounts receivable....................................... (1,203) (3,183)
Prepaid insurance......................................... 6,980 3,871
Cost of transponders under sales-type lease............... 9,543
Due from/to related parties............................... (17,666) (286)
Accounts payable and accrued expenses..................... (18,938) 14,371
Deferred revenues......................................... 4,859 (1,100)
Deferred financing costs and other assets................. (231) (8,800)
-------- ---------
Cash flow provided by (used in) operating activities........ (2,783) 19,026
-------- ---------
INVESTING ACTIVITIES
Acquisition of equipment and advances
for construction of satellite............................. (2,996) (101,751)
-------- ---------
Cash flow used in investing activities...................... (2,996) (101,751)
-------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of senior secured notes.............. 325,000
Proceeds from issuance of fixed rate notes.................. 320,000
Repayment of senior secured notes........................... (35,500) (500)
Decrease (increase) in interest reserve account............. 9,765 (701)
Repayment of bank loans..................................... (570,000)
Capital contributions....................................... 31,886 6
-------- ---------
Cash flow provided by financing activities.................. 6,151 73,805
-------- ---------
Increase (decrease) in cash and cash equivalents............ 372 (8,920)
Cash and cash equivalents -- beginning of period............ 11,883 24,144
-------- ---------
Cash and cash equivalents -- end of period.................. $ 12,255 $ 15,224
======== =========
Supplemental disclosure:
Interest paid............................................. $ 31,136 $ 18,598
======== =========
Income taxes paid......................................... $ -- $ --
======== =========
See notes to unaudited condensed financial statements.
4
6
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. ACTIVITY AND FORMATION OF THE COMPANY
Satelites Mexicanos, S.A. de C.V. ("Satmex") owns and operates three
geosynchronous communications satellites, Solidaridad 1, Solidaridad 2 and
Satmex 5. Satmex also owns another satellite, Morelos 2, which is in an inclined
orbit. Satmex operates in one segment and is the leading provider of fixed
satellite services 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 20 nations and
territories in the Latin American region.
In June 1995, the Constitution of Mexico was amended to establish the legal
framework for the privatization of certain fixed satellite services assets and
operations of Telecomunicaciones de Mexico, an agency of the government of
Mexico (the "Government"). On June 26, 1997 the Government formed Satmex for the
purpose of completing the privatization process.
On November 17, 1997, Loral Space & Communications Ltd. ("Loral") and
Principia, S.A. de C.V., ("Principia") formerly Telefonica Autrey, S.A. de C.V.
acquired 75% of the issued and outstanding stock of Satmex for $647 million. The
remaining 25% of the capital stock of Satmex has been retained by the
Government.
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 six months ended June
30, 1999, 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 the Company as of
December 31, 1998.
3. ACCOUNTS RECEIVABLE
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
Customers................................................... $7,906 $5,799
Value added tax recoverable................................. 1,291
Other....................................................... 475 594
Allowance for uncollectible accounts........................ (116) (622)
------ ------
$8,265 $7,062
====== ======
5
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)
4. SATELLITES AND EQUIPMENT
On December 5, 1998, Satmex 5 was successfully launched into orbit and was
placed into service on January 22, 1999.
Satmex 5 has a design life of 15 years. While Satmex 5 has sufficient fuel
on-board for approximately 21 years, the Company is depreciating Satmex 5 over
its 15 year design life. Capitalized interest related to the construction of
Satmex 5 was $1.6 million and $20.5 million for the period January 1, 1999 to
January 22, 1999 and the year ended December 31, 1998, respectively.
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
Satellites.................................................. $566,218 $340,112
Equipment................................................... 23,354 23,077
Furniture and fixtures...................................... 2,799 2,643
Leasehold improvements...................................... 1,991 1,784
Construction in process..................................... 562
Advances for construction and launch of Satmex 5............ 234,142
-------- --------
594,924 601,758
Accumulated depreciation.................................... (67,963) (44,302)
-------- --------
$526,961 $557,456
======== ========
5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The Company had the following amounts due from and payable to related
parties:
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
AMOUNTS RECEIVABLE:
Loral..................................................... $ 17,000
Holdings.................................................. 94 $ 61
Servicios................................................. 125 101
Principia................................................. 444 422
Mexican government agencies............................... 2,731 1,370
-------- --------
$ 20,394 $ 1,954
======== ========
AMOUNTS PAYABLE:
Loral..................................................... $ 1,160 $ 726
Servicios................................................. 327
Principia................................................. 109 96
-------- --------
$ 1,596 $ 822
======== ========
Revenue
On June 28, 1999, Loral Skynet entered into an end-of-life lease agreement
with Satmex for the use of two Ku-band transponders on Satmex 5. The agreement
provided for an up-front payment of $8.5 million for each transponder. The cost
of each transponder was approximately $4.8 million. Satmex provides no insurance
or warranty on these transponders. In the event of failure of the transponders
or the satellite, no refund is due
6
8
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
to Loral Skynet. At June 30, 1999, Satmex has accounted for this transaction as
a sales-type lease and, accordingly, recorded revenue of $17.0 million and an
operating expense of $9.5 million for the cost of the transponders.
Quarterly, Loral Skynet will pay Satmex $5,000 per transponder for
tracking, telemetry and command services for the life of this agreement. Loral
Skynet has options, expiring March 31, 2000, to lease up to five additional
Ku-band transponders on Satmex 5 under the same terms and conditions, subject to
availability and Satmex's consent. Loral and Principia have agreed to exclude
this transaction from the calculation of the management fee and the license fee
described below.
Revenue from related parties was $21.3 million and $6.4 million for the six
months ended June 30, 1999 and 1998, respectively.
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. For the six months ended June
30, 1999 and 1998 the management fee was $6,000 and $120,000, respectively.
License fee
Loral has licensed certain intellectual property to the Company for an
annual fee of 1.5% of the Company's gross revenue. In 1998 Loral and Satmex
agreed to delay the commencement of such fees until January 1, 1999. All fees
accrued through June 30, 1998 were reversed. Fees for the six months ended June
30, 1999 were $725,000.
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
Government. The Company pays rent to the Government for the use of the building.
The rent expense under this agreement was $122,000 and $129,000 for the six
months ended June 30, 1999 and 1998, 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. DEBT
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
Senior secured notes (8.75% at June 30, 1999 and 9.03% at
December 31, 1998)........................................ $288,500 $324,000
Fixed rate notes............................................ 320,000 320,000
-------- --------
608,500 644,000
Less, current maturities.................................... 1,000 36,000
-------- --------
$607,500 $608,000
======== ========
On March 31, 1999, the Company prepaid $35 million principal amount of the
senior secured notes.
7
9
SATELITES MEXICANOS, S.A. DE C.V.
(SUBSIDIARY OF SERVICIOS CORPORATIVOS SATELITALES, S.A. DE C.V.)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY
On March 30, 1999, the Company issued 606,730 shares of preferred stock to
Loral and Principia for a total purchase price of approximately $31.9 million.
The preferred stock has limited voting rights and pays a dividend in common
stock of the Company. The preferred stock can be exchanged at the Company's
option into common stock of the Company, at an exchange ratio of 1 share of
preferred stock for 2.0008 shares of common stock if the exchange occurs before
February 2, 2005, and at an exchange ratio of 1 share of preferred stock for
4.0016 shares of common stock on and after February 2, 2005.
8
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, from time to time, the
Company or its representatives have made or may make forward-looking statements,
orally or in writing. Such forward-looking statements may be included in, but
are not limited to, various filings made by the Company with the Securities and
Exchange Commission, press releases or oral statements made by or with the
approval of an authorized executive officer of the Company. Actual results could
differ materially from those projected or suggested in any forward-looking
statements as a result of a wide variety of factors and conditions. See the
section of Satmex's Annual Report on Form 20-F entitled "Certain Factors That
May Affect Future Results."
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Company, are forward-looking
statements that involve risks and uncertainties, many of which may be beyond the
Company's control. The actual results that the Company achieves may differ
materially from any forward-looking projections due to such risks and
uncertainties.
The following should be read in conjunction with the financial statements
of the Company for the three and six months ended June 30, 1999 and 1998.
OVERVIEW
Satelites Mexicanos, S.A. de C.V. ("Satmex") owns and operates three
geosynchronous communications satellites, Solidaridad 1, Solidaridad 2 and
Satmex 5. Satmex also owns another satellite, Morelos 2, which is in an inclined
orbit. Satmex operates in one segment and is the leading provider of fixed
satellite services 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 20 nations and
territories in the Latin American region.
In June 1995, the Constitution of Mexico was amended to establish the legal
framework for the privatization of certain fixed satellite services assets and
operations of Telecomunicaciones de Mexico, an agency of the government of
Mexico (the "Government"). On June 26, 1997 the Government formed Satmex for the
purpose of completing the privatization process.
On November 17, 1997, Loral Space & Communications Ltd. together with its
subsidiaries ("Loral") and Principia, S.A. de C.V., ("Principia") formerly
Telefonica Autrey, S.A. de C.V., acquired 75% of the issued and outstanding
stock of Satmex for $647 million. The remaining 25% of the capital stock of
Satmex has been retained by the Government.
On March 30, 1999, the Company issued 606,730 shares of preferred stock to
Loral and Principia for a total purchase price of approximately $31.9 million.
The preferred stock has limited voting rights and pays a dividend in common
stock of the Company. The preferred stock can be exchanged at the Company's
option into common stock of the Company, at an exchange ratio of 1 share of
preferred stock for 2.0008 shares of common stock if the exchange occurs before
February 2, 2005, and at an exchange ratio of 1 share of preferred stock for
4.0016 shares of common stock on and after February 2, 2005.
On June 28, 1999, Loral Skynet entered into an end-of-life lease agreement
with Satmex for the use of two Ku-band transponders on Satmex 5. The agreement
provided for an up-front payment of $8.5 million for each transponder. The cost
of each transponder was approximately $4.8 million. At June 30, 1999, Satmex has
accounted for this transaction as a sales-type lease and, accordingly, recorded
revenue of $17.0 million and an operating expense of $9.5 million for the cost
of the transponders. Quarterly, Loral Skynet will pay Satmex $5,000 per
transponder for tracking, telemetry and command services for the life of this
agreement. Loral and Principia have agreed to exclude this transaction from the
calculation of the management fee and the license fee.
9
11
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO JUNE
30, 1998
Revenue
Revenue during the second quarter of 1999 was $42.0 million, as compared to
$26.4 million during the second quarter of 1998. Revenue for 1999 includes $17.0
million related to the lease with Loral Skynet which was accounted for as a
sales-type lease. Excluding the revenue recorded in connection with this lease,
revenue in 1999 declined $1.3 million as compared to the quarter ended June 30,
1998. The decline is primarily due to lower utilization on Solidaridad 1 due to
a service interruption in April 1999, which caused some customers on Solidaridad
1 to move to Satmex 5.
Operating expenses
Operating expenses, excluding the cost of the transponders related to the
lease with Loral Skynet, increased to $26.4 million for the quarter ended June
30, 1999, from $18.5 million for the quarter ended June 30, 1998, as described
below.
Satellite operations. Satellite operations, which consists primarily of
satellite insurance and the personnel costs related to the operation of the
satellites, was $4.4 million for the quarter ended June 30, 1999, as compared to
$3.7 million for the quarter ended June 30, 1998. The increase is primarily due
to the higher in-orbit insurance expense for Satmex 5 which commenced service in
January 1999.
Selling and administrative expenses. Selling and administrative expenses
for the quarter ended June 30, 1999 were $5.4 million, as compared to $2.0
million for the quarter ended June 30, 1998. The increase is primarily due to
salaries and benefits associated with the planned hiring of additional
personnel.
Depreciation and amortization. Depreciation expense during the first
quarter of 1999 includes depreciation for Solidaridad I, Solidaridad 2 and
Satmex 5. Morelos 2 was fully depreciated at June 1998. Satmex 5 is being
depreciated over its 15 year design life. Depreciation expense for the quarter
was $12.9 million as compared to $9.3 million during 1998. Amortization expense
relating to the Concessions amounted to $3.3 million during the quarter as
compared to $3.9 million for 1998.
Interest expense
Interest expense was $16.1 million in 1999 as compared to $12.8 million
(net of $3.6 million of capitalized interest related to the construction and
launch of Satmex 5) during the second quarter of 1998.
Net foreign exchange gain (loss)
The Company recorded a net foreign exchange loss of $29,000 during the
current quarter and a net foreign exchange gain of $238,000 in 1998. During each
quarter the peso remained stable against the dollar. Deferred income tax
credit
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 effect of temporary differences between the
carrying amount of assets and liabilities for financial and income tax
reporting, as well as tax loss and tax credit carryforwards. The Company
recorded a deferred income tax benefit of $2.1 million in 1999 as compared to a
benefit of $439,000 for 1998.
Preferred stock dividend requirement
The preferred stock dividend requirement in 1999, of $377,000, relates to
the value of the stock dividend issuable on the 606,730 shares of preferred
stock issued on March 30, 1999.
10
12
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO JUNE
30, 1998
Revenue
Revenue for the six months ended June 30, 1999 was $70.0 million, as
compared to $52.3 million during 1998. Revenue for 1999 includes $17.0 million
related to the lease with Loral Skynet, which was accounted for as a sales-type
lease. Excluding the revenue recorded in connection with this lease, revenue for
the first six months of 1999 was $53.0 million as compared to $52.3 million in
1998. Revenue for 1999 has been effected by cancellations and non-renewals from
customers who switched their telecommunications networks to fiber optic service
providers and by the lower utilization on Solidaridad 1 due to a service
interruption in April 1999, which caused some customers on Solidaridad 1 to move
to Satmex 5.
Operating expenses
Operating expenses, excluding the cost of the transponders related to the
lease with Loral Skynet, increased to $47.2 million for 1999, from $37.6 million
for 1998, as described below.
Satellite operations. Satellite operations, which consists primarily of
satellite insurance and the personnel costs related to the operation of the
satellites, was $8.6 million for 1999, as compared to $7.3 million for 1998. The
increase is primarily due to the higher in-orbit insurance expense for Satmex 5.
Selling and administrative expenses. Selling and administrative expenses
for 1999 were $7.4 million, as compared to $3.6 million for 1998. The increase
is primarily due to salaries and benefits associated with the planned hiring of
additional personnel, incentive compensation expense and increased professional
fees. The increase also reflects planned spending increases for advertising and
promotional expenses.
Depreciation and amortization. Depreciation expense for 1999 was $23.9
million as compared to $19.4 million for 1998. Amortization expense relating to
the Concessions amounted to $6.5 million during the first six months of 1999 as
compared to $7.4 million during the first six months of 1998.
Interest expense
Interest expense was $32.0 million in 1999 as compared to $28.6 million
(net of $9.4 million of capitalized interest related to the construction and
launch of Satmex 5) for 1998.
Net foreign exchange gain (loss)
The Company recorded a net foreign exchange gain of $16,000 during the
first six months of 1999 and a net foreign exchange loss of $1.4 million in
1998. During the first six months of 1999, the peso remained stable against the
dollar. However, in the first six months of 1998, the peso declined 7.6% against
the dollar.
Extraordinary item
As a result of the refinancing of the Company's debt in the first quarter
of 1998, the Company recorded an extraordinary charge of $8.3 million less an
applicable income tax benefit of $2.8 million. The extraordinary charge
consisted of the write-off of deferred financing costs.
Deferred income tax credit
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 effect of temporary difference between the carrying
amount of assets and liabilities for financial and income tax reporting, as well
as tax loss and tax credit carryforwards. The Company recorded a deferred income
tax benefit of $2.2 million in 1999 as compared to a benefit of $1.5 million in
1998.
11
13
Preferred stock dividend requirement
The preferred stock dividend requirement in 1999, of $377,000, relates to
the value of the stock dividend issuable on the 606,730 shares of preferred
stock issued on March 30, 1999.
CAPITAL EXPENDITURES
Substantially all capital expenditures are denominated in U.S. dollars.
Capital expenditures, including capitalized interest, were $3.0 million for the
six months ended June 30, 1999, as compared to $101.8 million for the six months
ended June 30, 1998. Expenditures in 1998 related primarily to the construction
and launch of Satmex 5.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had total debt of $608.5 million. At June 30,
1999, the Company was in compliance with all covenants governing its debt
agreements.
The Company received $31.9 million in shareholder contributions during the
first quarter of 1999, which coupled with the Company's internally generated
cash flow, were used to pay down $35 million of the Company's senior secured
floating rate notes on March 31, 1999.
The Company's primary source of liquidity for working capital purposes is
cash flow from operations. At June 30, 1999, the company had cash and cash
equivalents of $12.3 million. The Company believes that cash flow from
operations, including the exercise of options under the lease agreement with
Loral Skynet, will be adequate to service the Company's interest and debt
requirements and ensure compliance with the covenants of its debt agreements.
OTHER MATTERS
Solidaridad 1 Service Interruption. On April 28, 1999, Solidaridad I
experienced a loss of its primary satellite control processor. Service was
restored after 14 hours, using the back up satellite control processor. Satmex
and the satellite manufacturer, Hughes Space and Communications, Inc., are
investigating the cause of the service interruption. Failure of the back up
satellite control processor would result in the loss of Solidaridad 1.
Solidaridad 1 is fully insured for its replacement cost in the event of the
failure of the satellite.
Year 2000 Issue. The Company's Year 2000 Program is proceeding on
schedule. The Year 2000 issue is the result of computer programs which were
written using two digits rather than four to signify a year (i.e., the year 1999
is denoted as "99" and not "1999"). Computer programs written using only two
digits may recognize the year 2000 as the year 1900. This could result in a
system failure or miscalculations causing disruption of operations.
The Company has implemented a Year 2000 program (the "Year 2000 Program")
for its internal products, system and equipment, as well as for key vendor and
customer-supplied products, systems and equipment. As part of the Year 2000
Program, the Company is assessing the Year 2000 capabilities of, among other
things, its satellites, ground equipment, and facility management systems. The
Year 2000 Program consists of the following phases: inventory of Year 2000
items, assessment (including prioritization), remediation (including
modification, upgrading and replacement), testing and auditing. This five-step
program is divided into six major sections covering both information and
non-information technology systems: 1) business systems, 2) technical systems,
3) products and services, 4) imbedded hardware/firmware, 5) vendor supplied
products and 6) customer provided products. As of June 30, 1999, the Company had
completed approximately 99% of the inventory phase and approximately 97% of the
assessment phase. The Company expects to complete the first four phases, through
the testing phase, of the Year 2000 Program during the third quarter of 1999,
which is prior to any anticipated material impact on the operations of the
Company. The fifth phase, the audit phase, commenced in January 1999 and is
expected to continue through the third quarter of 1999 to accommodate re-audits
if deemed necessary.
12
14
Both internal and external resources are being utilized to execute the
Company's plan. The program to address Year 2000 has been underway since
December 1997. The incremental costs incurred through June 30, 1999 for this
effort by the Company were approximately $49,000. Based on the efforts of the
Company to date, the Company anticipates additional incremental expenses of
approximately $158,000 will be incurred to substantially complete the effort.
As an added safeguard against the possibility that a Year 2000 related
problem will adversely affect the Company's ability to continue operations,
contingency plans are being developed under the assumption that worst case
scenarios are encountered in critical areas. Emphasis is being placed upon the
action to be taken if there is discontinuance of services and/or lack of
delivery of compliant products from third party suppliers, including utilities
which provide power, water, fuel and telecommunications. Baseline contingency
plans are expected to be completed prior to the end of the third quarter of
1999. The Company believes that adequate time will be available to ensure
alternatives can be developed, assessed and implemented prior to a Year 2000
issue having a material negative impact on the operations of the Company.
However, there can be no assurances that such plans, if required, will be
completed on a timely basis.
The cost of the program and the dates on which the Company believes it will
substantially complete Year 2000 modifications are based on management's best
estimates. Such estimates were derived using software surveys and programs to
evaluate calendar date exposures and numerous assumptions of future events,
including the continued availability of certain resources, third-party Year 2000
readiness and other factors. Because none of these estimates can be guaranteed,
actual results could differ materially and adversely from those anticipated.
Specific factors that might cause an adjustment of costs are: number of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, the ability to validate supplier certification and similar
uncertainties.
The Company's failure to remediate a material Year 2000 problem could
result in an interruption or failure of certain basic business operations. These
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. The Company is assessing the Year
2000 readiness of its key third-party suppliers. Information requests have been
distributed to such suppliers and replies are being evaluated. If the risk is
deemed material, on-site visits to suppliers will be conducted to verify the
adequacy of the information received. However, due to the general uncertainty of
the Year 2000 problem, including uncertainty with regard to third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have an adverse material impact on
the Company's results of operations, liquidity or financial condition. There can
be no assurance given that the Company's Year 2000 Program will be successful in
avoiding any interruption or failure of certain basic business operations, which
may have a material adverse effect on the Company's results of operations or
financial position.
Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement No. 133 Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The Company
has not yet determined the impact that adoption of SFAS 133 will have on its
earnings or financial position. The Company is required to adopt SFAS 133 on
January 1, 2001.
13
15
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: August 6, 1999