<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 March 31, 2000
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)
7600 East Orchard Road, Suite 330 South
Englewood, Colorado 80111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 268-5440
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 April 28, 2000, was:
Series A common stock - 63,727,396 shares; and
Series B common stock - 7,749,774 shares.
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Form 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 I-2
Consolidated Statements of Operations and Other Comprehensive
Income (Loss) - Three months ended March 31, 2000 and 1999 I-3
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2000 I-4
Consolidated Statements of Cash Flows -
Three months ended March 31, 2000 and 1999 I-5
Notes to Consolidated Financial Statements I-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-16
Item 3. Qualitative and Quantitative Disclosures about Market Risk I-18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds II-1
Item 6. Exhibits and Reports on Form 8-K II-1
Signatures II-2
</TABLE>
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
----------- ------------
amounts in thousands
<S> <C> <C>
Cash and cash equivalents $ 251,740 2,473
Receivables and prepaid expenses 235 113
Investment in General Motors Corporation (General Motors),
at fair value (note 3) 175,210 135,101
Investment in Sprint Corporation PCS Group Stock (Sprint PCS Stock),
at fair value (note 2) 333,051 --
Investment in Astrolink International L.L.C. (Astrolink) (notes 2 and 7) 173,941 --
Other investments (note 8) 172,454 5,000
Support equipment, net 296 275
Deferred financing costs 204 235
----------- -------
$ 1,107,131 143,197
=========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 890 139
Accrued interest payable 133 53
Other accrued expenses 599 71
Due to parent (note 9):
Accrued interest 205 --
Other accrued expenses 141 --
Note payable 60,000 --
----------- -------
60,346 --
----------- -------
Taxes payable 650 650
General Motors Corporation share appreciation right liability (note 3) 109,066 68,959
Employee stock appreciation right liability 7,009 5,554
Debt (note 10) 3,044 3,044
Deferred tax liability 12,540 --
----------- -------
Total liabilities 194,277 78,470
----------- -------
Minority interests in equity of consolidated subsidiaries 531,158 --
Redeemable preferred stock (notes 2 and 11) 186,861 --
Stockholders' equity:
Series A common stock, $1 par value; authorized 85,000,000 shares;
issued and outstanding 63,720,531 in 2000 and 62,894,446 in 1999 63,720 62,894
Series B common stock, $1 par value; authorized 10,000,000 shares;
issued and outstanding 7,756,639 and 8,465,224 in 2000 and 1999 7,757 8,465
Additional paid-in capital 938,822 825,726
Accumulated other comprehensive income, net of taxes 20,622 --
Accumulated deficit (836,086) (832,358)
----------- -------
Total stockholders' equity 194,835 64,727
----------- -------
Commitments (note 14)
$ 1,107,131 143,197
=========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Consolidated Statements of Operations and Other Comprehensive Income (Loss)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
-------- -------
amounts in thousands,
except per share amounts
<S> <C> <C>
Management fee revenue (note 4) $ 90 --
-------- -------
Operating costs and expenses:
Operating -- 2,777
Selling, general and administrative 1,218 43
Stock compensation (note 12) 2,388 181
Depreciation 13 --
-------- -------
3,619 3,001
-------- -------
Operating loss (3,529) (3,001)
Other income (expense):
Loss on sale of satellites (note 3) -- (83,765)
Interest income 673 --
Interest expense - parent (205)
Interest expense - other (137)
Share of losses of Astrolink (139) --
Minority interests in earnings of consolidated subsidiaries (391) --
Other, net -- 2
-------- -------
(199) (83,763)
-------- -------
Loss before income taxes (3,728) (86,764)
Income tax expense (note 13) -- --
-------- -------
Net loss (3,728) (86,764)
Accretion of redeemable preferred stock (note 11) (239) --
Dividends on redeemable preferred stock (1,250) --
-------- -------
Net loss attributable to common shareholders $ (5,217) (86,764)
======== =======
Basic and diluted loss per common share (note 5) $ (0.07) (1.28)
======== =======
Other comprehensive income:
Net loss $ (3,728) (86,764)
Unrealized holding gain on available for sale securities,
net of taxes 45,389 --
Unrealized loss on share appreciation right liability,
net of taxes (24,767) --
-------- -------
Comprehensive income (loss) $ 16,894 (86,764)
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Consolidated Statement of Stockholders' Equity
Three months ended March 31, 2000
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------------ PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SERIES A SERIES B CAPITAL INCOME DEFICIT EQUITY
-------- -------- ---------- ------------- ----------- -------------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $ 62,894 8,465 825,726 -- (832,358) 64,727
Net loss -- -- -- -- (3,728) (3,728)
Reversal of deferred tax asset
valuation allowance resulting from
the Liberty transaction (note 13) -- -- 114,628 -- -- 114,628
Unrealized holding gains on
available-for-sale securities,
net of taxes -- -- -- 45,389 -- 45,389
Unrealized holding losses on share
appreciation right liability,
net of taxes -- -- -- (24,767) -- (24,767)
Accretion and dividends on redeemable
preferred stock -- -- (1,489) -- -- (1,489)
Recognition of stock compensation
related to stock options and
restricted stock awards -- -- 35 -- -- 35
Issuance of Series A common stock
related to stock options exercised 5 -- 35 -- -- 40
Issuance of common stock related
to restricted stock awards 113 -- (113) -- -- --
Series B common stock exchanged
for Series A common stock 708 (708) -- -- -- --
-------- ----- ------- ------ -------- -------
Balance at March 31, 2000 $ 63,720 7,757 938,822 20,622 (836,086) 194,835
======== ===== ======= ====== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
--------- -------
amounts in thousands
(see note 6)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,728) (86,764)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss on sale of satellites -- 83,765
Depreciation 13 --
Share of losses of Astrolink 139 --
Minority interests in earnings of consolidated subsidiaries 391 --
Amortization of deferred loan costs 31 --
Stock compensation 2,388 181
Payments for stock compensation (898) --
Changes in operating assets and liabilities, net of the
effects of the Liberty transaction:
Change in receivables and prepaid expenses (122) --
Change in accruals and payables 1,471 --
--------- -------
Net cash used by operating activities (315) (2,818)
--------- -------
Cash flows from investing activities:
Net proceeds from sale of satellites -- 750
Capital expended for property and equipment (34) --
Proceeds received from the Liberty transaction 249,620 --
Other investing activities (44) --
--------- -------
Net cash provided by investing activities 249,542 750
--------- -------
Cash flows from financing activities:
Increase in due to Phoenixstar -- 2,820
Proceeds from share issuances from stock options 40 --
--------- -------
Net cash provided by financing activities 40 2,820
--------- -------
Net increase in cash and cash equivalents 249,267 752
Cash and cash equivalents:
Beginning of period 2,473 --
--------- -------
End of period $ 251,740 752
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
TCI Satellite Entertainment, Inc. and those of all majority-owned or
controlled subsidiaries, including the TSAT LLC's described in note 2,
(TSAT or the Company). All significant inter-company transactions have
been eliminated.
As a result of the Liberty transaction described in note 2, the Hughes
Transaction described in note 3 and the TSAT Asset Transfer described in
note 4, TSAT is currently a holding company.
The Company has had 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 development in
certain emerging technologies.
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 that are necessary to present
fairly the financial position of TSAT as of March 31, 2000 and the results
of its operations for the three months ended March 31, 2000 and 1999. The
results of operations for any interim period are not necessarily indicative
of the results for the entire year. These consolidated financial statements
should be read in conjunction with the consolidated financial statements
and related notes thereto included in TSAT's December 31, 1999 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 2000
presentation.
(2) LIBERTY TRANSACTION
On March 16, 2000, the Company entered into two transactions (collectively,
the Liberty Transactions), both of which closed simultaneously, with
Liberty Media Corporation (Liberty). Pursuant to the terms of the first
transaction, the Company acquired a beneficial interest in 5,084,745 shares
of Sprint PCS Stock with an aggregate market value on the closing
date of $300 million in exchange for TSAT Series A Preferred Stock with a
liquidation value of $150 million and TSAT Series B Preferred Stock (Series
B Preferred Stock) with a liquidation value of $150 million. The attributes
of both series of preferred stock are described in more detail in note 11.
The shares of Series B Preferred Stock have super voting rights which gives
Liberty voting control over the Company. Accordingly, since March 16, 2000,
the Company has been a consolidated subsidiary of Liberty. The Company
accounts for its investment in Sprint PCS Stock as an available for sale
security. The closing share price of Sprint PCS Stock as of March 31, 2000
was $65.50 per share.
I-6
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
Pursuant to the terms of the second transaction, the Company (through its
wholly owned subsidiaries) became the managing member of two newly formed
limited liability companies, Liberty Satellite, LLC (LSAT LLC) and LSAT
Astro LLC (LSAT Astro, and together with LSAT LLC, the TSAT LLC's). The
Company contributed its beneficial interest in 1,407,307 shares of General
Motors Class H Common Stock (GMH Stock), net of the General Motors share
appreciation right liability described in note 3, and its interest in JATO
Communications Corp. to LSAT LLC in exchange for a 10.59% ownership
interest in LSAT LLC. Liberty contributed its interests in various
satellite related assets, including an 86.01% ownership interest in LSAT
Astro, to LSAT LLC in exchange for the remaining 89.41% ownership interest
in LSAT LLC. As the Company is a consolidated subsidiary of Liberty, all of
the investments contributed by the Company and Liberty to the TSAT LLC's
were recorded at their net book values at the date of contribution. In
addition, TSAT received a 13.99% ownership interest in LSAT Astro in
exchange for a $60 million note payable to Liberty.
The Company operates and manages the activities of the TSAT LLC's and has
decision-making authority with respect to significant business transactions
entered into by such entities. Accordingly, the TSAT LLC's are included in
the Company's consolidated financial statements since March 16, 2000.
(3) 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 119DEG. West Longitude (the
In-Orbit Satellite) and one of which was used as a ground spare (the Ground
Satellite), its FCC authorizations with respect to the 119(degree) 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).
I-7
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
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 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.
I-8
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
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 GMH Stock valued at approximately $258 million
on the date of closing. At March 31, 2000, 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 AT&T Broadband, LLC., formerly known
as Tele-Communications, Inc., have committed to make funds available to
Phoenixstar, up to an aggregate of $1,013.3 million to fund such payments.
Through March 31, 2000, 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 might
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 Company accounts for its GMH Stock as an
available-for-sale security.
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 closing price of GMH Stock as of March 31, 2000 was $124.50. The
increase in the share appreciation right liability of $40,107,000 for the
three months ended March 31, 2000 is effectively hedged by the unrealized
holding gain on the GMH Stock, therefore, the amounts are included in other
comprehensive income.
I-9
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
(4) 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 (which, prior to the Restructuring was
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-Registered Trademark- programming service
(PRIMESTAR-Registered Trademark-) 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.
As of March 31, 2000, TSAT's share of losses of Phoenixstar had reduced the
book value of TSAT's investment in Phoenixstar to zero. Also, as noted
above, TSAT has no further commitment to fund obligations of Phoenixstar
and has agreed to forego any liquidating distribution upon dissolution of
Phoenixstar.
Effective February 1, 2000, the Company entered into a management agreement
with Phoenixstar pursuant to which the Company is managing Phoenixstar's
affairs in exchange for a monthly fee. Such fees aggregated $90,000 for the
three months ended March 31, 2000.
(5) EARNINGS (LOSS) PER COMMON SHARE
The Company computes earnings (loss) per share in accordance with SFAS No.
128, EARNINGS PER SHARE and Securities and Exchange Commission Staff
Accounting Bulletin No. 98 (SAB 98). SFAS No. 128 requires companies with
complex capital structures to present basic and diluted EPS. Basic EPS is
measured as the income or loss available to common shareholders divided by
the weighted average outstanding common shares for the period. Diluted EPS
is similar to basic EPS but presents the dilutive effect on a per share
basis of potential common shares (e.g. convertible securities,
I-10
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
options, etc.) as if they had been converted at the beginning of the
periods presented, or at original issuance date, if later. Dilutive common
shares that have an anti-dilutive effect (i.e., those that increase income
per share or decrease loss per share) are excluded from diluted EPS.
The basic earnings (loss) per common share is based on the weighted average
number of shares outstanding during the period of 71,359,000 and 67,783,000
shares for the three months ended March 31, 2000 and 1999, respectively.
Excluded from the computation of diluted earnings (loss) per common share
for the three months ended March 31, 2000 and 1999 are options and
convertible securities to acquire 18,940,000 and 8,515,000 shares of Series
A Common Stock, respectively, because inclusion of such options would be
anti-dilutive.
(6) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was not significant during the
three months ended March 31, 2000 and 1999.
Significant non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
--------- -------
(amounts in thousands)
<S> <C> <C>
Cash received in Liberty Transactions:
Value of investments received $(649,385) --
Debt issued 60,000 --
Deferred tax liability assumed 114,628 --
Redeemable preferred stock issued 185,372 --
Minority interests 539,005 --
--------- -------
$ 249,620 --
========= =======
Assumption of amounts due to Phoenixstar in exchange for
Ground Satellite $ -- 139,500
========= =======
</TABLE>
(7) INVESTMENT IN ASTROLINK
Pursuant to the Liberty Transactions described in note 2, Liberty
contributed its approximate 32% ownership interest in Astrolink to the TSAT
LLC's. Liberty contributed Astrolink at its net book value at the date of
the transaction. Astrolink is currently in its developmental stages but
intends to build a global telecom network using Ka-band geostationary
satellites to provide broadband data communications services. The first two
satellites are expected to be launched in 2002 and are intended to service
customers in North and South America, Europe and the Middle East.
Additional
I-11
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
spacecraft will extend the network worldwide and may provide in-orbit
back up as well. TSAT accounts for this investment using the equity
method. Summarized operational data for Astrolink for the period from
March 16, 2000 to March 31, 2000 is as follows:
<TABLE>
<S> <C>
Investment income $ 315,088
Operating expenses (732,571)
Depreciation and amortization (23,910)
---------
$(441,393)
=========
</TABLE>
(8) OTHER INVESTMENTS
Pursuant to the Liberty Transactions described in note 2, the Company owns
a number of satellite-related assets through the TSAT LLC's. All of these
investments were contributed at net book value at the date of the
transaction. The following table summarizes each investment March 31, 2000:
<TABLE>
<CAPTION>
ACCOUNTING
INVESTMENT METHOD BASIS
-------------------------------------------------------------- ---------- --------------
(in thousands)
<S> <C> <C>
(1) Investments in various Latin American satellite companies Cost $ 102,579
(2) XMSR Satellite Radio, Inc. (XMSR) AFS* 34,875
(3) iSKY, Inc. Cost 30,000
(4) Jato Communications Corp. Cost 5,000
-----------
$ 172,454
===========
</TABLE>
*Denotes an investment carried as an available-for-sale security.
(1) Represents the aggregate book basis of a number of different satellite
television operators located in Mexico, Brazil, Chile and Columbia. LSAT
LLC has a 10% ownership interest in each Latin and South American company.
(2) XMSR, a publicly traded company, plans to transmit up to 100 national audio
channels of music, news, talk, sports and children's programming from two
satellites directly to vehicle, home and portable radios. LSAT LLC
currently owns a 2% interest in XMSR. XMSR closing stock price as of March
31, 2000 was $34.875 per share.
(3) iSky, Inc. plans to build a Ka-band satellite network that will focus on
providing broadband services to homes and small offices in North America
and Latin America. LSAT LLC owns an approximate 19% interest in iSky, Inc.
(4) The Company's investment in Jato Communications Corp. was previously
included in the consolidated financial statements of TSAT at December 31,
1999.
I-12
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
(9) AMOUNTS DUE TO PARENT
Certain payroll and other expenses are advanced to TSAT by Liberty. Such
advances are non-interest bearing, aggregated $141,000 at March 31, 2000,
and are repaid monthly.
In addition, the Company entered into a $60,000,000 promissory note on
March 16, 2000 in exchange for its interest in LSAT Astro. The note bears
interest at Libor plus 2% (approximately 8.19% at March 31, 2000). Interest
payments are due semi-annually on the first day of March and September,
commencing on September 1, 2000. The note matures on March 16, 2003 at
which time all principal and unpaid interest is due. Accrued interest
aggregated $205,000 at March 31, 2000.
(10) DEBT
On November 19, 1999, TSAT entered into a loan agreement with the Bank of
America (TSAT Credit Facility) for the following facilities (i) Facility A
commitment of $5,000,000; (ii) Facility B commitment of $15,000,000; and
(iii) Facility C commitment of $5,000,000. Upon the "Collateral Pledge
Perfection Date" as defined as in the TSAT Credit Facility, Facility C
expires and the Facility A commitment increases to $10,000,000.
At March 31, 2000, $3,044,000 had been drawn on Facility C at an interest
rate of 10.5% per annum. The unused Facility A, Facility B and Facility C
amounts are charged a commitment fee at a rate of 0.375%.
(11) REDEEMABLE PREFERRED STOCK
On March 16, 2000, the Company issued 150,000 shares of Series A Cumulative
Preferred Stock (Series A Preferred Stock) and 150,000 shares of Series B
Preferred Stock to Liberty in exchange for shares of Sprint PCS Group
Stock.
SERIES A CUMULATIVE PREFERRED STOCK
The Series A Preferred Stock accrues dividends at 12% per annum at all
times prior to April 1, 2005, 11% on and after April 1, 2005 and prior to
April 1, 2010, and 10% on and after April 1, 2010. Such dividends are
payable the last day of each March, June, September and December,
commencing March 2000. Dividends not paid are added to the liquidation
preference on such date and remain a part of the liquidation preference
until such dividends are paid. Subject to certain specified exceptions,
the Company is prohibited from paying dividends on any shares, parity
securities or junior securities and from setting aside any money or assets
for any such purpose during any period in which the Company is in arrears
with respect to payment of dividends on Series A Preferred Stock.
The holder of Series A Preferred Stock is not entitled to vote on any
matters submitted to a vote of the shareholders of TSAT, except as required
by law and other limited exceptions.
I-13
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
The liquidation preference of each share of the Series A Preferred Stock
is equal to the sum of (a) the stated value per share of $1,000, plus
(b) an amount equal to all dividends accrued on such shares.
The Series A Preferred Stock is redeemable at the option of the Company by
action of the Board of Directors, in whole or from time to time in part, on
any business day after April 1, 2020 at the redemption price per share
equal to the liquidation preference of such share on the applicable
redemption date. If less than all outstanding shares are to be redeemed,
shares will be redeemed ratably among the holders. On or after April 1,
2020, the Series A Preferred Stock is redeemable at the option of the
holder for cash.
SERIES B CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK
The Series B Preferred Stock accrues dividends at the rate of 8% per annum.
Such dividends are payable the last day of each March, June, September and
December commencing March 31, 2000. Dividends not paid are added to the
liquidation preference on such date and remain a part of the liquidation
preference until such dividends are paid. On and after the occurrence and
during the continuance of a default, the dividend rate will be 10% per
annum. Subject to certain specified exceptions, the Company is prohibited
from paying dividends on any shares, parity securities or junior securities
and from setting aside any money or assets for any such purpose during any
period in which the Company is in arrears with respect to payment of
dividends on Series B Preferred Stock.
In addition to voting rights required by law, each share of Series B
Preferred Stock will be entitled to vote together with holders of the
Series A Common Stock as a single class upon all matters upon which holders
of Series A Common Stock are entitled to vote. In any such vote, the
holders of Series B Preferred Stock will be entitled to 5,580 votes per
share held. The Series B Preferred Stock is redeemable at the option of
the Company on April 1, 2005. At any date on or after April 1, 2020, the
Series B Preferred Stock is redeemable at the option of the holder for
cash.
The liquidation preference of each share of the Series B Preferred Stock
as of any date of determination is equal to the sum of (a) the stated value
per share of $1,000, plus (b) an amount equal to all dividends accrued on
such shares.
Each share of the Series B Preferred Stock is initially convertible into
113.1145 shares of Series B Common stock. Such conversion rate was
calculated as the liquidation value of such shares divided by $8.8406 and
is adjustable based on the adjusted liquidation value at the date of
conversion.
Both the Series A and Series B Preferred Stock were issued at a discount
from the stated values of such shares. Therefore, the Company is accreting
both the Series A Preferred Stock and the Series B Preferred Stock up to
the respective redemption values over the period from the issuance date to
the redemption date using the effective interest method. Accretion on the
Series A and B Preferred Stock for the period from March 16, 2000 to March
31, 2000 aggregated $239,000 and has been accounted for as a direct charge
to additional-paid-in-capital and has been added to net loss in the
calculation of loss attributed to common shareholders.
I-14
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
(A Consolidated Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
(12) STOCK OPTIONS
Certain officers and key employees of the Company are party to stock based
compensation arrangements. Participants under the Company's plans hold
options, some of which have tandem stock appreciation rights, which base
compensation on the performance of the Company's stock. Stock compensation
expense has been recorded in the accompanying consolidated financial
statements pursuant to APB Opinion No. 25. These estimates are subject to
future adjustments based upon vesting and the market value of the Company's
Series A Common Stock, when the rights are exercised. The consolidated
statements of operations and comprehensive income (loss) for the three
months ended March 31, 2000 include $2,388,000 in compensation expense as a
result of an increase in the Company's market price.
(13) INCOME TAXES
TSAT recognized no income tax benefit or expense during the three months
ended March 31, 2000 and 1999. TSAT is only able to realize income tax
benefits for financial reporting purposes to the extent that such benefits
are offset by TSAT's income tax liabilities or if TSAT generates taxable
income. 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.
Pursuant to the Liberty Transactions described in note 2, the Company
recorded an approximate $114 million deferred tax liability in connection
with its investment in Sprint, which is accounted for as an
available-for-sale security in the accompanying consolidated financial
statements. This future taxable income is used to offset historical net
taxable losses incurred by the Company. Accordingly, a portion of the tax
valuation allowance established as of December 31, 1999 for deferred tax
assets has been reversed. The Company has accounted for the decrease in the
tax valuation allowance for the three months ended March 31, 2000 as a
direct credit to additional paid-in capital in the accompanying
consolidated financial statements.
(14) COMMITMENTS
Pursuant to the terms of the Liberty Transactions, Liberty contributed
$249,620,000 in cash to LSAT Astro. The Company intends to use such cash to
fund future capital requirements of Astrolink. TSAT and LSAT Astro assumed
the obligation for such capital requirements in connection with the Liberty
Transactions.
I-15
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND 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 consolidated financial statements of TSAT,
and (ii) the consolidated 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, 1999.
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; 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 consolidated financial statements for a
discussion of the Liberty Transactions.
See note 3 to the accompanying consolidated financial statements for a
discussion of the transactions with Hughes.
See note 4 to the accompanying consolidated financial statements for a
description of the Restructuring Transaction.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Subsequent to the TSAT Asset Transfer, the Company has had no significant
operations other than (i) expenses associated with the operation and maintenance
of the Tempo Satellites, prior to the sale to Hughes effective June 4, 1999
($2,777,000 during the three months ended March 31, 1999) and (ii) general and
administrative expenses incurred to maintain the Company's status as a publicly
traded company ($328,000 and $43,000 during the three months ended March 31,
2000 and 1999, respectively). In addition, the Company incurred $800,000 in
investment banking, legal and accounting fees with respect to the Liberty
Transactions. The Company also recorded $2,388,000 in stock compensation expense
primarily as a result of an increase in stock price through March 31, 2000.
I-16
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
TSAT recognized no income tax benefit or expense during either of the three
months ended March 31, 2000 and 1999. 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 March 31, 2000 and December 31, 1999.
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. On November 19, 1999, TSAT
entered into the TSAT Credit Facility for the following facilities (i) Facility
A commitment of $5,000,000; (ii) Facility B commitment of $15,000,000; and (iii)
Facility C commitment of $5,000,000. Upon the "Collateral Pledge Perfection
Date" as defined as in the TSAT Credit Facility, Facility C expires and the
Facility A commitment increases to $10,000,000. At March 31, 2000, $3,044,000
had been drawn on Facility C at an interest rate of 10.5% per annum. The unused
Facility A, Facility B and Facility C amounts are charged a commitment fee at a
rate of 0.375%.
Through March 15, 2000, Facility A and Facility B of the TSAT Credit Facility
were collateralized by the GMH Stock. Upon consummation of the Liberty
Transactions and the contribution by TSAT of the GMH Stock to LSAT LLC, the
TSAT Credit Facility is no longer collateralized. As a result, the TSAT
Credit Facility was converted to a demand note which is due and payable upon
10 days notice from Bank of America.
In addition to the TSAT Credit Facility, the Company's current sources of
liquidity are its available cash and any proceeds from the monetization or
liquidation of the GMH Stock and Sprint PCS Stock. There can be no assurance
that TSAT will be able to monetize such investments on terms acceptable to
the Company.
Pursuant to the terms of the Liberty Transactions, Liberty contributed
$249,620,000 in cash to LSAT Astro. The Company intends to use such cash to fund
future capital requirements of Astrolink. TSAT and LSAT Astro assumed the
obligation for such capital requirements in connection with the Liberty
Transactions.
The Company currently intends to leverage its capital position and interests in
the TSAT LLC's to pursue strategic opportunities worldwide in the distribution
of internet data and other content via satellite and related businesses and is
actively seeking to develop or acquire an operating business related to, or
complementary with, such strategy.
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.
I-17
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the transaction described in notes 2 and 3 to the accompanying
consolidated financial statements, the Company has price risk related to
investments in equity securities. The following table summarizes the market risk
for the Company:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
----------------------------- ----------------------------
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Equity price risk:
GMH Stock $175,210,000 175,210,000 135,101,000 135,101,000
Sprint PCS Stock 333,050,000 333,050,000 -- --
XMSR Stock 34,875,000 34,875,000 -- --
</TABLE>
The Company has a share appreciation right liability of $109,066,000 at March
31, 2000 relating to its GMH Stock owned.
I-18
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company acquired from Liberty beneficial ownership in over 5,000,000 shares
of Sprint Corporation PCS Group common stock, having a market value of
approximately $330 million as of March 24, 2000, in exchange for the issuance by
the Company to Liberty of (i) Series A Preferred Stock of the Company with a
liquidation value of $150 million and (ii) Series B Preferred Stock of the
Company with a liquidation value of $150 million. The Series B Preferred Stock
is convertible into Series B Common Stock of the Company at a conversion price
of $8.84 per share, subject to adjustment, and prior to conversion represents
approximately 85% of the voting power of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
27 - Financial Data Schedule
(b) Report on Form 8-K filed during quarter ended March 31, 2000:
<TABLE>
<CAPTION>
Date of Report Items Reported Financial Statements Filed
---------------- -------------- --------------------------
<S> <C> <C>
March 22, 2000 Item 5 None
</TABLE>
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: May 12, 2000 By: /s/ Kenneth G. Carroll
-------------------------------------
Kenneth G. Carroll
Senior Vice President, Chief
Financial Officer and Treasurer
(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 MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 251,740
<SECURITIES> 508,261
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 331
<DEPRECIATION> 35
<TOTAL-ASSETS> 1,107,131
<CURRENT-LIABILITIES> 0
<BONDS> 3,044
186,861
0
<COMMON> 71,477
<OTHER-SE> 123,358
<TOTAL-LIABILITY-AND-EQUITY> 1,107,131
<SALES> 0
<TOTAL-REVENUES> 90
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 342
<INCOME-PRETAX> (3,728)
<INCOME-TAX> (3,728)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,728)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
