-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IAz+4sx2Ff7KB1f7vMoXh8TmMQ8Vohn6zotJB2NLbxEn/BGjFjzpFX6/0A9fhdzu vMeMmUIR0ZRxcAAPC5dn2A== 0000927356-99-001283.txt : 19990812 0000927356-99-001283.hdr.sgml : 19990812 ACCESSION NUMBER: 0000927356-99-001283 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOENIXSTAR INC CENTRAL INDEX KEY: 0001054666 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 841441684 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-45835 FILM NUMBER: 99683630 BUSINESS ADDRESS: STREET 1: 8085 S CHESTER STREET 2: STE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037124600 MAIL ADDRESS: STREET 1: 8085 S CHESTER STREET 2: STE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: PRIMESTAR INC DATE OF NAME CHANGE: 19980205 10-Q 1 PHOENIXSTAR, INC. FORM 10-Q 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 June 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 No.) incorporation or organization)
8085 South Chester Street, Suite 110 Englewood, Colorado 80112 --------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 712-4609 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 July 30, 1999. The number of shares outstanding of Phoenixstar, Inc.'s common stock as of July 30, 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.) Condensed Consolidated Balance Sheets (unaudited)
June 30, December 31, 1999 1998 --------------- ------------- amounts in thousands Assets Cash and cash equivalents $ 36,232 -- Receivables: Trade receivables -- 117,655 Other receivables 4,445 29,387 Due from TCI Satellite Entertainment, Inc. (note 2) 13,106 -- --------------- ------------- 17,551 147,042 Less allowance for doubtful accounts -- 7,442 --------------- ------------- 17,551 139,600 --------------- ------------- Prepaid expenses 393 3,967 Investment in General Motors Corporation (note 2) 195,074 -- 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 --------------- ------------- $ 249,250 2,112,087 =============== ============= (continued)
I-1 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Condensed Consolidated Balance Sheets, continued (unaudited)
June 30, December 31, 1999 1998 ------------- ------------ amounts in thousands Liabilities and Stockholders' Equity (Deficit) - ---------------------------------------------- Accounts payable $ 1,298 195,873 Accrued expenses 51,566 136,901 Accrued charges from related parties 5,080 14,792 Deferred revenue -- 100,948 General Motors Corporation share appreciation right liability (note 2) 45,365 -- Debt (note 2) 3,893 1,833,195 Deferred income taxes -- 75,057 Other liabilities 6,566 40,095 ------------ ----------- Total liabilities 113,768 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 179,143,934 in 1999 and 1998 1,791 1,791 Class B common stock, $.01 par value; authorized 50,000,000 shares; issued 8,465,324 in 1999 and 1998 85 85 Class C common stock, $.01 par value; authorized 30,000,000 shares; issued 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 1,967,435 1,511,041 Accumulated deficit (1,833,962) (1,797,824) ------------ ----------- Total stockholders' equity (deficit) 135,482 (284,774) ------------ ------------ Commitments and contingencies (notes 2 and 7) $ 249,250 2,112,087 ============ ===========
See accompanying notes to condensed consolidated financial statements. I-2 PHOENIXSTAR, INC. AND SUBSISDIARIES (formerly PRIMESTAR, INC.) Condensed Consolidated Statements of Operations (unaudited)
Three months ended Six months ended June 30, June 30, ------------------------------------- ------------------------------------ 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- amounts in thousands, except per share amounts Revenue: Programming and equipment rental $ 150,636 354,675 535,902 508,932 Installation 1,430 16,837 10,028 31,080 ---------------- ---------------- ---------------- ---------------- 152,066 371,512 545,930 540,012 ---------------- ---------------- ---------------- ---------------- Operating costs and expenses: Charges from PRIMESTAR Partners L.P. ("PPLP") (note 6) -- -- -- 82,235 Operating (note 6) 82,794 182,753 282,458 192,600 Selling, general and administrative (note 6) 155,784 144,207 260,989 204,417 Depreciation 50,976 112,390 165,437 177,495 Amortization 8,125 32,368 32,500 32,368 ---------------- ---------------- ---------------- ---------------- 297,679 471,718 741,384 689,115 ---------------- ---------------- ---------------- ---------------- Operating loss (145,613) (100,206) (195,454) (149,103) Other income (expense): Interest expense (19,843) (49,447) (62,271) (63,624) Gain on sale of assets 110,695 -- 110,695 -- Other, net 1,920 (110) 2,193 (6,553) ---------------- ---------------- ---------------- ---------------- 92,772 (49,557) 50,617 (70,177) ---------------- ---------------- ---------------- ---------------- Loss before income taxes and extraordinary item (52,841) (149,763) (144,837) (219,280) Income tax benefit 75,057 62,372 75,057 62,372 ---------------- ---------------- ---------------- ---------------- Earnings (loss) before extraordinary item 22,216 (87,391) (69,780) (156,908) Extraordinary item - gain on extinguishment of debt (note 2) 33,642 -- 33,642 -- ---------------- ---------------- ---------------- ---------------- Net earnings (loss) 55,858 (87,391) (36,138) (156,908) Other comprehensive income: Unrealized holding gain on available for sale securities 11,475 -- 11,475 -- Unrealized loss on share appreciation rights (11,475) -- (11,475) -- ---------------- ---------------- ---------------- ---------------- -- -- -- -- ---------------- ---------------- ---------------- ---------------- Comprehensive income (loss) $ 55,858 (87,391) (36,138) (156,908) ================ ================ ================ ================ Basic and diluted earnings (loss) per common share (note 4) $ .28 (.43) (.18) (1.17) ================ ================ ================ ================
See accompanying notes to condensed consolidated financial statements. I-3 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Condensed Consolidated Statement of Stockholders' Equity (Deficit) Six months ended June 30, 1999 (unaudited)
Total Common stock Additional stockholders' ----------------------------------------------- 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 -- -- -- -- -- (36,138) (36,138) Contribution from stockholders -- -- -- -- 456,394 -- 456,394 ----------- ---------- ---------- ---------- ---------- ----------- ---------- Balance at June 30, 1999 $ 1,791 85 133 -- 1,967,435 (1,833,962) 135,482 =========== ========== ========== ========== ========== =========== ==========
See accompanying notes to condensed consolidated financial statements. I-4 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, ----------------------------- 1999 1998 ------------ ------------ amounts in thousands (see note 5) Cash flows from operating activities: Net loss before extraordinary item $ (69,780) (156,908) Adjustments to reconcile net loss before extraordinary item to net cash provided (used) by operating activities: Depreciation and amortization 197,937 209,863 Accretion of debt discount 7,966 10,452 Stock compensation 427 9,986 Payments related to stock appreciation rights (1,577) -- Payments related to restructuring charges (12,811) -- Gain on sale of assets (110,695) -- Deferred tax benefit (75,057) (62,372) Noncash payment to TSAT 66,143 -- Other non-cash charges 799 7,678 Changes in operating assets and liabilities, net of the effects of sales and acquisitions: Change in receivables 16,734 (21,671) Change in prepaid expenses and other assets 1,716 (299) Change in accruals and payables (198,296) 45,644 Change in deferred revenue 4,005 890 ------------ ------------ Net cash provided (used) by operating activities (172,489) 43,263 ------------ ------------ Cash flows from investing activities: Capital expended for property and equipment (146,900) (216,198) Proceeds from sale of assets 1,650,959 -- Cash paid in Restructuring -- (54,894) Other investing activities (4,554) (75) ------------- ------------ Net cash provided (used) by investing activities 1,499,505 (271,167) ------------ ------------ Cash flows from financing activities: Borrowings of debt 22,000 451,561 Repayments of debt (1,769,178) (222,025) Payment of deferred financing costs -- (8,705) Stockholder contributions 456,394 -- Proceeds from issuance of common stock -- 989 ------------ ------------ Net cash provided (used) by financing activities (1,290,784) 221,820 ------------ ------------ Net increase (decrease) in cash and cash equivalents 36,232 (6,084) Cash and cash equivalents: Beginning of period -- 6,084 ------------ ------------ End of period $ 36,232 -- ============ ============
See accompanying notes to condensed consolidated financial statements. I-5 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Notes to Condensed Consolidated Financial Statements June 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(Degree) 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. Interim Financial Statements ---------------------------- 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 June 30, 1999 and the results of its operations for the periods ended June 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. Estimates --------- 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. Reclassifications ----------------- Certain amounts have been reclassified for comparability with the 1999 presentation. (continued) I-6 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Notes to Condensed Consolidated Financial Statements (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, before income tax effects, upon consummation of the Hughes Medium Power Transaction. The purchase price is subject to working capital adjustments to be settled within 150 days after the Hughes Closing Date. 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 June 30, 1999, such obligation aggregated $45,365,000. 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 substantially all of the remaining Notes and Bridge Loans as of June 30, 1999. (continued) I-7 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Notes to Condensed Consolidated Financial Statements 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 ($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 $148.7 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 June 30, 1999 aggregated $174.3 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 June 30, 1999, the value of such share appreciation right equaled $13,106,000, based upon the market value of GMH Stock on such date. 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 June 30, 1999, the Company is responsible for (i) the payment of certain obligations not assumed by Hughes and (ii) the payment of costs, estimated to range from $180 million to $200 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. (continued) I-8 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Notes to Condensed Consolidated Financial Statements 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-9 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Notes to Condensed Consolidated Financial Statements 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. (continued) I-10 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Notes to Condensed Consolidated Financial Statements 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. 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 six months ended June 30, 1998 would have been $744,075,000, $247,418,000 and $1.62 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) Earnings (Loss) Per Common Share -------------------------------- The earnings (loss) per common share for the three months and six months ended June 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 six months ended June 30, 1999; and 200,942,000 and 134,287,000 for the three months and six months ended June 30, 1998, respectively). (5) Supplemental Disclosures to Consolidated Statements of Cash Flows ----------------------------------------------------------------- Cash paid for interest was $68,558,000 and $51,179,000 during the six months ended June 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 six months ended June 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 ============== (continued) I-11 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Notes to Condensed Consolidated Financial Statements (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 $17,085,000 for the six months ended June 30, 1999 and 1998, respectively and are included in operating expenses in the accompanying consolidated statements of operations. 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 reimburses TCI and the Non-TSAT Parties for fees related to the Partnership Letters of Credit and the GE-2 Letters of Credit. Such reimbursements aggregated $4,143,000 and $5,474,000 during the six months ended June 30, 1999 and 1998, respectively and are included in interest expense in the accompanying 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 $4,014,000 for the six months ended June 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 $10,243,000 during the six months ended June 30, 1999 and 1998, respectively and are included in selling, general and administrative expenses in the accompanying 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) 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 consolidated financial statements. I-12 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) 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. I-13 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Material Changes in Results of Operations, continued - ---------------------------------------------------- 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 of operations of TSAT, and the periods subsequent to the Restructuring include the results of 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 three and 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. I-14 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Material Changes in Results of Operations, continued - ---------------------------------------------------- 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 three months ended June 30, 1999 is $15,192,000 related to the cancellation of the Company's high power uplinking contract. Selling and marketing expenses, which represented 20% of revenue during the six months ended June 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 27% and 11% of revenue during the six months ended June 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 $12,077,000 during 1998. The $12,058,000 or 7% decrease in depreciation expense during the six months ended June 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. 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 $69,780,000 for the six months ended June 30, 1999 represents a decrease of $87,128,000 as compared to a loss before extraordinary item of $156,908,000 for the six months ended June 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. I-15 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Material Changes in Financial Position - -------------------------------------- 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. 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 substantially all of the remaining Notes and Bridge Loans as of June 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 $148.7 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 June 30, 1999 aggregated $174.3 million. I-16 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Material Changes in Financial Position, continued - ------------------------------------------------- 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. The obligations under the Bridge Loan Agreement were due in full one year from the Closing Date. However, the Company had the option to convert any outstanding principal amount of the Bridge Loan on such date to a term loan maturing on April 1, 2008. The Company gave notice of such conversion on March 29, 1999, in accordance with the terms of the Bridge Loan Agreement. In addition, on the Conversion Date, the Company became obligated to enter into a stock warrant agreement with the Lenders providing for the issuance of warrants to purchase common stock of the Company equal to 2% of the Company's outstanding common stock on the Conversion Date. The warrants are to be exercisable over a ten-year period at a nominal exercise price. At June 30, 1999, no such agreement had been entered into. 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. At June 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 to range from $180 million to $200 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. I-17 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) Material Changes in Financial Position, continued - ------------------------------------------------- The Company has a history of operating losses and reported an accumulated deficit at June 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 $174.3 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 June 1999, the Company has spent approximately $1,375,000 for Y2K issues, $1,125,000 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-18 PHOENIXSTAR, INC. AND SUBSIDIARIES (formerly PRIMESTAR, Inc.) PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. - ------- --------------------------------- (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K filed during quarter ended June 30, 1999:
Date of Report Items Reported Financial Statements Filed -------------- -------------- -------------------------- May 13, 1999 Items 2, 5 and 7 Phoenixstar, Inc. - Condensed pro forma combined financial statements - December 31, 1999 June 18, 1999 Items 2 and 7 Phoenixstar, Inc. - Condensed pro forma combined financial statements - March 31, 1999
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: August 11, 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PHOENIXSTAR, INC.'S (FORMERLY PRIMESTAR, INC.) QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30,1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 36,232 195,074 17,551 0 0 0 0 0 249,250 0 3,893 0 0 2,009 133,473 249,250 0 545,930 0 282,458 197,937 0 62,271 (144,837) (75,057) (69,780) 0 33,642 0 (36,138) (.18) (.18)
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