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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number: 0-21317
TCI SATELLITE ENTERTAINMENT, INC.
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(Exact name of Registrant as specified in its charter)
State of Delaware 84-1299995
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7600 East Orchard Road, Suite 330 South
Englewood, Colorado 80111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 268-5400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Series A Common Stock, par value $1.00 per share
Series B Common Stock, par value $1.00 per share
Indicated 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
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. __X__
The aggregate market value of the voting stock held by nonaffiliates of TCI
Satellite Entertainment, Inc. computed by reference to the last sales price of
such stock, as of the close of trading on February 29, 2000, was approximately
$850,935,134.
The number of shares outstanding of TCI Satellite Entertainment, Inc.'s
common stock as of February 29, 2000 was:
Series A Common Stock - 62,894,446 shares; and
Series B Common Stock - 8,465,224 shares.
TCI SATELLITE ENTERTAINMENT, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business I-1
Item 2. Properties I-11
Item 3. Legal Proceedings I-11
Item 4. Submission of Matters to a Vote of Security Holders I-12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters II-1
Item 6. Selected Financial Data II-2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-3
Item 8. Financial Statements and Supplementary Data II-7
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-7
PART III
Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation III-4
Item 12. Security Ownership of Certain Beneficial Owners
and Management III-10
Item 13. Certain Relationships and Related Transactions III-14
PART IV
Item 14. Exhibits, Financial Statements and Financial Statement
Schedules and Reports on Form 8-K IV-1
PART I
ITEM 1. BUSINESS
(a) INTRODUCTION
Since its formation in 1996, TCI Satellite Entertainment, Inc. ("TSAT" or
the "Company") has undergone a number of significant changes in its
business. This Annual Report incorporates, for TSAT and its subsidiaries,
consolidated audited balance sheets as of December 31, 1999 and 1998, and
audited statements of income (loss) and cash flows for each of the three
fiscal years ended December 31, 1999, 1998 and 1997, as well as certain
selected financial data for each of the five fiscal years ended December
31, 1999, 1998, 1997, 1996 and 1995. In order to help the reader to
understand the financial information presented herein, this Annual Report
briefly describes the business of TSAT and its predecessors over such five
year period, as well as certain material transactions affecting TSAT during
such period.
On March 16, 2000, the Company completed its previously announced
transactions with Liberty Media Corporation ("Liberty Media"). As a result
of such transactions, the Company became the managing member (through its
wholly-owned subsidiaries) of two new limited liability companies
(collectively, the "Liberty Joint Ventures"), through which the Company
holds interests in a number of satellite and related businesses. The
Company also acquired from Liberty Media beneficial ownership in over
5,000,000 shares of Sprint Corporation PCS common stock, having a market
value of approximately $330 million as of March 24, 2000, in exchange for
the issuance by the Company to Liberty Media of (i) Series A Preferred
Stock of the Company with a liquidation value of $150 million and (ii)
Series B Preferred Stock of the Company with a liquidation value of
$150 million. The Series B Preferred Stock is convertible into Series B
Common Stock of the Company at a conversion price of $8.84 per share,
subject to adjustment, and prior to conversion represents approximately
85% of the voting power of the Company. The Company currently intends to
leverage its capital position and interests in the Liberty Joint Ventures
to pursue strategic opportunities worldwide in the distribution of internet
data and other content via satellite and related businesses and is
actively seeking to develop or acquire an operating business related to,
or complementary with, such strategy.
(b) HISTORY OF THE BUSINESS
THE SPIN-OFF. TSAT was incorporated in Delaware in November 1996. Prior to
the Spin-off (as defined below), the Company was wholly owned by
Tele-Communications, Inc. ("TCI"), which, through various subsidiaries, was
engaged in the business of distributing PRIMESTAR satellite television
services, a medium power digital satellite service, from December 1990
until the consummation of the Spin-off.
TSAT was formed to own and operate certain businesses of TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI, constituting TCI's
collective interest ("TCI SATCO") in the digital satellite business. On
December 4, 1996 (the "Spin-off Date"), TCI distributed (the "Spin-off"),
as a dividend, all of the issued and outstanding TSAT Common Stock to the
holders of record of shares of Tele-Communications, Inc., Series A TCI
Group Common Stock, $1.00 par value per share (the "Series A TCI Group
Stock"), and Tele-Communications, Inc., Series B TCI Group Common Stock,
$1.00 par value per share (the "Series B TCI Group Stock" and, together
with the Series A TCI Group Stock, the "TCI Group Stock"), on the basis of
one share of the Series A Common Stock for each ten shares of Series A TCI
Group Stock, and one share of Series B Common Stock for each ten shares of
Series B TCI Group Stock. References herein to the "Company" may, as the
context requires, refer to (i) TCI SATCO prior to the Spin-off Date and
(ii) TSAT and its consolidated subsidiaries on and after the Spin-off Date.
PRIMESTAR BY TCI. From December 4, 1996 until March 31, 1998, TSAT marketed
and distributed the PRIMESTAR programming service under the brand names
"PRIMESTAR By TCI" and "PRIMESTAR By TSAT" and owned an aggregate 20.86%
partnership interest in PRIMESTAR
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Partners L.P. (now known as Phoenixstar Partners L.P.) ("Phoenixstar
Partners"), which owned and operated the PRIMESTAR-Registered Trademark-
service. In addition, the Company, through its wholly-owned subsidiary,
Tempo Satellite, Inc. ("Tempo"), held a construction permit (the "FCC
Permit") issued by the Federal Communications Commission ("FCC"),
authorizing construction of a high power direct broadcast satellite
("DBS") system consisting of two or more satellites delivering DBS service
in 11 frequencies at the 119DEG. W.L. orbital position. Tempo was a party
to a satellite construction agreement (the "Satellite Construction
Agreement") with Space Systems/Loral, Inc. ("Loral") pursuant to which
Tempo arranged for the construction of two high power direct broadcast
satellites (the "Tempo Satellites"). On March 8, 1997, one of the Tempo
Satellites ("Tempo DBS-1") was launched into geosynchronous orbit. The
other Tempo Satellite ("Tempo DBS-2") served as a ground spare for Tempo
DBS-1.
THE PRIMESTAR ROLL-UP. On March 6, 1998, the TSAT stockholders voted to
approve a proposal to adopt the provisions of certain agreements and the
transactions contemplated thereby, collectively referred to herein as the
"Roll-up Plan". The Roll-up Plan was a two-step transaction comprising
the Restructuring and the proposed TSAT Merger, as described below.
Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998 (the "Restructuring
Agreement"), among TSAT, PRIMESTAR, Inc. (now known as Phoenixstar, Inc.)
("Phoenixstar"), Time Warner Entertainment Company, L.P. ("TWE"),
Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation ("Comcast"),
Cox Communications, Inc. ("Cox"), MediaOne of Delaware, Inc. ("MediaOne")
and GE American Communications, Inc. ("GE Americom") and (ii) an Asset
Transfer Agreement dated as of February 6, 1998 (the "TSAT Asset Transfer
Agreement"), between TSAT and Phoenixstar, a business combination (the
"Restructuring") was consummated. In connection with the Restructuring,
TSAT contributed and transferred to Phoenixstar (the "TSAT Asset Transfer")
all of TSAT's assets and liabilities except (i) the capital stock of Tempo,
(ii) the consideration received by TSAT in the Restructuring and (iii) the
rights and obligations of TSAT under certain agreements with Phoenixstar
and others. In addition, the business of Phoenixstar Partners and the
business of distributing PRIMESTAR-Registered Trademark- programming
service of each of TWE, Newhouse, Comcast, Cox and affiliates of MediaOne
were consolidated into Phoenixstar. As part of the Roll-up Plan, TSAT and
Phoenixstar also entered into an Agreement and Plan of Merger dated as of
February 6, 1998 (the "TSAT Merger Agreement"), providing for the merger of
TSAT with and into Phoenixstar, with Phoenixstar as the surviving
corporation (the "TSAT Merger").
In connection with the TSAT Asset Transfer, Phoenixstar assumed all of
TSAT's indebtedness on the Closing Date, and TSAT received from Phoenixstar
such number of shares of Class A Common Stock of Phoenixstar ("Phoenixstar
Class A Common Stock") and Class B Common Stock of Phoenixstar
("Phoenixstar Class B Common Stock" and together with the Phoenixstar Class
A Common Stock, "Phoenixstar Common Stock"), respectively, as equals the
number of shares of Series A Common Stock of TSAT ("Series A Common Stock")
and Series B Common Stock of TSAT ("Series B Common Stock"), respectively,
issued and outstanding on the Closing Date, in accordance with the
Restructuring Agreement and the TSAT Asset Transfer Agreement. In addition,
TSAT received one share of Phoenixstar Class A Common Stock for each share
of Series A Common Stock issuable at the Closing Date ("Issuable TSAT
Shares") pursuant to certain TSAT stock options, restricted stock awards
and other arrangements. TSAT received 66.3 million shares of Phoenixstar
Class A Common Stock and 8.5 million shares of Phoenixstar Class B Common
Stock, and as a result, owned approximately 37% of the outstanding shares
of common equity of Phoenixstar at the closing of the Restructuring,
representing approximately 38% of the combined voting power of such common
equity. The outstanding shares of Series A Common Stock and Series B
Common Stock remain outstanding and were not directly affected by the
Restructuring.
As a result of the TSAT Asset Transfer, as of March 31, 1998, TSAT became a
holding company, with no substantial assets or liabilities other than (i)
100% of the outstanding capital stock of Tempo,
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(ii) its ownership interest in Phoenixstar, and (iii) its rights and
obligations under certain agreements with Phoenixstar and others.
THE HUGHES TRANSACTIONS. On January 22, 1999, the Company announced that
the Company, Tempo, Phoenixstar and Phoenixstar Partners had reached an
agreement (the "Hughes High Power Agreement") with Hughes Electronics
Corporation ("Hughes"), a subsidiary of General Motors Corporation, to sell
(i) Tempo DBS-1 and Tempo DBS-2 (ii) Tempo's 119DEG. W.L. orbital location
license (the "FCC License") and (iii) Phoenixstar's rights to use Tempo's
direct broadcast satellite ("DBS") system (the "Tempo Rights" and
collectively, the "Tempo High Power Assets") to Hughes, for aggregate
consideration valued at $500 million (the "Hughes High Power Transaction").
Due to the fact that regulatory approval was required to transfer Tempo
DBS-1 and the FCC License to Hughes, the Hughes High Power Transaction was
to be completed in two steps.
Effective March 10, 1999, the first closing of the Hughes High Power
Transaction (the "First Closing") was consummated whereby Hughes acquired
Tempo DBS-2 and Phoenixstar's option to acquire Tempo DBS-2 (the "Tempo
DBS-2 Option") for aggregate consideration of $150 million. Such
consideration was comprised of the following: (i) $9.75 million paid to
Phoenixstar for the Tempo DBS-2 Option (including any amounts allocable to
Phoenixstar Partners in consideration of the termination and relinquishment
of the Tempo Rights), (ii) $750,000 paid to TSAT to exercise the Tempo
DBS-2 Option and (iii) the assumption by Hughes of $139.5 million due to
Phoenixstar Partners from TSAT in exchange for Tempo DBS-2. In connection
with the First Closing, the Company and Phoenixstar terminated the TSAT
Merger Agreement.
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
Tempo DBS-1 and related assets, including all rights of Tempo with respect
to the FCC License, for aggregate consideration of $350 million comprised
of (i) $22.75 million paid by Hughes to Phoenixstar and Phoenixstar
Partners for the transfer to Hughes of that portion of the Tempo Purchase
Option allocable to the Tempo DBS-1 and the termination of that portion of
the Tempo Capacity Option allocable to Tempo DBS-1, (the "Tempo DBS-1
Option") (ii) $1.75 million paid by Hughes to Tempo to exercise the Tempo
DBS-1 Option; and (iii) the assumption and payment by Hughes of the
remainder of the Tempo Reimbursement Obligation, in the amount of $325.5
million.
The carrying value of Tempo DBS-1 was approximately $239 million at the
time of the second closing. In addition, Phoenixstar agreed to forgive
amounts due from Tempo not assumed by Hughes in the amount of $9.346
million.
In a separate transaction (the "Hughes Medium Power Transaction") completed
on April 28, 1999 (the "Hughes Closing Date"), Phoenixstar sold to Hughes,
Phoenixstar's medium-power DBS business and assets for $1.1 billion in cash
and 4.871 million shares of General Motors Class H common stock ("GMH
Stock") valued at approximately $258 million on the date of closing. The
foregoing purchase price was subject to adjustments for working capital at
the date of closing, which subsequently totaled approximately $9.9 million.
Phoenixstar retained responsibility for the payment of certain obligations
not assumed by Hughes, and the payment of costs, estimated not to exceed
$180 million at December 31, 1999, associated with the termination of
certain vendor and service contracts and lease agreements not assumed by
Hughes. Affiliates of stockholders of Phoenixstar, other than the Company,
and an affiliate of Tele-Communications, Inc. ("TCI") have committed to
make funds available to Phoenixstar, up to an aggregate of $1,013.3 million
to fund such payments. Through December 31, 1999, approximately $467.3
million of such commitments have been funded to Phoenixstar, and $382.6
million of such commitments expired undrawn.
In connection with their approval of the Hughes Medium Power Transaction
and other transactions, the stockholders of Phoenixstar approved the
payment to TSAT of consideration in the form of 1.407
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million shares of GMH Stock (the "Phoenixstar Payment"), subject to the
terms and conditions set forth in an agreement (the "Phoenixstar Payment
Agreement") dated as of January 22, 1999. In consideration of the
Phoenixstar Payment, the Company agreed to approve the Hughes Medium Power
Transaction and Hughes High Power Transaction as a stockholder of
Phoenixstar, to modify certain agreements to facilitate the Hughes High
Power Transaction, and to issue Phoenixstar a share appreciation right (the
"TSAT GMH SAR") with respect to the shares of GMH Stock received as the
Phoenixstar Payment, granting Phoenixstar the right to any market price
appreciation in such GMH Stock during the one-year period following the
date of issuance, over an agreed strike price of $47.00. Pursuant to the
Phoenixstar Payment Agreement, the Company has also agreed to forego any
liquidating distribution or other payment that may be made in respect of
the outstanding shares of Phoenixstar upon any dissolution and winding-up
of Phoenixstar, or otherwise in respect of Phoenixstar's existing equity
and, subject to the approval of the Company's stockholders, to transfer its
shares in Phoenixstar to the other Phoenixstar stockholders. On the Hughes
Closing Date, the Company received 1.407 million shares of GMH Stock from
Phoenixstar in satisfaction of the Phoenixstar Payment.
The TSAT GMH SAR is secured by a first priority pledge and security
interest in the underlying shares of GMH Stock, and both the TSAT GMH SAR
and such pledge and security interest have been pledged by Phoenixstar for
the benefit of certain holders of share appreciation rights issued by
Phoenixstar with respect to shares of GMH Stock (the "Phoenixstar GMH
SARs"). The shares of GMH Stock issued to TSAT pursuant to the Phoenixstar
Payment Agreement are subject to certain restrictions on transfer during
the first year after the closing of the Hughes Medium Power Transaction,
and TSAT will be entitled (together with Phoenixstar) to certain
registration rights with respect to such shares following the expiration of
such one-year period.
(c) CURRENT BUSINESS
HOLDING COMPANY. As a result of the Hughes Medium Power Transaction and
Hughes High Power Transaction, the Company is no longer engaged in the
direct-to-home satellite television business through Phoenixstar and Tempo.
The Company is planning to take advantage of its industry expertise and
relationships and tax loss carryforward in various future business
opportunities.
LIBERTY MEDIA TRANSACTIONS. On March 16, 2000, the Company completed a
transaction with Liberty Media in which Liberty Media purchased shares
of cumulative preferred stock of the Company in exchange for Liberty
Media's economic interest in 5,084,745 shares of Sprint Corporation PCS
common stock, valued at over $333 million as of March 24, 2000.
The Company issued Series A 12% Cumulative Preferred Stock with a
liquidation value of $150 million ("Series A Preferred Stock") and
Series B 8% Cumulative Convertible Voting Preferred Stock with a
liquidation value of $150 million ("Series B Preferred Stock" and
together with the Series A Preferred Stock, the "Preferred Stock"). The
Preferred Stock is senior to all other classes and series of capital
stock of the Company. The Series A Preferred Stock does not have voting
rights and is not convertible into common stock. The holders of the
Series B Preferred stock have voting rights representing, in the
aggregate, approximately 85% of the total voting power of the Company
(after giving effect to such issuance) and will vote together with the
holders of all other classes or series of voting stock of the Company,
except as required by law. In addition, the Series B Preferred stock is
convertible at the option of the holder into shares of Series B Common
Stock at a conversion price of $8.84 per share of Series B Common Stock,
subject to adjustments as described in the Certificate of Designation
for the Series B Preferred Stock.
Concurrently with the investment by Liberty Media in the Company, the
Company and Liberty Media formed a new joint venture to hold and manage
interests in entities engaged globally in the distribution of internet data
and other content via satellite and related businesses. Liberty Media
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contributed interests in XM Satellite Radio Holdings, Inc., iSky, Inc.,
LSAT Astro LLC and the Sky Latin America satellite businesses in exchange
for an 89.41% ownership interest in the joint venture. The Company
contributed its interest in Jato Communications Corp. and General Motors
Class H Common Stock in exchange for a 10.59% ownership interest in the
joint venture. The Company will manage the business and affairs of the
venture, which has been named Liberty Satellite, LLC.
In a related transaction, the Company paid Liberty Media $60 million in the
form of an unsecured promissory note in exchange for a 13.99% ownership
interest in LSAT Astro LLC, a limited liability company that owns an
approximate 31.5% interest in ASTROLINK International LLC. The remaining
86.01% of LSAT Astro LLC was contributed by Liberty Media to Liberty
Satellite, LLC, as indicated above.
OTHER BUSINESS. Effective February 1, 2000, the Company entered into a
Management Agreement with Phoenixstar pursuant to which the Company is
managing Phoenixstar's affairs in exchange for a monthly management fee of
$45,000.
In July 1999, the Company negotiated a preliminary agreement (the "Asvan
Agreement") with Asvan Technology, LLC ("Asvan"). The Asvan Agreement
provides for Asvan to transfer certain assets to the Company's
subsidiary, TSAT Technologies, Inc. ("Technologies Sub") in exchange for
a 20% equity interest in Technologies Sub and for the Company to contribute
a maximum of $3,000,000 in exchange for an 80% equity interest in
Technologies Sub. The Asvan Agreement contemplates that Technologies Sub
will perform research and development related to certain emerging
technologies.
Certain statements in this Annual Report on Form 10-K 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 the Company,
or industry results, to differ materially from any future results,
performance or achievements express or implied by such forward-looking
statements. Such risks, uncertainties and other factors include, among
others: general economic and business conditions and industry trends; the
continued strength of the multichannel video programming distribution
industry and the satellite services industry and the growth of satellite
delivered television programming; uncertainties inherent in proposed
business strategies and development plans; future financial performance,
including availability, terms and deployment of capital; the ability of
vendors to deliver required equipment, software and services; availability
of qualified personnel; changes in, or the failure or the inability to
comply with, government regulation, including, without limitation,
regulations of the FCC, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and
joint venturers; competitor responses to the Company's products and
services, and the overall market acceptance of such products and services,
including acceptance of the pricing of such products and services; reliance
on software programs used by the Company or its suppliers containing
problems related to the Year 2000; and other factors referenced in this
Report. These forward-looking statements (and such risks, uncertainties and
other factors) speak only as of the date of this Report. The Company
expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement
is based.
(d) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Not applicable.
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(e) NARRATIVE DESCRIPTION OF BUSINESS
INTRODUCTION
During the periods prior to the Hughes Closing Date on April 28, 1999,
covered by the financial statements and selected financial data included in
this report, the Company was engaged, directly and through Phoenixstar and
Phoenixstar Partners, in the PRIMESTAR-Registered Trademark- satellite
business described below and related high power satellite efforts of Tempo
Satellite, Inc., a wholly-owned subsidiary of the Company. Since the
consummation of the Hughes transactions described herein, the Company has not
been engaged directly or indirectly in the PRIMESTAR-Registered Trademark- or
Tempo businesses. Since the Hughes Closing Date, "PRIMESTAR" has been a
registered trademark of Hughes.
THE PRIMESTAR-Registered Trademark- SERVICE
Prior to the Hughes Closing Date, Phoenixstar was a leading provider of
digital satellite services in the U.S. Phoenixstar owned and operated the
PRIMESTAR-Registered Trademark-digital satellite business, which was the
second largest digital satellite business and the eighth largest multichannel
video programming distribution business in the U.S., measured by the number
of subscribers as of December 31, 1998.
PRIMESTAR-Registered Trademark- offered a medium power satellite service with
over 160 channels of digital video and audio programming throughout the
continental United States. The medium power service was transmitted via GE-2,
which is owned by GE Americom and located at the 85DEG. W.L. orbital
position. The PRIMESTAR-Registered Trademark- medium power service served
approximately 2.3 million subscribers as of December 31, 1998.
PRIMESTAR-Registered Trademark- included a variety of advertiser-supported
networks (sometimes referred to as "basic cable" channels), a broad selection
of movie services, national and regional sports packages and other premium
services, and multiplexed pay-per-view programming. Phoenixstar secured its
rights to broadcast such programming via satellite by entering into
non-exclusive affiliation agreements with programming vendors. In addition to
video services, PRIMESTAR-Registered Trademark- included digital audio
services and regional weather services covering ten regions of the country.
Pursuant to an Amended and Restated Memorandum between GE Americon and
Phoenixstar (the "GE-2 Agreement"), GE Americom provided Phoenixstar with
service on 24 transponders on GE-2. Phoenixstar was entitled to non-preemptible
service on 18 of the transponders on GE-2 and preemptible service on six
transponders. Preemptible transponders are transponders that may be reassigned
to restore service to protected customers if such protected customers experience
transponder or satellite failure. Phoenixstar received "orbital location
protected service" on all 24 of its transponders, meaning that if there was a
failure of GE-2, Phoenixstar would have been entitled to restore the lost
service on another GE Americom medium power satellite, GE-3, which was
successfully launched on September 4, 1997 into the same 85DEG. W.L. orbital
position used by GE-2. Even in those circumstances, the six preemptible
transponders, although protected, would have remained preemptible.
Phoenixstar used proprietary authorization, encryption and digital
compression technology developed by an affiliate of General Instruments
Corporation ("GI"). Uplinking, encoding and compression services were
provided by National Digital Television Center, Inc., a subsidiary of TCI
("NDTC"), under a Master Digital Transmission Agreement between NDTC and
Phoenixstar.
PROGRAMMING. At December 31, 1998, Phoenixstar offered consumers programming
packages with 76 to 100 channels of audio and video programming depending upon
the package. Each of the packages included a monthly programming guide. Most of
Phoenixstar's customers rented their equipment for an additional $3 - $10
monthly charge, which included free maintenance and customer service.
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As of December 31, 1998, PRIMESTAR-Registered Trademark- also offered 15
channels of pay-per-view movies and events; a regional sports tier and other
sports packages that provided expanded coverage of regular-season,
out-of-market sports events; and niche services such as PBS and east and west
coast feeds of ABC, NBC, CBS and FOX (to those subscribers unable to receive
such networks through local affiliates). Such offerings were made on an a la
carte basis.
Phoenixstar contracted with and billed its residential and commercial
subscribers directly for PRIMESTAR-Registered Trademark- service. Most
residential subscribers could terminate their service at any time upon notice
to Phoenixstar. Commercial subscribers' service contracts automatically
renewed for successive terms unless the commercial subscribers provided 90
days' prior written notice to Phoenixstar of their intent to terminate their
service at the end of the current term. In addition, commercial customers
could terminate the contract prior to the expiration of the contractual term
by paying a cancellation fee. Satellite reception equipment reclaimed from
terminating subscribers was tested, refurbished as necessary and placed back
into service.
DISTRIBUTION. Phoenixstar distributed PRIMESTAR-Registered Trademark-
services through multiple distribution channels, including sales agents,
full-service providers, telemarketing agents and consumer retail outlets,
such as RadioShack-Registered Trademark-. Phoenixstar had sales agents, (the
"Sales Agents"), each of which had extensive experience distributing C-band
direct-to-home ("DTH") satellite equipment. Sales Agents generally did not
sell directly to customers, but recruited, trained and maintained a network
of sub-agents comprised generally of full-service independent satellite
retailers. The sub-agents sold PRIMESTAR-Registered Trademark- services on
behalf of Phoenixstar and installed, serviced and maintained customer
premises equipment for Phoenixstar's subscribers. Authorization of new
customers was provided by Phoenixstar's call center(s). Sales Agents were
responsible for maintaining their sub-agents' inventories of home satellite
dishes ("HSD") and other customer premises equipment, which were provided by
Phoenixstar on consignment.
Phoenixstar also contracted with independent contractors who had experience
in distributing and servicing DTH satellite equipment ("Full-Service
Providers"or "FSPs") to engage them to sell, install and service their own
accounts. The FSPs solicited potential subscribers by making door-to-door
sales calls, setting up booths at special events and otherwise marketing the
PRIMESTAR-Registered Trademark- service to customers in target markets in
their authorized distribution areas. FSPs also installed and serviced
customers obtained through retail outlets and call centers.
Phoenixstar paid the Sales Agents and FSPs commissions on equipment leased or
sold, as well as an installation reimbursement to cover the cost of each new
installation. The Sales Agents and FSPs also received a residual sales
commission for a contractually determined period of time (generally five years).
Sales Agents were responsible for compensating their sub-agents.
Phoenixstar operated a call center, located in Englewood, Colorado to take
subscription orders and provide both sales support and customer service. In
addition, Phoenixstar obtained call center support services from TCIC's Boise,
Idaho call center (the "Boise Call Center"), as well as call centers operated on
behalf of Phoenixstar by unaffiliated third parties. The call centers offered
customers around-the-clock telephone support for sales, installation,
authorization and billing, as well as for repair and customer service.
Phoenixstar also distributed its services through certain national consumer
electronics retailers, including Radio Shack. Pursuant to Phoenixstar's
national agreement with Radio Shack, Radio Shack was compensated based on the
number of installations generated. Phoenixstar's distribution network was
further supported by local market retailers, such as hardware stores and
convenience stores, which promoted Phoenixstar's services and further
assisted Phoenixstar in its distribution efforts.
EQUIPMENT AND INSTALLATION. Unlike other digital satellite television services,
Phoenixstar did not require consumers to purchase or finance the equipment
needed to receive its programming. Phoenixstar provided the HSD, satellite
receiver and remote control to subscribers for a monthly rental fee ($3 - $10
per month at December 31, 1998), which included ongoing maintenance and service
at no additional charge. The
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monthly equipment rental fee was normally included in a service package that
included various levels of basic and premium programming. Satellite receivers
were manufactured by GI, and packaged by GI with remote controls, and HSDs were
manufactured by multiple vendors.
In addition to monthly fees for programming and the purchase or lease of
equipment, Phoenixstar generally charged new subscribers an installation fee
ranging from $49 to $99.
HIGH POWER SATELLITES
TEMPO DBS SYSTEM. The Company, through Tempo, held the FCC Permit, authorizing
construction of a high power DBS system consisting of two or more satellites
delivering DBS service in 11 frequencies at the 119DEG. W.L. orbital position.
The 119DEG. W.L. orbital position is generally visible to HSDs throughout the
entire continental U.S. Tempo was also a party to the Satellite Construction
Agreement with Loral, pursuant to which Tempo arranged for the construction of
Tempo DBS-1 and Tempo DBS-2 and had an option to purchase up to three additional
satellites. As constructed, each Tempo Satellite could operate in either "single
transponder" mode (with 32 transponders broadcasting at 113 watts per channel)
or in "paired transponder" mode (with 16 transponders broadcasting at 220 watts
per channel).
Tempo DBS-1 was outfitted with an antenna designed for operation at the 119DEG.
W.L. orbital location and was launched into geosynchronous orbit on March 8,
1997. During 1997, Loral notified Tempo of nine separate occurrences of power
reductions on Tempo DBS-1. In addition, Loral notified Tempo of two additional
power reductions that occurred on March 29, 1999 and April 2, 1999.
TEMPO OPTION. In February 1990, Tempo entered into an option agreement (the
"Tempo Option Agreement") with Phoenixstar Partners, granting Phoenixstar
Partners the right and option (the "Tempo Capacity Option"), upon exercise,
to purchase or lease 100% of the capacity of the DBS system to be built,
launched and operated by Tempo pursuant to the FCC Permit. Under the Tempo
Option Agreement, upon the exercise of the Tempo Capacity Option, Phoenixstar
Partners was obligated to pay Tempo $1 million (the "Exercise Fee") and to
lease or purchase the entire capacity of the DBS system, with the purchase
price (or aggregate lease payments) for such capacity sufficient to cover the
costs of constructing, launching and operating such DBS system. In connection
with the Tempo Capacity Option and certain related matters, Tempo and
Phoenixstar Partners subsequently entered into two letter agreements (the
"Tempo Letter Agreements"), which provided for, among other things, the
funding by Phoenixstar Partners of milestone and other payments due under the
Satellite Construction Agreement, and certain related costs, through advances
by Phoenixstar Partners to Tempo ("PRIMESTAR Advances"). Phoenixstar Partners
financed such advances to Tempo through borrowings under a bank credit
facility (the "Partnership Credit Facility"), which is in turn supported by
letters of credit arranged for by affiliates of the partners of Phoenixstar
Partners (other than GE Americom). At December 31, 1998, the aggregate
funding provided to Tempo by Phoenixstar Partners was $469.5 million, and the
balance due under the Partnership Credit Facility was $575 million, including
amounts borrowed to pay interest charges. The Tempo Letter Agreements
permitted Phoenixstar to apply its advances to Tempo against any payments
(other than the Exercise Fee) due under the Tempo Capacity Option with
respect to its purchase or lease of satellite capacity.
On February 7, 1997, the Partners Committee of Phoenixstar Partners adopted a
resolution (i) affirming that Phoenixstar Partners had unconditionally exercised
the Tempo Capacity Option, (ii) approving the proposed launch of Tempo DBS-1
into the 119DEG. W.L. orbital position and the use of Tempo DBS-2 as a spare or
back-up for Tempo DBS-1, pending other deployment or disposition as determined
by Phoenixstar Partners, and (iii) authorizing the payment by Phoenixstar
Partners to Tempo of the Exercise Fee and other amounts in connection with the
Tempo Capacity Option and the Tempo Letter Agreements, including funding of
substantially all construction and related costs relating to the Tempo
Satellites not previously funded by the Phoenixstar Partners.
I-8
As described above, the Company entered into the Hughes High Power Agreement,
which provided for the sale of the Tempo Satellites, the 119DEG. W.L. orbital
location license and PRIMESTAR's right to use Tempo's high power DBS system to
Hughes for aggregate consideration of $500 million. In connection with the
Hughes High Power Transaction, Hughes agreed to assume, and to satisfy and
discharge, $465 million of Tempo's obligation to Phoenixstar Partners for the
PRIMESTAR Advances, and Phoenixstar Partners agreed to forgive the remaining
balance. In addition, Phoenixstar terminated its rights under the Tempo Capacity
Option to lease or purchase 100% of the capacity of the Tempo DBS system.
(f) REGULATORY MATTERS
GENERAL. Pursuant to the Communications Act of 1934, as amended (the
"Communications Act"), the FCC regulates the use of radio spectrum in the United
States. United States DBS licensees and permittees are subject to the regulatory
authority of the FCC. Although the non-technical aspects of DBS operations are
generally subject to less regulation than other communications services; some
regulations do apply. In addition, the FCC has proposed to adopt regulations
that will affect DBS licensees and permittees.
TEMPO FCC PERMITS AND LICENSES. Prior to June 4, 1999, Tempo was the holder
of the FCC Permit, which authorized construction of a high power DBS system
consisting of two or more satellites delivering DBS service in 11 frequencies
at the 119DEG. W.L. orbital location. As the holder of a DBS permit, Tempo
was subject to FCC jurisdiction and review primarily for: (i) authorization
of individual satellites (i.e. meeting minimum financial, legal, and
technical standards) and earth stations, (ii) avoiding interference with
other radio frequency transmitters, (iii) complying with the rules the FCC
has established specifically for holders of U.S. DBS authorizations and (iv)
complying with applicable provisions of the Communications Act.
Under the FCC Permit, the time by which the Tempo Satellites were to be
operational was due to expire in May 1998. On April 3, 1998, Tempo filed a
request with the FCC for an extension of that deadline pending FCC review of
(i) TSAT's request for consent to the transfer of control of Tempo to
Phoenixstar (the "Transfer Application") and (ii) Phoenixstar's application
(in connection with a subsequently terminated transaction between Phoenixstar
and ASkyB, a proposed joint venture between MCI and the News Corporation
Ltd.) for consent to the assignment to Phoenixstar of the high power DBS
authorizations and certain assets owned by MCI Communications, Inc. (the
"Assignment Application").
On April 30, 1998, the FCC determined that Tempo's satellite at 119DEG. W.L. was
not operational. It did find, however, that an extension of time was warranted
for that orbital location and granted an extension to Tempo for 119DEG. W.L.
Such extension was granted until six months after the FCC determination on the
Transfer Application and Assignment Application, with the condition that Tempo
not enter into a lease agreement with Phoenixstar or any similar lease
arrangement prior to the FCC's decision on the Transfer Application and the
Assignment Application. In addition, Tempo voluntarily surrendered its permit
for 166DEG. W.L. Effective November 19, 1998, Phoenixstar voluntarily withdrew
the Assignment Application.
I-9
ANTITRUST DECREE. Phoenixstar Partners and the parties named in the actions
described below were subject to the jurisdiction of the U.S. District Court for
the Southern District of New York to ensure compliance with an antitrust consent
decree. In United States v. PRIMESTAR Partners, L.P., et al., 93 Civ. 3919 (SDNY
1993) (the "Federal Decree"), Phoenixstar Partners and such parties agreed to
refrain from
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(i) enforcing any provisions of the Phoenixstar Partnership Agreement that
affect the availability, price, terms or conditions of sale of programming to
any provider of multichannel subscription television, or (ii) entering into
certain other agreements restricting the availability of programming services.
The Company was not named as a defendant in the above action, but may have been
subject to certain provisions of the Federal Decree as a successor-in-interest
to TCI K-1, Inc. and United Artists K-1 Investments, Inc., indirect subsidiaries
of TCI that were original partners in Phoenixstar Partners and named defendants
in the action. The Company believes that it is currently in compliance with the
Federal Decree in all material respects and that the Federal Decree does not
currently have a material adverse effect on the Company or its operations.
(g) OTHER
During 1999, the Company purchased approximately $200,000 in equipment to be
used in research and development activities, in addition to approximately
$200,000 in research and development activities included in operations.
Amounts expended in 1998 and 1997 were insignificant.
There is no one customer or affiliated group of customers to whom sales are made
in an amount that exceeds 10% of the Company's revenue.
Compliance with federal, state and local provisions that have been enacted or
adopted regulating the discharge of material into the environment or otherwise
relating to the protection of the environment has had no material effect upon
the capital expenditures, results of operations or competitive position of the
Company.
As of December 31, 1999, the Company had approximately 7 employees.
(h) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Not applicable.
ITEM 2. PROPERTIES.
The Company owns no real estate. The Company has entered into noncancellable
operating leases for two facilities in Englewood, Colorado with expiration dates
in February and December 2001. The Company believes that such facilities are
adequate for its business operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject, except as follows:
In a civil action entitled DANIEL BOONE, OZARK HEARTLAND ELECTRONICS, INC. V.
RADIO SHACK, ET AL, pending in the United States District Court, Western
District, Springfield Division, Missouri, Civil Action No.
99-3109-CV-S-RGC-ECF, plaintiff alleges that the Company and other defendants
(i) entered into a vertical resale price maintenance agreement with Radio
Shack, in violation of Sherman Act Section 1, and (ii) tortiously interfered
with plaintiff's contractual relationship with Radio Shack when they
requested that Radio Shack terminate plaintiff's right to market
PRIMESTAR-Registered Trademark- products. The Company has denied any
liability to the plaintiffs and is vigorously contesting the claims asserted
in the complaint. Phoenixstar has a contractual obligation to indemnify the
Company for liability, if any, arising out of this matter.
In a civil action entitled TCI SATELLITE ENTERTAINMENT, INC. ET AL V. BOARD OF
EQUALIZATION OF MONTEZUMA COUNTY, pending in the Court of Appeals for the State
of Colorado, Case No. 99-CA-0975, the Board of Equalization of Montezuma County
(the "Montezuma Board") has appealed a ruling by the Colorado State Board of
Assessment Appeals that the Montezuma Board violated administrative, statutory
and judicial mandates in denying the Company and Phoenixstar personal property
tax exemptions found in Colorado
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Revised Statutes Section 39-3-119.5. The Colorado Court of Appeals has received
briefs and heard oral arguments and the parties are awaiting a ruling.
Phoenixstar has a contractual obligation to indemnify the Company for
liability, if any, arising out of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Series A Common Stock and Series B Common Stock trade
over-the-counter on the OTC Bulletin Board under the symbols "TSATA" and
"TSATB", respectively. The following table sets forth the range of high and
low sale prices in U.S. dollars of shares of Series A Common Stock and Series
B Common Stock for the period indicated. The prices have been rounded up to
the nearest eighth, and do not include retail markups, markdowns, or
commissions.
SERIES A SERIES B
--------------------------- ------------ ------------
HIGH LOW HIGH LOW
------------ ------------ ------------ ------------
1999
First quarter 3 3/4 1/2 4 3/4 1
Second quarter 5 5/8 5/8 5 3/4 1
Third quarter 5 1/8 3 5 1/4 3
Fourth quarter 20 3 3/4 19 3 5/8
1998
First quarter 8 1/8 5 1/2 7 1/8 4 3/4
Second quarter 8 1/8 4 3/4 9 1/8 5
Third quarter 6 2 7/8 5 5/8 1 5/8
Fourth quarter 2 1/2 3/4 2 5/8 7/8
As of February 29, 2000, there were approximately 4,567 and 271 record holders
of the Series A Common Stock and Series B Common Stock, respectively (which
amounts do not include the number of shareholders whose shares are held of
record by banks, brokerage houses or other institutions but include each such
institution as one shareholder).
The Company has not paid cash dividends on its Series A Common Stock and Series
B Common Stock and has no present intention of so doing. Payment of cash
dividends, if any, in the future will be determined by the Company's Board of
Directors in light of its earnings, financial condition and other relevant
considerations. As a holding company, the Company's ability to pay cash
dividends is dependent on its ability to receive cash dividends, loans and
advances from its subsidiaries and its ability to monetize its beneficial
ownership of approximately 5,000,000 shares of PCS stock.
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data related to the Company's financial condition and results
of operations for the five years ended December 31, 1999 are summarized as
follows (such information should be read in conjunction with the accompanying
consolidated financial statements of the Company).
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998(1) 1997 1996 1995
-------- -------- -------- -------- --------
amounts in thousands, except per share amounts
Summary Statement of
Operations Data:
Revenue $ -- 168,500 561,990 417,461 208,903
Operating, selling, general
and administrative expenses
and stock compensation (12,160) (158,810) (489,947) (410,390) (214,117)
Depreciation (2) (23) (65,105) (243,642) (191,355) (55,488)
-------- -------- -------- -------- --------
Operating loss (12,183) (55,415) (171,599) (184,284) (60,702)
Gain on sale of satellites (5) 13,712 -- -- -- --
Interest expense, net (3) (140) (14,177) (47,992) (2,023) --
Share of losses of Phoenixstar, Inc. -- (369,231) -- -- --
Share of losses of
Phoenixstar Partners -- (5,822) (20,473) (3,275) (8,969)
Interest income 146 20 2,519 -- --
Other, net (6) 66,143 (641) (796) 3,641 306
Income tax (expense) benefit (416) -- -- 45,937 21,858
-------- -------- -------- -------- --------
Net earnings (loss) $ 67,262 (445,266) (238,341) (140,004) (47,507)
======== ======== ======== ======== =======
Basic and diluted earnings
(loss) per common share (4) $ 0.97 (6.58) (3.58) (2.11) (.72)
======== ======== ======== ======== =======
DECEMBER 31,
--------------------------------------------------------
1999 1998(1) 1997 1996 1995
-------- -------- -------- -------- --------
amounts in thousands
Summary Balance Sheet Data:
Property and equipment, net $ 275 463,133 1,121,937 1,107,654 889,220
Investment in, and related
advances to, Phoenixstar Partners -- -- 11,093 32,240 17,963
Investments in Jato Communications
and General Motors 140,101 -- -- -- --
Total assets 143,197 463,133 1,204,856 1,180,273 933,443
Due to Phoenixstar, Inc. -- 469,498 463,133 457,685 382,900
Debt (3) 3,044 -- 418,729 247,230 --
Stock appreciation 74,513 -- -- -- --
right liabilities
Equity (deficit) 64,727 (6,365) 136,269 372,358 483,584
(1) The Restructuring was consummated on April 1, 1998. In connection
therewith, TSAT contributed and transferred to Phoenixstar all of its
assets and liabilities except for assets and liabilities related to the
high power DBS system being constructed by Tempo.
(2) Effective October 1, 1996, the Company (i) changed the method used to
depreciate its subscriber installation costs, and (ii) reduced the
estimated useful life of certain satellite reception equipment. The
inception-to-date effect of the change in depreciation method aggregated
$55,304,000 and was recorded during the fourth quarter of 1996, and the
effect of the reduction in estimated useful life was accounted for on a
prospective basis.
II-2
(3) Effective December 31, 1996, TSAT entered into a bank credit facility with
initial commitments of $350 million. In addition, on February 20, 1997,
TSAT issued senior subordinated notes and senior subordinated discount
notes with aggregate principal amounts at maturity of $475 million.
On November 19, 1999, TSAT entered into a Loan Agreement with the Bank
of America for the following facilities (i) Facility A Commitment of
$5,000,000; (ii) Facility B commitment of $15,000,000; and (iii) Facility C
commitment of $5,000,000. Upon the "Collateral Pledge Perfection Date"
as defined in the Agreement, the undrawn portions of Facility C expires
and the Facility A commitment increases to $10,000,000. At December 31,
1999, $3,044,000 had been drawn on Facility C at an interest rate of
10.5% per annum. The unused Facility A, Facility B and Facility C amounts
are charged a commitment fee at a rate of 0.375%.
(4) In connection with the December 4, 1996 consummation of the Spin-off, the
Company issued 66,408,000 shares of Company Common Stock. The basic and
diluted loss per common share amounts for the years ended December 31, 1996
and 1995 assume that the shares issued pursuant to the Spin-off were issued
and outstanding since January 1, 1995. Accordingly the calculation of the
net loss per share assumes weighted average shares outstanding of
66,408,000 for each of the years ended December 31, 1996 and 1995. The
effect of all other common stock equivalents has been excluded for all
periods as inclusion would be anti-dilutive.
(5) In connection with the Hughes Transaction, the Company recognized a gain on
the sale of the Tempo Satellites and related orbital location license in
1999.
(6) In connection with the Hughes Medium Power Transaction, the stockholders
of Phoenixstar approved the payment to TSAT of consideration in the form of
1.407 million shares of GMH Stock, valued at $66,143,000, subject to the
terms set forth in the Phoenixstar Payment Agreement.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
HUGHES TRANSACTIONS
Effective June 4, 1999, the Company completed the sale of its high power DBS
assets to Hughes Electronics Corporation ("Hughes"), pursuant to an asset
purchase agreement dated as of January 22, 1999 (the "Hughes High Power
Agreement"), among Tempo Satellite, Inc., a wholly-owned subsidiary of the
Company ("Tempo"), Phoenixstar, Inc., a Delaware corporation formerly known as
PRIMESTAR, Inc. ("Phoenixstar"), Phoenixstar Partners L.P., a Delaware limited
partnership and wholly-owned subsidiary of Phoenixstar formerly known as
PRIMESTAR Partners L.P. ("Phoenixstar Partners"), and Hughes, a subsidiary of
General Motors. The assets transferred by the Company pursuant to the Hughes
High Power Agreement consisted of Tempo's two high-power DBS satellites (the
"Tempo Satellites"), one of which was in orbit at 119DEG. West Longitude ("Tempo
DBS-1") and one of which was used as a ground spare ("Tempo DBS-2"), its FCC
authorizations with respect to the 119DEG. West Longitude orbital location (the
"FCC License"), and certain related assets (collectively, the "Tempo High Power
Assets").
The Company had previously granted Phoenixstar the transferable right and
option (the "Tempo Purchase Option") to purchase 100% of the Tempo High Power
Assets for aggregate consideration of $2.5 million in cash and the assumption
of all related liabilities. In addition, Tempo had previously granted to
Phoenixstar Partners the right to purchase or lease 100% of the capacity of
the DBS system being constructed by Tempo (the "Tempo Capacity Option"), and
Phoenixstar Partners had made advances to Tempo to fund the construction of
Tempo's DBS system in the aggregate amount of $465 million (the "Tempo
Reimbursement Obligation").
The Hughes High Power Agreement provided for (i) the sale by Phoenixstar to
Hughes of the Tempo Purchase Option, (ii) the exercise of the Tempo Purchase
Option by Hughes, and (iii) the termination of the Tempo Capacity Option
(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 Tempo DBS-1 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 Tempo DBS-1 and related assets and 30% of the total consideration thereunder
to Tempo DBS-2 and related assets.
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The first closing under the Hughes High Power Agreement was consummated
effective March 10, 1999. In the first closing, Hughes acquired Tempo DBS-2 and
related assets for aggregate consideration of $150 million, comprised of (i)
$9.75 million paid by Hughes to Phoenixstar and Phoenixstar Partners for the
transfer to Hughes of that portion of the Tempo Purchase Option allocable to
Tempo DBS-2 and the termination of that portion of the Tempo Capacity Rights
allocable to the Tempo DBS-2, (ii) $750,000 paid by Hughes to TSAT to exercise
that portion of the Tempo Purchase Option allocable to the Tempo DBS-2; and
(iii) the assumption and payment by Hughes of a portion of the Tempo
Reimbursement Obligation in the amount of $139.5 million.
In addition, as required by the Hughes High Power Agreement, the Company and
Phoenixstar agreed to terminate the previously announced merger of the Company
with and into Phoenixstar, effective as of such first closing.
The FCC approved the transfer of the FCC License to Hughes on May 28, 1999, and
the second closing under the Hughes High Power Agreement was consummated
effective June 4, 1999. In the second closing, Hughes acquired Tempo DBS-1 and
related assets, including all rights of Tempo with respect to the FCC License,
for aggregate consideration of $350 million comprised of (i) $22.75 million paid
by Hughes to Phoenixstar and Phoenixstar Partners for the transfer to Hughes of
that portion of the Tempo Purchase Option allocable to Tempo DBS-1 and the
termination of that portion of the Tempo Capacity Rights allocable to Tempo
DBS-1, (ii) $1.75 million paid by Hughes to Tempo to exercise that portion of
the Tempo Purchase Option allocable to Tempo DBS-1; and (iii) the assumption and
payment by Hughes of the remainder of the Tempo Reimbursement Obligation, in the
amount of $325.5 million.
The carrying value of Tempo DBS-1 was approximately $239 million at the time of
the second closing. In addition, Phoenixstar agreed to forgive amounts due from
Tempo not assumed by Hughes in the amount of $9.346 million.
Effective April 28, 1999, Phoenixstar completed the Hughes Medium Power
Transaction in which Phoenixstar sold to Hughes, Phoenixstar's medium-power
DBS business and assets for $1.1 billion in cash and 4.871 million shares of
GMH Stock valued at approximately $258 million on the date of closing. The
foregoing purchase price was subject to adjustments for working capital at
the date of closing, which subsequently totaled approximately $9.9 million.
Phoenixstar retained responsibility for the payment of certain obligations
not assumed by Hughes, and the payment of costs, estimated not to exceed $180
million at December 31, 1999, associated with the termination of certain
vendor and service contracts and lease agreements not assumed by Hughes.
Affiliates of stockholders of Phoenixstar, other than the Company, and an
affiliate of TCI, have committed to make funds available to Phoenixstar, up
to an aggregate of $1,013.3 million to fund such payments. Through December
31, 1999, approximately $467.3 million of such commitments have been funded
to Phoenixstar, and $382.6 million of such commitments expired undrawn.
In connection with their approval of the Hughes Medium Power Transaction and
other transactions, the stockholders of Phoenixstar approved the payment to TSAT
of consideration in the form of 1.407 million shares of GMH Stock (the
"Phoenixstar Payment"), subject to the terms and conditions set forth in an
agreement (the "Phoenixstar Payment Agreement") dated as of January 22, 1999. In
consideration of the Phoenixstar Payment, the Company agreed to approve the
Hughes Medium Power Transaction and Hughes High Power Transaction as a
stockholder of Phoenixstar, to modify certain agreements to facilitate the
Hughes High Power Transaction, and to issue Phoenixstar a share appreciation
right (the "TSAT GMH SAR") with respect to the shares of GMH Stock received as
the Phoenixstar Payment, granting Phoenixstar the right to any market price
appreciation in such GMH Stock during the one-year period following the date of
issuance, over an agreed strike price of $47.00. Pursuant to the Phoenixstar
Payment Agreement, TSAT has also agreed to forego any liquidating distribution
or other payment that may be made in respect of the outstanding shares of
Phoenixstar upon any dissolution and winding-up of Phoenixstar, or otherwise in
respect of Phoenixstar's existing equity and, subject to the approval of the
Company's stockholders, to
II-4
transfer its shares in Phoenixstar to the other Phoenixstar stockholders. On the
Hughes Closing Date, the Company received 1.407 million shares of GMH Stock from
Phoenixstar in satisfaction of the Phoenixstar Payment.
The TSAT GMH SAR is secured by a first priority pledge and security interest in
the underlying shares of GMH Stock, and both the TSAT GMH SAR and such pledge
and security interest have been pledged by Phoenixstar for the benefit of
certain holders of share appreciation rights issued by Phoenixstar with respect
to shares of GMH Stock (the "Phoenixstar GMH SARs"). The shares of GMH Stock
issued to TSAT pursuant to the Phoenixstar Payment Agreement are subject to
certain restrictions on transfer during the first year after the closing of the
Hughes Medium Power Transaction, and TSAT will be entitled (together with
Phoenixstar) to certain registration rights with respect to such shares
following the expiration of such one-year period.
The increase in the share appreciation right liability of approximately $69
million through December 31, 1999, is effectively hedged by the unrealized
holding gain on the GMH Stock.
RESTRUCTURING TRANSACTION
Effective April 1, 1998 ( the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998, (the "Restructuring
Agreement"), among TSAT, Phoenixstar, prior to the Restructuring a
wholly-owned subsidiary of TSAT, Time Warner Entertainment Company, L.P.
("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of Delaware, Inc.,
("MediaOne"), and GE American Communications, Inc. ("GE American"), and (ii)
an Asset Transfer Agreement dated as of February 6, 1998, (the "TSAT Asset
Transfer Agreement") between TSAT and Phoenixstar, a business combination
(the "Restructuring") was consummated. In connection with the Restructuring,
TSAT contributed and transferred to Phoenixstar (the "TSAT Asset Transfer")
all of TSAT's assets and liabilities except (i) the capital stock of Tempo,
(ii) the consideration to be received by TSAT in the Restructuring and (iii)
the rights and obligations of TSAT under certain agreements with Phoenixstar
and others. In addition, the business of Phoenixstar Partners and the
business of distributing the PRIMESTAR-Registered Trademark-programming
service of each of TWE, Newhouse, Comcast, Cox and affiliates of MediaOne
were consolidated into Phoenixstar.
In connection with the TSAT Asset Transfer, Phoenixstar assumed all of TSAT's
indebtedness on such date, and TSAT received 66.3 million Phoenixstar Class A
Common Stock and 8.5 million shares of Phoenixstar Class B Common Stock, in
accordance with the Restructuring Agreement and the TSAT Asset Transfer
Agreement. As a result, TSAT owns approximately 37% of the outstanding shares of
common equity of Phoenixstar, representing approximately 38% of the combined
voting power of such common equity. As a result of the dilution of TSAT's
investment in Phoenixstar from 100% to approximately 37%, TSAT recognized an
increase in its investment in Phoenixstar and an increase in additional paid-in
capital of $299,046,000, net of income taxes. Such increase represents the
difference between TSAT's historical investment basis in Phoenixstar and TSAT's
proportionate share of Phoenixstar's equity subsequent to the Restructuring.
TSAT MERGER
The TSAT Merger Agreement provided that TSAT would be merged with and into
Phoenixstar, with Phoenixstar as the surviving corporation. In connection with
the First Closing, the Company and Phoenixstar terminated the TSAT Merger
Agreement.
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SUMMARY OF OPERATIONS
As a result of the consummation of the Restructuring, TSAT is a holding
company whose primary assets during the period from April 1, 1998, through
the consummation of the various transactions with Hughes described above
were: (i) Tempo's authorizations granted by the FCC and other assets and
liabilities relating to a proposed direct broadcast system being constructed
by Tempo and (ii) TSAT's investment in Phoenixstar. Accordingly, subsequent
to the Restructuring, TSAT's operations consisted of (i) expenses incurred to
maintain TSAT as a public company, including accounting and legal fees
($376,000 and $152,000 during 1999 and 1998), (ii) expenses associated with
the operation and maintenance of the Tempo Satellites ($6,365,000 during
1998) and (iii) TSAT's share of Phoenixstar's earnings or losses. TSAT's
results of operations for the year ended December 31, 1998 also include three
months of operations of TSAT's medium power DBS distribution business. Such
medium power business was contributed to Phoenixstar in connection with the
Restructuring.
During the periods covered by this report, the Company had no significant
operations subsequent to the TSAT Asset Transfer other than expenses
associated with the operation and maintenance of the Tempo Satellites, prior
to the sale of the Tempo Satellites to Hughes effective March 10, 1999 and
June 4, 1999. General and administrative expenses incurred to maintain the
Company's status as a publicly traded company and the increase in the share
appreciation right liability which is effectively hedged by the unrealized
holding gain on the GMH Stock.
In connection with the Hughes Medium Power Transactions, the stockholders of
Phoenixstar approved the payment to TSAT of consideration in the form of
1.407 million shares of GMH stock, valued at $66,143,000, subject to the
terms set forth in the Phoenixstar Payment Agreement. Such payment is
recorded as other income in the 1999 consolidated statement of operations.
TSAT recognized no income tax benefit during the years ended December 31,
1999, 1998 and 1997. TSAT is only able to realize income tax benefits for
financial reporting purposes to the extent that such benefits offset TSAT's
income tax liabilities or TSAT generates taxable income. For financial
reporting purposes, all of TSAT's income tax liabilities had been fully
offset by income tax benefits at December 31, 1999 and 1998.
The Company is currently evaluating its course of action and plans to take
advantage of its industry expertise and relationships in various future
business opportunities.
II-6
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("Statement No. 133"). Statement No. 133 is effective
for fiscal quarters beginning after June 15, 1999. In June 1999, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES -- DEFERRAL OF EFFECTIVE DATE OF FASB NO. 133" which deferred
Statement No. 133's effective date to fiscal quarter beginning after June 15,
2000.
The Company has not assessed the impact of implementing Statement No. 133,
but believes it will be insignificant.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the consummation of the Hughes transactions, the Company
currently has no operating income or cash flow. As of December 31, 1999, the
Company's sources of liquidity were its available cash and any proceeds from
the liquidation of the GMH Stock (subject to a one-year holding period).
At December 31, 1999, TSAT had no substantial assets or liabilities other
than cash, its ownership interest in General Motors Class H Common Stock, a
certain equity investment, a majority owned subsidiary and its ownership
interest in Phoenixstar.
In July 1999, the Company negotiated a preliminary agreement (the "Asvan
Agreement") with Asvan Technology, LLC ("Asvan"). The Asvan Agreement
provides for Asvan to transfer certain assets to the Company's subsidiary,
TSAT Technologies, Inc. ("Technologies Sub") in exchange for a 20% equity
interest in Technologies Sub and for the Company to contribute a maximum of
$3,000,000 in exchange for an 80% equity interest in Technologies Sub. The
Asvan Agreement contemplates that Technologies Sub will perform research and
development related to certain emerging technologies. The operations of the
subsidiary are consolidated into the accompanying consolidated financial
statements.
In September 1999, the Company made an investment of $5,000,000 for 714,286
shares of Series C Preferred Stock ("Preferred Stock") of Jato Communications
Corp. ("Jato"). The investment included a payment of $2,000,000 and,
originally, a promissory note that was subsequently satisfied and discharged.
On November 16, 1999, Jato issued TSAT an additional 178,571 shares in
accordance with a change in the conversion ratio pursuant to a provision in
the original agreement.
As a result of the transactions with Liberty Media described herein, which
closed on March 16, 2000, the Company is the beneficial owner of 5,084,745
shares of Sprint Corporation PCS Common Stock (the "PCS Stock"), having a
market value on March 24, 2000 of approximately $333 million. The Company
currently intends to meet its liquidity requirements by selling, borrowing
against and/or otherwise monetizing such investment, until such time as the
Company has cash flow from operations or other sources of liquidity.
TSAT will continue to be subject to the risks associated with operating as a
holding company including possible regulation under the Investment Company Act.
TSAT does not currently intend to be an investment company within the meaning of
the Investment Company Act and is actively seeking to develop or acquire an
operating business related to or complementary with the Company's strategy to
pursue opportunities in the distribution of Internet data and other content
via satellite and related businesses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are filed under this item beginning
on page II-9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
II-7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TCI Satellite Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of TCI Satellite
Entertainment, Inc. and subsidiaries (as defined in note 1) as of December 31,
1999 and 1998 and the related consolidated statements of operations, equity
(deficit) and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1999. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement
schedule listed in the index at Item 14(a). These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TCI Satellite
entertainment, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
Denver, Colorado
March 29, 2000
II-8
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
ASSETS 1999 1998
--------- --------
Amounts in thousands
Cash and cash equivalents $ 2,473 --
Prepaid expenses 113 --
Preferred stock investment, at cost (note 6) 5,000 --
Investment in Phoenixstar, Inc. (note 6) -- --
Investment in General Motors Corporation
at fair value (note 6) 135,101 --
--------- --------
Equipment and leasehold improvements, at cost:
Satellites (note 7) -- 463,133
Support equipment 223 --
Leasehold improvements 75 --
--------- --------
298 463,133
Less accumulated depreciation 23 --
--------- --------
275 463,133
Deferred financing costs 235 --
--------- --------
Total assets $ 143,197 463,133
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 139 --
Accrued interest payable 53 --
Other accrued expenses 41 --
Taxes payable 650 --
General Motors Corporation share appreciation right
liability (note 2) 68,959 --
Employee stock appreciation right liability (note 12) 5,554 --
Due to Phoenixstar (note 7) -- 469,498
Franchise taxes payable 30 --
Debt (note 8) 3,044 --
--------- --------
Total liabilities 78,470 469,498
--------- --------
Stockholders' equity (deficit) (note 9):
Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued -- --
Series A common stock, $1 par value; authorized
185,000,000 shares; issued 62,894,446 in 1999 and
59,280,466 in 1998 62,894 59,280
Series B common stock, $1 par value; authorized
10,000,000 shares; issued 8,465,224 in 1999 and 1998 8,465 8,465
Additional paid-in capital 825,726 825,276
Accumulated deficit (832,358) (899,386)
--------- --------
Total stockholders' equity (deficit) 64,727 (6,365)
--------- --------
Commitments and Contingencies (note 11)
Total liabilities and stockholders' equity (deficit) $ 143,197 463,133
========= ========
See accompanying notes to consolidated financial statements.
II-9
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------- -------- --------
Amounts in thousands
except per share amounts
Revenue:
Programming and equipment rental $ -- 154,257 512,894
Installation -- 14,243 49,096
--------- -------- --------
-- 168,500 561,990
--------- -------- --------
Operating costs and expenses:
Charges from Phoenixstar Partners (note 12) -- 82,235 259,600
Operating (note 12) 4,536 16,211 23,992
Selling, general and administrative (note 12) 751 55,495 198,263
Stock compensation (notes 10 and 12) 6,873 4,869 8,092
Depreciation 23 65,105 243,642
--------- -------- --------
12,183 223,915 733,589
--------- -------- --------
Operating loss (12,183) (55,415) (171,599)
--------- -------- --------
Other income (expense):
Gain on sale of satellites 13,712 -- --
Interest expense (140) (14,177) (47,992)
Share of losses of Phoenixstar (note 6) -- (369,231) --
Share of losses of Phoenixstar Partners -- (5,822) (20,473)
Interest income 146 20 2,519
Other (note 2) 66,143 (641) (796)
--------- -------- --------
79,861 (389,851) (66,742)
--------- -------- --------
Earnings (loss) before income taxes 67,678 (445,266) (238,341)
Income tax expense (note 10) (416) -- --
--------- -------- --------
Net earnings (loss) 67,262 (445,266) (238,341)
========= ======== ========
Basic and diluted earnings (loss) per
common share $ 0.97 (6.58) (3.58)
========= ======== ========
See accompanying notes to consolidated financial statements.
II-10
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
(In thousands)
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL OTHER STOCKHOLDERS'
---------------------- PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SERIES A SERIES B CAPITAL DEFICIT INCOME (DEFICIT)
--------- --------- --------- ----------- ----------- -------------
Balance at December 31, 1996 $57,946 8,467 521,724 (215,779) -- 372,358
Recognition of stock compensation
related to stock options and
restricted stock awards -- -- 1,781 -- -- 1,781
Issuance of Series A Common Stock related
to restricted stock awards 33 -- 180 -- -- 213
Issuance of Series a Common Stock upon
conversion of convertible securities of
Tele-Communications, Inc. 258 -- -- -- -- 258
Conversion of Series B to Series A 2 (2) -- -- -- --
Net loss -- -- -- (238,341) -- (238,341)
------- ------ -------- -------- ------- --------
Balance at December 31, 1997 58,239 8,465 523,685 (454,120) -- 136,269
Recognition of stock compensation related
to stock options and restricted stock awards -- -- 2,595 -- -- 2,595
Issuance of Series A Common Stock related to
restricted stock awards 50 -- (50) -- -- --
Issuance of Series A Common Stock upon
conversion of convertible securities of
Tele-Communications, Inc. 991 -- -- -- -- 991
Issuance of common stock by subsidiary (note 3) -- -- 299,046 -- -- 299,046
Net loss -- -- -- (445,266) -- (445,266)
------- ------ -------- -------- ------- --------
Balance at December 31, 1998 59,280 8,465 825,276 (899,386) -- (6,365)
Recognition of stock compensation related to
stock options and restricted stock awards 162 -- 450 -- -- 612
Tax benefit related to stock options and
restricted stock awards -- -- -- (234) -- (234)
Issuance of Series A Common Stock related to
Naify conversion 3,452 -- -- -- -- 3,452
------- ------ -------- -------- ------- --------
Comprehensive income:
Net Earnings -- -- -- 67,262 -- 67,262
Unrealized holding gains on available for sale
securities, net of tax -- -- -- -- 42,583 42,583
Share appreciation right liability, net of tax -- -- -- -- (42,583) (42,583)
------- ------ -------- -------- ------- --------
Total comprehensive income -- -- -- 67,262 -- 67,262
------- ------ -------- -------- ------- --------
Balance at December 31, 1999 $62,894 8,465 825,726 (832,858) -- 64,727
======= ====== ======== ======== ======= ========
See accompanying notes to consolidated financial statements.
II-11
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
-------- -------- --------
Amounts in thousands
(see note 7)
Cash flows from operating activities:
Net earnings (loss) $ 67,262 (445,266) (238,341)
Adjustments to reconcile net earnings (loss) to net cash
(used in) provided by operating activities:
Gain on sale of satellites (13,712) -- --
Depreciation 23 65,105 243,642
Amortization of deferred financing costs 15 -- --
Share of losses of Phoenixstar -- 369,231 --
Share of losses of Phoenixstar Partners -- 5,822 20,473
Accretion of debt discount -- 4,682 16,719
Stock compensation and restricted stock awards 6,873 4,869 8,092
Deferred income tax expense (234) -- --
Receipt of General Motors stock recorded
as other income (66,143) -- --
Other non-cash charges -- 8,108 6,919
Changes in operating assets and liabilities,
net of the effect of the
Restructuring:
Change in receivables -- 10,845 (15,014)
Change in prepared expenses (113) -- --
Change in other assets -- (736) (335)
Change in accruals and payables 957 (10,210) 42,056
Change in subscriber advance payments -- (3,114) 7,426
-------- -------- --------
Net cash (used in) provided by
operating activities (5,072) 9,336 91,637
-------- -------- --------
Cash flows from investing activities:
Capital expended for equipment (298) (73,966) (227,327)
Capital expended for construction of satellites -- -- (5,448)
Payments for stock appreciation rights exercised (707) -- --
Investment in Jato Communications (2,000) -- --
Additional investments in, and related advances to,
Phoenixstar Partners -- (75) (7,073)
Repayments of advances to Phoenixstar Partners -- -- 7,815
Other investing activities -- -- (1,581)
Proceeds from sale of equipment 2,500 -- --
-------- -------- --------
Net cash used in investing activities (505) (74,041) (233,614)
-------- -------- --------
Cash flows from financing activities:
Borrowings of debt -- 113,000 498,061
Repayments of debt -- (61,735) (344,699)
Payment of deferred financing costs (250) -- (17,780)
Increase in due to Phoenixstar 4,848 6,365 5,448
Proceeds from issuance of common stock 3,452 991 471
-------- -------- --------
Net cash provided by financing activities 8,050 58,621 141,501
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 2,473 (6,084) (476)
Cash and cash equivalents:
Beginning of year -- 6,084 6,560
-------- -------- --------
End of year $ 2,473 -- 6,084
======== ======== ========
See accompanying notes to consolidated financial statements.
II-12
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
TCI Satellite Entertainment, Inc. and those of all majority-owned
subsidiaries ("TSAT" or the "Company"). All significant inter-company
transactions have been eliminated.
As a result of the Hughes Transaction described in note 2 and the TSAT
Asset Transfer described in note 3, TSAT is currently a holding company,
with no substantial assets or liabilities other than (i) cash, (ii) its
ownership interest in General Motors, (iii) a certain equity investment,
(iv) a majority owned subsidiary (v) its ownership interest in Phoenixstar,
and (vi) its rights and obligations under certain agreements with
Phoenixstar and others.
In addition, the Company has not had significant operations subsequent to
the TSAT Asset Transfer other than (i) expenses associated with the
operation and maintenance of the Tempo Satellites, as defined below, prior
to the sale to Hughes effective June 4, 1999 and (ii) general and
administrative expenses incurred to maintain the Company's status as a
publicly traded company. The Company's majority owned subsidiary conducts
research and development in certain emerging technology.
Certain prior year amounts have been reclassified for comparability with
the 1999 presentation.
(2) HUGHES TRANSACTIONS
Effective June 4, 1999, the Company completed the sale of its high power
direct broadcast satellite ("DBS") assets to Hughes Electronics Corporation
("Hughes"), pursuant to an asset purchase agreement dated as of January 22,
1999 (the "Hughes High Power Agreement"), among Tempo Satellite, Inc., a
wholly-owned subsidiary of the Company ("Tempo"), Phoenixstar, Inc., a
Delaware corporation formerly known as PRIMESTAR, Inc. ("Phoenixstar"),
Phoenixstar Partners L.P. a Delaware limited partnership and wholly-owned
subsidiary of Phoenixstar formerly known as PRIMESTAR Partners L.P.
("Phoenixstar Partners"), and Hughes, a subsidiary of General Motors. The
assets transferred by the Company pursuant to the Hughes High Power
Agreement consisted of Tempo's two high-power DBS satellites (the "Tempo
Satellites"), one of which was in orbit at 119DEG. West Longitude ("Tempo
DBS-1") and one of which was used as a ground spare ("Tempo DBS-2"), its
FCC authorizations with respect to the 119DEG. West Longitude orbital
location (the "FCC License"), and certain related assets (collectively,
the "Tempo High Power Assets").
The Company had previously granted Phoenixstar the transferable right and
option (the "Tempo Purchase Option") to purchase 100% of the Tempo High
Power Assets for aggregate consideration of $2.5 million in cash and the
assumption of all liabilities. In addition, Tempo had previously granted to
Phoenixstar Partners the right to purchase or lease 100% of the capacity of
the DBS system being constructed by Tempo (the "Tempo Capacity Rights"),
and Phoenixstar Partners had made
II-13
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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 of
Phoenixstar to Hughes of the Tempo Purchase Option, (ii) the exercise of
the Tempo Purchase Option by Hughes, and (iii) the termination of the Tempo
Capacity Rights (collectively, the "Hughes High Power Transaction"). The
aggregate consideration payable by Hughes in the Hughes High Power
Transaction was $500 million, payable as described below.
As regulatory approval was required to transfer Tempo DBS-1 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 two-stage
exercise process. The parties allocated 70% of the total consideration
under the Hughes High Power Agreement to Tempo DBS-1 and related assets
and 30% of the total consideration thereunder to Tempo DBS-2 and related
assets.
The first closing under the Hughes High Power Agreement was consummated
effective March 10, 1999. In the first closing, Hughes acquired Tempo
DBS-2 and related assets for aggregate consideration of $150 million,
comprised of (i) $9.75 million paid by Hughes to Phoenixstar and
Phoenixstar Partners for the transfer to Hughes of the portion of the
Tempo Purchase Option allocable to Tempo DBS-2 and the termination of
that portion of the Tempo Capacity Rights allocable to Tempo DBS-2,
(ii) $750,000 paid by Hughes to Tempo to exercise that portion of the
Tempo Purchase Option allocable to Tempo DBS-2; and (iii) the assumption
and payment by Hughes of a portion of the Tempo Reimbursement Obligation
in the amount of $139 million.
In addition, as required by the Hughes High Power Agreement, the Company
and Phoenixstar agreed to terminate the previously announced merger of the
Company with and into Phoenixstar, effective as of such first closing.
The FCC approved the transfer of the FCC License to Hughes on May 28, 1999,
and the second closing under the Hughes High Power Agreement was
consummated effective June 4, 1999. In the second closing Hughes acquired
Tempo DBS-1 and related assets, including all rights of Tempo with respect
to the FCC License, for aggregate consideration of $350 million comprised
of (i) $22.75 million paid by Hughes to Phoenixstar and Phoenixstar
Partners for the transfer to Hughes of the portion of the Tempo Purchase
Option allocable to Tempo DBS-1 and the termination of that portion of the
Tempo Capacity Rights allocable to Tempo DBS-1, (ii) $1.75 million paid by
Hughes to Tempo to exercise that portion of the Tempo Purchase Option
allocable to Tempo DBS-1; and (iii) the assumption and payment by Hughes
of the remainder of the Tempo Reimbursement Obligation, in the amount of
$325.5 million.
The carrying value of Tempo DBS-1 was approximately $239 million at the
time of the second closing. In addition, Phoenixstar agreed to forgive
amounts due from Tempo not assumed by Hughes in the amount of $9,346,000.
In a separate transaction (the Hughes Medium Power Transaction) completed
on April 28, 1999 (the Hughes Closing Date), Phoenixstar sold to Hughes
Phoenixstar's medium-power DBS business and
II-14
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
assets for $1.1 billion in cash and 4,871 million shares of General Motors
Class H common stock ("GMH Stock") valued at approximately $258 million on
the date of closing. The foregoing purchase price was subject to
adjustments for working capital at the date of closing, which subsequently
totaled approximately $9.9 million. At December 31, 1999, Phoenixstar
retained responsibility for the payment of certain obligations not assumed
by Hughes, and the payment of costs, estimated not to exceed $180 million
at December 31, 1999, associated with the termination of certain vendor and
service contracts and lease agreements not assumed by Hughes. Affiliates
of stockholders of Phoenixstar, other than the Company, and an affiliate of
Tele-Communications, Inc. ("TCI") have committed to make funds available
to Phoenixstar, up to an aggregate of $1,013.3 million to fund such
payments. Through December 31, 1999, approximately $465.3 million of
such commitments have been funded to Phoenixstar, and $382.6 million of
such commitments expired undrawn.
In connection with their approval of the Hughes Medium Power Transaction
and other transactions, the stockholders of Phoenixstar approved the
payment to TSAT of consideration in the form of 1.407 million shares of GMH
Stock (the "Phoenixstar Payment"), subject to the term and conditions set
forth in an agreement (the "Phoenixstar Payment Agreement) dated as of
January 22, 1999. In consideration of the Phoenixstar Payment, the Company
agreed to approve the Hughes Medium Power Transaction and Hughes High Power
Transaction as a stockholder of Phoenixstar, to modify certain agreements
to facilitate the Hughes High Power Transaction, and to issue Phoenixstar a
share appreciation right (the "TSAT GMH SAR") with respect to the shares of
GMH Stock received as the Phoenixstar Payment, granting Phoenixstar the
right to any market price appreciation in such GMH Stock during the
one-year period following the date of issuance, over an agreed strike price
of $47.00. Pursuant to the Phoenixstar Payment Agreement, TSAT has also
agreed to forego any liquidation distribution or other payment that may be
made in respect of the outstanding shares of Phoenixstar upon any
dissolution and winding-up of Phoenixstar, or otherwise in respect of
Phoenixstar's existing equity and, subject to the approval of the
Company's stockholders, to transfer its shares in Phoenixstar to the other
Phoenixstar stockholders. On the Hughes Closing Date, the Company received
1.407 million shares of GMH Stock, valued at approximately $66,143,000,
from Phoenixstar in satisfaction of the Phoenixstar Payment. Such amount is
recorded as other income in the 1999 consolidated statement of operations.
The TSAT GMH SAR is secured by a first priority pledge and security
interest in the underlying shares of GMH Stock, and both the TSAT GMH SAR
and such pledge and security interest have been pledged by Phoenixstar for
the benefit of certain holders of share appreciation rights issued by
Phoenixstar with respect to shares of GMH Stock (the Phoenixstar GMH SARs).
The shares of GMH Stock issued to TSAT pursuant to the Phoenixstar Payment
Agreement are subject to certain restriction on transfer during the first
year after the closing of the Hughes Medium Power Transaction, and TSAT
will be entitled (together with Phoenixstar) to certain registration rights
with respect to such shares following the expiration of such one-year
period.
The Company's investment in GMH Stock is being accounted for as an
available-for-sale security and is recorded at fair value. Unrealized
holding gains and losses from increases and decreases in the fair value
of the security are reported as separate components of stockholders' equity
in comprehensive income. The TSAT GMH SAR serves as a hedge of the
unrealized holding gain on the GMH Stock and is also reported as a separate
component of stockholders' equity in comprehensive income.
(3) RESTRUCTURING
Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998, the "Restructuring
Agreement"), among TSAT, Phoenixstar, prior to the Restructuring a
wholly-owned subsidiary of TSAT, Time Warner
II-15
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Entertainment Company, L.P. ("TWE"), Advance/Newhouse Partnership
("Newhouse"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox"), MediaOne of Delaware, Inc., ("MediaOne"), and GE American
Communications, Inc., and (ii) an Asset Transfer Agreement dated as of
February 6, 1998, (the "TSAT Asset Transfer Agreement") between TSAT and
Phoenixstar, a business combination (the "Restructuring") was consummated.
In connection with the Restructuring, TSAT contributed and transferred to
Phoenixstar (the "TSAT Asset Transfer") all of TSAT's assets and
liabilities except (i) the capital stock of Tempo, (ii) the consideration
to be received by TSAT in the Restructuring and (iii) the rights and
obligations of TSAT under certain agreements with Phoenixstar and others.
In addition, the business of Phoenixstar Partners and the business of
distributing the PRIMESTAR-Registered Trademark- programming service
("PRIMESTAR-Registered Trademark-") of each of TWE, Newhouse, Comcast,
Cox and affiliates of MediaOne were consolidated into Phoenixstar.
In connection with the TSAT Asset Transfer, Phoenixstar assumed all of
TSAT's indebtedness on such date, and TSAT received from Phoenixstar 66.3
million shares of Class A Common Stock of Phoenixstar ("Phoenixstar Class A
Common Stock") and 8.5 million shares of Class B Common Stock of
Phoenixstar ("Phoenixstar Class B Common Stock" and together with the
Phoenixstar Class A Common Stock, "Phoenixstar Common Stock"), in
accordance with the Restructuring Agreement and the TSAT Asset Transfer
Agreement. In connection with the Restructuring, Phoenixstar assumed
TSAT's obligations pursuant to the Indemnification Agreements. As a result,
TSAT owns approximately 37% of the outstanding shares of common equity of
Phoenixstar, representing approximately 38% of the combined voting power of
such common equity. As a result of the dilution of TSAT's investment in
Phoenixstar from 100% to approximately 37%, TSAT recognized an increase
in its investment in Phoenixstar and an increase in additional paid-in
capital of $299,046,000, net of income taxes. Such increase represents the
difference between TSAT's historical investment basis in Phoenixstar and
TSAT's proportionate share of Phoenixstar's equity subsequent to the
Restructuring.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of acquisition to be cash
equivalents.
(b) INVESTMENTS
Investments mainly consist of equity securities. The Company
classifies its equity securities as available-for-sale and are
recorded at fair value.
A decline in the market value of any available-for-sale security below
cost that is deemed to be other than temporary results in a reduction
in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established.
II-16
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Investments in entities without a readily determinable market value
are carried at cost if the Company cannot significantly influence
operations, or as an equity investment if the Company's influence
over operations is deemed to be less than control.
(c) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The Company states equipment at cost and begins depreciation upon
acceptance of delivery, using the straight-line method over the useful
life of the asset. Leasehold improvements are amortized over the
shorter of the useful life of the asset or lease term.
The Company periodically reviews the carrying amount of its long-lived
assets to determine whether current events or circumstances warrant
adjustments to such carrying amounts. The Company considers historical
and expected future net operating losses to be its primary indicators
of potential impairment. Assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups
of assets ("Assets"). The Company deems Assets to be impaired if the
Company is unable to recover the carrying value of its Assets over
their expected remaining useful life through a forecast of
undiscounted future operating cash flows directly related to the
Assets. If Assets are deemed to be impaired, the loss is measured as
the amount by which the carrying amount of the Assets exceeds their
fair values. TSAT generally measures fair value by considering sales
prices for similar assets or by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
(d) DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the related
loan facility.
(e) REVENUE RECOGNITION
Programming and equipment rental revenue is recognized in the period
that services are delivered. Installation revenue is recognized in the
period the installation services are provided to the extent of direct
selling costs. To date, direct selling costs have exceeded
installation revenue.
(f) ADVERTISING COSTS
Advertising costs generally are expensed as incurred. Amounts expensed
for advertising aggregated $5,066,000 and $23,062,000 during 1998 and
1997, respectively. There were no advertising costs in 1999.
(g) MARKETING AND DIRECT SELLING COSTS
Marketing and direct selling costs are expensed as incurred. The
excess cost of customer premises equipment over proceeds received upon
sales of such equipment is recognized at the time of sale and is
included in selling expense.
II-17
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(h) RESIDUAL SALES COMMISSIONS
Residual sales commissions, which become payable upon the collection
of programming revenue from certain subscribers, are expensed during
the period in which such commissions become payable.
(i) STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation using the
intrinsic value method pursuant to Accounting Principles Board Opinion
No. 25.
(j) INCOME TAXES
TSAT accounts for its income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(k) EARNINGS (LOSS) PER COMMON SHARE
The earnings (loss) per common share for the years ended December 31,
1999, 1998 and 1997 is based on 69,587,000, 67,718,000 and 66,658,000
weighted average shares outstanding during the respective periods.
Excluded from the computation of diluted EPS for the years ended
December 31, 1999, 1998 and 1997 are options to acquire 3,462,000,
6,929,000 and 7,894,000 weighted average shares of Series A Common
Stock, respectively, because inclusion of such options would be
anti-dilutive.
(l) 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.
(5) SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Cash paid for interest was $13,844,000 and $20,224,000 during the years
ended December 31, 1998 and 1997, respectively. Cash paid for income taxes
was not material during the years ended December 31, 1999, 1998 and 1997.
II-18
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Significant non-cash investing and financing activities for the year ended
December 31, 1999 and 1998 are as follows (amounts in thousands):
1999
Issuance of note payable in connection
with investment $ 3,044
===========
Increase in value of GMH stock and
corresponding SAR liability $ 68,959
===========
1998
Contribution of operating assets and
liabilities to subsidiary in
Restructuring $ 68,796
===========
Increase in equity due to issuance of
stock by subsidiary in
Restructuring $ 299,046
===========
Accounts payable include accrued capital expenditures of $35,645,000 at
December 31, 1997, which has been excluded from the accompanying statements
of cash flows.
(6) INVESTMENTS
Prior to the Hughes Medium Power Transaction, Phoenixstar owned and
operated the PRIMESTAR-Registered Trademark- direct to home satellite
service throughout the continental United States. In connection with the
Phoenixstar Payment Agreement as discussed in Note 2, the Company has
agreed to forego any liquidation distribution or other payment that may be
made in respect of the outstanding shares of Phoenixstar, or otherwise in
respect of Phoenixstar's existing equity and, subject to the approval of
the Company's stockholders, to transfer its shares in Phoenixstar to the
other Phoenixstar stockholders. The Company's investment in Phoenixstar at
December 31, 1999 and 1998 is zero as a result of the cumulative losses of
Phoenixstar and the expected transfer of the Company's shares in
Phoenixstar pursuant to the Phoenixstar Payment Agreement.
On September 16, 1999, the Company made an investment of $5,000,000 for
714,286 shares of Series C Preferred Stock ("Preferred Stock") of Jato
Communications Corp. ("Jato"). The investment included a payment of
$2,000,000 and a promissory note in the amount of $3,000,000 originally due
October 31, 1999 and subsequently extended to November 10, 1999, bearing
interest at 10%, and secured by 434,208 shares of the Preferred Stock.
The note was subsequently satisfied and discharged. The Preferred Stock is
convertible into common stock at the option of the holder based on certain
conversion rates and allows the holder to vote equally with all other
classes of stock, on a per share basis, based on the number of shares of
common stock into which the Preferred Stock is convertible. The Preferred
Stock also has certain liquidation preferences and voting rights with
respect to certain actions by Jato. The Preferred Stock is carried at
cost. On November 16, 1999, Jato issued TSAT an additional 178,571 shares
in accordance with a change in the conversion ratio pursuant to a
provision in the original agreement.
The Company's investment in General Motors Corporation is an investment
in marketable equity securities and is accounted for as available-for-sale
under Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Such investment is
recorded at fair value. Unrealized gains and losses on available-for-sale
securities are reported as a separate component of stockholders' equity.
(7) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The Company purchased certain equipment in 1999 for research and
development purposes. The equipment is being depreciated over its useful
life, estimated to be 5 years. Leasehold improvements are amortized over
the leasehold term of 2 years.
TEMPO DBS SYSTEM
Prior to the Hughes Transactions, the Company, through Tempo, held the
FCC Permit authorizing construction of a high power DBS system consisting
of two or more satellites delivering DBS service in 11 frequencies at the
119DEG. W.L. orbital position.
II-19
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Tempo was also a party to the Satellite Construction Agreement with
Loral, pursuant to which Tempo has arranged for the construction of
the Tempo Satellites at a fixed contract price of $487,159,500, and
had an option to purchase up to three additional satellites.
On April 30, 1998, the FCC determined that Tempo's satellite at
119DEG. W.L. was not operational. It did find, however, that an
extension of time was warranted for that orbital location and granted
an extension to Tempo for 119DEG. W.L. Such extension was granted
until six months after the FCC determination on the Transfer
Application, with the condition that Tempo not enter into a lease
agreement with Phoenixstar or any similar lease arrangement prior to
the FCC's decision on the Transfer Application. In addition, Tempo
voluntarily surrendered its permit for 166DEG. W.L.
On November 25, 1998, Tempo and Phoenixstar requested expedited action
by the FCC on the Transfer Application. Several parties filed
responses to that request, objecting to the proposed transfer.
Phoenixstar and Tempo filed a joint reply to those objections. On
January 27, 1999, Tempo filed a joint application with DIRECTV
Enterprises, Inc. seeking FCC approval to assign Tempo's DBS
authorization to DIRECTV ("DIRECTV Application"). In addition, Tempo
and Phoenixstar jointly filed a letter seeking to maintain the status
quo with respect to the Transfer Application until the FCC decides the
DIRECTV Application. Therefore, Tempo and Phoenixstar requested that
the Transfer Application be held in abeyance and, subject to and
contemporaneously with approval of the DIRECTV Application, that the
FCC dismiss the Transfer Application. EchoStar filed a petition to
deny the DirecTV Application on March 5, 1999, on the basis that
DirecTV should not be allowed to control high power DBS spectrum at
three full-CONUS orbital locations and that EchoStar had offered to
purchase the Tempo high power DBS assets. On the same date, the Small
Cable Business Association submitted a request that any grant of the
DirecTV Application be conditioned on DirecTv providing a digital
add-on service that small cable systems can self-brand, and Media
Access Project filed a petition to deny the application to the extent
the FCC did not apply and DirecTv did not accept application of
Section 310(b) of the Communications Act. DirecTv and Terripo each
filed oppositions to these petitions on March 19, 1999. On April 12,
1999, Echostar filed a response, to which Tempo and DirecTV replied.
By order dated May 28, 1999, the FCC granted the DirecTV Application
and dismissed the Transfer Application.
TEMPO OPTION
In February 1990, Tempo entered into an option agreement (the "Tempo
Option Agreement") with Phoenixstar Partners granting Phoenixstar
Partners the right and option (the "Tempo Capacity Option"), upon
exercise, to purchase or lease 100% of the capacity of the DBS system
to be built, launched and operated by Tempo pursuant to the FCC
Permit. Under the Tempo Option Agreement, upon the exercise of the
Tempo Capacity Option, Phoenixstar Partners was obligated to pay Tempo
$1,000,000 (the "Exercise Fee") and to lease or purchase the entire
capacity of the DBS system with the purchase price (or aggregate lease
payments) being sufficient to cover the costs of constructing,
launching and operating such DBS system. In connection with the Tempo
Capacity Option and certain related matters, Tempo and Phoenixstar
Partners subsequently entered into two letter agreements (the "Tempo
Letter Agreements"), which provided for, among other things, the
funding by Phoenixstar Partners of
II-20
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
milestone and other payments due under the Satellite Construction
Agreement, and certain related costs, through advances by Phoenixstar
Partners to Tempo (the "Phoenixstar Advances"). The Phoenixstar
Advances aggregated $469,498,000 at December 31, 1998 and are
reflected in due to Phoenixstar, Inc. in the accompanying 1998
consolidated balance sheets.
On February 7, 1997, the Partners Committee of Phoenixstar Partners
adopted a resolution (i) affirming that Phoenixstar Partners had
unconditionally exercised the Tempo Capacity Option, (ii) approving
the proposed launch of Tempo DBS-1 into the 119DEG. W.L. orbital
position and the use of Tempo DBS-2 as a spare or back-up for Tempo
DBS-1, pending other deployment or disposition as determined by
Phoenixstar Partners, and (iii) authorizing the payment by Phoenixstar
Partners to Tempo of the Exercise Fee and other amounts in connection
with the Tempo Capacity Option and the Tempo Letter Agreements,
including funding of substantially all construction and related costs
relating to the Tempo Satellites not previously funded by Phoenixstar
Partners.
In connection with the Hughes High Power Transaction, Hughes assumes
$465 million of Tempo's obligation to Phoenixstar Partners for the
Phoenixstar Advances, and Phoenixstar Partners forgive the remaining
balance. In addition, Phoenixstar Partners has agreed to terminate its
rights under the Tempo Capacity Option.
(8) DEBT
On November 9, 1999, the Company entered into a Demand Note with the Bank
of America wherein TSAT could borrow up to $5,000,000 prior to November 19,
1999. Interest was based on the bank's prime rate plus .75%. On
November 10, 1999 approximately $3,044,000 was drawn on the demand note
in order to satisfy the Promissory Note, and accrued interest thereon,
with Jato as discussed in note 4.
On November 19, 1999, TSAT entered into a Loan Agreement with the Bank of
America for the following facilities (i) Facility A commitment of
$5,000,000; (ii) Facility B commitment of $15,000,000; and (iii) Facility C
commitment of $5,000,000. Upon the "Collateral Pledge Perfection Date" as
defined as in the Agreement, the undrawn portions of Facility C expires
and the Facility A commitment increases to $10,000,000.
II-21
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
At December 31, 1999, $3,044,000 had been drawn on Facility C at an
interest rate of 10.5% per annum. The unused Facility A, Facility B and
Facility C amounts are charged a commitment fee at a rate of 0.375%.
(9) STOCKHOLDERS' EQUITY
(a) COMMON STOCK
The Series A Common Stock has one vote per share and the Series B
Common Stock has ten votes per share. Each share of Series B Common
Stock is convertible, at the option of the holder, into one share of
Series A Common Stock.
(b) PREFERRED STOCK
TSAT is authorized to issue 5,000,000 shares of Preferred Stock. The
Preferred Stock may be issued from time to time as determined by the
Board of Directors, without stockholder approval. Such Preferred Stock
may be issued in such series and with such designations, preferences,
conversion or other rights voting powers, qualifications, limitations,
or restrictions as shall be stated or expressed in a resolution or
resolutions providing for the issue of such series adopted by the
Company's Board of Directors (the "TSAT Board").
(c) EMPLOYEE RETIREMENT PLAN
TSAT's Employee Stock Purchase Plan (the "TSAT ESPP") became effective
on January 1, 1997. The TSAT Plan provided eligible employees with an
opportunity to invest in TSAT and to create a retirement fund. Terms
of the TSAT ESPP provided for eligible employees to contribute up to
10% of their compensation to a trust for investment in TSAT common
stock. TSAT, by annual resolution of the TSAT Board, could elect to
contribute up to 100% of the amount contributed by employees. TSAT
contributed $317,000 and $1,200,000 in 1998 and 1997, respectively,
to the TSAT ESPP. The TSAT ESPP was merged into Phoenixstar Partners'
retirement plan in connection with the Restructuring, accordingly, no
further contributions were made by TSAT.
(d) STOCK OPTIONS
On the Spin-off Date, the TSAT Board adopted, and TCI as the sole
stockholder of the Company prior to the Spin-off, approved, the TCI
Satellite Entertainment, Inc. 1996 Stock Incentive Plan (the "TSAT
1996 Plan"). The TSAT 1996 Plan provides for awards to be made in
respect of a maximum of 3,200,000 shares of Series A Common Stock
(subject to certain anti-dilution adjustments). Awards may be made as
grants of stock options, stock appreciation rights ("SARs"),
restricted shares, stock units, performance awards or any
combination thereof (collectively, "Awards"). Awards may be made
to employees and to consultants and advisors to the Company who are
not employees. Shares of Series A Common Stock that are subject to
Awards that expire, terminate or are annulled for any reason
without having been exercised (or deemed exercised, by virtue of
the exercise of a related SAR), or are forfeited prior to becoming
vested, will return to the pool of such shares available for grant
under the TSAT 1996 Plan.
II-22
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
In June 1996, the Board of Directors of TCI (the "TCI Board")
authorized TCI to permit certain of its executive officers to acquire
equity interests in certain of TCI's subsidiaries. In connection
therewith, the TCI Board approved the acquisition by each of two
executive officers of TCI who are not employees of the Company (the
"TCI Officers"), of 1.0% of the net equity of the Company. The TCI
Board also approved the acquisition by the chief executive officer and
a director of the Company (the "Company Officer"), of 1.0% of the net
equity of the Company and the acquisition by an executive officer of
certain TCI subsidiaries who is also a director, but not an employee,
of the Company (the "TCI Subsidiary Officer"), of 0.5% of the net
equity of the Company. The TCI Board determined to structure such
transactions as grants by the Company to such persons of options to
purchase shares of Series A Common Stock representing 1.0% ( in the
case of each of the TCI Officers and the Company Officer) and 0.5% (in
the case of the TCI Subsidiary Officer) of the shares of Series A
Common Stock and Series B Common Stock issued and outstanding on the
Spin-off Date, determined immediately after giving effect to the
Spin-off, but before giving effect to any exercise of such options
(the "Spin-off Date Options").
Spin-off Date Options to purchase 2,324,266 shares of Series A Common
Stock at a per share price of $8.86 were granted on the Spin-off Date.
The Spin-off Date options vest in 20% cumulative increments on each
of the first five anniversaries of February 1, 1996, and are
exercisable for up to ten years following February 1, 1996.
Compensation expense with respect to the Spin-off Date Options held
by the Company Officer aggregated $246,000, $621,000 and $1,101,000
during the years ended December 31, 1999, 1998 and 1997, respectively.
Pursuant to the Reorganization Agreement, and (in the case of the TCI
Officers and the TCI Subsidiary Officer) in partial consideration for
the capital contribution made by TCI to the Company in connection with
the Spin-off, the Company agreed, effective as of the Spin-off Date,
to bear all obligations under such options and to enter into stock
option agreements with respect to such options with each of the TCI
Officers, the Company Officer and the TCI Subsidiary Officer.
On March 6, 1998, stockholders of the Company approved the TCI
Satellite Entertainment, Inc. 1997 Nonemployee Director Stock Option
Plan (the "TSAT DSOP") including the grant, effective as of February
3, 1997, to each person that as of that date was a member of the TSAT
Board and was not an employee of the Company or any of its
subsidiaries, of options to purchase 50,000 shares of Series A Common
Stock. Pursuant to the TSAT DSOP, options to purchase 200,000 shares
of Series A Common Stock were granted at an exercise price of $8.00
per share. As originally granted, options issued pursuant to the TSAT
DSOP vest and become exercisable over a five-year period from the date
of grant and expire 10 years from the date of grant. In November 1997,
the TSAT Board approved modifications to the vesting provisions to
provide for vesting in three annual installments, commencing February
1998. In November 1997, the TSAT Board also voted to increase the
number of directors by one, and the director
II-23
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
named to fill such newly created directorship received options to
purchase 50,000 shares of Series A Common Stock at an exercise price
of $6.50.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock options, and accordingly, compensation
expense has been recognized for its stock options in the accompanying
financial statements using the intrinsic value method. Had the Company
determined compensation expense based on the grant-date fair value
method pursuant to Statement of Financial Accounting Standards No.
123, the Company's net earnings (loss) and earnings (loss) per share
would have been $66,498,000 and $0.96 for 1999, ($447,012,000) and
($6.60) for 1998, ($240,384,000) and ($3.61) for 1997, respectively.
The following table presents the number, weighted-average exercise
price and weighted-average grant-date fair value of options to buy
Series A Common Stock.
WEIGHTED - WEIGHTED -
AVERAGE AVERAGE
NUMBER OF EXERCISE GRANT-DATE
OPTIONS PRICE FAIR VALUE
----------- ----------- -----------
Granted in connection with Spin-off 2,324,266 $ 8.86 8.74
Granted in 1997 1,070,000 7.93 4.77
---------
Outstanding at December 31, 1997 and 1998 3,394,266 8.57
Exercised 80,000 8.00
Forfeited and cancelled 20,000 8.00
Granted in 1999 1,190,500 7.93 6.03
Outstanding at December 31, 1999 4,484,766 8.40
========= ====
Exercisable at December 31, 1997 464,853 8.86
========= ====
Exercisable at December 31, 1998 1,241,706 8.64
========= ====
Exercisable at December 31, 1999 2,204,720 8.52
========= ====
II-24
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
As originally granted in February 1997, options granted to employees
vest evenly over five years with such vesting period beginning
January 1, 1997, first become exercisable on January 1, 1998 and
expire on December 31, 2006. In November 1997, the TSAT Board
approved modifications to the vesting provisions to provide for
vesting in three equal annual installments, commencing February
1998. In accordance with the TSAT 1996 Plan, absent action by the
TSAT Board, vesting would accelerate and the options would terminate
upon a sale of substantially all assets of the Company which
occurred with the sale of the Tempo DBS-1 Assets on June 4, 1999.
Pursuant to a provision in the TSAT 1996 Plan, the TSAT Board allowed
the options held by most of the employees and officers to vest and
extended the termination date to June 4, 2000. The original terms
for the options were maintained for employees and officers who were
continuing with the Company.
Options outstanding at December 31, 1999 have a range of exercise
prices from $6.50 to $8.86 and a weighted-average remaining
contractual life of approximately eight years.
The respective estimated grant-date fair values of the options noted
above are based on the Black-Scholes model and are stated in current
annualized dollars on a present value basis. The key assumptions used
in the model for purposes of these calculations include the following:
(a) a discount rate equal to the one-year Treasury Bill rate for the
twelve months ended December 31, 1999; (b) a 84% volatility rate;
(c) the 10-year option term; (d) the closing price of the Series A
Common Stock on the date of grant; and (e) an expected dividend rate
of zero.
In February 1997, certain key employees of the Company were granted,
pursuant to the TSAT 1996 Plan, an aggregate of 325,000 restricted
shares of Series A Common Stock. As originally granted, such
restricted shares vest as to 50% on January 1, 2001 and as to the
remaining 50% on January 1, 2002. In November 1997, the TSAT Board
approved modifications to the vesting provisions accelerating the
vesting schedules under such restricted stock awards to provide for
vesting of 50% on each of the second and third anniversaries of the
date of granting. Compensation expense with respect to the restricted
shares aggregated $366,000 and $434,000 during the years ended
December 31, 1999 and 1998, respectively.
On December 1, 1999, certain key employees and officers of TSAT
were granted, pursuant to the TSAT 1996 Plan, an aggregate of
628,000 options to acquire shares of Class A Common Stock at a per
share exercise price of $7.125 and 562,500 options to acquire
shares of Class A Common Stock at a per share exercise price of
$8.84 ("the 1999 Grant"). Each grant of options vest over a 5 year
period beginning on the date of the grant, first becomes
exercisable as to 25% on the second anniversary of the date of
grant and become exercisable as to an additional 25% on each of the
third, fourth and fifth anniversaries of the date of grant, and
expires on December 1, 2009.
(e) OTHER
Pursuant to the Reorganization Agreement, the Company granted to TCI
an option to purchase up to 4,765,000 shares of Series A Common Stock,
at an exercise price of $1.00 per share, as required by TCI from time
to time to meet its obligations under the conversion features of
certain convertible securities of TCI as such conversion features were
adjusted as a result of the Spin-off. During 1999 and 1998, TCI
purchased 3,452,000 shares and 991,000 shares, respectively, of
Series A Common Stock pursuant to such option.
In connection with the Spin-off, TCI and the Company also entered into
a "Share Purchase Agreement" to sell to each other from time to time,
at the then current market price, shares of Series A TCI Group Stock
and Series A Common Stock, respectively, as necessary to satisfy their
respective obligations after the Spin-off Date under certain stock
options and SARs held by their respective employees and non-employee
directors.
At December 31, 1999, a total of 5,338,329 shares of Series A Common
Stock were reserved for issuance pursuant to the Spin-off Date
Options, the Share Purchase Agreements, the
II-25
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Reorganization Agreement, the TSAT 1996 Plan and the TSAT DSOP. In
addition, one share of Series A Common Stock is reserved for each
outstanding share of Series B Common Stock.
(10) INCOME TAXES
Through the Spin-off Date, TSAT's results of operations were included in
TCI's consolidated U.S. Federal income tax returns, in accordance with the
existing tax sharing arrangements among TCI and its consolidated
subsidiaries. Effective July 1, 1995 TCI, TCIC and certain other
subsidiaries of TCI entered into a tax sharing agreement (the "Tax Sharing
Agreement"), which formalized such pre-existing tax sharing arrangements
and implemented additional provisions regarding the allocation of certain
consolidated income tax attributes and the settlement procedures with
respect to the intercompany allocation of current tax attributes. In
connection with the Spin-off, the Tax Sharing Agreement was amended to
provide that TSAT be treated as if it had been a party to the Tax Sharing
Agreement, effective July 1, 1995. TSAT's intercompany income tax
allocation through the Spin-off Date has been calculated in accordance with
the Tax Sharing Agreement. Subsequent to the Spin-off Date, TSAT files
separate U.S. Federal and state income tax returns.
In connection with the Restructuring, TSAT and TCI entered into a tax
sharing agreement dated June 1997, to confirm that pursuant to the amended
Tax Sharing Agreement (i) neither TSAT nor any of its subsidiaries has any
obligation to indemnify TCI or the TCI shareholders for any tax resulting
from the Spin-off failing to qualify as a tax-free distribution pursuant to
Section 355 of the Internal Revenue Code of 1986 (the "Code"); (ii) TCI is
obligated to indemnify TSAT and its subsidiaries for any taxes resulting
from the Spin-off failing to qualify as a tax-free distribution pursuant to
Section 355 of the Code; (iii) to the best knowledge of TCI, TSAT's total
payment obligation under the Tax Sharing Agreement could not reasonably be
expected to exceed $5 million; and (iv) the sole agreement between TCI and
TSAT or any of its subsidiaries relating to taxes is the Tax Sharing
Agreement.
TSAT recognized no income tax benefit during either of the years ended
December 31, 1999, 1998 and 1997. As a result of the Spin-off, TSAT is no
longer a part of the TCI consolidated tax group, and accordingly, is only
able to realize income tax benefits for financial reporting purposes to
the extent that such benefits offset TSAT's income tax liabilities or TSAT
generates taxable income. For financial reporting purposes, all of TSAT'S
income tax liabilities had been fully offset by income tax benefits at
December 31, 1999, 1998 and 1997.
Income tax benefit (expense) for the year ended December 31, 1999
consists of:
Current Deferred Total
------- -------- -----
amounts in thousands
Year ended December 31, 1999:
Federal $ (650) (1,197) (1,847)
State and local -- 1,431 1,431
------- -------- ------
$ (650) 234 (416)
======= ======== ======
II-26
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Income tax benefit (expense) differs from the amounts computed by applying
the Federal income tax rate of 35% as a result of the following (amounts in
thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- --------- -------
amounts in thousands
Computed "expected" tax (expense)
benefit (23,687) $ 155,843 83,419
State and local income taxes, net
of Federal income tax benefit 931 -- 13,009
Issuance of common stock by subsidiary -- (104,666) --
Change in valuation allowance 15,695 (51,736) (98,521)
Other 6,645 559 2,093
------- --------- -------
$ (416) -- --
======= ========= ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
DECEMBER 31,
------------------------
1999 1998
---------- ---------
amounts in thousands
Deferred tax assets:
Net operating loss carryforwards and tax credits $ 150,286 152,468
Investment in Phoenixstar, principally due to losses
recognized for financial statement purposes in excess
of losses recognized of tax purposes -- 15,827
Share appreciation right liability 26,376 --
Future deductible amounts principally due to
accruals deductible in later periods 642 --
Property and equipment, principally due to differences in
depreciation net of increase in tax basis resulting from
intercompany transfer 5 --
---------- ---------
Total deferred tax assets 177,309 168,295
Less - valuation allowance (150,933) (166,628)
---------- ---------
Net deferred tax assets 26,376 1,667
Deferred tax liability:
II-27
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Future gain related to unrealized appreciation on held
for sale security 26,376 --
Other -- 1,667
---------- ---------
Net deferred tax liability $ -- --
========== =========
The valuation allowances for deferred tax assets as of December 31, 1999
and 1998 were $150,933,000 and $166,628,000, respectively. Such balances
increased $15,195,000 and $51,736,000 from December 31, 1998 and 1997,
respectively.
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits
attributable to deductible temporary differences will be realized to the
extent of future reversals of existing taxable temporary differences.
At December 31, 1999, the Company had net operating loss carry forwards for
income tax purposes aggregating approximately $390,565,000 of which, if not
utilized to reduce taxable income in future periods, $18,953,000 expire in
2010, $17,094,000 expire in 2011, $238,558,000 expire in 2012 and
$115,960,000 expire in 2018.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases its office space under noncancelable operating leases.
Future minimum rental payments on these leases are as follows (in
thousands):
2000 $ 186
2001 131
--------
$ 317
========
Rent expense was approximately $23,000, $358,000 and $1,866,000 in 1999,
1998 and 1997, respectively.
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 financial statements.
II-28
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(12) TRANSACTIONS WITH RELATED PARTIES
Pursuant to the terms of the TSAT Merger Agreement, Phoenixstar reimbursed
TSAT for all reasonable costs and expenses incurred by TSAT (i) to comply
with its tax and financial reporting obligations, (ii) to maintain certain
insurance coverage and (iii) to maintain its status as a publicly traded
company. During the years ended December 31, 1999 and 1998, such
reimbursements aggregated $376,000 and $152,000, respectively. The effects
of such reimbursements have been reflected as a reduction of TSAT's
investment in Phoenixstar.
In addition, Phoenixstar makes advances to TSAT for the payment of certain
costs related to the Tempo Satellite and the proposed high power strategy.
Such advances aggregated $6,365,000 during 1998, and are included in due to
Phoenixstar in the accompanying 1998 consolidated balance sheets.
Certain former employees of TSAT, who are now employees of Phoenixstar,
hold stock options, stock options with tandem stock appreciation rights,
and restricted shares of TSAT (collectively, the "TSAT Options").
Subsequent to the Restructuring, compensation expense related to the TSAT
Options aggregated $1,541,000 and has been reflected as an increase in
TSAT's investment in PRIMESTAR in the accompanying consolidated financial
statements.
Prior to the Restructuring, Phoenixstar Partners provided programming
services to the Company and other authorized distributors in exchange for a
fee based upon the number of subscribers receiving programming services. In
addition, Phoenixstar Partners arranged for satellite capacity and uplink
services, and provided national marketing and administrative support
services in exchange of a separate authorization fee.
Effective January 1, 1997, charges for customer fulfillment services
provided by TCI were made pursuant to the Fulfillment Agreement entered
into by the Company and TCIC in connection with the Spin-off. Pursuant to
the fulfillment Agreement, TCIC continued to provide fulfillment services
on an exclusive basis to the Company following the Spin-off with respect to
customers of the PRIMESTAR-Registered Trademark- medium power service.
Such services were performed in accordance with specified performance
standards. Charges to TSAT pursuant to the Fulfillment Agreement
aggregated $54,823,000 during 1997, of which $46,498,000 were capitalized
installation costs. The Fulfillment Agreement terminated on
December 31, 1997.
Effective on the Spin-off Date, charges for administrative services
provided by TCIC were made pursuant to the Transition Services Agreement.
Pursuant to the Transition Services Agreement, TCI was obligated to provide
to the Company certain services and other benefits. As compensation for the
services rendered and for the benefits made available to the Company
pursuant to the Transition Services Agreement, the Company was required to
pay TCI a monthly fee of $1.50 per qualified subscribing household or other
residential or commercial unit (counted as one subscriber regardless of the
number of satellite receivers), up to a maximum of $3,000,000 per month,
and to reimburse TCI quarterly for direct, out-of-pocket expenses incurred
by TCI to third parties in providing the services. Amounts charged to TSAT
pursuant to the Transition Services Agreement aggregated $3,174,000 and
$11,579,000 for the years ended December 31, 1998 and 1997, respectively,
and was included in selling, general and administrative expense in the
accompanying consolidated statements of operations. Upon
II-29
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
consummation of the Restructuring, TSAT and TCI agreed to terminate the
Transition Services Agreement.
Beginning in March 1997, and through the Closing Date, TCIC provided TSAT
with customer support services from TCIC's Boise, Idaho call center.
Amounts charged by TCIC to TSAT for such services aggregated $5,026,000
and $12,173,000 during the years ended December 31, 1998 and 1997,
respectively, and are included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.
Certain key employees of the Company hold stock options in tandem with SARs
with respect to certain common stock of TCI. In connection with the
Spin-off, the Company assumed the stock compensation liability with respect
to such TCI options and SARs. Estimates of the compensation related to the
options and/or SARs granted to employees of the Company have been recorded
in the accompanying financial statements, but are subject to future
adjustment based upon the market value of the underlying TCI common stock
and, ultimately, on the final determination of market value when the rights
are exercised. Non-cash increases (decreases) to such estimated stock
compensation liability aggregated $5,554,000 during the year ended December
31, 1999. In 1999, 1998 and 1997, the Company recognized $6,261,000,
$3,814,000 and $6,134,000, respectively, of stock compensation expense
related to the aforementioned options with tandem SARs.
(13) SUBSEQUENT EVENTS
Effective February 1, 2000, the Company entered into a Management Agreement
with Phoenixstar pursuant to which the Company is managing Phoenixstar's
affairs in exchange for a monthly management fee of $45,000.
On March 16, 2000, the Company completed transactions with Liberty Media
Corporation ("Liberty Media"). As a result of such transactions, the
Company became the managing member (through its wholly-owned subsidiaries)
of two new limited liability companies (collectively, the "Liberty Joint
Ventures"), through which the Company holds interests in a number of
satellite and related businesses. The Company also acquired from Liberty
Media beneficial ownership in 5,084,745 shares of Sprint Corporation
PCS common stock, having a market value of approximately $333 million as
of March 24, 2000, in exchange for the issuance by the Company to Liberty
Media of (i) Series A Preferred Stock of the Company with a liquidation
value of $150 million and (ii) Series B Preferred Stock of the Company
with a liquidation value of $150 million. The Series B Preferred Stock is
convertible into Series B Common Stock of the Company at a conversion
price of $8.84 per share, subject to adjustment, and prior to conversion
represents approximately 85% of the voting power of the Company.
II-30
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following lists the directors and executive officers of the Company, their
birth dates, a description of their business experience and positions held with
the Company, as of February 1, 2000.
NAME POSITION
- ------------------------- ------------------------------------------------------
John C. Malone
Born March 7, 1941 Has served as Chairman of the Board and a director
of the Company since December 1996. Dr. Malone is also
currently the Chairman of the Board and a director of
Liberty Media Corporation. Dr. Malone served as Chief Executive
Officer of TCI from January 1994 until March 1999, and as
Chairman of the Board of TCI from November 1996 until March 1999.
Dr. Malone served as President of TCI from January 1994 to March
1997. Dr. Malone is also a director to AT&T, The Bank of New
York, USANi LLC, At Home Corporation, United GlobalCom, Inc. and
Cendant Corporation.
Gary S. Howard
Born February 22, 1951 Has served as Chief Executive Officer of the Company since
December 1996 and a director of the Company since November
1996. From February 1995 through August 1997, Mr. Howard
also served as President of the Company. Mr. Howard is also
currently the Executive Vice President and Chief Operating
Officer of Liberty Media Corporation. Mr. Howard
served as Executive Vice President of TCI from December 1997
to March 1999; as Chief Executive Officer, Chairman of the
Board and director of TV Guide, Inc. from June 1997 to March
1999; and as President and Chief Executive Officer of TCI
Ventures Group, LLC from December 1997 to March 1999. Mr. Howard
served as President of TV Guide, Inc. from June 1997 to
September 1997; and as Senior Vice President of TCI
Communications, Inc. from October 1994 to December 1996.
Mr. Howard is a director of Liberty Media Corporation, TV Guide,
Inc., Liberty Digital, Inc., and Teligent, Inc.
David P. Beddow
Born December 27, 1943 Has served as a director of the Company since December 1996.
Mr. Beddow has served as Vice President of Liberty Media
Corporation since April 1999. Mr. Beddow served as
Executive Vice President of TCIC and President and Chief
Executive Officer of NDTC from August 1998 until April 2000.
Prior to August 1998, Mr. Beddow served as Senior Vice
President of TCITV and NDTC since February 1995. Mr. Beddow
served as Vice President of TCI Technology, Inc. from June
1993 to February 1995.
William E. Johnson
Born June 23, 1941 Has served as a director of the Company since December 1996.
Mr. Johnson served as Chief Executive Officer of Scientific
Atlanta, Inc. from January 1987 until his retirement in
December 1992. Mr. Johnson served as a director of
Intelligent Electronic, Inc. from November 1994 to 1998 and
as a director of ATX, Inc. since January 1993.
III-1
NAME POSITION
- ------------------------- ------------------------------------------------------
John W. Goddard
Born May 4, 1941 Has served as a director of the Company since December 1996.
Mr. Goddard served as President and Chief Executive Officer
of the cable division of Viacom International, Inc. from
1980 until the division was sold in July 1996. Mr. Goddard
is also a director of Diva Systems Corporations, Phoenixstar,
Bend Cable Communications, Cable Television Laboratories, Inc.
(Cablelabs), and the Deafness Research Foundation and is a
Trustee of the Walter Kaitz Foundation.
Leo J. Hindery, Jr.
Born October 31, 1947 Has served as a director of the Company since November 1997.
Mr. Hindery is the Chief Executive Officer of Global
Crossings, Ltd. and of Global Center, Inc. Mr. Hindery served
as President and Chief Operating Officer of TCI, and as
President and a director of TCIC, from March 1997 until March 1999,
and as President and Chief Executive Officer of AT&T Broadband
and Internet Services from March 1999 until October 1999. Prior
to joining TCI, Mr. Hindery was the founder, Managing General
Partner and Chief Executive Officer of InterMedia Partners and its
affiliated entities since 1988. Mr. Hindery is also a
director of Tanning Technology Corp., TD Waterhouse Group, Inc.,
VerticalNet, Inc., and Phoenixstar.
Christopher Sophinos
Born January 26, 1952 Has served as President of the Company since September 1997,
and was previously Senior Vice President of the Company from
February 1996. Mr. Sophinos served as Senior Vice President
of Phoenixstar from April 1998 until August 1999. Mr.
Sophinos served as the President of Boats Unlimited from
November 1993 to September 1998 and has served as a director
of Sophinos & Sons, Inc. since November 1993.
Kenneth G. Carroll
Born April 21, 1955 Has served as Senior Vice President and Chief Financial
Officer of the Company since February 1995 and as Treasurer since
August 1999. He also served as Senior Vice President and Chief
Financial Officer of Phoenixstar since April 1998. From December
1994 to May 1997, Mr. Carroll served as Vice President of TCI K-1,
Inc. and as Vice President of United Artists K-1 Investments,
Inc. From April 1994 through January 1995, Mr. Carroll
served as Vice President of Business Operations and Chief
Financial Officer of Netlink USA, a subsidiary of TCI and
from July 1992 to May 1994, Mr. Carroll served as Senior
Director of Finance and Business Operations of Netlink.
William D. Myers
Born March 23, 1958 Served as Vice President and Treasurer of the Company from
September 1996 until August 1999. He also served as Vice
President and Treasurer of Phoenixstar from April 1998 until
August 1999. Mr. Myers served as Vice President of TCI Cable
Management Corporation from November 1994 through August
1996. Mr. Myers served as Director of Finance of TCI from
December 1991 to November 1994.
III-2
NAME POSITION
- ------------------------- ------------------------------------------------------
The directors of the Company will hold office until the next annual meeting of
stockholders of the Company and until their successors are duly elected and
qualified. The executive officers named above will be elected to serve in such
capacities until the next annual meeting of the Company's Board of Directors
(the "TSAT Board"), or until their respective successors have been duly elected
and have been qualified, or until their earlier death, resignation,
disqualification or removal from office.
The Company's charter provides for a classified Board of Directors of not
less than three members, divided into three classes of approximately equal
size, with each class to be elected for a three-year term at each annual
meeting of stockholders. The exact number of directors is fixed by resolution
of the TSAT Board. In connection with the Spin-off, the number of directors
on the TSAT Board was fixed at five. On November 10, 1997, the TSAT Board
voted to increase the size of the TSAT Board from five to six, and to add Leo
J. Hindery, Jr. to fill the newly created directorship. For purposes of
determining their terms, directors are divided into three classes. The Class
I directors, whose terms were scheduled to expire at the 1997 annual
stockholders' meeting, are Mr. Beddow and Mr. Hindery. The Class II
directors, whose terms were to expire at the 1998 annual stockholders'
meeting, are Messrs. Howard and Johnson. The Class III directors, whose terms
were to expire at the 1999 annual stockholders' meeting, are Dr. Malone and
Mr. Goddard. On November 10, 1997, approximately 11 months after the
Spin-off, the TSAT Board determined that the 1997 annual stockholders meeting
would not be held, as a result of the pendency of the proposed Roll-up Plan,
which would have resulted in the merger of the Company with and into
Phoenixstar. On March 6, 1998, the Company held a special meeting of
stockholders to vote on the Roll-up Plan, which was approved by more than
66-2/3% of the outstanding voting power of the Series A Common Stock and
Series B Common Stock, voting together as a class. Due to the pendency of the
TSAT Merger in 1998 and the Hughes High Power Transaction and Medium Power
Transaction in 1999, the 1998 and 1999 annual stockholders meeting were also
deferred. The Company currently expects that the 2000 annual stockholders
meeting will be held during the summer of 2000. At the 2000 annual
stockholders meeting, TSAT stockholders will have an opportunity to vote with
respect to the election of two Class I directors (whose terms will expire in
2001), two Class II directors (whose terms will expire in 2002 and two Class
III directors (whose terms will expire in 2003.
There are no family relations by blood, marriage or adoption, of first cousin or
closer, among the above named individuals.
III-3
During the past five years, none of the persons named above has had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.
Section 16(a) of the Security Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Security and Exchange Commission
("SEC"). Officers, directors and greater-than-ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on review of the copies of Forms 3, 4 and 5 and amendments thereto
furnished to the Company with respect to its most recent fiscal year, or written
representations that no Forms 5 were required, the Company believes that, during
the year ended December 31, 1999, its officers, directors and
greater-than-ten-percent beneficial owner complied with all Section 16(a) filing
requirements.
ITEM 11. EXECUTIVE COMPENSATION
(a) SUMMARY COMPENSATION TABLE
Certain directors, officers and employees of TCI and its subsidiaries
(including the Company, prior to the Spin-off) were granted options to
purchase shares of Series A TCI Group Common Stock ("TCI Options") and
stock appreciation rights with respect to shares of Series A TCI Group
Common Stock ("TCI SARs"). The TCI Options and TCI SARs were granted
pursuant to various stock plans of TCI (the "TCI Plans").
Immediately prior to the Spin-off, each TCI Option was divided into two
separately exercisable options: (i) an option to purchase Series A Common
Stock (an "Add-on Company Option"), exercisable for the number of shares of
Series A Common Stock that would have been issued in the Spin-off in
respect of the shares of Series A TCI Group Stock subject to the applicable
TCI Option, if such TCI Option had been exercised in full immediately prior
to the Spin-off Date, and (ii) an option to purchase Series A TCI Group
Stock (an "Adjusted TCI Option"), exercisable for the same number of shares
of Series A TCI Group Stock as the corresponding TCI Option had been. The
aggregate exercise price of each TCI Option was allocated between the
Add-on Company Option and the Adjusted TCI Option into which it was
divided, and all other terms of the Add-on Company Option and Adjusted TCI
Option are in all material respects the same as the terms of such TCI
Option. Similar adjustments were made to the outstanding TCI SARs,
resulting in the holders thereof holding Adjusted TCI SARs and Add-on
Company SARs instead of TCI SARs, and to outstanding restricted share
awards, resulting in the holders thereof holding restricted shares of
Series A Common Stock in addition to restricted shares of Series A TCI
Group Stock, effective immediately prior the Spin-off.
As a result of the foregoing, certain persons who remained TCI employees or
non-employee directors after the Spin-off and certain persons who were TCI
employees prior the Spin-off but became Company employees after the
Spin-off hold both adjusted TCI Options and separate Add-on Company Options
and/or hold both Adjusted TCI SARs and separate Add-on Company SARs. The
obligations with respect to the Adjusted TCI Options, Add-on Company
Options, Adjusted TCI SARs and Add-on Company SARs held by TCI employees
and non-employee directors are obligations solely of TCI. The obligations
with respect to the Adjusted TCI Options, Add-on Company Options, Adjusted
TCI SARs and Add-on Company SARs held by persons who were Company employees
at the time of the Spin-off and following the Spin-off were no longer TCI
employees ("Company Employees") are obligations solely of the Company.
Prior to the Spin-off, TCI and the Company entered into an agreement to
sell to each other from time to time at the then current market price
shares of Series A TCI Group Common Stock and Series A Common Stock,
respectively, as necessary to satisfy their respective obligations under
such securities.
III-4
The following table is a summary of all forms of compensation paid by the
Company to the officers named therein for services rendered in all
capacities to the Company for the fiscal years ended December 31, 1999,
1998, and 1997 (total of four persons).
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- ---------------------------
OTHER SECURITIES ALL
NAME AND ANNUAL RESTRICTED UNDERLYING OTHER
PRINCIPAL POSITION COMPENSATION STOCK OPTIONS/ COMPENSATION
WITH THE COMPANY YEAR SALARY BONUS (4) AWARD SARS (8)
- -------------------- ---- -------- ------- ------------ ----------- ----------- -----------
Gary S. Howard (1) 1999 $ -- -- -- -- -- --
(Chief Executive Officer) 1998 -- -- -- -- -- $ --
1997 215,519 120,600 2,976 1,000,000(5) -- 17,158
Christopher Sophinos (2) 1999 51,923(3) -- -- -- 425,000(7) --
(President) 1998 51,626 35,500 -- -- -- 4,667
1997 174,538 70,000 -- 400,000(5) 100,000(6) 10,240
Kenneth G. Carroll (2) 1999 -- -- -- -- 425,000(7) --
(Senior Vice President 1998 51,827 35,500 -- -- -- 4,590
and Chief Financial 1997 174,538 78,846 2,182 400,000(5) 100,000(6) 9,934
Officer)
William D. Meyers (2) 1999 -- -- -- -- -- --
(Vice President and 1998 41,731 26,000 -- -- -- 2,617
Treasurer) 1997 139,827 35,000 2,352 400,000(5) 100,000(6) 9,711
III-5
(1) Effective June 1, 1997 and through December 31, 1997, TSAT and UVSG agreed
that 75% of Mr. Howard's annual salary was to be charged to UVSG, of which
Mr. Howard is a director and chief Executive Officer. The 1997 amount
represents Mr. Howard's 1997 annual salary less amount charged to UVSG
($215,481). Subsequent to December 31, 1997, all of Mr. Howard's annual
salary is charged to UVSG and other TCI subsidiaries.
(2) In connection with the Restructuring and effective April 1, 1998, Messrs.
Sophinos, Carroll and Myers became officers of Phoenixstar; and from that
date forward, all of such officers' compensation for 1998 was paid by
Phoenixstar. Accordingly, the 1998 compensation information included in the
table represents three months of employment.
(3) Mr. Sophinos' employment by Phoenixstar terminated on August 31, 1999. Mr.
Sophinos began receiving compensation from TSAT on September 1, 1999.
Accordingly, the 1999 compensation information included in the table
represents four months of employment.
(4) Consists of amounts reimbursed during the year for the payment of taxes.
(5) Pursuant to the TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan
(the "TSAT 1996 Plan"), Mr. Howard was granted 125,000 restricted shares of
Series A Common Stock and Messrs. Sophinos, Carroll and Myers were each
granted 50,000 restricted shares vested as to 50% on each of January 1,
2001 and January 1, 2002. On November 10, 1997, the TSAT Board and the
Compensation Committee of the TSAT Board approved modifications to the
terms of such awards, accelerating the vesting provisions to provide for
vesting of 50% on February 3, 1999 and as to the remaining 50% on February
3, 2000. The value of Mr. Howard's unvested restricted shares at the end of
1999 was $1,000,000, and the value of each of Messrs. Sophinos', Carroll's
and Myers' unvested restricted shares at the end of 1999 was $400,000. The
Company has not paid cash dividends on the Series A common Stock and does
not anticipate paying cash dividends on the Series A Common Stock at any
time in the foreseeable future.
(6) Pursuant to the TSAT 1996 Plan, Messrs. Sophinos, Carroll and Myers were
each granted options with tandem SARs to purchase 100,000 shares of Series
A Common Stock at a purchase price of $8.00. As originally granted each
such grant of options vests evenly over five years with such vesting period
beginning January 1, 1997, first became exercisable on January 1, 1998 and
expires on December 31, 2006. On November 10, 1997, the TSAT Board and the
TSAT compensation committee approved modifications to the vesting of all
options issued pursuant to the TSAT 1996 Plan, accelerating the vesting
schedules under such options from five to three years, commencing February
1998.
(7) Pursuant to the TSAT 1996 Plan, Messrs. Sophinos and Carroll were each
granted options to purchase 200,000 shares of Series A Common Stock at a
purchase price of $7.125 and 225,000 shares of Series A Common stock at a
purchase price of $8.84.
III-6
(8) Includes TSAT contributions to the TSAT Employee Stock Purchase Plan
(the "TSAT ESPP") from January 1, 1997 through March 31, 1998. All named
executives were fully vested in such plans. Directors who are not
employees of TSAT are ineligible to participate in the TSAT ESPP. The
TSAT ESPP, a defined contribution plan, enables participating employees
to acquire a proprietary interest in TSAT and benefits upon retirement.
Under the terms of the TSAT ESPP, employees were eligible for
participation after one year of service. The TSAT ESPP's normal
retirement age is 65 years. Participants could contribute up to 10% of
their compensation and TSAT (by annual resolution of the TSAT Board)
could contribute up to a matching 100% of the participants'
contributions. The TSAT ESPP included a salary deferral feature in
respect of employee contributions. Forfeitures (due to participants'
withdrawal prior to full vesting) were used to reduce TSAT's otherwise
determined contributions. In connection with the Restructuring and
effective June 30, 1998, the TSAT ESPP was merged into the Phoenixstar,
Inc. 401(k) Savings Plan. Also includes insurance premiums paid by TSAT
in 1998 for the benefit of Messrs. Sophinos, Carroll and Myers in the
amount of $245, $148 and $113, respectively, and in 1997 for the benefit
of Messrs. Howard, Sophinos, Carroll and Myers in the amount of $2,158,
$740, $434 and $211, respectively.
(b) OPTION AND SARS GRANTS IN LAST FISCAL YEAR
The following table discloses information regarding stock options granted
during the year ended December 31, 1999 to each of the named executive
officers of the Company in respect of shares of Class A Common stock under
the TSAT 1996 Plan.
% OF
NUMBER OF TOTAL MARKET
SECURITIES GRANTED TO EXERCISE PRICE ON
UNDERLYING OFFICERS AND OR BASE GRANT GRANT DATE
OPTIONS EMPLOYEES PRICE DATE PRESENT
NAME GRANTED (1) 1999 ($/SH) ($/SH)(2) EXPIRATION DATE VALUE (3)
- --------------------- ----------- ---------- ------ --------- ---------------- ---------
Gary S. Howard -- -- -- -- -- --
Christopher Sophinos 200,000 16.80% 7.125 7.125 December 1, 2009 1,218,600
225,000 18.90% 8.84 7.125 December 1, 2009 1,342,800
Kenneth G. Carroll 200,000 16.80% 7.125 7.125 December 1, 2009 1,218,600
225,000 18.90% 8.84 7.125 December 1, 2009 1,342,800
William D. Meyers -- -- -- -- -- --
(1) Effective December 1, 1999 certain key employees and officers of TSAT
were granted, pursuant to the TSAT 1996 Plan, an aggregate of 628,000
options to acquire shares of Class A Common stock at a per share
exercise price of $7.125 and 562,500 options to acquire shares of Class
A Common Stock at a per share exercise price of $8.84 (the "1999
Grant"). Each such grant of options vests over a five-year period
beginning on the date of grant, first becomes exercisable as to 25% on
the second anniversary of the date of grant and becomes exercisable as
to an additional 25% on each of the third, fourth, and fifth
anniversaries of the date of grant, and expires on
III-7
December 1, 2009.
(2) Represents the closing market price per share of TSAT Series A Common Stock
on December 1, 1999, the date of grant.
(3) The value shown is based on the Black-Scholes model and is stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 5% discount rate; (b) a 84% volatility factor; (c) the 10-year
option term; (d) the closing price of TSAT Series A Common Stock on
December 1, 1999; and (e) a per share exercise price of $7.125 or $8.84
accordingly. The actual value an executive may realize will depend upon
the extent to which the stock price exceeds the exercise price on the date
the option is exercised. Accordingly, the value, if any, realized by an
executive will not necessarily be the value determined by the model.
(c) AGGREGATED TSAT OPTION/SAR EXERCISES AND FISCAL YEAR-END TSAT OPTION/SAR
VALUES
The following table provides, for the executives named in the Summary
Compensation Table, information on (i) the exercise during the year ended
December 31, 1999, of options with respect to shares of Series A Common
Stock, (ii) the number of shares of Series A Common Stock represented by
unexercised options owned by them at December 31, 1999, and (iii) the value
of those options as of the same date.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/ OPTIONS/
SARS AT SARS AT
DECEMBER 31, DECEMBER 31,
SHARES 1999 1999
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
------------------ ------------ -------- ------------- -------------
Gary S. Howard
Exercisable Series A -- $ -- 425,446 $ 2,844,901
Unexercisable Series A -- -- 268,630 1,923,391
Christopher Sophinos
Exercisable Series A -- -- 66,667 533,336
Unexercisable Series A -- -- 458,333 3,652,664
III-8
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/ OPTIONS/
SARS AT SARS AT
DECEMBER 31, DECEMBER 31,
SHARES 1999 1999
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
------------------ ------------ -------- ------------- -------------
Kenneth G. Carroll
Exercisable Series A -- -- 68,467 $ 533,336
Unexercisable Series A -- -- 458,683 3,652,664
William D. Myers
Exercisable Series A -- -- 101,900 800,000
Unexercisable Series A -- -- -- --
(d) COMPENSATION OF DIRECTORS
Members of the TSAT Board who are also full-time employees of the Company
or Liberty Media, or any of their respective subsidiaries, do not receive
any additional compensation for their services as directors. Directors who
are not full-time employees of the Company or Liberty Media, or any of
their respective subsidiaries, receive a retainer of $30,000 per year. All
members of the TSAT Board are also reimbursed for expenses incurred to
attend any meeting of the TSAT Board or any committee thereof. In addition,
on March 6, 1998, the TSAT stockholders approved the TCI Satellite
Entertainment, Inc. 1997 Nonemployee Director Stock Option Plan (the "TSAT
DSOP"). Pursuant to the TSAT DSOP, each of the persons who were directors
of the Company, but not employees of the Company or any of the Company's
subsidiaries (each such director, a "Nonemployee Director") as of
February 3, 1997 has been granted options to purchase 50,000 shares of
Series A Common Stock, and each person who becomes a Nonemployee Director
after February 3, 1997 will be automatically granted options to purchase
50,000 shares of Series A Common Stock upon such person's becoming a
director. The TSAT DSOP provides that the per share exercise price of each
option granted under the TSAT DSOP will be equal to the fair market value
of the Series A Common Stock on the date such option is granted. In
general, fair market value is determined by reference to the last sale
price for shares of Series A Common Stock on the date of grant.
III-9
(e) ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS
The members of the Company's compensation committee are Messrs. William E.
Johnson and John. W. Goddard, each a director of the Company. None of the
members of the compensation committee are or were officers of the Company
or any of its subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table lists stockholders believed by the Company to be the
beneficial owners of more than five percent of the outstanding Company
Common Stock as of December 31, 1999. Shares issuable upon exercise of
options and upon vesting of restricted shares are deemed to be outstanding
for the purpose of computing the percentage ownership and overall voting
power of persons believed to beneficially own such securities, but have not
been deemed to be outstanding for the purpose of computing the percentage
ownership or overall voting power of any other person. Voting power in the
table is computed with respect to a general election of directors. So far
as is known to the Company, the persons indicated below have sole voting
and investment power with respect to the shares indicated as believed to be
owned by them except as otherwise stated in the notes to the table.
NAME AND ADDRESS TITLE NUMBER OF SHARES PERCENT VOTING
OF BENEFICIAL OWNER OF CLASS BENEFICIALLY OWNED OF CLASS (1) POWER (1)
- -------------------------- --------- ------------------ ------------ ---------
John C. Malone,
Chairman of the Board
5619 DTC Parkway Series A 909,845(3) 1.4% 23.9%
Englewood, Colorado Series B 3,439,958(4) 40.6%
Kim Magness
(individually as
a member of Magness
Security LLC
4000 E. Belleview Series A 383,806(2)(7) 0.61% 21.3%
Greenwood Village, Colorado Series B 3,745,206(2) 25.6%
Gary Magness
(as co-representative
of the estate of Bob
Magness)
29 Sunset Drive Series A 243,373 * 21.3%
Englewood, Colorado Series B 3,120,770(2) 36.9%
The Associated Group, Inc.
200 Gateway Towers Series A 1,247,997(5) 2.0% 5.6%
Pittsburgh, Pennsylvania Series B 707,185(6) 8.4%
III-10
NAME AND ADDRESS TITLE NUMBER OF SHARES PERCENT VOTING
OF BENEFICIAL OWNER OF CLASS BENEFICIALLY OWNED OF CLASS (1) POWER (1)
- -------------------------- --------- ------------------ ------------ ---------
Tudor Investment Corporation
600 Steamboat Road Series A 4,238,670(8) 6.7% 2.9%
Greenwich, CT 06830
Paul Tudor Jones, II
c/o Tudor Investment Series A 4,519,100(8) 7.2% 3.1%
Corporation
600 Steamboat Road
Greenwich, CT 06830
*Less than one percent.
(1) Based on 62,894,446 shares of Series A Common Stock and 8,465,224 shares of
Series B Common Stock outstanding as of December 31, 1999.
(2) Effective January 5, 1998, Mr. Kim Magness and Mr. Gary Magness were
appointed co-Personal Representatives of the Estate of Bob Magness.
(3) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARS, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with SARs in November
of 1992 to acquire 100,000 shares of Series A Common Stock, all of which
options are currently exercisable; and (ii) stock options granted in tandem
with SARs in December of 1995 to acquire 100,000 shares of Series A Common
Stock, of which options to purchase 80,000 shares are currently
exercisable. Also assumes the exercise in full of options to purchase
50,000 shares of Series A Common Stock granted pursuant to the TSAT DSOP
effective February 3, 1997, 33,333 of which options are vested.
(4) Includes 117,300 shares of Series B Common Stock held by Dr. Malone's wife,
Mrs. Leslie Malone, but Dr. Malone disclaims any beneficial ownership of
such shares.
(5) The number of shares in the table is based on information provided by the
respective stockholder.
(6) The number of shares in the table is based upon information provided by The
Associated Group on February 26, 1998. Said corporation has shared voting
power and dispositive power over 707,185 shares of Series B Common Stock.
(7) Includes 210,533 shares of Series A Common Stock and 634,621 shares of
Series B common Stock held by Magness Securities LLC. Mr. Magness is
deemed to have beneficial ownership over such shares as a member of Magness
Securities LLC. Also assumes the exercise in full of all Add-on Company
Options and Add-on Company SARs, whether or not then exercisable or
in-the-money of stock options granted in November of 1994 to acquire
5,000 shares of Series A Common Stock, all of which options are currently
exercisable.
III-11
(8) The number of shares in the table is based upon a Schedule 13G, dated
February 14, 2000, filed by Tudor Investment Corporation which Schedule 13G
reflects that said company has shared voting power over 4,238,670 shares
and shared dispositive power over 4,238,670 shares of Series A Common
Stock.
(9) The number of shares in the table is based upon a Schedule 13G, dated
February 14, 2000, filed by Paul Tudor Jones, II, which Schedules 13G
reflects that said individual has shared voting power over 4,519,100 shares
and shared dispositive power over 4,519,100 shares of Series A Common
Stock.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table lists the number of shares of Company Common Stock
believed to be owned beneficially by each director and each of the
executive officers named in the above Summary Compensation Table, and
all directors and executive officers as a group as of December 31, 1999,
according to data furnished by the persons named. Shares issuable
upon exercise of options and upon vesting of restricted shares are deemed
to be outstanding for the purpose of computing the percentage ownership and
overall voting power of persons believed to beneficially own such
securities, but have not been deemed to be outstanding for the purpose of
computing the percentage ownership or overall voting power of any other
persons. Voting power in the table is computed with respect to a general
election of directors. So far as is known to the Company, the persons
indicated below have sole voting and investment power with respect to the
shares indicated as believed to be owned by them.
VOTING
NAME SERIES A SERIES B SERIES A SERIES B POWER (1)
- ---------------------- ----------- -------------- -------- -------- ---------
Directors:
John C. Malone 909,845(2) 3,439,958(3) 1.5% 40.6% 23.9%
Gary S. Howard 824,215(4) -- 1.4% -- *
David P. Beddow 414,300(5) -- * -- *
William E. Johnson 50,200(6) 10 * * *
John W. Goddard 51,408(6)(7) 1,425(7) * * *
Leo J. Hindery, Jr 50,000(6) -- * -- *
Other named executive
officers:
Christopher Sophinos 575,000(8) -- * -- *
Kenneth G. Carroll 577,170(9) -- * -- *
William D. Myers 151,974(10) -- * -- *
All directors and
executive officers
as a group (nine persons) 3,604,112 3,441,393 5.7% 40.7% 25.8%
*Less than one percent.
(1) Based on 62,894,446 shares of Series A Common Stock and 8,465,224 shares of
Series B Common Stock outstanding as of December 31, 1998.
(2) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (1) stock options granted in tandem with SARs in November
of 1992 to acquire 100,000 shares of Series A
III-12
Common Stock, all of which options are currently exercisable; and (ii)
stock options granted in tandem with SARs in December of 1995 to acquire
100,000 shares of Series A Common Stock, of which options to purchase
80,000 shares are currently exercisable. Also assumes the exercise in full
of options to purchase 50,000 shares of Series A Common Stock granted
pursuant to the TSAT DSOP effective February 3, 1997, of which options to
purchase 33,333 shares are currently vested.
(3) Includes 117,300 shares of Series B Common Stock held by Dr. Malone's wife,
Mrs. Leslie Malone, but Dr. Malone disclaims any beneficial ownership of
such shares.
(4) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with SARs in November
of 1992 to acquire 5,000 shares of Series A Common Stock, all of which
options are currently exercisable; (ii) stock options in tandem with SARs
granted in October of 1993 to acquire 5,000 shares of Series A Common
Stock, all of which options are currently exercisable; (iii) stock options
in tandem with SARs granted in November of 1994 to acquire 5,000 shares of
Series A Common Stock, all of which options to are currently exercisable;
(iv) stock options granted in tandem with SARs in December of 1995 to
purchase 15,000 shares of Series A Common Stock, of which options to
acquire 12,000 shares are currently exercisable; and (v) stock options
granted in December of 1996 to purchase 664,076 shares of Series A Common
Stock, of which options to acquire 398,446 shares are currently
exercisable. Additionally assumes the vesting in full of 126,500 restricted
shares of Series A Common Stock, 63,250 of which are currently vested. Also
includes 1,022 shares of Series A Common Stock held by trusts in which Mr.
Howard is beneficial owner as trustee for his children.
(5) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with SARs in October
of 1993 to acquire 750 shares of Series A Common Stock, all of which
options are currently exercisable; (ii) stock options granted in tandem
with SARs in November of 1994 to acquire 5,000 shares of Series A Common
Stock, all of which are currently exercisable; (iii) stock options granted
in tandem with SARs in December of 1995 to purchase 25,000 shares of Series
A Common Stock, of which options to purchase 20,000 shares are currently
exercisable; and (iv) stock options granted in December of 1996 to purchase
332,038 shares of Series A Common Stock, of which options to acquire
199,223 shares are currently exercisable. Additionally assumes the vesting
in full of 1,500 restricted shares of Series A Common Stock, 750 of which
are currently vested. Also assumes the exercise in full, whether or not
then exercisable or in-the-money, of options to purchase 50,000 shares of
Series A Common Stock granted pursuant to the TSAT DSOP effective February
3, 1997, of which options to purchase 33,334 shares are currently vested.
(6) Assumes the exercise in full, whether or not then exercisable or
in-the-money, of options to purchase 50,000 shares of Series A Common Stock
granted pursuant to the TSAT DSOP, of which options to purchase 33,334
shares are currently vented.
(7) Includes 478 shares of Series A Common Stock held by Mr. Goddard's wife, of
which Mr. Goddard is beneficial owner, and 129 shares of Series B Common
Stock held by a trust in which Mr. Goddard is beneficial owner as trustee.
(8) Assumes the exercise in full, whether or not then exercisable or
in-the-money, of stock options granted in tandem with SARs in February of
1997 to purchase 100,000 shares of Series A Common Stock, of which options
to purchase 66,667 shares are currently exercisable, and assumes the
vesting in full of 50,000 restricted shares of Series A Common Stock,
25,000 of
III-13
which are currently vested. Additionally assumes the exercise in full,
whether or not then exercisable or in-the-money of stock options granted in
December of 1999 to purchase 425,000 shares of Series A Common Stock, none
of which are currently exercisable.
(9) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (1) stock options granted in tandem with SARs in November
of 1994 to acquire 400 shares of Series A Common Stock, all of which
options are currently exercisable; and (ii) stock options granted in tandem
with SARs in December of 1995 to purchase 1,750 shares of Series A Common
Stock, of which options to purchase 1,400 shares of Series A Common Stock
are currently exercisable. Additionally assumes the exercise in full,
whether or not then exercisable or in-the-money, of stock options granted
in tandem with SARs in February of 1997 to purchase 100,000 shares of
Series A Common Stock, of which options to purchase 66,667 shares are
currently exercisable, and assumes the vesting in full of 50,000 restricted
shares of Series A Common Stock, 25,000 of which are currently vested.
Additionally assumes the exercise in full, whether or not then exercisable
or in-the-money, of stock options granted in December of 1999 to purchase
425,000 shares of Series A Common Stock, none of which are currently
exercisable.
(10) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or note then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with SARs in November
of 1994 to acquire 900 shares of Series A Common Stock, all of which
options are currently exercisable; and (ii) stock options granted in tandem
with SARs in December of 1995 to purchase 1,000 shares of Series A Common
Stock, all of which options are currently exercisable. Additionally assumes
the exercise in full, whether or not then exercisable or in-the-money, of
stock options granted in tandem with SARs in February of 1997 to purchase
100,000 shares of Series A Common Stock, all of which options are currently
exercisable, and assumes the vesting in full of 50,000 restricted shares of
Series A Common Stock, all of which are currently vested.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the March 9, 1999 merger of TCI into AT&T, John Malone was the
Chairman of the Board and a director of TCI and also the Chairman of the
Board and a director of the Company. Dr. Malone was also a principal
stockholder of TCI and currently is a principal stockholder of the Company.
The Company was formed in connection with the Spin-off to own and operate
certain businesses of TCI constituting all of TCI's interests in the
digital satellite business. On the Spin-off Date, TCI distributed all the
shares of Company Common Stock held by TCI to the holders of record of TCI
Group Stock, on the basis of one share of Series A Stock for each ten
shares of Series A TCI Group
III-14
Stock, and one share of Series B Common Stock for each ten shares of Series
B TCI Group Stock held by such holders.
Since the consummation of the Spin-off, the Company and TCI have operated
independently. However, for the purposes of governing certain of the
ongoing relationships between the Company and TCI after the Spin-off, and
to provide mechanisms for an orderly transition, the Company and TCI
entered into various agreements, including the "Reorganization Agreement",
the "Transition Services Agreement," an amendment to TCI's existing "Tax
Sharing Agreement," the "Indemnification Agreements," the "Trade name and
Service Mark Agreement" and the "Share Purchase Agreement," all of which
are described below.
REORGANIZATION AGREEMENT. On the Spin-off Date, TCI, TCIC and a number of
other TCI subsidiaries, including the Company, entered into the
Reorganization Agreement, which provided for, among other things, the
principal corporate transactions required to effect the Spin-off, the
conditions thereto and certain provisions governing the relationship
between the Company and TCI with respect to and resulting from the
Spin-off.
Pursuant to the Reorganization Agreement, the Company assumed TCI's
obligations under options granted to Brendan R. Clouston, Larry E. Romrell
and David P. Beddow to purchase shares of Series A Common Stock
representing 1.0%, 1.0% and 0.5%, respectively, of the shares of Company
Common Stock issued and outstanding on the Spin-off Date, determined
immediately after giving effect to the spin-off but before giving effect to
the issuance of the shares of Series A Common Stock issuable upon exercise
of such options; and granted an option to TCI to purchase up to 4,765,000
shares of Series A Common Stock (as such number may be adjusted to reflect
stock dividends, stock splits and the like), for a purchase price equal to
the par value of such shares, as necessary to satisfy TCI's obligations to
deliver shares of Series A Common Stock upon conversion of certain
convertible securities of TCI as a result of the Spin-off. During the year
ended December 31, 1999, the Company issued 3,451,880 shares of Series A
Common Stock to TCI under this arrangement.
III-15
TRADE NAME AND SERVICE MARK LICENSE AGREEMENT. Pursuant to the Trade Name
and Service Mark License Agreement (the "License Agreement"), TCI granted
to the Company, for an initial term of three years following the
Distribution, a non-exclusive non-assignable license to use certain trade
names and service marks specifically identified in the License Agreement,
including the mark "TCI" in the context of the Digital Satellite Business.
The License Agreement provides, among other things, that all advertising,
promotion and use of certain of TCI's trade names and service markets by
the Company shall be consistent wit TCI guidelines and standards, as well
as subject to TCI approval in certain circumstances. Since the
Distribution, the Company has taken steps to phase out the use of the TCI
names and marks covered by the License Agreement, except in connection with
its corporate name. The Company and TCI amended the License Agreement
immediately prior to the closing of the Restructuring to reflect such
limited use. The License Agreement has now expired.
OTHER ARRANGEMENTS. On the Spin-off Date, TCI and the Company entered into
the Share Purchase Agreement, which obligates TCI and the Company to sell
to each other from time to time, at the then current market price, shares
of Series A TCI Group Common Stock and Series A Common Stock, respectively,
as necessary to satisfy their respective obligations under Adjusted TCI
Options and Add-on Company Options held after the Spin-off Date by their
respective employees and non-employee directors. During the year ended
December 31, 1999, the Company did not issue shares of Series A Common
Stock to TCI under this arrangement.
Certain officers of the Company who were officers or directors of TCI
and/or TCIC prior to the Spin-off received undertakings of indemnification
from TCI and/or TCIC. Such undertakings survived the Spin-off.
In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire the equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the
acquisition by each of Brendan R. Clouston and Larry E. Romrell, executive
officers of TCI, of 1.0% of the net equity of the Company. The TCI Board
also approved the acquisition by Gary S. Howard, an executive officer of
TCIC prior to the Spin-off Date and chief executive officer and a director
of the Company, of 1.0% of the net equity of the Company and the
acquisition by David P. Beddow, an executive officer of certain TCI
subsidiaries and a director of the Company, of 0.5% of the net equity of
the Company. The TCI Board determined to structure such transactions as
grants to such persons of options to purchase shares of Series A Common
Stock representing 1.0% (in the case of each of Messrs. Clouston, Romrell
and Howard) and 0.5% (in the case of Mr. Beddow) of the shares of Series A
Common Stock and Series B Common Stock issued and outstanding on the
Spin-off Date, determined immediately after giving effect to the Spin-off,
but before giving effect to any exercise of such option ("Distribution Date
Options"). Distribution Date Options to purchase 2,324,266 shares of Series
A Common Stock at a per share price of $8.86 were granted on the Spin-off
Date. Pursuant to the Reorganization Agreement, and (in the case of the
options granted to Messrs. Clouston, Romrell and Beddow) in partial
consideration for the capital contribution made by TCI to the Company in
connection with the Spin-off, the Company agreed, effective as of the
Spin-off Date, to bear all obligations under such options and to enter into
stock option agreements with respect to such options with each of Messrs.
Clouston, Romrell, Howard and Beddow.
III-16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TCI SATELLITE ENTERTAINMENT, INC.
By: /s/ Gary S. Howard
------------------------------
Name: Gary S. Howard
Title: Chief Executive Officer
Dated March 31, 2000
Pursuant to the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ John C. Malone
- --------------------------- Chairman of the Board and March 31, 2000
John C. Malone Director
/s/ Gary S. Howard
- --------------------------- Director and Chief Executive March 31, 2000
Gary S. Howard Officer
/s/ David P. Beddow
- --------------------------- Director March 31, 2000
David P. Beddow
/s/ John W. Goddard
- --------------------------- Director March 31, 2000
John W. Goddard
/s/ Leo J. Hindery, Jr.
- --------------------------- Director March 31, 2000
Leo J. Hindery, Jr.
/s/ Christopher Sophinos
- --------------------------- President March 31, 2000
Christopher Sophinos
/s/ Kenneth G. Carroll
- --------------------------- Senior Vice President March 31, 2000
Kenneth G. Carroll Chief Financial Officer and
Treasurer (Principal Financial
Officer)
III-17
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Included in Part II of this Report: Page No.
Independent Auditors' Report II-8
Consolidated Balance Sheets,
December 31, 1999 and 1998 II-9
Consolidated Statements of Operations,
Years ended December 31, 1999, 1998 and 1997 II-10
Consolidated Statements of Equity (Deficit),
Years ended December 31, 1999, 1998 and 1997 II-11
Consolidated Statements of Cash Flows,
Years ended December 31, 1999, 1998 and 1997 II-12
Notes to Consolidated Financial Statements,
December 31, 1999, 1998 and 1997 II-13
(a) (2) FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this Report:
(i) Financial Statement Schedules required to be filed:
Schedule II - Valuation and Qualifying Accounts,
Years ended December 31, 1999, IV-6
IV-1
(a) (3) EXHIBITS
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1 Reorganization Agreement dated as of December 4, 1996, among
Tele-Communications, Inc. ("TCI"), TCI Communications, Inc. ("TCIC"),
Tempo Enterprises, Inc., TCI Digital Satellite Entertainment, Inc., TCI
K-1, Inc. ("TCI K-1"), United Artists K-1 Investments, Inc. ("UA K-1"),
TCI SE Partner 1, Inc. ("TCISE 1"), TCI SE Partner 2, Inc. "(TCISE 2")
and TCI Satellite Entertainment, Inc. (the "Company"). (d)
2.2 Merger and Contribution Agreement dates as of February 6, 1998, among
the Company, PRIMESTAR, Inc., Time Warner Entertainment Company L.P.
("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of Delaware,
Inc. ("MediaOne") and GE American Communications, Inc. ("GE Americom"). (f)
2.3 Asset Transfer Agreement dates as of February 6, 1998, between the
Company and PRIMESTAR, Inc. (f)
2.4 Agreement and plan of Merger dates as of February 6, 1998, between the
Company and PRIMESTAR, Inc. (f)
2.5 Guarantee Agreement dated as of February 6, 1998, by US WEST Media
Group, Inc. ("US West"), in favor of each of the Company, PRIMESTAR,
Inc., TWE, Newhouse, Comcast, Cox and GE Americom. (f)
2.6 Letter Agreement dates as of February 6, 1998, between John C. Malone
and the Company, PRIMESTAR, Inc., TWE, Newhouse, Comcast, Cox, MediaOne
and GE Americom, for the benefit of the Company, PRIMESTAR, Inc., TWE,
Newhouse, Comcast, Cox, MediaOne and GE Americom. (f)
2.7 Voting Agreement dates as of June 12, 1997, among John C. Malone, Time
Warner Cable, a division of TWE, Comcast, the Company, Cox, MediaOne,
Newhouse and GE Americom. (f)
2.8 Voting Agreement dates as of June 12, 1997, among Donne F. Fisher, as
Co-Personal Representative of the Estate of Bob Magness, Time Warner
Cable, a division of TWE, Comcast, the Company, Cox, MediaOne, Newhouse
and GE Americom. (f)
2.9 Voting Agreement dates as of June 12, 1997, among TCI, John C. Malone,
Time Warner Cable, a division of TWE, Comcast, the Company, Cox,
MediaOne, Newhouse and GE Americom. (f)
IV-2
2.10 Form of Stockholders Agreement among PRIMESTAR, Inc., the Company, TWE,
Newhouse, Comcast, Cox, MediaOne, Continental Satellite company, Inc./,
Continental Satellite Company of Chicago, Inc., Continental Satellite
Company of Minnesota, inc., Continental Satellite company of New
England, Inc., Continental Satellite Company of Michigan, Inc.,
Continental Satellite Company of Ohio, Inc., Continental Satellite
Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and
John C. Malone. (f)
2.11 Form of Registration Rights Agreement among PRIMESTAR, inc., the
Company, TWE, Newhouse, Comcast, Cox, MediaOne, Continental Satellite
company, Inc./, Continental Satellite Company of Chicago, Inc.,
Continental Satellite Company of Minnesota, inc., Continental Satellite
company of New England, Inc., Continental Satellite Company of Michigan,
Inc., Continental Satellite Company of Ohio, Inc., Continental Satellite
Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom and
John C. Malone. (f)
2.12 Share Appreciation Rights Agreement, dated as of April 28, 1999(h)
2.13 Pledge and Security Agreement dated as of April 28, 1999(h)
2.14 Amendment dated as of March 10, 1999 to TSAT Tempo Agreement Dated as
of February 6, 1998 Between Primestar, Inc. and TCI Satellite
Entertainment, Inc.(a)
2.15 Termination Agreement TSAT Merger Agreement(a)
2.16 Stockholders Agreement dates as of February 6, 1998, among PRIMESTAR,
Inc., the Company and John C. Malone. (f)
2.17 TSAT Tempo Agreement dated as of February 6, 1998, between PRIMESTAR,
Inc., and the Company. (f)
2.18 Contribution and Exchange Agreement (TSAT) among TCI Satellite Entertainment,
Inc., Liberty LSAT, Inc. and Liberty LSAT II, Inc. dated as of March 16, 2000. (a)
2.19 Contribution Agreement by and among Liberty Media Corporation, Liberty Media
International, Inc., LSAT Holdings, Inc., TCI Satellite Entertainment, Inc.,
TSAT Holding 1, Inc., each of the Liberty Members signatory hereto, Liberty
Satellite, LLC, and LSAT Astro, LLC dated March 16, 2000. (a)
2.20 Operating Agreement of Liberty Satellite, LLC dated March 16, 2000. (a)
2.21 Amended and Restated Operating Agreement of LSAT Astro LLC dated March 16, 2000. (a)
3 - Articles of Incorporation and Bylaws:
3.1 Amended and Restated Certificate of Incorporation of the Company. (e)
3.2 Amended and Restated Bylaws of the Company. (e)
3.3 TCI Satellite Entertainment, Inc. Certificate of Designations, Series A
Preferred Stock. (a)
3.4 TCI Satellite Entertainment, Inc. Certificate of Designations, Series B
Preferred Stock. (a)
4 - Instruments Defining the Rights of Security Holders:
4.1 Specimen certificate representing shares of Series A Common Stock of the
Company. (e)
4.2 Specimen certificate representing shares of Series B Common Stock of the
Company. (e)
10 - Material Contracts
10.1 TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan. (e)
10.2 Qualified Employee Stock Purchase Plan of the Company. (d)
10.3 Indemnification Agreement dated December 4, 1996, by and between TCI and
Gary S. Howard. (d)
10.4 Option Agreement, dated as of December 4, 1996, by and between the
Company and Gary S. Howard. (d)
10.5 Option Agreement, dated as of December 4, 1996, by and between the
Company and Larry E, Romrell. (d)
10.6 Option Agreement, dated as of December 4, 1996, by an between the
Company and Brendan R. Clouston. (d)
IV-3
10.7 Option Agreement, dated as of December 4, 1996, by ad between the
Company and David P. Beddow. (d)
10.8 1996 Ancillary Agreement Among Partners dates as of October 18, 1996,
among PRIMESTAR Partners L.P., the Participating Partners named therein,
GE Americom Services, Inc. and its affiliate GE American Communications,
Inc. (d)
10.9 Annex A to the 1996 Ancillary Agreement Among Partners. (e)
10.10 Option agreement dated February 8, 1990, between Tempo and K Prime
Partners, L.P. (e)
10.11 Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to FSS. (e)
10.12 Letter Agreement dated July 30, 1993, between Tempo an PRIMESTAR
Partners, L.P. relating to BSS. (e)
10.13 TPO-1-290 BSS Construction Agreement dates as of February 22, 1990,
between Tempo and Space Systems/Loral, Inc. (e)(h)
10.14 Trade Name and Service Mark License Agreement dates as of December 4,
1996, between TCI and the Company. (d)
10.15 Tax Sharing Agreement effective July 1, 1995, among TCIC and certain
other subsidiaries of TCI. (e)
10.16 First Amendment to Tax Sharing Agreement dates as of October 1995, among
TCIC a certain other subsidiaries of TCI. (e)
10.17 Second Amendment to Tax Sharing Agreement dates as of December 3, 1996,
among TCIC and certain other subsidiaries of TCI. (d)
10.18 TCI/TSAT Tax Sharing Agreement dated June 1997, by and between the
Company and TCI. (f)
10.19 Share Purchase Agreement dated as of December 4, 1996, between TCI and
the Company. (d)
10.20 Option Agreement dated as of December 4, 1996, between TCI and the
Company. (d)
10.21 Indemnification Agreement dated as of June 11, 1997, among News Corp.,
the Company, PRIMESTAR Partners, Time Warner, Comcast, Cox, MediaOne,
Newhouse, and GE Americom. (f)
10.22 TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Plan. (f)
10.23 Asset Purchase Agreement by and among Hughes Electronics Corporation,
PRIMESTAR, Inc., PRIMESTAR Partners L.P., Tempo Satellite, Inc. and the
Stockholders of PRIMESTAR listed herein, dates as of January 22, 1999. (g)
10.24 Asset Purchase Agreement among PRIMESTAR, Inc., PRIMESTAR Partners L.P.,
PRIMESTAR MOV, Inc., the Stockholders of PRIMESTAR, Inc. listed herein and
Hughes Electronics Corporation dated as of January 22, 1999. (g)
10.25 PRIMESTAR Payment Agreement dated as of January 22, 1999 among TCI Satellite
Entertainment, Inc., PRIMESTAR, Inc., the Funding Parties and Paragon
Communications. (j)
21 Subsidiaries of the Registrant. (a)
27 Financial Data Schedule. (a)
IV-4
(a) Filed herewith.
(b) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 (Commission File No. 0-21317).
(c) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (Commission File No. 0-21317).
(d) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (Commission File No. 0-21317).
(e) Incorporated by reference to the Company's Registration Statement on
Form 10 filed with the Securities and Exchange Commission ("SEC") on
November 15,1996 (Registration No. 0-21317).
(f) Incorporated by reference to PRIMESTAR, Inc.'s Registration Statement on
Form S-4 filed with the SEC on February 9, 1998 (Registration No.
333-45835).
(g) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 1, 1999.
(h) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended, March 31, 1999
(i) Portions of this document have been granted confidential treatment by
the SEC and have been redacted in accordance therewith.
(j) Incorporated by reference to Phoenixstar, Inc's Current Report on
Form 8-K, dated May 13, 1999.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 1999:
None.
IV-5
SCHEDULE II
TCI SATELLITE ENTERTAINMENT, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
ADDITIONS DEDUCTIONS
BALANCE AT CHARGED TO WRITE-OFFS BALANCE
BEGINNING PROFIT NET OF AT END
OF YEAR AND LOSS RECOVERIES OTHER (1) OF YEAR
---------- ---------- ---------- --------- -------
Year ended December 31, 1999:
Allowance for doubtful receivables - trade $ -- -- -- -- --
======== ====== ======= ====== =====
Year ended December 31, 1998:
Allowance for doubtful receivables - trade $ 5,307 3,062 (4,003) (4,366) --
======== ====== ======= ====== =====
Year ended December 31, 1997:
Allowance for doubtful receivables - trade $ 4,666 18,339 (17,698) -- 5,307
======== ====== ======= ====== =====
(1) Contribution of accounts receivable and related allowance for doubtful
accounts in connection with TSAT Asset Transfer.
IV-6