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 NOVEMBER 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 September 30, 1999 and
December 31, 1998...................................... 2
Condensed Statements of Operations for the three and nine
months ended September 30, 1999 and 1998............... 3
Condensed Statements of Cash Flows for the nine months
ended September 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 )
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED) (NOTE)
Current assets:
Cash and cash equivalents................................. $ 6,563 $ 11,883
Interest reserve account.................................. 9,765
Accounts receivable....................................... 4,533 7,062
Due from related parties.................................. 3,501 1,954
Prepaid insurance......................................... 16,090 26,673
Deferred income tax assets................................ 187
---------- ----------
Total current assets.............................. 30,874 57,337
Satellites and equipment, net............................... 510,637 557,456
Concessions, net............................................ 492,558 502,237
Deferred financing costs, net............................... 10,498 12,911
Other assets................................................ 586 303
Deferred income tax assets.................................. 7,401 7,720
---------- ----------
Total assets...................................... $1,052,554 $1,137,964
========== ==========
Current liabilities:
Current portion of debt................................... $ 1,000 $ 36,000
Accounts payable and accrued expenses..................... 19,854 38,714
Interest payable.......................................... 5,400 13,770
Deferred income tax liabilities........................... 3,810
Due to related parties.................................... 2,236 822
---------- ----------
Total current liabilities......................... 28,490 93,116
Long-term debt.............................................. 577,250 608,000
Deferred revenue............................................ 90,804 85,535
---------- ----------
Total liabilities................................. 696,544 786,651
---------- ----------
Commitments and contingencies (Note 5)
Stockholders' equity (Note 7):
Common stock.............................................. 379,403 379,403
Preferred stock........................................... 31,886
Common stock issuable..................................... 754
Accumulated deficit....................................... (56,033) (28,090)
---------- ----------
Total stockholders' equity........................ 356,010 351,313
---------- ----------
Total liabilities and stockholders' equity........ $1,052,554 $1,137,964
========== ==========
- ---------------
Note: The December 31, 1998 balance sheet has been derived from the audited
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
Revenue (Note 5)................................. $ 35,519 $27,132 $105,530 $ 79,392
-------- ------- -------- --------
Operating expenses:
Cost of transponders under sales-type leases
(Note 5).................................... 4,691 14,234
Satellite operations........................... 4,579 3,838 13,218 11,136
Selling and administrative expenses............ 4,804 2,009 12,245 5,627
License and management fees.................... 543 269 1,274 199
Depreciation and amortization.................. 15,582 10,910 45,983 37,692
-------- ------- -------- --------
30,199 17,026 86,954 54,654
-------- ------- -------- --------
Operating income................................. 5,320 10,106 18,576 24,738
Interest expense and amortization of deferred
financing costs................................ (17,439) (12,306) (49,417) (38,615)
Net foreign exchange gain (loss)................. (42) (473) (26) (1,852)
-------- ------- -------- --------
Loss before income taxes and extraordinary
item........................................... (12,161) (2,673) (30,867) (15,729)
Deferred income tax credit....................... 1,433 212 3,678 1,672
Extraordinary loss from extinguishment of debt,
net of income tax benefit of $2,840............ (5,513)
-------- ------- -------- --------
Net loss......................................... (10,728) (2,461) (27,189) (19,570)
Preferred stock dividend requirement............. (377) (754)
-------- ------- -------- --------
Net loss applicable to common stockholders....... $(11,105) $(2,461) $(27,943) $(19,570)
======== ======= ======== ========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
-------- ---------
OPERATING ACTIVITIES
Net loss.................................................... $(27,189) $ (19,570)
Items not requiring cash:
Depreciation and amortization............................. 45,983 37,692
Amortization of deferred financing costs.................. 3,215 5,318
Deferred income taxes..................................... (3,678) (1,672)
Extraordinary item........................................ 5,513
Changes in assets and liabilities:
Accounts receivable....................................... 2,529 (2,252)
Prepaid insurance......................................... 10,583 6,675
Cost of transponders under sales-type lease............... 14,234
Due from/to related parties............................... (133) 576
Accounts payable and accrued expenses..................... (27,230) 1,835
Deferred revenues......................................... 5,269 (1,650)
Deferred financing costs and other assets................. (1,146) (10,565)
-------- ---------
Cash flow provided by operating activities.................. 22,437 21,900
-------- ---------
INVESTING ACTIVITIES
Acquisition of equipment and advances
for construction of satellite............................. (3,658) (113,174)
-------- ---------
Cash flow used in investing activities...................... (3,658) (113,174)
-------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of senior secured notes.............. 325,000
Proceeds from issuance of fixed rate notes.................. 320,000
Borrowings under revolving credit facility.................. 20,000
Repayment of senior secured notes........................... (85,750) (750)
Decrease in interest reserve account........................ 9,765 15,364
Repayment of bank loans..................................... (570,000)
Capital contributions....................................... 31,886 6
-------- ---------
Cash flow provided by (used in) financing activities........ (24,099) 89,620
-------- ---------
Decrease in cash and cash equivalents....................... (5,320) (1,654)
Cash and cash equivalents -- beginning of period............ 11,883 24,144
-------- ---------
Cash and cash equivalents -- end of period.................. $ 6,563 $ 22,490
======== =========
Supplemental disclosure:
Interest paid............................................. $ 55,539 $ 50,662
======== =========
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" or the "Company") 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 22 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 nine months ended
September 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
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
Customers.................................................. $5,249 $5,799
Value added tax recoverable................................ 1,291
Other...................................................... 20 594
Allowance for uncollectible accounts....................... (736) (622)
------ ------
$4,533 $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. 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.
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
Satellites................................................. $561,362 $340,112
Equipment.................................................. 23,446 23,077
Furniture and fixtures..................................... 2,853 2,643
Leasehold improvements..................................... 1,999 1,784
Construction in process.................................... 1,008
Advances for construction and launch of Satmex 5........... 234,142
-------- --------
590,668 601,758
Accumulated depreciation................................... (80,031) (44,302)
-------- --------
$510,637 $557,456
======== ========
5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The Company had the following amounts due from and payable to related
parties:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
AMOUNTS RECEIVABLE:
Holdings................................................... $ 102 $ 61
Servicios................................................ 123 101
Principia................................................ 448 422
Mexican government agencies.............................. 2,825 1,370
Other.................................................... 3
-------- --------
$ 3,501 $ 1,954
======== ========
AMOUNTS PAYABLE:
Loral.................................................... $ 1,495 $ 726
Servicios................................................ 10
Principia................................................ 47 96
Other.................................................... 684
-------- --------
$ 2,236 $ 822
======== ========
Revenue
On June 28, 1999, Loral Skynet entered into an end-of-life lease agreement
with Satmex for two Ku-band transponders on Satmex 5. The agreement provides for
an up-front payment of $8.5 million for each transponder leased and gives Loral
Skynet 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. On September 24, 1999, Loral Skynet exercised
an option to lease an additional Ku-band
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)
transponder. The cost of the three transponders was approximately $4.8 million
each. Satmex provides no insurance or warranty on these transponders. In the
event of failure of the transponders or the satellite, no refund is due to Loral
Skynet. For the nine months ended September 30, 1999, Satmex has accounted for
these transactions as sales-type leases and, accordingly, recorded revenue of
$25.5 million and an operating expense of $14.2 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 these transactions from the calculation of
the management fee and the license fee described below.
Revenue from related parties, including the sales-type leases with Loral
Skynet, was $32.3 million and $8.9 million for the nine months ended September
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 nine months ended
September 30, 1999 and 1998, the management fee was $139,000 and $199,000,
respectively, after giving effect to the exclusion of the sales-type leases with
Loral Skynet.
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 September 30, 1998 were reversed. Fees for the nine months ended
September 30, 1999 were $1.1 million, after giving effect to the exclusion of
the sales-type leases with Loral Skynet.
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 $184,000 and $191,000 for the nine
months ended September 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
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
Revolving credit facility (9.01% at September 30, 1999).... $ 20,000
Senior secured notes (9.08% at September 30, 1999 and 9.03%
at December 31, 1998)...................................... 238,250 $324,000
Fixed rate notes........................................... 320,000 320,000
-------- --------
578,250 644,000
Less, current maturities................................... 1,000 36,000
-------- --------
$577,250 $608,000
======== ========
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)
On March 31, 1999 and September 30, 1999, the Company prepaid $35 million
and $50 million principal amount, respectively, of its senior secured notes.
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 a ratio of one share of preferred
stock for 2.0008 shares of common stock if the exchange occurs before February
2, 2005, and at a ratio of one 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
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 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,"
"project," "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 following should be read in conjunction with the financial statements
of the Company for the three and nine months ended September 30, 1999 and 1998.
OVERVIEW
Satelites Mexicanos, S.A. de C.V. ("Satmex" or the "Company") 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 22 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 a ratio of one share of preferred
stock for 2.0008 shares of common stock if the exchange occurs before February
2, 2005, and at a ratio of one 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 two Ku-band transponders on Satmex 5. The agreement provides for
an up-front payment of $8.5 million for each transponder leased and gives Loral
Skynet 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. On September 24, 1999, Loral Skynet exercised
an option to lease an additional Ku-band
9
11
transponder. The cost of the three transponders was approximately $4.8 million
each. For the nine months ended September 30, 1999, Satmex has accounted for
these transactions as sales-type leases and, accordingly, recorded revenue of
$25.5 million and an operating expense of $14.2 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 these transactions from the calculation of
the management fee and the license fee.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
SEPTEMBER 30, 1998
Revenue
Revenue during the third quarter of 1999 was $35.5 million, as compared to
$27.1 million during the third quarter of 1998. Revenue for 1999 includes $8.5
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 $0.1 million as compared to the quarter ended September
30, 1998. Revenue for the third quarter of 1999 has been effected by 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 $25.5 million for the quarter ended
September 30, 1999, from $17.0 million for the quarter ended September 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 $4.6 million for the quarter ended September 30, 1999, as
compared to $3.8 million for the quarter ended September 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 September 30, 1999 were $4.8 million, as compared to $2.0
million for the quarter ended September 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 quarter
includes depreciation for Solidaridad 1, Solidaridad 2 and Satmex 5. Satmex 5 is
being depreciated over its 15 year design life. Depreciation expense for the
quarter was $12.3 million as compared to $7.3 million during 1998. Amortization
expense relating to the Concessions amounted to $3.3 million during the quarter
as compared to $3.6 million for 1998.
Interest expense
Interest expense was $17.4 million in 1999 as compared to $12.3 million
(net of $5.5 million of capitalized interest related to the construction and
launch of Satmex 5) in 1998.
Net foreign exchange gain (loss)
The Company recorded a net foreign exchange loss of $42,000 during the
current quarter and a net foreign exchange loss of $473,000 in 1998. During the
third quarter of 1999 the peso remained stable against the dollar. In the third
quarter of 1998 the peso fell 13% 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 $1.4 million in 1999 as compared to a
benefit of $212,000 for 1998.
10
12
Preferred stock dividend requirement
The preferred stock dividend requirement in the third quarter of 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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
SEPTEMBER 30, 1998
Revenue
Revenue for the nine months ended September 30, 1999 was $105.5 million, as
compared to $79.4 million during 1998. Revenue for 1999 includes $25.5 million
related to the leases with Loral Skynet, which were accounted for as sales-type
leases. Excluding the revenue recorded in connection with these leases, revenue
for the first nine months of 1999 was $80.0 million as compared to $79.4 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
leases with Loral Skynet, increased to $72.7 million for 1999, from $54.7
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 $13.2 million for 1999, as compared to $11.1 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 $12.2 million, as compared to $5.6 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 $36.3
million as compared to $26.6 million for 1998. Amortization expense relating to
the Concessions amounted to $9.7 million during the first nine months of 1999 as
compared to $11.1 million during the first nine months of 1998.
Interest expense
Interest expense was $49.4 million in 1999 as compared to $38.6 million
(net of $14.8 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 loss of $26,000 during the
first nine months of 1999 and a net foreign exchange loss of $1.9 million in
1998. During the first nine months of 1999, the peso remained stable against the
dollar. However, in the first nine months of 1998, the peso declined 26.7%
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
11
13
and tax credit carryforwards. The Company recorded a deferred income tax benefit
of $3.7 million in 1999 as compared to a benefit of $1.7 million in 1998.
Preferred stock dividend requirement
The preferred stock dividend requirement in 1999, of $754,000, 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 $3.7 million for the
nine months ended September 30, 1999, as compared to $113.8 million for the nine
months ended September 30, 1998. Expenditures in 1998 related primarily to the
construction and launch of Satmex 5.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had total debt of $578.3 million. At
September 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. On September 30, 1999, the Company
borrowed $20 million under its revolving credit facility which together with
cash on hand was used to pay down $50 million principal amount of the Company's
senior secured floating rate notes.
The Company's primary source of liquidity for working capital purposes is
cash flow from operations. At September 30, 1999, the company had cash and cash
equivalents of $6.6 million. Satmex used funds from operating cash flow, sale of
preferred stock and the upfront payment on the leases with Loral Skynet to
prepay a portion of the Company's debt. For the remainder of 1999, the Company
believes that its cash flow from operations and the availability of its
revolving credit facility will be adequate to service its interest and debt
repayment requirements and ensure compliance with the covenants of its debt
agreements. Thereafter, the Company believes that its future operating cash flow
will be sufficient to service the Company's interest and debt repayment
requirements; but, may not be adequate to maintain certain financial ratios
required by its debt agreements.
OTHER MATTERS
Solidaridad 1 Service Interruption. On April 28, 1999, Solidaridad 1
experienced a loss of its primary satellite control processor. Service was
restored after 14 hours, using the back up satellite control processor. 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:
12
14
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 September 30, 1999, the Company had completed approximately 99%
of the inventory phase and approximately 98% of the assessment phase. The
Company expects to complete all phases of its Year 2000 Program during the
fourth quarter of 1999, prior to any potential material impact on the operations
of the Company. The audit phase, commenced in January 1999.
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 September 30, 1999 for
this effort by the Company were approximately $23,000. Based on the efforts of
the Company to date, the Company anticipates additional incremental expenses of
approximately $184,000 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 were completed at the end of the third quarter of 1999. The Company
believes that adequate time will be available to ensure that these contingency
plans are 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 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, the ability of
vendors to meet specific commitments 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. Ongoing assessments are made by
the Company with regard to the Year 2000 readiness of its key third-party
suppliers. Information requests are distributed to such suppliers and replies
are evaluated. When 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 M. Pelini
-------------------------------------
Cynthia M. Pelini
Chief Financial Officer
Date: November 11, 1999