<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File Number: 0-21317
TCI SATELLITE ENTERTAINMENT, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1299995
------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8085 South Chester Street, Suite 110
Englewood, Colorado 80112
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 712-4609
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days [X] Yes [_] No
The number of shares outstanding of TCI Satellite Entertainment, Inc.'s common
stock as of October 29, 1999, was:
Series A common stock - 62,894,346 shares; and
Series B common stock - 8,465,324 shares.
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Form 10-Q
Index
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION I-2
Item 1. Financial Statements (unaudited) I-2
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 I-2
Condensed Consolidated Statements of Operations -
Three and nine months ended June 30, 1999 and 1998 I-3
Condensed Consolidated Statement of Stockholders' Equity (Deficit) -
Nine months ended September 30, 1999 I-4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 I-5
Notes to Condensed Consolidated Financial Statements I-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-12
Item 3. Qualitative and Quantitative Disclosures about Market Risk I-14
PART II. OTHER INFORMATION
Item 6(a). Exhibits II-1
Signatures II-2
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------------- ------------
amounts in thousands
<S> <C> <C>
Cash and cash equivalents $ 3,903 --
Prepaid expenses 146 --
Preferred stock investment, at cost (note 10) 5,000 --
Investment in General Motors Corporation (General
Motors), at fair value (note 2) 80,568 --
Satellites, at cost (note 2) -- 463,133
Support equipment, net 136 --
------------- ------------
Total assets $ 89,753 463,133
============= ============
Liabilities and Stockholders' Equity (Deficit)
Due to Phoenixstar $ 2 469,498
General Motors Corporation share appreciation right
liability (note 2) 14,425 --
Promissory note payable (note 10) 3,000 --
------------- ------------
Total liabilities 17,427 469,498
------------- ------------
Stockholders' equity (deficit):
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Series A common stock, $1 par value; authorized
85,000,000 shares; issued and outstanding 62,894,346
in 1999 and 59,280,466 in 1998 62,894 59,280
Series B common stock, $1 par value; authorized
10,000,000 shares; issued and outstanding 8,465,324
in 1999 and 1998 8,465 8,465
Additional paid-in capital 825,583 825,276
Accumulated deficit (824,616) (899,386)
------------- ------------
Total stockholders' equity (deficit) 72,326 (6,365)
------------- ------------
$ 89,753 463,133
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-2
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- --------- ----------
amounts in thousands, except per share amounts
<S> <C> <C> <C> <C>
Revenue $ -- -- -- --
Operating costs and expenses:
Charges from PRIMESTAR Partners L.P.
(note 7) -- -- -- 82,235
Operating -- -- 4,511 9,847
Selling, general and administrative 87 43 205 55,427
Stock compensation (note 7) 144 -- 469 4,869
Depreciation -- -- -- 65,105
---------- ---------- --------- ----------
231 43 5,185 217,483
Operating loss (231) (43) (5,185) (48,983)
Other income (expense):
Gain on sale of satellites (note 2) -- -- 13,712 --
Interest income (expense) 69 -- 100 (14,177)
Share of losses of Phoenixstar -- (36,833) -- (69,369)
Share of losses of PRIMESTAR
Partners L.P. -- -- -- (5,822)
Other, net -- -- 66,143 (621)
---------- ---------- --------- ----------
69 (36,833) 79,955 (89,989)
---------- ---------- --------- ----------
Earnings (loss) before income taxes (162) (36,876) 74,770 (138,972)
Income tax expense (note 8) -- -- -- --
---------- ---------- --------- ----------
Net earnings (loss) (162) (36,876) 74,770 (138,972)
Other comprehensive income:
Unrealized holding gain on available for
sale securities 1,319 -- 14,425 --
Unrealized loss on share appreciation rights (1,319) -- (14,425) --
---------- ---------- --------- ----------
-- -- -- --
---------- ---------- --------- ----------
Comprehensive income (loss) $ (162) (36,876) 74,776 (138,972)
========== ========== ========= ==========
Basic earnings (loss) per
common share (note 4) $ (0.002) (0.54) 1.09 (2.05)
========== ========== ========= ==========
Fully diluted earnings (loss) per
common share (note 4) $ 0.002 (0.54) 0.97 (2.05)
========== ========== ========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-3
<PAGE>
<TABLE>
<CAPTION>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Nine months ended September 30, 1999
(unaudited)
Additional Total
Common stock paid-in Accumulated stockholders'
---------------------------
Series A Series B capital deficit equity (deficit)
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 59,280 8,465 825,276 (899,386) (6,365)
Net earnings -- -- -- 74,770 74,770
Issuance of Series A Common Stock
related to Naify conversion 3,452 -- -- -- 3,452
Recognition of stock compensation
related to stock options and
restricted stock awards -- -- 469 -- 469
Issuance of Series A Common Stock
related to restricted stock awards 162 -- (162) -- --
------------ ------------ ------------ ------------ ----------------
Balance at September 30, 1999 $ 62,894 8,465 825,583 (824,616) 72,326
============ ============ ============ ============ ================
</TABLE>
I-4
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
1999 1998
--------------- ---------------
amounts in thousands
(see note 5)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 74,770 (138,972)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Gain on sale of satellites (13,712) --
Depreciation -- 65,105
Share of losses of Phoenixstar -- 69,369
Share of losses of PRIMESTAR Partners L.P. -- 5,822
Accretion of debt discount -- 4,682
Stock compensation 469 4,869
Receipt of General Motors common stock recorded
as other income (66,143) --
Other non-cash charges -- 8,042
Changes in operating assets and liabilities, net
of the effects of the Restructuring:
Change in receivables -- 10,845
Change in other assets (146) (736)
Change in accruals and payables -- (10,209)
Change in subscriber advance payments -- (3,114)
--------------- ---------------
Net cash provided (used) by operating activities (4,762) 15,703
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sale of satellites 2,500 --
Capital expended for property and equipment (136) (73,966)
Additional investments in and advances to
PRIMESTAR Partners L.P. -- (75)
Cash paid for equity investment (2,000) --
--------------- ---------------
Net cash provided (used) by investing activities 364 (74,041)
--------------- ---------------
Cash flows from financing activities:
Borrowings of debt -- 113,000
Repayments of debt -- (61,735)
Increase in due to Phoenixstar 4,849 --
Issuance of common stock 3,452 989
--------------- ---------------
Net cash provided by financing activities 8,301 52,254
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 3,903 (6,084)
Cash and cash equivalents:
Beginning of period -- 6,084
--------------- ---------------
End of period $ 3,903 --
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-5
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
TCI Satellite Entertainment, Inc. and those of all majority-owned
subsidiaries (TSAT or the Company). All significant inter-company
transactions have been eliminated.
As a result of the Hughes Transaction described in note 2 and the TSAT
Asset Transfer described in note 3, TSAT is currently a holding company,
with no substantial assets or liabilities other than (i) cash, (ii) its
ownership interest in General Motors, (iii) a certain equity investment,
(iv) a majority owned subsidiary (v) its ownership interest in Phoenixstar,
and (vi) its rights and obligations under certain agreements with
Phoenixstar and others.
In addition, the Company has no significant operations subsequent to the
TSAT Asset Transfer other than (i) expenses associated with the operation
and maintenance of the Tempo Satellites, as defined below, prior to the
sale to Hughes effective June 4, 1999 and (ii) general and administrative
expenses incurred to maintain the Company's status as a publicly traded
company. The Company's majority owned subsidiary conducts research and
devleopment in certain emerging technology.
The accompanying interim consolidated financial statements of TSAT are
unaudited. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) have been made which are necessary to present
fairly the financial position of TSAT as of September 30, 1999 and the
results of its operations for the periods ended September 30, 1999 and
1998. The results of operations for any interim period are not necessarily
indicative of the results for the entire year. These financial statements
should be read in conjunction with the financial statements and related
notes thereto included in TSAT's December 31, 1998 Annual Report on Form
10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain amounts have been reclassified for comparability with the 1999
presentation.
(2) Hughes Transactions
Effective June 4, 1999, the Company completed the sale of its high power
direct broadcast satellite (DBS) assets to Hughes Electronics Corporation
(Hughes), pursuant to an asset purchase agreement dated as of January 22,
1999 (the Hughes High Power Agreement), among Tempo Satellite, Inc., a
wholly-owned subsidiary of the Company (Tempo), Phoenixstar, Inc., a
Delaware corporation formerly known as PRIMESTAR, Inc. (Phoenixstar),
Phoenixstar Partners L.P., a Delaware limited partnership and wholly-owned
subsidiary of Phoenixstar formerly known as PRIMESTAR Partners L.P.
(PRIMESTAR Partners), and Hughes, a subsidiary of General Motors. The
assets transferred by the Company pursuant to the Hughes High Power
Agreement consisted of Tempo's two high-power DBS satellites (the Tempo
Satellites), one of which was in orbit at 119(degrees) West Longitude
(the In-Orbit Satellite) and one of which was used as a ground spare (the
Ground
I-6
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
Satellite), its FCC authorizations with respect to the 119(degrees) West
Longitude orbital location (the FCC License), and certain related assets
(collectively, the Tempo High Power Assets).
The Company had previously granted Phoenixstar the transferable right and
option (the Tempo Purchase Option) to purchase 100% of the Tempo High
Power Assets for aggregate consideration of $2.5 million in cash and the
assumption of all liabilities. In addition, Tempo had previously granted to
PRIMESTAR Partners the right to purchase or lease 100% of the capacity of
the DBS system being constructed by Tempo (the Tempo Capacity Rights), and
PRIMESTAR Partners had made advances to Tempo to fund the construction of
Tempo's DBS system in the aggregate amount of $465 million (the Tempo
Reimbursement Obligation).
Accordingly, the Hughes High Power Agreement provided for (i) the sale by
Phoenixstar to Hughes of the Tempo Purchase Option, (ii) the exercise of
the Tempo Purchase Option by Hughes, and (iii) the termination of the Tempo
Capacity Rights (collectively, the Hughes High Power Transaction). The
aggregate consideration payable by Hughes in the Hughes High Power
Transaction was $500 million, payable as described below.
As regulatory approval was required to transfer the In-Orbit Satellite and
the FCC License, the Hughes High Power Agreement provided for the Hughes
High Power Transaction to be completed in two steps. To facilitate the
transaction, the Tempo Purchase Option was amended to provide for a two-
stage exercise process. The parties allocated 70% of the total
consideration under the Hughes High Power Agreement to the In-Orbit
Satellite and related assets and 30% of the total consideration thereunder
to the Ground Satellite and related assets.
The first closing under the Hughes High Power Agreement was consummated
effective March 10, 1999. In the first closing, Hughes acquired the Ground
Satellite and related assets for aggregate consideration of $150 million,
comprised of (i) $9,750,000 paid by Hughes to Phoenixstar and PRIMESTAR
Partners for the transfer to Hughes of that portion of the Tempo Purchase
Option allocable to the Ground Satellite and the termination of that
portion of the Tempo Capacity Rights allocable to the Ground Satellite,
(ii) $750,000 paid by Hughes to Tempo to exercise that portion of the Tempo
Purchase Option allocable to the Ground Satellite; and (iii) the assumption
and payment by Hughes of a portion of the Tempo Reimbursement Obligation in
the amount of $139,500,000.
At the time of the first closing, the carrying value of the Ground
Satellite was $224 million. In addition, as required by the Hughes High
Power Agreement, the Company and Phoenixstar agreed to terminate the
previously announced merger of the Company with and into Phoenixstar,
effective as of such first closing.
The FCC approved the transfer of the FCC License to Hughes on May 28, 1999,
and the second closing under the Hughes High Power Agreement was
consummated effective June 4, 1999. In the second closing, Hughes acquired
the In-Orbit Satellite and related assets, including all rights of Tempo
with respect to the FCC License, for aggregate consideration of $350
million comprised of (i) $22,750,000 paid by Hughes to Phoenixstar and
PRIMESTAR Partners for the transfer to Hughes of that portion of the Tempo
Purchase Option allocable to the In-Orbit Satellite and the termination of
that portion of the Tempo Capacity Rights allocable to the In-Orbit
Satellite, (ii) $1,750,000 paid
I-7
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
by Hughes to Tempo to exercise that portion of the Tempo Purchase Option
allocable to the In-Orbit Satellite; and (iii) the assumption and payment
by Hughes of the remainder of the Tempo Reimbursement Obligation, in the
amount of $325,500,000.
The carrying value of the In-Orbit Satellite was approximately $239 million
at the time of the second closing. In addition, Phoenixstar agreed to
forgive amounts due from Tempo not assumed by Hughes in the amount of
$9,346,000.
In a separate transaction (the Hughes Medium Power Transaction) completed
on April 28, 1999 (the Hughes Closing Date), Phoenixstar sold to Hughes
Phoenixstar's medium-power DBS business and assets for $1.1 billion in cash
and 4.871 million shares of General Motors Class H common stock (GMH Stock)
valued at approximately $258 million on the date of closing. At September
30, 1999, Phoenixstar is responsible for the payment of certain obligations
not assumed by Hughes, and the payment of costs, estimated not to exceed
$180 million, associated with the termination of certain vendor and service
contracts and lease agreements not assumed by Hughes. Affiliates of
stockholders of Phoenixstar, other than the Company, and an affiliate of
Tele-Communications, Inc. (TCI) have committed to make funds available to
Phoenixstar, up to an aggregate of $1,013.3 million to fund such payments.
Through September 30, 1999, approximately $465.3 million of such
commitments have been funded to Phoenixstar, and $382.6 million of such
commitments expired undrawn.
In connection with their approval of the Hughes Medium Power Transaction
and other transactions, the stockholders of Phoenixstar approved the
payment to TSAT of consideration in the form of 1.407 million shares of GMH
Stock (the Phoenixstar Payment), subject to the terms and conditions set
forth in an agreement (the Phoenixstar Payment Agreement) dated as of
January 22, 1999. In consideration of the Phoenixstar Payment, the Company
agreed to approve the Hughes Medium Power Transaction and Hughes High Power
Transaction as a stockholder of Phoenixstar, to modify certain agreements
to facilitate the Hughes High Power Transaction, and to issue Phoenixstar a
share appreciation right (the TSAT GMH SAR) with respect to the shares of
GMH Stock received as the Phoenixstar Payment, granting Phoenixstar the
right to any market price appreciation in such GMH Stock during the one-
year period following the date of issuance, over an agreed strike price of
$47.00. Pursuant to the Phoenixstar Payment Agreement, TSAT has also agreed
to forego any liquidating distribution or other payment that may be made in
respect of the outstanding shares of Phoenixstar upon any dissolution and
winding-up of Phoenixstar, or otherwise in respect of Phoenixstar's
existing equity and, subject to the approval of the Company's stockholders,
to transfer its shares in Phoenixstar to the other Phoenixstar
stockholders. On the Hughes Closing Date, the Company received 1.407
million shares of GMH Stock from Phoenixstar in satisfaction of the
Phoenixstar Payment .
The TSAT GMH SAR is secured by a first priority pledge and security
interest in the underlying shares of GMH Stock, and both the TSAT GMH SAR
and such pledge and security interest have been pledged by Phoenixstar for
the benefit of certain holders of share appreciation rights issued by
Phoenixstar with respect to shares of GMH Stock (the Phoenixstar GMH SARs).
The shares of GMH Stock issued to TSAT pursuant to the Phoenixstar Payment
Agreement are subject to certain restrictions on transfer during the first
year after the closing of the Hughes Medium Power Transaction, and TSAT
will be entitled (together with Phoenixstar) to certain registration rights
with respect to such shares following the expiration of such one-year
period.
The increase in the share appreciation right liability of $1,319,000 and
$14,425,000 for the three and nine months ended September 30, 1999,
respectively, is effectively hedged by the unrealized holding gain on the
GMH Stock, therefore, the amounts are included in other comprehensive
income.
I-8
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
(3) The Restructuring
Effective April 1, 1998 (the Closing Date) and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998, (the
Restructuring Agreement), among TSAT, Phoenixstar, prior to the
Restructuring a wholly-owned subsidiary of TSAT, Time Warner Entertainment
Company, L.P. (TWE), Advance/Newhouse Partnership (Newhouse), Comcast
Corporation (Comcast), Cox Communications, Inc. (Cox), MediaOne of
Delaware, Inc., (MediaOne), and GE American Communications, Inc., and
(ii) an Asset Transfer Agreement dated as of February 6, 1998, (the TSAT
Asset Transfer Agreement) between TSAT and Phoenixstar, a business
combination (the Restructuring) was consummated. In connection with the
Restructuring, TSAT contributed and transferred to Phoenixstar (the TSAT
Asset Transfer) all of TSAT's assets and liabilities except (i) the
capital stock of Tempo, (ii) the consideration to be received by TSAT in
the Restructuring and (iii) the rights and obligations of TSAT under
certain agreements with Phoenixstar and others. In addition, the business
of PRIMESTAR Partners and the business of distributing the PRIMESTAR(R)
programming service (PRIMESTAR(R)) of each of TWE, Newhouse, Comcast, Cox
and affiliates of MediaOne were consolidated into Phoenixstar.
In connection with the TSAT Asset Transfer, Phoenixstar assumed all of
TSAT's indebtedness on such date, and TSAT received from Phoenixstar 66.3
million shares of Class A Common Stock of Phoenixstar (Phoenixstar Class A
Common Stock) and 8.5 million shares of Class B Common Stock of
Phoenixstar (Phoenixstar Class B Common Stock and together with the
Phoenixstar Class A Common Stock, Phoenixstar Common Stock), in
accordance with the Restructuring Agreement and the TSAT Asset Transfer
Agreement. As a result, TSAT owns approximately 37% of the outstanding
shares of common equity of Phoenixstar, representing approximately 38% of
the combined voting power of such common equity. As a result of the
dilution of TSAT's investment in Phoenixstar from 100% to approximately
37%, TSAT recognized an increase in its investment in Phoenixstar and an
increase in additional paid-in capital of $299,046,000, net of income
taxes. Such increase represents the difference between TSAT's historical
investment basis in Phoenixstar and TSAT's proportionate share of
Phoenixstar's equity subsequent to the Restructuring.
(4) Earnings (Loss) Per Common Share
The basic earnings (loss) per common share is based on the weighted average
number of shares outstanding during the period (70,330,000 and 67,746,000
shares for the three months ended September 30, 1999 and 1998,
respectively; and 68,660,000 and 67,808,000 for the nine months ended
September 30, 1999 and 1998, respectively). Diluted earnings per common
share for the nine months ended September 30, 1999 is based on weighted
average shares outstanding of 77,175,000 which assumes conversion of all
common stock equivalents. Excluded from the computation of diluted earnings
(loss) per common share for the three and nine months ended September 30,
1999 the three months ended September 30, 1999 are options and convertible
securities to acquire 8,515,000 and 6,799,000 shares of Series A Common
Stock, respectively, because inclusion of such shares would be anti-
dilutive.
I-9
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
(5) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $0 and $13,844,000 during the nine months ended
September 30, 1999 and 1998, respectively. Cash paid for income taxes was
not significant during either of such periods.
(6) Investment in Phoenixstar
Prior to the Hughes Medium Power Transaction, Phoenixstar owned and
operated the PRIMESTAR(R) direct to home satellite service throughout the
continental United States. TSAT was the largest Stockholder of Phoenixstar
on the basis of both total equity and voting power. TSAT was entitled to
designate three out of eleven seats on Phoenixstar's Board of Directors and
had significant governance rights and powers regarding Phoenixstar. TSAT's
basis in Phoenixstar had been reduced to zero as of December 31, 1998.
(7) Transactions Related Parties
Prior to the Restructuring, PRIMESTAR Partners provided programming
services to the Company and other authorized distributors in exchange for a
fee based upon the number of subscribers receiving programming services. In
addition, PRIMESTAR Partners arranged for satellite capacity and uplink
services, and provided national marketing and administrative support
services in exchange for a separate authorization fee.
Prior to the Restructuring, certain key employees of TSAT held stock
options in tandem with stock appreciation rights with respect to certain
common stock of TCI. Estimates of the compensation related to the options
and/or stock appreciation rights granted to employees of TSAT have been
recorded in the accompanying condensed consolidated financial statements.
Compensation expense recognized by TSAT related to such options aggregated
$3,814,000 during the nine months ended September 30, 1998.
(8) Income Taxes
TSAT recognized no income tax benefit or expense during of the nine months
ended September 30, 1999 and 1998. TSAT is only able to realize income tax
benefits for financial reporting purposes to the extent that such benefits
offset TSAT's income tax liabilities or TSAT generates taxable income. For
financial reporting purposes, all of TSAT's income tax liabilities had been
fully offset by income tax benefits at September 30, 1999 and December 31,
1998. Additionally, during the foreseeable future, TSAT believes that it
will incur net losses for income tax purposes, and accordingly, will not be
in a position to realize income tax benefits on a current basis.
(9) Research and Development Subsidiary
In July 1999, the Company negotiated a preliminary agreement (the Asvan
Agreement) with Asvan Technology, LLC (Asvan). The Company changed the name
of a shell subsidiary to TSAT Technologies, Inc. (Technologies Sub). The
Asvan Agreement provides for Asvan to transfer certain assets to
Technologies Sub in exchange for a 20% equity interest in Technologies Sub
and for the Company to contribute a maximum of $3,000,000 in exchange for
an 80% equity interest in Technologies Sub. the Asvan Agreement
contemplates that Technologies Sub will perform research and development
related to certain emerging technologies. The operations of the subsidiary
are consolidated into the accompanying condensed consolidated financial
statements.
(10) Preferred Stock Investment
On September 16, 1999, the Company made an investment of $5,000,000 for
714,286 shares of Series C Preferred Stock (Preferred Stock) of Jato
Communications Corp. (Jato). The investment included a payment of
$2,000,000 and a promissory note in the amount of $3,000,000 originally due
October 31, 1999 and subsequently extended to November 10, 1999, bearing
interest at 10%, and secured by 434,208 shares of the Preferred Stock. The
Preferred Stock is convertible into common stock at the option of the
holder based on certain conversion rates and allows the holder to vote
equally with all other classes of stock, on a per share basis, based on the
number of shares of
I-10
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
common stock into which the Preferred Stock is convertible. The Preferred
Stock also has certain liquidation preferences and voting rights with
respect to certain actions by Jato. The Preferred Stock is carried at cost.
On November 9, 1999, the Company issued a Demand Note to the Bank of
America wherein TSAT may borrow up to $5,000,000 prior to November 19,
1999. Interest is payable monthly and is based on the prime rate plus .75%.
The promissory note to Jato was paid on November 10, 1999 with proceeds
from the Demand Note.
I-11
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The following discussion and analysis provides information concerning the
financial condition and results of operations of TSAT and should be read in
conjunction with (i) the accompanying financial statements of TSAT, and (ii) the
financial statements, and related notes thereto, of TSAT, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in TSAT's Annual Report on Form 10-K for the year ended December 31,
1998.
Certain statements in this Quarterly Report on Form 10-Q constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of TSAT, or industry results, to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
factors include, among others: general economic and business conditions and
industry trends; uncertainties inherent in proposed business strategies and
development plans, including uncertainties regarding possible regulatory issues
under the Investment Company Act of 1940, as amended (the Investment Company
Act); future financial performance, including availability, terms and
deployment of capital; the ability of vendors to deliver required equipment,
software and services; availability of qualified personnel; changes in, or the
failure or the inability to comply with, government regulations, including,
without limitation, regulations of the FCC, and adverse outcomes from regulatory
proceedings; changes in the nature of key strategic relationships with partners
and joint venturers; reliance on software programs used by the Company or its
suppliers containing problems related to the Year 2000; and other factors
referenced in this Report. These forward-looking statements speak only as of
the date of this Report. TSAT expressly disclaims any obligation or undertaking
to disseminate any updates or revisions to any forward-looking statement
contained herein to reflect any change in TSAT's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
See note 2 to the accompanying condensed consolidated financial statements for a
discussion of the transactions with Hughes.
See note 3 to the accompanying condensed consolidated financial statements for a
description of the Restructuring Transaction.
Material Changes in Results of Operations
As a result of the consummation of the Restructuring, TSAT's operations prior to
the Hughes High Power Agreement transaction consisted of (i) TSAT's
participation in PRIMESTAR's earnings or losses (zero during the nine months
ended September 30, 1999) (ii) expenses incurred to maintain TSAT as a public
company, including accounting and legal fees ($192,000 during the nine months
ended September 30, 1999), (iii) expenses associated with the operation and
maintenance of the Tempo Satellites prior to the sale to Hughes effective June
4, 1999 ($4,511,000 during the nine months ended September 30, 1999).
TSAT recognized a nonrecurring gain of $13,712,000 during the nine months ended
September 30, 1999 in connection with the Hughes High Power Transaction. In
addition, TSAT recognized other income of $66,143,000 upon receipt of the
Phoenixstar Payment.
I-12
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
TSAT recognized no income tax benefit or expense during either of the nine month
periods ended September 30, 1999 and 1998. TSAT is only able to realize income
tax benefits for financial reporting purposes to the extent that such benefits
offset TSAT's income tax liabilities or TSAT generates taxable income. For
financial reporting purposes, all of TSAT's income tax liabilities had been
fully offset by income tax benefits at September 30, 1999 and December 31, 1998.
Additionally, TSAT believes that it will incur net losses for income tax
purposes during the foreseeable future, and accordingly, will not be in a
position to realize income tax benefits on a current basis.
Material Changes in Financial Condition
As a result of the consummation of the Hughes transactions, the Company
currently has no operating income or cash flow. The Company's current sources
of liquidity are its available cash and any proceeds from the monetization or
liquidation of the GMH Stock (subject to a one-year holding period).
In July 1999, the Company negotiated a preliminary agreement (the Asvan
Agreement) with Asvan Technology, LLC (Asvan). the Asvan Agreement provides for
Asvan to transfer certain assets to Technologies Sub in exchange for a 20%
equity interest in Technologies Sub and for the Company to contribute a maximum
of $3,000,000 in exchange for an 80% equity interest in Technologies Sub. the
Asvan Agreement contemplates that Technologies Sub will perform research and
development related to certain emerging technologies. The operations of the
subsidiary are consolidated into the accompanying consolidated financial
statements.
TSAT is currently considering its course of action with respect to its available
cash and GMH Stock. Options available to the Company include, but are not
limited to, distribution of the Company's assets to the Company's shareholders
(subject to the prior satisfaction by the Company of its obligations to
Phoenixstar under the TSAT GMH SAR and the expiration of a one-year required
holding period for the GMH Stock), investment in yet to be determined operating
businesses, or retention for future use.
TSAT will continue to be subject to the risks associated with operating as a
holding company including possible regulation under the Investment Company Act.
TSAT does not currently intend to be an investment company within the meaning of
the Investment Company Act.
The Company is in the process of identifying and addressing issues surrounding
the Year 2000 ("Y2K") and their impact on the Company's operations. The issue
surrounding the Year 2000 is whether the Company's operations and financial
systems or the systems used by companies with whom the Company conducts business
will properly recognize and process date sensitive information before and after
January 1, 2000. Phoenixstar provides the Company with accounting services and
the use of any and all related information systems. Therefore, TSAT is
coordinating its Y2K assessment with Phoenixstar. The following discussion of
Phoenixstar's Y2K project is based on information currently available to the
Company.
Prior to the Hughes Closing Date, Phoenixstar completed an initial assessment
which identified areas of risk associated with the Year 2000. The Year 2000
Program Office was established to oversee Phoenixstar's Year 2000 project.
Detailed inventories were gathered and cost estimates were finalized. For each
functional area of the project, detailed work plans were developed and put into
place. Separate test environments completed construction and testing in the
first quarter of 1999.
In connection with the Hughes Medium Power Transaction, Hughes acquired
substantially all of Phoenixstar's systems. Phoenixstar has analyzed and
continues to analyze its remaining internal IT and non-IT systems. Phoenixstar
believes that such systems are currently capable of functioning without
substantial Y2K compliance problems.
I-13
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. SUBSIDIARIES
Through September 30, 1999, Phoenixstar spent approximately $1,423,000 for Y2K
issues, $1,173,000 of which was spent in 1999, and does not currently expect to
spend any additional amounts for Y2K related issues.
The Company does not currently believe that any of the foregoing will have a
material adverse effect on its financial condition or its results of operations.
However, the process of evaluating Phoenixstar's products and third party
products and systems is ongoing. Although not expected, failures of critical
suppliers and/or systems could have a material adverse effect on the Company's
financial condition or results of operations. As widely publicized, Y2K
compliance has many issues and aspects, not all of which the Company is able to
accurately forecast or predict. There is no way to assure that Y2K will not
have adverse effects on the Company, some of which could be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of the transaction described in note 2 to the accompanying financial
statements, the Company has price risk related to investments in equity
securities. The following table summarizes the market risk for the Company:
September 30, 1999 December 31, 1998
-------------------------- -----------------------
Fair Carrying Fair Carrying
value value value value
----------- ---------- --------- ----------
Equity price risk:
Equity Securities $ 80,568,000 80,568,000 -- --
The Company has a share appreciation right liability of $14,425,000 at September
30, 1999 relating to its equity securities.
I-14
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits
(a) Exhibit
27 - Financial Data Schedule
II-1
<PAGE>
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.
TCI SATELLITE ENTERTAINMENT, INC.
Date: November 15, 1999 By: /s/ Gary S. Howard
____________________________
Gary S. Howard
Chief Executive Officer
Date: November 15, 1999 By: /s/ Kenneth G. Carroll
_________________________________
Kenneth G. Carroll
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TCI
SATELLITE ENTERTAINMENT INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,903
<SECURITIES> 85,568
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 89,753
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 71,359
<OTHER-SE> 967
<TOTAL-LIABILITY-AND-EQUITY> 89,753
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,511
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 74,770
<INCOME-TAX> 0
<INCOME-CONTINUING> 74,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,770
<EPS-BASIC> 1.09
<EPS-DILUTED> 0.97
</TABLE>
