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: 000-23883
PHOENIXSTAR INC.
----------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1441684
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
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
PRIMESTAR, INC.
---------------------
(Former name)
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
None of Phoenixstar, Inc.'s shares of common stock were publicly traded as of
October 29, 1999. The number of shares outstanding of Phoenixstar, Inc.'s common
stock as of October 29, 1999 was:
Class A common stock 179,143,934 shares;
Class B common stock 8,465,324 shares; and
Class C common stock 13,332,365 shares.
PHOENIXSTAR, INC. AND SUBSIDIARIES
(Formerly PRIMESTAR, Inc.)
Form 10-Q
Index
Page
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 September 30, 1999 and 1998 I-4
Condensed Consolidated Statement of Stockholders'
Equity (Deficit) -
Nine months ended September 30, 1999 I-5
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 I-6
Notes to Condensed Consolidated Financial Statements I-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations I-15
Item 3. Qualitative and Quantitative Disclosures about Market Risk I-20
PART II. OTHER INFORMATION II-1
Item 6(a). Exhibits II-1
Signatures II-2
I-1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
Condensed Consolidated Balance Sheets
(unaudited)
September 30, December 31,
Assets 1999 1998
------------ --------------
amounts in thousands
Cash and cash equivalents $ 17,963 --
Receivables:
Trade receivables -- 117,655
Other receivables 2,479 29,387
Due from TCI Satellite Entertainment, Inc. (note 2) 14,425 --
------------ --------------
16,904 147,042
Less allowance for doubtful accounts 7,442
------------ --------------
16,904 139,600
Prepaid expenses 540 3,967
Investment in General Motors Corporation (note 2) 198,322 --
Property and equipment, at cost, net -- 1,148,590
Intangible assets, net of accumulated amortization -- 786,373
Deferred financing costs and other assets, net of
accumulated amortization -- 33,557
------------ --------------
Total assets $ 233,729 2,112,087
============ ==============
(Continued)
I-2
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
Condensed Consolidated Balance Sheets
(unaudited)
September 30, December 31,
Liabilities and Stockholders' Equity (Deficit) 1999 1998
-------------- ------------
amounts in thousands
Accounts payable $ 693 195,873
Accrued expenses 26,254 136,901
Accrued charges from related parties (notes 2 and 6) 9,849 14,792
Deferred revenue -- 100,948
General Motors Corporation share appreciation right liability
(note 2) 49,932 -
Debt (notes 2 and 6) 3,807 1,833,195
Deferred income taxes -- 75,057
Other liabilities 6,565 40,095
-------------- ------------
Total liabilities 97,100 2,396,861
-------------- ------------
Stockholders' equity (deficit):
Preferred stock, $.01 par value; authorized 350,000,000 shares;
none issued -- --
Class A common stock, $.01 par value; authorized 850,000,000
shares; issued and outstanding 179,143,934 in 1999 and 1998 1,791 1,791
Class B common stock, $.01 par value; authorized 50,000,000
shares; issued and outstanding 8,465,324 in 1999 and 1998 85 85
Class C common stock, $.01 par value; authorized 30,000,000
shares; issued and outstanding 13,332,365 in 1999 and 1998 133 133
Class D common stock, $.01 par value; authorized 150,000,000
shares; none issued -- --
Additional paid-in capital 1,976,435 1,511,041
Accumulated deficit (1,841,815) (1,797,824)
-------------- ------------
Total stockholders' equity (deficit) 136,629 (284,774)
-------------- ------------
Commitments and contingencies (notes 2 and 8)
Total liabilities and stockholders' equity (deficit) $ 233,729 2,112,087
============== ============
See accompanying notes to condensed consolidated financial statements.
I-3
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
Condensed Consolidated Statements of Operations
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
amounts in thousands, except per share amounts
Revenue:
Programming and equipment rental $ -- 356,576 535,902 865,508
Installation -- 14,784 10,028 45,864
------------ ------------ ------------ ------------
-- 371,360 545,930 911,372
------------ ------------ ------------ ------------
Operating costs and expenses:
Charges from PRIMESTAR Partners
L.P. (PPLP) (note 6) -- -- -- 82,235
Operating (note 6) 117 189,225 282,575 381,825
Selling, general and administrative
(note 6) 4,280 137,894 265,269 342,311
Depreciation -- 123,124 165,437 300,619
Amortization -- 32,486 32,500 64,854
------------ ------------ ------------ ------------
4,397 482,729 745,781 1,171,844
------------ ------------ ------------ ------------
Operating loss (4,397) (111,369) (199,851) (260,472)
Other income (expense):
Interest expense (495) (40,418) (62,766) (104,042)
Gain (loss) on sale of assets (4,258) -- 106,437 --
Other, net (note 2) 1,297 (493) 3,490 (7,046)
------------ ------------ ------------ ------------
(3,456) (40,911) 47,161 (111,088)
------------ ------------ ------------ ------------
Loss before income taxes and
extraordinary item (7,853) (152,280) (152,690) (371,560)
Income tax benefit -- 53,346 75,057 115,718
------------ ------------ ------------ ------------
Loss before
extraordinary item (7,853) (98,934) (77,633) (255,842)
Extraordinary item -- gain on
extinguishment of debt (note 2) -- -- 33,642 --
------------ ------------ ------------ ------------
Net loss (7,853) (98,934) (43,991) (255,842)
------------ ------------ ------------ ------------
Other comprehensive income:
Unrealized holding gain on available
for sale securities (note 2) 3,248 -- 35,507 --
Unrealized loss on share appreciation
rights (note 2) (3,248) -- (35,507) --
------------ ------------ ------------ ------------
-- -- -- --
------------ ------------ ------------ ------------
Comprehensive Loss $ (7,853) (98,934) (43,991) (255,842)
============ ============ ============ ============
Basic and diluted earnings (loss) per
common share (note 4) $ (.04) (.49) (.22) (1.63)
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
I-4
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Nine months ended September 30, 1999
(unaudited)
Total
Additional stockholders
Common stock paid-in Accumulated equity
------------------------------------------------
Class A Class B Class C Class D capital deficit (deficit)
----------- ----------- --------- -------- ---------- ------------- -------------
amounts in thousands
Balance at January 1, 1999 $ 1,791 85 133 --- 1,511,041 (1,797,824) (284,774)
Net loss --- --- --- --- --- (43,991) (43,991)
Contribution from stockholders --- --- --- --- 465,394 --- 465,394
---------- ------ ----- ------- ---------- ------------ -----------
Balance at September 30, 1999 $ 1,791 85 133 --- 1,976,435 (1,841,815) 136,629
========== ====== ===== ======= ========== ============ ===========
See accompanying notes to condensed consolidated financial statements.
I-5
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine months ended
September 30,
-------------------------------------
1999 1998
-------------------------------------
amounts in thousands
(see note 5)
Cash flows from operating activities:
Net loss before extraordinary item $ (77,633) (255,842)
Adjustments to reconcile net loss before extraordinary
item to net cash provided (used) by operating activities:
Depreciation and amortization 197,937 365,473
Accretion of debt discount 7,966 15,384
Stock compensation 427 8,254
Payments related to stock appreciation rights (1,577) ---
Payments related to restructuring charges (12,811) ---
Gain on sale of assets (106,437) ---
Deferred tax benefit (75,057) (115,718)
Noncash payment to TSAT 66,143 ---
Other non-cash charges 799 8,974
Changes in operating assets and liabilities, net of the
effects of sales and acquisitions:
Change in receivables 18,699 (51,672)
Change in prepaid expenses and other assets 1,569 4,505
Change in accruals and payables (223,702) 84,484
Change in deferred revenue 4,005 8,237
----------- ---------
Net cash provided (used) by operating activities (199,672) 72,079
----------- ---------
Cash flows from investing activities:
Capital expended for property and equipment (146,900) (387,746)
Proceeds from sale of assets 1,650,959 ---
Cash paid in Restructuring --- (54,894)
Other investing activities (4,554) (244)
----------- ---------
Net cash provided (used) by investing activities 1,499,505 (442,884)
----------- ---------
Cash flows from financing activities:
Borrowings of debt 22,000 724,761
Repayments of debt (1,769,264) (351,546)
Payment of deferred financing costs --- (9,483)
Stockholder contributions 465,394 ---
Proceeds from issuance of common stock --- 989
----------- ---------
Net cash provided (used) by financing activities (1,281,870) 364,721
----------- ---------
Net increase (decrease) in cash and cash equivalents 17,963 (6,084)
Cash and cash equivalents:
Beginning of period --- 6,084
---------- ---------
End of period $ 17,963 ---
========== =========
See accompanying notes to condensed consolidated financial statements.
1-6
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, INC.)
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
(1) Organization and Basis of Presentation
The accompanying condensed consolidated financial statements of
Phoenixstar, Inc. (formerly PRIMESTAR, Inc.) (Phoenixstar or the Company)
include the historical financial information of (i) TCI Satellite
Entertainment, Inc. (TSAT) and its consolidated subsidiaries for the period
prior to the April 1, 1998 Restructuring and (ii) Phoenixstar and its
consolidated subsidiaries for the period subsequent to March 31, 1998. All
significant intercompany transactions have been eliminated.
Phoenixstar was incorporated on August 27, 1997. Through the Hughes Closing
Date, as defined below, the Company owned and operated the PRIMESTAR(R)
direct to home satellite service throughout the continental U.S. The
PRIMESTAR(R) service is transmitted via a satellite (GE-2) owned and
operated by GE American Communications (GE Americom) at the 85 degrees West
Longitude (W.L.) orbital position. As a result of the consummation of the
Hughes Medium Power Transaction, as defined below, the Company is no longer
engaged in the digital satellite-based television services industry. The
Company is in the process of satisfying its remaining liabilities,
terminating any remaining contracts and winding up its business affairs.
The accompanying interim condensed consolidated financial statements of the
Company 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 the Company 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 the Company'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) The Hughes Transactions
Effective April 28, 1999 (the Hughes Closing Date) and pursuant to an asset
purchase agreement dated January 22, 1999 (the Hughes Medium Power
Agreement), the Company sold its medium-power direct broadcast satellite
business to Hughes Electronics Corporation (Hughes), a subsidiary of
General Motors Corporation, for aggregate consideration of $1,358.2 million
(the Hughes Medium Power Transaction). Such consideration was comprised of
$1,100 million in cash (before working capital adjustments and transaction
costs) and 4.871 million shares of General Motors Class H common stock (GMH
Stock) valued at $258.2 million on the Hughes Closing Date. The Company
recognized a gain of approximately $99 million during the quarter ended
March 31, 1999, before income tax effects, upon consummation of the Hughes
Medium Power Transaction. The agreement included a provision to adjust the
purchase price based on working capital adjustments to be settled
I-7
(Continued)
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, INC.)
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
within 150 days after the Hughes Closing Date. As of September 30, 1999,
Phoenixstar has accrued approximately $4,258,000 based on working capital
adjustments the Company has agreed to refund. The parties have not agreed
on the remaining items claimed by Hughes totaling approximately
$17,700,000, accordingly, these amounts have not been charged to
operations.
Concurrently with the Hughes Medium Power Transaction, Phoenixstar reached
an agreement (the Lock-up Agreement) with holders of approximately 84% of
the aggregate principal amount of its 10-7/8% Senior Subordinated Notes due
2007 (the Senior Subordinated Notes), 12-1/4% Senior Subordinated Discount
Notes due 2007 (the Senior Subordinated Discount Notes and, together with
the Senior Subordinated Notes, the Notes), and notes issued under its
Senior Subordinated Credit Facility dated as of April 1, 1998 (the Bridge
Loans). Holders participating in the privately negotiated transaction
agreed to sell their Notes and Bridge Loans to the Company for cash equal
to 85.6% of the aggregate principal amount thereof, plus stock appreciation
rights (SARs) on the shares of GMH Stock received by Phoenixstar in the
Hughes Medium Power Transaction. The Company recognized a gain on the
extinguishment of debt equal to $33,642,000 or $.17 per share in connection
with the Lock-up Agreement.
Each SAR issued in the transaction entitles the holder to receive a payment
from Phoenixstar at the end of one year from the date of issuance in the
amount, if any, by which the market price per share of GMH Stock at such
time exceeds $47.00 per share. At September 30, 1999, such obligation
aggregated $49,932,000. Participating Note holders and bridge lenders
received approximately 7.8 SARs per $1,000 principal amount of debt sold to
Phoenixstar pursuant to the Lock-up Agreement. Participating Note holders
and bridge lenders also agreed to (i) consent to the transaction with
Hughes and (ii) amend the indentures and credit agreement governing such
debt obligations to remove substantially all covenants, other than
covenants to pay interest on and principal of the Notes and Bridge Loan
when due and covenants relating to certain required purchase offerings.
Under the terms of the indentures and credit agreement governing
Phoenixstar's subordinated debt, Phoenixstar was required to make an offer
to purchase the remainder of the outstanding Notes and Bridge Loans at a
purchase price equal to 101% of par plus any accrued and unpaid interest.
In that connection, the Company purchased all of the remaining Notes and
Bridge Loans as of September 30, 1999.
In connection with the Hughes Medium Power Transaction and pursuant to a
funding agreement, dated as of March 31, 1999 (the Funding Agreement),
affiliates of the stockholders of the Company, other than TSAT, and an
affiliate of Tele-Communications, Inc. (collectively, the Stockholder
Affiliates) committed to make funds available to the Company either in the
form of capital contributions or loans, up to an aggregate of $1,013.3
million, subject to certain conditions and triggering events set forth in
the Funding Agreement (the Stockholder Commitment). Pursuant to such
commitment, the Stockholder Affiliates contributed to the Company $307.7
million on the Hughes Closing Date (the Initial Funding Amount). On the
Hughes Closing Date, the Company used a portion of the cash proceeds from
the Hughes Medium Power Transaction and the Initial Funding Amount to (i)
repay principal, interest and fees due under the Company's senior bank
credit facility
(Continued)
I-8
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, INC.)
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
($537.5 million) and (ii) fund amounts due pursuant to the Lock-up
Agreement ($543.5 million) and (iii) fund amounts to holders of Bridge
Loans who were not party to the Lock-up Agreement ($10.1 million).
Subsequent to the Hughes Closing Date, the Stockholder Affiliates
contributed to the Company an additional $157.7 million pursuant to the
Funding Agreement. In addition, Stockholder Commitments in the amount of
$382.6 million expired undrawn. As a result of the foregoing, remaining
Stockholder Commitments at September 30, 1999 aggregated $165.3 million.
In connection with their approval of the Hughes Medium Power Transaction
and other transactions, the stockholders of Phoenixstar also 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 dated as of January 22, 1999 (the Phoenixstar Payment
Agreement). In consideration of the Phoenixstar Payment, TSAT agreed to
approve the Hughes Medium Power Transaction and Hughes High Power
Transaction (as defined below) as a stockholder of Phoenixstar, to modify
certain agreements to facilitate the Hughes High Power Transaction, and to
issue the Company a share appreciation right with respect to the shares of
GMH Stock received as the Phoenixstar Payment, granting the Company the
right to any market price appreciation in such GMH Stock over the one year
period following the date of issuance, over an agreed strike price of
$47.00. At September 30, 1999, the value of such share appreciation right
equaled $14,425,000, based upon the market value of GMH Stock on such date.
The portion of the increase in the share appreciation right liability which
is directly offset by the unrealized holding gain on GMH stock of
$3,248,000 and $35,507,000 for the three and nine months ended September
30, 1999, respectively, is treated as a component of other comprehensive
income since they constitute an effective hedge. The remaining portion of
the increase in the share appreciation right liability of $1,319,000 and
$14,425,000 for the three months and nine months ended September 30, 1999,
respectively, is treated as other expense and is directly offset by other
income relating to the receivable due from TSAT.
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. On the Hughes Closing Date, the Company issued to TSAT
1.407 million shares of GMH Stock in satisfaction of the Phoenixstar
Payment.
At September 30, 1999, the Company is responsible for (i) the payment of
certain obligations not assumed by Hughes and (ii) 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. The Company currently expects to fund such obligations with
available cash and additional advances and/or contributions from the
Stockholder Affiliates pursuant to the Stockholder Commitment. Such costs
will be charged to expense as they become known.
(Continued)
I-9
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
In a separate transaction and effective June 4, 1999, the Company and TSAT
completed the sale of their high power direct broadcast satellite (DBS)
assets to Hughes pursuant to an asset purchase agreement dated as of
January 22, 1999 (the Hughes High Power Agreement), among Tempo Satellite,
Inc., (Tempo) a wholly-owned subsidiary of TSAT, the Company, PPLP, a
wholly-owned subsidiary of the Company, and Hughes. The assets transferred
by Tempo pursuant to the Hughes High Power Agreement consisted of Tempo's
two high-power DBS satellites, one of which was in orbit at 119 degrees
W.L. (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
degrees W.L. orbital location (the FCC License), and certain related assets
(collectively, the Tempo High Power Assets).
Tempo had previously granted the Company 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 PPLP the
right to purchase or lease 100% of the capacity of the DBS system being
constructed by Tempo (the Tempo Capacity Rights), and PPLP 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
the Company 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 the Company and PPLP 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.
In addition, as required by the Hughes High Power Agreement, the Company
and TSAT agreed to terminate the previously announced merger of TSAT with
and into the Company, effective as of such first closing.
(Continued)
I-10
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
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 the Company and PPLP
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. In addition, the
Company agreed to forgive amounts due from Tempo not assumed by Hughes in
the amount of $9,346,000.
(3) The Restructuring
Effective April 1, 1998 (the Restructuring Closing Date) and pursuant to
(i) a Merger and Contribution Agreement dated as of February 6, 1998 (the
Restructuring Agreement), among TSAT, the Company, 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 Americom, and (ii) an Asset Transfer
Agreement dated as of February 6, 1998, between TSAT and the Company, a
business combination (the Restructuring) was consummated. In connection
with the Restructuring, TSAT contributed and transferred to the Company
(the TSAT Asset Transfer) all of TSAT's assets and liabilities except (i)
the capital stock of Tempo, (ii) the consideration received by TSAT in the
Restructuring and (iii) the rights and obligations of TSAT under agreements
with the Company and others. In addition, (i) the business of PPLP, (ii)
the business of distributing the PRIMESTAR(R) programming service
(PRIMESTAR(R)), including certain related assets and liabilities of each
of TWE, Newhouse, Comcast, Cox and affiliates of MediaOne, and (iii) the
interest in PPLP of each of TWE, Newhouse, Comcast, Cox, affiliates of
MediaOne and GE Americom (collectively, the Non-TSAT Parties) were
consolidated into the Company.
In connection with the Restructuring, each of TSAT, Comcast, Cox, MediaOne,
Newhouse, TWE and GE Americom received from the Company (i) cash or an
assumption of indebtedness, (ii) shares of Class A Common Stock, $.01 par
value per share, of the Company, (iii) in the case of TSAT only, shares of
Class B Common Stock, $.01 par value per share, of the Company, and (iv)
except in the case of TSAT and GE Americom, shares of Class C Common Stock,
$.01 par value per share, of the Company, in each case in an amount
determined pursuant to the Restructuring Agreement. The total consideration
paid by Phoenixstar to the Non-TSAT Parties (including assumed liabilities)
aggregated approximately $2.2 billion comprising $1.3 billion of cash and
assumed liabilities and $900 million of common stock.
The TSAT Asset Transfer was recorded at TSAT's historical cost, and the
remaining elements of the Restructuring, as set forth above, were accounted
for using the purchase method of accounting. The fair value of the
consideration issued to the Non-TSAT Parties was allocated to the assets
and liabilities acquired based upon the estimated fair values of such
assets and liabilities.
(Continued)
I-11
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
TSAT was identified as the acquirer for accounting purposes and the
predecessor for financial reporting purposes due to the fact that TSAT
owned the largest interest in the Company immediately following
consummation of the Restructuring.
On a pro forma basis, the Company's revenue, net loss and loss per common
share for the nine months ended September 30, 1998 would have been
$1,115,435, $346,352 and $1.72 assuming the Restructuring had been
consummated on January 1, 1998. Such unaudited pro forma financial
information is based upon historical results of operations adjusted for
acquisition costs and, in the opinion of management, is not necessarily
indicative of the results had the Restructuring been consummated on January
1, 1998.
(4) Loss Per Common Share
The loss per common share for the three months and nine months
ended September 30, 1999 and 1998 is based on the weighted average number
of shares outstanding during the period (200,942,000 for the three months
and nine months ended September 30, 1999; and 200,942,000 and 156,506,000
for the three months and nine months ended September 30, 1998,
respectively).
(5) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $69,055,000 and $92,514,000 during the nine
months ended September 30, 1999 and 1998, respectively. Cash paid for
income taxes was not material during such periods.
Significant non-cash investing and financing activities for the nine months
ended September 30, 1998 are reflected in the following table (amounts in
thousands):
Cash paid in Restructuring:
Property and equipment acquired $ 716,821
Intangible assets 1,500,034
Current liabilities assumed, net of
current assets (116,849)
Debt assumed (903,299)
Deferred tax liability (222,585)
Common stock issued (919,228)
----------
$ 54,894
==========
(6) Transactions With Related Parties
The Company was a party to a satellite transponder service agreement, as
amended (the GE-2 Agreement) with an affiliate of GE Americom for satellite
service on GE-2. Charges to the Company for the use of GE-2 and other
services provided by GE Americom aggregated $28,392,000 and $42,278,000 for
the nine months ended September 30, 1999 and 1998, respectively and are
included in operating expenses in the accompanying condensed consolidated
statements of operations.
(Continued)
I-12
PHOENIXSTAR, INC AND SUBSIDIARES
(formerly PRIMESTAR, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(unaudited
The Company continues to make payments on a lease related to a satellite
transponder agreement, as amended (the K1/K2 Agreement) with GE Americom
for satellite service on K2. As these services were not included in the
transactions with Hughes as described in Note 2, and are no longer
providing benefit to the Company, the remaining amounts have been accrued
and are reflected on the balance sheet. Monthly payments continue through
July of 2008 and approximate $48,000.
TCI and the Non-TSAT Parties, other than GE Americom, arranged for letters
of credit (the GE-2 Letters of Credit) to support the Company's obligations
under the GE-2 Agreement. Pursuant to the Restructuring Agreement, the
Company is obligated to reimburse TCI and the Non-TSAT Parties for fees
related to the Partnership Letters of Credit and the GE-2 Letters of
Credit. Such reimbursements aggregating $5,591,000 and $7,739,000 during
the nine months ended September 30, 1999 and 1998, respectively are
reflected in accrued charges to related parties and the related interest
expense is included in the accompanying condensed consolidated statement of
operations.
From April 1, 1998 to April 28, 1999, a subsidiary of TCI provided
satellite uplink services to the Company. Charges for such services
aggregated $4,843,000 and $7,885,000 for the nine months ended September
30, 1999 and 1998, respectively and are included in operating expenses in
the accompanying consolidated statements of operations.
TCI also provided the Company with customer support services from TCI's
Boise, Idaho call center. Amounts charged by TCI to the Company for such
services aggregated $12,024,000 and $16,565,000 during the nine months
ended September 30, 1999 and 1998, respectively and are included in
selling, general and administrative expenses in the accompanying condensed
consolidated statements of operations.
Prior to the Restructuring, the Partnership provided programming services
to TSAT and other authorized distributors in exchange for a fee based upon
the number of subscribers receiving programming services. In addition, the
Partnership arranged for satellite capacity and uplink services, and
provided national marketing and administrative support services in exchange
for a separate authorization fee.
(7) Income Taxes
Phoenixstar recognized no income tax benefit or expense during of the nine
months ended September 30, 1999. Phoenixstar 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 Phoenixstar generates
taxable income. For financial reporting purposes, all of Phoenixstar'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, Phoenixstar 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.
(Continued)
I-13
PHOENIXSTAR, INC AND SUBSIDIARES
(formerly PRIMESTAR, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
(8) Commitments and Contingencies
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to
the accompanying condensed consolidated financial statements.
I-14
PHOENIXSTAR, INC AND SUBSIDIARES
(formerly PRIMESTAR, Inc.)
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 Phoenixstar and should be read
in conjunction with (i) the accompanying consolidated financial statements of
Phoenixstar, and (ii) the financial statements and related notes of the Company,
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company'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 Phoenixstar 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;
future financial performance, including availability, terms and deployment of
capital; 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;
reliance on software programs used by the Company or its business partners
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. Phoenixstar expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in Phoenixstar's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
Material Changes in Results of Operations
As discussed in note 2 to the accompanying consolidated financial statements,
the Hughes Medium Power Transaction was consummated on April 28, 1999. As a
result of such consummation, the Company is no longer engaged in the digital
satellite-based television service industry. The Company is in the process of
satisfying its remaining liabilities, terminating any remaining contracts and
winding up its business affairs.
As discussed in note 3 to the accompanying consolidated financial statements,
the Restructuring was consummated on April 1, 1998. As a result of the
Restructuring, the Company owned and operated the PRIMESTAR(R) digital satellite
business. The Company offered a direct to home satellite service with over 160
channels of digital video and audio programming throughout the continental
United States. Prior to the Restructuring, the PRIMESTAR(R) service was owned
and operated by the Partnership and separately distributed and serviced by
affiliates of the partners of the Partnership (the Distributors). As a result of
the Restructuring, the entire PRIMESTAR(R) digital satellite business was
consolidated into the Company.
TSAT was identified as the acquiror for accounting purposes and the predecessor
for financial reporting purposes due to the fact that TSAT owned the largest
interest in the Company immediately following the consummation of the
Restructuring. Accordingly, the periods prior to the Restructuring represent the
results ofoperations of TSAT, and the periods subsequent to the Restructuring
include the results of
(Continued)
I-15
PHOENIXSTAR, INC AND SUBSIDIARES
(formerly PRIMESTAR, Inc.)
operations of TSAT, the Partnership and the Non-TSAT Parties. To the extent not
otherwise described, increases in the Company's revenue and operating, selling,
general and administrative expenses, as detailed below, are primarily related to
the Restructuring.
The Company added 20,000 net customers during the three months ended March 31,
1999 for a total of 2,316,000 customers at March 31, 1999. During the three
months ended March 31, 1999 and 1998 and the years ended December 31, 1998 and
1997, (i) the Company's annualized subscriber churn rate (which represents the
annualized number of subscriber terminations divided by the weighted average
number of subscribers during the period) was 37.3%, 27.1%, 33.2% and 30.1%,
respectively and (ii) the average subscriber life implied by such subscriber
churn rate was 2.7 years, 3.7, years 3.0 years and 3.3 years, respectively. The
Company believes that the higher churn rate in 1999 is due to increased
competitive pressures in 1999 and the announcement of the Hughes Medium Power
Transaction. In addition, the Company reduced its marketing efforts in the first
quarter of 1999 as a result of the announcement of the Hughes Medium Power
Transaction.
During 1998, in an effort to remain competitive, attract new customers and
retain existing customers, the Company implemented various new service offerings
and changed the pricing of certain of its existing offerings. For example, the
Company implemented a national pricing and programming package structure
effective July 1, 1998, whereby customers would receive the same programming
packages for the same price throughout the country. Such national pricing
structure had the effect of lowering certain rates for certain packages in
certain areas of the country. In addition, the Company initiated promotional
offers including installation rebates and packages with reduced rental fees. The
Company believes that such new service offerings, pricing changes and
promotional offers attracted new customers and helped retain existing customers,
but had a negative impact on the Company's recurring revenue per customer and
installation revenue per new customer installed.
Revenue decreased 59% and increased 1% during the six months ended June 30, 1999
and 1998 respectively, as compared to the corresponding prior year periods. The
Company's average monthly programming and equipment rental revenue per customer
decreased from $57 during 1998 to $55 during 1999. Such decrease was primarily
the result of the aforementioned changes in the price structure of the Company's
service offerings. The average installation revenue from each customer installed
decreased from $95 in 1998 to $36 in 1999. Such decrease is primarily due to a
$50 rebate offer that was initiated by the Company in April 1998 and increased
to $100 in September 1998.
Through the Restructuring Closing Date, the Partnership provided programming
services to the Company and other authorized Distributors in exchange for a fee
based upon the number of customers receiving programming services. The
Partnership also arranged for satellite capacity and uplink services, and
provided national marketing and administrative support services, in exchange for
a separate authorization fee from each Distributor, including the Company, based
on such Distributor's total number of authorized satellite receivers.
Subsequent to the Restructuring Closing Date, operating expenses were primarily
comprised of programming, satellite capacity and uplink costs (costs, which
prior to the Restructuring were included in charges from the Partnership) and
amounts related to customer fulfillment activities. Also included in operating
expenses for the nine months ended September 30, 1999 is $15,192,000 related to
the cancellation of the Company's high power uplinking contract.
(Continued)
I-16
PHOENIXSTAR, INC AND SUBSIDIARES
(formerly PRIMESTAR, Inc.)
Selling and marketing expenses, which represented 16% of revenue during the nine
months ended September 30, 1999, include sales salaries and commissions,
marketing and advertising expenses, and costs associated with the operation of
customer service call centers. General and administrative expenses represented
32% and 9% of revenue during the nine months ended September 30, 1999 and 1998,
respectively. The increase in such percentage is primarily attributable to (i)
the Phoenixstar Payment ($66,143,000) (ii) the accrual of severance payments in
connection with the Hughes Medium Power Transaction ($25,740,000) and (iii)
contract and lease cancellation fees incurred as a result of the Hughes Medium
Power Transaction ($10,393,000).
During the second half of 1997, the Company began offering a marketing program
that allowed subscribers to purchase the Company's proprietary satellite
reception equipment at a price that was less than the Company's cost. Losses
incurred by the Company on such sales of satellite reception equipment are
included in selling expense in the period such sales are consummated. As the
Company stopped aggressively marketing such program in the fourth quarter of
1998, such losses decreased to $299,000 in 1999 from $15,115,000 during 1998.
The $135,182,000 or 45% decrease in depreciation expense during the nine months
ended September 30, 1999, as compared to the corresponding prior year period, is
the result of the sale of the Company's depreciable assets in connection with
the Hughes Medium Power Transaction.
The Company recognized a gain of $99,080,000 upon consummation of the Hughes
Medium Power Transaction and a gain of $11,615,000 upon the consummation of the
Hughes High Power Transaction. The Company recognized a loss of $4,258,000
during the three months ended September 30, 1999 in connecting with certain
working capital adjustments. In addition, the Company recognized a gain on the
extinguishment of debt of $33,642,000 in connection with the Lock-up Agreement.
The Company's loss before extraordinary item of $77,633,000 for the nine months
ended September 30, 1999 represents a decrease of $178,209,000 as compared to a
loss before extraordinary item of $255,842,000 for the nine months ended
September 30, 1998. Such decreased loss before extraordinary item is due
primarily to the gains recorded in connection with the Hughes Transactions
partially offset by an increased operating loss.
Material Changes in Financial Condition
Concurrently with the Hughes Medium Power Transaction, Phoenixstar reached
agreement with holders of approximately 84% of the aggregate principal amount of
its Senior Subordinated Notes, Senior Subordinated Discount Notes and Bridge
Loans. Holders participating in the privately negotiated transaction agreed to
consent to the transaction with Hughes, amend the indentures and credit
agreement governing such debt obligations to remove substantially all covenants,
and sell their Notes and Bridge Loans to the Company for cash equal to 85.6% of
the aggregate principal amount thereof, plus stock appreciation rights on the
shares of GMH Stock received by Phoenixstar in the Hughes Medium Power
Transaction. Each SAR issued in the transaction entitles the holder to receive a
payment from Phoenixstar at the end of one year from the date of issuance in the
amount, if any, by which the market price per share of GMH Stock at such time
exceeds $47.00 per share. Participating note holders and bridge lenders received
approximately 7.8 SARs per $1,000 principal amount of debt sold to Phoenixstar
pursuant to the Lock-up Agreement.
(Continued)
I-17
PHOENIXSTAR, INC AND SUBSIDIARES
(formerly PRIMESTAR, Inc.)
Under the terms of the indentures and credit agreement governing Phoenixstar's
subordinated debt, Phoenixstar was required to make an offer to purchase the
remainder of the outstanding Notes and Bridge Loans at a purchase price equal to
101% of par plus any accrued and unpaid interest. In that connection, the
Company purchased all of the remaining Notes and Bridge Loans as of September
30, 1999.
In connection with the Hughes Medium Power Transaction and pursuant to the
Funding Agreement, the Stockholder Affiliates committed to make funds available
to the Company, either in the form of capital contributions or loans, up to an
aggregate of $1,013.3 million, subject to certain conditions and triggering
events set forth in the Funding Agreement. Pursuant to such commitment, the
Stockholder Affiliates contributed to the Company $307.7 million on the Hughes
Closing Date. On the Hughes Closing Date, the Company used a portion of the cash
proceeds from the Hughes Medium Power Transaction and the Initial Funding Amount
to (i) repay principal, interest and fees due under the Company's bank credit
facility ($537.5 million), (ii) fund amounts due pursuant to the Lock-up
Agreement ($543.5 million) and (iii) fund amounts to holders of Bridge Loans who
were not party to the Lock-up Agreement ($10.1 million).
Subsequent to the Hughes Closing Date, the Stockholder Affiliates contributed to
the Company an additional $157.7 million pursuant to the Funding Agreement. In
addition, Stockholder Commitments in the amount of $382.6 million expired. As a
result of the foregoing, remaining Stockholder Commitments at September 30, 1999
aggregated $165.3 million.
In addition, the stockholders of Phoenixstar approved the payment to TSAT of
consideration in the form of 1.407 million shares of GMH Stock, subject to the
terms and conditions set forth in the Phoenixstar Payment Agreement. In
consideration of the Phoenixstar Payment, TSAT 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 the Company a share appreciation right with respect to
the shares of GMH Stock received as the Phoenixstar Payment, granting the
Company the right to any market price appreciation in such GMH Stock over 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. On the
Hughes Closing Date, the Company issued to TSAT 1.407 million shares of GMH
Stock in satisfaction of the Phoenixstar Payment.
During the second quarter of 1999, the Company used the cash proceeds from the
Hughes High Power Transaction and funds provided by the Stockholder Affiliates
pursuant to the Funding Agreement to repay the Partnership Credit Facility. In
connection with such repayment, letters of credit which collateralized the
Partnership Credit Facility and which were arranged for by the Stockholder
Affiliates were terminated.
(Continued)
I-18
PHOENIXSTAR, INC AND SUBSIDIARES
(formerly PRIMESTAR, Inc.)
At September 30, 1999, the Company is responsible for (i) the payment of certain
obligations not assumed by Hughes and (ii) the payment of costs, currently
estimated not to exceed $180 million, associated with the termination of certain
vendor and service contracts and lease agreements not assumed by Hughes. The
Company currently expects to fund such obligations with available cash and
additional advances and/or contributions from the Stockholder Affiliates
pursuant to the Stockholder Commitments.
As noted above, the consideration received by the Company in the Hughes Medium
Power Transaction comprised of $1.1 billion in cash and 4.871 million shares of
GMH Stock. Pursuant to the terms of the Hughes Medium Power Agreement,
Phoenixstar will not be able to dispose of the GMH Stock for a period of one
year from the closing of the Hughes Medium Power Transaction except for certain
transfers to affiliates. Phoenixstar is considering its options with respect to
the GMH Stock, but has not yet made any decisions as to the ultimate disposition
of such stock.
The Company has a history of operating losses and reported an accumulated
deficit at September 30, 1999. The Stockholder Affiliates have committed to make
funds available to the Company, either in the form of capital contributions or
loans, up to an aggregate of $165.3 million, subject to certain conditions and
triggering events set forth in the Funding Agreement. Management of the Company
believes, but cannot assure, that when such funds are combined with the
Company's existing sources of liquidity, that the Company will be able to meet
its obligations as they become due and payable.
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 the companies with whom the Company conducts
business, will properly recognize and process date sensitive information before
and after January 1, 2000. The following discussion is based on information
currently available to the Company.
Prior to the Hughes Closing Date, the Company completed an initial assessment
which identified areas of risk associated with the Year 2000. The Year 2000
Program Office was established to oversee the Company'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 was
initiated in the first quarter of 1999.
In connection with the Hughes Medium Power Transaction, Hughes acquired
substantially all of the Company's systems. The Company has analyzed and
continues to analyze its remaining internal IT and non-IT systems. The Company
believes that such systems are currently capable of functioning without
substantial Y2K compliance problems.
Through September 1999, the Company has 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 the Company'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.
I-19
PHOENIXSTAR, INC AND SUBSIDIARES
(formerly PRIMESTAR, Inc.)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of the transactions 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 - $ 198,322,000 198,322,000 -- --
equity securities
The Company has a share appreciation right liability of $49,932,000 at September
30, 1999 relating to its equity securities.
I-20
PART II. OTHER INFORMATION
ITEM 6. Exhibits
(a) Exhibit
27 - Financial Data Schedule
II-1
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.
PHOENIXSTAR, INC.
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