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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10/A
AMENDMENT NO.4
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
TCI Satellite Entertainment, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1299995
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(State of incorporation (I.R.S. Employer
or organization) Identification No.)
8085 South Chester, Suite 300
Englewood, Colorado 80112
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (303) 712-4600
--------------
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Series A Common Stock, $1.00 par value
--------------------------------------
(Title of class)
Series B Common Stock, $1.00 par value
--------------------------------------
(Title of class)
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TCI SATELLITE ENTERTAINMENT, INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED IN FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
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ITEM ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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NO.
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1. Business. SUMMARY; RISK FACTORS; THE DISTRIBUTION -- Reasons for
the Distribution; THE DISTRIBUTION -- Certain
Consequences of the Distribution; ARRANGEMENTS BETWEEN
TCI AND THE COMPANY AFTER THE DISTRIBUTION; BUSINESS OF
THE COMPANY; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
2. Financial Information. SUMMARY; RISK FACTORS; SELECTED FINANCIAL DATA;
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS; FINANCIAL
STATEMENTS.
3. Properties. BUSINESS OF THE COMPANY -- Properties.
4. Security Ownership of RISK FACTORS -- Disparate Voting Rights; Substantial
Certain Beneficial Stockholders; MANAGEMENT OF THE COMPANY -- Stock
Owners and Management. Ownership of Management; PRINCIPAL STOCKHOLDERS OF THE
COMPANY.
5. Directors and Executive MANAGEMENT OF THE COMPANY; DESCRIPTION OF COMPANY
Officers. CAPITAL STOCK -- Limitation on Directors' Liability;
Indemnification.
6. Executive Compensation. MANAGEMENT OF THE COMPANY.
7. Certain Relationships SUMMARY; RISK FACTORS -- Relationship with TCI;
and Related Transactions. RISK FACTORS -- Potential Conflicts of Interest
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<TABLE>
<S> <C>
ARRANGEMENTS BETWEEN TCI AND THE
COMPANY AFTER THE DISTRIBUTION; THE
DISTRIBUTION; MANAGEMENT OF THE COMPANY; FINANCIAL
STATEMENTS.
8. Legal Proceedings. BUSINESS OF THE COMPANY -- Legal Proceedings.
9. Market Price of and Dividends on the Registrant's SUMMARY; RISK FACTORS -- Dividends and
Common Equity and Related Stockholder Matters. Dividend Policy; RISK FACTORS -- Absence of
Prior Trading Market; THE DISTRIBUTION;
DESCRIPTION OF COMPANY CAPITAL STOCK.
10. Recent Sales of Unregistered Securities. Not Applicable.
11. Description of Registrant's Securities to be Registered. RISK FACTORS -- Potential Antitakeover
Provisions; DESCRIPTION OF COMPANY CAPITAL
STOCK.
12. Indemnification of Directors and Officers. DESCRIPTION OF COMPANY CAPITAL STOCK --
Limitation on Directors' Liability;
Indemnification.
13. Financial Statements and Supplementary Data. SUMMARY; RISK FACTORS; SELECTED FINANCIAL
DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS; FINANCIAL STATEMENTS.
14. Changes in and Disagreements with Accountants on Not Applicable.
Accounting and Financial Disclosure.
15. Financial Statements and Exhibits. FINANCIAL STATEMENTS; EXHIBIT INDEX.
</TABLE>
<PAGE>
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111-3000
Dear Fellow Shareholder:
The Board of Directors of Tele-Communications, Inc. ("TCI") has declared a
distribution (the "Distribution") by TCI to holders of its TCI Group Common
Stock (as defined below) of shares of the Series A Common Stock, $1.00 par
value per share (the "Series A Common Stock"), and the Series B Common Stock,
$1.00 par value per share (the "Series B Common Stock" and, together with the
Series A Common Stock, the "Company Common Stock"), of TCI Satellite
Entertainment, Inc. (the "Company"), a wholly owned subsidiary of TCI. The
Distribution will occur on December 4, 1996 (the "Distribution Date") and will
be made as a dividend to holders of record at the close of business on
November 12, 1996 (the "Record Date") of shares of Tele-Communications, Inc.
Series A TCI Group Common Stock, $1.00 par value per share (the "Series A TCI
Group Common Stock") and Tele-Communications, Inc. Series B TCI Group Common
Stock, $1.00 par value per share (the "Series B TCI Group Common Stock" and,
together with the Series A TCI Group Common Stock, the "TCI Group Common
Stock").
If you are a stockholder of record of TCI Group Common Stock on the Record
Date, you will receive one share of Series A Common Stock for each ten shares
of Series A TCI Group Common Stock owned by you of record at the close of
business on the Record Date and one share of Series B Common Stock for each
ten shares of Series B TCI Group Common Stock owned by you of record as of the
close of business on the Record Date. Fractional shares will not be issued.
Fractions of one-half or greater of a share will be rounded up and fractions
of less than one-half of a share will be rounded down to the nearest whole
number of shares of Series A Common Stock and Series B Common Stock. You will
receive your stock certificate or certificates for Company Common Stock in a
separate mailing shortly after the Distribution Date.
The Distribution will not affect the number of shares of Series A TCI Group
Common Stock and Series B TCI Group Common Stock that you hold, and does not
require any payment or other action by you. No vote of TCI's shareholders is
required to effect the Distribution and proxies are not being solicited.
The attached Information Statement, which is being distributed to all
holders of TCI Group Common Stock in connection with the Distribution,
contains information concerning the Distribution, the business of the Company
and certain effects of the divestiture of the Company through the
Distribution. You are urged to examine this document carefully and to retain
it for future reference.
The shares of Series A Common Stock and Series B Common Stock to be
distributed are expected to be approved for listing on the Nasdaq National
Market under the symbols "TSAT A" and "TSAT B", respectively.
Any questions you may have concerning the Distribution may be addressed to
Investor Relations, Tele-Communications, Inc., P.O. Box 5630, Denver, Colorado
80217; telephone (303) 267-5051.
Sincerely,
/s/ John C. Malone
John C. Malone
President and Chief Executive Officer
Englewood, Colorado
November 15, 1996
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TCI SATELLITE ENTERTAINMENT, INC.
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
Dear Shareholder:
I am pleased to welcome you as a shareholder of TCI Satellite Entertainment,
Inc. (the "Company"), a new Company formed to operate the digital satellite
programming distribution business formerly operated as part of the TCI Group
of Tele-Communications, Inc. ("TCI").
While we are a new public Company, we are actually one of the pioneers in
the satellite to home business. Our Company and its predecessor entities began
operations back in 1990, as a distributor of PRIMESTAR(R), the PRIMESTAR
Partners, L.P. ("PRIMESTAR Partners") programming service. PRIMESTAR (R), at
that time, was an analog service, limited to seven broadcast television
superstations, TV Japan and three pay-per-view stations, and was offered in an
effort to serve customers in rural areas unable to obtain cable television
service. In 1994, PRIMESTAR Partners was among the first digital video to home
satellite providers.
Over the years, both technology and content have improved dramatically. As a
result, the demand for satellite to home services has expanded beyond the
rural marketplace. Today, your Company serves approximately 20 percent of a
3.5 million subscriber industry.
Through PRIMESTAR Partners, your Company's partnership with six other
companies, the Company expects to broadcast over a new medium power satellite
to be launched in January 1997. This will enable us to increase our digital
channel offerings to over 140 and reduce the receive dish size down to below
30 inches. In addition, the Company has announced its intention to launch a
new high power satellite in early 1997, which, if successful, will enable your
Company to offer a 65-80 channel service capable of being received on a dish
of less than 14 inches.
The digital satellite television industry is a very competitive and fast
growing industry. The future holds many challenges and opportunities for us.
We hope you participate in this exciting future with us.
Sincerely,
/s/ Gary S. Howard
Gary S. Howard
President and Chief Executive
Officer
Englewood, Colorado
November 15, 1996
<PAGE>
INFORMATION STATEMENT
[LOGO]
TCI SATELLITE ENTERTAINMENT, INC.
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
(303) 712-4600
This Information Statement is being furnished by Tele-Communications, Inc.,
a Delaware corporation ("TCI"), in connection with the distribution (the
"Distribution") by TCI 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 Common Stock"), and to the holders of record of
shares of Tele-Communications, Inc. Series B TCI Group Common Stock, $1.00 par
value per share (the "Series B TCI Group Common Stock" and, together with the
Series A TCI Group Common Stock, the "TCI Group Common Stock"), of all the
issued and outstanding common stock (the "Company Common Stock") of TCI
Satellite Entertainment, Inc., a Delaware corporation and a wholly owned
subsidiary of TCI (the "Company"). The Distribution will be made on December
4, 1996 (the "Distribution Date") as a dividend to the holders of record
(other than certain subsidiaries of TCI that have waived such dividend) of TCI
Group Common Stock (such holders, the "TCI Group Stockholders") at the close
of business on November 12, 1996 (the "Record Date"), on the basis of one
share of the Company's Series A Common Stock, $1.00 par value per share (the
"Series A Common Stock"), for each ten shares of Series A TCI Group Common
Stock held of record on the Record Date, and one share of the Company's Series
B Common Stock, $1.00 par value per share (the "Series B Common Stock"), for
each ten shares of Series B TCI Group Common Stock held of record on the
Record Date. No certificates or scrip representing fractional shares of Series
A Common Stock or Series B Common Stock will be issued. Fractions of one-half
or greater of a share will be rounded up and fractions of less than one-half
of a share will be rounded down to the nearest whole number of shares of
Series A Common Stock or Series B Common Stock.
The TCI Group Stockholders will not be required to pay any consideration for
the shares of Company Common Stock they receive in the Distribution. There is
no current public trading market for the Company Common Stock. The shares of
Series A Common Stock and Series B Common Stock to be distributed are expected
to be approved for listing on the Nasdaq National Market upon issuance under
the symbols "TSAT A" and "TSAT B," respectively.
In connection with the Distribution, TCI will cause to be transferred to the
Company and its subsidiaries certain assets and businesses (and the related
liabilities) constituting all of TCI's interests in the business of
distributing multichannel programming services directly to consumers in the
United States via digital medium power or high power satellite, including the
rental and sale of customer premises equipment relating thereto (the "Digital
Satellite Business").
In reviewing this Information Statement, stockholders should carefully
consider the matters described under the heading "Risk Factors" beginning on
p. 15.
THIS INFORMATION STATEMENT CONTAINS MANY FORWARD-LOOKING STATEMENTS ABOUT
BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE, NEW
SERVICE LAUNCHES AND OTHER MATTERS. SUCH STATEMENTS INVOLVE MANY RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND UNCERTAINTIES
DESCRIBED UNDER THE HEADING "RISK FACTORS," BEGINNING ON P. 15.
---------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
---------------
THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE DATE OF THIS INFORMATION STATEMENT IS NOVEMBER 15, 1996.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form 10 (including exhibits, schedules and
amendments thereto, the "Company Form 10") pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), with respect to the Company
Common Stock. This Information Statement, while forming a part of the Company
Form 10, does not contain all of the information set forth in the Company Form
10. Reference is hereby made to the Company Form 10 for further information
with respect to the Company and the securities to be distributed to the TCI
Group Stockholders in the Distribution. Statements contained herein concerning
the provisions of documents filed as exhibits to the Company Form 10 are
necessarily summaries of such documents, and each such statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the SEC.
The Company Form 10 is available for inspection and copying at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as at the Regional Offices of the SEC at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The SEC also maintains a Web site that contains information
regarding registrants (including the Company) that file electronically with
the SEC. The address of the SEC's Web site is http://www.sec.gov.
Following the Distribution, the Company will be subject to the informational
requirements of the Exchange Act, and, in accordance therewith, will file
reports, proxy statements and other information with the SEC that will be
available for inspection and copying at the SEC's public reference facilities
referred to above. Copies of such material can be obtained by mail at
prescribed rates by writing to the Public Reference Branch of the SEC at the
address referred to above. In addition, it is expected that reports, proxy
statements and other information concerning the Company will be available for
inspection at the Nasdaq Stock Market, 1735 K Street, N.W., Washington D.C.
20006.
Questions concerning the Distribution should be directed to Investor
Relations, Tele-Communications, Inc., P.O. Box 5630, Denver, Colorado 80217;
telephone (303) 267-5051. After the Distribution, holders of Company Common
Stock having inquiries related to their investment in the Company should
contact Investor Relations, TCI Satellite Entertainment, Inc., 8085 South
Chester, Suite 300, Englewood, Colorado 80112, (303) 712-4600.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED.
2
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TABLE OF CONTENTS
<TABLE>
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PAGE
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ADDITIONAL INFORMATION................................................... 2
SUMMARY.................................................................. 4
ORGANIZATION OF THE COMPANY.............................................. 14
RISK FACTORS............................................................. 15
THE DISTRIBUTION......................................................... 25
ARRANGEMENTS BETWEEN TCI AND THE COMPANY AFTER THE DISTRIBUTION.......... 30
CAPITALIZATION........................................................... 36
SELECTED FINANCIAL DATA.................................................. 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 38
BUSINESS OF THE COMPANY.................................................. 47
REGULATORY MATTERS....................................................... 70
MANAGEMENT OF THE COMPANY................................................ 73
PRINCIPAL STOCKHOLDERS OF THE COMPANY.................................... 86
DESCRIPTION OF COMPANY CAPITAL STOCK..................................... 88
INDEPENDENT AUDITORS..................................................... 96
GLOSSARY OF TERMS........................................................ 97
FINANCIAL STATEMENTS..................................................... F-1
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3
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including financial statements, appearing elsewhere in this
Information Statement. For definitions of certain terms used in the satellite
industry and this Information Statement, see "Glossary of Terms."
THE COMPANY
The Company was formed in connection with the Distribution to own and operate
certain businesses of the TCI Group (as defined below under "Distribution"),
constituting all of the TCI Group's interests in the Digital Satellite
Business. At the time of the Distribution, TCI will cause to be transferred to
the Company and its subsidiaries the ownership interests in (i) TCI's business
of distributing the PRIMESTAR(R) programming service ("PRIMESTAR(R)"), known as
PRIMESTAR By TCI, which, as of June 30, 1996, had an installed base of
approximately 659,000 Authorized Units, (ii) an aggregate 20.86% partnership
interest in PRIMESTAR Partners, L.P. ("PRIMESTAR Partners" or the
"Partnership"), and (iii) Tempo Satellite, Inc. ("Tempo"), which holds TCI's
high power satellite interests. See "Business of the Company." References in
this Information Statement to "Authorized Units" refer to the number of active
authorized satellite receivers, more than one of which may be installed in a
subscribing household.
The Company was incorporated in Delaware in June 1996 and at the time of the
Distribution will be a wholly owned subsidiary of TCI. The principal executive
office of the Company is at 8085 South Chester, Suite 300, Englewood, Colorado
80112. Its telephone number is (303) 712-4600.
Unless the context otherwise requires, references in this Information
Statement to "the Company" refer to (i) TCI's collective interests in the
Digital Satellite Business (as described above) before the Distribution Date
and (ii) the Company and its consolidated subsidiaries on and after the
Distribution Date. Additionally, references in this Information Statement to
"TCI" include TCI's consolidated subsidiaries unless the context indicates
otherwise. References to TCI prior to August 4, 1994, refer to TCI's
predecessor.
PRIMESTAR(R)
PRIMESTAR Partners was formed by subsidiaries of TCI, several other cable
operators and General Electric Company ("G.E.") in February 1990, under the
name K Prime Partners, L.P., to acquire, originate and/or provide television
programming services for delivery by satellite (at Ku-band or higher
frequencies) to subscribers in the continental U.S. In 1994 PRIMESTAR Partners
was among the first satellite television providers to use digital compression
technology for superior delivery of picture and sound. PRIMESTAR Partners
currently provides 94 channels of entertainment programming throughout the
continental U.S., via medium power satellite, to home satellite dishes
("dishes" or "HSDs") approximately 36 inches in diameter. During the first
quarter of 1997, subject to the successful launch and operation of a new
satellite, GE-2 (described below), PRIMESTAR Partners will have the capacity to
increase its offering to about 140 channels of programming while reducing its
dish size to approximately 29 inches for subscribers in the majority of the
U.S. See "Business of the Company--PRIMESTAR By TCI--The PRIMESTAR Service."
The PRIMESTAR(R) service is currently broadcast from Satcom K-1 ("K-1"), a
medium power satellite located at the 85(degrees) West Longitude ("W.L.")
orbital position that was launched in January 1986 and is nearing the end of
its normal operational life. K-1 is ultimately expected to be replaced by GE-2
("GE-2"), a medium power satellite that is currently scheduled to be launched
on January 31, 1997 and to be operational within 60 days after launch. In
November 1996, pending the availability of GE-2, K-1 will be replaced by
another medium power satellite, Satcom K-2 ("K-2"), which is currently located
at 81(degrees) W.L. and will be moved to 85(degrees) W.L. for use by PRIMESTAR
Partners, pending the availability of GE-2. K-2 is also nearing the end of its
operational life, however, and is expected to begin inclined orbit operations
in January 1997. Accordingly, if a replacement
4
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satellite is not available, PRIMESTAR(R) subscribers could begin to experience
unacceptable outage levels in the month of June 1997. Thus, a delay in the
availability of GE-2 could result in a material adverse effect on PRIMESTAR
Partners and the Company. If GE-2 suffers a launch failure, another
communications satellite, denominated GE-3 ("GE-3"), which is currently
expected to be available for launch in the summer of 1997, will be launched to
replace GE-2. Each of K-1, K-2, GE-2 and GE-3 is owned by GE American
Communications, Inc. ("GE Americom"), which is a subsidiary of G.E. and the
parent company of G.E. Americom Services, Inc. ("GEAS"), a partner of PRIMESTAR
Partners. See "Risk Factors--Risks of Failure or Delay in Launch of GE-2--Risks
of Satellite Defect, Loss or Reduced Performance" and "Risk Factors--Risks of
Failure or Delay in Launch of GE-2--Risk of Inclined Orbit Operations."
The PRIMESTAR(R) service is distributed through distributors
("Distributors"), all of which currently are affiliated with the Partnership's
partners other than G.E. The Partnership's Distributors operate in non-
exclusive territories assigned by PRIMESTAR Partners' management, which
territories generally comprise, among other areas, areas in and around
localities in which affiliates of such Distributors have cable television
franchises. TCI, through various subsidiaries, has been engaged in the business
of distributing PRIMESTAR(R) since December 1990. The Company's predecessor was
incorporated in February 1995 to consolidate TCI's PRIMESTAR(R) distribution
business in one subsidiary, and will be merged into the Company in connection
with the Distribution.
TEMPO
The Company desires to participate, directly or through PRIMESTAR Partners,
in the high power segment of the digital satellite industry. The Company,
through Tempo, holds a construction 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 119(degrees) W.L. orbital position and 11
frequencies at the 166(degrees) W.L. orbital position (the "Construction
Permit"). Tempo is also a party to a satellite construction agreement with
Space Systems/Loral, Inc. ("Loral"), dated as of February 22, 1990 (the
"Satellite Construction Agreement"), pursuant to which Tempo has agreed to
purchase two high power direct broadcast satellites (each, a "Company
Satellite" and together, the "Company Satellites") and has an option to
purchase up to three additional satellites. See "Business of the Company--High
Power Satellites."
Tempo currently intends to deploy one of the Company Satellites ("Satellite
No. 1") into the 119(degrees) W.L. orbital slot and expects that PRIMESTAR
Partners will purchase or lease 100% of the capacity of such Company Satellite.
See "Risk Factors--Risks Regarding Deployment of High Power Satellites."
However, if the Company and PRIMESTAR Partners are unable to reach agreement
with respect to such purchase or lease, the Company may itself use the capacity
of Satellite No. 1 to provide a high power DBS service. Such service, whether
provided by PRIMESTAR Partners or the Company, will operate either as a limited
service complementary to off-the-air television, basic cable and other
programming services or, subject to future advances in digital compression, as
a full service, stand-alone offering. See "Business of the Company--High Power
Satellites--Tempo Option."
5
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STRATEGY
The Company's primary objectives are to maintain its position in the market
as one of the premier providers of satellite delivered entertainment
programming and to become one of the major providers of informational services
to the home and business. It is expected that the Company's strategy will be
achieved as follows:
High Quality Programming. The Company offers consumers the PRIMESTAR(R)
service, which consists of a wide variety of high quality programming,
delivered digitally for laser-disc quality image and compact-disc quality
sound, for a competitive price. The Company believes that the image and sound
quality of the PRIMESTAR(R) service is superior to that provided by most
existing cable systems and wireless cable providers, which transmit analog
signals to their subscribers, and is comparable to that of other digital
satellite television providers, including those using compression methods based
on the MPEG-2 digital compression architecture. The Company further believes
that its combination of price and services provides consumers with greater
value than the respective price and service offerings of other current digital
satellite service providers. In addition, when GE-2 (or its replacement, GE-3)
is successfully launched and begins commercial operation, PRIMESTAR(R) will
increase its channel offerings from 94 video and audio channels to over 140
channel offerings, while reducing its dish size from 36 inches to approximately
29 inches for subscribers in the majority of the U.S. See "Business of the
Company--PRIMESTAR By TCI--The PRIMESTAR(R) Service," "Risk Factors--Risks of
Failure or Delay in Launch of GE-2--Risks of Satellite Defect, Loss or Reduced
Performance" and "Risk Factors--Risks of Failure or Delay in Launch of GE-2--
Risk of Inclined Orbit Operations."
Continued Subscriber Growth. The Company continues to grow its substantial
customer base through its multiple sales and distribution channels, which
include master sales agents and their sub-agents, direct sales representatives,
telemarketing, cable system operators and consumer retail outlets. The Company
recently began to distribute its services through Radio Shack, one of the
nation's largest consumer electronics retailers. In February 1996, PRIMESTAR
Partners entered into a national agreement with Radio Shack under which
PRIMESTAR(R) is expected to be sold through more than 6,500 Radio Shack stores
nationwide. As of October 1996, PRIMESTAR(R) is available for sale in
approximately 2,200 Radio Shack stores located in the Company's authorized
distribution territories, and the Company estimates that when the arrangement
is fully implemented, PRIMESTAR(R) will be available for sale in over 2,500
such stores. In addition, the Company supports its multiple distribution
channels with a wide variety of advertising, marketing and promotional
activities. See "Business of the Company--PRIMESTAR By TCI--Distribution" and
"Business of the Company--PRIMESTAR By TCI--Marketing."
Differentiating the Company's Offerings Through Superior Customer
Service. The Company believes that providing outstanding service, convenience
and value is essential in developing long term customer relationships. The
Company offers consumers a "one-stop shopping" service which includes
programming, installation, maintenance, reliable customer service and satellite
reception equipment. The Company maintains its own national call center
("National Call Center"), providing customers with round-the-clock telephone
support for sales, installation, authorization and billing, as well as to
schedule repair and customer service calls, 365 days per year. See "Business of
the Company--PRIMESTAR By TCI--Distribution."
Providing Consumers Attractive Alternatives to Obtain Equipment. The
Company's equipment rental program, which includes free maintenance and repair,
provides significant benefits to customers, who are not required to buy
satellite equipment in order to receive the PRIMESTAR(R) service. Because
PRIMESTAR By TCI is marketed as a service, with programming, equipment rental,
maintenance and 24-hour customer service included in the monthly charge, the
up-front costs to new subscribers of PRIMESTAR By TCI are generally lower than
the up-front costs to new subscribers of the Company's competitors, who must
typically purchase and install HSDs, satellite receivers and related equipment.
Moreover, since the Company generally owns,
6
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services and installs all customer premises equipment for its rental customers,
the Company protects its subscribers from the inconvenience of equipment
failure, maintenance concerns, obsolete technology, self-installation and
expired warranties. In addition, the Company recently began offering consumers
several options for purchasing, rather than renting, the necessary equipment,
and intends to implement a consumer financing program in late 1996 through an
independent financial institution. See "Business of the Company--PRIMESTAR By
TCI--Equipment and Installation."
Expanding Commercial Opportunities For Digital Satellite Services. The
Company believes that the commercial marketplace (i.e., hotels, motels, bars,
restaurants, multiple dwelling units, businesses and schools) (the "Commercial
Market") offers a substantial opportunity for growth and is therefore of
strategic importance. With an enhanced channel capacity in its audio and video
entertainment programming, subject to the successful launch and operation of
GE-2 (or its replacement, GE-3), the Company anticipates having the ability to
successfully penetrate the Commercial Market. The Company also intends to
pursue opportunities to provide private network service to businesses, and to
participate in the growing market for distance learning. In that connection,
the Company is exploring opportunities to work together with At Home
Corporation, a joint venture among TCI, Kleiner Perkins Caufield & Byers,
Comcast Corporation ("Comcast") and Cox Communications, Inc. ("Cox"), to
deliver Internet content to personal computers, and ETC w/tci, Inc., a
majority-owned subsidiary of TCI, formed to develop and distribute content and
technology applications for education, training and communications, as well as
other Internet and educational content providers.
Strategic Marketing Alliances. The Company intends to broaden its product and
service offerings to further complement its existing video service offerings by
forming alliances with strategic partners, such as its existing non-exclusive
relationships with Bose Corporation ("Bose") and Apple Computer, Inc.
("Apple"). See "Business of the Company--PRIMESTAR By TCI--Marketing." The
Company believes that such alliances can be important not only to expand the
market awareness of the Company's name and service offerings, but also to
increase the Company's potential market by expanding the scope of the use of
its product and services.
Focusing on Customers Currently Underserved by Multichannel Programming. The
Company seeks to maximize penetration in the "underserved" marketplace, defined
by the Company as those areas not passed by cable, or served by cable systems
with fewer than 40 channels. To date, the Company's primary market focus has
been the rural market, which is underserved for variety, choice and convenience
in audio and video entertainment programming. With the successful launch of GE-
2 (or its replacement, GE-3), the Company also intends to pursue subscriber
growth in the more urban and suburban markets within its territories.
High Power Opportunities. The Company continues to assess strategies for
delivering high power digital satellite signals to the consumer's home. The
Company's current strategy is to implement a high power DBS system by deploying
Satellite No. 1 into the 119(degrees) W.L. orbital slot under its Construction
Permit and using the capacity of such Company Satellite to provide a DBS
service either (i) as a limited service complementary to off-the-air
television, basic cable and other programming services, or (ii) subject to
future advances in digital channel compression, as a full-service, stand-alone
offering, in either case, either directly or through PRIMESTAR Partners. The
Company also intends to review any new opportunities that may arise to
secure additional spectrum capacity.
7
<PAGE>
THE DISTRIBUTION
DESCRIPTION OF THE DISTRIBUTION
TCI's Board of Directors (the "TCI Board") has declared a distribution of all
the shares of Company Common Stock held by TCI to the TCI Group Stockholders of
record (other than certain subsidiaries of TCI that have waived their right to
participate in such distribution) at the close of business on the Record Date,
without any consideration being paid by such holders, on the basis of one share
of Series A Common Stock for each ten shares of Series A TCI Group Common
Stock, and one share of Series B Common Stock for each ten shares of Series B
TCI Group Common Stock held by such holders on the Record Date. See "The
Distribution--Description of the Distribution." TCI has two other series of
common stock outstanding--the Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, $1.00 par value per share, and the Tele-Communications,
Inc. Series B Liberty Media Group Common Stock, $1.00 par value per share
(collectively, the "Liberty Media Group Common Stock"). The Liberty Media Group
Common Stock is intended to reflect the separate performance of TCI's
programming and electronic retailing businesses (the "Liberty Media Group").
Prior to the Distribution, the Company was a member of the group of TCI
businesses not attributed to the Liberty Media Group (the "TCI Group") and all
of the assets and businesses transferred to the Company were included in the
TCI Group. Accordingly, the Distribution is being made to the TCI Group
Stockholders and the holders of Liberty Media Group Common Stock will not
participate in the Distribution.
REASONS FOR THE DISTRIBUTION
The Distribution has been designed to separate the TCI Group's interests in
the cable distribution business from its interests in the Digital Satellite
Business--two businesses that use distinct distribution networks to provide
entertainment and other programming potentially to the same customer.
The separation of the TCI Group's Digital Satellite Business from its cable
business and the Company's status as a separate public company will enable
investors to evaluate better the merits and outlook of the Company's business.
TCI's management believes that, because of the relative size of the assets and
business of the Company compared to that of the TCI Group as a whole, the value
of the Company is largely overlooked by the investment community. By separating
the Company from TCI and allowing the market to establish a separate valuation
for the Company, the Distribution should, in management's opinion, result in an
increase in the long-term value of the TCI Group Stockholders' current
investment in the TCI Group. The Distribution would also give the TCI Group
Stockholders and other potential investors the opportunity to direct their
investment to their specific area of interest, satellite or cable, or to
continue to retain an interest in both distribution media. Furthermore, as a
part of TCI, the Company is currently one of several businesses competing for
the allocation of TCI's financial resources. As a separate, publicly traded
company, the Company will have increased flexibility to raise capital and
effect acquisitions by issuing its own securities.
The separation of the TCI Group's Digital Satellite Business from its
principal cable business will also permit management of the Company to focus on
the development and expansion of the Digital Satellite Business, and to tailor
its business strategies and capital investments in a manner best suited to that
business and its market, without concern for the objectives of, or competitive
effect on, the TCI Group's cable business. Further, as an independent, publicly
traded company, the Company will be able to design more effective incentive
compensation programs for its management and employees by linking their
compensation to the performance of the Company's Digital Satellite Business, as
reflected in the stock market's evaluation of the Company Stock, thereby
enhancing the Company's ability to attract, motivate and retain high quality
employees. See "The Distribution--Reasons for the Distribution."
FEDERAL INCOME TAX CONSEQUENCES
Prior to the Distribution, Baker & Botts, L.L.P., counsel for TCI, will
render an opinion to the effect that the Distribution should qualify as a tax-
free transaction to the TCI Group Stockholders under Section 355 of the
8
<PAGE>
Internal Revenue Code of 1986, as amended (the "Code"), in which case no gain
or loss will be recognized by (and no amount will be included in the income of)
the TCI Group Stockholders by reason of their receipt of Company Common Stock
pursuant to the Distribution. See "The Distribution--Federal Income Tax
Consequences." The Company has not requested a ruling from the Internal Revenue
Service (the "Service") with respect to the federal income tax consequences of
the Distribution.
CERTAIN CONSEQUENCES OF THE DISTRIBUTION
As a result of the Distribution, the TCI Group's interests in the Digital
Satellite Business will be owned and operated by a separate publicly held
company. Immediately after the Distribution, the TCI Group Stockholders will
own the same interests in each of the Company and TCI that they held in TCI on
the Record Date, but in the form of separate securities, TCI Group Common Stock
and Company Common Stock. The Company expects that the Series A Common Stock
and Series B Common Stock will be listed for trading on the Nasdaq National
Market under the symbols "TSAT A" and "TSAT B," respectively. No prediction can
be made as to the extent of the trading in the Company Common Stock, if any,
that will occur after the Distribution, or the prices at which the TCI Group
Common Stock or Company Common Stock will be traded. See "The Distribution--
Certain Consequences of the Distribution."
RELATIONSHIP BETWEEN TCI AND THE COMPANY AFTER THE DISTRIBUTION
After the Distribution, pursuant to a transition services agreement between
TCI and the Company (the "Transition Services Agreement"), TCI will provide to
the Company certain services and other benefits, including certain
administrative and other services that were provided to the Company by TCI
prior to the Distribution. On or before the Distribution Date, the Company will
also become a party to the existing tax sharing agreement among TCI and certain
of its subsidiaries (the "Tax Sharing Agreement"), which will provide, among
other things, for the allocation between the Company and the other members of
the TCI consolidated tax group of tax liabilities attributable to periods prior
to the Distribution. In addition, TCI Communications, Inc., a Delaware
corporation and the subsidiary of TCI that owns and operates cable systems in
the U.S. (together with its consolidated subsidiaries, "TCIC"), has
historically provided the Company with installation, maintenance, retrieval and
other customer fulfillment services for certain customers of the Company. TCIC
will continue to provide fulfillment services to the Company following the
Distribution, pursuant to a fulfillment agreement (the "Fulfillment Agreement")
with respect to customers of the PRIMESTAR(R) medium power service.
On the Distribution Date, the Company will issue to TCIC a promissory note in
the principal amount of $250,000,000 (the "Company Note"), representing a
portion of the Company's intercompany balance owed to TCIC on such date. The
remainder of such intercompany balance, which remainder was $473,413,000 at
June 30, 1996, will be assumed by TCI on or before the Distribution Date, in
part in the form of a capital contribution to the Company and in part as
consideration for the Company's assumption of TCI's obligations under certain
stock options.
TCIC also has agreed to make loans to the Company (the "TCIC Revolving
Loans") from time to time following the Distribution Date up to an aggregate
outstanding principal amount of $500,000,000. TCIC's commitment to make the
TCIC Revolving Loans and the Company's obligations with respect to the TCIC
Revolving Loans and the Company Note will be provided for in a credit
agreement, dated as of the Distribution Date, between the Company and TCIC (the
"TCIC Credit Facility"). The TCIC Credit Facility requires the Company to use
its best efforts to refinance the TCIC Credit Facility with external debt or
equity financing. See "Arrangements Between TCI and the Company After the
Distribution--TCIC Credit Facility."
Following the Distribution, TCI will continue to be liable under certain
contracts relating to the business of the Company, and, on or before the
Distribution Date, the Company will agree to indemnify TCI for any liability
9
<PAGE>
resulting therefrom. In addition, TCI and the Company will agree on behalf of
themselves and their successors and assigns to certain indemnification
provisions arising primarily from the operation of their respective businesses.
John C. Malone, the President of TCI and a member of the TCI Board, is also
Chairman of the Board and a director of the Company. See "Management of the
Company--Directors and Executive Officers."
See "Risk Factors--Relationship with TCI," "Risk Factors--Potential Conflicts
of Interest" and "Arrangements Between TCI and the Company After the
Distribution--Other Arrangements."
POTENTIAL CONFLICTS OF INTEREST
Following the Distribution, the Company may face potential conflicts of
interest with TCI and PRIMESTAR Partners. The Fulfillment Agreement may result
in a potential for conflicts of interest between the Company and TCIC since in
those parts of the Company's territories served by cable systems, the Company
competes for subscribers with the cable systems owned and operated by TCIC. In
order to offset this potential for conflicts, the Fulfillment Agreement
contains specific performance standards designed to ensure that the Company's
customers receive appropriate service from TCIC's employees when they perform
installation, maintenance and other functions for the Company. In addition,
through PRIMESTAR Partners, the Company is a customer or potential customer of
programming services affiliated with the Liberty Media Group. The Liberty Media
Group's desire to maximize the fees it receives for its programming may
conflict with the desire of the Company and PRIMESTAR Partners to minimize the
fees that it pays for such programming.
The Company may also face potential conflicts of interest with PRIMESTAR
Partners because the Company holds a 20.86% interest in the Partnership, but
its customers, at June 30, 1996, represented approximately 47% of the
Partnership's estimated installed Authorized Units. Although PRIMESTAR Partners
may seek to maximize the economic benefit to the Partnership of its dealings
with its Distributors, which could result in a potential conflict with the
Company, a supermajority vote requirement in connection with many material
decisions helps offset any such potential conflict of interest. The Company
alone, however, would not have sufficient votes to block any such action.
Further, there is currently a dispute between the Company and PRIMESTAR
Partners regarding rights to capacity on the Company Satellites under certain
agreements. See "Business of the Company--High Power Satellites--Tempo Option."
The Company and PRIMESTAR Partners are attempting to resolve their
disagreement. There can be no assurance, however, that any resolution can be
reached, or can be reached on terms acceptable to the Company. However, the
Company does not believe that such dispute or its resolution is reasonably
likely to have a material adverse effect on the Company.
See "Risk Factors--Relationship with TCI," "Risk Factors--Dependence on
PRIMESTAR Partners," "Risk Factors--Potential Conflicts of Interest,"
"Arrangements Between TCI and the Company After the Distribution" and "Business
of the Company--PRIMESTAR Partnership Agreement."
TRANSFER AGENT
The transfer agent for the Company Common Stock will be The Bank of New York.
DIVIDEND POLICY
The Company does not anticipate declaring and paying cash dividends on the
Company Common Stock in the foreseeable future. The decision whether to apply
any legally available funds to the payment of dividends on the Company Common
Stock will be made by the Board of Directors of the Company (the "Company
Board") from time to time in the exercise of its business judgment, taking into
account the Company's financial
10
<PAGE>
conditions, results of operations, existing and proposed commitments for use of
the Company's funds and other relevant factors. See "Description of Company
Capital Stock--Common Stock--Dividends."
RISK FACTORS AND FORWARD LOOKING STATEMENTS
In reviewing this Information Statement, stockholders should carefully
consider the matters described under the heading "Risk Factors" beginning on p.
15.
THIS INFORMATION STATEMENT CONTAINS MANY FORWARD-LOOKING STATEMENTS ABOUT
BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE, NEW
SERVICE LAUNCHES AND OTHER MATTERS. SUCH STATEMENTS INVOLVE MANY RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND UNCERTAINTIES
DESCRIBED UNDER THE HEADING "RISK FACTORS," BEGINNING ON P. 15.
11
<PAGE>
SUMMARY SELECTED FINANCIAL AND OTHER DATA
The following table presents summary financial data relating to the Company's
historical financial position as of June 30, 1996, and December 31, 1995 and
1994, and to the Company's historical results of operations for each of the six
month periods ended June 30, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1995. In addition, the following table
presents summary financial data relating to the Company's unaudited pro forma
financial condition as of June 30, 1996, and the Company's unaudited pro forma
results of operations for the six months ended June 30, 1996 and the year ended
December 31, 1995. The historical financial data for each of the years in the
three-year period ended December 31, 1995, is derived from the Audited Combined
Financial Statements of the Company for the corresponding periods, which
combined financial statements have been audited by KPMG Peat Marwick LLP,
independent auditors. The historical data for the other periods presented has
been derived from unaudited information. The unaudited pro forma statement of
operations data gives effect to (i) the Distribution, and (ii) the
"Reorganization Agreement," the "Fulfillment Agreement," the "Transition
Services Agreement," and the "Stock Option Agreements" (collectively, the "TCI
Intercompany Agreements"), as of January 1, 1995. The unaudited pro forma
balance sheet data gives effect to the Distribution and the TCI Intercompany
Agreements as of June 30, 1996. The unaudited pro forma data does not purport
to be indicative of the results of operations or financial position that may be
obtained in the future or that actually would have been obtained had such
transactions occurred on such dates. The following information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is qualified in its entirety by
reference to the historical and pro forma combined financial statements,
including the notes thereto, of the Company. For a description of the TCI
Intercompany Agreements, see "Arrangements Between TCI and the Company After
the Distribution."
<TABLE>
<CAPTION>
PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
------------ ----------------- ------------ -------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------ --------------------------------------
1996 1996 1995 1995 1995 1994 1993
------------ -------- ------- ------------ -------- ------- ------
AMOUNTS IN THOUSANDS, EXCEPT PER AUTHORIZED UNIT AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OPERATING AND
OTHER DATA:
Revenue................. $ 193,647 193,647 61,611 208,903 208,903 30,279 11,679
Operating, selling,
general and
administrative
expenses............... (188,515) (186,626) (56,717) (212,125) (214,117) (25,106) (7,069)
Depreciation............ (58,455) (53,527) (19,915) (59,733) (55,488) (14,317) (6,513)
--------- -------- ------- -------- -------- ------- ------
Operating loss........ (53,323) (46,506) (15,021) (62,955) (60,702) (9,144) (1,903)
Share of loss of
PRIMESTAR Partners..... (1,446) (1,446) (4,988) (8,969) (8,969) (11,722) (5,524)
Other, net.............. 10,291 15,064 6,973 8,065 22,164 7,178 2,593
--------- -------- ------- -------- -------- ------- ------
Net loss.............. $ (44,478) (32,888) (13,036) (63,859) (47,507) (13,688) (4,834)
========= ======== ======= ======== ======== ======= ======
Operating income (loss)
before
depreciation(2)........ $ 5,132 7,021 4,894 (3,222) (5,214) 5,173 4,610
========= ======== ======= ======== ======== ======= ======
Capital expenditures:
Satellite reception
equipment............ $175,339 139,398 442,782 109,184 14,881
Construction of
satellites........... 36,684 43,631 104,128 207,608 71,164
-------- ------- -------- ------- ------
$212,023 183,029 546,910 316,792 86,045
======== ======= ======== ======= ======
Average monthly revenue
per Authorized
Unit(3)................ $ 44 39 41 28 27
======== ======= ======== ======= ======
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
----------------------- ---------------
PRO FORMA(1) HISTORICAL 1995 1994
------------ ---------- ------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C>
SUMMARY BALANCE SHEET AND OTHER DATA:
Property and equipment, net............ $ 1,047,703 1,047,703 889,220 397,798
=========== ========= ======= =======
Total assets........................... $ 1,109,477 1,098,177 933,443 410,105
=========== ========= ======= =======
Due to PRIMESTAR Partners.............. $ 386,219 386,219 382,900 278,772
=========== ========= ======= =======
Company Note........................... $ 250,000 -- -- --
=========== ========= ======= =======
Stock compensation obligation.......... $ 39,500 -- -- --
=========== ========= ======= =======
Equity................................. $ 336,550 614,750 483,584 120,526
=========== ========= ======= =======
Authorized Units....................... 659 535 100
========= ======= =======
</TABLE>
- --------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Financial Statements of the Company.
(2) Operating income before depreciation ("Operating Cash Flow") is a commonly
used measure of value and borrowing capacity within the Company's industry,
and is not intended to be a substitute for a measure of performance in
accordance with generally accepted accounting principles and should not be
relied upon as such.
(3) Represents average monthly revenue (exclusive of installation revenue)
divided by the average number of Authorized Units.
13
<PAGE>
ORGANIZATION OF THE COMPANY
The following chart illustrates the organizational structure of the Company and
each entity's operational assets:
-----------------------
TCI Satellite
Entertainment, Inc.
. Business of
distributing the
PRIMESTAR/r/
programming service
-----------------------
- --------------------- --------------------- ---------------------
TCISE Partner 1, Inc. TCISE Partner 2, Inc. Tempo Satellite, Inc.
- --------------------- --------------------- . High power satellite
construction
10.43% 10.43% agreement and FCC
construction permit
----------------------
Note 1:
PRIMESTAR Partners, L.P. ------
(See Note 1 for a list of Partners in PRIMESTAR Partners, L.P.
partners unaffiliated with unaffiliated with the Company:
the Company, and each such
partner's repective G.E. Americom Services, Inc. 16.56%
partnership interest) Cox Satellite, Inc. 10.43%
Comcast DBS, Inc. 10.43%
Continental Satellite
Company, Inc. 10.43%
New Vision Satellite 10.43%
TW Programming Co. 20.86%
14
<PAGE>
RISK FACTORS
An investment in the Company Common Stock involves certain risks, including
those described below, which can adversely affect the value of the Company
Common Stock. Neither TCI nor the Company makes, nor is any other person
authorized to make, any representation as to the future market value of the
Company Common Stock.
LIMITED OPERATING HISTORY; OPERATING LOSSES OF THE COMPANY
The Company has had a limited history as a separate operating entity. From
1990 to 1995, TCI's business of distributing PRIMESTAR(R) was operated by
TCIC. During this period of time, such business sustained significant
operating losses.
The Company has sustained significant losses in recent periods. The
Company's operating losses were $46,506,000 for the six months ended June 30,
1996, and $60,702,000, $9,144,000 and $1,903,000 for the years ended December
31, 1995, 1994, and 1993, respectively. The Company had net losses of
$32,888,000 for the six months ended June 30, 1996, and $47,507,000,
$13,688,000 and $4,834,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Further, assuming the Distribution and the TCI
Intercompany Agreements were effective on January 1, 1995, the Company would
have incurred (i) pro forma operating losses of $53,323,000 and $62,955,000
and (ii) pro forma net losses of $44,478,000 and $63,859,000, during the six
months ended June 30, 1996 and the year ended December 31, 1995, respectively.
Improvements in the Company's results of operations are largely dependent upon
its ability to increase its customer base while maintaining its price
structure, reducing the rate at which subscribers terminate the Company's
service ("churn") and effectively managing the Company's costs. No assurance
can be given that any such improvements will occur. In addition, the Company
incurs significant sales commission and installation costs when its customers
initially subscribe to the service. Accordingly, management expects that
operating costs will remain high as a percentage of revenue so long as the
Company maintains its rapid growth in subscribers. The high cost of obtaining
new subscribers also magnifies the negative effects of subscriber churn. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical and pro forma financial statements, including
the notes thereto, of the Company.
RISKS OF FAILURE OR DELAY IN LAUNCH OF GE-2
Limited Life of Satellites. All satellites have limited useful lives, which
vary as a result of their construction, the durability of their components,
the capability of their solar arrays and batteries, the amount of
stationkeeping fuel remaining once in orbit, the launch vehicle used and the
accuracy of the launch. PRIMESTAR(R) is currently broadcast from K-1, which is
nearing the end of its useful operational life and is ultimately expected to
be replaced by GE-2. The ability of PRIMESTAR Partners to increase the number
of channels in the PRIMESTAR(R) programming service from 94 to approximately
140 channels is dependent upon the successful launch of GE-2 (or its
replacement, GE-3), and the deployment of the additional channels could be
adversely affected by an operational failure of the satellite's transponders
after launch. See "--Risks of Satellite Defect, Loss or Reduced Performance"
and "Business of the Company--PRIMESTAR By TCI--The PRIMESTAR(R) Service."
The minimum design life of GE-2 is 15 years. There can be no assurance
however that such satellite will achieve its minimum design life, and the
contract with GE Americom does not guarantee the minimum useful life of GE-2.
The Company could be adversely affected if a satellite used in connection with
its business failed prior to its minimum design life.
Risk of Inclined Orbit Operations. Communication satellites must maintain a
fixed orbital position for their signals to be received by stationary HSDs.
Accordingly, such satellites use maneuvering thrusters to maintain their
orbital positions. The limited on-board fuel capacity of conventional
satellites is a major factor
15
<PAGE>
limiting the useful life of such satellites. When on-board fuel supplies get
low, the satellite operator may cause the satellite to enter inclined orbit.
During inclined orbit operations North-South stationkeeping is terminated and
only East-West positioning maneuvers are performed, thereby conserving fuel
and extending the useful life of the satellite. Once inclined orbit operations
have begun, the North-South excursion of the satellite, measured in degrees of
drift above and below the equator, begins to grow steadily. A satellite such
as K-1 or K-2 could continue broadcasting to stationary HSDs for up to five
months after commencing inclined orbit operations before experiencing
unacceptable outage levels as a result of the satellite signals moving outside
of the viewing angle of the receiving HSD during portions of each day.
In November 1996, prior to the expected availability of GE-2 for PRIMESTAR
Partners' use, K-1 will be replaced by K-2. GE Americom expects K-2 to begin
inclined orbit operations in January 1997 and, consequently, if a replacement
satellite is unavailable, PRIMESTAR subscribers could begin to experience
unacceptable outage levels in the month of June 1997. Such timing is only a
prediction, however, because at any point in time, the amount of on-board
maneuvering fuel can only be estimated. Nevertheless, a delay in the
availability of GE-2 (or, if applicable, GE-3) could result in a material
adverse effect on both PRIMESTAR Partners and the Company as a result of a
fully operational satellite not being available for PRIMESTAR Partners' use
within five months of the beginning of inclined orbit operations of K-2. See
"Business of the Company--PRIMESTAR By TCI--The PRIMESTAR(R) Service."
Risks of Satellite Defect, Loss or Reduced Performance. Satellites are
subject to significant risks, including: manufacturing defects affecting the
satellite or its components; launch failure resulting in damage to, or
destruction of, the satellite or incorrect orbital placement; and damage in
orbit caused by asteroids, space debris or electrostatic storms. Such factors
may prevent or limit commercial operation or reduce the satellite's useful
life.
While approximately 15% of all commercial geosynchronous satellite launches
have resulted in a total or constructive total loss, the failure rate varies
by launch vehicle and manufacturer. GE Americom has chosen one of the most
reliable launch vehicles available for GE-2. Provided no delays occur, GE-2 is
expected to be launched on January 31, 1997 via a dedicated ARIANE 4 launch
vehicle from Kourou, French Guiana. Arianespace is generally perceived by the
international launch insurance community to be among the most reliable launch
providers today. Since 1985, there have been 21 ARIANE 4 launches, of which 20
were successful. The only launch failure experienced by the ARIANE 4 since
1985 occurred on February 22, 1990. There can, however, be no assurance that
such launch vehicle will continue to be as reliable as it has been to date.
Neither the Company nor PRIMESTAR Partners is entitled to the benefit of any
launch insurance relating to the launch of any of GE Americom's satellites.
COMPETITIVE NATURE OF INDUSTRY
The industry in which the Company operates is highly competitive, and the
Company expects to face strong competition from existing and potential
competitors. The Company's competitors comprise a broad range of companies
engaged in communications and entertainment, including cable operators, other
digital satellite programming distributors, wireless cable operators,
television networks and home video products companies, as well as companies
developing new technologies. A number of telephone companies have also
expressed an interest in becoming subscription television providers and/or
have made investments in this industry. Certain of these competitors and
potential competitors are well established companies and have significantly
greater financial, marketing and programming resources than the Company.
Cable operators generally have large installed customer bases, and many
cable operators have significant investments in, and access to, programming.
According to industry sources, cable television service is currently available
to more than 90% of the approximately 96 million U.S. television households,
and approximately 66% of total U.S. television households currently subscribe
to cable. In order to increase substantially its subscriber base, the Company
will be required to attract customers who currently subscribe to cable and to
develop commercial accounts, including hotels, motels, bars and restaurants as
well as multiple dwelling units
16
<PAGE>
("MDUs"). There can be no assurance that the Company will be able to establish
a substantial subscriber base or successfully attract customers in competition
with cable operators.
The Company also competes with companies offering programming through
various other satellite broadcasting systems, including DirecTv, Inc.
("DirecTv"), United States Satellite Broadcasting Corporation ("USSB") and
EchoStar Communications Corp. ("EchoStar"), which transmit from high power
satellites and generally use smaller dishes to receive their signals.
Alphastar, Inc. ("Alphastar") began offering medium power service in the
second quarter of 1996. A joint venture ("MCI/News Corp.") between MCI
Communications, Corp. ("MCI") and The News Corporation Limited ("News Corp.")
has announced that it expects to commence offering high power service by the
end of 1997. There can be no assurance that the Company will be able to
compete successfully against such other current and prospective providers of
digital satellite programming services, some of which will have access to
greater resources and/or have secured the rights to broadcast from a greater
number of satellite transponder frequencies. In addition, the territories in
which the Company is authorized to distribute PRIMESTAR(R) are assigned on a
non-exclusive basis. Accordingly, although only approximately 5% of the
distribution territories assigned by PRIMESTAR Partners' management currently
overlap, there can be no assurance that the Company will not in the future
face substantial competition from other existing and/or prospective authorized
distributors of PRIMESTAR(R). See "Business of the Company--Market for Digital
Satellite Services" and "Business of the Company--Competition."
RISKS REGARDING DEPLOYMENT OF HIGH POWER SATELLITES
Uncertainty Regarding Alternative Strategies. Although the Company's current
primary focus is the distribution of the PRIMESTAR(R) medium power programming
service, the Company desires to participate in the high power segment of the
digital satellite industry, directly or through the Partnership. See "Business
of the Company--High Power Satellites."
The Company currently intends to deploy Satellite No. 1 into the
119(degrees) W.L. orbital location in February 1997 and expects that PRIMESTAR
Partners will purchase or lease 100% of the capacity of such Company
Satellite. However, if the Company and PRIMESTAR Partners are unable to reach
agreement with respect to such purchase or lease, the Company may itself use
the capacity of Satellite No. 1 to provide a high power DBS service. Such
service, whether provided by PRIMESTAR Partners or the Company, will operate
either as a limited service complementary to off-the-air television, basic
cable and other programming services or, subject to future advances in digital
compression, as a full service, stand-alone offering. See "--Risks of Adverse
Government Regulations and Adjudications--Construction Permit" and "Business
of the Company--High Power Satellites--Tempo Option." The Company does not
currently have any agreements with programmers or other parties regarding any
satellite service to be delivered through Satellite No. 1 by the Company or
PRIMESTAR Partners and is currently exploring various potential business
strategies regarding the proposed use of Satellite No. 1 as well as various
potential plans for the use and/or disposition of the other Company Satellite
("Satellite No. 2"). See "Business of the Company--High Power Satellites."
No assurance can be given that the Company will not significantly change the
direction of its high power strategy or that any high power strategy will be
successful.
Risks of Satellite, Defect, Loss or Reduced Performance. A launch failure or
other defect or damage affecting Satellite No. 1 could prevent or postpone the
Company's entrance into the high power segment of the digital satellite
industry. See "--Risks of Failure or Delay in Launch of GE-2--Risks of
Satellite Defect, Loss or Reduced Performance."
The Company is entitled to the benefit of certain limited warranties and
insurance coverage pursuant to the Satellite Construction Agreement with
Loral. However, such warranties and insurance coverage might not be sufficient
to compensate the Company for all of its losses in the event of a partial or
total satellite failure or casualty, even if such failure or casualty were a
covered loss. See "Business of the Company--High Power Satellites--Satellite
Launches."
Limited Life of Satellites. The minimum design life of both of the Company
Satellites is 12 years. There can be no assurance, however, that either
satellite will achieve its minimum design life, and the contract with Loral
does not guarantee the minimum useful life of the Company Satellites. See "--
Risks of Failure or Delay in Launch of GE-2--Limited Life of Satellites."
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DEPENDENCE ON ADDITIONAL CAPITAL; SUBSTANTIAL LEVERAGE
In the past, the Company has relied on TCI to meet the majority of the
Company's working capital and liquidity requirements. During the six months
ended June 30, 1996, and the year ended December 31, 1995, TCI made aggregate
advances to the Company of $164,230,000 and $397,529,000 respectively.
Following the Distribution, it is anticipated that TCI will cease to be a
source of long-term financing for the Company, although TCIC has agreed to
enter into the TCIC Credit Facility with the Company on an interim basis,
pending consummation of permanent financing. See "--Relationship with TCI,"
and "Arrangements Between TCI and the Company After the Distribution--TCIC
Credit Facility." Pursuant to the TCIC Credit Facility, the Company will be
required to use its best efforts to refinance the TCIC Credit Facility, and to
repay all obligations of the Company under the TCIC Credit Facility, as soon
as possible following the Distribution.
The Company also has relied upon advances from PRIMESTAR Partners to finance
the majority of the cost of constructing the Company Satellites. Such
advances, which aggregate $386,219,000 at June 30, 1996, are reflected as a
liability in the combined balance sheets included in the historical combined
financial statements of the Company. The Company expects that the amount due
to PRIMESTAR Partners will be settled through the sale or lease of all the DBS
capacity of the Company Satellites. The ultimate settlement of the amounts
advanced from PRIMESTAR Partners is dependent, in part, on the outcome of
certain uncertainties. For additional information concerning such
uncertainties, see "--Risks Regarding Deployment of High Power Satellites--
Uncertainty Regarding Alternative Strategies," "--Risks of Adverse Government
Regulations and Adjudications" and "Business of the Company--High Power
Satellites."
Following the Distribution, the Company will require significant additional
capital to meet its operating plan. Such capital will be used primarily to
purchase additional inventory of satellite reception equipment for sale or
rental to subscribers (including pursuant to existing minimum purchase
commitments), to finance the cost of installing new customers and to fund
operations and provide for working capital and other liquidity requirements
that may arise. The Company also has significant contingent obligations
pursuant to certain indemnification agreements and other arrangements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and notes 4, 5 and 7 to the Unaudited Combined Financial
Statements of the Company.
As described above, the TCIC Credit Facility is intended to provide the
Company with a source of liquidity until such time as the Company is able to
arrange for permanent financing. In this regard, the Company currently is
seeking to arrange for a possible bank financing and may in the future seek to
obtain additional financing through an institutional private placement, a
public offering of debt securities or a combination of such sources. The
Company anticipates that it will use proceeds from any bank or other permanent
financing, together with any net cash provided by operations, to (i) repay all
amounts due under the TCIC Credit Facility and (ii) fund the Company's
projected liquidity requirements for the next eighteen months. Although the
Company believes that it will be able to obtain such permanent financing,
there can be no assurance that this will be the case. Additionally, faster-
than-anticipated subscriber growth or other contingencies may require
additional financing. The Company expects that, if additional financing is
needed, it would seek to obtain such financing through the capital markets,
including the high-yield debt market. No assurance can be given however that
such additional financing would be available on terms satisfactory to the
Company, or that sufficient financing to meet the Company's needs would be
available on any terms. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The degree to which the Company becomes leveraged may adversely affect the
Company's ability to compete effectively against better capitalized
competitors and to withstand downturns in its business or the economy
generally, and could limit its ability to pursue business opportunities that
may be in the interests of the Company and its stockholders. The Company's
ability to service its debt will require growth in the Company's Operating
Cash Flow. There can be no assurance that the Company will be successful in
increasing its Operating Cash Flow by a sufficient magnitude or in a timely
manner or in raising additional equity or debt financing to enable it to meet
its debt service requirements. In addition, a failure of the Company to have
adequate access to capital may adversely affect the Company's ability, or
choice, to launch proposed products and services in the time frames discussed
herein.
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ABILITY TO MANAGE GROWTH
The Company's business has grown rapidly since 1994, when PRIMESTAR Partners
completed its adoption of digital technology, and must continue to expand to
achieve the Company's business objectives. The Company believes that such
rapid growth has been a factor in the increases it has experienced in both
subscriber churn and bad-debt write-offs. Whether the Company can meet its
goal of increasing its customer base while maintaining its price structure,
reducing its churn rate and managing costs will depend upon, among other
things, the Company's ability to manage its growth effectively. To manage
growth effectively, the Company must continue to develop its internal and
external sales force, installation capability, customer service team and
information systems, maintain its relationships with third party vendors and
implement efficient procedures to mitigate subscriber credit risk. The Company
will also need to continue to grow, train and manage its employee base, and
its management will be required to assume even greater levels of
responsibility. If the Company is unable to manage its growth effectively, the
Company's business and results of operations could be materially adversely
effected.
RISKS OF ADVERSE GOVERNMENT REGULATIONS AND ADJUDICATIONS
General. The construction and launch of broadcasting satellites and the
operation of satellite broadcasting systems are subject to substantial
regulation by the FCC. FCC rules are subject to change in response to industry
developments, new technology and political considerations. The Company's
business and business prospects could be adversely affected by the adoption of
new laws, policies, and regulations. While Tempo has generally been successful
to date with respect to compliance with regulatory matters, there can be no
assurance that the Company will succeed in obtaining all requisite regulatory
approvals for its operations without the imposition of restrictions on, or
adverse consequences to, the Company. There can also be no assurance that
material adverse changes in regulations affecting the digital satellite
television industry or the Company will not occur in the future.
Construction Permit. Tempo holds the Construction Permit which authorizes
construction of a DBS system with 11 frequency channels at 119(degrees) W.L.
and 11 frequency channels at 166(degrees) W.L. The 119(degrees) W.L. position
is generally visible to HSDs throughout all fifty states; the 166(degrees) is
visible only in the western half of the continental U.S. as well as Alaska and
Hawaii. The FCC's DBS construction permits are conditioned on the satisfaction
of ongoing construction and related obligations. The Construction Permit
expires in May 1998, and if Tempo's satellites are not launched by then, there
can be no assurance that an extension of the Construction Permit would be
granted. In July 1993, Tempo filed an application with the FCC proposing minor
modifications to the technical designs of its satellites, which remains
pending. Approval by the FCC of the proposed modifications is necessary before
Tempo may launch the satellites. Tempo expects that the FCC would act on the
application when Tempo notifies it of Tempo's intention to launch the
satellites. There can be no assurance that the FCC will grant this
application.
In July 1996, Western Tele-Communications, Inc. ("WTCI"), a subsidiary of
TCIC, filed an application with the FCC for authorization to construct and
operate an earth station to uplink video programming to Tempo's proposed DBS
system utilizing the 119(degrees) W.L. orbital slot. In October 1996, EchoStar
and DirectSat Corporation ("DirectSat") jointly filed an objection to the
application, alleging that WTCI's uplink station would interfere with
operations of EchoStar's and DirectSat's DBS satellites at that same orbital
location. WTCI filed an opposition to EchoStar's and DirectSat's objection on
October 28, 1996, demonstrating that no harmful interference will result from
its proposed operations and responding to the objectors' other comments. If
the FCC denies WTCI's application, Tempo will be unable to operate its system.
WTCI expects, but cannot assure, that its application will be approved.
State Taxes. In addition to being subject to FCC regulation, operators of
satellite broadcast systems in the U.S. may be affected by imposition of state
and/or local sales taxes on satellite-delivered programming. According to the
Satellite Broadcasting and Communications Association ("SBCA"), several
states, including Maryland, Missouri, North Dakota, New York and Washington
have either adopted or proposed such taxes.
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Other states are in various stages of considering proposals that would tax
providers of satellite-delivered programming and other communications
providers. The adoption of state imposed sales taxes could have adverse
consequences to the Company's business.
There can be no assurance that additional government regulations affecting
the digital satellite television industry will not occur in the future.
DEPENDENCE ON PRIMESTAR PARTNERS
The Company's relationship with PRIMESTAR Partners is critical to the
Company and its business. The Company is a 20.86% partner in PRIMESTAR
Partners and substantially all the current revenue of the Company is derived
from its activities as a Distributor of PRIMESTAR(R) programming and
equipment, under the name PRIMESTAR By TCI.
In addition to the Company and GEAS, the partners of PRIMESTAR Partners
include Cox Satellite, Inc, a subsidiary of Cox, Comcast DBS, Inc., a
subsidiary of Comcast, Continental Satellite Company, Inc., a subsidiary of
Continental Cablevision, Inc. ("Continental"), New Vision Satellite, a
partnership controlled by a subsidiary of Newhouse Broadcasting Corporation
("Newhouse") and TW Programming Co., a partnership controlled by a subsidiary
of Time Warner Inc. ("Time Warner"). Time Warner has substantial interests,
through its subsidiaries and controlled partnerships, in video programming and
distribution, and is the second largest operator of cable systems in the U.S.
(in terms of numbers of basic subscribers), after TCI. Cox, Comcast and
Continental are also among the five largest cable system operators. In 1995,
the cable systems formerly controlled by Newhouse were contributed to a
partnership controlled by Time Warner. In 1996, Continental agreed to be
acquired by U.S. WEST, Inc., a regional bell operating company.
Pursuant to the Limited Partnership Agreement of PRIMESTAR Partners dated as
of February 8, 1990, as amended (the "PRIMESTAR Partnership Agreement"), if
the Company fails to pay its share of capital contributions or loans that the
partners agree to require or that are contemplated by budgets or business
plans approved by the partners, or that are otherwise necessary in order to
satisfy partnership commitments, the Company's interest in the Partnership
will be diluted and, if such interest is diluted to less than 5%, its right to
vote or exercise certain other rights may be forfeited. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
notes 4, 5 and 7 to the Unaudited Combined Financial Statements of the
Company.
Although the PRIMESTAR Partnership Agreement contemplates that PRIMESTAR(R)
will be marketed and distributed primarily by affiliates of the Partnership's
partners, there are no written distribution agreements between PRIMESTAR
Partners and any of its Distributors. Any dispute between PRIMESTAR Partners
and the Company regarding the Company's right to distribute PRIMESTAR(R), or
any material dispute regarding the terms and conditions of such distribution
rights, could have a material adverse effect on the Company, and no assurance
can be given that such a dispute could not arise in the future. However, as
the Company is currently the largest Distributor of PRIMESTAR(R), serving
about 47% of PRIMESTAR Partners' estimated 1.4 million Authorized Units as of
June 30, 1996, the Company does not anticipate that any such dispute would
call into question the Company's right to continue to distribute PRIMESTAR(R).
There is currently a dispute between the Company and PRIMESTAR Partners
regarding rights to capacity on the Company Satellites under certain
agreements. See "Business of the Company--High Power Satellites--Tempo
Option." The Company and PRIMESTAR Partners are currently attempting to
resolve their disagreement. There can be no assurance, however, that any
resolution can be reached, or can be reached on terms acceptable to the
Company. However, the Company does not believe that such dispute or its
resolution is reasonably likely to have a material adverse effect on the
Company.
RISK OF SIGNAL PIRACY
In common with all providers of subscription television programming, the
Company faces the risk that the PRIMESTAR(R) programming signal will be
obtained by unauthorized users. If signal piracy became widespread,
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the Company's revenue could be adversely affected. While management believes
that the encryption method utilized by PRIMESTAR Partners, which was developed
by an affiliate of General Instrument Corporation ("GI"), has been effective
in minimizing signal piracy, and there have been no published reports of
breaches in PRIMESTAR(R) security, there can be no assurance that changes in
technology will not render less effective the anti-piracy efforts associated
with PRIMESTAR(R).
RISK OF TECHNOLOGICAL CHANGES
Technology in the digital satellite television industry is subject to rapid
change, and new technologies are continuously being developed. Some
competitors of the Company may have or may obtain access to proprietary
technologies that are perceived by the market for satellite services as
superior to, or more desirable than, the technology of the Company and/or the
technology used in the PRIMESTAR(R) system. There can be no assurance that the
Company and/or PRIMESTAR Partners could obtain access to any such technology
or that the lack of any such technology would not adversely affect the ability
of the Company to compete with such competitors.
RELATIONSHIP WITH TCI
On or before the Distribution Date, the Company and TCI will enter into
various agreements in connection with the Distribution, including the
Reorganization Agreement, the Transition Services Agreement and other
agreements described under "Arrangements Between TCI and the Company After the
Distribution." These agreements will provide, among other things, for TCI and
the Company to indemnify each other from tax and other liabilities relating to
their respective businesses following the Distribution, and for TCI to provide
to the Company certain services and other benefits, including certain
administrative and other services that were provided to the Company by TCI
prior to the Distribution. In addition, the Company has entered into a
Fulfillment Agreement with TCIC pursuant to which TCIC will continue to
provide installation, maintenance and other customer fulfillment services to
customers of the Company with respect to the PRIMESTAR(R) medium power
service. See "Arrangements Between TCI and the Company After the
Distribution--Fulfillment Agreement." Further, TCIC and the Company will enter
into the TCIC Credit Facility, which will set forth the Company's obligations
with respect to the Company Note and any TCIC Revolving Loans. The terms of
the agreements that will govern the relationship between the Company and TCI
or TCIC, as applicable, were established by TCI and TCIC in consultation with
the Company's management prior to the Distribution, when the Company was a
wholly-owned subsidiary of TCI, and are not the result of arms'-length
negotiations. Accordingly, although the Company believes that the terms and
conditions of these arrangements taken as a whole are reasonable, there can be
no assurance that the terms and conditions of these agreements are not more or
less favorable to the Company than those that might have been obtained from
unaffiliated third parties. In addition, there can be no assurance that
comparable services could be obtained from third parties if the Transition
Services Agreement or the Fulfillment Agreement were to be terminated.
Although the Company believes that its relationship with TCI is excellent,
adverse developments or material disputes with TCI following the Distribution
could have a material adverse effect on the Company.
Pursuant to the Transition Services Agreement, the Company will be obligated
to pay to TCI a per subscriber per month fee, commencing with the month of
January 1997, up to a maximum monthly fee of $3,000,000, and to reimburse TCIC
for its direct out-of-pocket expenses to third parties in providing the
services to the Company contemplated by that agreement. The Transition
Services Agreement will expire on December 31, 1999, unless earlier
terminated. Pursuant to the Fulfillment Services Agreement, the Company will
pay TCIC for installation and other fulfillment services in accordance with
scheduled rates. The installation charges allocated to the Company by TCIC
aggregated $28,212,000 and $69,154,000 during the six months ended June 30,
1996 and the year ended December 31, 1995, respectively. If the Fulfillment
Agreement had been in effect on January 1, 1995, the estimated installation
fees payable by the Company to TCIC would have been $37,177,000 and
$91,021,000 during the six months ended June 30, 1996 and the year ended
December 31, 1995, respectively. The amount payable in future periods by the
Company to TCIC under the Fulfillment Agreement will be dependent upon the
level of fulfillment services provided by TCIC to the Company. The Fulfillment
Agreement will have an initial term of two years and will be terminable by the
Company on 180 days notice to
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TCIC at any time during the first six months following the Distribution Date.
The Company will also be obligated under the TCIC Credit Facility to repay the
Company Note (in the original principal amount of $250,000,000) and any TCIC
Revolving Loans that it may request be made to it. See "Arrangements Between
TCI and the Company After the Distribution."
POTENTIAL CONFLICTS OF INTEREST
Following the Distribution, the Company may face potential conflicts of
interest with TCI and PRIMESTAR Partners.
Pursuant to the Fulfillment Agreement, after the Distribution, TCIC, the
subsidiary of TCI that owns and operates cable systems in the U.S., will
continue to provide certain customers of the Company with installation,
maintenance and other customer fulfillment services. Although the Company
believes that the Fulfillment Agreement will provide the Company with
significant benefits, such agreement may result in a potential for conflicts
of interest since in those parts of the Company's territories served by cable
television, the Company competes for subscribers with the cable systems owned
and operated by TCIC. However, in order to offset this potential for conflicts
of interest, the Fulfillment Agreement contains specific performance standards
designed to ensure that the Company's customers receive appropriate service
from TCIC's employees when they perform installation, maintenance and other
functions for the Company. See "--Relationship with TCI" and "Arrangements
Between TCI and the Company After the Distribution."
In addition, John Malone is currently the President and a director of TCI
and on the Distribution Date will also be the Chairman of the Board and a
director of the Company. See "Management of the Company--Directors and
Executive Officers." Dr. Malone is a principal stockholder of TCI and will be
a principal stockholder of the Company. See "Principal Stockholders of the
Company." TCI's directors and executive officers as a group (17 persons)
beneficially owned, as of April 30, 1996, shares of TCI Group Common Stock
representing approximately 14.8% of the shares of TCI Group Common Stock
outstanding and approximately 45.9% of the total voting power of the shares of
TCI Group Common Stock outstanding, and after giving effect to the
Distribution, will beneficially own, as a group, shares of the Company Common
Stock representing approximately 45.9% of the total voting power of the shares
of Company Common Stock outstanding. No formal policies or guidelines have
been adopted by the Company Board to deal with Board actions that may involve
actual or potential conflicts of interest between the Company and TCI. The
directors of the Company, however, have fiduciary obligations under Delaware
law to the Company and all of its stockholders. Dr. Malone will also have
fiduciary obligations, when acting as a TCI director, to TCI and its
stockholders.
The Company may also face potential conflicts of interest with PRIMESTAR
Partners. The Company holds a 20.86% interest in the Partnership, but its
customers, at June 30, 1996, represented approximately 47% of PRIMESTAR
Partners' estimated installed Authorized Units. PRIMESTAR Partners may have an
interest in maximizing the economic benefit to the Partnership of its dealings
with its Distributors, which could result in a potential conflict with the
Company. However, the PRIMESTAR Partnership Agreement's requirement of a
supermajority vote of the Partners Committee (which manages and controls the
business and affairs of the Partnership and is composed of representatives of
the partners and two independent members) in connection with many material
decisions helps offset any potential conflicts of interest. The Company alone,
however, would not have sufficient votes to block any such action. See
"Business of the Company--PRIMESTAR Partnership Agreement." In addition,
affiliates of each of the other partners of the Partnership, individually and
in joint ventures with each other, TCI and others, have substantial other
interests in the communications and entertainment industries, some of which
may compete with the business of PRIMESTAR Partners and/or the Company. See
"--Dependence on PRIMESTAR Partners" and "Business of the Company--High Power
Satellites--Tempo Option."
DISPARATE VOTING RIGHTS; SUBSTANTIAL STOCKHOLDERS
Holders of shares of the Series A Common Stock are entitled to one vote per
share, and holders of shares of the Series B Common Stock are entitled to ten
votes per share, on each matter presented to a vote of the holders
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of Company Common Stock. After giving effect to the Distribution, Bob Magness,
John Malone and Kearns-Tribune Corporation ("Kearns-Tribune") will
beneficially own in the aggregate shares of Company Common Stock that
represent approximately 13.1% of the total number of shares of Company Common
Stock outstanding and approximately 51.1% of the voting power of the shares of
Company Common Stock outstanding. See "Principal Stockholders of the Company."
There are currently no agreements among such persons or between such persons
and the Company with respect to the ownership, voting or disposition of shares
of Company Common Stock.
DIVIDENDS AND DIVIDEND POLICY
The Company does not anticipate declaring and paying cash dividends on the
Company Common Stock at any time in the foreseeable future. The decision
whether to apply legally available funds to the payment of dividends on the
Company Common Stock will be made by the Company Board from time to time in
the exercise of its business judgment, taking into account, among other
things, the Company's results of operations and financial condition, any then
existing or proposed commitments by the Company for the use of available
funds, and the Company's obligations with respect to the holders of any then
outstanding indebtedness or preferred stock. In addition, the Company may in
the future issue debt securities or preferred stock or enter into loan
agreements or other agreements that restrict the payment of dividends on, and
repurchases of, the Company's Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description of
Company Capital Stock--Common Stock--Dividends."
POTENTIAL ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Company Charter") and the Company's Bylaws may have the effect of making
more difficult an acquisition of control of the Company in a transaction not
approved by the Company Board. These provisions include the disparate voting
rights of the Series A Common Stock and Series B Common Stock; provisions
giving the Company Board the power to issue up to 5,000,000 shares of
preferred stock, and to fix the rights and preferences thereof, without
further authorization of the Company's common stockholders; the requirement of
a supermajority vote to approve specified actions; and the other provisions
described under "Description of Company Capital Stock--Antitakeover Effects of
Certain Statutory Provisions and Provisions of the Company Charter and
Bylaws." In addition, the Company Board is divided into three classes, each of
which serves for a staggered three-year term, which may make it more difficult
for a third party to gain control of the Company Board. Many of these
provisions generally are designed to permit the Company to develop its
businesses and foster its long-term growth without the disruption caused by
the threat of a takeover not deemed by the Company Board to be in the best
interests of the Company and its stockholders. These provisions may also have
the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of the Company even though such an
attempt might be economically beneficial to the Company and its stockholders.
See "Description of Company Capital Stock--Antitakeover Effects of Certain
Statutory Provisions and Provisions of the Company Charter and Bylaws."
ABSENCE OF PRIOR TRADING MARKET
Prior to the date of this Information Statement, there has been no trading
market for the Company Common Stock and the Company is unable to predict the
extent of the market for the Company Common Stock or the prices at which such
shares will trade. The prices at which the Series A Common Stock and Series B
Common Stock trade will be determined by the marketplace and may be influenced
by many factors, including, among others, investor perception of the Company
and of the business of distributing satellite services and general economic
and market conditions. The prices at which the Company Common Stock trades may
fluctuate broadly.
A "when-issued" trading market in the Series A Common Stock and the Series B
Common Stock may develop on or about the Record Date. The existence of such a
market means that shares can be traded prior to the time certificates are
actually available or issued. Whether or not there is a "when-issued" market
prior to the
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availability of certificates, until an orderly market for the Series A Common
Stock or Series B Common Stock develops, the prices at which shares of such
stock will trade may be affected by an imbalance of supply and demand.
Although the Company has applied for the Series A Common Stock and Series B
Common Stock to be listed on the Nasdaq National Market effective concurrently
with the Distribution, there can be no assurance that an active trading market
will develop or, if one does develop, that it will be maintained.
FORWARD LOOKING STATEMENTS
This Information Statement contains certain forward-looking statements
regarding business strategies, market potential, future financial performance,
product launches and other matters. Such forward-looking statements inherently
involve many risks and uncertainties that could cause actual results to differ
materially from those projected in such statements. Overall potential risks
and uncertainties include such factors as the continued health of the
multichannel video programming distribution industry, the satellite services
industry and the economy in general; the ability of vendors to deliver
required equipment, software and services; potential changes in law and
regulation 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.
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THE DISTRIBUTION
DESCRIPTION OF THE DISTRIBUTION
The Distribution will be made on the Distribution Date to holders of record
of TCI Group Common Stock at the close of business on the Record Date on the
basis of one share of Series A Common Stock for each ten shares of Series A
TCI Group Common Stock held of record as of such time and one share of Series
B Common Stock for each ten shares of Series B TCI Group Common Stock held of
record as of such time. No certificates or scrip representing fractional
shares of Series A Common Stock or Series B Common Stock will be issued.
Fractions of one-half or larger of a share will be rounded up and fractions of
less than one-half of a share will be rounded down to the nearest whole number
of shares of Series A Common Stock or Series B Common Stock.
The Distribution will not be received by subsidiaries of TCI that hold TCI
Group Common Stock, all of which have agreed to waive their right to
participate in the Distribution and in consideration therefor will receive
additional shares of Series A TCI Group Common Stock in accordance with a
formula substantially identical to the formula for adjusting the conversion
rate under TCI's Series F Convertible Redeemable Participating Preferred
Stock. See "--Effects of the Distribution on Outstanding Preferred Stock of
TCI and TCIC and Convertible Notes of TCI UA, Inc."
Stock certificates representing the shares of Series A Common Stock and
Series B Common Stock to which the TCI Group Stockholders on the Record Date
are entitled will be delivered to such shareholders in a separate mailing. The
Distribution will not affect the number of shares of TCI Group Common Stock
held by the TCI Group Stockholders. The TCI Group Stockholders are not
required to take any action or pay any consideration in connection with the
Distribution.
EXPENSES OF THE DISTRIBUTION
It is estimated that the direct legal, financial advisory, accounting,
printing, mailing and other expenses (including the fees of TCI's and the
Company's transfer agents) will total approximately $3,500,000, and will be
borne 50% by TCI and 50% by the Company. These expenses do not include any of
the costs associated with the time spent by TCI's and the Company's officers
and legal, accounting and other personnel in connection with the Distribution
or other internal costs of TCI or the Company. Upon request, TCI will pay the
reasonable expenses of brokerage firms, custodians, nominees and fiduciaries
who are record holders of TCI shares for forwarding this Information Statement
to the beneficial owners of such shares.
REASONS FOR THE DISTRIBUTION
The Distribution has been designed to separate the TCI Group's interests in
the cable distribution business from its interests in the Digital Satellite
Business--two businesses that use distinct distribution networks to provide
entertainment and other programming potentially to the same customer. The
Digital Satellite Business has grown substantially in recent years and, as a
result, the joint valuation and operation of these businesses have become less
desirable. TCI's management believes that, because of the relative size of the
assets and business of the Company compared to that of the TCI Group as a
whole, the value of the Company is largely overlooked by the investment
community. In addition, the separation of the TCI Group's Digital Satellite
Business from its principal cable business will permit management of the
Company to focus on the development and expansion of the Digital Satellite
Business in a manner best suited to that business and its market, without
concern for the objectives of, or competitive effect of such expansion on, the
TCI Group's cable business.
The separation of the TCI Group's Digital Satellite Business from its cable
business will enable the market to focus on the individual strengths of the
Company and more accurately evaluate the Company's performance compared to
other companies in the Digital Satellite Business. By allowing the market to
establish a separate valuation for the Company, the Distribution should, in
management's opinion, result in an increase in the long-term value of the TCI
Group Stockholders' current investment in the TCI Group. The Distribution
would also give the TCI Group Stockholders and other potential investors the
opportunity to direct their investment to their specific area of interest,
satellite or cable, or to continue to retain an interest in both distribution
media. The separate reporting of the results of the Company's Digital
Satellite Business and the TCI Group's cable business
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should also create a framework for increased and more focused equity research
coverage of both companies by the investment community. Furthermore, as a part
of TCI, the Company is currently one of several businesses competing for the
allocation of TCI's financial resources. As a separate, publicly traded
company, the Company will have increased flexibility to raise capital and
effect acquisitions by issuing its own securities.
In addition, after the Distribution, the Company will be able to focus
better on responding to the operational and distribution characteristics and
competitive dynamics of the Digital Satellite Business and the Company's
management will be able to tailor its business strategies and capital
investments to the specific requirements of the Digital Satellite Business.
Further, as an independent, publicly traded company, the Company will be able
to design more effective incentive compensation programs for its management
and employees by linking their compensation to the performance of the
Company's Digital Satellite Business, as reflected in the stock market's
evaluation of the Company Stock, thereby enhancing the Company's ability to
attract, motivate and retain high quality employees.
CERTAIN CONSEQUENCES OF THE DISTRIBUTION
As a result of the Distribution, TCI's interests in the Digital Satellite
Business will be owned and operated by a separate publicly held company. The
TCI Group Stockholders will own the same interest in each of the Company and
TCI that they held in TCI on the Record Date, but in the form of separate
securities, TCI Group Common Stock and Company Common Stock. The Series A
Common Stock and the Series B Common Stock are expected to be approved for
listing on the Nasdaq National Market under the symbols "TSAT A" and "TSAT B,"
respectively. The transfer agent and registrar for the Company Common Stock
will be The Bank of New York.
The Distribution will not affect the number of outstanding shares of TCI
Group Common Stock or the rights of any TCI Group Stockholder with respect
thereto.
RESTRICTIONS ON TRANSFER
Shares of the Company Common Stock distributed to the TCI Group Stockholders
pursuant to the Distribution will be freely transferable under the Securities
Act of 1933, as amended (the "Securities Act"), except for shares received by
any persons who may be deemed to be "affiliates" of the Company as that term
is defined in Rule 144 promulgated under the Securities Act. Persons who may
be deemed to be affiliates of the Company after the Distribution generally
include individuals or entities that control, are controlled by, or are under
common control with, the Company and may include certain officers and
directors of the Company as well as principal stockholders of the Company.
Persons who are affiliates of the Company will be permitted to sell their
shares of the Company Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemptions provided by Section
4(2) of the Securities Act or Rule 144 thereunder.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth a summary of the material federal income
tax consequences under the Code, to holders of TCI Group Common Stock with
respect to the receipt of the Company Common Stock pursuant to the
Distribution. The discussion may not address all federal income tax
consequences that may be relevant to particular TCI Group Stockholders, e.g.,
foreign persons, dealers in securities and persons who received TCI Group
Common Stock in compensatory transactions. In addition, the discussion does
not address any state, local or foreign tax considerations relative to the
Distribution. ACCORDINGLY, ALL HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS.
TCI has not requested a ruling from the Service with respect to the federal
income tax consequences of the Distribution. However, as a condition of the
consummation of the Distribution, TCI will receive an opinion of Baker &
Botts, L.L.P. ("Counsel") that: (i) for federal income tax purposes, the
Distribution should be treated as a tax-free transaction qualifying under
Section 355 of the Code; and (ii) the following discussion insofar as it
relates to the statements of law or legal conclusions is correct in all
material respects.
In rendering the tax opinion, Counsel will rely upon certain representations
and covenants made by TCI, certain of its stockholders and the Company,
including the following: (a) following the Distribution, the holders
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of TCI Group Common Stock must, in the aggregate, maintain a substantial
continuing ownership interest in the Company Common Stock they receive in the
Distribution; and (b) the Company must continue its historic business. The tax
opinion will be explicitly conditioned upon the accuracy of such
representations and covenants and upon certain assumptions critical to the
Distribution qualifying as a tax-free spinoff under Section 355 of the Code.
The tax opinion does not bind the Service nor does it preclude the Service
from adopting a contrary position from that taken in the tax opinion. In the
event the representations or assumptions are not accurate or the covenants are
breached, then TCI and the Company will be unable to rely on the tax opinion.
Assuming the Distribution qualifies as a tax-free spinoff under Section 355,
the following tax consequences will result:
(1) No gain or loss will be recognized by or includable in the income
of a holder of TCI Group Common Stock solely as a result of the
receipt of Company Common Stock pursuant to the Distribution;
(2) No gain or loss will be recognized by TCI or the Company solely as
a result of the Distribution, except as noted below with respect to
deferred intercompany gains and excess loss accounts;
(3) The tax basis of the TCI Group Common Stock held by a TCI Group
Stockholder immediately before the Distribution will be apportioned
between such TCI Group Common Stock and the Company Common Stock
received by such stockholder in the Distribution based upon the
relative fair market value of such TCI Group Common Stock and
Company Common Stock on the date of the Distribution; and
(4) Assuming that the TCI Group Common Stock held by a TCI Group
Stockholder is held as a capital asset, the holding period for
Company Common Stock received in the Distribution will include the
period during which such TCI Group Common Stock was held.
Even if the Distribution qualifies as a tax-free spinoff pursuant to Section
355 of the Code, TCI will recognize as a result of the Distribution any
deferred intercompany gain with respect to the Company's assets. TCI estimates
that such gain will be approximately $20 million. In addition, the movement of
assets in preparation for the Distribution will generate additional deferred
intercompany gain which will be recognized as a result of the Distribution.
The amount of such gain will depend upon the valuation of certain assets but
may be substantial. In addition, immediately prior to the Distribution, TCI
may have an excess loss account on the Company Common Stock, which is the
equivalent of a negative basis. TCI would be required to recognize the amount
of this negative basis as a result of the Distribution. TCI believes that such
amount, if any, will be relatively small.
Notwithstanding the opinion of Counsel referred to above, the application of
Section 355 of the Code to the Distribution is complex and may be subject to
differing interpretation. In particular, the Service may challenge the tax-
free status of the Distribution on the grounds that it lacks an adequate
"business purpose" or that the active business requirement of Section 355(b)
of the Code (which requires the continuation after the Distribution of a
business conducted for at least five years prior to the Distribution) is not
satisfied. Accordingly, there can be no assurance that the Service will not
successfully assert that the Distribution is a taxable event.
If the Distribution does not qualify as a tax-free spinoff under Section 355
of the Code, then: (i) TCI would recognize capital gain equal to the
difference between the fair market value of the Company Common Stock on the
date of the Distribution and TCI's tax basis in such stock; (ii) each
stockholder receiving shares of Company Common Stock in the Distribution may
be treated as having received a distribution equal to the value of the Company
Common Stock received which would be taxable as ordinary income to the extent
of TCI's current and accumulated earnings and profits; (iii) the holding
period for determining capital gain treatment of the Company Common Stock
received in the Distribution would commence on the date of the Distribution;
and (iv) each stockholder would have a tax basis in the shares of Company
Common Stock received in the Distribution equal to the fair market value of
such shares. Corporate stockholders may be eligible for a dividends-received
deduction (subject to certain limitations) with respect to the portion of the
Distribution constituting a dividend, and may be subject to the Code's
extraordinary dividend provisions which, if applicable, would require a
reduction in such holder's tax basis in his or her TCI Group Common Stock to
the extent of such deduction.
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THE FOREGOING IS A SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS OF
THE DISTRIBUTION UNDER CURRENT LAW. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER
TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH
STOCKHOLDER, IN LIGHT OF HIS OR HER PERSONAL CIRCUMSTANCES, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
TREATMENT OF OUTSTANDING TCI STOCK OPTIONS AND SARS
Certain directors, officers and employees of TCI and its subsidiaries
(including the Company) have been 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 have been granted pursuant to various stock plans of TCI
(the "TCI Plans"). The TCI Plans give the committee of the TCI Board that
administers the TCI Plans (the "TCI Plan Committee") the authority to make
equitable adjustments to outstanding TCI Options and TCI SARs in the event of
certain transactions, of which the Distribution is one.
The TCI Plan Committee and the TCI Board have determined that, immediately
prior to the Distribution, each TCI Option will be 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 Distribution in respect of the shares
of Series A TCI Group Common Stock subject to the applicable TCI Option, if
such TCI Option had been exercised in full immediately prior to the Record
Date, and containing substantially equivalent terms as the existing TCI
Option, and (ii) an option to purchase Series A TCI Group Common Stock (an
"Adjusted TCI Option"), exercisable for the same number of shares of Series A
TCI Group Common Stock as the corresponding TCI Option had been. The aggregate
exercise price of each TCI Option will be allocated between the Add-on Company
Option and the Adjusted TCI Option into which it is divided, and all other
terms of the Add-on Company Option and Adjusted TCI Option will in all
material respects be the same as such TCI Option, except that references
therein to TCI shall generally refer to the Company with respect to Adjusted
TCI Options and Add-on Company Options (and related SARs) held by Company
Employees (as defined below). Similar adjustments will be made to the
outstanding TCI SARs, resulting in the holders thereof holding Adjusted TCI
SARs and Add-on Company SARs instead of TCI SARs, effective immediately prior
to the Distribution. The foregoing adjustments will be made pursuant to the
anti-dilution provisions of the TCI Plans pursuant to which the respective TCI
Options and TCI SARs were granted. Notwithstanding the foregoing, the Add-on
Company Options and Add-on Company SARs held by TCI employees and non-employee
directors that do not become Company Employees will not be exercisable for
shares of Series A Common Stock prior to the effectiveness of a registration
statement under the Securities Act with respect to such shares, and Add-on
Company Options and related Add-on Company SARs which would otherwise have
expired during the period from the Distribution Date through the effective
date of such registration statement will remain in effect until three months
after the effective date of such registration statement. Such deferral will
not otherwise affect the vesting schedule or other terms and conditions of the
Add-on Company Options and related Add-on Company SARs. The Company intends to
file a registration statement with respect to such shares of Series A Common
Stock as soon as practicable following the Distribution Date, but in any event
no later than December 31, 1997.
As a result of the foregoing, certain persons who remain TCI employees or
non-employee directors after the Distribution and certain persons who were TCI
employees prior to the Distribution but become Company employees after the
Distribution will hold both Adjusted TCI Options and separate Add-on Company
Options and/or will 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 following the Distribution will be 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
are Company employees at the time of the Distribution and following the
Distribution are no longer TCI employees ("Company Employees") will be
obligations solely of the Company. Prior to the Distribution, TCI and the
Company will enter 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.
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EFFECTS OF THE DISTRIBUTION ON OUTSTANDING PREFERRED STOCK OF TCI AND TCIC AND
CONVERTIBLE NOTES OF TCI UA, INC.
As a result of the Distribution, the number of shares of TCI Group Common
Stock issuable upon conversion (i.e., the "conversion rate") of each of TCI's
(i) Series C Convertible Preferred Stock, (ii) Series F Convertible Redeemable
Participating Preferred Stock, and (iii) Series G Redeemable Convertible TCI
Group Preferred Stock, shall be adjusted in accordance with a formula based on
the aggregate fair market value of the Company Common Stock issued in the
Distribution, relative to the aggregate market price of the Series A TCI Group
Common Stock on the Record Date. Similarly, as a result of the Distribution,
the exchange rate of TCIC's Series A Cumulative Exchangeable Preferred Stock
shall be adjusted in accordance with a formula based on the aggregate fair
market value of the Company Common Stock issued in the Distribution, relative
to the aggregate market price of the Series A TCI Group Common Stock on the
Record Date.
As a result of the Distribution, the conversion rights of TCI's Series D
Convertible Preferred Stock ("TCI Series D Preferred Stock") will be adjusted
so that the holders of TCI Series D Preferred Stock will have a right to
receive on conversion, in addition to shares of TCI Group Common Stock, the
same number of shares of Company Common Stock that they would have received
had they converted their TCI Series D Preferred Stock to TCI Group Common
Stock prior to the Distribution.
Under the Convertible Notes due December 12, 2021 of TCI UA, Inc. (the
"Convertible Notes"), the Distribution will require an adjustment either to
the conversion rate in accordance with a formula, so that the number of shares
of Series A TCI Group Common Stock issuable upon conversion would be
increased, or to the conversion rights of the Convertible Notes so that
holders of such Notes will be entitled to receive on conversion shares of
Series A Common Stock in addition to shares of Series A TCI Group Common
Stock, depending on the aggregate fair market value of the Company Common
Stock distributed to holders of Series A TCI Group Common Stock in the
Distribution.
For purposes of each of the above adjustments, the determination of the TCI
Board as to the fair market value of the Company Common Stock distributed in
the Distribution shall be conclusive. See "Arrangements Between TCI and the
Company After the Distribution--Other Arrangements."
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ARRANGEMENTS BETWEEN TCI AND THE COMPANY AFTER THE DISTRIBUTION
Following the Distribution, the Company and TCI will operate independently,
and neither will have any stock ownership, beneficial or otherwise, in the
other. For the purposes of governing certain of the ongoing relationships
between the Company and TCI after the Distribution, and to provide mechanisms
for an orderly transition, on or before the Distribution Date, the Company and
TCI will enter into various agreements, including the Reorganization
Agreement, the Transition Services Agreement, an amendment to TCI's existing
Tax Sharing Agreement, the Indemnification Agreements and the Trade Name and
Service Mark License Agreement, all of which are described below. In addition,
TCIC will continue to provide installation, maintenance, retrieval and other
customer fulfillment services for certain customers of the Company, pursuant
to the Fulfillment Agreement described below. In addition, the Company and TCI
and their respective subsidiaries and affiliates may from time to time do
business with one another following the Distribution, in areas not governed by
any of the following agreements.
REORGANIZATION AGREEMENT
On or before the Distribution Date, TCI, TCIC and a number of other TCI
subsidiaries, including the Company, will enter into a Reorganization
Agreement (the "Reorganization Agreement"), which will provide for, among
other things, the principal corporate transactions required to effect the
Distribution, the conditions thereto and certain provisions governing the
relationship between the Company and TCI with respect to and resulting from
the Distribution.
Certain of the Company's assets relating to the Digital Satellite Business
have historically been owned by subsidiaries of TCI other than the Company and
its predecessors. These assets include the capital stock of Tempo and the
20.86% partnership interests in PRIMESTAR Partners. The Reorganization
Agreement will provide for, among other things, the transfer of these assets
to the Company and for the assumption by the Company of related liabilities.
No consideration will be payable by the Company for these transfers, except
that two subsidiaries of the Company will purchase the TCI Group's partnership
interests in PRIMESTAR Partners for consideration payable by delivery of
promissory notes issued by such subsidiaries (the "K-1 Notes"), which
promissory notes will be assumed by TCI on or before the Distribution Date in
the form of a capital contribution to the Company. The Reorganization
Agreement also will provide for certain cross-indemnities designed to make the
Company financially responsible for all liabilities relating to the Digital
Satellite Business prior to the Distribution, as well as for all liabilities
incurred by the Company after the Distribution, and to make TCI financially
responsible for all potential liabilities of the Company which are not related
to the Digital Satellite Business, including, for example, liabilities arising
as a result of the Company's having been a subsidiary of TCI. The
Reorganization Agreement further will provide for each of the Company and TCI
to preserve the confidentiality of all confidential or proprietary information
of the other party, for five years following the Distribution, subject to
customary exceptions, including disclosures required by law, court order or
government regulation.
Pursuant to the Reorganization Agreement, on or before the Distribution
Date, the Company will issue to TCIC the Company Note, in the principal amount
of $250,000,000, representing a portion of the Company's intercompany balance
owed to TCIC on such date. See "--TCIC Credit Facility," below. Pursuant to
the Reorganization Agreement, the remainder of the Company's intercompany
balance owed to TCIC on the Distribution Date, as well as the indebtedness
represented by the K-1 Notes, will be assumed by TCI in the form of (i) a
$100,000,000 capital contribution to the Company, (ii) consideration for the
Company's assumption of 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 Distribution Date,
determined immediately after giving effect to the Distribution but before
giving effect to the issuance of the shares of Series A Common Stock issuable
upon exercise of such options, and (iii) consideration for the Company's grant
of 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
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satisfy TCI's obligations to deliver shares of Series A Common Stock upon
conversion of the TCI Series D Preferred Stock and, if applicable, the
Convertible Notes, as a result of the Distribution. See "--Other Arrangements"
and the Condensed Pro Forma Combined Financial Statements of the Company.
The Reorganization Agreement may be terminated, and the Distribution may be
abandoned, at any time prior to the Distribution Date, by and in the sole
discretion of the TCI Board, without the approval of TCI Group Stockholders or
any other persons. In the event of any such termination or abandonment, TCI
will have no liability to any person under the Reorganization Agreement or any
obligation to effect the Distribution thereafter.
TRANSITION SERVICES AGREEMENT
Pursuant to the Transition Services Agreement between TCI and the Company,
following the Distribution, TCI will provide to the Company certain services
and other benefits, including certain administrative and other services that
were provided by TCI prior to the Distribution. Such services shall include
(i) tax reporting, financial reporting, payroll, employee benefit
administration, workers' compensation administration, telephone, fleet
management, package delivery, management information systems, billing, lock
box, remittance processing and risk management services, (ii) other services
typically performed by TCI's accounting, finance, treasury, corporate, legal,
tax, benefits, insurance, facilities, purchasing, fleet management and
advanced information technology department personnel, (iii) use of
telecommunications and data facilities and of systems and software developed,
acquired or licensed by TCI from time to time for financial forecasting,
budgeting and similar purposes, including without limitation any such software
for use on personal computers, in any case to the extent available under
copyright law or any applicable third-party contract, (iv) technology support
and consulting services, and (v) such other management, supervisory, strategic
planning or other services as the Company and TCI may from time to time
mutually determine to be necessary or desirable.
Pursuant to the Transition Services Agreement, TCI has also agreed to
provide the Company with certain most-favored-customer rights to programming
services that TCI or a wholly owned subsidiary of TCI may own in the future
and access to any volume discounts that may be available to TCI for purchase
of HSDs, satellite receivers and other equipment.
As compensation for services rendered to the Company and for the benefits
made available to the Company pursuant to the Transition Services Agreement,
the Company will pay TCI a 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) per month, commencing with the month of
January 1997, up to a maximum of $3,000,000 per month, and reimburse TCI
quarterly for direct, out-of-pocket expenses incurred by TCI to third parties
in providing the services.
The Transition Services Agreement will continue in effect until the close of
business on December 31, 1999 and will be renewed automatically for successive
one-year periods thereafter, unless earlier terminated by (i) either party at
the end of the initial term or the then current renewal term, as applicable,
on not less than 180 days' prior written notice to the other party, (ii) TCI
upon written notice to the Company following certain changes in control of the
Company, and (iii) either party if the other party is the subject of certain
bankruptcy or insolvency-related events.
TAX SHARING AGREEMENT
Through the Distribution Date, the Company's results of operations have been
and will be 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 procedures for the allocation of certain consolidated
income tax attributes and the settlement of certain intercompany tax
allocations. The Tax Sharing Agreement
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encompasses U.S. Federal, state, local and foreign tax consequences and relies
upon the Code and any applicable state, local and foreign tax law and related
regulations. On or before the Distribution Date, the Tax Sharing Agreement
will be amended to provide that the Company will be treated as if it had been
a party to the Tax Sharing Agreement, effective July 1, 1995. Pursuant to the
amended Tax Sharing Agreement, beginning on the July 1, 1995 effective date,
the Company is responsible to TCI for its share of current consolidated income
tax liabilities. TCI is responsible to the Company to the extent that the
Company's income tax attributes generated after the effective date are
utilized by TCI to reduce its consolidated income tax liabilities.
Accordingly, all tax attributes generated by the Company's operations after
the effective date including, but not limited to, net operating losses, tax
credits, deferred intercompany gains, and the tax basis of assets are
inventoried and tracked for the entities comprising the Company.
INDEMNIFICATION AGREEMENTS
On or before the Distribution Date, the Company will enter into
Indemnification Agreements (the "Indemnification Agreements") with TCIC and
TCI UA 1, Inc. ("TCI UA 1"). The Indemnification Agreement with TCIC will
provide for the Company to reimburse TCIC for any amounts drawn under an
irrevocable transferable letter of credit issued by the Bank of New York for
the account of TCIC to support the Company's share of PRIMESTAR Partners'
obligations under an Amended and Restated Memorandum of Agreement, effective
as of October 18, 1996, between the Partnership and GE Americom, with respect
to PRIMESTAR Partners' use of transponders on GE-2, to be launched by GE
Americom (the "GE-2 Agreement"). The original drawable amount of such letter
of credit is $25,000,000, increasing to $75,000,000 if PRIMESTAR Partners
exercises its option under the GE-2 Agreement to extend the term of such
agreement for the remainder of the useful life of GE-2. See "Risk Factors--
Risks of Failure or Delay in Launch of GE-2--Risks of Satellite Defect, Loss
or Reduced Performance," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business of the Company--PRIMESTAR
By TCI--The PRIMESTAR(R) Service."
The Indemnification Agreement with TCI UA 1 will provide for the Company to
reimburse TCI UA 1 for any amounts drawn under an irrevocable transferable
letter of credit issued by Chemical Bank for the account of TCI UA 1 (the "TCI
UA 1 Letter of Credit"), which supports a credit facility (the "PRIMESTAR
Credit Facility") that was obtained by PRIMESTAR Partners to finance advances
to Tempo for payments due in respect of the construction of the Company
Satellites and that is supported by letters of credit arranged for by
affiliates of the partners of the Partnership (other than GEAS).
The Indemnification Agreements further provide for the Company to indemnify
and hold harmless TCIC and TCI UA 1 and certain related persons from and
against any losses, claims, and liabilities arising out of the respective
letters of credit or any drawings thereunder. The payment obligations of the
Company to TCIC and TCI UA 1, under such Indemnification Agreements will be
subordinated in right of payment with respect to certain future obligations of
the Company to financial institutions.
TRADE NAME AND SERVICE MARK LICENSE AGREEMENT
Pursuant to the Trade Name and Service Mark License Agreement (the "License
Agreement"), TCI will grant 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 will provide, among other things, that all
advertising, promotion and use of certain of TCI's trade names and service
marks by the Company shall be consistent with TCI guidelines and standards, as
well as subject to TCI approval in certain circumstances.
FULFILLMENT AGREEMENT
TCIC has historically provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force or National Call Center. Charges for such services have been allocated
to the Company by TCIC based on scheduled rates.
Pursuant to the Fulfillment Agreement entered into by TCIC and the Company,
TCIC will continue to provide fulfillment services to the Company following
the Distribution with respect to customers of the
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PRIMESTAR(R) medium power service. Such services will include installation,
maintenance, retrieval, inventory management and other customer fulfillment
services. The Fulfillment Agreement will become effective on the first day of
the month following the Distribution Date. Among other matters, the
Fulfillment Agreement (i) sets forth the responsibilities of TCIC with respect
to fulfillment services, including performance standards and penalties for
nonperformance, (ii) provides for TCIC's fulfillment sites to be connected to
the billing and information systems used by the Company, allowing for on-line
scheduling and dispatch of installation and other service calls, and (iii)
provides scheduled rates to be charged to the Company for the various customer
fulfillment services to be provided by TCIC. The Company retains sole control
under the Fulfillment Agreement to establish the retail prices and other terms
and conditions on which installation and other services will be provided to
the Company's customers. The Fulfillment Agreement also provides that, during
the term of the Fulfillment Agreement, TCIC will not provide fulfillment
services to any other Ku-band, Ka-band, DBS, BSS, FSS, C-band, wireless or
other similar or competitive provider or distributor of television programming
services (other than traditional cable). The Fulfillment Agreement will have
an initial term of two years and is terminable, on 180 days notice to TCIC, by
the Company at any time during the first six months following the Distribution
Date. The scheduled rates for the services to be provided by TCIC under the
Fulfillment Agreement exceed the scheduled rates upon which charges
historically have been allocated to the Company for such services, reflecting
in part the value to the Company, as determined by Company management, of the
performance standards, exclusivity, termination right and certain other
provisions included in the Fulfillment Agreement.
There can be no assurance that the terms of the Fulfillment Agreement are
not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained by
the Company from third parties on any terms if the Fulfillment Agreement is
terminated. See "Risk Factors--Relationship with TCI," "Risk Factors--
Potential Conflicts of Interest," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Condensed Pro Forma
Combined Financial Statements of the Company.
TCIC CREDIT FACILITY
TCIC has agreed to make the TCIC Revolving Loans. The terms and conditions
of the Company Note and the TCIC Revolving Loans will be provided for by the
TCIC Credit Facility. The TCIC Revolving Loans and the Company Note will bear
interest at 10% per annum, compounded semi-annually. Commitment fees equal to
3/8% of the average unborrowed availability of TCIC's $500,000,000 commitment
under the TCIC Credit Facility will be payable to TCIC annually. Proceeds from
the TCIC Revolving Loans may be used to fund (i) working capital requirements,
(ii) capital expenditures contemplated by the October 1996 business plan of
the Company, (iii) up to $75,000,000 of other capital expenditures and
investments and (iv) the commitment fees payable under the TCIC Credit
Facility. The TCIC Credit Facility requires the Company to use its best
efforts to obtain external debt or equity financing after the Distribution
Date. The TCIC Credit Facility further provides for mandatory prepayment of
the TCIC Revolving Loans and the Company Note if, and in the amount that, the
Company has obtained such external financing. Any such prepayment from the
proceeds of external financing is required to be applied first to the Company
Note and then to repay borrowings and correspondingly reduce the commitments
under the TCIC Credit Facility. The outstanding principal of the TCIC
Revolving Loans and the Company Note, together with accrued interest, will be
due and payable on September 30, 2001, the final maturity date of the TCIC
Credit Facility, whether or not sufficient external financing has then been
obtained by the Company. There can be no assurance that the Company will be
able to obtain such external financing on terms acceptable to the Company, or
on any terms, within the time required. Accordingly, the failure of the
Company to refinance the TCIC Credit Facility by the final maturity thereof
could have a material adverse effect on the Company.
Borrowings under the TCIC Credit Facility are subject to, among other
things, (a) the Company's representations and warranties being true and
correct on the date of borrowing, (b) the Company's being in compliance with
its covenants in the TCIC Credit Facility, (c) no default having occurred and
being continuing on the borrowing date or being caused by such borrowing and
(d) the Company's being in compliance, in all material respects, with the
terms and conditions of the Indemnification Agreements, the Transition
Services Agreement, the Reorganization Agreement and the Fulfillment
Agreement. The TCIC Credit Facility sets forth
33
<PAGE>
the covenants the Company has agreed to comply with during the term of the
TCIC Credit Facility, including its covenants (i) not to sell, transfer or
otherwise dispose of any asset (other than sales of inventory in the ordinary
course of business), without the prior written consent of TCIC (other than the
sale of assets or securities of a subsidiary if the aggregate consideration
payable to the seller in respect of such sale is not less than the fair market
value of such assets), (ii) not to merge into or consolidate or combine with
any other person, without the prior written consent of TCIC, (iii) not to
declare or pay any dividend or make any distribution on its capital stock
(other than in common stock), or purchase, redeem or otherwise acquire or
retire for value any capital stock of the Company, (iv) to maintain specified
minimum numbers of qualified subscribers from December 31, 1996 through
December 31, 1997, (v) not to incur indebtedness at any time prior to and
including December 31, 1997 that would exceed a specified amount per qualified
subscriber, (vi) to maintain specified leverage ratios from January 1, 1998
through September 30, 2001, (vii) to maintain specified minimum ratios of
annualized cash flow to annual interest expense and (viii) to maintain a
specified minimum ratio of annualized cash flow to pro forma debt service.
OTHER ARRANGEMENTS
On or before the Distribution Date, TCI and the Company will enter into an
agreement (the "Share Purchase 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 Adjusted TCI Options and Add-on Company Options
held after the Distribution Date by their respective employees and non-
employee directors.
Certain officers of the Company who were officers or directors of TCI and/or
TCIC prior to the Distribution have received undertakings of indemnification
from TCI and/or TCIC. Such undertakings will survive the Distribution.
In June 1996, 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 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 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
WTCI and TCI Technology Ventures, Inc., a Delaware corporation and a
subsidiary of TCI ("TCITV"), 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 Distribution
Date, determined immediately after giving effect to the Distribution, but
before giving effect to any exercise of such options. The aggregate exercise
price for each such option will be equal to 1.0% (in the case of each of
Messrs. Clouston, Romrell and Howard) and 0.5% (in the case of Mr. Beddow) of
TCI's Net Investment (as defined below) as of the first to occur of the
Distribution Date and the date on which such option first becomes exercisable,
but excluding any portion of TCI's Net Investment that as of such date is
represented by a promissory note or other evidence of indebtedness from the
Company to TCI. TCI's Net Investment is defined for this purpose as the
cumulative amount invested by TCI and its predecessor in the Company and its
predecessors prior to and including the applicable date of determination, less
the aggregate amount of all dividends and distributions made by the Company
and its predecessors to TCI and its predecessor prior to and including such
date. The options will be granted on the Distribution Date, will vest in 20%
cumulative increments on each of the first five anniversaries of February 1,
1996, and will be exercisable for up to ten years following February 1, 1996.
Assuming the Distribution had occurred on June 30, 1996, options would have
been granted to Messrs. Clouston, Romrell, Howard and Beddow to purchase an
aggregate of 2,341,660 shares of Series A Common Stock at a per share exercise
price of approximately $7.00. The actual exercise price to be calculated on
the Distribution Date is expected to be higher than such assumed exercise
price due to increases in TCI's Net Investment that are expected to occur
between
34
<PAGE>
June 30, 1996 and the Distribution 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 to
be made by TCI to the Company in connection with the Distribution, the Company
has agreed, effective as of the Distribution Date, to bear all obligations
under such options and to enter into stock option agreements with respect to
such options (collectively, the "Stock Option Agreements") with each of
Messrs. Clouston, Romrell, Howard and Beddow. See the Condensed Pro Forma
Combined Financial Statements of the Company.
WTCI, an indirect subsidiary of TCI, has obtained a nontransferable,
nonexclusive license to use certain proprietary technology of Imedia
Corporation currently under development (the "Imedia Technology") to provide
statistical multiplexing of digitally compressed video signals. Although there
can be no assurance that the Imedia Technology will be successfully
implemented, if successful, such technology would increase the number of
digital program signals that could be transmitted simultaneously over a single
satellite transponder, thus effectively increasing the digital compression
ratio. See "Business of the Company--Overview of Digital Satellite Television
Industry." WTCI has agreed that if, prior to March 1, 1997, the Company
engages WTCI to provide digitization, compression and uplinking services for
any high power DBS system operated by the Company, and WTCI is authorized to
use Imedia Technology or other proprietary technologies to provide
multiplexing of digitally compressed video signals for the Company, WTCI shall
provide such multiplexing services to the Company for an agreed fee, based on
WTCI's incremental costs and other factors. The Company's rights to receive
multiplexing services under its agreement with WTCI are assignable by the
Company to any affiliate of the Company, including for this purpose PRIMESTAR
Partners.
35
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of June 30, 1996, and (ii) the pro forma capitalization of the
Company assuming the Distribution and the TCI Intercompany Agreements were
effective on June 30, 1996. See "The Distribution" and "Arrangements Between
TCI and the Company After the Distribution." The table should be read in
conjunction with the pro forma and historical financial statements, including
the notes thereto, of the Company, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
PRO
HISTORICAL FORMA(1)
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Payables, accruals and other operating liabilities...... $ 97,208 97,208
Due to PRIMESTAR Partners............................... 386,219 386,219
TCIC Credit Facility(2):
Company Note.......................................... -- 250,000
TCIC Revolving Loans.................................. -- --
Stock compensation obligation........................... -- 39,500
---------- ---------
Total liabilities................................. 483,427 772,927
---------- ---------
Equity:
Common Stock ($1 par value):
Series A; 185,000,000 shares authorized; 58,437,032
assumed issued on a pro forma basis.............. -- 58,437
Series B; 10,000,000 shares authorized; 8,467,550
assumed issued on a pro forma basis.............. -- 8,468
Additional paid-in capital............................ -- 378,308
Accumulated deficit................................... (108,663) (108,663)
Due to TCIC........................................... 723,413 --
---------- ---------
Total equity...................................... 614,750 336,550
---------- ---------
Total liabilities and equity...................... $1,098,177 1,109,477
========== =========
</TABLE>
- --------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Financial Statements of the Company.
(2) For a description of the terms of the TCIC Credit Facility, see
"Arrangements Between TCI and the Company After the Distribution--TCIC
Credit Facility."
36
<PAGE>
SELECTED FINANCIAL DATA
The following table presents summary financial data relating to the
Company's historical financial position and results of operations as of June
30, 1996, and for each of the six month periods ended June 30, 1996 and 1995,
and as of and for each of the years in the five-year period ended December 31,
1995. In addition, the following table presents summary financial data
relating to the Company's unaudited pro forma financial condition as of June
30, 1996, and the Company's unaudited pro forma results of operations for the
six months ended June 30, 1996 and the year ended December 31, 1995. The
historical financial data for each of the years in the three-year period ended
December 31, 1995, and as of December 31, 1995 and 1994, is derived from the
Audited Combined Financial Statements of the Company for the corresponding
periods, which combined financial statements have been audited by KPMG Peat
Marwick LLP, independent auditors. The historical data for the other periods
presented has been derived from unaudited information. The unaudited pro forma
statement of operations data gives effect to the Distribution and the TCI
Intercompany Agreements as of January 1, 1995. The audited pro forma balance
sheet data gives effect to the Distribution and the TCI Intercompany
Agreements as of June 30, 1996. The unaudited pro forma data does not purport
to be indicative of the results of operations or financial position that may
be obtained in the future or that actually would have been obtained had such
transactions occurred on such dates. The following information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is qualified in its entirety by
reference to the historical and pro forma combined financial statements,
including the notes thereto, of the Company. For a description of the TCI
Intercompany Agreements, see "Arrangements Between TCI and the Company After
the Distribution."
<TABLE>
<CAPTION>
PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
------------ ------------------ ------------ -----------------------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------- ------------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
------------ --------- ------- ------------ -------- ------- ------ ------ ------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF
OPERATIONS DATA:
Revenue................. $ 193,647 193,647 61,611 208,903 208,903 30,279 11,679 4,614 165
Operating, selling,
general and
administrative
expenses............... (188,515) (186,626) (56,717) (212,125) (214,117) (25,106) (7,069) (2,268) (280)
Depreciation............ (58,455) (53,527) (19,915) (59,733) (55,488) (14,317) (6,513) (2,602) (283)
--------- --------- ------- -------- -------- ------- ------ ------ ------
Operating loss......... (53,323) (46,506) (15,021) (62,955) (60,702) (9,144) (1,903) (256) (398)
Share of losses of
PRIMESTAR Partners..... (1,446) (1,446) (4,988) (8,969) (8,969) (11,722) (5,524) (4,561) (5,146)
Other, net.............. 10,291 15,064 6,973 8,065 22,164 7,178 2,593 1,581 1,908
--------- --------- ------- -------- -------- ------- ------ ------ ------
Net Loss............... $ (44,478) (32,888) (13,036) (63,859) (47,507) (13,688) (4,834) (3,236) (3,636)
========= ========= ======= ======== ======== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
JUNE 30, 1996 DECEMBER 31,
----------------------- ------------------------------------
PRO FORMA(1) HISTORICAL 1995 1994 1993 1992 1991
------------ ---------- ------- ------- ------- ------ -----
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET
DATA:
Property and equipment,
net.................... $1,047,703 1,047,703 889,220 397,798 95,323 15,791 1,776
========== ========= ======= ======= ======= ====== =====
Investment in, and
related advances to
PRIMESTAR Partners..... $ 28,847 28,847 17,963 9,793 19,625 485 213
========== ========= ======= ======= ======= ====== =====
Total assets............ $1,109,477 1,098,177 933,443 410,105 116,495 18,583 4,359
========== ========= ======= ======= ======= ====== =====
Due to PRIMESTAR
Partners............... $ 386,219 386,219 382,900 278,772 71,164 -- --
========== ========= ======= ======= ======= ====== =====
Company Note............ $ 250,000 -- -- -- -- -- --
========== ========= ======= ======= ======= ====== =====
Stock compensation
obligation............. $ 39,500 -- -- -- -- -- --
========== ========= ======= ======= ======= ====== =====
Equity.................. $ 336,550 614,750 483,584 120,526 43,349 17,537 4,314
========== ========= ======= ======= ======= ====== =====
</TABLE>
- --------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Financial Statements of the Company.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be
read in conjunction with the Company's historical and pro forma combined
financial statements.
SUMMARY OF OPERATIONS
As described in greater detail below, the Company reported net losses of
$32,888,000 and $13,036,000 during the six months ended June 30, 1996 and
1995, respectively, and $47,507,000, $13,688,000 and $4,834,000 during the
years ended December 31, 1995, 1994 and 1993, respectively. Improvements in
the Company's results of operations are largely dependent upon its ability to
increase its customer base while maintaining its pricing structure, reducing
subscriber churn and effectively managing the Company's costs. No assurance
can be given that any such improvements will occur. In addition, the Company
incurs significant sales commission and installation costs when its customers
initially subscribe to the service. Accordingly, management expects that
operating costs will remain high as a percentage of revenue so long as the
Company maintains its rapid growth in subscribers. The high cost of obtaining
new subscribers also magnifies the negative effects of subscriber churn.
During the six months ended June 30, 1996, and the years ended December 31,
1995, 1994 and 1993, (i) the Company's subscriber churn rate (which represents
the number of subscriber terminations divided by the weighted average number
of subscribers during the period) was 40.3%, 24.7%, 16.1% and 23.2%,
respectively, and (ii) the average subscriber life implied by such subscriber
churn rate was 2.5 years, 4.1 years, 6.2 years and 4.3 years, respectively.
As set forth above, the Company has experienced an increase during 1996 in
the rate of subscriber churn, as compared to prior periods. The Company
believes that the higher 1996 churn rate is primarily attributable to
identifiable circumstances that are not expected to have a continuing impact.
In general, these circumstances stemmed from the Company's efforts to maximize
its subscriber growth during the fourth quarter of 1995 and the first six
months of 1996. See related discussion below.
One result of the Company's subscriber maximization efforts, which included,
for example, marketing programs that allowed subscribers to initiate service
by paying 33% of the normal installation fee with no credit approval (the "33%
Install Program"), was that the Company added, during the fourth quarter of
1995 and the first six months of 1996, a significant number of customers whose
service was terminated during the first six months of 1996 after their
accounts became delinquent. As set forth below, such delinquent accounts
contributed to a significant increase in the Company's bad debt expense during
1996. The Company has addressed this issue by implementing more stringent
credit policies and eliminating the 33% Install Program. In this regard, the
Company began to institute more selective credit policies during the third
quarter of 1996 and further tightened such policies during the fourth quarter
of 1996. The Company believes that a significant percentage of the subscribers
whose service was terminated during 1996 would not have been allowed to
initiate service if the credit policies that are currently in effect had been
in place during 1995.
Although no assurance can be given, the Company expects future churn rates
to be more consistent with its previous annual history. If the Company's churn
rates were to continue at 1996 levels or increase, the Company believes that
its financial condition and results of operations would be adversely affected.
In October 1996, the Company initiated a marketing program that allows
subscribers to purchase the Company's proprietary satellite reception
equipment at a price that is less than the Company's cost. There is no
assurance that the difference between the Company's costs and the revenue
generated from the sale of the
38
<PAGE>
equipment would be recoverable. To date, the number of customers selecting
this marketing program has been insignificant. The Company cannot presently
predict whether a significant number of customers will take advantage of this
marketing program in the future.
Since July 1994, when PRIMESTAR Partners completed its conversion from an
analog to a digital signal, the Company has experienced significant growth in
Authorized Units. In this regard, the number of Authorized Units was 659,000
and 220,000 at June 30, 1996 and 1995, respectively, and 535,000, 100,000 and
35,000 at December 31, 1995, 1994 and 1993, respectively. To the extent not
otherwise described, increases in the Company's revenue and operating,
selling, general and administrative expenses, as detailed below, are primarily
related to such growth in Authorized Units. The Company is operating in an
increasingly competitive environment. No assurance can be given that such
increasing competition will not adversely affect the Company's ability to
continue to achieve significant growth in Authorized Units and revenue. See
"Risk Factors--Competitive Nature of the Industry" and "Business of the
Company--Competition."
TCIC has historically provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force or National Call Center. Charges for such services have been allocated
to the Company by TCIC based on scheduled rates. TCIC will continue to provide
fulfillment services to the Company following the Distribution with respect to
customers of the PRIMESTAR(R) medium power service, pursuant to the
Fulfillment Agreement. Such services will include installation, maintenance,
retrieval, inventory management and other customer fulfillment services. The
Fulfillment Agreement, which will become effective on the first day of the
month following the Distribution Date, provides for, among other matters, (i)
the responsibilities of TCIC with respect to fulfillment services, including
performance standards and penalties for nonperformance, (ii) TCIC's
fulfillment sites to be connected to the billing and information systems used
by the Company, allowing for on-line scheduling and dispatch of installation
and other service calls, and (iii) scheduled rates to be charged to the
Company for the various customer fulfillment services to be provided by TCIC.
The Fulfillment Agreement also provides that, during its term, TCIC will not
provide fulfillment services to certain other providers or distributors of
television programming services. The Fulfillment Agreement will have an
initial term of two years, and is terminable, on 180 days notice to TCIC, by
the Company at any time during the first six months following the Distribution
Date. There can be no assurance that the terms of the Fulfillment Agreement
are not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained by
the Company from third parties on any terms if the Fulfillment Agreement is
terminated. See "Risk Factors--Relationship with TCI" and "Risk Factors--
Potential Conflicts of Interest."
Installation charges from TCIC include direct and indirect costs of
performing installations. The Company has capitalized a portion of such
charges based upon amounts charged by unaffiliated third parties to perform
similar services. Following the Distribution, the Company will capitalize the
full amount of installation fees paid to TCIC pursuant to the Fulfillment
Agreement. Additionally, the scheduled rates for the services to be provided
by TCIC under the Fulfillment Agreement exceed the scheduled rates upon which
charges, historically, have been allocated to the Company for such services,
reflecting in part the value to the Company, as determined by Company
management, of the performance standards, exclusivity, termination right and
certain other provisions included in the Fulfillment Agreement. For
information concerning the pro forma effect of the Fulfillment Agreement, see
the Condensed Pro Forma Combined Financial Statements of the Company.
In connection with the Distribution, the Company and TCI also will enter
into the Transition Services Agreement, the Stock Option Agreements and the
TCIC Credit Facility. In general, such agreements will result in increases in
the expenses to be incurred by the Company following the Distribution, as
compared to the amounts allocated to the Company by TCI prior to the
Distribution. For information concerning the pro forma effects of such
agreements, see the Condensed Pro Forma Combined Financial Statements of the
Company.
39
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
1996 1995
-------------------- -------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
AMOUNT REVENUE AMOUNT REVENUE
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Revenue:
Programming and equipment rental..... $156,870 81% 37,362 61%
Installation......................... 36,777 19 24,249 39
-------- --- ------- ---
Total revenue...................... 193,647 100 61,611 100
-------- --- ------- ---
Operating costs and expenses:
Charges from PRIMESTAR Partners:
Programming......................... (57,464) (30) (14,309) (23)
Satellite, marketing and distribu-
tion............................... (29,422) (15) (7,387) (12)
-------- --- ------- ---
(86,886) (45) (21,696) (35)
Other operating:
Allocations from TCIC............... (10,505) (5) (7,136) (12)
Other............................... (4,345) (2) (705) (1)
-------- --- ------- ---
(14,850) (7) (7,841) (13)
Selling, general and administrative:
Selling and marketing............... (49,987) (26) (18,967) (31)
Bad debt............................ (9,779) (5) (1,432) (2)
Allocations from TCIC............... (9,576) (5) (2,223) (4)
Other general and administrative.... (15,548) (8) (4,558) (7)
-------- --- ------- ---
(84,890) (44) (27,180) (44)
-------- --- ------- ---
Operating Cash Flow(1).............. 7,021 4 4,894 8
Depreciation......................... (53,527) (28) (19,915) (32)
-------- --- ------- ---
Operating loss...................... $(46,506) (24)% (15,021) (24%)
======== === ======= ===
</TABLE>
- --------
(1) Operating Cash Flow is a commonly used measure of value and borrowing
capacity within the Company's industry, and is not intended to be a
substitute for a measure of performance in accordance with generally
accepted accounting principles and should not be relied upon as such.
Revenue increased $132,036,000 or 214% during the six months ended June 30,
1996, as compared to the corresponding prior year period. Exclusive of
installation revenue, the Company's average monthly revenue per Authorized
Unit increased from $39 during the 1995 period to $44 during the 1996 period.
Such increase occurred as the positive effects of (i) an increase in the
average monthly revenue derived from premium and pay-per-view services, and
(ii) a March 1995 increase in the monthly equipment rental fee more than
offset the effects of a second quarter promotional campaign that provided
certain new customers with one month of free service.
PRIMESTAR Partners provides programming services to the Company and other
authorized Distributors in exchange for a fee based upon the number of
Authorized Units receiving the respective programming services. PRIMESTAR
Partners also arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services, in exchange
for a separate authorization fee from each Distributor, including the Company,
based on such Distributor's total number of Authorized Units. The aggregate
charges for such programming and other services increased $65,190,000 or 300%
during the six months ended June 30, 1996, as compared to the corresponding
prior year period. The average aggregate monthly amount per Authorized Unit
charged by PRIMESTAR Partners increased from $22 during the 1995 period to $24
during the 1996 period. For additional information concerning the operations
of PRIMESTAR Partners, see related discussion below.
Other operating costs and expenses, which are primarily comprised of amounts
related to customer fulfillment activities, increased $7,009,000 or 89% during
the six months ended June 30, 1996, as compared to the corresponding prior
year period. Most of such operating costs and expenses were allocated from
TCIC to the
40
<PAGE>
Company based upon a standard charge for each of the various customer
fulfillment activities performed by TCIC. As discussed above, TCIC and the
Company have entered into a Fulfillment Agreement with respect to
installation, maintenance, retrieval and other customer fulfillment services
to be provided by TCIC following the Distribution. See the Condensed Pro Forma
Combined Financial Statements of the Company.
Selling, general and administrative expenses increased $57,710,000 or 212%
during the six months ended June 30, 1996, as compared to the corresponding
prior year period. Selling and marketing expenses, which represented 26% of
revenue during the 1996 period, include sales commissions, marketing and
advertising expenses, and costs associated with the operation of a customer
service call center. Bad debt expense represented 5% of revenue during the
1996 period. The Company is attempting to reduce the percentage of revenue
represented by selling, marketing and bad debt expenses. No assurance can be
given that such attempts will be successful.
General and administrative allocations from TCIC are generally based upon
the estimated cost of the general and administrative services provided to the
Company. Following the Distribution, charges for administrative services
provided by TCIC will be made pursuant to the Transition Services Agreement.
For information concerning the pro forma effect of the Transition Services
Agreement, see the Condensed Pro Forma Combined Financial Statements of the
Company.
The $33,612,000 or 169% increase in depreciation during the six months ended
June 30, 1996, as compared to the corresponding prior year period, is the
result of an increase in the Company's depreciable assets, due primarily to
capital expenditures with respect to the Company's Satellite reception
equipment. Effective October 1, 1996, the Company will effect certain changes
in its depreciation policies and estimates. When effective, such changes
generally will result in higher levels of depreciation than those which have
been reflected in the historical financial statements of the Company. See note
8 to the Unaudited Combined Financial Statements of the Company. See also the
Condensed Pro Forma Combined Financial Statements of the Company.
The Company's share of PRIMESTAR Partners' net losses decreased $3,542,000
or 71% during the six months ended June 30, 1996, as compared to the
corresponding prior year period. Such decrease is primarily attributable to a
significant increase in the revenue derived by PRIMESTAR Partners' from the
Company and other Distributors of PRIMESTAR Partners' programming.
Historically, PRIMESTAR Partners' operating deficits have been funded by
capital contributions from the Company and the other partners of PRIMESTAR
Partners. To the extent that future Authorized Unit growth does not generate
increases in PRIMESTAR Partners' revenue sufficient to offset its operating
costs and expenses, the Company anticipates that any such operating deficit
would be funded by PRIMESTAR Partners' then existing external sources of
liquidity (which may include capital contributions from the Company and
PRIMESTAR Partners' other partners), or by increases in the above-described
programming and authorization fees charged by PRIMESTAR Partners to the
Company and other authorized Distributors.
The Company's income tax benefit was $14,870,000 and $6,830,000 during the
six months ended June 30, 1996 and 1995, respectively. The effective tax rate
associated with such benefits was 31% and 34%, respectively. In connection
with the Distribution, the Company expects to become a party to the Tax
Sharing Agreement that currently exists among TCI, TCIC and certain other
subsidiaries of TCI. The Company's income tax benefits include intercompany
allocations from TCI of current income tax benefits of $26,333,000 and
$6,673,000 during the six months ended June 30, 1996 and 1995, respectively.
Following the Distribution the Company will cease to be a part of the TCI
consolidated tax group, and will only be able to realize current income tax
benefits to the extent that the Company generates taxable income. During the
first several years following the Distribution, the Company believes that it
will incur net losses for income tax purposes, and accordingly, will not be in
a position to realize income tax benefits on a current basis. For additional
information, see note 7 to the Audited Combined Financial Statements of the
Company.
41
<PAGE>
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993
--------------------- ------------------- ------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ---------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Programming and equip-
ment rental........... $ 133,688 64% 18,641 62% 9,075 78%
Installation........... 75,215 36 11,638 38 2,604 22
--------- --- ------- --- ------ ---
Total revenue......... 208,903 100 30,279 100 11,679 100
--------- --- ------- --- ------ ---
Operating costs and ex-
penses:
Programming, satellite,
marketing and distri-
bution charges from
PRIMESTAR Partners.... (78,250) (37) (11,632) (38) (4,445) (38)
Other operating:
Allocations from TCIC.. (15,916) (8) (4,367) (14) (1,577) (14)
Other.................. (1,884) (1) -- -- -- --
--------- --- ------- --- ------ ---
(17,800) (9) (4,367) (14) (1,577) (14)
Selling, general and
administrative:
Selling and marketing.. (81,764) (39) (1,777) (6) (54) --
Bad debt............... (10,549) (5) (1,529) (5) (30) --
Allocations from TCIC.. (7,817) (4) (1,080) (4) (795) (7)
Other general and ad-
ministrative.......... (17,937) (8) (4,721) (16) (168) (1)
--------- --- ------- --- ------ ---
(118,067) (56) (9,107) (31) (1,047) (8)
--------- --- ------- --- ------ ---
Operating Cash Flow
(deficit)............ (5,214) (2) 5,173 17 4,610 40
Depreciation........... (55,488) (27) (14,317) (47) (6,513) (56)
--------- --- ------- --- ------ ---
Operating loss........ $ (60,702) (29%) (9,144) (30%) (1,903) (16%)
========= === ======= === ====== ===
</TABLE>
- --------
(1) Operating Cash Flow is a commonly used measure of value and borrowing
capacity within the Company's industry, and is not intended to be a
substitute for a measure of performance in accordance with generally
accepted accounting principles and should not be relied upon as such.
Revenue increased $178,624,000 or 590% and $18,600,000 or 159% during 1995
and 1994, as compared to the corresponding prior year period. Exclusive of
installation revenue, the Company's average monthly revenue per Authorized
Unit was $41, $28 and $27 during 1995, 1994 and 1993, respectively. The 46%
increase in the average monthly revenue per Authorized Unit from 1994 to 1995
is primarily attributable to (i) the full year effect of the higher basic
service rates and the increased availability of premium and pay-per-view
services that followed the July 1994 completion of the conversion from an
analog to a digital signal, and (ii) a March 1995 increase in the monthly
equipment rental fee.
Programming, satellite, marketing and distribution charges from PRIMESTAR
Partners increased $66,618,000 or 573% and $7,187,000 or 162% during 1995 and
1994, respectively, as compared to the corresponding prior year periods. The
average aggregate monthly amount per Authorized Unit charged by PRIMESTAR
Partners was $24, $17 and $13 during 1995, 1994 and 1993, respectively. In
general, such increases reflect the higher programming, satellite and national
marketing expenses that PRIMESTAR Partners began to incur following the July
1994 completion of the conversion from an analog to a digital signal.
Other operating expenses increased $13,433,000 or 308% and $2,790,000 or
177% during 1995 and 1994, respectively, as compared to the corresponding
prior year periods. Most of such operating costs and expenses were allocated
from TCIC to the Company based upon a standard charge for each of the various
customer fulfillment activities performed by TCIC. As discussed above, TCIC
and the Company have entered into a Fulfillment Agreement with respect to
installation, maintenance, retrieval and other customer fulfillment services
to be provided by TCIC following the Distribution. See the Condensed Pro Forma
Combined Financial Statements of the Company.
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Selling, general and administrative expenses increased $108,960,000 or
1,196% and $8,060,000 or 770% during 1995 and 1994, respectively, as compared
to the corresponding prior year periods. In 1995, selling and marketing
expenses represented 39% of revenue and bad debt expense represented 5% of
revenue. Such relatively high percentages are attributable to the Company's
efforts to increase its subscriber base.
General and administrative allocations from TCIC are generally based upon
the estimated cost of the general and administrative services provided to the
Company. Following the Distribution, charges for administrative services
provided by TCIC will be made pursuant to the Transition Services Agreement.
For information concerning the pro forma effect of the Transition Services
Agreement, see the Condensed Pro Forma Combined Financial Statements of the
Company.
The $41,171,000 or 288% and $7,804,000 or 120% increases in depreciation
during 1995 and 1994, respectively, as compared to the corresponding prior
year periods, are the result of increases in the Company's depreciable assets
due primarily to capital expenditures with respect to the Company's satellite
reception equipment. See the Condensed Pro Forma Combined Financial Statements
of the Company.
The Company's 20.86% share of PRIMESTAR Partners' net losses decreased
$2,753,000 or 23% and increased $6,198,000 or 112% during 1995 and 1994,
respectively, as compared to the corresponding prior year periods. For
additional information concerning PRIMESTAR Partners' operations, see related
discussion above.
The Company's income tax benefit was $21,858,000, $6,872,000 and $2,505,000
during 1995, 1994 and 1993, respectively. The effective tax rates associated
with such benefits were 32%, 33% and 34%, respectively. The Company's income
tax benefits include intercompany allocations from TCI of current income tax
benefits of $36,530,000, $9,611,000 and $3,403,000 during 1995, 1994 and 1993
respectively. As described above, during the first several years following the
Distribution, the Company believes that it will not be in a position to
realize current income tax benefits. For information concerning the Tax
Sharing Agreement, see note 7 to the Audited Combined Financial Statements of
the Company.
LIQUIDITY AND CAPITAL RESOURCES
In recent periods, the Company has relied upon non-interest bearing advances
from TCI in order to fund the majority of the Company's working capital
requirements and capital expenditures. During the six months ended June 30,
1996, and the year ended December 31, 1995, such advances aggregated
$164,230,000 and $397,529,000, respectively. Following the Distribution, it is
anticipated that TCIC will provide the Company with funding pursuant to the
TCIC Credit Facility, subject to the Company's best efforts obligations to
refinance the TCIC Credit Facility. Following the termination of the TCIC
Credit Facility, whether at maturity or in connection with any such
refinancing, it is not expected that TCI will continue to be a source of long-
term financing for the Company. For a description of the terms of the TCIC
Credit Facility, see "Arrangements Between TCI and the Company After the
Distribution-- TCIC Credit Facility."
The Company also has relied upon advances from PRIMESTAR Partners to finance
the majority of the cost of constructing the Company Satellites. Such
advances, which aggregate $386,219,000 at June 30, 1996, are reflected as a
liability in the combined balance sheets included in the historical combined
financial statements of the Company. PRIMESTAR Partners financed such advances
to the Company through borrowings under the PRIMESTAR Credit Facility, which
was in turn supported by letters of credit arranged for by affiliates of all
but one of the partners of PRIMESTAR Partners. PRIMESTAR Partners'
indebtedness under the PRIMESTAR Credit Facility aggregated $433,000,000 at
June 30, 1996. The Company expects that the amount due to PRIMESTAR Partners
will be settled through the sale or lease of all the DBS capacity of the
Company Satellites. The ultimate settlement of the amounts advanced from
PRIMESTAR Partners is dependent, in part, on the outcome of certain
uncertainties. For additional information concerning such uncertainties, see
"Risk Factors--Risks Regarding Deployment of High Power Satellites--
Uncertainty Regarding Alternative Strategies," "Risk Factors--Risks of Adverse
Government Regulations and Adjudications" and "Business of the Company--High
Power Satellites."
During the six months ended June 30, 1996, and the year ended December 31,
1995, the Company's operating activities provided cash of $61,338,000 and
$64,193,000, respectively. Most of the cash provided by
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<PAGE>
the Company's operating activities during such periods is attributable to the
intercompany allocation of current income tax benefits from TCI, and to
changes in the Company's receivables, prepaids, accruals and payables and
subscriber advance payments ("Operating Assets and Liabilities"). As described
above, during the first several years following the Distribution, the Company
believes that it will not be in a position to realize income tax benefits on a
current basis. In addition, the timing and amount of changes in the balances
of the Company's Operating Assets and Liabilities are subject to a variety of
factors, certain of which are outside of the control of, or not easily
predicted by, the Company. Exclusive of the effects of intercompany
allocations of current income tax benefits, and changes in the Company's
Operating Assets and Liabilities, the Company's operating activities provided
(used) cash of $7,052,000 and $(4,007,000) during the six months ended June
30, 1996, and year ended December 31, 1995, respectively. For the first
several years following the Distribution, the Company believes that its
operating activities will represent a reliable source of liquidity only to the
extent that the Company is able to generate Operating Cash Flow.
During the six months ended June 30, 1996, and the year ended December 31,
1995, the Company used cash of $36,684,000 and $104,128,000, respectively, to
fund the cost of constructing the Company Satellites and $175,339,000 and
$442,782,000, respectively, to fund (i) the acquisition and installation of
satellite reception equipment, and (ii) certain other capital expenditures.
See the combined statements of cash flows included in the historical combined
financial statements of the Company. The amount of capital required to fund
the acquisition and installation of satellite reception equipment in the
future will be primarily a function of (i) subscriber growth and churn rates,
and (ii) the outcome of the uncertainties associated with the deployment of
the Company Satellites. See "Risk Factors--Risks Regarding Deployment of High
Power Satellites--Uncertainty Regarding Alternative Strategies." As described
above the scheduled rates for the services to be provided by TCIC pursuant to
the Fulfillment Agreement exceed the schedule rates upon which charges,
historically, have been allocated to the Company for such services prior to
the Distribution. In this regard, the installation charges allocated to the
Company by TCIC aggregated $28,212,000 and $69,154,000 during the six months
ended June 30, 1996 and the year ended December 31, 1995, respectively. If the
Fulfillment Agreement had been in effect on January 1, 1995, the estimated
installation fees payable by the Company to TCIC would have been $37,177,000
and $91,021,000 during the six months ended June 30, 1996 and the year ended
December 31, 1995, respectively. The amount payable in future periods by the
Company to TCIC under the Fulfillment Agreement will be dependent upon the
level of fulfillment services provided by TCIC to the Company. See the
Condensed Pro Forma Combined Financial Statements of the Company.
At June 30, 1996, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $56,000,000.
As part of the compensation paid to the Company's four master sales agents,
the Company has agreed to pay certain residual sales commissions equal to a
percentage of the programming collected from subscribers installed by such
master sales agents during specified periods following the initiation of
service (generally five years). During the six months ended June 30, 1996, and
the year ended December 31, 1995, residual payments to such master sales
agents aggregated $4,597,000 and $2,178,000, respectively.
PRIMESTAR Partners currently broadcasts from K-1, a medium power satellite
that is nearing the end of its operational life. Although the Company believes
that a replacement satellite will be successfully deployed prior to the
expiration of K-1's operational life, such deployment is dependent on a number
of factors that are outside of the Company's control and no assurance can be
given as to the successful deployment of a replacement satellite. The failure
to deploy a fully operational replacement satellite by the end of K-1's
operational life (or the operational life of any temporary in-orbit
replacement that might be available) could have a material adverse effect on
both the Company and PRIMESTAR Partners. See "Risk Factors--Risks of Failure
or Delay in Launch of GE-2--Risks of Satellite Defect, Loss or Reduced
Performance," "Risk Factors--Risks of Failure or Delay in Launch of GE-2--Risk
of Inclined Orbit Operations" and "Business of the Company-- PRIMESTAR By
TCI--The PRIMESTAR(R) Service."
On or before the Distribution Date, the Company will enter into the
Indemnification Agreements with TCIC and TCI UA 1. The Indemnification
Agreement with TCIC will provide for the Company to reimburse TCIC for any
amounts drawn under an irrevocable transferable letter of credit issued by the
Bank of New York for the account of TCIC to support the Company's share of
PRIMESTAR Partners' obligations under the GE-2
44
<PAGE>
Agreement. The original drawable amount of such letter of credit is
$25,000,000, increasing to $75,000,000 if PRIMESTAR Partners exercises its
option under the GE-2 Agreement to extend the term of such agreement for the
remainder of the useful life of GE-2. See "Risk Factors--Risks of Failure or
Delay in Launch of GE-2--Risks of Satellite Defect, Loss or Reduced
Performance," and "Business of the Company--PRIMESTAR by TCI--The PRIMESTAR(R)
Service."
The Indemnification Agreement with TCI UA 1 will provide for the Company to
reimburse TCI UA 1 for any amounts drawn under the TCI UA 1 Letter of Credit,
which supports the PRIMESTAR Credit Facility that was obtained by PRIMESTAR
Partners to finance advances to Tempo for payments due in respect of the
Company Satellites and that is supported by letters of credit arranged for by
affiliates of the partners of the Partnership (other than GEAS).
The Indemnification Agreements further provide for the Company to indemnify
and hold harmless TCIC and TCI UA 1 and certain related persons from and
against any losses, claims, and liabilities arising out of the respective
letters of credit or any drawings thereunder. The payment obligations of the
Company to TCIC and TCI UA1, respectively, under such Indemnification
Agreements will be subordinated in right of payment with respect to certain
future obligations of the Company to financial institutions.
At June 30, 1996, the Company had guaranteed approximately $4,200,000 of
certain minimum commitments of PRIMESTAR Partners to purchase satellite
reception equipment.
Under the PRIMESTAR Partnership Agreement, the Company has agreed to fund
its share of any capital contributions and/or loans to PRIMESTAR Partners that
might be agreed upon from time to time by the partners of PRIMESTAR Partners.
Additionally, those subsidiaries of the Company that are general partners of
PRIMESTAR Partners are liable as a matter of partnership law for all debts of
PRIMESTAR Partners in the event the liabilities of PRIMESTAR Partners were to
exceed its assets. The Company has additional contingent liabilities related
to PRIMESTAR Partners. See notes 4, 5 and 7 to the Unaudited Combined
Financial Statements of the Company.
The Company has agreed to bear all obligations with respect to stock options
that will be granted on the Distribution Date pursuant to the Stock Option
Agreements. Assuming the Distribution had occurred on June 30, 1996, options
would have been granted pursuant to the Stock Option Agreements to purchase an
aggregate of 2,341,660 shares of Series A Common Stock at a per share exercise
price of approximately $7.00. Additionally, based upon (i) a preliminary
estimate of the market value of the shares underlying the Stock Option
Agreements and (ii) the aforementioned assumed exercise price that would have
been calculated if the stock options evidenced by the Stock Option Agreements
had been granted on June 30, 1996, the Company estimates that the pro forma
stock compensation obligation associated with the Stock Option Agreements
would have been $39,500,000 at June 30, 1996. Such obligation will be settled
by the Company's issuance of Series A Common Stock to the extent options are
exercised in accordance with the terms of the Stock Option Agreements. The
Company will also grant 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
the TCI Series D Preferred Stock and the Convertible Notes, as such conversion
features are adjusted as a result of the Distribution. For additional
information, see "Arrangements Between TCI and the Company After the
Distribution" and the Condensed Pro Forma Combined Financial Statements of the
Company.
Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet Communications, Inc., a Delaware
corporation ("ResNet"), for a purchase price of $5,396,000. Prior to the
investment by the Company, ResNet was a wholly owned subsidiary of LodgeNet
Entertainment Corporation, a Delaware corporation ("LodgeNet"). ResNet was
formed by LodgeNet in February 1996 to engage in the business of operating as
a "private cable operator" under applicable federal law, providing video on
demand, basic and premium cable television programming, and other interactive,
multi-media entertainment and information services to subscribers in multiple
dwelling units with facilities that do not use any public right-of-way (the
"ResNet Business"). ResNet agreed to purchase from the Company up to $40
million in satellite reception equipment, to be used in connection with the
ResNet Business exclusively over a five-year period
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<PAGE>
(subject to a one-year extension at the option of ResNet if ResNet has not
purchased the full $40 million in equipment during the five-year initial
term). The Company also agreed to make a subordinated convertible term loan to
ResNet, in the principal amount of $34,604,000, the proceeds of which can be
used only to purchase such equipment from the Company. The term of the loan is
five years with an option by ResNet to extend the term for one additional
year. The total principal and accrued and unpaid interest under the loan is
convertible over a four-year period into shares of common stock of ResNet that
will provide the Company with the right to acquire an additional 32% of the
issued and outstanding common stock of ResNet. The Company's only recourse
with respect to repayment of the loan is conversion into ResNet stock or
warrants as described below. Under current interpretations of the FCC rules
and regulations related to restrictions on cross-ownership of cable and
satellite master antenna television operations, the Company would be
prohibited from holding 5% or more of the stock of ResNet and consequently
could not exercise the conversion rights under the convertible loan agreement.
The Company is required to convert the convertible loan at such time as
conversion would not violate such currently applicable regulatory
restrictions. In addition, ResNet granted the Company an option to acquire an
additional 13.01% of the issued and outstanding common stock of ResNet at
appraised fair market value at the time of exercise of the option. The option
is exercisable between December 21, 1999 and the maturity of the convertible
loan. Upon the maturity date of the convertible loan, if the Company has been
prevented from converting the loan or exercising the option in full due to the
previously described regulatory restriction, ResNet will issue warrants to the
Company to acquire the stock that has not been issued pursuant to conversion
of the loan and the stock that the Company has a right to acquire by exercise
of the option. The exercise price of the warrants to be issued in respect of
the convertible loan will be de minimis, and the exercise price of the
warrants to be issued in respect of the option will be equivalent to the
exercise price under such option. The Company has agreed to customary
standstill provisions with respect to acquisitions of more than 10% of the
outstanding stock of LodgeNet and any additional shares of ResNet. For
additional information concerning the ResNet Transaction, see "Business of the
Company--PRIMESTAR By TCI--ResNet Transaction."
Following the Distribution, the Company will require significant additional
capital to meet its operating plan. Such capital will be used primarily to
purchase additional inventory of satellite reception equipment for sale or
rental to subscribers, to finance the cost of installing new customers and to
provide for working capital and other liquidity requirements that may arise.
As described above, the TCIC Credit Facility is intended to provide the
Company with a source of liquidity until such time as the Company is able to
arrange for permanent financing. In this regard, the Company currently is
seeking to arrange for a possible bank financing and may, in the future seek
to obtain additional financing through an institutional private placement, a
public offering of debt securities or a combination of such sources. The
Company anticipates that it will use proceeds from any bank or other permanent
financing, together with any net cash provided by operations, to (i) repay all
amounts due under the TCIC Credit Facility and (ii) fund the Company's
projected liquidity requirements for the next eighteen months. Although the
Company believes that it will be able to obtain such permanent financing,
there can be no assurance that this will be the case. Additionally, faster-
than-anticipated subscriber growth or other contingencies may require
additional financing. The Company expects that, if additional financing is
needed, it would seek to obtain such financing through the capital markets,
including the high-yield debt market. No assurance can be given however that
such additional financing would be available on terms satisfactory to the
Company, or that sufficient financing to meet the Company's needs would be
available on any terms.
The degree to which the Company becomes leveraged may adversely affect the
Company's ability to compete effectively against better capitalized
competitors and to withstand downturns in its business or the economy
generally, and could limit its ability to pursue business opportunities that
may be in the interests of the Company and its stockholders. The Company's
ability to service its debt will require growth in the Company's Operating
Cash Flow. There can be no assurance that the Company will be successful in
increasing its Operating Cash Flow by a sufficient magnitude or in a timely
manner or in raising additional equity or debt financing to enable it to meet
its debt service requirements. In addition, a failure of the Company to have
adequate access to capital may adversely affect the Company's ability, or
choice, to launch proposed products and services in the time frames discussed
herein. See "Risk Factors--Dependence on Additional Capital; Substantial
Leverage" and "Risk Factors--Limited Operating History; Operating Losses of
the Company."
46
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company was formed in connection with the Distribution to own and
operate certain businesses of the TCI Group constituting all of the TCI
Group's interests in the Digital Satellite Business. At the time of the
Distribution, TCI will cause to be transferred to the Company and its
subsidiaries the ownership interests in (i) the business of distributing
PRIMESTAR(R), known as PRIMESTAR By TCI, which as of June 30, 1996 had an
installed base of approximately 659,000 Authorized Units, (ii) an aggregate
20.86% partnership interest in PRIMESTAR Partners, and (iii) Tempo, which
holds TCI's high power satellite interests.
TCI, through various subsidiaries, has been engaged in the business of
distributing PRIMESTAR(R) since December 1990. TCI Digital Satellite
Entertainment, Inc., a Colorado corporation ("Digital"), was incorporated in
February 1995 in order to consolidate the PRIMESTAR By TCI distribution
business into one subsidiary. In connection with the Distribution, Digital
will be merged with and into the Company, as a means of reincorporating
Digital in Delaware.
OVERVIEW OF DIGITAL SATELLITE TELEVISION INDUSTRY
Digital satellite television services use communications satellites,
broadcasting at Ku-band or higher frequencies, to transmit multichannel video
programming directly to consumers, who receive such signals on home satellite
dishes or HSDs. Such satellites operate in geosynchronous orbit above the
equator, from orbital positions or "slots" allocated by international
agreement to the U.S. and other national governments and assigned by such
governments in accordance with local law. Orbital slots are designated by
their location East or West of the zero meridian, measured in degrees of
longitude, and comprise both a physical location and an assignment of
broadcast spectrum in the applicable frequency band, divided into 32 frequency
channels, each with a useable bandwidth of 24 MHZ. Such frequency channels are
sometimes referred to as "transponders" because each transponder on a
satellite generally transmits on one of such channels. With digital
compression technology, each frequency channel can be converted on average
into five or more analog channels of programming, thereby enabling the digital
satellite service operator to offer a broader variety of programming choices
than analog satellite systems and enabling subscribers of digital satellite
services to receive laser disc-quality picture and compact disc-quality sound
from the satellite.
The operator of a digital satellite television service typically enters into
agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellite, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming sharing a
given transponder and other necessary data streams (such as conditional access
information). Each transponder's signal is then uplinked, or transmitted, to
the transponder owned or leased by the service operator on the service's
satellite, which receives and transmits the signal to HSDs configured to
receive it.
In order to receive the programming, a subscriber requires (i) a properly
installed HSD, which includes a dish-shaped antenna, low noise block converter
("LNB") and related equipment, (ii) an integrated receiver/decoder ("IRD,"
sometimes referred to herein as the "satellite receiver" or "set-top box"),
which receives the data stream from each broadcasting transponder, separates
it into separate digital programming signals, decrypts and decompresses those
signals that the subscriber is authorized to receive and converts such digital
signals into analog radio frequency signals, and (iii) a television set, to
view and listen to the programming contained in such analog signals. A
subscriber's IRD is generally connected to the digital satellite service
operator's authorization center by telephone, to report the purchase of
premium and pay-per-view channels.
The FCC authorizes two types of satellite services for transmission of
television programming: Broadcast Satellite Service ("BSS"), which operates at
high power (120 to 240 watts per channel) in the Ku-band, and Fixed Satellite
Service ("FSS"), which includes medium power (20 to 100 watts per channel)
services
47
<PAGE>
transmitting in the Ku-band, as well as low power services transmitting in the
C-band. Both high power BSS satellites and medium power FSS satellites are
used for digital satellite television services. High power signals can
generally be received by HSDs of approximately 18 inches in diameter, while
medium power signals require HSDs of 27 to 39 inches in diameter (depending on
the geographical location of the HSD). However, both high power and medium
power digital satellite services provide the same high video and audio
quality.
MARKET FOR DIGITAL SATELLITE SERVICES
The Company believes that the market for digital satellite products and
services is growing and that there is significant unsatisfied demand for high
quality, reasonably priced television programming. According to industry
sources, there are approximately 96 million television households in the U.S.
and it is estimated that approximately 63 million cable subscribers pay an
average of approximately $33 per month for multichannel programming services.
The Company believes, therefore, that the potential market in the U.S. for
video, audio and data programming services consists of (i) the approximately 8
to 11 million households that do not have access to cable television (not
"passed by cable"), (ii) the approximately 20 to 21 million households
currently passed by cable television systems with fewer than 40 channels of
programming, (iii) other existing cable subscribers who desire a greater
variety of programming, improved video and audio quality, better customer
service and fewer transmission interruptions, and (iv) the Commercial Market.
The large base of potential customers will enhance the Company's ability to
increase its installed base of Authorized Units.
PRIMESTAR Partners estimates that, based on the number of Authorized Units
installed, its share of current digital satellite television subscribers was
approximately 41.8%, as of September 30, 1996, as compared to an estimated
52.5% share for DirecTv/USSB, an estimated 5.4% share for EchoStar and an
estimated 0.3% share for Alphastar, as of such date.
The Company believes that the following factors will contribute to the
growth of the market for digital satellite services:
Unserved or Underserved by Cable. Approximately 8 to 11 million households
are not passed by cable and approximately 20 to 21 million households are in
areas served by cable systems with fewer than 40 channels. Cable systems with
sufficient channel capacity (generally 54 or more channels) and good quality
cable plant will not require costly upgrades to add bandwidth or incur
significant maintenance costs in order to offer digital programming services.
The Company believes, however, that based on current compression technology,
the number of channels that a cable system would have to remove from its
existing service offerings in order to use them for digital services may, in
the case of cable systems with limited channel capacity, result in the value
of their analog programming offering being degraded and their subscribers
alienated. Accordingly, pending the availability of advanced digital
compression technology now under development, such smaller cable systems will
be required to incur substantial costs to upgrade their plant to expand
channel capacity before they can introduce digital services. Due to the
substantial capital investment required for wide scale deployment of fiber-
based digital services, several cable companies have delayed originally-
announced deployment schedules. The Company believes areas served by cable
systems which have not been fully upgraded currently provide a prime market
for digital satellite services.
Commercial Market. The Company believes that digital satellite services are
well suited for hotels, motels, bars, MDUs, schools and other organizations
within the Commercial Market. In addition to the wide variety of
entertainment, sports, news and other general programming, the Company expects
that some commercial organizations will in the future provide a market for
educational, foreign language, and other niche video and audio programming, as
well as data services.
Demand for More Choice in Television Programming, Reliable Service and
Better Quality Picture and Sound. Prior to the growth of cable television
services, television viewers were offered a relatively limited number of
channels. As the number of channels increased, consumer demand for more
programming choices also increased. As a result, the multichannel video market
has experienced significant growth, both in terms of
48
<PAGE>
the number of content producers creating programming and the number of
channels available to viewers. The Company expects this trend will continue
and that consumers will desire even more programming choices than are
available through cable. The Company believes consumers are also demanding
more reliable service and improved picture quality compared to what has
historically been offered by over-the-air VHF and UHF broadcasters and by
cable.
STRATEGY
The Company's primary objectives are to maintain its position in the market
as one of the premier providers of satellite delivered entertainment
programming and to become one of the major providers of informational services
to the home and business. It is expected that the Company's strategy will be
achieved as follows:
High Quality Programming. The Company offers consumers the PRIMESTAR(R)
service, which consists of a wide variety of high quality programming,
delivered digitally for laser-disc quality image and compact-disc quality
sound, for a competitive price. The Company believes that the image and sound
quality of the PRIMESTAR(R) service is superior to that provided by most
existing cable systems and wireless cable providers, which transmit analog
signals to their subscribers, and is comparable to that of other digital
satellite television providers, including those using compression methods
based on the MPEG-2 digital compression architecture. The Company further
believes that its combination of price and services provides consumers with
greater value than the respective price and service offerings of other current
digital satellite service providers. In addition, when GE-2 (or its
replacement, GE-3) is successfully launched and begins commercial operation,
PRIMESTAR(R) will increase its channel offerings from 94 video and audio
channels to over 140 channel offerings, while reducing its dish size from 36
inches to approximately 29 inches for subscribers in the majority of the U.S.
See "--PRIMESTAR By TCI--The PRIMESTAR(R) Service."
PRIMESTAR Partners currently broadcasts from K-1, a medium power satellite
located at 85(degrees) W.L. that was launched in January 1986 and is nearing
the end of its useful operational life. K-1 is ultimately expected to be
replaced by GE-2, a medium power satellite that is currently scheduled to be
launched on January 31, 1997 and to be operational within 60 days after
launch. In November 1996, pending the availability of GE-2, K-1 will be
replaced by K-2, another medium power satellite, which is currently located at
81(degrees) W.L. and will be moved to 85(degrees) W.L. K-2 is expected to
begin inclined orbit operations in January 1997, however, and if a replacement
satellite is unavailable, PRIMESTAR(R) subscribers could begin to experience
unacceptable outage levels in the month of June 1997. Thus, a delay in the
availability of GE-2 could result in a material adverse effect on PRIMESTAR
Partners and the Company. If GE-2 suffers a launch failure, another
communications satellite, GE-3, which is currently expected to be available
for launch in the summer of 1997, will be launched to replace GE-2. See "Risk
Factors--Risks of Failure or Delay in Launch of GE-2--Risks of Satellite
Defect, Loss or Reduced Performance" and "Risk Factors--Risks of Failure or
Delay in Launch of GE-2--Risk of Inclined Orbit Operations."
Continued Subscriber Growth. The Company continues to grow its substantial
customer base through its multiple sales and distribution channels, which
include master sales agents and their sub-agents, direct sales
representatives, telemarketing, cable system operators and consumer retail
outlets. The Company recently began to distribute its services through Radio
Shack, one of the nation's largest consumer electronics retailers. In February
1996, PRIMESTAR Partners entered into a national agreement with Radio Shack
under which PRIMESTAR(R) is expected to be sold through more than 6,500 Radio
Shack stores nationwide. As of October 1996, PRIMESTAR(R) is available for
sale in approximately 2,200 Radio Shack stores located in the Company's
authorized distribution territories, and the Company estimates that when the
arrangement is fully implemented, PRIMESTAR(R) will be available for sale in
over 2,500 such stores. In addition, the Company supports its multiple
distribution channels with a wide variety of advertising, marketing and
promotional activities. See "--PRIMESTAR By TCI--Distribution" and "--
PRIMESTAR By TCI--Marketing."
Differentiating the Company's Offerings Through Superior Customer
Service. The Company believes that providing outstanding service, convenience
and value is essential in developing long term customer relationships.
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The Company offers consumers a "one-stop shopping" service which includes
programming, installation, maintenance, reliable customer service and
satellite reception equipment. The Company maintains its own National Call
Center, providing customers with round-the-clock telephone support for sales,
installation, authorization and billing, as well as to schedule repair and
customer service calls, 365 days per year. See "--PRIMESTAR By TCI--
Distribution."
Providing Consumers Attractive Alternatives to Obtain Equipment. The
Company's equipment rental program, which includes free maintenance and
repair, provides significant benefits to customers, who are not required to
buy satellite equipment in order to receive the PRIMESTAR(R) service. Because
PRIMESTAR By TCI is marketed as a service, with programming, equipment rental,
maintenance and 24-hour customer service included in the monthly charge, the
up-front costs to new subscribers of PRIMESTAR By TCI are generally lower than
the up-front costs to new subscribers of the Company's competitors, who must
typically purchase and install HSDs, satellite receivers and related
equipment. Moreover, since the Company generally owns, services and installs
all customer premises equipment for its rental customers, the Company protects
its subscribers from the inconvenience of equipment failure, maintenance
concerns, obsolete technology, self-installation and expired warranties. In
addition, the Company recently began offering consumers several options for
purchasing, rather than renting, the necessary equipment, and intends to
implement a consumer financing program in late 1996 through an independent
financial institution. See "--PRIMESTAR By TCI--Equipment and Installation."
Expanding Commercial Opportunities For Digital Satellite Services. The
Company believes that the Commercial Market offers a substantial opportunity
for growth and is therefore of strategic importance. With an enhanced channel
capacity in its audio and video entertainment programming, subject to the
successful launch and operation of GE-2 (or its replacement, GE-3), the
Company anticipates having the ability to successfully penetrate the
Commercial Market. The Company also intends to pursue opportunities to provide
private network service to businesses, and to participate in the growing
market for distance learning. In that connection, the Company is exploring
opportunities to work together with At Home Corporation, a joint venture among
TCI, Kleiner Perkins Caufield & Byers, Comcast and Cox, to deliver Internet
content to personal computers, and ETC w/tci, Inc., a majority-owned
subsidiary of TCI, formed to develop and distribute content and technology
applications for education, training and communications, as well as other
Internet and educational content providers.
Strategic Marketing Alliances. The Company intends to broaden its product
and service offerings to further complement its existing video services by
forming alliances with strategic partners, such as its existing non-exclusive
relationships with Bose and Apple. See "--PRIMESTAR By TCI--Marketing." The
Company believes that such alliances can be important not only to expand the
market awareness of the Company's name and service offerings, but also to
increase the Company's potential market by expanding the scope of the use of
its product and services.
Focusing on Customers Currently Underserved by Multichannel Programming. The
Company seeks to maximize penetration in the "underserved" marketplace,
defined by the Company as those areas not passed by cable, or served by cable
systems with fewer than 40 channels. To date, the Company's primary market
focus has been the rural market, which is underserved for variety, choice and
convenience in audio and video entertainment programming. With the successful
launch of GE-2 (or its replacement, GE-3), the Company also intends to pursue
subscriber growth in the more urban and suburban markets within its
territories.
High Power Opportunities. The Company continues to assess strategies for
delivering high power digital satellite signals to the consumer's home. The
Company's current strategy is to implement a high power DBS system by
deploying one of the Company Satellites into the 119(degrees) W.L. orbital
slot under its Construction Permit and using the capacity of such Company
Satellite to provide a DBS service either (i) as a limited service
complementary to off-the-air television, basic cable and other programming
services, or (ii) subject to future advances in digital channel compression,
as a full-service, stand-alone offering, in either case, either directly or
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through PRIMESTAR Partners. The Company also intends to review any new
opportunities that may arise to secure additional spectrum capacity.
PRIMESTAR BY TCI
The PRIMESTAR(R) Service. PRIMESTAR Partners was formed as a limited
partnership in 1990 by subsidiaries of TCI, several other cable operators and
G.E. Initially, PRIMESTAR Partners' product was an analog service limited to
seven broadcast television superstations, TV Japan and three pay-per-view
stations. In 1994, PRIMESTAR Partners was among the first satellite television
providers to use digital compression technology for superior delivery of
picture and sound. PRIMESTAR Partners currently provides 94 channels of
entertainment programming throughout the continental U.S., via medium power
satellite, to HSDs approximately 36 inches in diameter. During the first
quarter of 1997, subject to the successful launch and operation of GE-2,
PRIMESTAR Partners will have the capacity to increase its offerings to about
140 channels of programming while reducing its dish size to approximately 29
inches for subscribers in the majority of the U.S. These smaller dishes can be
attached more easily to a subscriber's wall or roof.
PRIMESTAR(R) includes 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. See "--Programming." PRIMESTAR Partners
secures its rights to broadcast such programming by entering into non-
exclusive affiliation agreements with programming vendors. In addition to
video services, PRIMESTAR(R) includes digital audio and data services,
including Ingenius, which provides access to news, business news, stock
quotes, sports, weather and entertainment information to subscribers through
their personal computers.
PRIMESTAR Partners currently broadcasts from 14 transponders on K-1, a
medium power Ku-band satellite owned and operated by GE Americom. Digital
satellite television service requires that subscribers install HSDs for a
clear line of sight to the transmitting satellite. K-1 is located at 85 W.L.
in the FSS orbital arc and provides coverage to the entire continental U.S.
with favorable "look" angles, meaning that the satellite is viewable from the
entire continental U.S. at angle elevations high enough to facilitate
installation of HSDs in most areas. Additionally, K-1's orbital location over
the East coast of the U.S. is considered favorable because the signal travels
a shorter path through the relatively moist air of the Eastern sea board,
minimizing potential interference from bad weather. The overall PRIMESTAR
system is designed for high availability and operates consistently without any
significant interference approximately 99.8% of the time. Pursuant to its
agreement with GE Americom, up to 10 of PRIMESTAR Partners' transponders are
subject to preemption if transponders on GE Americom's second FSS satellite,
K-2, cease to be operational. However, the Company does not believe that
PRIMESTAR Partners' use of preemptible transponders is likely to interfere in
any material respect with the operation of the PRIMESTAR(R) service.
PRIMESTAR Partners currently uses proprietary authorization, encryption and
digital compression technology developed by an affiliate of GI. The Company
believes that the compression technology used by PRIMESTAR Partners, which is
known as DigiCipher-1(R), produces picture and sound quality comparable to
that of other digital satellite television providers, including those using
compression methods based on the MPEG-2 digital compression architecture.
Uplinking, encoding and compression services are provided by WTCI, an
affiliate of TCI, under a Master Digital Transmission Agreement between WTCI
and the Partnership. Although the DigiCipher-1(R) satellite receiver used by
PRIMESTAR(R) customers is not currently compatible with MPEG-2 compression
systems, it can be upgraded to be compatible through equipment provided by GI,
the cost of which equipment is projected to range from $150 to $200 at
commercial volumes.
PRIMESTAR Partners has entered into the GE-2 Agreement, pursuant to which GE
Americom has agreed to provide the Partnership with service on 24 transponders
on GE-2, subject to the successful launch of that satellite. GE-2, which is
currently scheduled to be launched on January 31, 1997 and to be operational
within 60 days thereafter, would replace K-1, which is nearing the end of its
useful life. See "Risk Factors--Risks of Failure or Delay in Launch of GE-2--
Risks of Satellite Defect, Loss or Reduced Performance" and "Risk
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Factors--Risks of Failure or Delay in Launch of GE-2--Risk of Inclined Orbit
Operations." The additional transponders on GE-2 would enable PRIMESTAR
Partners to offer about 140 channels of programming. In addition, the use of
higher power transponders on GE-2, as compared to K-1, is expected to enable
PRIMESTAR(R) subscribers to utilize 29 inch HSDs in the majority of the U.S.,
rather than the 36-inch dishes currently required, without a meaningful
increase in signal interference.
The GE-2 Agreement is for an initial term of four years from the date on
which service is made available to the Partnership on GE-2 following GE-2's
becoming commercially operational. The term is extendible for the remainder of
the useful life of GE-2 (the "End-of-Life Option") at the option of PRIMESTAR
Partners exercised prior to December 31, 1996. Nonpreemptible service will be
provided to the Partnership on 18 of the transponders on GE-2 and preemptible
service will be provided on six transponders. Preemptible transponders will be
reassigned to restore service to protected customers and services should such
protected customers or services experience satellite failure. The Company does
not believe, however, that, during the early stages of GE-2's operational
life, the use of preemptible transponders by PRIMESTAR Partners is likely to
interfere in any material respect with the operation of the PRIMESTAR(R)
service. Under the GE-2 Agreement, if PRIMESTAR Partners exercises the End-of-
Life Option, GE Americom would be required to make available another
communications satellite, GE-3, to serve as an in-orbit spare for GE-2
(referred to as "orbital location protected service"). After orbital location
protected service is being provided and effective upon the successful launch
of GE-4 (as described below), the Partnership's transponders would become
nonpreemptible. If GE-2 suffers a launch failure, GE-3 (which is currently
expected to be available for launch in the summer of 1997) will be launched to
replace GE-2. In that event, GE-3 will not be available to serve as an in-
orbit spare for GE-2; however, if PRIMESTAR Partners exercises the End-of-Life
Option, GE Americom would make available another communications satellite, GE-
4, to replace GE-3, sometime in the second half of 1998. If a launch failure
or other defect or damage affecting GE-2 and GE-3 were to prevent or
materially delay the commercial operation of both such satellites, the
business of both PRIMESTAR Partners and the Company could be materially and
adversely affected.
If, after exercise of the End-of-Life Option, PRIMESTAR Partners intends to
use more than six of its transponders for uses other than providing
PRIMESTAR(R) service, GE Americom may reduce service from orbital location
protected service to nonpreemptible or preemptible service, as the case may
be. However, the Partnership shall be entitled to restoration on GE-3 of the
transponders on GE-2 which suffer a transponder failure, which restored
transponders shall continue to be nonpreemptible or preemptible, as the case
may be, until such time as GE-4 becomes operational, at which time they shall
become nonpreemptible transponders. If PRIMESTAR Partners exercises the End-
of-Life Option, PRIMESTAR Partners will have a further right to negotiate to
obtain capacity on any successor satellite to GE-2 launched by GE Americom at
85(degrees) W.L.
As contemplated by the PRIMESTAR Partnership Agreement, the Partnership does
not distribute its programming directly, but utilizes distributors to market
the PRIMESTAR(R) service and contract with subscribers. Currently, affiliates
of each of the Partnership's partners other than GEAS, including the Company,
are authorized Distributors of PRIMESTAR(R). However, the PRIMESTAR
Partnership Agreement does not require that Distributors be affiliated with
the Partnership's partners. None of the Distributors currently has a formal
written distribution agreement with PRIMESTAR Partners, although PRIMESTAR
Partners and the Distributors have attempted to negotiate such an agreement
from time to time since 1990. All of the Partnership's distribution
arrangements are currently non-exclusive. The PRIMESTAR Partnership Agreement
also contemplates the possibility that the Partnership may establish a
separate national marketing company to distribute PRIMESTAR(R); however, the
Partnership has not taken any action to create such a national marketing
company, and the creation of such a national marketing company would require a
supermajority vote of the Partners Committee.
The Company and other Distributors set their own retail pricing and are
responsible in their respective territories for installation, maintenance and
retrieval of customer premises equipment, authorization of subscribers, and
billing and collection of monthly and other fees, and bear all risks of loss
relating thereto. The
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Partnership negotiates and enters into agreements with programmers, arranges
for satellite capacity through its agreements with GE Americom and is
responsible, through its Master Digital Transmission Agreement with WTCI, for
the uplinking and compression of programming signals. In addition, the
Partnership provides marketing and administrative support, including national
advertising and a national toll-free number, "1-800-PRIMESTAR," that
automatically transfers potential customers to one of the Distributors, based
on the potential customers' zip codes. Potential customers in the Company's
service areas who call the "1-800" number and key in their zip codes are
transferred automatically to the Company's National Call Center. In return for
such services, the Partnership collects from the Distributors a monthly
programming fee based on the number of Authorized Units receiving such
programming plus a separate monthly authorization fee based on each
Distributor's total number of Authorized Units.
The Company markets and distributes the Partnership's equipment and services
to households and businesses in its assigned territories under the name
PRIMESTAR By TCI. The Company's territories as a PRIMESTAR(R) Distributor
comprise communities in the vicinity of TCI's cable television franchise areas
and other areas assigned by the management of PRIMESTAR Partners, in each case
on a non-exclusive basis. The Company's territories cover approximately 45% of
the geographic area of the U.S. and 19,163 zip codes, as of June 1996. The
Company estimates that approximately 38% of the country's 96.3 million
television households reside in the Company's territories.
Programming. The Company currently offers consumers three primary
programming packages, which provide a wide variety of programming selections,
as detailed in the chart below. The PrimeFamilysm package offers 74 channels
of programming with 14 commercial-free premium movie channels in addition to a
selection of other channels. The PrimeEntertainmentsm package offers 64
channels of programming and gives the customer four commercial-free movie
channels as well as a combination of a number of popular channels. Lastly, the
PrimeValuesm package offers customers 52 channels of expanded programming.
Each of the packages includes a free monthly programming guide. As of June 30,
1996, the monthly prices for the PrimeFamilysm package, the
PrimeEntertainmentsm package and the PrimeValuesm package were $44.99, $29.99
and $22.99, respectively. Most of the Company's customers rent their equipment
and pay an additional $10 monthly charge for equipment rental, which includes
free maintenance and 24-hour customer service.
The Company also offers 11 channels of pay-per-view movies and events and
niche services on an "a la carte" basis such as ABC, NBC, CBS, FOX and PBS (to
those subscribers unable to receive such networks through local affiliates),
The Golf Channel, TV Japan and Ingenius.
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The Company's three primary programming packages consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PRIMEVALUE/SM/ PRIMEENTERTAINMENT/SM/ PRIMEFAMILY/SM/
PACKAGE PACKAGE PACKAGE
52 CHANNELS 64 CHANNELS 74 CHANNELS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
A & E All PrimeValue/SM/Channels All PrimeEntertainment/SM/Channels
CSPAN 1
Cartoon Plus: Plus:
CNBC Classic Sports Cinemax--Multichannel (2)
CNN CMT Cinemax Selecciones (2)
Discovery CNN International/CNN-FN HBO--Multichannel (3)
Disney (2) E! HBO en Espanol (3)
ESPN Encore
Faith & Values Encore Multiplex (2)
Family Channel ESPN 2
Headline News Sci-Fi
Learning Channel STARZ!
Lifetime TCM
MTV The Weather Channel
Nickelodeon
Prevue
QVC
Regional Sports Networks (15)
TBS
TNN
TNT
Univision
USA
Digital Audio Channels (14)
- --------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1996, the Company had an installed base of approximately
659,000 Authorized Units. Subscriptions to the Company's (i) premier
programming package, the PrimeFamily SM package, (ii) mid-level
PrimeEntertainment SM package, and (iii) basic PrimeValue SM package comprised
approximately 39%, 26% and 35%, respectively of the Company's Authorized Units
at June 30, 1996. Exclusive of installation revenue, the Company's average
monthly revenue per Authorized Unit was $44 and $41 for the six months ended
June 30, 1996 and the year ended December 31, 1995, respectively. At June 30,
1996, the Company's customers represented approximately 47% of PRIMESTAR
Partners' estimated 1.4 million installed Authorized Units.
The Company contracts with and bills its residential and commercial
subscribers directly for PRIMESTAR(R) services. Residential subscribers may
terminate their service at any time upon notice to the Company while commercial
subscribers must provide 90 days' written notice to the Company prior to the
expiration of their contractual term to terminate their service. A commercial
customer can terminate the contract prior to the expiration of the contractual
term by paying 75% of the remaining amount due.
In an effort to minimize the Company's churn rate, the Company has
implemented new policies, including a more stringent automatic disconnect
policy for subscriber non-payment and a tightened credit check policy for new
subscribers. The Company also believes that its churn rate is affected by
subscribers' ability to rent, rather than purchase, the PRIMESTAR(R) satellite
reception equipment, which both attracts subscribers unable or unwilling to
make the financial commitment required to purchase such equipment and reduces a
subscriber's cost of dropping the service.
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Satellite reception equipment reclaimed from terminating subscribers is
tested, refurbished as necessary and placed back into service. Used equipment
in good working order is used, among other places, in master antenna and other
commercial installations where such equipment is not visible to the end user.
Distribution. The Company distributes PRIMESTAR(R) services through multiple
distribution channels. The Company's Master Agent Program, direct sales force,
a state-of-the-art National Call Center for orders, information and customer
service and a recently implemented agreement with Radio Shack form a wide-
reaching distribution network. The Company has engaged four master sales
agents, Metron Digital Services, Inc., CVS Systems, Inc., Resource
Electronics, Inc. and Recreation Sports and Imports, Inc. (collectively, the
"Master Agents"), each of which has extensive experience distributing C-band
direct-to-home satellite equipment. Master Agents generally do not sell
directly to customers, but recruit, train and maintain a network of sub-agents
comprised generally of full service independent satellite retailers in the
Company's target markets, including rural and other areas that are not served
or are underserved by cable television. The sub-agents sell PRIMESTAR(R)
services on behalf of the Company and install, service and maintain customer
premises equipment for the Company's subscribers. Authorization of new
customers is provided by the National Call Center. At June 30, 1996, the
Company's Master Agents had over 1,400 active sub-agents and in the first six
months of 1996 the Master Agent Program accounted for approximately 50% of the
Company's new business.
The Company believes that the Master Agents, who are responsible for the
acts of their sub-agents, are currently able to manage the diverse network of
satellite retailers more effectively than the Company could do so directly.
Master Agents are responsible for maintaining their sub-agents' inventories of
HSDs and other customer premises equipment, which are provided by the Company
on consignment. The Company pays the Master Agents commissions on equipment
leased or sold by their sub-agents, as well as an installation reimbursement
to cover the cost of each new installation and a 10% commission on monthly
programming revenue received from subscribers enrolled through the Master
Agent Program, for a contractually determined period of time (generally five
years). Master Agents are responsible for compensating their sub-agents.
The Company's direct sales force solicits potential subscribers by
telephone, makes door-to-door sales calls, sets up booths at special events
and otherwise markets the Company's products and services to customers in
target markets in its authorized distribution areas. At June 30, 1996, the
direct sales force consisted of approximately 820 employees throughout the
Company's service areas operating out of the Company's five regional offices
and several field offices. To date, the main focus of the direct sales force
has been rural and semi-rural communities. Direct sales employees are paid
pursuant to a tiered compensation plan with varying commission arrangements
based on productivity. New subscriptions obtained by the direct sales force
are referred to the Company's National Call Center for authorization, which in
turn dispatches the new orders to the nearest TCI cable system for
installation.
In order to support its direct sales force, the Company obtains
installation, maintenance, retrieval, inventory management and other customer
fulfillment services from TCIC for Company customers enrolled by its direct
sales force or National Call Center. Pursuant to the Fulfillment Agreement,
TCIC will continue to provide fulfillment services to the Company following
the Distribution with respect to customers of the PRIMESTAR(R) medium power
service. The Fulfillment Agreement, among other things, sets forth the
responsibilities of TCIC with respect to fulfillment services, including
performance standards and penalties for nonperformance, and provides scheduled
rates to be charged to the Company for the various customer fulfillment
services to be provided by TCIC. The Company retains sole control under the
Fulfillment Agreement to establish the retail prices and other terms and
conditions on which installation and other services will be provided to the
Company's customers.
The National Call Center, which, as of June 30, 1996, housed more than 450
employees, takes subscription orders and provides both sales support and
customer service. The National Call Center offers customers round-the-clock
telephone support for sales, installation, authorization and billing, as well
as for repair and customer service, 365 days per year. During the six months
ended June 1996, the National Call Center handled over 3.3 million customer
service calls and over 400,000 sales calls. In addition, the Company engages
teleservices
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vendors to assist the Company in providing these services. The Company trains
the employees of these teleservices vendors and works closely with them to
ensure that its existing and potential subscribers receive quality customer
service.
In addition to the Master Agent Program, direct sales force and National
Call Center, the Company has recently begun distributing its services through
certain national consumer electronics retailers. In February 1996, PRIMESTAR
Partners entered into a national agreement with Radio Shack, one of the
nation's largest consumer electronics retailers, under which PRIMESTAR(R) is
expected to be available through more than 6,500 Radio Shack stores
nationwide. Under this agreement, Radio Shack is compensated based on the
number of installations generated. As of October 1996, PRIMESTAR(R) is
available for sale in approximately 2,200 Radio Shack stores located in the
Company's authorized distribution territories, and the Company estimates that
when the arrangement is fully implemented, PRIMESTAR(R) will be available for
sale in over 2,500 such stores. Retail points of sale will be in the Company's
authorized distribution territories. The Company's distribution network is
further supported by approximately 900 local market retailers, such as
hardware stores and convenience stores, which promote the Company's services
and further assist the Company in its distribution efforts.
The Company believes that its use of a number of different distribution
channels has been an important factor in the success of its sales efforts over
the past 18 months and will continue to fuel subscriber growth. During 1995,
the Company expanded its points of sale over seven-fold, from 325 to
approximately 2,400. Furthermore, the Company's sub-agents ranked highest in
customer satisfaction in a study conducted by the SBCA in August 1995. The
Company's sub-agents scored highest for post-sale customer support and
salesperson knowledge of the industry and technology, as well as programming.
Moreover, the SBCA research showed that the Company's service strategy ranked
first as the customer's choice for a "better buying experience." The Company
intends to continue to target multiple distribution channels and to expand on
its existing satellite retailer distribution network and presence with
consumer electronics outlets.
Equipment and Installation. Unlike other digital satellite television
services, PRIMESTAR(R) does not require consumers to purchase or finance the
equipment needed to receive its programming. The Company provides the HSD,
satellite receiver and remote control to subscribers for a monthly rental fee
starting from about $10 per month, which includes ongoing maintenance and
service at no additional charge. (The monthly equipment rental fee is normally
included in a service package that includes various levels of basic and
premium programming.) Satellite receivers are manufactured by GI, and packaged
by GI with remote controls, and HSDs are manufactured by multiple vendors,
under agreements with PRIMESTAR Partners. Pursuant to such agreements, each
Distributor orders and purchases its inventory of customer premises equipment
directly from the vendor, and is responsible for certain minimum purchases
based on forecasts provided to the vendor through PRIMESTAR Partners.
Approximately 99% of the Company's subscribers currently elect to rent their
equipment from the Company, and the Company believes that the ability to
obtain PRIMESTAR(R) without a large initial cash outlay is a significant
factor in the Company's early acceptance by consumers. However, for those
subscribers who would prefer to own their equipment, the Company recently
implemented two alternative purchase options: (i) subscribers who agree to
purchase the PrimeEntertainmentSM or PrimeFamilySM package for one year and
who pay in full for such package in advance are given the option to purchase a
single satellite receiver for $199 plus an installation charge of $199 and
(ii) subscribers who wish to purchase two satellite receivers are given the
option to purchase the first receiver for $199 and a second used receiver for
$325, with the installation charge of the first receiver set at $199 and the
installation price of the second receiver reduced to $75, and such subscribers
are not required to commit to a one-year subscription and may purchase either
the PrimeValueSM, PrimeEntertainmentSM or PrimeFamilySM package. In order to
facilitate the purchase option and provide subscribers with additional payment
choices, the Company will implement a consumer financing program in late 1996
through an independent financial institution. The consumer financing program
will be available to customers who elect either of the two purchase options,
but all customers participating in such program would be required to purchase
a one-year subscription to their programming package in advance. The Company
believes
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<PAGE>
that an attractive financing option may provide customers with a greater
incentive to purchase the equipment, increasing revenues and decreasing churn.
PRIMESTAR(R) equipment incorporates proprietary technology and must be
purchased from the Company or another authorized Distributor or retailer. For
those customers who elect one of the purchase options described above, the
Company currently provides a free one-year in-home service warranty for the
purchased equipment.
In addition to monthly fees for programming and the purchase or lease of
equipment, the Company generally charges new subscribers an installation fee,
which is currently $199. In order to insure that HSDs are properly pointed and
aligned to receive the PRIMESTAR(R) signal, the Company strongly recommends
professional installation. The Company also offers qualified subscribers an
opportunity to enter into subscription contracts that allow for the option of
paying their installation fee over time. Further, from time to time, the
Company offers special installation prices on a promotional basis. Certain of
the Company's competitors offer consumers the option of self-installation of
the HSD and other equipment for their digital satellite systems, with an
installation kit that retails for approximately $70.
Marketing. The Company engages in extensive local and regional marketing,
advertising and promotional activities to increase consumer awareness of
PRIMESTAR(R), to promote the sale and lease of PRIMESTAR(R) equipment and to
generate subscriptions to PRIMESTAR(R). To complement the national marketing
support received from PRIMESTAR Partners, the Company operates a central
advertising strategy that also supports regional marketing efforts. The
Company's advertising strategy focuses on five important selling points for
potential subscribers: (i) program variety, (ii) good value, (iii) digital
quality picture and sound, (iv) no equipment to buy, and (v) on-going
equipment maintenance and service at no extra charge. The Company also
provides its network of sub-agents and direct sales force with marketing
support ranging from cooperative advertising funds to customized advertising
campaigns. The Company intends to continue these efforts in the future.
The Company's current regional and local advertising strategy includes
television, print and radio advertisements, direct mail campaigns, handouts of
brochures and flyers and participation in local events, including the display
of posters, banners and pop-up displays. The Company has engaged a media
agency to provide media counsel and services to aid the Company in planning,
placing and measuring results in regional and local advertising and media
programs. The Company has also engaged an advertising agency to develop all
strategic and creative efforts in advertising and a marketing fulfillment
agency to provide direct mail, collateral materials and other marketing
services.
The Company, from time to time, promotes subscriptions to its programming
service by offering discounts or free services for a limited period of time.
For example, the Company has offered a discount for annual subscriptions,
whereby customers, by paying annually, have been entitled to get one month for
free. In addition, the Company has provided coupons to new customers which
offer programming discounts, providing customers with the opportunity to try
many of the Company's premium services. Finally, the Company has also provided
free pay-per-view movies to new subscribers for a limited period of time.
The Company engages independent retailers as display representatives who
display promotional materials about the Company. The Company uses such display
representatives to promote its service and to attain customer referrals. The
Company pays the display representative a one time referral fee for each
eligible subscriber who installs the service within sixty days of the
referral.
The Company has initiated a joint marketing alliance with Bose under the co-
brand name "PRIMESTAR/Bose Home Theater systems." Pursuant to this alliance,
the Company and Bose will offer a home theater system which includes the Bose
Companion satellite surround system, a complete surround sound system designed
specifically for use with home satellite systems.
The Company also engages in two joint marketing efforts with TCI. First, the
Company, since March 1996, has been distributing Kid Control(TM), a child-size
remote control unit supplied by TCI. The Kid Control(TM) units
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are channel selectors designed solely for children and help parents monitor
and control television viewing. They are pre-programmed with the most popular
children's programming to provide a secure lineup of age-appropriate
entertainment. Second, as a sign of its commitment to education, the Company,
along with TCI, launched the PRIMESTAR Goes To School program which provides
schools not wired for cable with free access to PRIMESTAR(R) equipment and 500
hours of commercial-free "Cable in the Classroom" programming per month. This
educational package is offered free of charge. The program is designed to
provide educational programming and data services and offer access to training
to inner city, rural and other schools that do not have access to cable and
that are within the Company's territories. From its inception in November 1995
through June 30, 1996, over 1,100 schools have enrolled in the program.
The Company has also entered into a joint marketing agreement with Apple,
pursuant to which the Company is expected to market and resell certain Apple
products with value-added enhancements for education and home uses. The
Company is authorized to provide schools that obtain PRIMESTAR(R) with
discount coupons toward the purchase of Apple computers, and intends to work
with Apple (and potentially other personal computer vendors) to bundle home
computer sales with PRIMESTAR(R).
The Company intends to continue and increase its joint marketing efforts to
bundle products and services to the marketplace. The Company believes such
efforts will assist the Company in maximizing its potential market share.
ResNet Transaction. Effective as of October 21, 1996, the Company acquired
4.99% of the issued and outstanding capital stock of ResNet. ResNet was formed
by LodgeNet in February 1996 to engage in the business of operating as a
"private cable operator" under applicable federal law, providing video on-
demand, basic and premium cable television programming, and other interactive,
multi-media entertainment and information services to subscribers in multiple
dwelling units with facilities that do not use any public right-of-way (the
"ResNet Business"). ResNet agreed to purchase from the Company up to $40
million in satellite reception equipment, to be used in connection with the
ResNet Business exclusively, over a five-year period (subject to a one-year
extension at the option of ResNet if ResNet has not purchased the full $40
million in equipment during the five-year initial term). The Company also
agreed to make a subordinated convertible term loan to ResNet, the proceeds of
which can be used only to purchase such equipment from the Company. The term
of the loan is five years with an option by ResNet to extend the term for one
additional year. The total principal and accrued and unpaid interest under the
loan is convertible over a four-year period into shares of common stock of
ResNet that will provide the Company with the right to acquire an additional
32% of the issued and outstanding common stock of ResNet. The Company's only
recourse with respect to repayment of the loan is conversion into ResNet stock
or warrants as described below. Under current interpretations of the FCC rules
and regulations related to restrictions on the provision of cable and
satellite master antenna television services in certain areas, the Company
could be prohibited from holding 5% or more of the stock of ResNet and
consequently could not exercise the conversion rights under the convertible
loan agreement. The Company is required to convert the convertible loan at
such time as conversion would not violate such currently applicable regulatory
restrictions. In addition, ResNet granted the Company an option to acquire an
additional 13.01% of the issued and outstanding common stock of ResNet at
appraised fair market value at the time of exercise of the option. The option
is exercisable between December 21, 1999 and the maturity of the convertible
loan. Upon the maturity date of the convertible loan, if the Company has been
prevented from converting the loan or exercising the option in full due to the
previously described regulatory restrictions, ResNet will issue warrants to
the Company to acquire the stock that has not been issued pursuant to
conversion of the loan and the stock that the Company has a right to acquire
by exercise of the option. The exercise price of the warrants to be issued in
respect of the convertible loan will be de minimis, and the exercise price of
the warrants to be issued in respect of the option will be equivalent to the
exercise price under such option. The Company has agreed to customary
standstill provisions with respect to acquisitions of more than 10% of the
outstanding stock of LodgeNet and any additional shares of ResNet.
The Company also entered into a long-term signal availability agreement with
ResNet, pursuant to which the Company will transport to "private cable
systems" owned and operated by ResNet, the satellite signal used
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by PRIMESTAR Partners to transmit its programming services (the "PRIMESTAR
Satellite Signal") or the signal of a substantially comparable service.
"Private cable system" means a satellite master antenna television system that
provides television programming services to residential MDUs through cable
plant or other equipment that is located entirely on private property and does
not constitute a direct-to home distribution system or a franchised cable
system. The Company is acting solely to make the PRIMESTAR Satellite Signal
available to ResNet and is not acting as a distributor of any PRIMESTAR(R)
programming services to ResNet. ResNet must obtain its own rights from the
applicable programming networks to receive the programming services and to
distribute them to ResNet's subscribers. WTCI has the right from PRIMESTAR
Partners to use the PRIMESTAR Satellite Signal for delivery of programming for
the benefit of third parties, including private cable systems (the
"simultaneous use rights"). WTCI has agreed with the Company that private
cable systems designated by the Company, including the ResNet private cable
systems, will receive the transport of the PRIMESTAR Satellite Signal by WTCI
in exchange for the payment by the Company of a fee per subscriber per video
program signal. The agreement between the Company and WTCI is coextensive with
the agreement between WTCI and PRIMESTAR Partners, which expires on March 31,
2001, and there is no assurance that the Company will continue to have the
ability to make the PRIMESTAR Satellite Signal available after that date. In
its agreement with ResNet, the Company has committed to make the PRIMESTAR
Satellite Signal or the signal of a substantially comparable service available
for a term that extends substantially beyond March 31, 2001. If the Company
loses its contractual ability to make the PRIMESTAR Satellite Signal available
and is not able to make the signal of a substantially comparable service
available, the Company is obligated to reimburse ResNet for its costs in
obtaining a digital signal from another source, including the cost of
replacement equipment if the new digital signal is not compatible with
ResNet's equipment. While it is not possible at this time to quantify the
amount that the Company would be obligated to pay to ResNet under the
circumstances described above, the Company believes that the costs could be
significant, particularly if it were to lose its ability to make a signal
available towards the end of its agreement with ResNet.
The Company has also entered into a shorter term signal availability
agreement with one other customer and intends to pursue other signal
availability opportunities as they arise.
Counsel to PRIMESTAR Partners has advised the Company of the Partnership's
position that there are certain preconditions to WTCI's simultaneous use
rights which have not yet been satisfied and that such rights are not
assignable by WTCI to the Company. The Company believes that its transaction
with ResNet and similar transactions are permitted under the agreement between
WTCI and the Partnership. The Company does not believe that any potential
dispute with the Partnership regarding this issue is likely to have a material
adverse effect on the Company.
Use of PRIMESTAR(R) Name and Marks. The Company markets and distributes the
Partnership's equipment and services to households and businesses in its
assigned territories under the name PRIMESTAR By TCI. PRIMESTAR(R) is a
registered service mark of PRIMESTAR Partners. The Company believes that it
has the right to use the PRIMESTAR(R) name and certain related trademarks and
service marks as a Distributor, in substantially the same manner as it has
been using such name and marks, pursuant to its existing understandings with
PRIMESTAR Partners. However, the Company does not have a written license to
use the PRIMESTAR(R) name and marks, and there can be no assurance that the
Company will be entitled to continue to use the PRIMESTAR(R) name and marks in
the future.
HIGH POWER SATELLITES
Tempo DBS System. The Company desires to participate in the high power
segment of the digital satellite industry. The Company, through Tempo, holds a
Construction Permit issued by the FCC authorizing construction of a DBS system
consisting of two or more satellites delivering DBS service in 11 frequencies
at the 119(degrees) W.L. orbital position and 11 frequencies at the
166(degrees) W.L. orbital position. The 119(degrees) W.L. orbital position is
generally visible to HSDs throughout all fifty states; the 166(degrees) W.L.
orbital position is visible only in the western half of the continental U.S.,
as well as Alaska and Hawaii.
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Tempo is also a party to the Satellite Construction Agreement with Loral,
pursuant to which Tempo has agreed to purchase the Company Satellites and has
an option to purchase up to three additional satellites. Construction of each
of the Company Satellites has been completed except for the proper
installation of an antenna. As constructed, each Company Satellite can 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 226 watts per channel). Either such configuration can be
selected at any time, either before or after launch.
The Company has instructed Loral to install an antenna on Satellite No. 1
that is suitable for operation at the 119(degrees) W.L. orbital location, and
has arranged for the launch of Satellite No. 1 into that location on an Atlas
rocket scheduled for launch from Cape Canaveral by International Launch
Services on behalf of Lockheed Martin Corporation on or about February 27,
1997. If the launch of Satellite No. 1 is successful, the Company intends to
operate such satellite in paired transponder mode, broadcasting on 11 of the
16 available transponder pairs, in accordance with the Construction Permit.
The remaining five transponder pairs would be available as in-orbit spares.
The Company believes that the signal broadcast by Satellite No. 1, operating
in paired transponder mode at 226 watts per channel, could be received by
households in the majority of the U.S. using HSDs of less than 14 inches in
diameter.
The Company and the Partnership have been in discussions which contemplate
that the Company would make 100% of the capacity on Satellite No. 1 available
to the Partnership and that the Partnership would reimburse the Company for
the costs of operating such satellite. In such event, the Partnership would
also determine the disposition of Satellite No. 2 and the Company would be
unconditionally released from any obligation it may have to repay PRIMESTAR
Partners for its funding of the costs of constructing and launching the
Company Satellites. However, if the Company and PRIMESTAR Partners are unable
to reach agreement with respect to the foregoing, the Company will consider
other potential uses for the available capacity on Satellite No. 1, which
could include using such capacity to provide its own DBS service. Such
service, whether offered by the Partnership or the Company, would be a limited
service complementary to off-the-air television, basic cable and other
programming services or, subject to future advances in digital channel
compression, a full-service, stand-alone offering. See "--Competitive Position
of the Company's Proposed High Power DBS System" and "--Tempo Option."
The Company does not currently have definite plans for deployment of
Satellite No. 2. The Company is engaged in discussions with Telesat Canada, a
Canadian corporation ("Telesat"), with respect to the possible purchase of
Satellite No. 2 by Telesat, but there can be no assurance that any such
transaction will occur. If the Company does not enter into a binding agreement
to sell Satellite No. 2 by the end of this year, the Company currently intends
to place Satellite No. 2 in storage, for such future deployment or disposition
as the Company may determine.
The Company is currently in discussions with Loral and other parties with
respect to the possibility of obtaining an additional launch window in 1997 to
be used as a backup for the Company's February 1997 launch window. However,
there can be no assurance that such a launch window can be arranged at this
time or will be available on terms acceptable to the Company.
Competitive Position of the Company's Proposed High Power DBS System. It is
expected that the Company's proposed high power DBS system will broadcast from
11 transponders at the 119(degrees) W.L. orbital position. At current
compression ratios, the Company's 11 transponders could be used to broadcast
65 to 80 channels of entertainment and/or information programming, depending
on the type of programming. Although such a programming service would have
relatively limited channel capacity compared to DirecTv, EchoStar and the
proposed MCI/News Corp. service, the Company believes that such potential
competitive disadvantage may
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be offset in part (i) by the possibility of using smaller (less than 14 inches
in diameter) HSDs and (ii) by offering programming, such as multiplexed
premium movies, sports, pay-per-view and a selection of popular cable
networks, on an "a la carte" basis.
However, the Company does not currently have any agreements with PRIMESTAR
Partners or any programming vendors with respect to the operation of any such
DBS programming service, and does not currently have agreements with any
antenna manufacturers with respect to the purchase of HSDs of less than 14
inches. No assurances can be given that any such agreements can be obtained on
terms satisfactory to the Company, or that the Company or PRIMESTAR Partners
will be successful in pursuing such a strategy, or will not elect to pursue an
alternative strategy with respect to Satellite No. 1.
Moreover, although advances in digital compression technology currently
under development by third parties may in the future enable the Company to
obtain greater channel capacity from the 11 transponders on Satellite No. 1,
there can be no assurance that such new technology will be successfully
implemented or that, if implemented, the Company or PRIMESTAR Partners will be
able to obtain the rights to use such technology on satisfactory terms.
However, WTCI has agreed that if, prior to March 1, 1997, the Company engages
WTCI to provide digitization, compression and uplinking services for any high
power DBS system operated by the Company, and WTCI is authorized to use Imedia
Technology or other proprietary technologies to provide multiplexing of
digitally compressed video signals for the Company, WTCI shall provide such
multiplexing services to the Company for an agreed fee, based on WTCI's
incremental costs and other factors. The Company's rights under its agreement
with WTCI are assignable by the Company to any affiliate of the Company,
including for this purpose PRIMESTAR Partners.
If advanced digital compression technology becomes available to the Company,
such technology (or similar technology) will likely also be made available to
cable operators and/or other competitors of the Company and PRIMESTAR
Partners.
Satellite Launches. Pursuant to the Satellite Construction Agreement,
following the launch of a satellite, Loral will conduct in-orbit testing.
Delivery of a satellite takes place upon Tempo's acceptance of such satellite
after completion of in-orbit testing ("Delivery"). Subject to certain limits,
Loral must reimburse Tempo for Tempo's actual and reasonable expenses directly
incurred as a result of any delays in the Delivery of satellites. The in-orbit
useful life of each satellite is designed to be a minimum of 12 years. If in-
orbit testing confirms that the satellite conforms fully to specifications and
the service life of the satellite will be at least 12 years, Tempo is required
to accept the satellite. If in-orbit testing determines that the satellite
does not fully conform to specifications but at least 50% of its transponders
are functional and the service life of the satellite will be at least six
years, Tempo is required to accept the satellite but is entitled to receive a
proportionate decrease in the purchase price. If Loral fails to deliver a
satellite, it has 29 months to deliver, at its own expense, a replacement
satellite. Loral may make four attempts to launch the two Company Satellites;
however, if the two Company Satellites are not delivered in such four
attempts, Tempo may terminate the Satellite Construction Agreement. Tempo also
may terminate the contract in the event of two successive satellite failures.
Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has warranted that
all items other than the satellites delivered under the Satellite Construction
Agreement will be free from defects in materials or workmanship for one year
from the date of their acceptance and will perform in accordance with the
applicable performance specifications. Loral bears the risk of loss of the
Company Satellites until Delivery. Upon Delivery, title and risk of loss pass
to Tempo. However, Loral is obligated to carry risk insurance on each
satellite covering the period from the launch of the satellite through an
operating period of 180 days. Such risk insurance will cover (i) the cost of
any damages due under the Satellite Construction Agreement; (ii) the cost of
delivery of a replacement satellite in the event of a satellite failure; and
(iii) the refund of the full purchase price
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for each undelivered Company Satellite if Loral fails to deliver both Company
Satellites after four attempts. Loral is also required to obtain insurance
indemnifying Tempo from any third party claims arising out of the launch of a
satellite.
Tempo Option. In February 1990, Tempo entered into an option agreement with
PRIMESTAR Partners (the "Option Agreement"), granting PRIMESTAR Partners the
right and option (the "Tempo 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 Construction Permit. Under the Option Agreement, upon
the exercise of the Tempo Option, PRIMESTAR Partners would be obligated to pay
Tempo $1,000,000 (the "Exercise Price") and 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 Option and certain
related matters, Tempo and PRIMESTAR Partners subsequently entered into two
letter agreements (the "Tempo Letter Agreements"), which provided for, among
other things, the funding by PRIMESTAR Partners of milestone and other
payments due under the Satellite Construction Agreement, and certain related
costs, through advances by the Partnership to Tempo. The Partnership financed
such advances to Tempo through borrowings under the PRIMESTAR Credit Facility
which was in turn supported by letters of credit arranged for by affiliates of
the partners of the Partnership (other than GEAS). At June 30, 1996, the
aggregate funding provided to Tempo by PRIMESTAR Partners was $386,219,000,
and the balance due under the PRIMESTAR Credit Facility was $433,000,000,
including accrued interest.
The Tempo Letter Agreements permit the Partnership to apply its advances to
Tempo against any payments (other than the Exercise Price) due under the Tempo
Option and would not require Tempo to repay such advances unless the
Partnership elected to stop funding amounts due under the Satellite
Construction Agreement or failed to exercise the Tempo Option within the
period provided for in the Tempo Letter Agreements, in which event Tempo
could, in lieu of making such repayment, elect to assign all of its rights
relating to the Company Satellites to the Partnership.
On February 29, 1996, Tempo notified PRIMESTAR Partners of Tempo's belief
that PRIMESTAR Partners had failed to effectively exercise the Tempo Option
and that such failure had resulted in the termination of the Tempo Option
pursuant to the Tempo Letter Agreements. In that connection, Tempo advised the
Partnership that, based on and assuming the effective termination of the Tempo
Option, Tempo would reimburse the Partnership for its advances to Tempo by
assuming the Partnership's indebtedness for borrowed money under the PRIMESTAR
Credit Facility, to the extent used to fund such advances.
Tempo's belief that PRIMESTAR Partners failed to effectively exercise the
Tempo Option is based, among other things, on the fact that despite the
Partnership's notice to Tempo at the July 29, 1994 meeting of the Partners
Committee of its exercise of the Tempo Option, since such date, PRIMESTAR
Partners has failed to take any of the actions contemplated by the Option
Agreement to be taken following exercise of the Tempo Option, including (i)
advising Tempo whether it intends to purchase or lease the capacity of the DBS
system referred to in the Option Agreement, (ii) negotiating an agreement of
purchase or lease with Tempo and (iii) paying Tempo the Exercise Price.
Moreover, in December 1995, a representative of PRIMESTAR Partners informed
the Company that the July 1994 exercise of the Tempo Option had been intended
as a conditional exercise, although conditional exercises are not contemplated
by the Option Agreement, and that the conditions upon which the Tempo Option
had purportedly been exercised had not been met.
Counsel for PRIMESTAR Partners subsequently notified Tempo that the
Partnership disagreed with the positions advanced by Tempo in the February 29
letter, believed that the Partnership had effectively and irrevocably
exercised the Tempo Option and was asserting certain rights to the Company
Satellites. Counsel for PRIMESTAR Partners also advised Tempo that the
Partnership would impede any attempt by Tempo to repay PRIMESTAR Partners'
advances. The Partners Committee of the Partnership has failed, however, to
vote to confirm that the Partnership has irrevocably and unconditionally
exercised the Tempo Option. The Company
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believes that the Partnership's position is based primarily on equitable
arguments relating to the advances made by PRIMESTAR Partners to Tempo under
the Tempo Letter Agreements and their misreading of the terms of the Option
Agreement and the Tempo Letter Agreements. The Company believes the PRIMESTAR
Partners' claims regarding the Company Satellites and the Tempo Option are
without merit, but there can be no assurance that Tempo's position would
prevail in the event of any litigation regarding this controversy.
The Company and PRIMESTAR Partners are currently attempting to resolve their
disagreement regarding the Tempo Option. In that connection, the Company and
PRIMESTAR Partners have discussed the alternatives available to the Company
for deployment of the Company Satellites and the terms and provisions under
which the Company would make available to PRIMESTAR Partners 100% of the
capacity of one or more Company Satellites as so deployed. Although the
Company and PRIMESTAR Partners have not reached agreement with respect to any
such resolution of their dispute, and there can be no assurance that any such
resolution can be reached, or can be reached on terms acceptable to the
Company, the Company does currently believe that its dispute with PRIMESTAR
Partners will be resolved and does not believe that such dispute or its
resolution is reasonably likely to have a material adverse effect on the
Company.
Regardless of the outcome of the uncertainties with respect to the Company
Satellites, the Company believes that, although no assurance can be given,
alternative courses of action are available that would allow the Company to
recover the costs of constructing the Company Satellites.
COMPETITION
The business of providing subscription and pay television programming is
highly competitive. The Company faces competition from numerous other
companies offering video, audio and data products and services. The Company's
existing and potential competitors comprise a broad range of companies engaged
in communications and entertainment, including cable operators, other digital
satellite program providers, wireless cable operators, television networks and
home video products companies, as well as companies developing new
technologies. Many of the Company's competitors have greater financial,
marketing and programming resources than the Company. The Company expects that
quality and variety of programming, quality of picture and service and cost
will be the key bases of competition. See "Risk Factors--Competitive Nature of
Industry."
Cable Television. Cable television is currently available for purchase by
more than 90% of the approximately 96 million U.S. television households. The
cable television industry is an established provider of multichannel
programming, with approximately 66% of total U.S. television households
subscribing. Cable systems typically offer 25 to 78 channels of programming at
an average monthly subscription price of approximately $33.
The Company expects to encounter a number of challenges in competing with
cable television providers. First, cable television providers benefit from
their entrenched position in the domestic consumer marketplace. Second,
satellite television systems generally have not found it efficient to provide
any local broadcast programming and, under the Satellite Home Viewer Act of
1994, cannot provide broadcast network programming to subscribers except in
those limited areas where network programming is unavailable through local
affiliates. Accordingly, most PRIMESTAR(R) subscribers cannot obtain such
programming without utilizing a standard television antenna (traditional
rooftop or set-top antenna) or purchasing some level of cable service. Third,
since reception of digital satellite signals requires clear line of sight to
the satellite, it may not be possible for some households served by cable to
receive PRIMESTAR(R) as a result of large adjacent structures or other
obstacles. In addition to households lacking a clear line of sight to the
satellite, PRIMESTAR(R) is not available to households in apartment complexes
or other MDUs that do not facilitate or allow the installation of satellite
television equipment. Fourth, because IRDs are significantly more expensive
than analog cable converters, existing cable operators are able to offer their
subscribers the ability to have fully functional cable on multiple television
sets in a household without additional cost.
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The Company believes, however, that it can successfully compete with cable
television providers. While cable companies currently serve a majority of the
U.S. television market, the Company believes many may not be able to provide
the quality and variety of programming offered by digital satellite service
providers until they significantly upgrade their coaxial systems. Many cable
television providers are in the process of upgrading their systems and other
cable operators have announced their intentions to make significant upgrades.
Many proposed upgrades, such as conversion to digital format, fiber optic
cabling, advanced compression technology and other technological improvements,
when fully completed, will permit cable companies to increase channel
capacity, thereby increasing programming alternatives, and to deliver a better
quality signal. However, although cable systems with adequate channel capacity
may offer digital service without major rebuilds and the first such offerings
are expected in late 1996, the Company believes that, given the limits of
current compression technology, other cable systems that have limited channel
capacity will have to be upgraded to add bandwidth in order to provide digital
service, which upgrades will require substantial investments of capital and
time to complete industry-wide. As a result, the Company believes that there
will be a substantial delay before cable systems can offer programming
services equivalent to digital satellite television providers on a national
basis and that some cable systems may never be upgraded, subject to advances
in digital compression technology currently under development.
The Company believes that its current strategy of targeting rural and other
unpassed or underserved communities which may avoid head-to-head competition
with major cable television systems, partially offsets the cable industry's
entrenched position in the domestic consumer marketplace. The Company also
believes that anticipated advances of cable television, such as interactivity
and expanded channel capacity, may not be widely available in the near term at
a reasonable cost to the consumer. Moreover, if the substantial capital costs
of those advances, when available, are passed on to the consumer, it will
ultimately enhance the attractiveness of digital satellite television
programming.
Other Digital Satellite Service Providers. In addition to the Company,
several other companies offer, or are expected to offer, digital satellite
services and are, or will be, positioned to compete with the Company for home
satellite subscribers.
DirecTv successfully launched its first satellite in December 1993, its
second satellite in August 1994 and a third satellite in June 1995 as an in-
orbit spare. The third satellite may also be operated by DirecTv to provide
additional capacity. DirecTv's satellites, which are high power satellites,
are located at 101(degrees) W.L. DirecTv operates 27 transponders on each of
its existing satellites, enabling it to offer over 175 channels of digital
programming. As of July 31, 1996, according to trade publications, DirecTv
served approximately 1.8 million Authorized Units.
AT&T Corp. ("AT&T") and DirecTv have entered into an exclusive agreement for
AT&T to market and distribute DirecTv's DBS service and related equipment to
AT&T's large customer base. As part of the agreement, AT&T is making an
initial investment of approximately $137.5 million to acquire 2.5% of the
equity of DirecTv with an option to increase its investment up to 30% over
five years. This agreement provides a significant base of potential customers
for the DirecTv DBS system and allows AT&T and DirecTv to offer customers a
package of digital entertainment and communications services. As a result, the
Company is at a competitive disadvantage marketing to these customers. AT&T
and DirecTv also announced plans to jointly develop new multimedia services
for DirecTv under the agreement. In addition, affiliates of the National Rural
Telecommunications Cooperative have acquired territories in rural areas of the
U.S. as distributors of DirecTv programming.
USSB owns and operates five transponders on DirecTv's first satellite and
offers a programming service separate from DirecTv's service, with, as of
December 31, 1995, over 25 channels of premium video programming not available
from DirecTv. USSB's selection of programming services (and its use of
transponders on the same satellite used by DirectTv, which enables subscribers
to receive both DirectTv and
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USSB signals with a single HSD) allows it to be marketed as complementary to
DirecTv, partially offsetting the competitive handicap caused by its
relatively limited channel capacity. As of July 31, 1996, approximately one-
half of DirecTv's 1.8 million Authorized Units receive USSB programming. In
addition, USSB has a construction permit from the FCC that would allow it to
build and launch two high power DBS systems, one at 110(degrees) W.L. (with
three transponders) and one at 148(degrees) W.L. (with eight transponders).
The 110(degrees) W.L. orbital location would enable USSB to provide a second
high power DBS service to the continental U.S., although with limited channel
capacity. The 148(degrees) W.L. slot would allow USSB to transmit signals to
viewers in Alaska and Hawaii and could provide programming between the U.S.
and certain locations on the Pacific Rim.
EchoStar launched a high power satellite in December 1995, commenced
national broadcasting of programming channels in March 1996 and, as of June
30, 1996, broadcasts over 100 such channels. EchoStar was assigned 11
transponders at 119(degrees) W.L., the same orbital location as Tempo, and
acquired 10 transponders at such location, one transponder at 110(degrees)
W.L. and 11 transponders at 175(degrees) W.L. through a merger with DirectSat.
Following such merger, DirectSat, which became an EchoStar subsidiary,
launched a second satellite into the 119(degrees) W.L. orbital location in
September 1996. EchoStar is expected to increase its program offering to
approximately 125 channels when the EchoStar/DirectSat system is fully
operational. In addition, EchoStar acquired 24 frequencies at 148(degrees)
W.L. for $52.3 million in an FCC auction held in January 1996 of 28
frequencies at the 110(degrees) W.L. orbital location and 24 frequencies at
the 148(degrees) W.L. orbital location (the "FCC Auction"). Furthermore, in
August 1996, the FCC approved the prior assignment of Direct Broadcasting
Satellite Corporation's DBS permit for 11 frequencies at 61.5(degrees) W.L.
and 11 frequencies at 175(degrees) W.L. to another subsidiary of EchoStar.
MCI acquired the 28 frequencies at 110(degrees) W.L. in the FCC Auction for
$682.5 million. Thereafter, MCI entered into a joint venture with News Corp.
to build and launch a high power digital satellite system at 110(degrees) W.L.
The Company expects the MCI/News Corp. joint venture to commence broadcasting
operations of 175 programming channels by the end of 1997.
Alphastar commenced offering approximately 150 digital video and audio
channels of programming via a medium power FSS satellite in mid-1996 and plans
to expand to 200 channels by the end of 1997. The Alphastar service uses MPEG
2/DVB digital compression technology. Alphastar subscribers must generally use
36 inch satellite dishes, similar in size to those currently used by
PRIMESTAR(R) subscribers, rather than the 18 inch satellite dishes used by
customers of the high power services of DirecTv, USSB and EchoStar.
In addition, potential competitors may provide television programming at any
time by leasing transponders from an existing satellite operator. However, the
number of transponders available for lease on any one satellite is generally
limited, making it difficult to provide sufficient channels of programming for
a viable system.
The Company believes that the PRIMESTAR(R) medium power service can
successfully compete with other digital satellite service providers. Unlike
other current suppliers of digital satellite television, the Company does not
require customers to buy satellite reception equipment. PRIMESTAR By TCI is
marketed as a service, with programming, equipment rental, maintenance and 24-
hour customer service included in the monthly price, which currently ranges
from $32.99 to $54.99. In addition, each of the PRIMESTAR By TCI programming
packages includes a free monthly programming guide. The up-front costs to new
subscribers of PRIMESTAR By TCI, who are charged only an installation fee
(currently $199) and the first month's programming and equipment rental fees,
are generally lower than the up-front costs to new subscribers of
PRIMESTAR(R)'s competitors, who typically must purchase and install an HSD,
IRD and related equipment. Moreover, since the Company generally owns,
services and installs all home reception equipment, the Company protects its
subscribers from the inconvenience of equipment failure, maintenance concerns,
obsolete technology, self-installation and expired warranties. The Company
believes that when the cost of equipment is factored in, its service is priced
competitively, compared to the respective prices of other current digital
satellite service providers.
C-band Satellite Program Distributors. The Company also competes with C-band
satellite program distributors, such as the Netlink USA/Superstar Satellite
Entertainment joint venture ("Joint Venture"). The
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Joint Venture is a consolidated subsidiary of United Video Satellite Group,
Inc. ("UVSG"). UVSG is a consolidated subsidiary of TCI that is included in
the TCI Group. The Liberty Media Group holds the interest in the Joint Venture
that is not owned by UVSG. TCI's interests in the C-band satellite business
are not being transferred to the Company in connection with the Distribution.
C-band systems have been popular, (mostly in rural and semi-rural areas)
since the late 1970s, and in the aggregate serve approximately 2.1 million
subscribers. However, digital satellite television systems use Ku-band
frequencies that can be received by less expensive systems with significantly
smaller dishes than those used with C-band frequencies. As a result of the
smaller dish size, digital satellite television systems are more widely
accepted by consumers than C-band systems, particularly in urban areas.
Wireless Cable Systems. Other potential competitors of the Company are
multi-channel multi-point distribution systems ("MMDS"), which deliver
programming services over microwave channels to subscribers with special
antennas, and other so-called "wireless cable" systems. According to Wireless
Cable Association International, there are currently an estimated 190 wireless
cable systems operating in the U.S., serving an estimated 950,000 subscribers,
mostly with limited channel, analog service. However, the number of wireless
cable systems is likely to increase as virtually all markets have been
licensed or tentatively licensed, and developments in digital compression
technology will significantly increase the number of channels and video and
audio quality of wireless cable systems. Moreover, wireless cable systems may
provide their customers with local programming, a potential advantage over
digital satellite television systems. In 1995, several large telephone
companies acquired significant ownership in numerous wireless cable companies.
This infusion of money into the wireless cable industry can be expected to
accelerate its growth and its competitive impact. However, while it is
expected that most large wireless operators backed by local telephone
companies will upgrade to digital technology over the next several years, such
upgrades will require the installation of new digital decoders in customers'
homes and modifications to transmission facilities, at a potentially
significant cost. Wireless cable also generally requires direct line of sight
from the receiver to the transmitter tower, which creates the potential for
substantial interference from terrain, buildings and foliage.
Telephone Companies. In addition to the DBS system planned by the MCI/News
Corp. joint venture and AT&T's agreement with, and investment in, DirecTv,
certain regional telephone companies and other long distance telephone
companies could become significant competitors in the future, as they have
expressed an interest in becoming subscription television providers.
Furthermore, legislation recently passed by Congress removes barriers to entry
which previously inhibited telephone companies from competing, or made it more
difficult for telephone companies to compete, in the provision of video
programming and information services. Certain telephone companies have
received authorization to test market video and other services in certain
geographic areas using fiber optic cable and digital compression over existing
telephone lines. Estimates for the timing of wide-scale deployment of such
multichannel video service vary, as several telephone companies have pushed
back originally announced deployment schedules.
As more telephone companies begin to provide subscription television
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial financial
resources, and an existing infrastructure and may be able to subsidize the
delivery of programming through their position as the sole source of telephone
service to the home.
VHF/UHF Broadcasters. Most areas of the U.S. are covered by traditional
territorial over-the-air VHF/UHF broadcasters. Consumers can receive from
three to ten channels of over-the-air programming in most markets. These
stations provide local, network and syndicated programming free of charge, but
each major market is generally limited in the number of programming channels.
Congress is expected to consider the release of additional digital spectrum
for use by VHF/UHF broadcasters later this year.
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PRIMESTAR PARTNERSHIP AGREEMENT
Pursuant to the PRIMESTAR Partnership Agreement, the business and affairs of
the Partnership are managed and controlled by the Partners Committee, composed
of representatives of the partners and two independent members. The Company
has two voting representatives on the Partners Committee, Time Warner has two
voting representatives, and Cox, Comcast, Continental, Newhouse and G.E. each
have one voting representative. Ordinary decisions of the Partners Committee
require the consent of a majority of the members of the Partners Committee,
which majority must include a majority of the representatives of the partners.
Certain extraordinary decisions of the Partners Committee, including, without
limitation, decisions regarding the dissolution, merger or sale of
substantially all the assets of the Partnership; the admission of additional
partners; calls for capital contributions; the approval of the annual budget;
the appointment or dismissal of Partnership senior management; the
determination of the Partnership's policies with respect to the distribution
of its programming services; the selection of satellites (including successor
satellite capacity, the decision whether the Partnership should provide
services at BSS or higher frequencies and the decision to exercise the End-of-
Life Option); the determination to take any action that would cause the amount
of the letters of credit required to be issued in connection with the
Partnership's obligations under the GE-2 Agreement to exceed $100,000,000; the
decision to effect certain material changes to the GE-2 Agreement and certain
related agreements with respect to the letters of credit issued in connection
with the GE-2 Agreement; and the decision to provide any optional letters of
credit, or pledge, grant a security interest in or otherwise create a lien on
any material assets of the Partnership to secure the payment of reimbursement
obligations of the Partnership with respect to letters of credit issued in
connection with the GE-2 Agreement require, in addition to a majority vote,
the affirmative vote of at least six of the nine partner representatives on
the Partners Committee (assuming that no partner representative is required to
abstain in such vote), or such other vote as shall be required by the
PRIMESTAR Partnership Agreement if one or more partner representatives are
required to abstain in such vote under the terms of the PRIMESTAR Partnership
Agreement because of such partner's, or an affiliate's, interest in the
outcome thereof.
Pursuant to the PRIMESTAR Partnership Agreement, if the Company fails to pay
its share of capital contributions or loans that the partners agree to require
or that are contemplated by budgets or business plans approved by the
partners, or that are otherwise necessary in order to satisfy partnership
commitments, the Company's interest in the Partnership will be diluted and, if
such interest is diluted to less than 5%, its right to vote or exercise
certain other rights may be forfeited. See "Risk Factors--Dependence on
PRIMESTAR Partners."
CERTAIN AGREEMENTS
In addition, the Company is subject to the provisions of certain agreements
that may limit the ability of the Company to engage in, or invest in entities
that engage in, certain businesses, other than through the Partnership.
Tag-Along Agreement. Tempo is a party to the Tag-Along Agreement, originally
entered into by and among Cox Enterprises, Inc., Comcast, Continental and
Newhouse (subsidiaries of each of which are partners of the Partnership),
Tempo, TCIC and TCI Development Corporation, a subsidiary of TCIC. The Tag-
Along Agreement provides that if any party to the agreement, directly or
indirectly through any person controlled by such party (an "Investing Party"),
engages in, or makes an equity investment in any entity engaging or proposing
to engage in, the business of providing television programming by uplink to
BSS or higher frequency domestic satellite transponders, or otherwise becomes
entitled to exercise a management role with respect to any such entity, at any
time that such party or a person controlled by such party is a partner in the
Partnership, or within one year after it ceases to be a partner, then, subject
to certain exceptions, such party shall provide the other parties with a
written offer to participate in such investment or other transaction on terms
and conditions comparable to those available to the Investing Party, pro rata
in accordance with their respective percentage interests in the Partnership at
the time of such offer. The Tag-Along Agreement further provides that if a
party transfers assets to a person that is not majority owned or controlled by
such party but which person either is the "ultimate parent" of, or has the
same "ultimate parent" as, such party, then such party must cause such
affiliate
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to become a party to the Tag-Along Agreement. The term "ultimate parent" as
used in the Tag-Along Agreement has the meaning ascribed to such term in the
Hart-Scott-Rodino Antitrust Improvement Act of 1974, as amended ("HSR Act").
Generally under the HSR Act, the "ultimate parent" of a person is an entity
that directly or indirectly owns at least 50% of the voting securities of such
person or has the contractual right to designate 50% or more of a board of
directors of such person. The Tag-Along Agreement will terminate upon the
termination or dissolution of the Partnership, or, if earlier, when the
parties to the Tag-Along Agreement and their affiliates cease to be partners
of the Partnership.
Partnership Agreement Provisions Regarding Investments in Similar
Businesses. The PRIMESTAR Partnership Agreement provides, among other things,
that if any partner, or an affiliate of a partner, engages in, or makes an
equity investment in any entity engaging or proposing to engage in, the
business of providing television programming by uplink to FSS, BSS or higher
frequency domestic satellite transponders, directly or indirectly to HSDs, or
otherwise becomes entitled to exercise a management role with respect to any
such entity, then such partner (the "Notifying Partner") shall be required to
give notice of such investment or other transaction to the Partnership and the
other partners, and the Partnership, by vote of the Partners Committee, with
the Notifying Partner abstaining, shall have the right, but not the
obligation, to elect one of the following courses of action: (i) to remove the
Notifying Partner's representative from the Partners Committee, in which case
the Notifying Partner will no longer be entitled to make capital contributions
to the Partnership or to receive any financial or other information about the
Partnership, other than audited year-end financial statements and tax-related
information; or (ii) to purchase the Notifying Partner's entire interest in
the Partnership for a purchase price equal to the fair market value thereof,
payable in cash or, at the option of the Partnership, for a combination of
cash and a three-year promissory note. Notwithstanding the foregoing, the
Partnership will not have the right to exercise either of the foregoing
alternatives if the Notifying Partner, or its affiliate, acquires an equity
interest in an entity that engages in, or proposes to engage in, the business
of uplinking television programming to BSS or higher frequency domestic
satellite transponders, and the Partnership does not then uplink its
programming to BSS or higher frequency transponders and does not, within 120
days thereafter, make a commitment to such transmission method comparable to
the commitment of such other entity. The Partnership will also not have the
right to exercise either of such remedies if the Notifying Partner, or its
affiliate, offers each other partner who did not vote against the Partnership
making a commitment to such transmission method, or its affiliate, an
opportunity to participate with the Notifying Partner or its affiliate in its
equity interest in such BSS business.
EMPLOYEES
The Company had approximately 1,500 employees as of June 30, 1996. None of
the Company's employees are represented by a union and the Company believes
its employee relations are good.
After the Distribution, TCI will provide to the Company certain services and
other benefits, including certain administrative and other services that were
provided to the Company by TCI prior to the Distribution. Such services will
include (i) tax reporting, financial reporting, payroll, employee benefit
administration, workers' compensation administration, telephone, fleet
management, package delivery, management information systems, billing, lock
box, remittance processing and risk management services, (ii) other services
typically performed by TCI's accounting, finance, treasury, corporate, legal,
tax, benefits, insurance, facilities, purchasing, fleet management and
advanced information technology department personnel, (iii) use of
telecommunications and data facilities and of systems and software developed,
acquired or licensed by TCI from time to time for financial forecasting,
budgeting and similar purposes, including without limitation any such software
for use on personal computers, in any case to the extent available under
copyright law or any applicable third-party contract, (iv) technology support
and consulting services, and (v) such other management, supervisory, strategic
planning or other support services as the Company and TCI may from time to
time mutually determine to be necessary or desirable. See "Arrangements
Between TCI and the Company After the Distribution--Transition Services
Agreement."
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PROPERTIES
The Company owns no real property. The Company has entered into
noncancellable operating leases for all of its facilities, all of which expire
at various times through 2001. The Company believes that such facilities are
in good condition and are suitable and adequate for its business operations
for the foreseeable future.
The following table sets forth certain information concerning the Company's
principal properties as of August 31, 1996:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE EXPIRATION OF
DESCRIPTION/USE LOCATION FOOTAGE LEASE
--------------- -------- ----------- -------------
<S> <C> <C> <C>
Corporate Headquarters.. Englewood, Colorado 60,471 6/30/2001
National Call Center.... Englewood, Colorado 50,009 6/30/2001
Northwest Regional Of-
fice................... Lake Oswego, Oregon 3,236 3/31/1998
Northeast Regional Of-
fice................... State College, Pennsylvania 7,073 8/31/2000
Great Lakes Regional Of-
fice................... St. Charles, Missouri 4,300 2/28/1998
South Central Regional
Office................. Farmers Branch, Texas 4,328 8/31/1998
Southeast Regional Of-
fice................... Atlanta, Georgia 3,835 1/31/1997(1)
Stand-Alone Office...... Hazelhurst, Georgia 2,300 7/1/2000(1)
Stand-Alone Office...... Bogart, Georgia 2,400 5/1/1998(1)
</TABLE>
- --------
(1) The leases for the Southeast Regional Office and the Stand-Alone Office
located in Bogart, Georgia were entered into by TCI of Georgia, Inc. and
the lease for the Stand-Alone Office in Hazelhurst, Georgia was entered
into by TCI Cablevision of Georgia, in each case for the use and benefit
of the Company. The Company pays the rent on these facilities.
The Company leases additional properties as field offices to support its
sales force.
LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than certain legal
proceedings in the ordinary course of business that the Company believes will
not have a material adverse effect on the Company's financial position or
results of operations.
In July 1996, WTCI filed an application with the FCC for authorization to
construct and operate an earth station to uplink video programming to Tempo's
proposed DBS system utilizing the 119(degrees) W.L. orbital slot. In October
1996, EchoStar and DirectSat jointly filed an objection to the application,
alleging among other things that WTCI's uplink station would interfere with
operations of EchoStar's and DirectSat's DBS satellites at the same orbital
location. WTCI filed an opposition to EchoStar's and DirectSat's objection on
October 28, 1996 demonstrating that no harmful interference will result from
its proposed operations and responding to the objectors' other comments. If
the FCC denies WTCI's application, Tempo will be unable to operate its system.
WTCI expects, but cannot assure, that its application will be approved.
In July 1993, Tempo filed an application with the FCC proposing minor
modifications to the technical design of the satellites. Numerous existing and
potential DBS competitors have opposed Tempo's application. Approval by the
FCC of the proposed modifications is necessary before Tempo may launch the
satellites. Tempo expects that the FCC will act on the application when Tempo
notifies it of Tempo's intention to launch the satellites. Tempo expects, but
cannot assure, that the application will be approved. See "Regulatory
Matters--FCC Permits and Licenses".
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REGULATORY MATTERS
GENERAL
Tempo, as the holder of a U.S. DBS permit, and WTCI, as an applicant for a
new facility to uplink signals to satellites to provide DBS service to the
U.S., are subject to the regulatory authority of the FCC. Authorizations and
permits issued by the FCC are required for the operation of Tempo's satellites
and for its and WTCI's uplink facilities that will be used to transmit signals
to such satellites. As a distributor of DBS programming, Tempo and its
affiliates may also be affected by numerous laws and regulations, including
the Communications Act of 1934, as amended (the "Communications Act").
Although the non-technical aspects of high power DBS operations are
generally subject to less regulation than terrestrial broadcasting, some
regulations do apply and others are proposed. For example, high power DBS
operators which control the video programs they distribute, and DBS licensees
or permittees which are licensed as broadcasters, are subject to equal
employment opportunity requirements. Regulations proposed by the FCC (but not
yet adopted) include access requirements for Federal political candidates,
limitations on charges for advertising by political candidates and (subject to
the outcome of a pending constitutional challenge) a requirement that high
power DBS providers reserve 4 to 7 percent of channel capacity for
noncommercial programming of an educational and informational nature.
While Tempo and WTCI have generally been successful to date with respect to
compliance with regulatory matters, there can be no assurance that they will
succeed in obtaining all requisite regulatory approvals for their operations
without the imposition of restrictions on or other adverse consequences to
Tempo, WTCI or the Company.
FCC PERMITS AND LICENSES
Tempo holds a Construction Permit issued by the FCC authorizing construction
of two or more satellites to operate 11 transponders at an orbital location at
119(degrees) W.L. and 11 transponders at an orbital location at 166(degrees)
W.L. As the holder of a DBS permit, Tempo is 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 rules the FCC has established specifically for holders of U.S.
DBS authorizations and receivers, and (iv) complying with applicable
provisions of the Communications Act. The FCC's DBS construction permits are
also conditioned on satisfaction of ongoing construction and related
obligations. The FCC's DBS rules require that a DBS permittee place its
satellites in operation within six years following the initial grant of a
construction permit. Tempo's Construction Permit was issued in May 1992, and
the permit would expire in May 1998, absent completion of the system or an
approved extension of time. At present, Tempo must continue to demonstrate
that it is exercising due diligence in progressing toward that goal. Tempo
believes it is currently meeting this requirement through the Satellite
Construction Agreement with Loral, which is currently constructing the Company
Satellites and related ground equipment.
There can be no assurance that Tempo will be able to comply with the FCC's
due diligence obligations or that the FCC will determine that Tempo has
complied with such due diligence obligations. Tempo's permit and its
compliance with construction due diligence requirements have been contested in
FCC proceedings by current and potential DBS competitors, including MCI/News
Corp., DirecTv, EchoStar, USSB, Dominion Video Satellite, Inc. and DirectSat.
If Tempo is unable to meet the terms of its permit, it would be necessary to
apply to the FCC for an extension of time to complete its DBS system. Tempo
cannot be certain that an extension would be granted.
In addition to the general conditions placed on DBS permits, Tempo's permit
was originally subject to the condition that in areas served by TCI-affiliated
cable systems, Tempo or any related entities shall not offer or provide its
DBS service (1) to subscribers exclusively or primarily as an ancillary or
supplementary cable service, and (2) in a manner that would allow subscribers
of TCI-affiliated cable systems to receive Tempo's DBS service under terms and
conditions different from those offered or provided to consumers who are not
subscribers to TCI-affiliated cable systems.
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In a rulemaking proceeding concluded in December 1995, the FCC removed the
marketing conditions set forth above. DirecTv, however, has appealed the
Commission's decision to the U.S. Court of Appeals for the District of
Columbia Circuit, arguing, among other things, that the Commission's decision
to remove the conditions on Tempo's permit was arbitrary and capricious. Tempo
cannot predict whether the Court of Appeals will uphold the FCC's order.
In July 1996, WTCI filed an application with the FCC for authorization to
construct and operate an earth station to uplink video programming to Tempo's
proposed DBS system utilizing the 119(degrees) W.L. orbital slot. In October
1996, EchoStar and DirectSat jointly filed an objection to the application,
alleging among other things that WTCI's uplink station would interfere with
operations of EchoStar's and DirectSat's DBS satellites at the same orbital
location. WTCI filed an opposition to EchoStar's and DirectSat's objection on
October 28, 1996 demonstrating that no harmful interference will result from
its proposed operations and responding to the objectors' other comments. If
the FCC denies WTCI's application, Tempo will be unable to operate its system.
WTCI expects, but cannot assure, that its application will be approved.
In July 1993, Tempo filed an application with the FCC proposing minor
modifications to the technical design of the satellites. Numerous existing and
potential DBS competitors have opposed Tempo's application. Approval by the
FCC of the proposed modifications is necessary before Tempo may launch the
satellites. Tempo expects that the FCC will act on the application when Tempo
notifies it of Tempo's intention to launch the satellites. Tempo expects, but
cannot assure, that the application will be approved.
Near the expected launch date of its satellites, Tempo will file a request
for final launch authority. Tempo will also be required to file an application
for a license to operate its satellites in orbit. Tempo expects that the FCC
will approve these requests, but cannot assure the ultimate outcome. FCC
licenses must be renewed at the end of each ten-year license term. FCC
licenses are generally renewed in the ordinary course, absent misconduct by
the licensee.
RECENT FCC ACTIONS
On October 18, 1995, the FCC upheld a decision by its International Bureau
denying a request by Advanced Communications Corporation ("ACC") for an
extension of its construction permit for channels and orbital assignments at
110(degrees) W.L. and 148(degrees) W.L. This was the FCC's first denial of a
request for an extension of a construction permit deadline. The FCC held that
an extension of ACC's permit was not warranted in view of ACC's failure to
achieve any concrete progress toward the actual construction and operation of
its DBS system. Both ACC's appeal of the decision to the U.S. Court of Appeals
for the District of Columbia Circuit and its petition for rehearing en banc
were denied. ACC has also filed a petition for writ of certiorari in the
United States Supreme Court, which is pending.
In a rulemaking proceeding concluded in December 1995, the FCC announced
that it would auction the orbital slots previously held by ACC. In adopting an
auction, the FCC abandoned its previous policy of reassigning DBS channels
through a method of pro rata distribution to other DBS permittees, without
charge. EchoStar and DirecTv appealed the FCC's decision to the U.S. Court of
Appeals for the District of Columbia Circuit. The case was heard on October 1,
1996, and its outcome cannot be predicted. In January 1996, the FCC auctioned
28 channels at 110(degrees) W.L. to MCI for $682.5 million, and 24 channels at
148(degrees) W.L. to EchoStar for $52.3 million.
In the December rulemaking, the FCC also adopted several new service rules
for U.S.-licensed DBS operators. The FCC established a requirement that all
new DBS permittees provide service to Alaska and Hawaii if such service is
technically feasible. The FCC also required that all existing U.S.-licensed
DBS permittees provide service to Alaska and Hawaii from at least one of their
currently assigned orbital positions. Finally, the FCC revised its rules with
respect to the use of DBS systems to provide non-DBS services. The revised
rules are expected to make it easier for DBS permittees to use portions of
their satellite capacity for non-DBS services such as data transfer. Tempo
cannot predict how application of these rules will affect its operations, or
the operations of its competitors.
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THE TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 ("1996 Telecom Act") clarifies that the
FCC has exclusive jurisdiction over direct-to-home satellite services, and
that criminal penalties may be imposed for piracy of direct-to-home satellite
services. The 1996 Telecom Act also preempted local (but not state)
governments from imposing taxes or fees on direct-to-home services, including
DBS, and directed the FCC to promulgate regulations prohibiting local
(including state) governments from maintaining zoning regulations that
restrict the use of DBS receive-only dishes in residential areas. The FCC has
adopted rules it believes comply with the statutory requirement regarding
zoning issues. Finally, the 1996 Telecom Act required that multichannel video
programming distributors such as DBS operators scramble or block channels
providing indecent or sexually explicit adult programming.
ANTITRUST DECREES
PRIMESTAR Partners and the partners of the Partnership named in the actions
described below are subject to the jurisdiction of the U.S. District Court for
the Southern District of New York to ensure compliance with two antitrust
consent decrees. In United States v. PRIMESTAR Partners, L.P., et al., 93 Civ.
3913 (SDNY, 1993) (the "Federal Decree"), the Partnership and such partners
agreed to refrain from (i) enforcing any provisions of the PRIMESTAR
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 Federal Decree expires in April
1999. In The States of New York, et al. v. PRIMESTAR Partners, L.P., et al.,
93 Civ. 3068-3907 (SDNY, 1994) (the "State Decree" and, together with the
Federal Decree, the "Decrees"), the Partnership and such partners agreed,
among other things, to provide access to certain related programming services
on reasonable terms to other digital satellite service and MMDS providers, to
make certain changes to PRIMESTAR Partners' management structure and the
PRIMESTAR Partnership Agreement, and to limit the use of exclusive programming
agreements. The State Decree expires in part in October 1997, with the
remainder expiring on or before October 1, 1999. The Company was not named as
a defendant in either of the above actions, but may be subject to certain
provisions of one or both of the Decrees 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 PRIMESTAR Partners and named defendants in the
actions. The Company believes that it is currently in compliance with the
Decrees in all material respects and that the Decrees do not currently have a
material adverse effect on the Company or its operations.
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MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The following persons are expected to serve as directors and/or executive
officers of the Company as of the date of the Distribution:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary S. Howard........ 45 President and Chief Executive Officer; Director
Kenneth G. Carroll.... 41 Senior Vice President and Chief Financial Officer
Lloyd S. Riddle III... 36 Senior Vice President and Chief Operating Officer
Christopher Sophinos.. 44 Senior Vice President
William D. Myers...... 38 Vice President and Treasurer
John C. Malone........ 55 Director
David P. Beddow....... 52 Director
William E. Johnson.... 55 Director
John W. Goddard....... 55 Director
</TABLE>
The following is a five-year employment history for the directors and
executive officers of the Company, including any directorships held in public
companies. It is contemplated that Mr. Howard will terminate his position as
Senior Vice President of TCIC effective on the date of the Distribution.
Gary S. Howard has served as Senior Vice President of TCIC since October
1994 and President of the Company since February 1995. Mr. Howard served as
Vice President of TCI from December 1991 through October 1994 and as Senior
Vice President of United Artists Entertainment Company from June 1989 to
December 1991.
Kenneth G. Carroll has served as Senior Vice President and Chief Financial
Officer of the Company since February 1995. Since December 1994, Mr. Carroll
has 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 a member of the Liberty Media
Group, and from July 1992 to May 1994, Mr. Carroll served as Senior Director
of Finance and Business Operations of Netlink. From 1990 to July 1992, Mr.
Carroll served as Vice President of Finance of Midwest CATV.
Lloyd S. Riddle III has served as Senior Vice President and Chief Operating
Officer of the Company since February 1995. Mr. Riddle served as State Manager
of TCI of New York from February 1993 to February 1995, Area Manager of TCI of
Iowa from January 1992 to February 1993 and General Manager of TCI of St.
Charles, MO from January 1990 to January 1992.
Christopher Sophinos has served as Senior Vice President of the Company
since February 1996. Mr. Sophinos has served as the President of Boats
Unlimited since November 1993 and as a director of Sophinos & Sons, Inc. since
November 1993. Mr. Sophinos served as the President of Midwest CATV, a
division of UNR Industries, Inc., from July 1987 to November 1993.
William D. Myers has served as Vice President and Treasurer of the Company
since September 1996. 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 and
Director of Finance for United Artists Entertainment Company from September
1990 to December 1991.
John C. Malone has served as Chief Executive Officer and President of TCI
since January 1994. Dr. Malone served as Chief Executive Officer of TCIC from
March 1992 to October 1994 and as President of TCIC from
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<PAGE>
1973 to October 1994. Dr. Malone has also served as Chairman of the Board and
as a director of Tele-Communications International, Inc. since May 1995. Dr.
Malone is also a director of TCI, TCIC, BET Holdings, Inc., Home Shopping
Network, Inc. and The Bank of New York.
David P. Beddow has served as Senior Vice President of TCITV and WTCI since
February 1995. Mr. Beddow served as Vice President of TCI Technology, Inc.
from June 1993 to February 1995 and as Executive Vice President and Chief
Operating Officer of PRIMESTAR Partners from March 1990 to June 1993. Mr.
Beddow has served as a director of UVSG since January 1996.
William E. Johnson served as Chief Executive Officer for Scientific Atlanta,
Inc. from January 1987 to December 1992, at which time he retired. Mr. Johnson
has served as a director of Intelligent Electronic, Inc. since November 1994
and as a director of ATX, Inc. since January 1993. Mr. Johnson was a director
of I.C.T. from 1991 to 1993.
John W. Goddard served as President and Chief Executive Officer of the cable
division of Viacom International, Inc. from 1980 through July 1996, at which
time he retired. Mr. Goddard has served as a director of StarSight Telecast,
Inc. since May 1994.
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 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.
There is no family relationship between any of the directors.
BOARD COMPOSITION
The Company's charter provides for a classified Board of Directors of not
less than three members, with the exact number of directors to be fixed by
resolution of the Company Board. On or before the Distribution Date, the
number of directors on the Company Board will be fixed at five. For purposes
of determining their terms, directors will be divided into three classes. The
Class I director, whose term expires at the 1997 annual stockholders' meeting,
will be Mr. Beddow. The Class II directors, whose terms expire at the 1998
annual stockholders' meeting, will be Messrs. Howard and Johnson. The Class
III directors, whose terms expire at the 1999 annual stockholders' meeting,
will be Dr. Malone and Mr. Goddard. Each director elected at an annual
stockholders' meeting will serve for a term ending on the date of the annual
stockholders' meeting held in the third year following the year of his
election or until his earlier death, resignation or removal.
COMMITTEES OF THE COMPANY BOARD
The Company Board will establish an Audit Committee and a Compensation
Committee.
The Audit Committee of the Board, whose members will be Messrs. Goddard
(Committee Chairman) and Johnson, will consist of only nonemployee directors.
The Audit Committee will meet periodically with management and representatives
of the Company's independent auditors. The Audit Committee will review the
scope and approach of external audit activities and the results of such audits
and will be responsible for making the annual recommendation to the Company
Board of the firm of independent accountants to be retained by the Company to
perform the annual audit.
The Compensation Committee, whose members will be Messrs. Johnson (Committee
Chairman) and Goddard, will consist of only nonemployee directors. The
Compensation Committee will be responsible for recommending the salaries and
compensation programs for executive officers to the Company Board. This
committee will also be responsible for administering the Company's stock
incentive plan and certain other benefit programs. None of the members of the
Compensation Committee will be entitled to participate in any of the Company's
employee benefit plans administered by the Compensation Committee.
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<PAGE>
The Company Board may from time to time establish certain other committees
of the Company Board and may fill any vacancies on any committee of the
Company Board as it deems advisable.
COMPENSATION OF DIRECTORS
Members of the Company Board who are also full-time employees of the Company
or TCI, or any of their respective subsidiaries, will not receive any
additional compensation for their services as directors. Directors who are not
full-time employees of the Company or TCI, or any of their respective
subsidiaries, will receive a retainer of $10,000 per year. All members of the
Company Board will also be reimbursed for expenses incurred to attend any
meetings of the Company Board or any committee thereof.
See also "Arrangements Between TCI and the Company After the Distribution--
Other Arrangements."
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth information relating to compensation from the
Company (or from TCI or any other subsidiary of TCI) to the Company's Chief
Executive Officer and each of the next most highly compensated executive
officers of the Company other than the Company's Chief Executive Officer, for
services rendered in all capacities to TCI.
The following table is a summary of all forms of compensation paid to the
officers named therein for such services for the fiscal year ended December
31, 1995 (total of four persons).
SUMMARY COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- --------------------------
RESTRICTED
NAME AND PRINCIPAL OTHER ANNUAL STOCK SECURITIES ALL OTHER
POSITION COMPENSATION AWARD UNDERLYING COMPENSATION
WITH THE COMPANY SALARY ($) BONUS ($) ($)(1) ($)(2) OPTIONS/SARS(3) ($)(4)
------------------ ---------- --------- ------------ ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Howard
(President and Chief
Executive Officer).... $262,500 $23,210(5) $ 3,415 $309,375 150,000 $15,000
Lloyd S. Riddle III
(Senior Vice President
and Chief Operating
Officer).............. $123,078 $34,478 $ 1,557 -- 17,500 $13,439
Kenneth G. Carroll
(Senior Vice President
and Chief Financial
Officer).............. $ 98,845 $27,199 $ 861 -- 17,500 $ 3,668
William D. Myers (Vice
President and
Treasurer)............ $108,130 -- $ 2,425 -- 10,000 $ 8,839
</TABLE>
- --------
(1) Consists of amounts reimbursed during the year for the payment of taxes.
(2) Pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan (the
"TCI 1994 Plan"), on December 13, 1995, Mr. Howard was granted 15,000
restricted shares of Series A TCI Group Common Stock. Such restricted
shares vest as to 50% of such shares on December 13, 1999 and as to the
remaining 50% on December 13, 2000. The value of such restricted shares at
the end of 1995 was $298,125. TCI has not paid cash dividends on the
Series A TCI Group Common Stock and does not anticipate declaring and
paying cash dividends on the Series A TCI Group Common Stock at any time
in the foreseeable future.
(3) For additional information regarding this award, see "--Option and SAR
Grants of Series A TCI Group Common Stock to Company Executives in Last
Fiscal Year," below.
(4) All amounts shown in this column represent contributions to the TCI
Employee Stock Purchase Plan ("ESPP"). All named executive officers of the
Company for whom contributions were made in 1995 are fully vested except
for Kenneth G. Carroll who is 45% vested in TCI's contribution. The
accounts in the ESPP of all employees of the Company will become vested in
full as of the effective time of the
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<PAGE>
Distribution. Directors who are not employees of TCI are ineligible to
participate in the ESPP. The ESPP, a defined contribution plan, enables
participating employees to acquire a proprietary interest in TCI and
benefits upon retirement. Under the terms of the ESPP, employees are
eligible for participation after one year of service. The ESPP's normal
retirement age is 65 years. Participants may contribute up to 10% of their
compensation and TCI (by annual resolution of the TCI Board) may contribute
up to a matching 100% of the participants' contributions. The ESPP includes
a salary deferral feature in respect of employee contributions. Forfeitures
(due to participants' withdrawal prior to full vesting) are used to reduce
TCI's otherwise determined contributions. Generally, participants acquire a
vested right in TCI contributions as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTING PERCENTAGE
---------------- ------------------
<S> <C>
Less than 1............... 0
1-2..................... 20
2-3..................... 30
3-4..................... 45
4-5..................... 60
5-6..................... 80
6 or more................. 100
</TABLE>
Participant contributions are fully vested. Although TCI has not expressed
an intent to terminate the ESPP, it may do so at any time. The ESPP
provides for full immediate vesting of all participants' rights upon
termination.
(5) This amount reflects the amortization of obligations under an employment
contract between Mr. Howard and a prior employer, which were assumed by
TCI in connection with the acquisition of such prior employer and will be
assumed by the Company in connection with the Distribution.
OPTION AND SAR GRANTS OF SERIES A TCI GROUP COMMON STOCK TO COMPANY EXECUTIVES
IN LAST FISCAL YEAR
The following table discloses information regarding stock options granted in
tandem with stock appreciation rights to the executive officers named in the
above Summary Compensation Table in respect of shares of Series A TCI Group
Common Stock under the Tele-Communications, Inc. 1995 Stock Incentive Plan
(the "TCI 1995 Plan").
OPTION AND SAR GRANTS TO PURCHASE SERIES A TCI GROUP COMMON STOCK IN THE LAST
FISCAL YEAR
<TABLE>
<CAPTION>
NO. OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR MARKET PRICE
OPTIONS/SARS EMPLOYEES IN BASE PRICE ON GRANT DATE GRANT DATE
NAME GRANTED 1995 ($/SH) ($/SH) EXPIRATION DATE PRESENT VALUE
---- ------------ ------------ ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Howard.......... 150,000 (1)(5) $17.00 $20.625(3) August 4, 2005 $2,120,070(4)
Lloyd S. Riddle III..... 17,500 (2)(5) $17.00 $20.625(3) August 4, 2005 $ 247,342(4)
Kenneth G. Carroll...... 17,500 (2)(5) $17.00 $20.625(3) August 4, 2005 $ 247,342(4)
William D. Myers........ 10,000 (2)(5) $17.00 $20.625(3) August 4, 2005 $ 141,338(4)
</TABLE>
- --------
(1) Mr. Howard's grant, pursuant to the TCI 1995 Plan, of options in tandem
with stock appreciation rights represents 5.4% of the total options
granted to purchase Series A TCI Group Common Stock pursuant to the TCI
1995 Plan and, together with the options granted to purchase Series A TCI
Group Common Stock pursuant to the TCI 1994 Plan and the Tele-
Communications, Inc. 1996 Incentive Plan (the "TCI 1996 Plan"), represents
2.0% of all options granted in 1995 to purchase Series A TCI Group Common
Stock.
(2) Mr. Riddle's, Mr. Carroll's and Mr. Myers' grants, pursuant to the TCI
1995 Plan, of options in tandem with stock appreciation rights represent
less than 1% of the total options granted to purchase Series A TCI Group
Common Stock pursuant to the TCI 1995 Plan and, together with the options
granted to purchase Series A TCI Group Common Stock pursuant to the TCI
1994 Plan and the TCI 1996 Plan, represent less than 1% of all options
granted in 1995 to purchase Series A TCI Group Common Stock.
76
<PAGE>
(3) Represents the closing market price per share of Series A TCI Group Common
Stock on December 13, 1995.
(4) The values shown 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 this calculation include the following:
(a) a 5.65% discount rate; (b) a volatility factor based upon the
historical trading pattern of Series A TCI Group Common Stock; (c) the 10-
year option term; and (d) the closing price of Series A TCI Group Common
Stock on February 8, 1996. 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.
(5) On December 13, 1995, pursuant to the TCI 1994 Plan, certain executive
officers of TCI were granted an aggregate of 2,650,000 options in tandem
with stock appreciation rights to acquire shares of Series A TCI Group
Common Stock. On December 13, 1995, pursuant to the TCI 1995 Plan, certain
key employees of TCI were granted an aggregate of 2,757,500 options in
tandem with stock appreciation rights to acquire shares of Series A TCI
Group Common Stock. On December 13, 1995, pursuant to the TCI 1996 Plan,
certain executive officers of TCI were granted an aggregate of 2,000,000
options in tandem with stock appreciation rights to acquire shares of
Series A TCI Group Common Stock. Each such grant of options with tandem
stock appreciation rights vests evenly over five years with such vesting
period beginning August 4, 1995, first becomes exercisable beginning on
August 4, 1996 and expires on August 4, 2005.
The following table provides, for the executives named in the Summary
Compensation Table, information on the exercise during the year ended December
31, 1995 of TCI Options granted in tandem with TCI SARs, the number of shares
of Series A TCI Group Common Stock represented by unexercised TCI Options and
TCI SARs owned by them at December 31, 1995, and the value of those TCI
Options and TCI SARs as of the same date.
AGGREGATED TCI OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-
END TCI OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
DECEMBER 31, AT DECEMBER 31,
VALUE 1995 (#) 1995 ($)
SHARES ACQUIRED REALIZED EXERCISABLE / EXERCISABLE /
NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Gary S. Howard
Exercisable......... 9,714 $75,046 95,000 $525,625
Unexercisable....... -- -- 205,000 $811,875
Lloyd S. Riddle III
Exercisable......... -- -- 4,300 $ 12,763
Unexercisable....... -- -- 17,200 $ 51,050
Kenneth Carroll
Exercisable......... -- -- 4,300 $ 12,763
Unexercisable....... -- -- 17,200 $ 51,050
William D. Myers
Exercisable......... -- -- 3,800 $ 11,825
Unexercisable....... -- -- 15,200 $ 47,300
</TABLE>
Additionally, on the Distribution Date, Mr. Howard will be granted an option
to purchase shares of Series A Common Stock representing 1.0% of the number of
shares of Company Common Stock issued and outstanding on the Distribution
Date, determined immediately after giving effect to the Distribution, but
before giving effect to the exercise of such option or the other options to be
evidenced by the Stock Option Agreements. The aggregate exercise price for
such option is equal to 1.0% of TCI's Net Investment as of the first to occur
of the
77
<PAGE>
Distribution Date and the date on which such option first becomes exercisable,
but excluding any portion of TCI's Net Investment that as of such date is
represented by a promissory note or other evidence of indebtedness from the
Company to TCI. Such option will be granted on the Distribution Date, will
vest in 20% cumulative increments on each of the first five anniversaries of
February 1, 1996 and will be exercisable for up to ten years following
February 1, 1996. The Company has agreed to bear all obligations under such
option, effective as of the Distribution Date. See "Arrangements Between TCI
and the Company After the Distribution--Other Arrangements."
THE TCI SATELLITE ENTERTAINMENT, INC. 1996 STOCK INCENTIVE PLAN
General. It is expected that, on or before the Distribution Date, the
Company Board will adopt, and TCI, as the sole stockholder of the Company
prior to the Distribution, will approve, the TCI Satellite Entertainment, Inc.
1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan will provide 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 ("Options"), stock appreciation rights
("SARs"), restricted shares ("Restricted Shares"), Stock Units (as defined
below), performance awards ("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 1996
Plan.
The 1996 Plan will be administered by the Compensation Committee of the
Company Board, or such other committee as the Company Board may in the future
appoint, which shall comprise at least two persons (the "Committee"). Each
member of the Committee will be a member of the Company Board who is not a
current employee of the Company and is not otherwise disqualified from being
(A) a "non-employee director" with respect to the Company for purposes of Rule
16b-3 under the Exchange Act (or any successor rule) or (B) an "outside
director" with respect to the Company for purposes of Section 162(m) of the
Code (or any successor statute) and the rules and regulations of the Treasury
Department promulgated thereunder.
The Committee will have broad discretion in administering the 1996 Plan, and
is authorized, subject only to the express provisions of the 1996 Plan, to
determine the eligible persons to whom Awards may be made, to determine the
terms and conditions (which need not be identical) of each Award (including
the timing of the grant, the type of Award granted, the pricing and the amount
of the Award and terms related to vesting, exercisability, forfeiture and
termination), and to interpret the provisions of the 1996 Plan and each
agreement relating to Awards granted under the 1996 Plan. The determinations
of the Committee are final and binding upon all participants.
Stock Options. Options granted pursuant to the 1996 Plan may be either
incentive stock options ("Incentive Options") within the meaning of Section
422 of the Code, or nonqualified stock options ("Nonqualified Options"), which
do not qualify under Section 422. The Committee is authorized to determine
whether an Option is an Incentive Option or a Nonqualified Option.
The exercise price of all Options granted under the 1996 Plan will be fixed
by the Committee, and may be more than, less than or equal to the fair market
value of the Series A Common Stock on the date the Option is granted. However,
the Company does not have any current intention to grant Options with an
exercise price less than the fair market value of the Series A Common Stock on
the date of grant. No participant may be granted Options covering more than
1,000,000 shares of Series A Common Stock in the calendar year ending December
31, 1996, or Options covering more than 500,000 shares of Series A Common
Stock in any one subsequent calendar year (in each case as adjusted for stock
splits, etc.), except that any acceleration of existing Options in accordance
with the provisions of the 1996 Plan regarding certain extraordinary corporate
events will not be deemed to be a new grant of such Options for purposes of
such limits.
78
<PAGE>
Subject to the provisions of the 1996 Plan relating to death, retirement and
termination of employment, the term of each Option will be fixed by the
Committee at the time of grant. Options may be exercised in whole or in part
at any time or only after a period of time or in installments, as determined
by the Committee at the time of grant, and the exercisability of Options may
be accelerated by the Committee.
An Option shall be exercised by written notice to the Committee upon the
terms set forth in the agreement relating thereto and in accordance with such
other procedures as the Committee may establish.
The method of payment of the exercise price of an Option will be determined
by the Committee and may consist of cash, a check, a promissory note, the
surrender of already owned shares of Series A Common Stock or Series B Common
Stock, the withholding of shares of Series A Common Stock issuable upon
exercise of such Option, delivery of a properly executed exercise notice and
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price, any
combination of the foregoing methods of payment or such other consideration
and method of payment as may be permitted for the issuance of shares under
Delaware law, subject, in the case of any permitted method of payment other
than cash, to such conditions as the Committee deems appropriate. By way of
example, if a holder is permitted to elect to pay such exercise price by the
withholding of shares of Series A Common Stock, the Committee may reserve the
discretion to approve or disapprove such election.
Stock Appreciation Rights. An SAR may be granted under the 1996 Plan to the
holder of an Option (a "related Option") with respect to all or a portion of
the shares of Series A Common Stock subject to the related Option (a "Tandem
SAR") or may be granted separately to an eligible participant (a "Free
Standing SAR"). A Tandem SAR may be granted either concurrently with the grant
of the related Option or, if the related Option is a Nonqualified Option, at
any time thereafter and prior to the complete exercise, termination,
expiration or cancellation of the related Option. A Tandem SAR will be
exercisable only at the time and to the extent that the related Option is
exercisable and may be subject to such additional limitations on
exercisability as the Committee may determine. Upon exercise of a Tandem SAR,
the related Option will be deemed to have been exercised to the extent of the
number of shares of Series A Common Stock with respect to which such Tandem
SAR is exercised. Conversely, upon the exercise or termination of the related
Option, the Tandem SAR will be canceled automatically to the extent of the
number of shares of Series A Common Stock with respect to which the related
Option was so exercised or terminated. Free Standing SARs will be exercisable
at the time, to the extent and upon the terms and conditions determined by the
Committee and set forth in the agreement relating to the Award. No participant
may be granted SARs covering more than 1,000,000 shares of Series A Common
Stock in the calendar year ending December 31, 1996, or SARs covering more
than 500,000 shares of Series A Common Stock in any one subsequent calendar
year (in each case and adjusted for stock splits, etc.), except that any
acceleration of existing SARs in accordance with the provisions of the 1996
Plan regarding certain extraordinary corporate events will not be deemed to be
a new grant of such SARs for purposes of such limits.
The base price of a Tandem SAR will be the same as the exercise price of the
related Option unless the Committee provides for a higher base price. The base
price of a Free Standing SAR will not be less than the fair market value of
the Series A Common Stock on the date of grant of the Free Standing SAR. Upon
exercise of a SAR, the holder will be entitled to receive from the Company,
for each share of Series A Common Stock with respect to which the SAR is
exercised, an amount equal to the excess of the fair market value of a share
of Series A Common Stock on the date of exercise over the base price per share
of such SAR. Such amount shall be paid in cash, shares of Series A Common
Stock (valued at their fair market value on the date of exercise of the SAR)
or a combination thereof as specified in the agreement relating to the Award.
Unless the Committee shall otherwise determine, to the extent a Free Standing
SAR is exercisable, it will be exercised automatically for a cash settlement
on its expiration date.
The agreement relating to an Award of SARs may provide for a limit on the
amount payable to a holder upon exercise of SARs at any time or in the
aggregate, for a limit on the number of SARs that may be exercised by the
holder in whole or in part for cash during any specified period, for a limit
on the time periods during which a holder may exercise SARs and for such other
limits on the rights of the holder and other terms and conditions as the
Committee may determine.
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<PAGE>
Restricted Shares. At the time of any Award of Restricted Shares, the
Committee will designate a period of time which must elapse (the "Restriction
Period") and may impose such other restrictions, terms and conditions that
must be fulfilled, before the Restricted Shares will become vested. The
Committee may determine that (a) Restricted Shares will be issued at the
beginning of the Restriction Period, in which case, such shares will
constitute issued and outstanding shares of Series A Common Stock for all
corporate purposes or (b) Restricted Shares will not be issued until the end
of the Restriction Period, in which case the participant receiving the Award
will have none of the rights of a stockholder with respect to the shares of
Series A Common Stock covered by such Award until such shares shall have been
issued to such participant at the end of the Restriction Period. The
participant will have the right to vote Restricted Shares issued at the
beginning of the Restriction Period and to receive such dividends and other
distributions as the Committee may, in its sole discretion, designate that are
paid or distributed on such Restricted Shares, and generally to exercise all
other rights as a holder of Series A Common Stock, except that, until the end
of the Restriction Period: (i) such participant will not be entitled to take
possession of the stock certificates representing the Restricted Shares; (ii)
such participant may not sell, transfer or otherwise dispose of the Restricted
Shares; and (iii) other than such dividends and other distributions as the
Committee may designate, the Company will retain custody of all dividends and
distributions made or declared with respect to the Restricted Shares
("Retained Distributions") and such Retained Distributions shall not bear
interest or be segregated in a separate account. In the case of Restricted
Shares issued at the end of the Restriction Period, the participant will be
entitled to receive, to the extent specified by the Committee only, cash or
property corresponding to all dividends and other distributions (or the
economic equivalent thereof) that would have been paid, made or declared on
such Restricted Shares had such shares been issued at the beginning of the
Restriction Period (collectively, "Dividend Equivalents"), and such Dividend
Equivalents will be paid as specified by the Committee in the applicable Award
agreement. A breach of any restrictions, terms or conditions established by
the Committee with respect to any award of Restricted Shares will cause a
forfeiture of such Restricted Shares and any Retained Distributions (including
any unpaid Dividend Equivalents) with respect thereto. The 1996 Plan also
provides that the Committee may authorize awards of cash to a holder of
Restricted Shares, payable at any time after the Restricted Shares become
vested.
Upon expiration of the applicable Restriction Period and the satisfaction of
any other applicable conditions, all or part of the Restricted Shares and any
Retained Distributions thereon (including any unpaid Dividend Equivalents)
will become vested and all or part of any cash amount awarded will become
payable. Any Restricted Shares and Retained Distributions thereon (including
any unpaid Dividend Equivalents) which do not so vest will be forfeited.
Stock Units. The 1996 Plan also authorizes the Committee to grant to
eligible participants, either alone or in addition to Options, SARs and
Restricted Shares, awards of Series A Common Stock and other awards that are
valued in whole or in part by reference to, or are otherwise based on, the
value of the Series A Common Stock ("Stock Units"). The Committee will
determine all terms and conditions of such Awards, including any restrictions
(including restrictions on transfer), deferral periods, or performance
requirements. The provisions of any Award of Stock Units need not be the same
with respect to each recipient and are subject to such rules as the Committee
may establish at the time of grant.
Performance Awards. Performance Awards consist of grants made to an eligible
person subject to the attainment of one or more performance goals. A
Performance Award will be paid, vested or otherwise deliverable solely upon
the attainment of one or more pre-established, objective performance goals
established by the Committee prior to the earlier of (i) 90 days after the
commencement of the period of service to which the performance goals relate,
and (ii) the passage of 25% of the period of service, and in any event while
the outcome is substantially uncertain. A performance goal may be based upon
one or more business criteria that apply to the eligible person, one or more
business units of the Company or the Company as a whole, and may include any
of the following: revenue, net income, cash flow (as defined for such purpose
by the Committee), stock price, market share, earnings per share, return on
equity, return on assets or decrease in costs. Subject to the foregoing, the
terms, conditions and limitations applicable to any Performance Award will be
determined by the Compensation Committee.
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<PAGE>
Any Performance Awards granted under the 1996 Plan will be limited so that
no individual may be granted Performance Awards consisting of cash or in any
other form permitted under the 1996 Plan (other than any Awards consisting of
Options or SARs or otherwise consisting of shares of Common Stock or units
denominated in such shares, or, in either case, additional cash amounts
related to such an Award) in respect of any one-year period having a value
determined on the date of grant in excess of $10,000,000.
Effect of Termination of Employment. Under the terms of the 1996 Plan, if
the employment of the holder of an Award (which for this purpose includes the
engagement of the holder of an Award as a nonemployee consultant or advisor)
terminates by reason of death or total disability, then, unless the agreement
relating to such Award provides otherwise, (a) all outstanding Options and
SARs granted in such Award will become immediately exercisable in full in
respect of the aggregate number of shares covered thereby, (b) the Restriction
Period for all Restricted Shares granted in such Award will be deemed to have
expired and all such Restricted Shares, any related Retained Distributions and
any unpaid Dividend Equivalents will become vested and any cash amounts
payable pursuant to the related agreement will be adjusted in such manner as
may be provided in such agreement, and (c) all Stock Units granted in such
Award will become vested in full.
Under the terms of the 1996 Plan, if the employment of the holder of an
Award is terminated during the Restriction Period with respect to any
Restricted Shares, or prior to the complete exercise of any Option or SAR or
the vesting or complete exercise of any Stock Units, granted in such Award,
then such Options, SARs and Stock Units will thereafter be exercisable, and
the holder's rights to any such unvested Restricted Shares, Retained
Distributions, unpaid Dividend Equivalents and cash amounts and any such
unvested Stock Units will thereafter vest, only to the extent provided by the
Committee in the agreement relating to such Award, except that (a) if the
holder's employment terminates by reason of death or total disability then any
Option or SAR granted in the Award will remain exercisable for a period of at
least one year after such termination (but not later than the scheduled
expiration of such Option or SAR), (b) no Option or SAR may be exercised after
the scheduled expiration date thereof, and (c) if the holder's employment is
terminated for cause (as defined) then (i) such participant's rights to all
Restricted Shares, Retained Distributions, unpaid Dividend Equivalents and any
cash amounts covered by such Award will be forfeited immediately, (ii) all
Options and SARs and all unvested or unexercised Stock Units granted in such
Award will immediately terminate and (iii) such participant's interest in all
unvested Performance Awards shall be forfeited immediately.
Additional Provisions. Unless otherwise required by the Committee in the
agreement relating to an Award, each Award will vest and become exercisable in
full upon the occurrence of any of the following change in control
transactions: (a) the Company Board (or stockholders, if Company Board
approval is not required by law) approves any of the following transactions
(each an "Approved Transaction"): (i) a merger, consolidation or binding share
exchange to which the Company is a party (x) pursuant to which shares of
Series A Common Stock would be converted into or exchanged for cash,
securities or other property (other than a transaction in which the common
stockholders of the Company prior to such transaction have the same
proportionate ownership of the common stock of, and voting power with respect
to, the surviving corporation immediately after such transaction) or (y) as a
result of which the persons who are common stockholders of the Company prior
to such transaction would have less than a majority of the combined voting
power of the outstanding capital stock of the Company immediately following
such transaction; (ii) the sale of substantially all of the assets of the
Company; or (iii) the liquidation or dissolution of the Company; (b) any
person or other entity (other than the Company, any subsidiary, any employee
benefit plan sponsored by the Company or any subsidiary or any Controlling
Person (as defined)) purchases any common stock of the Company pursuant to a
tender or exchange offer, without the prior consent of the Company Board, or
any person or other entity (other than the Company, any subsidiary, any
employee benefit plan sponsored by the Company or any subsidiary or any
Controlling Person) becomes the beneficial owner of securities of the Company
representing 20% or more of the combined voting power of the Company's
outstanding securities, other than in a transaction (or series of related
transactions) approved by the Company Board; or (c) during any two-year
period, individuals who at the beginning of such period constitute the entire
Company Board cease to constitute a majority of the Company Board, unless the
election, or nomination for election, of each new director is approved by at
least two-thirds of the directors then still in office who were directors at
the beginning of the period. "Controlling Person" is defined in the 1996
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Plan to mean each of (1) the Chairman of the Board, the President and each of
the directors of the Company as of the effective date of the 1996 Plan, (2)
John C. Malone, (3) Bob Magness, (4) the respective family members, estates
and heirs of each of the persons referred to in clauses (1) through (3) and
any trust or other investment vehicle for the primary benefit of any of such
persons or their respective family members or heirs and (5) Kearns-Tribune
Corporation. Options, SARs, or, if applicable, Stock Units not theretofore
exercised will terminate upon consummation of an Approved Transaction. The
Committee will have the discretion, unless otherwise provided in the agreement
relating to a particular Award, to determine that any or all outstanding
Awards of any or all types granted pursuant to the 1996 Plan will not vest or
become exercisable on an accelerated basis in connection with an Approved
Transaction or will not terminate if not exercised prior to consummation of
the Approved Transaction, if action that, in the opinion of the Committee, is
equitable and appropriate is taken by the Company Board or by the surviving or
acquiring corporation, as the case may be, to assume such Award or substitute
a new award therefor that is, as nearly as may be practicable, equivalent to
the old Award.
The Committee may require in the agreement relating to an Award that if the
holder acquires any shares of Series A Common Stock through the exercise of
Options or SARs or through the vesting of Restricted Shares or Stock Units
granted in the Award, then prior to selling or otherwise transferring any such
shares to a third party, such holder must offer to sell such shares to the
Company, at their fair market value, pursuant to a right of first refusal.
No awards may be granted under the 1996 Plan on or after the tenth
anniversary of its effective date. The Company Board or the Committee may at
any time terminate the 1996 Plan and may from time to time suspend or amend
the 1996 Plan. Without stockholder approval, no amendment to the 1996 Plan
shall increase the number of shares of Series A Common Stock subject to the
1996 Plan, change the class of persons eligible to receive Awards under the
1996 Plan, or otherwise materially increase the benefits accruing to
participants under the 1996 Plan. Termination or amendment of the 1996 Plan
may not adversely affect the rights of any holder of an Award without his or
her consent. Subject to the specific terms of the 1996 Plan, the Committee may
accelerate any Award or waive any conditions or restrictions pertaining to
such Award at any time.
EMPLOYEE STOCK PURCHASE PLAN
The Company will establish an employee benefit plan known as the Qualified
Employee Stock Purchase Plan (the "Employee Plan"). The Employee Plan is
intended to be a qualified employee plan under Sections 401(a) and 401(k) of
the Code. The basic terms of the Employee Plan are as follows: An employee
must complete one year of service and be at least 18 years of age to
participate in the Employee Plan. Upon commencing participation, the
participant may elect to make pre-tax contributions, after-tax contributions
or both to the Employee Plan (the "Participant Contributions"). All
Participant Contributions are made by payroll deduction and all Participant
Contributions may not exceed 10% of the participant's wages from the Company.
Only the first $155,000 (as adjusted in 1997 and thereafter for cost of living
increases) of any participant's compensation is taken into account for all
purposes under the Employee Plan, as required by law. Pre-tax Participant
Contributions are not subject to income tax when contributed to the Employee
Plan, but those pre-tax Participant Contributions will be subject to FICA
taxes when contributed to the Employee Plan. Those pre-tax Participant
Contributions (and earnings) will be taxed to the participant when the
participant receives a distribution from the Employee Plan. Pre-tax
Participant Contributions are limited to $9,500 for each year (as adjusted for
cost of living increases). After-tax Participant Contributions are subject to
income taxes and FICA taxes when contributed to the Employee Plan, but
earnings on those contributions will not be taxed to the participant until the
participant receives a distribution from the Employee Plan. Participant
Contributions always are 100% vested. All Participant Contributions are
invested in the Company Common Stock.
The Company, in its discretion, may make Company matching contributions to
the Employee Plan for each participant who makes Participant Contributions.
The Company matching contribution may be an amount up to 100% of the
Participant Contributions to the Employee Plan. All Company contributions to
the Employee Plan are invested in the Company Common Stock. Company
contributions to the Employee Plan become vested according to a vesting
schedule that provides for 20% vesting after one year of service, 30% vesting
after two
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<PAGE>
years of service, 45% vesting after three years of service, 60% vesting after
four years of service, 80% vesting after five years of service and 100%
vesting after six years of service. Service with TCI or any of its
subsidiaries prior to the Distribution Date will be counted toward such
vesting schedule. A year of service will be credited if the participant
completes 1,000 hours of service during the Plan Year. In addition, a
participant will be 100% vested in his Company contributions upon attaining
normal retirement age (age 65), upon becoming totally disabled, or upon the
participant's death while employed with the Company. Company contributions to
the Employee Plan (and earnings on those contributions) on behalf of a
participant are not taxable to the participant until those amounts are
distributed from the Employee Plan. The Company receives a deduction for the
amounts it contributes to the Employee Plan.
A participant can withdraw his Participant Contributions and Company
contributions while he remains employed by the Company only in the following
limited circumstances: Upon attaining age 59 1/2, and if the participant is
100% vested in his Company contributions, the participant may request one
withdrawal of all or any portion of his Company contributions account
(including earnings on such contributions) and his pre-tax Participant
Contributions account (including earnings on such contributions). A
Participant may withdraw any portion of his after-tax Participant
Contributions at any time but, if the Participant is not yet 59 1/2, a
withdrawal of after-tax Participant Contributions will result in the
Participant not being eligible to make any Participant Contributions to the
Employee Plan for a period of six months from the date of the withdrawal. Upon
experiencing a financial hardship, a Participant may request a withdrawal of
his pre-tax Participant Contributions (but not the earnings on such
contributions) in an amount necessary to meet the financial need, subject to
certain limitations.
Upon terminating employment with the Company, the participant may receive a
distribution of his entire vested account in the Employee Plan. Distributions
will be made in whole shares of the Company Common Stock, which may be rolled
over to an IRA or other qualified plan upon the election of the participant.
The shares of stock that are attributable to after-tax Participant
Contributions will be distributed to the participant tax-free because that
stock is purchased with after-tax dollars. Subsequent sales of the stock by
the participant may result in taxation to the participant. The appreciation on
all stock generally is not taxed until the shares are sold by the participant
if the participant receives the stock in a lump sum. A 10% federal penalty tax
may be imposed on certain early distributions from the Employee Plan. The tax
is 10% of the taxable amount of the distribution.
STOCK OWNERSHIP OF MANAGEMENT
TCI currently owns all the issued and outstanding shares of capital stock of
the Company. The following table lists the number of shares of Company Common
Stock that are expected to be owned beneficially by each director, each of the
executive officers named in the above Summary Compensation Table, and all
directors and executive officers as a group immediately following the
Distribution, based on their respective holdings of TCI Group Common Stock as
of April 30, 1996, according to data furnished by the persons named. The
number of shares and percentage amounts have been calculated in each case
assuming, solely for purposes of this disclosure, (x) that the number of
shares of TCI Group Common Stock beneficially owned by such directors and
executive officers on the Record Date, and the total number of shares of TCI
Group Common Stock outstanding on the Record Date, are in each case identical
to such amounts on April 30, 1996, and (y) that the Company Common Stock will
be distributed to TCI Group Stockholders on a 1:10 ratio. 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 expected 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 expected of any other person. Voting power
in the table is computed with respect to a general election of directors. The
number of shares in the table is based on amounts which include interests of
the named directors or executive officers or members of the group of directors
and executive officers in shares held by the trustee of TCI's ESPP and shares
held by the trustee of the United Artist Entertainment Employee Stock
Ownership Plan for their respective accounts. So far as is known to the
Company, the persons indicated below will have sole
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<PAGE>
voting and investment power with respect to the shares indicated as expected
to be owned by them except for the shares held by the trustee of TCI's ESPP
for the benefit of such person, which shares are voted at the discretion of
the trustee. The following table does not reflect the options to be granted to
Gary S. Howard and David P. Beddow on the Distribution Date pursuant to the
Stock Option Agreements. Mr. Howard's option will entitle him to purchase
shares of Series A Common Stock equal to 1.0%, and Mr. Beddow's option will
entitle him to purchase shares of Series A Common Stock equal to 0.5%, of the
number of shares of Company Common Stock outstanding following the
Distribution Date, in each case without giving effect to the exercise of any
of the options to be evidenced by the Stock Option Agreements. See
"Arrangements Between TCI and the Company After the Distribution--Other
Arrangements."
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT OF CLASS(1)
------------------------ --------------------
NAME SERIES A SERIES B SERIES A SERIES B VOTING POWER(1)
---- -------- --------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Directors:
Gary S. Howard........ 34,852(2) -- * -- *
John C. Malone........ 217,203(3) 2,533,208(5) * 29.9% 17.8%
David P. Beddow....... 32,445(4) -- * -- *
William E. Johnson.... 1,900 10 * * *
John W. Goddard....... 1,807(6)(7) 3,525(7) * * *
Other Named Executive
Officers:
Kenneth G. Carroll.... 2,303(8) -- * -- *
Lloyd S. Riddle III... 2,674(8) -- * -- *
William D. Myers...... 2,359(9) -- * -- *
All directors and
executive officers
as a group (nine 2,536,745(5)(7) * 29.9% 17.9%
persons)............... 295,543(10)
</TABLE>
- --------
* Less than one percent.
(1) Assuming 58,336,191 shares of Series A Common Stock and 8,468,163 shares
of Series B Common Stock outstanding immediately following the
Distribution, based on 583,361,905 shares of Series A TCI Group Common
Stock and 84,681,629 shares of Series B TCI Group Common Stock outstanding
on April 30, 1996 (after elimination of shares held by subsidiaries of
TCI).
(2) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1992 to
acquire 50,000 shares of Series A TCI Group Common Stock, of which options
to acquire 40,000 shares are currently exercisable; (ii) stock options in
tandem with stock appreciation rights granted in November of 1993 to
acquire 50,000 shares of Series A TCI Group Common Stock, of which options
to acquire 37,500 shares are currently exercisable; (iii) stock options in
tandem with stock appreciation rights granted in November of 1994 to
acquire 50,000 shares of Series A TCI Group Common Stock, of which options
to acquire 10,000 shares are currently exercisable; and (iv) stock options
granted in tandem with stock appreciation rights in December of 1995 to
purchase 150,000 shares of Series A TCI Group Common Stock, of which
options to acquire 30,000 shares are currently exercisable. Additionally
assumes that shares of Series A Common Stock to be issued in the
Distribution in respect of 15,000 restricted shares of Series A TCI Group
Common Stock are issued to Mr. Howard. None of the restricted shares is
currently vested.
(3) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1992 to
acquire 1,000,000 shares of Series A TCI Group Common Stock, of which
options to acquire 800,000 shares are currently exercisable; and (ii)
stock options granted in tandem with stock appreciation rights in December
of 1995 to acquire 1,000,000 shares of Series A TCI Group Common Stock, of
which options to purchase 200,000 shares are currently exercisable.
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<PAGE>
(4) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1993 to
acquire 7,500 shares of Series A TCI Group Common Stock, of which options
to acquire 5,625 shares are currently exercisable; (ii) stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 50,000 shares of Series A TCI Group Common Stock, of which options
to purchase 10,000 shares are currently exercisable; and (iii) stock
options granted in tandem with stock appreciation rights in December of
1995 to purchase 250,000 shares of Series A TCI Group Common Stock, of
which options to purchase 50,000 shares are currently exercisable.
Additionally assumes that shares of Series A Common to be issued in the
Distribution in respect of 15,000 restricted shares of Series A TCI Group
Common Stock are issued to Mr. Beddow. None of the restricted shares is
currently vested.
(5) Includes 117,300 shares of Series B Common Stock to be held by Dr.
Malone's wife, Mrs. Leslie Malone, but Dr. Malone is expected to disclaim
any beneficial ownership of such shares.
(6) Includes 477 shares of Series A Common Stock to be held by Mr. Goddard's
wife, but Mr. Goddard is expected to disclaim any beneficial ownership of
such shares.
(7) Includes 200 shares of Series A Common Stock and 1,029 shares of Series B
Common Stock to be held by a trust in which Mr. Goddard will be beneficial
owner as trustee.
(8) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 4,000 shares of Series A TCI Group Common Stock, of which options
to acquire 800 shares of Series A TCI Group Common Stock are currently
exercisable; and (ii) stock options granted in tandem with stock
appreciation rights in December of 1995 to purchase 17,500 shares of
Series A TCI Group Common Stock, of which options to purchase 3,500 shares
of Series A TCI Group Common Stock are currently exercisable.
(9) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 9,000 shares of Series A TCI Group Common Stock, of which options
to acquire 1,800 shares of Series A TCI Group Common Stock are currently
exercisable; and (ii) stock options granted in tandem with stock
appreciation rights in December of 1995 to purchase 10,000 shares of
Series A TCI Group Common Stock, of which options to purchase 2,000 shares
are currently exercisable.
(10) See notes (2), (3), (4), (6), (7), (8) and (9) above.
CERTAIN RELATIONSHIPS
John Malone is currently the President and a director of TCI and on the
Distribution Date will also be the Chairman of the Board and a director of the
Company. See "Risk Factors--Potential Conflicts of Interest." In addition, Dr.
Malone is a principal stockholder of TCI and will be a principal stockholder
of the Company. See "Principal Stockholders of the Company." On or before the
Distribution Date, for the purpose of governing certain of the ongoing
relationships between the Company and TCI after the Distribution, and to
provide mechanisms for an orderly transition, the Company and TCI will enter
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. In addition, TCIC will continue to
provide installation, maintenance, retrieval and other customer fulfillment
services for certain customers of the Company, pursuant to the Fulfillment
Agreement, and will enter into the TCIC Credit Facility with the Company. See
"Arrangements Between TCI and the Company After the Distribution," note 8 to
the Audited Combined Financial Statements of the Company and note 6 to the
Unaudited Combined Financial Statements of the Company. In addition, as an
officer of TCIC prior to the Distribution, Gary Howard had the benefit of
certain undertakings of indemnification from TCI and TCIC, which will survive
the Distribution. See "Arrangements Between TCI and the Company After the
Distribution--Other Arrangements."
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<PAGE>
PRINCIPAL STOCKHOLDERS OF THE COMPANY
TCI currently owns all of the outstanding shares of Company Common Stock.
The following table lists shareholders expected by the Company to be the
beneficial owners of more than five percent of the outstanding Company Common
Stock upon completion of the Distribution, assuming each such person continued
to own beneficially on the Record Date the same number of shares of TCI Group
Common Stock believed by TCI to be owned beneficially by such person on April
30, 1996. The number of shares has been calculated in each case assuming that
the Company Common Stock will be distributed to TCI Group Stockholders on a
1:10 ratio.
<TABLE>
<CAPTION>
TITLE NUMBER OF SHARES PERCENT VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER OF CLASS BENEFICIALLY OWNED OF CLASS (1) POWER (1)
- ------------------------------------ -------- ------------------ ------------ ---------
<S> <C> <C> <C> <C>
Bob Magness................ Series A 562,965(2)(3) * 26.3%
5619 DTC Parkway Series B 3,713,208(2) 43.9%
Englewood, Colorado
John C. Malone............. Series A 217,203(4) * 17.8%
5619 DTC Parkway Series B 2,533,208(5) 29.9%
Englewood, Colorado
Kearns-Tribune Series A 879,251 1.5% 7.0%
Corporation................
400 Tribune Building Series B 911,250 10.8%
Salt Lake City, Utah
The Associated Group, Series A 1,247,998 2.1% 5.8%
Inc........................
200 Gateway Towers Series B 707,185 8.4%
Pittsburgh, Pennsylvania
The Equitable Companies Series A 4,119,345(6) 7.1% 2.9%
Incorporated...............
787 Seventh Avenue Series B -- --
New York, New York; and
The Mutuelles AXA and AXA
101-100 Terrasse Boieldieu
92042 Paris La Defense
France
The Capital Group Series A 3,954,687(7) 6.8% 2.8%
Companies, Inc.............
333 South Hope Street Series B -- --
Los Angeles, California
</TABLE>
- --------
* Less than one percent.
(1) Assuming 58,336,191 shares of Series A Common Stock and 8,468,163 shares
of Series B Common Stock outstanding immediately following the
Distribution, based on 583,361,905 shares of Series A TCI Group Common
Stock and 84,681,629 shares of Series B TCI Group Common Stock outstanding
on April 30, 1996.
(2) Mr. Magness, as the executor of the Estate of Betsy Magness, will be the
beneficial owner of all shares of Series A Common Stock and Series B
Common Stock to be held of record by the Estate of Betsy Magness after the
Distribution. The number of shares to be held by Mr. Magness will include
210,533 shares of Series A Common Stock and 634,621 shares of Series B
Common Stock of which Mr. Magness will be beneficial owner as executor.
(3) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1992 to
acquire 1,000,000 shares of Series A TCI Group Common Stock, of which
options to acquire 600,000 shares are currently exercisable; and (ii)
stock options granted in tandem with stock appreciation rights in December
of 1995 to acquire 1,000,000 shares of Series A TCI Group Common Stock, of
which options to purchase 200,000 shares are currently exercisable.
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<PAGE>
(4) See note (3) to the table in "Management of the Company--Stock Ownership
of Management."
(5) See note (5) to the table in "Management of the Company--Stock Ownership
of Management."
(6) The number of shares in the table is based upon a Schedule 13G, dated
February 9, 1996, filed by the Equitable Companies Incorporated, which
Schedule 13G reflects that said corporation has sole voting power over
30,729,443 shares and shared voting power over 1,002,725 shares of Series
A TCI Group Common Stock.
(7) Certain operating subsidiaries of The Capital Group Companies, Inc.
exercised investment discretion over various institutional accounts which
held, as of December 29, 1995, 39,546,870 shares of Series A TCI Group
Common Stock. Capital Guardian Trust Company, a bank, and one of such
operating companies, exercised investment discretion over 3,636,820 of
said shares. Capital Research and Management Company, a registered
investment advisor, and Capital International Limited and Capital
International, SA., other operating subsidiaries, had investment
discretion with respect to 35,565,750, 137,770 and 206,510 shares,
respectively, of the above shares. The information set forth above is
based upon a Schedule 13G, dated February 9, 1996, filed by The Capital
Group Companies, Inc. Assumes such arrangements will continue to apply
with regard to the Company Common Stock.
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<PAGE>
DESCRIPTION OF COMPANY CAPITAL STOCK
GENERAL
The following description of the Company's capital stock is intended as a
summary only, does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the applicable provisions of the Delaware
General Corporation Law (the "DGCL") and to the Company Charter and the
Company's Bylaws, both of which have been filed as exhibits to the Company
Form 10 pursuant to the Exchange Act.
The Company will be authorized to issue 195,000,000 shares of common stock,
par value $1.00 per share and 5,000,000 shares of preferred stock, par value
$.01 per share ("Preferred Stock"). The Company Common Stock will be divided
into two series, consisting of 185,000,000 authorized shares of Series A
Common Stock and 10,000,000 authorized shares of Series B Common Stock. Upon
completion of the Distribution, the Company estimates that there will be
approximately 58,445,000 shares of Series A Common Stock and 8,466,000 shares
of Series B Common Stock outstanding. No shares of Preferred Stock will be
issued in connection with the Distribution.
COMMON STOCK
The rights of holders of Series A Common Stock and Series B Common Stock are
identical except for voting and conversion rights. All of the shares of Series
A Common Stock and Series B Common Stock distributed to the TCI Group
Stockholders pursuant to the Distribution will be validly issued, fully paid
and nonassessable.
Voting. Each share of Series A Common Stock entitles the holder to one vote
and each share of Series B Common Stock entitles the holder to ten votes on
each matter to be voted upon by the holders of the Company Common Stock.
Except as may otherwise be required by the DGCL or, with respect to any series
of Preferred Stock, as otherwise provided in any resolution of the Company
Board providing for the establishment of such series of Preferred Stock, the
holders of the Series A Common Stock and the holders of the Series B Common
Stock and the holders of each series of Preferred Stock, if any, entitled to
vote thereon will vote as one class on all matters to be voted on by such
stockholders of the Company. Neither the holders of Series A Common Stock nor
the holders of Series B Common Stock have any rights to vote as a separate
class or series on any matter coming before the stockholders of the Company,
except for certain limited series voting rights provided under the DGCL. Under
the DGCL, the approval of the holders of a majority of the outstanding shares
of any class of capital stock of a corporation, voting separately as a class,
is required to approve any amendment to the charter that would alter or change
the powers, preferences or special rights of the shares of such class so as to
affect them adversely, provided that, if any amendment would alter or change
the powers, preferences or special rights of one or more series of the class
so as to affect them adversely, but would not so affect the entire class, then
only the shares of the series so affected by the amendment would be entitled
to vote thereon separately as a class. The Company Charter does not provide
for cumulative voting in elections of directors of the Company. Under the
Company's Bylaws, directors may be elected by a plurality of the votes of
shares present in person or represented by proxy at the meeting and entitled
to vote on the election of officers.
Conversion. Each share of Series B Common Stock is convertible at any time,
at the option of its holder, into one share of Series A Common Stock. The
Series A Common Stock is not convertible into Series B Common Stock.
Dividends. Subject to the preferential rights, if any, of the holders of
outstanding shares of any series of Preferred Stock, dividends may be paid on
the Company Common Stock as determined by the Company Board out of funds of
the Company legally available therefor under the DGCL. Except for dividends
declared or paid as described below under "--Share Distributions," any
dividends paid on the Series A Common Stock or the Series B Common Stock will
be paid only on both series, in equal amounts per share.
The Company Board will determine its dividend policy with respect to the
Company Common Stock based on the Company's results of operations, financial
condition, capital requirements and other circumstances,
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including restrictions that may be contained in agreements pursuant to which
the Company may borrow funds. It is the Company Board's present intention to
retain cash for the operations of the Company and it is not anticipated that
cash dividends will be paid on the Company Common Stock in the foreseeable
future.
Share Distributions. If at any time a distribution paid in Series A Common
Stock or Series B Common Stock or any other securities of the Company or of
any other corporation, partnership, limited liability company, trust or other
legal entity ("Person") (hereinafter sometimes called a "share distribution")
is to be made with respect to the Series A Common Stock or Series B Common
Stock, such share distribution will be declared and paid only as follows:
(a) a share distribution consisting of shares of Series A Common Stock
(or Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Series A Common Stock) to holders
of Series A Common Stock and Series B Common Stock, on an equal per share
basis; or consisting of shares of Series B Common Stock (or Convertible
Securities that are convertible into, exchangeable for or evidence the
right to purchase shares of Series B Common Stock) to holders of Series A
Common Stock and Series B Common Stock, on an equal per share basis; or
consisting of shares of Series A Common Stock (or Convertible Securities
that are convertible into, exchangeable for or evidence the right to
purchase shares of Series A Common Stock) to holders of Series A Common
Stock and, on an equal per share basis, shares of Series B Common Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Series B Common Stock) to holders
of Series B Common Stock; or
(b) a share distribution consisting of shares of any class or series of
security of the Company or any other Person other than Series A Common
Stock or Series B Common Stock (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase shares
of Series A Common Stock or Series B Common Stock), either on the basis of
a distribution of identical securities, on an equal per share basis, to
holders of Series A Common Stock and Series B Common Stock or on the basis
of a distribution of one class or series of securities to holders of Series
A Common Stock and another class or series of securities to holders of
Series B Common Stock, provided that the securities so distributed (and, if
applicable, the securities into which the distributed securities are
convertible, or for which they are exchangeable, or which the distributed
securities evidence the right to purchase) do not differ in any respect
other than their relative voting rights and related differences in
designation, conversion and share distribution provisions, with holders of
shares of Series B Common Stock receiving the class or series having the
higher relative voting rights (without regard to whether such rights differ
to a greater or lesser extent than the corresponding differences in voting
rights and related differences in designation, conversion and share
distribution provisions between the Series A Common Stock and the Series B
Common Stock), provided that if the securities so distributed constitute
capital stock of a Subsidiary of the Company, such rights shall not differ
to a greater extent than the corresponding differences in voting rights,
designation, conversion and share distribution provisions between the
Series A Common Stock and the Series B Common Stock, and provided in each
case that such distribution is otherwise made on an equal per share basis.
The term "Convertible Securities" is defined in the Company Charter as any
securities of the Company (other than any series of Company Common Stock) that
are convertible into, exchangeable for or evidence the right to purchase any
shares of any series of Company Common Stock, whether upon conversion,
exercise, exchange, pursuant to anti-dilution provisions of such securities or
otherwise. As used in the Company Charter, the term "Subsidiary" means, when
used with respect to any Person, (i) a corporation in which such Person and/or
one or more Subsidiaries of such Person, directly or indirectly, owns capital
stock having a majority of the voting power of such corporation's capital
stock to elect directors under ordinary circumstances, and (ii) any other
Person (other than a corporation) in which such Person and/or one or more
Subsidiaries of such Person, directly or indirectly, has (x) a majority
ownership interest or (y) the power to elect or direct the election of a
majority of the members of the governing body of such first-named Person.
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The Company Charter provides that the Company shall not reclassify,
subdivide or combine the Series A Common Stock without reclassifying,
subdividing or combining the Series B Common Stock, on an equal per share
basis, and the Company shall not reclassify, subdivide or combine the Series B
Common Stock without reclassifying, subdividing or combining the Series A
Common Stock, on an equal per share basis.
Liquidation Rights. In the event of a liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, after payment or provision
for payment of the debts and other liabilities of the Company and subject to
the preferential rights, if any, of holders of any then outstanding shares of
any series of Preferred Stock, holders of shares of Series A Common Stock and
holders of shares of Series B Common Stock would be entitled to share ratably
in all assets of the Company available for distribution to holders of Company
Common Stock. Neither a consolidation, merger, nor sale of assets will be
construed to be a "liquidation", "dissolution" or "winding up" of the Company.
No Preemptive Rights. Holders of Company Common Stock have no preemptive
rights to subscribe for or purchase additional shares of capital stock or
other obligations or securities convertible into or exercisable for shares of
capital stock that may hereafter be issued by the Company.
PREFERRED STOCK
The Preferred Stock may be divided and issued in one or more series from
time to time as determined by the Company Board, without further stockholder
approval. The Company Board is authorized to establish, by resolution, the
number of shares of each series, the powers, designations, preferences and
relative, participating, optional or other rights of each such series, and the
qualifications, limitations, or restrictions thereof. All shares of any one
series of Preferred Stock are required to be alike in every particular. Except
to the extent otherwise provided in the resolution or resolutions providing
for the issue of any series of Preferred Stock, the holders of shares of such
series will have no voting rights except as may be required by Delaware law.
At the date of this Information Statement, the Company Board has not
authorized the issuance of any shares of Preferred Stock and the Company has
no current plans for the issuance of any shares of Preferred Stock.
ANTITAKEOVER EFFECTS OF CERTAIN STATUTORY PROVISIONS AND PROVISIONS OF THE
COMPANY CHARTER AND BYLAWS
General. The DGCL, the Company Charter and the Company's Bylaws contain
provisions which may serve to discourage or make difficult a change in control
of the Company without the support of the Company Board or without meeting
various other conditions. These provisions are designed to enable the Company
Board, particularly in the initial years of the Company's existence as an
independent, publicly owned company, to develop the Company's business in a
manner that will foster its long-term growth without the potential disruption
that might be entailed by the threat of a takeover not deemed by the Company
Board to be in the best interests of the Company and its stockholders. Many of
these provisions are also present in TCI's Restated Certificate of
Incorporation or Bylaws.
The principal provisions of the DGCL and the aforementioned corporate
governance documents are outlined below. The following description of these
provisions is intended as a summary only, does not purport to be complete and
is subject to, and qualified in its entirety by reference to, the DGCL, the
Company Charter and the Company's Bylaws.
Antitakeover Legislation. Section 203 of the DGCL, in general, prohibits a
"business combination" between a Delaware corporation and an "interested
stockholder" within three years following the time that such stockholder
became an "interested stockholder" unless (i) prior to such time, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, exclusive of shares owned by directors who are
also officers and by certain employee stock plans, or (iii) at or subsequent
to such time, the business combination
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is approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote
of at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
The term "business combination" is defined by the DGCL to include, among
other transactions between the interested stockholder and the corporation or
any direct or indirect majority owned subsidiary thereof, a merger or
consolidation; a sale, pledge, transfer or other disposition (including as
part of a dissolution) of assets having an aggregate market value equal to 10%
or more of either the aggregate market value of all assets of the corporation
on a consolidated basis or the aggregate market value of all the outstanding
stock of the corporation; certain transactions that would increase the
interested stockholder's proportionate share ownership of the stock of any
class or series of the corporation or such subsidiary; and any receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation or
any such subsidiary. In general, and subject to certain exceptions, an
"interested stockholder" is any person (other than the corporation and any
direct or indirect majority owned subsidiary of the corporation) who is the
owner of 15% or more of the outstanding voting stock (or, in the case of a
corporation with classes of voting stock with disparate voting power, 15% or
more of the voting power of the outstanding voting stock) of the corporation,
and the affiliates and associates of such person. The term "owner" is broadly
defined to include any person that individually or with or through his or its
affiliates or associates, among other things, beneficially owns such stock, or
has the right to acquire such stock (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement or
understanding or upon the exercise of warrants or options or otherwise or has
the right to vote such stock pursuant to any agreement or understanding, or
has an agreement or understanding with the beneficial owner of such stock for
the purpose of acquiring, holding, voting or disposing of such stock. The
restrictions of DGCL Section 203 do not apply to corporations that have
elected, in the manner provided therein, not to be subject to such section or,
with certain exceptions, which do not have a class of voting stock that is
listed on a national securities exchange or authorized for quotation on an
interdealer quotation system of a registered national securities association
or held of record by more than 2,000 stockholders.
The Company Charter does not contain any provision "opting out" of the
application of DGCL Section 203 and the Company has not taken any of the
actions necessary for it to "opt out" of such provision. As a result, the
provisions of Section 203 will remain applicable to transactions between the
Company and any of its "interested stockholders". The Company Board has,
however, approved the following transactions which could result in certain
persons becoming interested stockholders within the meaning of DGCL Section
203, and by such approval has exempted persons who become interested
stockholders as a result of such transactions from the application of such
section: (a) the acquisition of Company Common Stock by a TCI Group
Stockholder pursuant to the Distribution, (b) the grant of Add-on Company
Options to holders of TCI Options and the grant of Add-on Company SARs to
holders of TCI SARs on the Distribution Date and the issuance of shares of
Series A Common Stock upon the exercise thereof, and (c) the grant of Options
and other Awards payable in Series A Common Stock to employees and directors
of the Company under the 1996 Plan and the issuance of shares of Series A
Common Stock upon the exercise thereof. See "Management of the Company--
Compensation of Directors," "Management of the Company--Compensation of
Executive Officers," "Management of the Company--The TCI Satellite
Entertainment, Inc. 1996 Stock Incentive Plan" and "The Distribution--
Treatment of Outstanding Stock Options and SARs."
Classified Board of Directors. The Company Charter provides for a Company
Board of not less than three members, divided into three classes, as nearly
equal in number as possible, serving staggered three-year terms. The initial
terms of the Company's Class I, Class II and Class III directors expire at the
1997, 1998 and 1999 annual stockholders' meetings, respectively. Starting with
the 1997 annual meeting of stockholders, one class of directors will be
elected each year for a three-year term.
At least two annual meetings of stockholders, instead of one, will generally
be required to effect a change in a majority of the Company Board. The Company
believes that such a delay is advantageous to the Company and its stockholders
because it may help ensure that the Company's directors, if confronted by a
stockholder attempting to force a proxy contest, a tender offer, or an
extraordinary corporate transaction, would have
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sufficient time to review the proposal as well as any available alternatives
to the proposal and to act in what they believe to be the best interest of the
stockholders. In addition, the Company believes that the longer time required
to elect a majority of a classified Company Board will help to ensure
continuity and stability of the Company's management and policies. The
classification of the Company Board will enhance the ability of the Company's
management to effect the Company's long-term business strategies and policies
as determined by the Company Board because in most cases a majority of the
directors at any given time will have had prior experience as directors of the
Company. The Company believes that this, in turn, will permit the Company
Board to represent more effectively the interests of all stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Company Board would
be beneficial to the Company and its stockholders and whether or not a
majority of the Company's stockholders believe that such a change would be
desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or
otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its stockholders. The
classification of the Company Board could thus increase the likelihood that
incumbent directors will retain their positions. In addition, because under
the Company Charter directors may be removed only for cause, a classified
Company Board would delay stockholders who do not agree with the policies of
the Company Board from replacing a majority of the Company Board for two
years, unless they can demonstrate that the directors should be removed for
cause and obtain the requisite vote.
Number of Directors; Removal; Filling Vacancies. The Company Charter and the
Bylaws provide that, subject to the rights of holders of any series of
Preferred Stock to elect additional directors, the number of directors will be
fixed by the Company Board by resolution, but there shall be no fewer than
three directors. The Bylaws provide that the Company Board, by resolution
adopted by the affirmative vote of 75% of the members of the Company Board
then in office, may increase or decrease the number of directors. In addition,
the Company Charter and the Bylaws provide that, subject to the rights of
holders of any series of Preferred Stock, vacancies on the Company Board may
be filled only by the affirmative vote of a majority of the remaining
directors then in office (even though less than a quorum) or by the sole
remaining director. Accordingly, the Company Board could temporarily prevent
any stockholder from obtaining majority representation on the Company Board by
enlarging the size of the Company Board and filling the new directorships with
such stockholder's own nominees.
Under the DGCL, directors serving on a classified board may be removed by
the stockholders only for cause. Moreover, the Company Charter and the Bylaws
provide that, subject to the rights of holders of any series of Preferred
Stock, directors may be removed for cause only upon the affirmative vote of
holders of at least 66 2/3% of the total voting power of the then outstanding
shares of Series A Common Stock, Series B Common Stock and any series of
Preferred Stock entitled to vote at an election of directors, voting together
as a single class.
Mergers, Consolidations and Sale of Assets. The Company Charter provides
that, subject to the rights of holders of any series of Preferred Stock, the
affirmative vote of 66 2/3% of the total voting power of the outstanding
Voting Securities, voting together as a single class, is required to approve
(a) a merger or consolidation of the Company with, or into, another
corporation, other than a merger or consolidation which does not require the
consent of stockholders under the DGCL or a merger or consolidation which has
been approved by at least 75% of the members of the Company Board (in which
case, in accordance with the DGCL, the affirmative vote of a majority in total
voting power of the outstanding Voting Securities would, with certain
exceptions, be required for approval), (b) the sale, lease or exchange of all
or substantially all of the property and assets of the Company or (c) the
dissolution of the Company. "Voting Securities" is currently defined in the
Company Charter as the Series A Common Stock, the Series B Common Stock and
any series of Preferred Stock entitled to vote with the holders of Company
Common Stock generally upon all matters that may be submitted to a vote of
stockholders at any annual meeting or special meeting thereof.
Amendment of the Company Charter and the Bylaws. Under the DGCL, the
stockholders have the right to adopt, amend or repeal the certificate of
incorporation and bylaws of a corporation. In addition, if the certificate
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of incorporation so provides, the bylaws may be amended by the board of
directors. The Company Charter provides that the affirmative vote of 66 2/3%
in total voting power of the outstanding Voting Securities, voting together as
a single class, is required to approve any amendment, alteration or repeal of
any provision of the Company Charter or the addition or insertion of other
provisions therein. The Company Charter further provides that provisions of
the Company's Bylaws may be adopted, amended or repealed by the affirmative
vote of (i) 66 2/3% in total voting power of the outstanding Voting
Securities, voting together as a single class, or (ii) 75% of the members of
the Company Board. These voting requirements will have the effect of making
more difficult any amendment by stockholders of the Company's Bylaws or the
Company Charter, even if a majority of the Company's stockholders believe that
such amendment would be in their best interests.
No Stockholder Action by Written Consent; Special Meetings of
Stockholders. The Company Charter and the Company's Bylaws provide that,
subject to the rights of holders of any series of Preferred Stock, stockholder
action can be taken only at an annual or special meeting of stockholders and
no action may be taken by the written consent of stockholders in lieu of a
meeting. The Company Charter and the Company's Bylaws provide that, except as
otherwise provided by law or in the terms of any series of Preferred Stock,
special meetings of stockholders may be called by the Secretary of the Company
(i) upon the written request of the holders of not less than 66 2/3% in total
voting power of the outstanding Voting Securities or (ii) at the request of
not less than 75% of the members of the Company Board then in office.
The provisions of the Company Charter and the Company's Bylaws prohibiting
stockholder action by written consent in lieu of a meeting will prevent the
holders of a majority of the voting power of the Company from using the
written consent procedure to take stockholder action, thereby ensuring that
all of the stockholders will have the opportunity to participate at a duly
called meeting in determining future corporate actions. In addition, the
requirement that special meetings of stockholders be called upon the request
of 66 2/3% of the total voting power of the Voting Securities or 75% of the
members of the Company Board will prevent the calling of a special meeting by
the holders of less than the percentage of the total voting power of the
Voting Securities necessary to approve a merger or consolidation of the
Company or an amendment to the Company Charter or the Bylaws.
These provisions may be deemed to have an antitakeover effect because such
provisions will limit the ability of stockholders to call special meetings in
order to consider a merger or consolidation or amendment to the Company
Charter or the Company's Bylaws and, absent the request of holders having the
voting power required to approve such transactions, will enable 26% of the
members of the incumbent Company Board to delay until an annual meeting
stockholder consideration of such matters, even if the holders of a majority
of the outstanding voting power of the Company favored such a special meeting.
Such provisions might also have the effect of making more difficult the
removal of incumbent management (through, for example, amendments to the
Company Charter) at such time as the stockholders might believe such action to
be appropriate.
The Company Board, however, believes that these provisions will prevent the
business of the Company from being disrupted between annual meetings by the
calling of special meetings by stockholders holding less than the requisite
percentage of the voting power of the outstanding Voting Securities required
to effectuate any such transaction or amendment or by attempts to take
stockholder action by written consent, and will also provide greater time for
consideration of any proposal submitted by a stockholder to the extent that
his or her proposal would be deferred until the next annual meeting of
stockholders. These provisions will not affect the calling of special meetings
of stockholders by 75% of the members of the Company Board, if in their
opinion, there are matters to be acted upon which are in the interests of the
Company and its stockholders.
Advance Notice Provisions for Stockholder Nominations. The Company's Bylaws
establish an advance notice procedure for stockholders to make nominations of
candidates for election as directors. Nominations of candidates for election
to the Company Board may be made at an annual meeting of stockholders (i)
pursuant to the Company's notice of meeting, (ii) by, or at the direction of,
the Chairman of the Board or the Company Board, or (iii) by a stockholder of
the Company who is entitled to vote at the meeting, has given timely written
notice to the Secretary of the Company in accordance with the procedures set
forth in the Bylaws and was a
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stockholder of record at the time such notice was given. The Bylaws further
provide that at a special meeting at which directors are to be elected,
nominations of candidates for election to the Company Board can be made only
(i) by, or at the direction of, the Company Board, or (ii) by a stockholder of
the Company who has given timely written notice to the Secretary of the
Company.
For notice of stockholder nominations to be made at an annual meeting to be
timely, such notice must be delivered to the Secretary of the Company not less
than 90 days nor more than 120 days prior to the first anniversary of the
preceding year's annual meeting (or if the date of the annual meeting is
advanced by more than 20 days or delayed by more than 70 days from such
anniversary date, not earlier than the 120th day prior to such annual meeting
and not later than the later of (x) the 90th day prior to such annual meeting
and (y) the tenth day after public announcement of the date of such meeting is
first made). For notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
delivered to the Secretary not earlier than the 120th day before such special
meeting and not later than the later of (x) the 90th day prior to such special
meeting and (y) the tenth day after public announcement is first made of the
date of such special meeting.
A stockholder's notice to the Company proposing to nominate a person for
election as a director must contain certain information, including, without
limitation, the identity and address of the nominating stockholder and the
beneficial owner, if any, on whose behalf the nomination is made, the series
and number of shares of capital stock of the Company which are owned by such
stockholder and beneficial owner, a representation that such stockholder is
entitled to vote at the meeting and intends to appear in person or by proxy at
the meeting to nominate the person specified in the notice, all information
regarding the proposed nominee that would be required to be included in a
proxy statement soliciting proxies for the proposed nominee and the consent of
the nominee to serve as a director of the Company if so elected. If the
Chairman of the Board or other officer presiding at a meeting determines that
a person was not nominated in accordance with the required procedures, such
person will not be eligible for election as a director.
The requirement of advance notice of nominations by stockholders will afford
the Company Board a meaningful opportunity to consider the qualifications of
the proposed nominee and, to the extent deemed necessary or desirable by the
Company Board, to inform stockholders about such qualifications. Although the
Company Charter and the Bylaws do not give the Company Board any power to
approve or disapprove stockholder nominations for the election of directors,
they may have the effect of precluding a contest for the election of directors
if the proper procedures are not followed, and of discouraging or deterring a
third party from conducting a solicitation of proxies to elect its own slate
of directors, without regard to whether consideration of such nominees might
be harmful or beneficial to the Company and its stockholders.
Voting Rights. Each share of Series A Common Stock entitles the holder to
one vote and each share of Series B Common Stock entitles the holder to ten
votes on each matter presented to stockholders. The Series A Common Stock and
the Series B Common Stock vote together as a single class. The voting power
afforded to the holders of the Series B Common Stock may be deemed to have an
antitakeover effect as such concentration of voting power may have the effect
of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of the Company even though such an attempt might
be economically beneficial to the Company and its stockholders. In addition,
the disparate voting rights of the two series of Company Common Stock may
affect the ability of holders of Series A Common Stock to change the Company
Board or to benefit from transactions that are opposed by the holders of a
significant number of shares of Series B Common Stock, even though such
actions may be in the interests of the holders of a majority of the shares of
Company Common Stock. Because such concentration of voting power may make it
more difficult to and thereby discourage an effort to acquire the Company, the
stockholders may be deprived of an opportunity to sell their shares in a
tender offer or to sell their shares at a premium over prevailing market
prices.
Preferred Stock. The Company Charter authorizes the Company Board to issue
five million shares of Preferred Stock, in one or more series, and to
establish the powers, preferences, rights and privileges thereof to the full
extent permitted by law. The Company believes that the ability of the Company
Board to issue one or
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more series of Preferred Stock will provide the Company with increased
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs that might arise. The authorized shares of
Preferred Stock, as well as the authorized shares of Company Common Stock,
will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. If the approval of the Company's
stockholders is not required for the issuance of shares of Preferred Stock or
Company Common Stock, the Company Board does not intend to seek stockholder
approval. The Company Board will make any determination to issue such shares
based on its judgment as to the best interests of the Company and its
stockholders. The Company Board, in so acting, could issue Company Common
Stock and/or Preferred Stock in connection with an attempt to acquire control
of the Company or other transaction, and the terms of such series of Preferred
Stock could be designed to discourage such acquisition attempt or other
transaction, notwithstanding that some, or a majority, of the Company's
stockholders might believe such acquisition or other transaction to be in
their best interests or that stockholders might receive a premium for their
stock over the then current market price of such stock as a result thereof.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
The Company Charter provides that, to the fullest extent permitted by the
DGCL as it presently exists or may hereafter be amended, a director will not
be liable to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director. Under existing Delaware law, directors would
not be liable except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL (involving the payment of an unlawful dividend),
or (iv) for any transaction from which the director derived improper personal
benefit. While the Company Charter provides directors with protection from
awards for monetary damages for breach of their duty of care, it does not
eliminate such duty. Accordingly, the Company Charter will have no effect on
the availability of equitable remedies, such as an injunction or rescission,
based on a director's breach of his or her duty of care.
Delaware law contains provisions permitting and, in some situations,
requiring Delaware corporations, such as the Company, to provide
indemnification to their officers and directors for losses and litigation
expenses incurred in connection with their service to the corporation in those
capacities. The Company Charter requires the Company to indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any person who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he, or a person for whom he is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such person. The Company's Bylaws
provide that such right of indemnification applies to the respective heirs,
personal representatives and successors in interest of members of the Company
Board and officers of the Company for or on account of any action performed on
behalf of the Company. The Company Charter also requires the Company to pay
the expenses (including attorneys' fees) incurred by a director or officer in
defending any proceeding in advance of its final disposition upon receipt of
an undertaking by the director or officer to repay all advanced amounts if it
should ultimately be determined that the director or officer is not entitled
to indemnification. If a valid claim for indemnification or payment of
expenses is not paid in full within 60 days after a written claim therefor has
been received by the Company, the claimant may file suit to recover the unpaid
amount of such claim and, if successful in whole or in part, will be entitled
to be paid the expense of prosecuting such claim. In any such action, the
Company will have the burden of proving that the claimant was not entitled to
the requested indemnification or payment of expenses under applicable law.
The Company Charter provides that the indemnification right stated therein
is not exclusive of any other rights that a person may have or may in the
future acquire under any statute, provision of the Company Charter, the
Bylaws, agreement, vote of stockholders or resolution of disinterested
directors or otherwise. The Company
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Charter further states that no amendment, modification or repeal of the above-
described Company Charter provisions shall adversely affect any limitation,
right or protection of a director or officer under such Company Charter
provision in respect of any act or omission occurring prior to the time of
such amendment, modification or repeal.
The Company will enter into indemnification agreements with each of its
directors. The indemnification agreements will generally provide (i) for the
prompt indemnification to the fullest extent permitted by law against (a) any
and all expenses, including attorneys' fees and all other costs paid or
incurred in connection with investigating, preparing to defend, defending or
otherwise participating in, any threatened, pending or completed action, suit
or proceeding related to the fact that such indemnitee is or was a director,
officer, employee, agent or fiduciary of the Company or is or was serving at
the Company's request as a director, officer, employee, trustee, agent or
fiduciary of another entity, or by reason of anything done or not done by such
indemnitee in any such capacity, and (b) any and all judgments, fines,
penalties and amounts paid in settlement of any claim, unless the "Reviewing
Party" (defined as one or more members of the Company Board or appointee(s) of
the Company Board, who are not parties to the particular claim, or independent
legal counsel) determines that such indemnification is not permitted under
applicable law and (ii) for the prompt advancement of expenses to an
indemnitee as well as the reimbursement by such indemnitee of such advancement
to the Company if the Reviewing Party determines that the indemnitee is not
entitled to such indemnification under applicable law. In addition, the
indemnification agreements will provide (i) a mechanism through which an
indemnitee may seek court relief in the event the Reviewing Party determines
that the indemnitee would not be permitted to be indemnified under applicable
law (and would therefore not be entitled to indemnification or expense
advancement under the indemnification agreement) and (ii) indemnification
against all expenses, including attorneys' fees, and the advancement thereof,
if requested, incurred by the indemnitee in any action brought by the
indemnitee to enforce an indemnity claim or to collect an advancement of
expenses or to recover under a directors' and officers' liability insurance
policy, regardless of whether such action is ultimately successful or not.
Furthermore, the indemnification agreements will provide that after there has
been a "change in control" in the Company (as defined in the indemnification
agreements), other than a change in control approved by a majority of
directors who were directors prior to such change, then, with respect to all
determinations regarding rights to indemnification and the advancement of
expenses, the Company will seek legal advice as to the right of the indemnitee
to indemnification under applicable law only from independent legal counsel
selected by the indemnitee and approved by the Company.
The indemnification agreements will impose upon the Company the burden of
proving that an indemnitee is not entitled to indemnification in any
particular case and negate certain presumptions that may otherwise be drawn
against an indemnitee seeking indemnification in connection with the
termination of actions in certain circumstances. Indemnitees' rights under the
indemnification agreements are not exclusive of any other rights they may have
under Delaware law, the Company's Bylaws or otherwise. Although not requiring
the maintenance of directors' and officers' liability insurance, the
indemnification agreements require that indemnitees be provided with the
maximum coverage available for any director or officer of the Company if there
is such a policy.
The Company may purchase liability insurance policies covering its directors
and officers.
INDEPENDENT AUDITORS
The Company Board has designated KPMG Peat Marwick LLP as the Company's
independent auditors for the 1996 fiscal year. TCI, as the Company's sole
stockholder, has approved the designation.
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GLOSSARY OF TERMS
1996 Plan. TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan.
1996 Telecom Act. Telecommunications Act of 1996.
ACC. Advanced Communications Corporation.
Add-on Company Option. Option to purchase Series A Common Stock, issuable in
connection with the Distribution to holders of existing TCI Options. See "The
Distribution--Treatment of Outstanding TCI Stock Options and SARs."
Adjusted TCI Option. Option to purchase Series A TCI Group Common Stock,
issuable in connection with the Distribution to holders of existing TCI
Options. See "The Distribution--Treatment of Outstanding TCI Stock Options and
SARs."
Alphastar. Alphastar, Inc., a subsidiary of Tee-Com Electronics, Inc., a
Canadian company.
Apple. Apple Computer, Inc., a California corporation.
AT&T. AT&T Corp.
Authorized Units. Number of active authorized satellite receivers, more than
one of which may be installed in a subscribing household.
Awards. Grants of Options, SARs, Restricted Shares, Stock Units, Performance
Awards or any combination thereof, made pursuant to the 1996 Plan.
Bose. Bose Corporation, a Massachusetts corporation.
box. See "IRD" and "satellite receiver."
BSS. Broadcast Satellite Service, which operates at high power in the Ku-
band.
churn. Subscriber termination of satellite television service.
Code. Internal Revenue Code of 1986, as amended.
Comcast. Comcast Corporation.
Commercial Market. Commercial customers and potential customers of digital
satellite television service, such as restaurants, bars, hotels and motels,
multiple dwelling units, businesses and schools.
Committee. Compensation Committee of the Company Board, or such other
committee as the Board may in the future appoint to administer the 1996 Plan.
Communications Act. Communications Act of 1934, as amended.
Company. TCI Satellite Entertainment, Inc., a Delaware corporation and a
wholly owned subsidiary of TCI prior to the Distribution. Unless the context
otherwise requires, also refers to (i) TCI's collective interests in the
Digital Satellite Business before the Distribution Date, and (ii) TCI
Satellite Entertainment, Inc. and its consolidated subsidiaries on and after
the Distribution Date.
Company Board. Board of Directors of the Company.
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Company Charter. Restated Certificate of Incorporation of the Company.
Company Common Stock. Series A Common Stock and Series B Common Stock.
Company Employee. Person who is a Company employee at the time of the
Distribution and following the Distribution is no longer a TCI employee.
Company Form 10. Registration Statement on Form 10, including exhibits,
schedules and amendments thereto, filed by the Company with the SEC.
Company Note. A promissory note in the principal amount of $250,000,000 to
be issued by the Company to TCIC on or before the Distribution Date pursuant
to the Reorganization Agreement and the TCIC Credit Facility, evidencing a
portion of the Company's intercompany balance owed to TCIC on the date of
issuance.
Company Satellites. Two high power direct broadcast satellites, which Tempo
has agreed to purchase from Loral pursuant to the Satellite Construction
Agreement.
Construction Permit. Construction permit held by Tempo and issued by the FCC
to build, launch and operate a DBS system.
Continental. Continental Cablevision, Inc.
Convertible Notes. Convertible Notes due December 12, 2021 of TCI UA, Inc.
Counsel. Baker & Botts, L.L.P.
Cox. Cox Communications, Inc.
DBS. Direct Broadcast Satellite.
Decrees. The State Decree and the Federal Decree.
Delivery. Delivery of a satellite by Loral to Tempo, in accordance with the
Satellite Construction Agreement.
DGCL. Delaware General Corporation Law.
Digital. TCI Digital Satellite Entertainment, Inc., a Colorado corporation.
Digital compression. Conversion of the standard analog video signal into a
digital signal, and the compression of that signal so as to facilitate
multiple channel transmission through a single transponder.
Digital Satellite Business. Business of distributing multichannel
programming services directly to consumers in the U.S. via digital medium
power or high power satellite, including the rental and sale of customer
premises equipment relating thereto.
DirectSat. DirectSat Corporation.
DirecTv. DirecTv, Inc., a subsidiary of Hughes Electronics Corporation, a
Delaware corporation.
Distribution. Distribution by TCI to the TCI Group Stockholders of all of
the issued and outstanding Company Common Stock.
Distribution Date. December 4, 1996, the date the Distribution will be made.
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Distributors. Affiliates of each of the partners of PRIMESTAR Partners other
than GEAS, including the Company, who are authorized distributors of
PRIMESTAR(R).
Dividend Equivalents. Cash or property corresponding to all dividends and
distributions (or the economic equivalent thereof) in respect of Restricted
Shares issued at the end of the Restriction Period that would have been paid,
made or declared on such Restricted Shares had such shares been issued at the
beginning of the Restriction Period.
EchoStar. EchoStar Communications Corp., a Nevada corporation.
Employee Plan. Qualified Employee Stock Purchase Plan to be established by
the Company.
End-of-Life Option. PRIMESTAR Partners' option, exercisable prior to
December 31, 1996, to extend the agreement between PRIMESTAR Partners and GE
Americom with respect to the use of up to 24 transponders on GE-2.
ESPP. TCI Employee Stock Purchase Plan.
Exchange Act. Securities Exchange Act of 1934, as amended.
Exercise Price. $1,000,000, which PRIMESTAR Partners would be obligated to
pay Tempo upon the exercise of the Tempo Option.
FCC. Federal Communications Commission.
FCC Auction. FCC auction held in January 1996 of 28 frequencies at the
110(degrees) W.L. orbital location and 24 frequencies at the 148(degrees) W.L.
orbital location.
Federal Decree. Consent decree entered in United States v. PRIMESTAR
Partners, L.P., et al., 93 Civ. 3913 (SDNY, 1993).
Free Standing SAR. SAR granted under the 1996 Plan to an eligible employee
who is not the holder of an Option.
FSS. Fixed Satellite Service, which includes medium power services
transmitting in the Ku-band, as well as low power services transmitting in the
C-band.
Fulfillment Agreement. Agreement entered into between TCIC and the Company,
pursuant to which TCIC will continue to provide fulfillment services to the
Company following the Distribution with respect to certain customers of the
PRIMESTAR(R) medium power service.
G.E. General Electric Company.
GE-2. GE Americom medium power satellite that GE Americom currently expects
to launch on January 31, 1997 to replace K-1, and make operational within 60
days after launch.
GE-3. GE Americom medium power satellite that is expected to serve as an in-
orbit spare for GE-2. GE-3 is still under construction and is expected to be
available for launch in the summer of 1997.
GE-2 Agreement. Amended and Restated Memorandum of Agreement, effective as
of October 18, 1996, between PRIMESTAR Partners and GE Americom.
GE Americom. GE American Communications, Inc., a Delaware corporation. GE
Americom is a subsidiary of G.E. and the parent company of GEAS.
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GEAS. G.E. Americom Services, Inc., a Delaware corporation and a partner of
PRIMESTAR Partners.
GI. General Instruments Corporation, a Delaware corporation.
HSD. Home satellite dish.
HSR Act. Hart-Scott-Rodino Antitrust Improvement Act of 1974, as amended.
homes passed. Homes that can be connected to a cable distribution system
without further extension of the cable distribution network.
ILS. International Launch Services.
Imedia Technology. Proprietary technology of Imedia Corporation currently
under development to provide statistical multiplexing of digitally compressed
video signals.
Incentive Options. Options granted pursuant to the 1996 Plan which are
incentive stock options within the meaning of Section 422 of the Code.
Indemnification Agreements. Indemnification Agreements between (i) the
Company and TCI UA 1, relating to a letter of credit issued for the account of
TCI UA 1, which supports the PRIMESTAR Credit Facility and (ii) the Company
and TCIC, relating to a letter of credit issued for the account of two
subsidiaries of TCI to support the Company's share of PRIMESTAR Partners'
obligations under the GE-2 Agreement, with respect to PRIMESTAR Partners' use
of transponders on GE-2.
IRD. Integrated receiver/decoder; a set-top satellite television receiver.
Joint Venture. Netlink USA/Superstar Satellite Entertainment Joint Venture;
a C-band satellite program distributor.
K-1. Satcom K-1, a GE Americom medium power satellite located at 85(degrees)
W.L., from which PRIMESTAR Partners currently broadcasts.
K-1 Notes. Promissory notes to be issued in connection with the Distribution
by two subsidiaries of the Company for the purchase of TCIC's partnership
interests in PRIMESTAR Partners, which promissory notes will be assumed by TCI
on or before the Distribution Date in the form of a capital contribution to
the Company.
K-2. Satcom K-2, a GE Americom medium power satellite that will replace K-1
in November 1996.
Kearns-Tribune. Kearns-Tribune Corporation, a Utah corporation.
Liberty Media Group. TCI's programming and electronic retailing businesses.
Liberty Media Group Common Stock. Tele-Communications, Inc. Series A Liberty
Media Group Common Stock, $1.00 par value per share, and Tele-Communications,
Inc. Series B Liberty Media Group Common Stock, $1.00 par value per share.
License Agreement. Trade Name and Service Mark License Agreement by and
between TCI and the Company.
LMDS. Local multi-point distribution service.
LNB. Low noise block converter, a component of HSDs.
Lockheed-Martin. Lockheed Martin Corporation.
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LodgeNet. LodgeNet Entertainment Corporation, a Delaware corporation.
Loral. Space Systems/Loral, Inc., a New York corporation.
Master Agents. Four master sales agents engaged by the Company to distribute
PRIMESTAR(R), including Metron Digital Services, Inc., CVS Systems, Inc.,
Resource Electronics, Inc. and Recreation Sports and Imports, Inc.
MCI. MCI Communications Corp., a Delaware corporation.
MCI/News Corp. Joint venture between MCI and News Corp. that expects to
commence offering high power service by the end of 1997.
MDU. Multiple dwelling unit.
MMDS. Multi-channel multi-point distribution service; a one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
National Call Center. National call center maintained by the Company for
orders, information and customer service.
Newhouse. Newhouse Broadcasting Corporation.
News Corp. The News Corporation Limited, an Australian corporation.
Nonqualified Options. Options granted pursuant to the 1996 Plan, which are
nonqualified stock options under Section 422 of the Code.
Operating Cash Flow. Operating income before depreciation. Operating Cash
Flow is a commonly used measure of value and borrowing capacity within the
Company's industry, and is not intended to be a measure of performance in
accordance with generally accepted accounting principles and should not be
relied upon as such.
Option Agreement. Agreement entered into by Tempo and PRIMESTAR Partners in
February 1991, granting PRIMESTAR Partners the Tempo Option.
Options. Stock options granted pursuant to the 1996 Plan.
Participant Contributions. Pre-tax contributions, after-tax contributions or
both made by a participant to the Employee Plan.
Partners Committee. Committee of the Partnership, composed of
representatives of the partners of the Partnership and two independent
members, that manages and controls the business and affairs of PRIMESTAR
Partners pursuant to the PRIMESTAR Partnership Agreement.
Partnership. PRIMESTAR Partners, L.P., a Delaware limited partnership.
Passed by cable. With access to cable television.
Performance Awards. Performance awards granted pursuant to the 1996 Plan.
Person. Any corporation (other than the Company), partnership, limited
liability company, trust or other legal entity.
Preferred Stock. Preferred stock, par value $.01 per share, of TCI Satellite
Entertainment, Inc.
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PRIMESTAR(R). The PRIMESTAR(R) programming service.
PRIMESTAR Credit Facility. Bank credit facility obtained by PRIMESTAR
Partners to finance advances to Tempo for payments due in respect of the
Company Satellites under the Satellite Construction Agreement, and supported
by letters of credit arranged for by affiliates of the partners of the
Partnership (other than GEAS).
PRIMESTAR Partners. PRIMESTAR Partners, L.P., a Delaware limited
partnership.
PRIMESTAR Partnership Agreement. Limited Partnership Agreement of PRIMESTAR
Partners (then known as K Prime Partners, L.P.), dated as of February 8, 1990,
as amended.
PRIMESTAR Satellite Signal. Satellite signal used by PRIMESTAR Partners to
transmit its programming services.
Private cable system. Satellite master antenna television system that
provides television programming services to residential MDUs through cable
plant or other equipment that is located entirely on private property and does
not constitute a direct-to home distribution system or a franchised cable
system.
Record Date. November 12, 1996.
Reorganization Agreement. Agreement to be entered into on or before the
Distribution Date by TCI, TCIC and a number of other TCI subsidiaries,
including the Company and its subsidiaries, which will provide for, among
other things, the principal corporate transactions required to effect the
Distribution, the conditions thereto and certain provisions governing the
relationship between the Company and TCI with respect to and resulting from
the Distribution.
ResNet. ResNet Communications, Inc., a Delaware corporation and subsidiary
of LodgeNet.
ResNet Business. ResNet's business of operating as a "private cable
operator" under applicable federal law, providing video on-demand, basic and
premium cable television programming, and other interactive, multi-media
entertainment and information services to subscribers in multiple dwelling
units with facilities that do not use any public right-of-way.
Restricted Shares. Restricted shares granted pursuant to the 1996 Plan.
Restriction Period. Period of time designated by the Committee at the time
of any Award of Restricted Shares, which must elapse before the Restricted
Shares will become vested.
Retained Distributions. Dividends and distributions made or declared with
respect to Restricted Shares before the end of the Restriction Period, other
than such dividends and other distributions designated by the Committee.
SARs. Stock appreciation rights granted pursuant to the 1996 Plan.
Satellite Construction Agreement. Fixed-price satellite construction
agreement between Loral and Tempo dated as of February 22, 1990, pursuant to
which the Company has agreed to purchase the Company Satellites and has an
option to purchase up to three additional satellites.
Satellite No. 1. One of the two Company Satellites. The Company currently
intends to launch Satellite No. 1 into the 119(degrees) W.L. orbital location.
Satellite No. 2. One of the two Company Satellites. The Company does not
currently have definite plans regarding the launch or use of Satellite No. 2.
satellite receiver. See "IRD."
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SBCA. Satellite Broadcasting and Communications Association.
SEC. Securities and Exchange Commission.
Securities Act. Securities Act of 1933, as amended.
Series A Common Stock. TCI Satellite Entertainment, Inc. Series A Common
Stock, $1.00 par value per share.
Series A Liberty Media Group Common Stock. Tele-Communications, Inc. Series
A Liberty Media Group Common Stock, $1.00 par value per share.
Series A TCI Group Common Stock. Tele-Communications, Inc. Series A TCI
Group Common Stock, $1.00 par value per share.
Series B Common Stock. TCI Satellite Entertainment, Inc. Series B Common
Stock, $1.00 par value per share.
Series B Liberty Media Group Common Stock. Tele-Communications, Inc. Series
B Liberty Media Group Common Stock, $1.00 par value per share.
Series B TCI Group Common Stock. Tele-Communications, Inc. Series B TCI
Group Common Stock, $1.00 par value per share.
Service. Internal Revenue Service.
set-top box. See "IRD."
Share Purchase Agreement. Agreement to be entered into by TCI and the
Company on or before the Distribution Date, 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 Distribution Date by their respective employees and nonemployee
directors.
State Decree. Consent decree entered in The States of New York, et al. v.
PRIMESTAR Partners, L.P., et al., 93 Civ. 3068-3907 (SDNY, 1994).
Stock Units. Awards of Series A Common Stock and other awards granted by the
Committee under the 1996 Plan that are valued in whole or in part by reference
to, or are otherwise based on, the value of the Series A Common Stock.
Tag-Along Agreement. Agreement dated as of February 8, 1990, originally
entered into by and among Cox Enterprises, Inc., Comcast, Continental,
Newhouse, Tempo, TCIC and TCI Development Corporation, a subsidiary of TCI.
Tandem SAR. SAR granted under the 1996 Plan to the holder of an Option with
respect to all or a portion of the shares of Series A Common Stock subject to
the related Option.
Tax Sharing Agreement. The Tax Sharing Agreement among TCI, TCIC and certain
other consolidated subsidiaries of TCI, as amended. In connection with the
Distribution, the Tax Sharing Agreement will be amended to provide that the
Company will be treated as if it had been a party to the Tax Sharing Agreement
effective July 1, 1995.
TCI. Tele-Communications, Inc., a Delaware corporation.
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TCI 1994 Plan. Tele-Communications, Inc. 1994 Stock Incentive Plan.
TCI 1995 Plan. Tele-Communications, Inc. 1995 Stock Incentive Plan.
TCI 1996 Plan. Tele-Communications, Inc. 1996 Incentive Plan.
TCI Board. Board of Directors of TCI.
TCIC. TCI Communications, Inc., a Delaware corporation and the subsidiary of
TCI that owns and operates cable systems in the U.S., and its consolidated
subsidiaries.
TCIC Credit Facility. A credit facility, dated as of the Distribution Date,
that will provide for TCIC's commitment to make the TCIC Revolving Loans and
the Company's obligations with respect to the TCIC Revolving Loans and the
Company Note.
TCIC Revolving Loans. Loans to be made by TCIC from time to time pursuant to
the TCIC Credit Facility up to an aggregate outstanding principal amount of
$500,000,000.
TCI Group. TCI's businesses that are not attributed to the Liberty Media
Group.
TCI Group Common Stock. Series A TCI Group Common Stock and Series B TCI
Group Common Stock.
TCI Group Stockholders. Holders of record of TCI Group Common Stock.
TCI Intercompany Agreements. The Reorganization Agreement, the Fulfillment
Agreement, the Transition Services Agreement and the Stock Option Agreements.
TCI Options. Options to purchase shares of Series A TCI Group Common Stock.
TCI Plan Committee. Committee of the TCI Board of Directors that administers
the TCI Plans.
TCI Plans. Various stock plans of TCI, other than the TCI 1992 Plan.
TCI SARs. Stock appreciation rights with respect to shares of Series A TCI
Group Common Stock.
TCI Series D Preferred Stock. TCI Series D Convertible Preferred Stock.
TCI's Net Investment. Cumulative amount invested by TCI and its predecessor
in the Company and its predecessors prior to and including the applicable date
of determination, less the aggregate amount of all dividends and distributions
made by the Company and its predecessors to TCI and its predecessor prior to
and including such date.
TCITV. TCI Technology Ventures, Inc., a Delaware corporation and a
subsidiary of TCI.
TCI UA 1. TCI UA 1, Inc., a Colorado corporation and a subsidiary of TCI.
TCI UA 1 Letter of Credit. Irrevocable transferable letter of credit issued
by Chemical Bank for the account of TCI UA 1, which supports the PRIMESTAR
Credit Facility.
Telesat. Telesat Canada, a Canadian corporation.
Tempo. Tempo Satellite, Inc., an Oklahoma corporation and a direct, wholly
owned subsidiary of the Company.
Tempo Letter Agreements. Two letter agreements entered into by Tempo and
PRIMESTAR Partners in connection with the Tempo Option and certain related
matters.
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Tempo Option. PRIMESTAR Partners' right and option, granted by Tempo under
the Option Agreement, upon exercise, to purchase or lease 100% of the capacity
of a DBS system to be built, launched and operated by Tempo pursuant to the
Construction Permit.
Time Warner. Time Warner, Inc.
Transition Services Agreement. Agreement between TCI and the Company,
pursuant to which TCI will provide to the Company certain services and other
benefits, including certain administrative and other services that were
provided to the Company by TCI prior to the Distribution.
transponder. The device on a communications satellite, composed of one or
more traveling wave tube amplifiers and related equipment, that receives and
transmits radio signals. For an analog signal, there is one transmitting
channel per transponder. Using currently available digital compression, one
transponder can be converted on average into five or more analog programming
channels.
USSB. United States Satellite Broadcasting Corporation, a Minnesota
corporation.
UVSG. United Video Satellite Group, Inc., an Oklahoma corporation and a
consolidated subsidiary of TCI that is included in the TCI Group.
Voting Securities. The Series A Common Stock, the Series B Common Stock and
any series of Preferred Stock entitled to vote with the holders of Company
Common Stock generally upon all matters that may be submitted to a vote of
stockholders at any annual meeting or special meeting thereof.
wireless cable. Any of a number of methods of distributing multichannel
video programming by land-based radio frequency transmissions, including MMDS
and LMDS.
W.L. West longitude. Satellite orbital positions are identified by their
position over the equator in degrees of longitude East or West of the zero
meridian.
WTCI. Western Tele-Communications, Inc., a Delaware corporation and a
subsidiary of TCIC.
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INDEX TO FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<S> <C>
TCI SATELLITE ENTERTAINMENT, INC.
Condensed Pro Forma Combined Financial Statements, June 30, 1996 (unau-
dited).................................................................. F-2
Condensed Pro Forma Combined Balance Sheet, June 30, 1996 (unaudited).... F-3
Condensed Pro Forma Combined Statement of Operations,
Six months ended June 30, 1996 (unaudited).............................. F-4
Year ended December 31, 1995 (unaudited)................................ F-5
Notes to Condensed Pro Forma Combined Financial Statements, June 30, 1996
(unaudited)............................................................. F-6
HISTORICAL FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<S> <C>
"TCI SATCO"
Audited Combined Financial Statements
Independent Auditors' Report............................................ F-10
Combined Balance Sheets, December 31, 1995 and 1994..................... F-11
Combined Statements of Operations, Years ended December 31, 1995, 1994
and 1993............................................................... F-12
Combined Statements of Parent's Investment, Years ended December 31,
1995, 1994 and 1993.................................................... F-13
Combined Statements of Cash Flows, Years ended December 31, 1995, 1994
and 1993............................................................... F-14
Notes to Combined Financial Statements, December 31, 1995, 1994 and
1993................................................................... F-15
Unaudited Combined Financial Statements
Combined Balance Sheets, June 30, 1996 and December 31, 1995............ F-33
Combined Statements of Operations, Six months ended June 30, 1996 and
1995................................................................... F-34
Combined Statements of Parent's Investment, Six months ended June 30,
1996................................................................... F-35
Combined Statements of Cash Flows, Six months ended June 30, 1996 and
1995................................................................... F-36
Notes to Combined Financial Statements, June 30, 1996................... F-37
</TABLE>
<TABLE>
<S> <C>
PRIMESTAR PARTNERS, L.P.
Audited Financial Statements
Report of Independent Accountants....................................... F-52
Balance Sheet, December 31, 1995 and 1994............................... F-53
Statement of Operations, December 31, 1995, 1994 and 1993............... F-54
Statement of Changes in Partners Capital, Years ended December 31, 1995,
1994 and 1993.......................................................... F-55
Statement of Cash Flows, Years ended December 31, 1995, 1994 and 1993... F-56
Notes to Financial Statements, December 31, 1995, 1994 and 1993......... F-57
</TABLE>
F-1
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
"TCI SATCO" is comprised of certain satellite television assets of TCI
Communications, Inc. ("TCIC"), a subsidiary of Tele-Communications, Inc.
("TCI"). Upon consummation of the spinoff transaction described in note 1 (the
"Distribution"), TCI Satellite Entertainment, Inc. ("TSEI") will own the
assets that comprise "TCI SATCO," which assets include (i) a 100% ownership
interest in "PRIMESTAR By TCI," the TCIC business that distributes the
PRIMESTAR(R) programming service to subscribers within specified areas of the
continental United States, (ii) an aggregate 20.86% ownership interest in
PRIMESTAR Partners, L.P. ("PRIMESTAR Partners"), and (iii) a 100% ownership
interest in Tempo Satellite, Inc. ("Tempo").
In the following text, the "Company" may, as the context requires, refer to
"TCI SATCO" (prior to the completion of the Distribution), TSEI (subsequent to
the completion of the Distribution) or both. Additionally, unless the context
indicates otherwise, references to "TCI" and "TCIC" herein are to TCI and
TCIC, together with their respective consolidated subsidiaries (other than the
Company).
The following unaudited condensed pro forma combined balance sheet of the
Company, dated as of June 30, 1996, assumes that (i) the Distribution and (ii)
the "Reorganization Agreement" (see note 2), the "Fulfillment Agreement" (see
note 3), the "Transition Services Agreement" (see note 4) and the "Stock
Option Agreements" (see note 5), (collectively, the "TCI Intercompany
Agreements") were effective, as of such date.
The following unaudited condensed pro forma combined statements of operations
of the Company for the six months ended June 30, 1996 and the year ended
December 31, 1995 assume that the Distribution and the TCI Intercompany
Agreements were effective, as of January 1, 1995.
The unaudited pro forma results do not purport to be indicative of the results
of operations that would have been obtained if the Distribution and the TCI
Intercompany Agreements were effective as of January 1, 1995. These condensed
pro forma combined financial statements of the Company should be read in
conjunction with the historical combined financial statements and the related
notes thereto of the Company.
F-2
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
ASSETS
Cash, receivables and prepaids.......... $ 21,627 11,300 (7) 32,927
Investment in, and related advances to,
PRIMESTAR Partners..................... 28,847 -- 28,847
Property and equipment, net of
accumulated depreciation............... 1,047,703 -- 1,047,703
---------- -------- ---------
$1,098,177 11,300 1,109,477
========== ======== =========
LIABILITIES AND EQUITY
Payables, accruals and other operating
liabilities............................ $ 97,208 -- 97,208
Due to PRIMESTAR Partners............... 386,219 -- 386,219
Company Note............................ -- 250,000 (6) 250,000
Stock compensation obligation........... -- 39,500 (7) 39,500
---------- -------- ---------
Total liabilities................... 483,427 289,500 772,927
---------- -------- ---------
Equity:
Series A Common Stock.................. -- 58,437 (8) 58,437
Series B Common Stock.................. -- 8,468 (8) 8,468
Additional paid-in capital............. -- 473,413 (6) 378,308
(28,200)(7)
(66,905)(8)
Accumulated deficit.................... (108,663) -- (108,663)
Due to TCIC............................ 723,413 (723,413)(6) --
---------- -------- ---------
Total equity........................ 614,750 (278,200) 336,550
---------- -------- ---------
$1,098,177 11,300 1,109,477
========== ======== =========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-3
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue.............................. $ 193,647 -- 193,647
Operating, selling, general and ad-
ministrative expenses............... (186,626) 4,315 (9) (187,068)
(4,757)(10)
Stock compensation expense........... -- (1,447)(11) (1,447)
Depreciation......................... (53,527) (4,928)(12) (58,455)
--------- ------- --------
Operating Loss..................... (46,506) (6,817) (53,323)
Interest expense..................... -- (12,500)(13) (12,500)
Share of losses of PRIMESTAR Part-
ners................................ (1,446) -- (1,446)
Other, net........................... 194 -- 194
--------- ------- --------
Loss before income taxes........... (47,758) (19,317) (67,075)
Income tax benefit................... 14,870 7,727 (14) 22,597
--------- ------- --------
Net loss........................... $ (32,888) (11,590) (44,478)
========= ======= ========
Pro forma net loss per share......... $ (0.66)(15)
========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-4
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue............................... $208,903 -- 208,903
Operating, selling, general and admin-
istrative expenses................... (214,117) 11,427 (9) (206,974)
(4,284)(10)
Stock compensation expense............ -- (5,151)(11) (5,151)
Depreciation.......................... (55,488) (4,245)(12) (59,733)
-------- ------- --------
Operating Loss...................... (60,702) (2,253) (62,955)
Interest expense...................... -- (25,000)(13) (25,000)
Share of losses of PRIMESTAR Part-
ners................................. (8,969) -- (8,969)
Other, net............................ 306 -- 306
-------- ------- --------
Loss before income taxes............ (69,365) (27,253) (96,618)
Income tax benefit.................... 21,858 10,901 (14) 32,759
-------- ------- --------
Net loss............................ $(47,507) (16,352) (63,859)
======== ======= ========
Pro forma net loss per share.......... $ (.95)(15)
========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-5
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(1) On June 17, 1996, the Board of Directors of TCI (the "TCI Board")
announced its intention to spinoff all the capital stock of the Company to
the holders of Tele-Communications, Inc. Series A TCI Group Common Stock
(the "Series A TCI Group Common Stock") and Tele-Communications, Inc.
Series B TCI Group Common Stock (the "Series B TCI Group Common Stock"
and, together with the Series A TCI Group Common Stock, the "TCI Group
Common Stock"). The spinoff will be effected as a distribution by TCI to
holders of its TCI Group Common Stock of shares of the Series A Common
Stock of the Company (the "Series A Common Stock") and Series B Common
Stock of the Company (the "Series B Common Stock"). The Distribution will
not involve the payment of any consideration by the holders of TCI Group
Common Stock (such holders, the "TCI Group Stockholders"), and is intended
to qualify as a tax-free spinoff. The Distribution is expected to occur
during the fourth quarter of 1996, on a date (the "Distribution Date") to
be determined by the TCI Board, and will be made as a dividend to holders
of record (other than certain subsidiaries of TCI that have waived such
dividend in consideration for additional shares of Series A TCI Group
Common Stock) of TCI Group Common Stock as of the close of business on
November 12, 1996 (the "Record Date").
Stockholders of record of TCI Group Common Stock on the Record Date will
receive one share of Series A Common Stock for each ten shares of Series A
TCI Group Common Stock owned of record at the close of business on the
Record Date and one share of Series B Common Stock for each ten shares of
Series B TCI Group Common Stock owned of record as of the close of business
on the Record Date. Fractional shares will not be issued. Fractions of one-
half or greater of a share will be rounded up and fractions of less than
one-half of a share will be rounded down to the nearest whole number of
shares of Series A Common Stock and Series B Common Stock.
(2) The "Reorganization Agreement" will provide for, among other things, the
transfer to the Company of the assets of TCI SATCO, and for the assumption
by the Company of related liabilities. No consideration will be payable by
the Company for these transfers, except that two subsidiaries of the
Company will purchase TCIC's partnership interests in PRIMESTAR Partners
for consideration payable by delivery of promissory notes issued by such
subsidiaries, which notes will be assumed by TCI in connection with the
Distribution, in the form of a capital contribution to the Company. The
Reorganization Agreement will also provide for certain cross-indemnities
designed to make the Company financially responsible for all liabilities
relating to the digital satellite business conducted by TCI prior to the
Distribution, as well as for all liabilities incurred by the Company after
the Distribution, and to make TCI financially responsible for all
potential liabilities of the Company which are not related to the digital
satellite business, including, for example, liabilities arising as a
result of the Company being a subsidiary of TCI.
The Reorganization Agreement also will provide that, prior to the
Distribution, the Company will issue to TCIC a promissory note (the "Company
Note"), in the principal amount of $250,000,000, representing a portion of
the Company's intercompany balance owed to TCIC on such date. The Company
Note will bear interest at the rate of 10.0% per annum, compounded semi-
annually. The outstanding principal and accrued interest under the Company
Note will be due and payable on September 30, 2001. However, the Company
will be required to use its best efforts to refinance the Company Note as
soon as possible following the Distribution. Pursuant to the Reorganization
Agreement, the remainder of the Company's intercompany balance owed to TCIC
on the Distribution Date will be assumed by TCI in the form of a capital
contribution to the Company. In addition, the Company will (i) assume TCI's
obligations under options to be granted on the Distribution Date to certain
key employees of TCI (who are not employees of the Company) representing, in
aggregate, 2.5% of the shares of Company Common Stock issued and outstanding
on the Distribution Date, after giving effect to the Distribution, and (ii)
grant to TCI an option to purchase up to 4,765,000 shares of Series A Common
Stock, at an exercise price of $1.00
F-6
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
per share, as required by TCI from time to time to meet its obligations
under the conversion features of the TCI Series D Preferred Stock and the
Convertible Notes due December 12, 2021, of TCI UA, Inc., as such
conversion features are adjusted as a result of the Distribution. See note
5 .
(3) TCIC historically has provided the Company with certain customer
fulfillment services. Charges for such services have been allocated to the
Company by TCIC based on scheduled rates. Pursuant to the "Fulfillment
Agreement," TCIC will continue to provide fulfillment services to the
Company following the Distribution with respect to customers of the
PRIMESTAR(R) medium power service. Such services will include
installation, maintenance, retrieval, inventory management and other
customer fulfillment services. The Fulfillment Agreement, which will
become effective on the first day of the month following the Distribution
Date, provides for, among other matters, (i) the responsibilities of TCIC
with respect to fulfillment services, including performance standards and
penalties for non-performance, (ii) TCIC's fulfillment sites to be
connected to the billing and information systems used by the Company,
allowing for on-line scheduling and dispatch of installation and other
service calls, and (iii) scheduled rates to be charged to the Company for
the various customer fulfillment services to be provided by TCIC. The
Company retains sole control under the Fulfillment Agreement to establish
the retail prices and other terms and conditions on which installation and
other services will be provided to the Company's customers. The
Fulfillment Agreement also provides that, during the term of the
Fulfillment Agreement, TCIC will not provide fulfillment services to any
other wireless or other similar or competitive provider or distributor of
television programming services (other than traditional cable). The
Fulfillment Agreement will have an initial term of two years, and is
terminable, on 180 days notice to TCIC, by the Company at any time during
the first six months following the Distribution Date.
There can be no assurance that the terms of the Fulfillment Agreement are
not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained
by the Company from third parties on any terms if the Fulfillment Agreement
is terminated. The cost to the Company of the services provided by TCIC
under the Fulfillment Agreement will exceed the standard charges that,
historically, have been allocated to the Company for such services,
reflecting in part the value to the Company, as determined by Company
management, of the performance standards, exclusivity, termination right
and certain other provisions included in the Fulfillment Agreement.
Installation charges from TCIC include direct and indirect costs of
performing installations. The Company has capitalized a portion of such
charges based upon amounts charged by unaffiliated third parties to perform
similar services. Following the Distribution, the Company will capitalize
the full amount of installation fees paid to TCIC pursuant to the
Fulfillment Agreement. In this regard, the installation charges allocated
to the Company by TCIC aggregated $28,212,000 and $69,154,000 during the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively. If the Fulfillment Agreement had been in effect on January 1,
1995, the estimated installation fees payable by the Company to TCIC would
have been $37,177,000 and $91,021,000 during the six months ended June 30,
1996 and the year ended December 31, 1995, respectively. The amount payable
in future periods by the Company to TCIC under the Fulfillment Agreement
will be dependent upon the level of fulfillment services provided by TCIC
to the Company.
(4) Pursuant to the Transition Services Agreement between TCI and the Company,
following the Distribution, TCI will provide to the Company certain
services and other benefits, including administrative and other services
that were provided to the Company prior to the Distribution. Pursuant to
the Transition Services Agreement, TCI has also agreed to provide the
Company with certain most-favored-customer rights to programming services
that TCI or a wholly owned subsidiary of TCI may own in the future and
access to any volume discounts that may be available to TCI for purchase
of home satellite dishes, satellite receivers and other equipment. The
Company does not presently purchase programming from SSI and no assurance
can be given that the Company will, in the future, purchase programming
from SSI. As compensation for
F-7
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the services rendered and for the benefits made available to the Company
pursuant to the Transition Services Agreement, the Company will 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), commencing with the month of January
1997, up to a maximum of $3 million per month, and reimburse TCI quarterly
for direct, out-of-pocket expenses to third parties. The Transition
Services Agreement will continue in effect until the close of business on
December 31, 1999, and will be renewed automatically for successive one-
year periods thereafter, unless earlier terminated by (i) either party at
the end of the initial term or the then current renewal term, as
applicable, on not less than 180 days' prior written notice to the other
party, (ii) TCI upon written notice to the Company following certain
changes in control of the Company, and (iii) either party if the other
party is the subject of certain bankruptcy or insolvency-related events.
(5) In June 1996, 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 an executive
officer of TCIC who is also 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 Distribution Date, determined immediately after giving
effect to the Distribution, but before giving effect to any exercise of
such options. The aggregate exercise price for each such option is equal
to 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 TCI's Net
Investment as of the first to occur of the Distribution Date and the date
on which such option first becomes exercisable, but excluding any portion
of TCI's Net Investment that as of such date is represented by a
promissory note or other evidence of indebtedness from the Company to TCI.
TCI's Net Investment is defined for this purpose as the cumulative amount
invested by TCI and its predecessor in the Company and its predecessors
prior to and including the applicable date of determination, less the
aggregate amount of all dividends and distributions made by the Company
and its predecessors to TCI and its predecessor prior to and including
such date. The options will be granted on the Distribution Date, will vest
in 20% cumulative increments on each of the first five anniversaries of
February 1, 1996, and will be exercisable for up to ten years following
February 1, 1996. Assuming the Distribution had occurred on June 30, 1996,
options would have been granted to the TCI Officers, the Company Officer
and the TCI Subsidiary Officer to purchase an aggregate of 2,341,660
shares of Series A Common Stock at a per share exercise price of
approximately $7.00. The actual exercise price to be calculated on the
Distribution Date is expected to be higher than such assumed exercise
price due to increases in TCI's Net Investment that are expected to occur
between June 30, 1996 and the Distribution Date. 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
to be made by TCI to the Company in connection with the Distribution, the
Company has agreed, effective as of the Distribution Date, to bear all
obligations under such options and to enter into stock option agreements
with respect to such stock options (collectively, the "Stock Option
Agreements") with each of the TCI Officers, the Company Officer and the
TCI Subsidiary Officer. See note 2.
(6) Represents the issuance of the Company Note in satisfaction of
$250,000,000 of the intercompany balance owed to TCIC. The excess of the
remaining intercompany balance over the stock compensation obligation
described in notes 5 and 7 is reflected as a contribution to additional
paid-in capital. See note 2.
F-8
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(7) Represents the estimated stock compensation obligation associated with the
Stock Option Agreements. Such estimated obligation is based upon (i) a
preliminary estimate of the market value of the shares underlying the
Stock Option Agreements and (ii) the exercise price that would have been
calculated if the stock options evidenced by the Stock Option Agreements
had been granted on June 30, 1996. Accordingly, such estimated obligation
is subject to adjustment upon the determination of the actual market value
and exercise price on the Distribution Date (the date of grant). The
estimated stock compensation obligation includes a $28,200,000 obligation
with respect to the TCI Officers and the TCI Subsidiary Officer, and a
$11,300,000 obligation with respect to the Company Officer. The
recognition of the estimated stock compensation obligation with respect to
the Company Officer gives rise to deferred stock compensation expense that
will be amortized over the five-year vesting period set forth in the Stock
Option Agreements. See notes 5 and 11.
(8) Reflects the issuance of Series A Common Stock and Series B Common Stock
pursuant to the Distribution. The number of shares reflected in the
accompanying condensed pro forma combined balance sheet was calculated by
applying the one-for-ten distribution ratio to the respective number of
issued and outstanding Series A TCI Group Common Stock and Series B TCI
Group Common Stock at June 30, 1996 (after elimination of shares held by
subsidiaries of TCI).
(9) Eliminates the portion of the installation fees allocated to the Company
by TCIC that was not capitalized in the Company's historical combined
financial statements. See note 3.
(10) Represents the estimated additional charges that would have been incurred
by the Company assuming the Transition Services Agreement had been
effective on January 1, 1995. See note 4.
(11) Represents estimated compensation expense resulting from the vesting of
the stock options that were assumed to be granted to the Company Officer
on January 1, 1995 pursuant to the Stock Option Agreements. See notes 5
and 7.
(12) Represents the estimated additional depreciation expense that would have
been incurred by the Company assuming (i) the Fulfillment Agreement had
been effective on January 1, 1995 and (ii) the Company had capitalized
all installation fees paid to TCIC under the Fulfillment Agreement. See
note 3.
(13) Represents assumed interest expense on the Company Note. The pro forma
adjustment has been calculated using an interest rate of 10% per annum,
the rate that interest will accrue on borrowings under the Company Note.
See note 2.
(14) Represents the estimated income tax effect of the pro forma adjustments.
(15) Represents pro forma loss per share assuming 66,904,582 weighted average
shares of the Company were outstanding during the six months ended June
30, 1996 and the year ended December 31, 1995. Such weighted average
shares represent the number of shares that would have been issued by the
Company if the Distribution had occurred on June 30, 1996.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TCI Communications, Inc.:
We have audited the accompanying combined balance sheets of "TCI SATCO" (a
combination of certain satellite television assets of TCI Communications,
Inc., as defined in note 1) as of December 31, 1995 and 1994, and the related
combined statements of operations, parent's investment, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of "TCI SATCO" as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
October 21, 1996
F-10
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash................................................... $ 1,801 --
Accounts receivable.................................... 29,192 4,103
Less allowance for doubtful accounts................... 4,819 1,589
---------- ---------
24,373 2,514
---------- ---------
Prepaid expenses....................................... 86 --
Investment in, and related advances to, PRIMESTAR Part-
ners L.P., ("PRIMESTAR Partners") (note 5)............ 17,963 9,793
Property and equipment, at cost:
Satellite reception equipment........................ 422,070 110,808
Subscriber installation costs........................ 128,870 24,382
Support equipment.................................... 12,395 425
Cost of satellites under construction (note 6)....... 382,900 278,772
---------- ---------
946,235 414,387
Less accumulated depreciation........................ 57,015 16,589
---------- ---------
889,220 397,798
---------- ---------
$ 933,443 410,105
========== =========
LIABILITIES AND PARENT'S INVESTMENT
Accounts payable....................................... $ 11,378 1,168
Accrued charges from PRIMESTAR Partners (note 5)....... 26,420 4,900
Other accrued expenses................................. 11,483 1,078
Subscriber advance payments............................ 13,244 1,764
Due to PRIMESTAR Partners (note 6)..................... 382,900 278,772
Deferred income taxes (note 7)......................... 4,434 1,897
---------- ---------
Total liabilities.................................. 449,859 289,579
---------- ---------
Parent's investment:
Accumulated deficit.................................. (75,775) (28,268)
Due to TCI Communications, Inc. ("TCIC") (notes 2 and
8).................................................. 559,359 148,794
---------- ---------
Total parent's investment.......................... 483,584 120,526
---------- ---------
Commitments and contingencies (notes 2, 5, 6, 8, 9 and
10)
$ 933,443 410,105
========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-11
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- ------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue:
Programming and equipment rental.................. $133,688 18,641 9,075
Installation...................................... 75,215 11,638 2,604
-------- ------- ------
208,903 30,279 11,679
-------- ------- ------
Operating costs and expenses:
Programming and other charges from PRIMESTAR Part-
ners (note 5).................................. 78,250 11,632 4,445
Other operating:
TCIC (note 8)................................... 15,916 4,367 1,577
Other........................................... 1,884 -- --
Selling, general and administrative:
TCIC (note 8)................................... 7,817 1,080 795
Other........................................... 110,250 8,027 252
Depreciation...................................... 55,488 14,317 6,513
-------- ------- ------
269,605 39,423 13,582
-------- ------- ------
Operating loss................................ (60,702) (9,144) (1,903)
Other income (expense):
Share of losses of PRIMESTAR Partners (note 5).... (8,969) (11,722) (5,524)
Other, net........................................ 306 306 88
-------- ------- ------
(8,663) (11,416) (5,436)
-------- ------- ------
Loss before income taxes...................... (69,365) (20,560) (7,339)
Income tax benefit (note 7)......................... 21,858 6,872 2,505
-------- ------- ------
Net loss...................................... $(47,507) (13,688) (4,834)
======== ======= ======
</TABLE>
See accompanying notes to combined financial statements.
F-12
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF PARENT'S INVESTMENT
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED DUE TO PARENT'S
DEFICIT TCI INVESTMENT
----------- ------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Balance at January 1, 1993..................... $ (9,746) 27,283 17,537
Net loss..................................... (4,834) -- (4,834)
Allocation of TCIC expenses.................. -- 2,372 2,372
Allocation of TCIC installation costs........ -- 4,511 4,511
Intercompany income tax allocation........... -- (3,403) (3,403)
Net cash transfers from TCIC................. -- 27,166 27,166
-------- ------- -------
Balance at December 31, 1993................... (14,580) 57,929 43,349
Net loss..................................... (13,688) -- (13,688)
Allocation of TCIC expenses.................. -- 5,447 5,447
Allocation of TCIC installation costs........ -- 15,369 15,369
Intercompany income tax allocation........... -- (9,611) (9,611)
Net cash transfers from TCIC................. -- 79,660 79,660
-------- ------- -------
Balance at December 31, 1994................... (28,268) 148,794 120,526
Net loss..................................... (47,507) -- (47,507)
Allocation of TCIC expenses.................. -- 23,733 23,733
Allocation of TCIC installation costs........ -- 57,058 57,058
Intercompany income tax allocation........... -- (36,530) (36,530)
Recognition of deferred tax assets in
connection with intercompany transfer of
certain property and equipment.............. -- 12,136 12,136
Net cash transfers from TCIC................. -- 354,168 354,168
-------- ------- -------
Balance at December 31, 1995................... $(75,775) 559,359 483,584
======== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-13
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (47,507) (13,688) (4,834)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation.................................. 55,488 14,317 6,513
Share of losses of PRIMESTAR Partners......... 8,969 11,722 5,524
Deferred income tax expense................... 14,672 2,739 898
Other non-cash charges (credits).............. 901 (87) 449
Changes in operating assets and liabilities:
Change in receivables........................ (21,859) (1,809) (263)
Change in prepaids........................... (86) -- --
Change in accruals and payables.............. 42,135 5,624 764
Change in subscriber advance payments........ 11,480 1,304 172
--------- -------- --------
Net cash provided by operating activities... 64,193 20,122 9,223
--------- -------- --------
Cash flows from investing activities:
Capital expended for construction of satel-
lites......................................... (104,128) (207,608) (71,164)
Capital expended for property and equipment.... (442,782) (109,184) (14,881)
Additional investments in and advances to
PRIMESTAR Partners............................ (17,139) (32,082) (24,664)
Repayment of advances to PRIMESTAR Partners.... -- 30,192 --
--------- -------- --------
Net cash used in investing activities: (564,049) (318,682) (110,709)
--------- -------- --------
Cash flows from financing activities:
Increase in due to PRIMESTAR Partners.......... 104,128 207,608 71,164
Increase in due to TCIC........................ 397,529 90,952 30,197
--------- -------- --------
Net cash provided by financing activities... 501,657 298,560 101,361
--------- -------- --------
Net increase (decrease) in cash............. 1,801 -- (125)
Cash at beginning of period................. -- -- 125
--------- -------- --------
Cash at end of period....................... $ 1,801 -- --
========= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-14
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) BASIS OF PRESENTATION
The accompanying combined financial statements of "TCI SATCO" represent a
combination of the historical financial information of certain satellite
television assets of TCIC, a subsidiary of Tele-Communications, Inc. ("TCI").
Upon consummation of the spinoff transaction described in note 2, TCI
Satellite Entertainment, Inc. ("TSEI") will own the assets that comprise "TCI
SATCO," which assets include (i) a 100% ownership interest in "PRIMESTAR By
TCI," the TCIC business that distributes the PRIMESTAR(R) programming service
to subscribers within specified areas of the continental United States, (ii)
an aggregate 20.86% ownership interest in PRIMESTAR Partners, and (iii) a 100%
ownership interest in Tempo Satellite, Inc. ("Tempo").
Tempo holds a construction permit (the "Construction Permit") issued by the
Federal Communications Commission ("FCC") authorizing construction of a direct
broadcast satellite ("DBS") system. Tempo is also a party to a construction
agreement (the "Satellite Construction Agreement") with Space Systems/Loral,
Inc. ("Loral"), pursuant to which Loral is currently constructing two high
power communications satellites (the "Company Satellites"). PRIMESTAR
Partners, which was formed as a limited partnership in 1990 by subsidiaries of
TCIC, several other cable operators and General Electric Company, broadcasts
satellite entertainment services that are delivered to the home through
PRIMESTAR By TCI and certain other authorized distributors.
In the following text, the "Company" may, as the context requires, refer to
"TCI SATCO" (prior to the completion of the spinoff transaction described in
note 2), TSEI and its consolidated subsidiaries (subsequent to the completion
of the spinoff transaction described in note 2) or both. Additionally, unless
the context indicates otherwise, references to "TCI" and "TCIC" herein are to
TCI and TCIC, together with their respective consolidated subsidiaries (other
than the Company).
All significant inter-entity transactions have been eliminated.
As further discussed in note 8, the accompanying combined statements of
operations include allocations of certain costs and expenses of TCI. Although
such allocations are not necessarily indicative of the costs that would have
been incurred by the Company on a stand-alone basis, management believes the
resulting allocated amounts are reasonable.
(2) SPINOFF TRANSACTION
On June 17, 1996, the Board of Directors of TCI (the "TCI Board") announced
its intention to spinoff all the capital stock of the Company to the holders
of Tele-Communications, Inc. Series A TCI Group Common Stock (the "Series A
TCI Group Common Stock") and Tele-Communications, Inc. Series B TCI Group
Common Stock (the "Series B TCI Group Common Stock" and, together with the
Series A TCI Group Common Stock, the "TCI Group Common Stock"). The spinoff
will be effected as a distribution (the "Distribution") by TCI to holders of
its TCI Group Common Stock of shares of Series A Common Stock of the Company
(the "Series A Common Stock") and Series B Common Stock of the Company (the
"Series B Common Stock"). The Distribution will not involve the payment of any
consideration by the holders of TCI Group Common Stock (such holders, the "TCI
Group Stockholders"), and is intended to qualify as a tax-free spinoff. The
Distribution is expected to occur in the fourth quarter of 1996, on a date
(the "Distribution Date") to be determined by the TCI Board, and will be made
as a dividend to holders of record (other than certain subsidiaries of TCI
that have waived such dividend in consideration for additional shares of
Series A TCI Group Common Stock) of TCI Group Common Stock as of the close of
business on November 12, 1996 (the "Record Date").
F-15
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Stockholders of record of TCI Group Common Stock on the Record Date will
receive one share of Series A Common Stock for each ten shares of Series A TCI
Group Common Stock owned of record at the close of business on the Record Date
and one share of Series B Common Stock for each ten shares of Series B TCI
Group Common Stock owned of record as of the close of business on the Record
Date. Fractional shares will not be issued. Fractions of one-half or greater
of a share will be rounded up and fractions of less than one-half of a share
will be rounded down to the nearest whole number of shares of Series A Common
Stock and Series B Common Stock.
Following the Distribution, the Company and TCI will operate independently,
and neither will have any stock ownership, beneficial or otherwise, in the
other. For the purposes of governing certain of the ongoing relationships
between the Company and TCI after the Distribution, and to provide mechanisms
for an orderly transition, on or before the Distribution Date the Company and
TCI will enter into various agreements, including the "Reorganization
Agreement", the "Fulfillment Agreement", the "TCIC Credit Facility", the
"Transition Services Agreement," an amendment to TCI's existing "Tax Sharing
Agreement" and the "Indemnification Agreements."
Reorganization Agreement
The Reorganization Agreement will provide for, among other things, the
transfer to the Company of the assets of TCI SATCO, and for the assumption by
the Company of related liabilities. No consideration will be payable by the
Company for these transfers, except that two subsidiaries of the Company will
purchase TCIC's partnership interests in PRIMESTAR Partners for consideration
payable by delivery of promissory notes issued by such subsidiaries, which
promissory notes will be assumed by TCI on or before the Distribution Date, in
the form of a capital contribution to the Company. The Reorganization
Agreement will also provide for certain cross-indemnities designed to make the
Company financially responsible for all liabilities relating to the digital
satellite business conducted by TCI prior to the Distribution, as well as for
all liabilities incurred by the Company after the Distribution, and to make
TCI financially responsible for all potential liabilities of the Company which
are not related to the digital satellite business, including, for example,
liabilities arising as a result of the Company's having been a subsidiary of
TCI.
Pursuant to the Reorganization Agreement, on or before the Distribution
Date, the Company will issue to TCIC a promissory note (the "Company Note"),
in the principal amount of $250,000,000, representing a portion of the
Company's intercompany balance owed to TCIC on such date. See related
discussion below.
Pursuant to the Reorganization Agreement, the remainder of the Company's
intercompany balance owed to TCIC on the Distribution Date will be assumed by
TCI in the form of a capital contribution to the Company. In addition, the
Company will (i) assume TCI's obligations under options to be granted on the
Distribution Date to certain key employees of TCI (who are not employees of
the Company) representing, in aggregate, 2.5% of the shares of Company Common
Stock issued and outstanding on the Distribution Date, after giving effect to
the Distribution, and (ii) grant 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 the TCI Series D Preferred Stock and the Convertible Notes due
December 12, 2021, of TCI UA, Inc., as such conversion features are adjusted
as a result of the Distribution. See related discussion below.
Fulfillment Agreement
TCIC historically has provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force and National Call Center. Charges for such services have been allocated
to the Company by TCIC based on scheduled rates.
F-16
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the Fulfillment Agreement entered into by TCIC and the Company,
TCIC will continue to provide fulfillment services to the Company following
the Distribution with respect to customers of the PRIMESTAR(R) medium power
service. Such services will include installation, maintenance, retrieval,
inventory management and other customer fulfillment services. The Fulfillment
Agreement, which will become effective on the first day of the month following
the Distribution Date. Among other matters, the Fulfillment Agreement (i) sets
forth the responsibilities of TCIC with respect to fulfillment services,
including performance standards and penalties for non-performance, (ii)
provides for TCIC's fulfillment sites to be connected to the billing and
information systems used by the Company, allowing for on-line scheduling and
dispatch of installation and other service calls, and (iii) provides scheduled
rates to be charged to the Company for the various customer fulfillment
services to be provided by TCIC. The Company retains sole control under the
Fulfillment Agreement to establish the retail prices and other terms and
conditions on which installation and other services will be provided to the
Company's customers. The Fulfillment Agreement also provides that, during the
term of the Fulfillment Agreement, TCIC will not provide fulfillment services
to any other wireless or other similar or competitive provider or distributor
of television programming services (other than traditional cable). The
Fulfillment Agreement will have an initial term of two years and is
terminable, on 180 days notice to TCIC, by the Company at any time during the
first six months following the Distribution Date.
There can be no assurance that the terms of the Fulfillment Agreement are
not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained by
the Company from third parties on any terms if the Fulfillment Agreement is
terminated. The cost to the Company of the services provided by TCIC under the
Fulfillment Agreement will exceed the standard charges that, historically,
have been allocated to the Company for such services, reflecting in part the
value to the Company, as determined by Company management, of the performance
standards, exclusivity, termination right and certain other provisions
included in the Fulfillment Agreement. See notes 1 and 8.
TCIC Credit Facility
TCIC has agreed to make loans to the Company from time to time up to an
aggregate outstanding principal amount of $500,000,000 (the "TCIC Revolving
Loans"). The terms and conditions of the TCIC Revolving Loans and Company Note
will be provided for by a credit agreement, dated as of the Distribution Date,
between the Company and TCIC (the "TCIC Credit Facility"). The TCIC Revolving
Loans and the Company Note will bear interest at 10% per annum, compounded
semi-annually. Commitment fees equal to 3/8% of the average unborrowed
availability of TCIC's $500,000,000 commitment under the TCIC Credit Facility
will be payable to TCIC annually. Proceeds from the TCIC Revolving Loans may
be used to fund (i) working capital requirements, (ii) capital expenditures
contemplated by the October 1996 business plan of the Company, (iii) up to
$75,000,000 of other capital expenditures and investments and (iv) the
commitment fees payable under the TCIC Credit Facility. The TCIC Credit
Facility requires the Company to use its best efforts to obtain external debt
or equity financing after the Distribution Date. The TCIC Credit Facility
further provides for mandatory prepayment of the TCIC Revolving Loans and the
Company Note if and in the amount that the Company has obtained such external
financing. Any such prepayment from the proceeds of external financing is
required to be applied first to the Company Note and then to repay borrowings
and correspondingly reduce the commitments under the TCIC Credit Facility. The
outstanding principal of the TCIC Revolving Loans and the Company Note,
together with accrued interest, will be due and payable on September 30, 2001,
the final maturity date of the TCIC Credit Facility, whether or not sufficient
external financing has then been obtained by the Company.
Borrowings under the TCIC Credit Facility are subject to, among other
things, (a) the Company's representations and warranties being true and
correct on the date of borrowing, (b) the Company's being in compliance with
its covenants in the TCIC Credit Facility, (c) no default having occurred and
being continuing
F-17
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
on the borrowing date or being caused by such borrowing and (d) the Company's
being in compliance, in all material respects, with the terms and conditions
of the Indemnification Agreements, the Transition Services Agreement, the
Reorganization Agreement and the Fulfillment Agreement. The TCIC Credit
Facility sets forth the covenants the Company has agreed to comply with during
the term of the TCIC Credit Facility, including its covenants (i) not to sell,
transfer or otherwise dispose of any asset (other than sales of inventory in
the ordinary course of business), without the prior written consent of TCIC
(other than the sale of assets or securities of a subsidiary if the aggregate
consideration payable to the seller in respect of such sale is not less than
the fair market value of such assets), (ii) not to merge into or consolidate
or combine with any other person, without the prior written consent of TCIC,
(iii) not to declare or pay any dividend or make any distribution on its
capital stock (other than in common stock), or purchase, redeem or otherwise
acquire or retire for value any capital stock of the Company, (iv) to maintain
specified minimum numbers of qualified subscribers from December 31, 1996
through December 31, 1997, (v) not to incur indebtedness at any time prior to
and including December 31, 1997 that would exceed a specified amount per
qualified subscriber, (vi) to maintain specified leverage ratios from January
1, 1998 through September 30, 2001, (vii) to maintain specified minimum ratios
of annualized cash flow to annual interest expense, and (viii) to maintain a
specified minimum ratio of annualized cash flow to pro forma debt service.
Transition Services Agreement
Pursuant to the Transition Services Agreement between TCI and the Company,
following the Distribution, TCI will provide to the Company certain services
and other benefits, including certain administrative and other services that
were provided by TCI prior to the Distribution. Pursuant to the Transition
Services Agreement, TCI has also agreed to provide the Company with certain
most-favored-customer rights to programming services that TCI or a wholly
owned subsidiary of TCI may own in the future and access to any volume
discounts that may be available to TCI for purchase of home satellite dishes,
satellite receivers and other equipment. As compensation for the services
rendered and for the benefits made available to the Company pursuant to the
Transition Services Agreement, the Company will 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),
commencing with the month of January 1997, up to a maximum of $3,000,000 per
month, and reimburse TCI quarterly for direct, out-of-pocket expenses incurred
by TCI to third parties in providing the services. The Transition Services
Agreement will continue in effect until the close of business on December 31,
1999, and will be renewed automatically for successive one-year periods
thereafter, unless earlier terminated by (i) either party at the end of the
initial term or the then current renewal term, as applicable, on not less than
180 days' prior written notice to the other party, (ii) TCI upon written
notice to the Company following certain changes in control of the Company, and
(iii) either party if the other party is the subject of certain bankruptcy or
insolvency-related events.
Indemnification Agreements
On or before the Distribution Date, the Company will enter into
Indemnification Agreements (the "Indemnification Agreements") with TCIC and
TCI UA 1, Inc. ("TCI UA 1"). The Indemnification Agreement with TCIC will
provide for the Company to reimburse TCIC for any amounts drawn under an
irrevocable transferable letter of credit issued for the account of TCIC to
support the Company's share of PRIMESTAR Partners' obligations under an
Amended and Restated Memorandum of Agreement, effective as of October 18,
1996, between the Partnership and GE Americom, with respect to PRIMESTAR
Partners' use of transponders on a medium power satellite ("GE-2"), to be
launched by GE Americom to replace the existing satellite used by PRIMESTAR
Partners (the "GE-2 Agreement"). The original drawable amount of such letter
of credit is
F-18
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
$25,000,000, increasing to $75,000,000 if PRIMESTAR Partners exercises its
option under the GE-2 Agreement to extend the term of such agreement for the
remainder of the useful life of GE-2. See notes 5 and 9.
The Indemnification Agreement with TCI UA 1 will provide for the Company to
reimburse TCI UA 1 for any amounts drawn under an irrevocable transferable
letter of credit issued for the account of TCI UA 1 (the "TCI UA 1 Letter of
Credit"), which supports a credit facility (the "PRIMESTAR Credit Facility")
that was obtained by PRIMESTAR Partners to finance advances to Tempo for
payments due in respect of the construction of the Company Satellites, and
that is supported by letters of credit arranged for by affiliates of all but
one of the partners of PRIMESTAR Partners.
The Indemnification Agreements further provide for the Company to indemnify
and hold harmless TCIC and TCI UA 1 and certain related persons from and
against any losses, claims, and liabilities arising out of the respective
letters of credit or any drawings thereunder. The payment obligations of the
Company to TCIC and TCI UA 1 under such Indemnification Agreements will be
subordinated in right of payment with respect to certain future obligations of
the Company to financial institutions.
Other Arrangements
In June 1996, 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 an executive officer of TCIC who is also 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 Distribution Date, determined immediately after
giving effect to the Distribution, but before giving effect to any exercise of
such options. The aggregate exercise price for each such option is equal to
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 TCI's Net Investment (as
defined below) as of the first to occur of the Distribution Date and the date
on which such option first becomes exercisable, but excluding any portion of
TCI's Net Investment that as of such date is represented by a promissory note
or other evidence of indebtedness from the Company to TCI. TCI's Net
Investment is defined for this purpose as the cumulative amount invested by
TCI and its predecessor in the Company and its predecessors prior to and
including the applicable date of determination, less the aggregate amount of
all dividends and distributions made by the Company and its predecessors to
TCI and its predecessor prior to and including such date. The options will be
granted on the Distribution Date, will vest in 20% cumulative increments on
each of the first five anniversaries of February 1, 1996, and will be
exercisable for up to ten years following February 1, 1996. Pursuant to the
Reorganization Agreement, and (in the case of the TCI Officers and the TCIC
Subsidiary Officer) in partial consideration for the capital contribution to
be made by TCI to the Company in connection with the Distribution, the Company
has agreed effective as of the Distribution Date to bear all obligations under
such option and to enter into stock option agreements with respect to such
stock options with each of the TCI Officers, the Company Officer and the TCIC
Subsidiary Officer.
In connection with the Distribution, TCI and the Company also will enter
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
F-19
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Group Common Stock and Series A Common Stock, respectively, as necessary to
satisfy their respective obligations after the Distribution Date under certain
stock options and stock appreciation rights held by their respective employees
and non-employee directors. On or prior to the Distribution, the Company will
also enter into an amendment to TCI's existing "Tax Sharing Agreement." See
note 7.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in PRIMESTAR Partners
The Company uses the equity method to account for its investment in
PRIMESTAR Partners. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's share of the net earnings or
losses of PRIMESTAR Partners as they occur, rather than as dividends or other
distributions are received, limited to the extent of the Company's investment
in, and advances and commitments to, PRIMESTAR Partners. The Company's share
of net earnings or losses of PRIMESTAR Partners includes the amortization of
the difference between the Company's investment and its share of the net
assets of PRIMESTAR Partners.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on a
straight-line basis using estimated useful lives of 4 to 8 years for satellite
reception equipment and subscriber installation costs and 3 to 10 years for
support equipment. Subscriber installation costs are depreciated over the
estimated average life of a subscriber (4 years).
Installation charges from TCIC include direct and indirect costs of
performing installations. The Company has capitalized a portion of such
charges based upon amounts charged by unaffiliated third parties to perform
similar services.
Repairs and maintenance are charged to operations, and betterments and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such
property are charged to accumulated depreciation, and salvage, if any, is
credited thereto.
The cost of the Company Satellites under construction is comprised of
amounts paid by the Company pursuant to a fixed price construction contract.
See note 6.
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121"), effective for fiscal years beginning after December 15,
1995. Statement No. 121 requires impairment losses to be recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement No. 121 effective December 31, 1995. Such adoption
did not have a significant effect on the financial position or results of
operations of the Company. In accordance with Statement No. 121, 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
F-20
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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. TCI SATCO 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.
Revenue Recognition
Monthly 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.
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred.
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. See note 9.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("Statement No. 123") was issued by the FASB in October
1995. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans as well as transactions
in which an entity issues its equity instruments to acquire goods or services
from non-employees. The disclosures required by Statement No. 123, to the
extent applicable, will be included in the notes to future financial
statements.
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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(4) SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was not material during the years
ended December 31, 1995, 1994 and 1993.
With the exception of certain non-cash transactions described in notes 7 and
8, transactions effected through the intercompany account with TCIC have been
considered to be constructive cash receipts and payments for purposes of the
accompanying combined statements of cash flows.
F-21
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(5) INVESTMENT IN PRIMESTAR PARTNERS
Summarized unaudited financial information for PRIMESTAR Partners is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
-------- -------
<S> <C> <C>
FINANCIAL POSITION
Current assets.............................................. $ 72,638 39,756
Property and equipment, net................................. 9,990 7,703
Cost of satellites under construction....................... 419,256 289,607
Other assets, net........................................... 14,078 7,009
-------- -------
Total assets.............................................. $515,962 344,075
======== =======
Current liabilities......................................... $ 37,911 17,081
PRIMESTAR Credit Facility................................... 419,000 290,000
Other liabilities........................................... 7,210 11,178
Partners' capital........................................... 51,841 25,816
-------- -------
Total liabilities and partners' capital................... $515,962 344,075
======== =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
--------- ------- -------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Revenue....................................... $ 180,595 27,841 10,861
Operating, selling, general and administrative
expenses..................................... (216,100) (78,175) (38,433)
Depreciation and amortization................. (2,890) (2,700) (1,849)
--------- ------- -------
Operating loss.............................. (38,395) (53,034) (29,421)
Other, net.................................... (3,642) (2,682) 131
--------- ------- -------
Net loss.................................... $ (42,037) (55,716) (29,290)
========= ======= =======
</TABLE>
The PRIMESTAR Credit Facility matures on June 30, 1997 and borrowings
thereunder are collateralized by letters of credit issued by affiliates of all
but one of the partners. See notes 6 and 9.
PRIMESTAR Partners currently broadcasts from Satcom K-1 ("K-1"), a medium
power satellite that is nearing the end of its operational life. Although the
Company believes that GE-2 will be successfully deployed prior to the
expiration of the operational life of K-1, such deployment is dependent on a
number of factors that are outside of the Company's control, and no assurance
can be given as to the successful deployment of GE-2. The failure to deploy a
fully operational satellite by the end of K-1's operational life (or the
operational life of any temporary in-orbit replacement that might be
available) could have a material adverse effect on both the Company and
PRIMESTAR Partners. See note 2.
PRIMESTAR Partners is obligated to make certain minimum lease payments
throughout the remaining operational life of K-1. Pursuant to the GE-2
Agreement, PRIMESTAR Partners will be required to make minimum lease payments
for an initial term of four years from the date of commercial operation,
extendible, at the option of PRIMESTAR Partners exercised prior to December
31, 1996, for the remainder of the operational life of GE-2 (the "End-Of-Life
Option"). See notes 2 and 9.
F-22
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PRIMESTAR Partners provides programming services to the Company and other
authorized distributors in exchange for a fee based upon the number of
subscribers receiving the respective programming services. In addition,
PRIMESTAR Partners arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services in exchange
for a separate authorization fee. In April 1994, PRIMESTAR Partners began to
separately identify charges which relate to programming services from those
which relate to other items. During the year ended December 31, 1995, the
charges from PRIMESTAR Partners included approximately $53,006,000 for
programming services and $25,244,000 for other items.
Under the PRIMESTAR Partners limited partnership agreement, the Company has
agreed to fund its share of any capital contributions and/or loans to
PRIMESTAR Partners that might be agreed upon from time to time by the partners
of PRIMESTAR Partners. Additionally, as a general partner of PRIMESTAR
Partners, the Company is liable as a matter of partnership law for all debts
of PRIMESTAR Partners in the event the liabilities of PRIMESTAR Partners were
to exceed its assets. PRIMESTAR Partners has contingent liabilities related to
legal and other matters arising in the ordinary course of business. Management
of PRIMESTAR Partners is unable at this time to assess the impact, if any, of
such matters on PRIMESTAR Partners' results of operations, financial position,
or cash flows.
(6) SATELLITES UNDER CONSTRUCTION
Tempo DBS System.
The Company, through Tempo, holds a Construction Permit issued by the FCC
authorizing construction of a DBS system consisting of two or more satellites
delivering DBS service in 11 frequencies at the 119(degrees) West Longitude
("W.L.") orbital position and 11 frequencies at the 166(degrees) W.L. orbital
position. The 119 W.L. orbital position is generally visible to home satellite
dishes throughout all fifty states; the 166 W.L. orbital position is visible
only in the western half of the continental U.S. as well as Alaska and Hawaii.
Tempo is also a party to the Satellite Construction Agreement with Loral,
pursuant to which Tempo has agreed to purchase the Company Satellites at a
fixed contract price of $487,159,500, and has an option to purchase up to
three additional satellites. The cost of constructing the Company Satellites
is reflected in "Cost of satellites under construction" in the accompanying
combined balance sheets.
Construction of each of the Company Satellites has been completed except for
the proper installation of an antenna. As constructed, each Company Satellite
can 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 226 watts per channel). Each such
configuration can be selected at any time, either before or after launch.
The Company has instructed Loral to install an antenna on one of the Company
Satellites ("Satellite No. 1") that is suitable for operation at the
119(degrees) W.L. orbital location, and has arranged for the launch of
Satellite No. 1 into that location on an Atlas rocket scheduled for launch
from Cape Canaveral by International Launch Services on behalf of Lockheed
Martin Corporation on February 27, 1997. If the launch of Satellite No. 1 is
successful, the Company intends to operate such satellite in "paired
transponder" mode, broadcasting on 11 of the 16 available transponder pairs,
in accordance with the Construction Permit. The remaining five transponder
pairs would be available as in-orbit spares. The Company believes that the
signal broadcast by Satellite No. 1 operating in "paired transponder" mode at
226 watts per channel, could be received by households in the majority of the
U.S. using home satellite dishes of less than 14 inches in diameter.
F-23
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company and PRIMESTAR Partners have been in discussions which
contemplate that the Company would make 100% of the capacity of Satellite No.
1 available to PRIMESTAR Partners and that PRIMESTAR Partners would reimburse
the Company for the costs of operating such satellite. In such event,
PRIMESTAR Partners would also determine the disposition of Satellite No. 2 and
the Company would be unconditionally released from any obligation it may have
to repay PRIMESTAR Partners for its funding of the costs of constructing and
launching the Company Satellites. However, if the Company and PRIMESTAR
Partners are unable to reach agreement with respect to the foregoing, the
Company will consider other potential uses for the available capacity on
Satellite No. 1, which could include using such capacity to provide its own
DBS service. Such service, whether offered by PRIMESTAR Partners or the
Company, would be a limited service complementary to off-the-air television,
basic cable and other programming services, or subject to future advances in
digital channel compression, as a full-service, stand-alone offering. See
related discussion below.
The Company does not currently have definite plans for deployment of the
second Company Satellite ("Satellite No. 2"). The Company is currently engaged
in discussions with Telesat Canada, a Canadian corporation ("Telesat"), with
respect to the possible purchase of Satellite No. 2 by Telesat, but there can
be no assurance that any such transaction will occur. If the Company does not
enter into a binding agreement to sell Satellite No. 2 by the end of this
year, the Company currently intends to place Satellite No. 2 in storage, for
such future deployment or disposition as the Company may determine.
The Company is currently in discussions with Loral and other parties with
respect to the possibility of obtaining an additional launch window in 1997 to
be used as a backup for the Company's February 1997 launch window. However,
there can be no assurance that such a launch window can be arranged at this
time or will be available on terms acceptable to the Company.
Competitive Position of the Company's Proposed High Power DBS System.
It is expected that the Company's proposed high power DBS system will
broadcast from 11 transponders at the 119(degrees) W.L. orbital position. At
current compression ratios, the Company's 11 transponders could be used to
broadcast 65 to 80 channels of entertainment and/or information programming,
depending on the type of programming. Although such a programming service
would have relatively limited channel capacity compared to that of other DBS
providers, the Company believes that such potential competitive disadvantage
may be offset in part (i) by the possibility of using smaller (less than 14
inches in diameter) home satellite dishes and (ii) by offering programming
such as multiplexed premium movies, sports, pay-per-view and a selection of
popular cable networks on an "a la carte" basis.
However, the Company does not currently have any agreements with PRIMESTAR
Partners or any programming vendors (except as provided in the Transition
Services Agreement) with respect to the operation of any such DBS programming
service, and does not currently have agreements with any antenna manufacturers
with respect to the purchase of sub-14 inch home satellite dishes. No
assurances can be given that any such agreements can be obtained on terms
satisfactory to the Company, or that the Company or PRIMESTAR Partners will be
successful in pursuing such a strategy, or will not elect to pursue an
alternative strategy with respect to Satellite No. 1.
Moreover, although advances in digital compression technology currently
under development may in the future enable the Company to obtain greater
channel capacity from the 11 transponders on Satellite No. 1, there can be no
assurance that such new technology will be successfully implemented or that,
if implemented, the Company or PRIMESTAR Partners will be able to obtain the
rights to use such technology on satisfactory terms.
F-24
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
However, Western Tele-Communications, Inc. ("WTCI"), an indirect subsidiary of
TCI, has agreed that if, prior to March 1, 1997, the Company engages WTCI to
provide digitization, compression and uplinking services for any high power
DBS system operated by the Company, and WTCI is then authorized to use certain
proprietary technology of Imedia Corporation currently under development or
other proprietary technologies to provide multiplexing of digitally compressed
video signals for the Company. WTCI shall provide such multiplexing services
to the Company for an agreed fee based on WTCI's incremental costs and other
factors. The Company's rights under its agreement with WTCI are assignable by
the Company to any affiliate of the Company, including for this purpose
PRIMESTAR Partners.
If advanced digital compression technology becomes available to the Company,
such technology (or similar technology) will likely also be made available to
cable operators and/or other competitors of the Company and PRIMESTAR
Partners.
Satellite Launches.
Pursuant to the Satellite Construction Agreement, following the launch of a
satellite, Loral will conduct in-orbit testing. Delivery of a satellite takes
place upon Tempo's acceptance of such satellite after completion of in-orbit
testing ("Delivery"). Subject to certain limits, Loral must reimburse Tempo
for Tempo's actual and reasonable expenses directly incurred as a result of
any delays in the Delivery of satellites. The in-orbit useful life of each
satellite is designed to be a minimum of 12 years. If in-orbit testing
confirms that the satellite conforms fully to specifications and the service
life of the satellite will be at least 12 years, Tempo is required to accept
the satellite. If in-orbit testing determines that the satellite does not
fully conform to specifications but at least 50% of its transponders are
functional and the service life of the satellite will be at least six years,
Tempo is required to accept the satellite but is entitled to receive a
proportionate decrease in the purchase price. If Loral fails to deliver a
satellite, it has 29 months to deliver, at its own expense, a replacement
satellite. Loral may make four attempts to launch the two Company Satellites;
however, if the two Company Satellites are not delivered in such four
attempts, Tempo may terminate the Satellite Construction Agreement. Tempo also
may terminate the contract in the event of two successive satellite failures.
Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has warranted that
all items other than the satellites delivered under the Satellite Construction
Agreement will be free from defects in materials or workmanship for one year
from the date of their acceptance and will perform in accordance with the
applicable performance specifications. Loral bears the risk of loss of the
Company Satellites until Delivery. Upon Delivery, title and risk of loss pass
to Tempo. However, Loral is obligated to carry risk insurance on each
satellite covering the period from the launch of the satellite through an
operating period of 180 days. Such risk insurance will cover (i) the cost of
any damages due under the Satellite Construction Agreement; (ii) the cost of
delivery of a replacement satellite in the event of a satellite failure; and
(iii) the refund of the full purchase price for each undelivered Company
Satellite if Loral fails to deliver both Company Satellites after four
attempts. Loral is also required to obtain insurance indemnifying Tempo from
any third party claims arising out of the launch of a satellite.
Tempo Option.
In February 1990, Tempo entered into an option agreement with PRIMESTAR
Partners (the "Option Agreement"), granting PRIMESTAR Partners the right and
option (the "Tempo 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 Construction Permit. Under the Option Agreement, upon the
exercise of the Tempo Option, PRIMESTAR Partners would be obligated to pay
Tempo $1,000,000 (the "Exercise Price") and lease or purchase the entire
capacity of the DBS system with the purchase price (or aggregate lease
payments) being sufficient to cover the
F-25
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
costs of constructing, launching and operating such DBS system. In connection
with the Tempo Option and certain related matters, Tempo and PRIMESTAR
Partners subsequently entered into two letter agreements (the "Tempo Letter
Agreements"), which provided for, among other things, the funding by PRIMESTAR
Partners of milestone and other payments due under the Satellite Construction
Agreement, and certain related costs, through advances by PRIMESTAR Partners
to Tempo. PRIMESTAR Partners financed such advances to Tempo through
borrowings under the PRIMESTAR Credit Facility which was in turn supported by
letters of credit arranged for by affiliates of all but one of the partners of
PRIMESTAR Partners. The aggregate funding provided to Tempo by PRIMESTAR
Partners is reflected in "Due to PRIMESTAR Partners" in the accompanying
combined balance sheets. At December 31, 1995, the amount borrowed by
PRIMESTAR Partners under the PRIMESTAR Credit Facility was $419,000,000,
including accrued interest. See note 5.
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
to Tempo against any payments (other than the Exercise Price) due under the
Tempo Option and would not require Tempo to repay such advances unless
PRIMESTAR Partners elected to stop funding amounts due under the Satellite
Construction Agreement or failed to exercise the Tempo Option within the
period provided for in the Tempo Letter Agreements, in which event Tempo
could, in lieu of making such repayment, elect to assign all of its rights
relating to the Company Satellites to PRIMESTAR Partners.
On February 29, 1996, Tempo notified PRIMESTAR Partners of Tempo's belief
that PRIMESTAR Partners had failed to effectively exercise the Tempo Option
and that such failure had resulted in the termination of the Tempo Option
pursuant to the Tempo Letter Agreements. In that connection, Tempo advised
PRIMESTAR Partners that, based on and assuming the effective termination of
the Tempo Option, Tempo would reimburse PRIMESTAR Partners for its advances to
Tempo by assuming PRIMESTAR Partner's indebtedness for borrowed money under
the PRIMESTAR Credit Facility, to the extent used to fund such advances.
Tempo's belief that PRIMESTAR Partners failed to effectively exercise the
Tempo Option is based, among other things, on the fact that despite the
Partnership's notice to Tempo at the July 29, 1994 meeting of the Partners
Committee of its exercise of the Tempo Option, since such date, PRIMESTAR
Partners has failed to take any of the actions contemplated by the Option
Agreement to be taken following exercise of the Tempo Option, including (i)
advising Tempo whether it intends to purchase or lease the capacity of the DBS
system referred to in the Option Agreement, (ii) negotiating an agreement of
purchase or lease with Tempo and (iii) paying Tempo the Exercise Price.
Moreover, in December 1995, a representative of PRIMESTAR Partners informed
the Company that the July 1994 exercise of the Tempo Option had been intended
as a conditional exercise, although conditional exercises are not contemplated
by the Option Agreement, and that the conditions upon which the Tempo Option
had purportedly been exercised had not been met.
Counsel for PRIMESTAR Partners subsequently notified Tempo that PRIMESTAR
Partners disagreed with the positions advanced by Tempo in the February 29
letter, and believed that PRIMESTAR Partners had effectively and irrevocably
exercised the Tempo Option and was asserting certain rights to the Company
Satellites. Counsel for PRIMESTAR Partners also advised Tempo that PRIMESTAR
Partners would impede any attempt by Tempo to repay PRIMESTAR Partners'
advances. The Partners Committee of PRIMESTAR Partners has failed, however, to
vote to confirm that PRIMESTAR Partners has irrevocably and unconditionally
exercised the Tempo Option. The Company believes that PRIMESTAR Partners'
position is based primarily on equitable arguments relating to the advances
made by PRIMESTAR Partners to Tempo under the Tempo Letter Agreements and
their misreading of the terms of the Option Agreement and the Tempo Letter
Agreements. The Company believes the PRIMESTAR Partners' claims regarding the
Company Satellites and the Tempo Option
F-26
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
are without merit, but there can be no assurance that Tempo's position would
prevail in the event of any litigation regarding this controversy.
The Company and PRIMESTAR Partners are currently attempting to resolve their
disagreement regarding the Tempo Option. In that connection, the Company and
PRIMESTAR Partners have discussed the alternatives available to the Company
for deployment of the Company Satellites and the terms and provisions under
which the Company would make available to PRIMESTAR Partners 100% of the
capacity of one or more Company Satellites as so deployed. Although the
Company and PRIMESTAR Partners have not reached agreement with respect to any
such resolution of their dispute, and there can be no assurance that any such
resolution can be reached, or can be reached on terms acceptable to the
Company, the Company does currently believe that its dispute with PRIMESTAR
Partners will be resolved and does not believe that such dispute or its
resolution is reasonably likely to have a material adverse effect on the
Company.
Regardless of the outcome of the uncertainties with respect to the Company
Satellites, the Company believes that, although no assurance can be given,
alternative courses of action are available that would allow the Company to
recover the Company's costs of constructing the Company Satellites.
(7) INCOME TAXES
The Company is included in the consolidated Federal and state income tax
returns of TCI. Income tax benefit for the Company is based on those items in
TCI's consolidated calculation applicable to the Company. Intercompany tax
allocation represents an apportionment of tax expense or benefit (other than
deferred taxes) among subsidiaries of TCI in relation to their respective
amounts of taxable earnings or losses. The payable or receivable arising from
the intercompany tax allocation is recorded as an increase or decrease in "Due
to TCIC," as reflected in the accompanying combined balance sheets.
A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and certain
other subsidiaries of TCI was implemented effective July 1, 1995. The Tax
Sharing Agreement formalizes certain of the elements of a pre-existing tax
sharing arrangement and contains 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. The Tax Sharing Agreement encompasses U.S. Federal, state, local
and foreign tax consequences and relies upon the U.S. Internal Revenue Code of
1986 as amended, and any applicable state, local and foreign tax law and
related regulations. Beginning on the July 1, 1995 effective date, TCIC is
responsible to TCI for its share of current consolidated income tax
liabilities. TCI is responsible to TCIC to the extent that TCIC's income tax
attributes generated after the effective date are utilized by TCI to reduce
its consolidated income tax liabilities. Accordingly, all tax attributes
generated by TCIC's operations after the effective date including, but not
limited to, net operating losses, tax credits, deferred intercompany gains,
and the tax basis of assets are inventoried and tracked for the entities
comprising TCIC. The Company's intercompany income tax allocation for the six
months ended December 31, 1995, has been calculated in accordance with the Tax
Sharing Agreement, and is not materially different from the intercompany
allocation that would have been calculated under the pre-existing tax sharing
arrangement. In connection with the Distribution, the Tax Allocation Agreement
will be amended to provide that the Company will be treated as if it had been
a party to the Tax Sharing Agreement, effective July 1, 1995.
F-27
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income tax benefit (expense) for the years ended December 31, 1995, 1994 and
1993 consists of (amounts in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1995:
Intercompany allocation......................... $36,530 -- 36,530
Federal......................................... -- (11,040) (11,040)
State and local................................. -- (3,632) (3,632)
------- ------- -------
$36,530 (14,672) 21,858
======= ======= =======
Year ended December 31, 1994:
Intercompany allocation......................... $ 9,611 -- 9,611
Federal......................................... -- (2,254) (2,254)
State and local................................. -- (485) (485)
------- ------- -------
$ 9,611 (2,739) 6,872
======= ======= =======
Year ended December 31, 1993:
Intercompany allocation......................... $ 3,403 -- 3,403
Federal......................................... -- (739) (739)
State and local................................. -- (159) (159)
------- ------- -------
$ 3,403 (898) 2,505
======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit.................. $ 24,278 7,196 2,569
State and local income taxes, net of Federal
income tax benefit.............................. (2,361) (315) (103)
Adjustment to deferred tax assets and liabilities
for enacted change in Federal income tax rate... -- -- 43
Other............................................ (59) (9) (4)
--------- ------- -------
$ 21,858 6,872 2,505
========= ======= =======
</TABLE>
F-28
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
------ -----
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards.......................... $6,668 821
Investment in PRIMESTAR Partners, due principally to losses
recognized for financial statement purposes in excess of
losses recognized for income tax purposes................. 1,049 978
Future deductible amounts principally due to non-deductible
accruals.................................................. 1,906 629
------ -----
Total deferred tax assets................................ 9,623 2,428
------ -----
Deferred tax liability--
Property and equipment, principally due to differences in
depreciation net of increase in tax basis resulting from
intercompany transfer..................................... 14,057 4,325
------ -----
Net deferred tax liability............................... $4,434 1,897
====== =====
</TABLE>
On February 22, 1995, the assets (primarily property and equipment) and
liabilities comprising PRIMESTAR By TCI were transferred from certain
subsidiaries of TCIC to the predecessor of TSEI. Such transfer was recorded at
TCIC's carryover basis for financial reporting purposes. In connection with
such transfers, the Company recorded an $12,136,000 non-cash increase to the
intercompany amount owed to TCIC, and an $12,136,000 non-cash decrease to the
Company's deferred tax liability.
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. No tax benefit has been
recognized on remaining operating loss carryforwards due to the Company's
history of operating losses.
At December 31, 1995, the Company had net operating loss carry forwards for
income tax purposes aggregating approximately $18,688,000 of which, if not
utilized to reduce taxable income in future periods, $2,347,000 expire in 2006
and $16,341,000 expire in 2010.
(8) TRANSACTIONS WITH RELATED PARTIES
The effects of all transactions between the Company and TCIC have been
reflected as adjustments to the non-interest bearing intercompany account
between the Company and TCIC. For a description of certain agreements that the
Company and TCI will enter into in connection with the Distribution, see note
2.
TCIC provides certain installation, maintenance, retrieval and other
customer fulfillment services to the Company. The costs associated with such
services have been allocated to the Company based upon a standard charge for
each of the various customer fulfillment activities performed by TCIC. During
the years ended December 31, 1995, 1994 and 1993, the Company's capitalized
installation costs included amounts allocated
F-29
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
from TCIC of $57,058,000, $15,369,000 and $4,511,000, respectively.
Maintenance, retrieval and other operating expenses allocated from TCIC to the
Company aggregated $15,916,000, $4,368,000 and $1,577,000 during the years
ended December 31, 1995, 1994 and 1993, respectively. Following the
Distribution, charges for customer fulfillment services provided by TCI will
be made pursuant to the Fulfillment Agreement. See note 2.
TCIC also provides corporate administrative services to the Company. Such
administrative expenses, which were allocated from TCIC to the Company based
primarily on the estimated cost of providing the service, aggregated
$7,817,000, $1,080,000 and $795,000 during the years ended December 31, 1995,
1994 and 1993, respectively. Following the Distribution, charges for
administrative services provided by TCI will be made pursuant to the
Transition Services Agreement. See note 2.
Certain key employees of the Company hold stock options in tandem with stock
appreciation rights with respect to certain common stock of TCI. Estimates of
the compensation related to the options and/or stock appreciation rights
granted to employees of 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 the Company's share of TCI's estimated stock
compensation liability, which are included in the above-described TCIC
administrative expense allocations, aggregated $901,000, ($87,000) and
$449,000 during the years ended December 31, 1995, 1994 and 1993,
respectively. See note 2.
(9) COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $73,000,000.
In 1994, the Company began to engage master sales agents (the "Master
Agents") to recruit, train and maintain a network of agents to sell services
on behalf of the Company and to install, service and maintain equipment
located at the premises of subscribers. As part of the compensation for such
services, the Company has agreed to pay certain residual sales commissions
equal to a percentage of the programming revenue collected from a subscriber
installed by a Master Agent during specified periods following the initiation
of service (generally five years). Residual payments to Master Agents
aggregated $2,178,000 during 1995 and were immaterial in prior years.
The Company leases business offices and uses certain equipment under lease
arrangements. Rental expense under such arrangements amounted to $1,257,000 in
1995 and was immaterial in prior years. It is expected that, in the normal
course of business, expiring leases will be renewed or replaced by leases on
other properties; thus, it is anticipated that future minimum lease
commitments will not be less than the rental expense incurred during 1995.
As described in note 2, TCI UA 1 has arranged for the issuance of the TCI UA
1 Letter of Credit to support the Company's pro rata share of the PRIMESTAR
Credit Facility. The amount of the TCI UA 1 Letter of Credit was $141,250,000
at December 31, 1995. In connection with the Distribution, the Company will
agree to indemnify TCI UA 1 for any loss, claim or liability that TCI UA 1 may
incur by reason of the TCI UA 1 Letter of Credit. See notes 2, 5 and 6.
TCIC has arranged for the issuance of a standby letter of credit to support
the Company's share of PRIMESTAR Partners' obligations under the GE-2
Agreement with respect to PRIMESTAR Partners' use of GE-2. The original
maximum drawable amount of such letter of credit is approximately $25,000,000,
increasing
F-30
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
to approximately $75,000,000 if PRIMESTAR Partners exercises the End-Of-Life
Option, as described in note 5. Pursuant to one of the Indemnification
Agreements to be entered into by the Company in connection with the
Distribution, the Company will be required to reimburse TCIC for any amounts
drawn under this standby letter of credit. See note 2.
At December 31, 1995, the Company had guaranteed approximately $5,600,000 of
certain minimum commitments of PRIMESTAR Partners to purchase satellite
reception equipment.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. 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 combined financial statements.
(10) SUBSEQUENT EVENTS
Change in Accounting
During the fourth quarter of 1996, the Company began to assess the
accounting for a recently implemented marketing program that allows
subscribers to purchase the Company's proprietary satellite reception
equipment at a price that is less than the Company's costs.
After considering current accounting practices in similar industries,
relevant accounting literature and other factors, the Company concluded that
the most appropriate depreciation policy for its subscriber installation costs
was to depreciate subscriber installation costs on a straight line basis over
the estimated average life of a subscriber, and charge to depreciation expense
the unamortized balance of installation costs associated with customers who
have terminated service with the Company. The Company believes the new policy
is more appropriate than the prior method since, under the new policy,
subscriber installation costs associated with subscribers whose service has
been terminated are no longer carried on the Company's balance sheet after the
date of termination. This change will be adopted effective October 1, 1996 and
will be treated as a change in accounting policy that is inseparable from a
change in estimate. Accordingly, the cumulative effect of such change for
periods prior to October 1, 1996, together with the fourth quarter 1996 effect
of such change, will be included in the Company's depreciation expense for the
fourth quarter of 1996.
In connection with the aforementioned discussion of the Company's accounting
policies with respect to subscriber installation costs, the Company also
determined that a reduction in the estimated useful life of certain satellite
reception equipment was appropriate in light of certain changes in the
Company's expectations with respect to technological and other factors. This
change in estimate will be given effect on a prospective basis as of October
1, 1996.
Resnet Transaction
Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet Communications, Inc., a Delaware
corporation ("ResNet") for a purchase price of $5,396,000. ResNet was formed
by LodgeNet Entertainment Corporation, a Delaware corporation, in February
1996 to engage in the business of providing video services to subscribers in
multiple dwelling units (the "ResNet Business"). ResNet agreed to purchase
from the Company up to $40 million in satellite reception equipment to be used
in connection with the ResNet Business exclusively, over a five year period
(subject to a one-year extension at the option of ResNet if ResNet has not
purchased the full $40 million in equipment during the five-year initial
term). The Company also agreed to make a subordinated convertible term loan to
ResNet, in the principal amount of $34,604,000, the proceeds of which can be
used only to purchase such equipment from the Company. The term of the loan is
five years with an option by ResNet to extend the term for one additional
year. The total principal and accrued and unpaid interest under the loan is
convertible over a four-year period
F-31
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
into shares of common stock of ResNet that will provide the Company with the
right to acquire an additional 32% of the issued and outstanding common stock
of ResNet. The Company's only recourse with respect to repayment of the loan
is conversion into ResNet stock or warrants as described below. Under current
interpretations of the FCC rules and regulations related to restrictions on
the provision of cable and satellite master antenna television services in
certain areas. The Company could be prohibited from holding 5% or more of the
stock of ResNet and consequently could not exercise the conversion rights
under the convertible loan agreement. The Company is required to convert the
convertible loan at such time as conversion would not violate such currently
applicable regulatory restrictions. In addition, ResNet granted the Company an
option to acquire an additional 13.01% of the issued and outstanding common
stock of ResNet at appraised fair market value at the time of exercise of the
option. The option is exercisable between December 21, 1999 and the maturity
of the convertible loan. Upon the maturity date of the convertible loan, if
the Company has been prevented from converting the loan or exercising the
option in full due to the previously described regulatory restrictions, ResNet
will issue warrants to the Company to acquire the stock that has not been
issued pursuant to conversion of the loan and the stock that the Company has a
right to acquire by exercise of the option. The exercise price of the warrants
will be de minimis, and the exercise price of the warrants to be issued in
respect of the option will be equivalent to the exercise price under such
option. The Company has agreed to customary standstill provisions with respect
to acquisitions of more than 10% of the outstanding stock of LodgeNet and any
additional shares of ResNet.
The Company also entered into a long-term signal availability agreement with
ResNet, pursuant to which the Company will transport to certain defined
private cable systems owned and operated by ResNet, the satellite signal used
by PRIMESTAR Partners to transmit the PRIMESTAR(R) programming service (the
"PRIMESTAR Satellite Signal") or the signal of a substantially comparable
service. The Company is acting solely to make the PRIMESTAR Satellite Signal
available to ResNet and is not acting as a distributor of any PRIMESTAR(R)
programming services to ResNet. ResNet must obtain its own rights from the
applicable programming networks to receive the programming services and to
distribute them to ResNet's subscribers. WTCI has the right from PRIMESTAR
Partners to use the PRIMESTAR Satellite Signal for delivery of programming for
the benefit of third parties, including private cable systems (the
"Simultaneous Use Rights"). WTCI has agreed with the Company that private
cable systems designated by the Company, including the ResNet private cable
systems, will receive the transport of the PRIMESTAR Satellite Signal by WTCI
in exchange for the payment by the Company of a per subscriber per video
program signal. The agreement between the Company and WTCI is coextensive with
the agreement between WTCI and PRIMESTAR Partners, expiring on March 31, 2001,
and there is no assurance that the Company will continue to have the ability
to make the PRIMESTAR Satellite Signal available after that date. In its
agreement with ResNet, the Company has committed to make the PRIMESTAR
Satellite Signal or the signal of a substantially comparable service available
for a term that extends substantially beyond March 31, 2001. If the Company
loses its contractual ability to make the PRIMESTAR Satellite Signal available
and is not able to make the signal of a substantially comparable service
available, the Company is obligated to reimburse ResNet for its costs in
obtaining a digital signal from another source, including the cost of
replacement equipment if the new digital signal is not compatible with
ResNet's equipment. While it is not possible at this time to quantify the
amount that the Company would be obligated to pay to ResNet under the
circumstances described above, the Company believes that the costs could be
significant, particularly if it were to lose its ability to make a signal
available towards the end of its agreement with ResNet.
Counsel to PRIMESTAR Partners has advised the Company of the Partnership's
position that there are certain preconditions to WTCI's Simultaneous Use
Rights which have not yet been satisfied and that such rights are not
assignable by WTCI to the Company. The Company believes that its transaction
with ResNet and similar transactions are permitted under the agreements
between WTCI and PRIMESTAR Partners. The Company does not believe that any
potential dispute with the Partnership regarding this issue is likely to have
a material adverse effect on the Company.
F-32
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash................................................. $ 6,335 1,801
Accounts receivable.................................. 19,180 29,192
Less allowance for doubtful accounts................. 4,241 4,819
---------- -------
14,939 24,373
---------- -------
Prepaid expenses..................................... 353 86
Investment in, and related advances to, PRIMESTAR
Partners L.P. ("PRIMESTAR Partners") (note 4)....... 28,847 17,963
Property and equipment, at cost:
Satellite reception equipment...................... 527,559 422,070
Subscriber installation costs...................... 187,792 128,870
Support equipment.................................. 18,129 12,395
Cost of satellites under construction (note 5)..... 419,584 382,900
---------- -------
1,153,064 946,235
Less accumulated depreciation...................... 105,361 57,015
---------- -------
1,047,703 889,220
---------- -------
$1,098,177 933,443
========== =======
<CAPTION>
LIABILITIES AND PARENT'S INVESTMENT
<S> <C> <C>
Accounts payable..................................... $ 6,119 11,378
Accrued charges from PRIMESTAR Partners (note 4)..... 47,056 26,420
Other accrued expenses............................... 10,465 11,483
Subscriber advance payments.......................... 17,671 13,244
Due to PRIMESTAR Partners (note 5)................... 386,219 382,900
Deferred income taxes................................ 15,897 4,434
---------- -------
Total liabilities................................ 483,427 449,859
---------- -------
Parent's investment:
Accumulated deficit................................ (108,663) (75,775)
Due to TCI Communications, Inc. ("TCIC") (notes 2
and 6)............................................ 723,413 559,359
---------- -------
Total parent's investment........................ 614,750 483,584
---------- -------
Commitments and contingencies (notes 2, 4, 5, 6, 7
and 8)
$1,098,177 933,443
========== =======
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1995
---------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Revenue:
Programming and equipment rental....................... $ 156,870 37,362
Installation........................................... 36,777 24,249
---------- ---------
193,647 61,611
---------- ---------
Operating costs and expenses:
Charges from PRIMESTAR Partners (note 4):
Programming.......................................... 57,464 14,309
Satellite, marketing and distribution................ 29,422 7,387
Other operating:
TCIC (note 6)........................................ 10,505 7,136
Other................................................ 4,345 705
Selling, general and administrative:
TCIC (note 6)........................................ 9,576 2,223
Other................................................ 75,314 24,957
Depreciation (note 10)................................. 53,527 19,915
---------- ---------
240,153 76,632
---------- ---------
Operating loss..................................... (46,506) (15,021)
---------- ---------
Other income (expense):
Share of losses of PRIMESTAR Partners (note 4)......... (1,446) (4,988)
Other, net............................................. 194 143
---------- ---------
(1,252) (4,845)
---------- ---------
Loss before income taxes........................... (47,758) (19,866)
Income tax benefit....................................... 14,870 6,830
---------- ---------
Net loss........................................... $ (32,888) (13,036)
========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF PARENT'S INVESTMENT
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED DUE TO PARENT'S
DEFICIT TCIC INVESTMENT
----------- ------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Balance at January 1, 1996...................... $ (75,775) 559,359 483,584
Net loss...................................... (32,888) -- (32,888)
Allocation of TCIC expenses................... -- 20,081 20,081
Allocation of TCIC installation costs......... -- 23,319 23,319
Intercompany income tax allocation............ -- (26,333) (26,333)
Net cash transfers from TCIC.................. -- 146,987 146,987
--------- ------- -------
Balance at June 30, 1996........................ $(108,663) 723,413 614,750
========= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1995
---------- ----------
AMOUNTS IN THOUSANDS
(SEE NOTE 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (32,888) (13,036)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation.......................................... 53,527 19,915
Share of losses of PRIMESTAR Partners................. 1,446 4,988
Deferred income tax benefit........................... 11,463 (157)
Other non-cash charges (credits)...................... (163) 209
Changes in operating assets and liabilities:
Change in receivables................................ 9,434 (8,770)
Change in prepaids................................... (267) (177)
Change in accruals and payables...................... 14,359 15,890
Change in subscriber advance payments................ 4,427 3,210
---------- ---------
Net cash provided by operating activities........... 61,338 22,072
---------- ---------
Cash flows from investing activities:
Capital expended for construction of satellites........ (36,684) (43,631)
Capital expended for property and equipment............ (175,339) (139,398)
Additional investments in and loans to PRIMESTAR
Partners.............................................. (12,330) (7,027)
---------- ---------
Net cash used in investing activities............... (224,353) (190,056)
---------- ---------
Cash flows from financing activities:
Increase in due to PRIMESTAR Partners.................. 3,319 43,631
Increase in due to TCIC................................ 164,230 124,353
---------- ---------
Net cash provided by financing activities........... 167,549 167,984
---------- ---------
Net increase in cash................................ 4,534 --
Cash at beginning of period......................... 1,801 --
---------- ---------
Cash at end of period............................... $ 6,335 --
========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying combined financial statements of "TCI SATCO" represent a
combination of the historical financial information of certain satellite
television assets of TCIC, a subsidiary of Tele-Communications, Inc. ("TCI").
Upon consummation of the spinoff transaction described in note 2, TCI
Satellite Entertainment, Inc. ("TSEI") will own the assets that comprise "TCI
SATCO," which assets include (i) a 100% ownership interest in "PRIMESTAR By
TCI," the TCIC business that distributes the PRIMESTAR(R) programming service
to subscribers within specified areas of the continental United States, (ii) a
100% ownership interest in Tempo Satellite, Inc. ("Tempo"), and (iii) a 20.86%
aggregate ownership interest in PRIMESTAR Partners.
Tempo holds a construction permit (the "Construction Permit") issued by the
Federal Communications Commission ("FCC") authorizing construction of a direct
broadcast satellite ("DBS") system. Tempo is also a party to a construction
agreement (the "Satellite Construction Agreement") with Space Systems/Loral,
Inc. ("Loral"), pursuant to which Loral is currently constructing two high
power communications satellites (the "Company Satellites"). PRIMESTAR
Partners, which was formed as a limited partnership in 1990 by subsidiaries of
TCIC, several other cable operators, and General Electric Company, broadcasts
satellite entertainment services that are delivered to the home through
PRIMESTAR By TCI and certain other authorized distributors.
In the following text, the "Company" may, as the context requires, refer to
"TCI SATCO" (prior to the completion of the spinoff transaction described in
note 2), TSEI and its consolidated subsidiaries (subsequent to the completion
of the spinoff transaction described in note 2) or both. Additionally, unless
the context indicates otherwise, references to "TCI" and "TCIC" herein are to
TCI and TCIC, together with their respective consolidated subsidiaries (other
than the Company).
All significant inter-entity transactions have been eliminated.
As further discussed in note 6, the accompanying combined statements of
operations include allocations of certain costs and expenses of TCIC. Although
such allocations are not necessarily indicative of the costs that would have
been incurred by the Company on a stand-alone basis, management believes the
resulting allocated amounts are reasonable.
The accompanying interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results of such periods.
The results of operations for any interim period are not necessarily
indicative of results for the full year. The unaudited interim combined
financial statements should be read in conjunction with the Company's December
31, 1995 audited combined financial statements and notes thereto.
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.
(2) SPINOFF TRANSACTION
On June 17, 1996, the Board of Directors of TCI (the "TCI Board") announced
its intention to spinoff all the capital stock of the Company to the holders
of Tele-Communications, Inc. Series A TCI Group Common
F-37
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Stock (the "Series A TCI Group Common Stock") and Tele-Communications, Inc.
Series B TCI Group Common Stock (the "Series B TCI Group Common Stock" and,
together with the Series A TCI Group Common Stock, the "TCI Group Common
Stock"). The spinoff will be effected as a distribution (the "Distribution")
by TCI to holders of its TCI Group Common Stock of shares of the Series A
Common Stock of the Company (the "Series A Common Stock") and Series B Common
Stock of the Company (the "Series B Common Stock"). The Distribution will not
involve the payment of any consideration by the holders of TCI Group Common
Stock (such holders, the "TCI Group Stockholders"), and is intended to qualify
as a tax-free spinoff. The Distribution is expected to occur in the fourth
quarter of 1996, on a date (the "Distribution Date") to be determined by the
TCI Board, and will be made as a dividend to holders of record (other than
certain subsidiaries of TCI that have waived such dividend in consideration
for additional shares of Series A TCI Group Common Stock) of TCI Group Common
Stock as of the close of business on November 12, 1996 (the "Record Date").
Stockholders of record of TCI Group Common Stock on the Record Date will
receive one share of Series A Common Stock for each ten shares of Series A TCI
Group Common Stock owned of record at the close of business on the Record Date
and one share of Series B Common Stock for each ten shares of Series B TCI
Group Common Stock owned of record as of the close of business on the Record
Date. Fractional shares will not be issued. Fractions of one-half or greater
of a share will be rounded up and fractions of less than one-half of a share
will be rounded down to the nearest whole number of shares of Series A Common
Stock and Series B Common Stock.
Following the Distribution, the Company and TCI will operate independently,
and neither will have any stock ownership, beneficial or otherwise, in the
other. For the purposes of governing certain of the ongoing relationships
between the Company and TCI after the Distribution, and to provide mechanisms
for an orderly transition, on, or before the Distribution Date the Company and
TCI will enter into various agreements, including the "Reorganization
Agreement," the "Fulfillment Agreement," the "TCIC Credit Facility," the
"Transition Services Agreement," an amendment to TCI's existing "Tax Sharing
Agreement" and the "Indemnification Agreements."
Reorganization Agreement
The Reorganization Agreement will provide for, among other things, the
transfer to the Company of the assets of TCI SATCO, and for the assumption by
the Company of related liabilities. No consideration will be payable by the
Company for these transfers, except that two subsidiaries of the Company will
purchase TCIC's partnership interests in PRIMESTAR Partners for consideration
payable by delivery of promissory notes issued by such subsidiaries, which
promissory notes will be assumed by TCI on or before the Distribution Date in
the form of a capital contribution to the Company. The Reorganization
Agreement will also provide for certain cross-indemnities designed to make the
Company financially responsible for all liabilities relating to the digital
satellite business conducted by TCI prior to the Distribution, as well as for
all liabilities incurred by the Company after the Distribution, and to make
TCI financially responsible for all potential liabilities of the Company which
are not related to the digital satellite business, including, for example,
liabilities arising as a result of the Company's having been a subsidiary of
TCI.
Pursuant to the Reorganization Agreement, on or before the Distribution
Date, the Company will issue to TCIC a promissory note (the "Company Note"),
in the principal amount of $250,000,000, representing a portion of the
Company's intercompany balance owed to TCIC on such date. See related
discussion below.
Pursuant to the Reorganization Agreement, the remainder of the Company's
intercompany balance owed to TCIC on the Distribution Date will be assumed by
TCI in the form of a capital contribution to the Company. In
F-38
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
addition, the Company will (i) assume TCI's obligations under options to be
granted on the Distribution Date to certain key employees of TCI (who are not
employees of the Company) representing, in aggregate, 2.5% of the shares of
Company Common Stock issued and outstanding on the Distribution Date, after
giving effect to the Distribution, and (ii) grant 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 the TCI Series D Preferred Stock and the
Convertible Notes due December 12, 2021, of TCI UA, Inc., as such conversion
features are adjusted as a result of the Distribution. See related discussion
below.
Fulfillment Agreement
TCIC historically has provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force and National Call Center. Charges for such services have been allocated
to the Company by TCIC based on scheduled rates.
Pursuant to the Fulfillment Agreement entered into by TCIC and the Company,
TCIC will continue to provide fulfillment services to the Company following
the Distribution with respect to customers of the PRIMESTAR(R) medium power
service. Such services will include installation, maintenance, retrieval,
inventory management and other customer fulfillment services. The Fulfillment
Agreement, which will become effective on the first day of the month following
the Distribution Date. Among other matters, the Fulfillment Agreement (i) sets
forth the responsibilities of TCIC with respect to fulfillment services,
including performance standards and penalties for non-performance, (ii)
provides for TCIC's fulfillment sites to be connected to the billing and
information systems used by the Company, allowing for on-line scheduling and
dispatch of installation and other service calls, and (iii) provides scheduled
rates to be charged to the Company for the various customer fulfillment
services to be provided by TCIC. The Company retains sole control under the
Fulfillment Agreement to establish the retail prices and other terms and
conditions on which installation and other services will be provided to the
Company's customers. The Fulfillment Agreement also provides that, during the
term of the Fulfillment Agreement, TCIC will not provide fulfillment services
to any other wireless or other similar or competitive provider or distributor
of television programming services (other than traditional cable). The
Fulfillment Agreement will have an initial term of two years and is
terminable, on 180 days notice to TCIC, by the Company at any time during the
first six months following the Distribution Date.
There can be no assurance that the terms of the Fulfillment Agreement are
not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained by
the Company from third parties on any terms if the Fulfillment Agreement is
terminated. The cost to the Company of the services provided by TCIC under the
Fulfillment Agreement will exceed the standard charges that, historically,
have been allocated to the Company for such services, reflecting in part the
value to the Company, as determined by Company management, of the performance
standards, exclusivity, termination right and certain other provisions
included in the Fulfillment Agreement. See notes 1 and 6.
TCIC Credit Facility
TCIC has agreed to make loans to the Company from time to time up to an
aggregate outstanding principal amount of $500,000,000 (the "TCIC Revolving
Loans"). The terms and conditions of the TCIC Revolving Loans and Company Note
will be provided for in a credit agreement, dated as of the Distribution Date,
between the Company and TCIC (the "TCIC Credit Facility"). The TCIC Revolving
Loans and the Company Note will bear interest at 10% per annum, compounded
semi-annually. Commitment fees equal to 3/8% of the average unborrowed
availability of TCIC's $500,000,000 commitment under the TCIC Credit Facility
will be payable to
F-39
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
TCIC annually. Proceeds from the TCIC Revolving Loans may be used to fund (i)
working capital requirements, (ii) capital expenditures contemplated by the
October 1996 business plan of the Company, (iii) up to $75,000,000 of other
capital expenditures and investments and (iv) the commitment fees payable
under the TCIC Credit Facility. The TCIC Credit Facility requires the Company
to use its best efforts to obtain external debt or equity financing after the
Distribution Date. The TCIC Credit Facility further provides for mandatory
prepayment of the TCIC Revolving Loans and the Company Note if and in the
amount that the Company has obtained such external financing. Any such
prepayment from the proceeds of external financing is required to be applied
first to the Company Note and then to repay borrowings and correspondingly
reduce the commitments under the TCIC Credit Facility. The outstanding
principal of the TCIC Revolving Loans and the Company Note, together with
accrued interest, will be due and payable September 30, 2001, the final
maturity date of the TCIC Credit Facility, whether or not sufficient external
financing has then been obtained by the Company.
Borrowings under the TCIC Credit Facility are subject to, among other
things, (a) the Company's representations and warranties being true and
correct on the date of borrowing, (b) the Company's being in compliance with
its covenants in the TCIC Credit Facility, (c) no default having occurred and
being continuing on the borrowing date or being caused by such borrowing and
(d) the Company's being in compliance, in all material respects, with the
terms and conditions of the Indemnification Agreements, the Transition
Services Agreement, the Reorganization Agreement and the Fulfillment
Agreement. The TCIC Credit Facility sets forth the covenants the Company has
agreed to comply with during the term of the TCIC Credit Facility, including
its covenants (i) not to sell, transfer or otherwise dispose of any asset
(other than sales of inventory in the ordinary course of business), without
the prior written consent of TCIC (other than the sale of assets or securities
of a subsidiary if the aggregate consideration payable to the seller in
respect of such sale is not less than the fair market value of such assets),
(ii) not to merge into or consolidate or combine with any other person,
without the prior written consent of TCIC, (iii) not to declare or pay any
dividend or make any distribution on its capital stock (other than in common
stock), or purchase, redeem or otherwise acquire or retire for value any
capital stock of the Company, (iv) to maintain specified minimum numbers of
qualified subscribers from December 31, 1996 through December 31, 1997, (v)
not to incur indebtedness at any time prior to and including December 31, 1997
that would exceed a specified amount per qualified subscriber, (vi) to
maintain specified leverage ratios from January 1, 1998 through September 30,
2001, (vii) to maintain specified minimum ratios of annualized cash flow to
annual interest expense and (viii) to maintain a specified minimum ratio of
annualized cash flow to pro forma debt service.
Transition Services Agreement
Pursuant to the Transition Services Agreement between TCI and the Company,
following the Distribution, TCI will provide to the Company certain services
and other benefits, including certain administrative and other services that
were provided by TCI prior to the Distribution. Pursuant to the Transition
Services Agreement TCI has also agreed to provide the Company with certain
most-favored-customer rights to programming services that TCI or a wholly
owned subsidiary of TCI may own in the future and access to any volume
discounts that may be available to TCI for purchase of home satellite dishes,
satellite receivers and other equipment. As compensation for the services
rendered and for the benefits made available to the Company pursuant to the
Transition Services Agreement, the Company will pay TCI a monthly fee of $1.50
per qualified subscribing household or other residential or commericial unit
(counted as one subscriber regardless of the number of satellite receivers),
up to a maximum of $3,000,000 per month, and reimburse TCI quarterly for
direct, out-of-pocket expenses incurred by TCI to third parties in providing
the services. The Transition Services Agreement will become effective on
January 1, 1997, will continue in effect until the close of business on
December 31, 1999, and will be renewed automatically for successive one-year
periods thereafter, unless earlier terminated by (i)
F-40
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
either party at the end of the initial term or the then current renewal term,
as applicable, on not less than 180 days' prior written notice to the other
party, (ii) TCI upon written notice to the Company following certain changes
in control of the Company, and (iii) either party if the other party is the
subject of certain bankruptcy or insolvency-related events.
Indemnification Agreements
On or before the Distribution Date, the Company will enter into
Indemnification Agreements (the "Indemnification Agreements") with TCIC and
TCI UA 1, Inc. ("TCI UA 1"). The Indemnification Agreement with TCIC will
provide for the Company to reimburse TCIC for any amounts drawn under an
irrevocable transferable letter of credit issued for the account of TCIC to
support the Company's share of PRIMESTAR Partners' obligations under an
Amended and Restated Memorandum of Agreement, effective as of October 18,
1996, between the Partnership and GE Americom, with respect to PRIMESTAR
Partners' use of transponders on a medium power satellite ("GE-2"), to be
launched by GE Americom to replace the existing satellite used by PRIMESTAR
Partners (the "GE-2 Agreement"). The original drawable amount of such letter
of credit is $25,000,000, increasing to $75,000,000 if PRIMESTAR Partners
exercises its option under the GE-2 Agreement to extend the term of such
agreement for the remainder of the useful life of GE-2. See notes 4 and 7.
The Indemnification Agreement with TCI UA 1 will provide for the Company to
reimburse TCI UA 1 for any amounts drawn under an irrevocable transferable
letter of credit issued for the account of TCI UA 1 (the "TCI UA 1 Letter of
Credit"), which supports a credit facility (the "PRIMESTAR Credit Facility")
that was obtained by PRIMESTAR Partners to finance advances to Tempo for
payments due in respect of the construction of the Company Satellites, and
that is supported by letters of credit arranged for by affiliates of the all
but one of partners of PRIMESTAR Partners.
The Indemnification Agreements further provide for the Company to indemnify
and hold harmless TCIC and TCI UA 1, respectively, and certain related persons
from and against any losses, claims, and liabilities arising out of the
respective letters of credit or any drawings thereunder. The payment
obligations of the Company to TCIC and TCI UA 1 under such Indemnification
Agreements will be subordinated in right of payment with respect to certain
future obligations of the Company to financial institutions.
Other Arrangements
In June 1996, 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 an executive officer of TCIC who is also 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 Distribution Date, determined immediately after
giving effect to the Distribution, but before giving effect to any exercise of
such options. The aggregate exercise price for each such option is equal to
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 TCI's Net Investment (as
defined below) as of the first to occur of the Distribution Date and the date
on which such option first becomes
F-41
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
exercisable, but excluding any portion of TCI's Net Investment that as of such
date is represented by a promissory note or other evidence of indebtedness
from the Company to TCI. TCI's Net Investment is defined for this purpose as
the cumulative amount invested by TCI and its predecessor in the Company and
its predecessors prior to and including the applicable date of determination,
less the aggregate amount of all dividends and distributions made by the
Company and its predecessors to TCI and its predecessor prior to and including
such date. The options will be granted on the Distribution Date, will vest in
20% cumulative increments on each of the first five anniversaries of February
1, 1996, and will be exercisable for up to ten years following February 1,
1996. Pursuant to the Reorganization Agreement, and (in the case of the TCI
Officers and the TCIC Subsidiary Officer) in partial consideration for the
capital contribution to be made by TCI to the Company in connection with the
Distribution, the Company has agreed, effective as of the Distribution 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.
In connection with the Distribution, TCI and the Company will also enter
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 Common Stock and
Series A Common Stock, respectively, as necessary to satisfy their respective
obligations after the Distribution Date under certain stock options and stock
appreciation rights held by their respective employees and non-employee
directors. On or prior to the Distribution, the Company will also enter into
an amendment to TCI's existing "Tax Sharing Agreement." See note 6.
(3) SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was not material during the six
months ended June 30, 1996 and 1995.
See note 6 for a description of certain non-cash activities.
(4) INVESTMENT IN PRIMESTAR PARTNERS
Summarized unaudited operating information for PRIMESTAR Partners is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
--------- -------
<S> <C> <C>
RESULTS OF OPERATIONS
Revenue................................................ $ 185,981 58,322
Operating, selling, general and administrative ex-
penses................................................ (191,571) (81,039)
Depreciation and amortization.......................... (1,626) (1,381)
--------- -------
Operating loss....................................... (7,216) (24,098)
Other income, net...................................... 765 666
--------- -------
Net loss............................................. $ (6,451) (23,432)
========= =======
</TABLE>
PRIMESTAR Partners' indebtedness under the PRIMESTAR Credit Facility
aggregated $433,000,000 at June 30, 1996. The PRIMESTAR Credit Facility
matures on June 30, 1997 and borrowings thereunder are collateralized by
letters of credit issued by all but one of the partners or their affiliated
designees. See notes 5 and 7.
F-42
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PRIMESTAR Partners currently broadcasts from Satcom K-1 ("K-1"), a medium
power satellite that is nearing the end of its operational life. Although the
Company believes that GE-2 will be successfully deployed prior to the
expiration of the operational life of K-1, such deployment is dependent on a
number of factors that are outside of the Company's control and no assurance
can be given as to the successful deployment of GE-2. The failure to deploy a
fully operational satellite by the end of K-1's operational life (or the
operational life of any temporary in-orbit replacement that might be
available) could have a material adverse effect on both the Company and
PRIMESTAR Partners. See note 2.
PRIMESTAR Partners is obligated to make certain minimum lease payments
throughout the remaining operational life of K-1. Pursuant to the GE-2
Agreement, PRIMESTAR Partners will be required to make minimum lease payments
for an initial term of four years from the date of commercial operation,
extendible, at the option of PRIMESTAR Partners exercised prior to December
31, 1996, for the remainder of the operational life of GE-2 (the "End-Of-Life
Option"). See notes 2 and 7.
PRIMESTAR Partners provides programming services to the Company and other
authorized distributors in exchange for a fee based upon the number of
subscribers receiving the respective programming services. In addition,
PRIMESTAR Partners arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services in exchange
for a separate authorization fee.
Under the PRIMESTAR Partners limited partnership agreement, the Company has
agreed to fund its share of any capital contributions and/or loans to
PRIMESTAR Partners that might be agreed upon from time to time by the partners
of PRIMESTAR Partners. Additionally, as a general partner of PRIMESTAR
Partners, the Company is liable as a matter of partnership law for all debts
of PRIMESTAR Partners in the event the liabilities of PRIMESTAR Partners were
to exceed its assets. PRIMESTAR Partners has contingent liabilities related to
legal and other matters arising in the ordinary course of business. Management
of PRIMESTAR Partners is unable at this time to assess the impact, if any, of
such matters on PRIMESTAR Partners' results of operations, financial position,
or cash flows.
(5) SATELLITES UNDER CONSTRUCTION
Tempo DBS System
The Company, through Tempo, holds a Construction Permit issued by the FCC
authorizing construction of a DBS system consisting of two or more satellites
delivering DBS service in 11 frequencies at the 119(degrees) West Longitude
("W.L.") orbital position and 11 frequencies at the 166(degrees) W.L. orbital
position. The 119(degrees) W.L. orbital position is generally visible to home
satellite dishes throughout all fifty states; the 166(degrees) W.L. orbital
position is visible only in the western half of the continental U.S. as well
as Alaska and Hawaii.
Tempo is also a party to the Satellite Construction Agreement with Loral,
pursuant to which Tempo has agreed to purchase the Company Satellites at a
fixed contract price of $487,159,500, and has an option to purchase up to
three additional satellites. The cost of constructing the Company Satellites
is reflected in "Cost of satellites under construction" in the accompanying
combined balance sheets.
Construction of each of the Company Satellites has been completed except for
the proper installation of an antenna. As constructed, each Company Satellite
can 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 226 watts per channel). Each such
configuration can be selected at any time, either before or after launch.
F-43
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company has instructed Loral to install an antenna on one of the Company
Satellites ("Satellite No. 1") that is suitable for operation at the
119(degrees) W.L. orbital location, and has arranged for the launch of
Satellite No. 1 into that location on an Atlas rocket scheduled for launch
from Cape Canaveral by International Launch Services on behalf of Lockheed
Martin Corporation on February 27, 1997. If the launch of Satellite No. 1 is
successful, the Company intends to operate such satellite in "paired
transponder" mode, broadcasting on 11 of the 16 available transponder pairs,
in accordance with the Construction Permit. The remaining five transponder
pairs would be available as in-orbit spares. The Company believes that the
signal broadcast by Satellite No. 1 operating in "paired transponder" mode at
226 watts per channel, could be received by households in the majority of the
U.S. using home satellite dishes of less than 14 inches in diameter.
The Company and PRIMESTAR Partners have been in discussions which
contemplate that the Company would make 100% of the capacity of Satellite No.
1 available to PRIMESTAR Partners and that PRIMESTAR Partners would reimburse
the Company for the costs of operating such satellite. In such event,
PRIMESTAR Partners would also determine the disposition of Satellite No. 2 and
the Company would be unconditionally released from any obligation it may have
to repay PRIMESTAR Partners for its funding of the costs of constructing and
launching the Company Satellites. However, if the Company and PRIMESTAR
Partners are unable to reach agreement with respect to the foregoing, the
Company will consider other potential uses for the available capacity on
Satellite No. 1, which could include using such capacity to provide its own
DBS service. Such service, whether offered by PRIMESTAR Partners or the
Company, would be a limited service complementary to off-the-air television,
basic cable and other programming services, or subject to future advances in
digital channel compression, as a full-service, stand-alone offering. See
related discussion below.
The Company does not currently have definite plans for deployment of the
second Company Satellite ("Satellite No. 2"). The Company is currently engaged
in discussions with Telesat Canada, a Canadian corporation ("Telesat"), with
respect to the possible purchase of Satellite No. 2 by Telesat, but there can
be no assurance that any such transaction will occur. If the Company does not
enter into a binding agreement to sell Satellite No. 2 by the end of this
year, the Company currently intends to place Satellite No. 2 in storage, for
such future deployment or disposition as the Company may determine.
The Company is currently in discussions with Loral and other parties with
respect to the possibility of obtaining an additional launch window in 1997 to
be used as a backup for the Company's February 1997 launch window. However,
there can be no assurance that such a launch window can be arranged at this
time or will be available on terms acceptable to the Company.
Competitive Position of the Company's Proposed High Power DBS System.
It is expected that the Company's proposed high power DBS system will
broadcast from 11 transponders at the 119(degrees) W.L. orbital position. At
current compression ratios, the Company's 11 transponders could be used to
broadcast 65 to 80 channels of entertainment and/or information programming,
depending on the type of programming. Although such a programming service
would have relatively limited channel capacity compared to that of other DBS
providers, the Company believes that such potential competitive disadvantage
may be offset in part (i) by the possibility of using smaller (less than 14
inches in diameter) home satellite dishes and (ii) by offering programming
such as multiplexed premium movies, sports, pay-per-view and a selection of
popular cable networks on an "a la carte" basis.
However, the Company does not currently have any agreements with PRIMESTAR
Partners or any programming vendors (except as provided in the Transition
Services Agreement) with respect to the operation of any such DBS programming
service, and does not currently have agreements with any antenna manufacturers
F-44
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
with respect to the purchase of sub-14 inch home satellite dishes. No
assurances can be given that any such agreements can be obtained on terms
satisfactory to the Company, or that the Company or PRIMESTAR Partners will be
successful in pursuing such a strategy, or will not elect to pursue an
alternative strategy with respect to Satellite No. 1.
Moreover, although advances in digital compression technology currently
under development may in the future enable the Company to obtain greater
channel capacity from the 11 transponders on Satellite No. 1, and there can be
no assurance that such new technology will be successfully implemented or
that, if implemented, the Company or PRIMESTAR Partners will be able to obtain
the rights to use such technology on satisfactory terms. However, Western
Tele-Communications, Inc. ("WTCI"), an indirect subsidiary of TCI, has agreed
that if, prior to March 1, 1997 the Company engages WTCI to provide
digitization, compression and uplinking services for any high power DBS system
operated by the Company, and WTCI is then authorized to use certain
proprietary programming of Imedia Corporation currently under development or
other proprietary technologies to provide multiplexing of digitally compressed
video signals for the Company, WTCI shall provide such multiplexing services
to the Company for an agreed fee, based on WTCI's incremental costs and other
factors. The Company's rights under its agreement with WTCI are assignable by
the Company to any affiliate of the Company, including for this purpose
PRIMESTAR Partners.
If advanced digital compression technology becomes available to the Company,
such technology (or similar technology) will likely also be made available to
cable operators and/or other competitors of the Company and PRIMESTAR
Partners.
Satellite Launches.
Pursuant to the Satellite Construction Agreement, following the launch of a
satellite, Loral will conduct in-orbit testing. Delivery of a satellite takes
place upon Tempo's acceptance of such satellite after completion of in-orbit
testing ("Delivery"). Subject to certain limits, Loral must reimburse Tempo
for Tempo's actual and reasonable expenses directly incurred as a result of
any delays in the Delivery of satellites. The in-orbit useful life of each
satellite is designed to be a minimum of 12 years. If in-orbit testing
confirms that the satellite conforms fully to specifications and the service
life of the satellite will be at least 12 years, Tempo is required to accept
the satellite. If in-orbit testing determines that the satellite does not
fully conform to specifications but at least 50% of its transponders are
functional and the service life of the satellite will be at least six years,
Tempo is required to accept the satellite but is entitled to receive a
proportionate decrease in the purchase price. If Loral fails to deliver a
satellite, it has 29 months to deliver, at its own expense, a replacement
satellite. Loral may make four attempts to launch the two Company Satellites;
however, if the two Company Satellites are not delivered in such four
attempts, Tempo may terminate the Satellite Construction Agreement. Tempo also
may terminate the contract in the event of two successive satellite failures.
Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has warranted that
all items other than the satellites delivered under the Satellite Construction
Agreement will be free from defects in materials or workmanship for one year
from the date of their acceptance and will perform in accordance with the
applicable performance specifications. Loral bears the risk of loss of the
Company Satellites until Delivery. Upon Delivery, title and risk of loss pass
to Tempo. However, Loral is obligated to carry risk insurance on each
satellite covering the period from the launch of the satellite through an
operating period of 180 days. Such risk insurance will cover (i) the cost of
any damages due under the Satellite Construction Agreement; (ii) the cost of
delivery of a replacement satellite in the event of a satellite failure; and
(iii) the refund of the full purchase price
F-45
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
for each undelivered Company Satellite if Loral fails to deliver both Company
Satellites after four attempts. Loral is also required to obtain insurance
indemnifying Tempo from any third party claims arising out of the launch of a
satellite.
Tempo Option.
In February 1990, Tempo entered into an option agreement with PRIMESTAR
Partners (the "Option Agreement"), granting PRIMESTAR Partners the right and
option (the "Tempo 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 Construction Permit. Under the Option Agreement, upon the
exercise of the Tempo Option, PRIMESTAR Partners would be obligated to pay
Tempo $1,000,000 (the "Exercise Price") and 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 Option and certain
related matters, Tempo and PRIMESTAR Partners subsequently entered into two
letter agreements (the "Tempo Letter Agreements"), which provided for, among
other things, the funding by PRIMESTAR Partners of milestone and other
payments due under the Satellite Construction Agreement, and certain related
costs, through advances by PRIMESTAR Partners to Tempo. PRIMESTAR Partners
financed such advances to Tempo through borrowings under the PRIMESTAR Credit
Facility which was in turn supported by letters of credit arranged for by
affiliates of all but one of the partners of the Partnership. The aggregate
funding provided to Tempo by PRIMESTAR Partners is reflected in "Due to
PRIMESTAR Partners" in the accompanying combined balance sheets. At June 30,
1996, the amount borrowed by PRIMESTAR Partners under the PRIMESTAR Credit
Facility was $433,000,000, including accrued interest. See note 5.
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
to Tempo against any payments (other than the Exercise Price) due under the
Tempo Option and would not require Tempo to repay such advances unless
PRIMESTAR Partners elected to stop funding amounts due under the Satellite
Construction Agreement or failed to exercise the Tempo Option within the
period provided for in the Tempo Letter Agreements, in which event Tempo
could, in lieu of making such repayment, elect to assign all of its rights
relating to the Company Satellites to PRIMESTAR Partners.
On February 29, 1996, Tempo notified PRIMESTAR Partners of Tempo's belief
that PRIMESTAR Partners had failed to effectively exercise the Tempo Option
and that such failure had resulted in the termination of the Tempo Option
pursuant to the Tempo Letter Agreements. In that connection, Tempo advised
PRIMESTAR Partners that, based on and assuming the effective termination of
the Tempo Option, Tempo would reimburse PRIMESTAR Partners for its advances to
Tempo by assuming PRIMESTAR Partner's indebtedness for borrowed money under
the PRIMESTAR Credit Facility, to the extent used to fund such advances.
Tempo's belief that PRIMESTAR Partners failed to effectively exercise the
Tempo Option is based, among other things, on the fact that despite PRIMESTAR
Partners' notice to Tempo at the July 29, 1994 meeting of the Partners
Committee of its exercise of the Tempo Option, since such date, PRIMESTAR
Partners has failed to take any of the actions contemplated by the Option
Agreement to be taken following exercise of the Tempo Option, including (i)
advising Tempo whether it intends to purchase or lease the capacity of the DBS
system referred to in the Option Agreement, (ii) negotiating an agreement of
purchase or lease with Tempo and (iii) paying Tempo the Exercise Price.
Moreover, in December 1995, a representative of PRIMESTAR Partners informed
the Company that the July 1994 exercise of the Tempo Option had been intended
as a conditional exercise, although conditional exercises are not contemplated
by the Option Agreement, and that the conditions upon which the Tempo Option
had purportedly been exercised had not been met.
F-46
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Counsel for PRIMESTAR Partners subsequently notified Tempo that PRIMESTAR
Partners disagreed with the positions advanced by Tempo in the February 29
letter and believed that PRIMESTAR Partners had effectively and irrevocably
exercised the Tempo Option and was asserting certain rights to the Company
Satellites. Counsel for PRIMESTAR Partners also advised Tempo that PRIMESTAR
Partners would impede any attempt by Tempo to repay PRIMESTAR Partners'
advances. The Partners Committee of PRIMESTAR Partners has failed, however, to
vote to confirm that PRIMESTAR Partners has irrevocably and unconditionally
exercised the Tempo Option. The Company believes that PRIMESTAR Partners'
position is based primarily on equitable arguments relating to the advances
made by PRIMESTAR Partners to Tempo under the Tempo Letter Agreements and
their misreading of the terms of the Option Agreement and the Tempo Letter
Agreements. The Company believes the PRIMESTAR Partners' claims regarding the
Company Satellites and the Tempo Option are without merit, but there can be no
assurance that Tempo's position would prevail in the event of any litigation
regarding this controversy.
The Company and PRIMESTAR Partners are currently attempting to resolve their
disagreement regarding the Tempo Option. In that connection, the Company and
PRIMESTAR Partners have discussed the alternatives available to the Company
for deployment of the Company Satellites and the terms and provisions under
which the Company would make available to PRIMESTAR Partners 100% of the
capacity of one or more Company Satellites as so deployed. Although the
Company and PRIMESTAR Partners have not reached agreement with respect to any
such resolution of their dispute, and there can be no assurance that any such
resolution can be reached, or can be reached on terms acceptable to the
Company, the Company does currently believe that its dispute with PRIMESTAR
Partners will be resolved and does not believe that such dispute or its
resolution is reasonably likely to have a material adverse effect on the
Company.
Regardless of the outcome of the uncertainties with respect to the Company
Satellites, the Company believes that, although no assurance can be given,
alternative courses of action are available that would allow the Company to
recover the Company's costs of constructing the Company Satellites.
(6) TRANSACTIONS WITH RELATED PARTIES
The effects of all transactions between the Company and TCIC have been
reflected as adjustments to the non-interest bearing intercompany account
between the Company and TCIC. For a description of certain agreements that the
Company and TCI will enter into in connection with the Distribution, see note
2.
TCIC provides certain installation, maintenance, retrieval and other
customer fulfillment services to the Company. The costs associated with such
services have been allocated to the Company based upon a standard charge for
each of the various customer fulfillment activities performed by TCIC. During
the six months ended June 30, 1996 and 1995, the Company's capitalized
installation costs included amounts allocated from TCIC of $23,319,000 and
$23,485,000, respectively. Maintenance, retrieval and other operating expenses
allocated from TCIC to the Company aggregated $10,505,000 and $7,136,000
during the six months ended June 30, 1996 and 1995, respectively. Following
the Distribution, charges for customer fulfillment services provided by TCI
will be made pursuant to the Fulfillment Agreement. See note 2.
TCIC also provides corporate administrative services to the Company. Such
administrative expenses, which were allocated from TCIC to the Company based
primarily on the estimated cost of providing the service, aggregated
$9,576,000 and $2,223,000 during the six months ended June 30, 1996 and 1995,
respectively. Following the Distribution, charges for administrative services
provided by TCI will be made pursuant to the Transition Services Agreement.
See note 2.
F-47
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Certain key employees of the Company hold stock options in tandem with stock
appreciation rights with respect to certain common stock of TCI. Estimates of
the compensation related to the options and/or stock appreciation rights
granted to employees of 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 the Company's share of TCI's estimated stock
compensation liability, which are included in the above-described TCIC
administrative expense allocations, aggregated $(176,000) and $209,000 during
the six months ended June 30, 1996 and 1995, respectively. See note 2.
A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and certain
other subsidiaries of TCI was implemented effective July 1, 1995. The Tax
Sharing Agreement formalizes certain of the elements of a pre-existing tax
sharing arrangement and contains 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. The Tax Sharing Agreement encompasses U.S. Federal, state, local
and foreign tax consequences and relies upon the U.S. Internal Revenue Code of
1986 as amended, and any applicable state, local and foreign tax law and
related regulations. Beginning on the July 1, 1995 effective date, TCIC is
responsible to TCI for its share of current consolidated income tax
liabilities. TCI is responsible to TCIC to the extent that TCIC's income tax
attributes generated after the effective date are utilized by TCI to reduce
its consolidated income tax liabilities. Accordingly, all tax attributes
generated by TCIC's operations after the effective date including, but not
limited to, net operating losses, tax credits, deferred intercompany gains and
the tax basis of assets are inventoried and tracked for the entities
comprising TCIC. The Company's intercompany income tax allocation for the six
months ended June 30, 1996, has been calculated in accordance with the Tax
Sharing Agreement, and is not materially different from the intercompany
allocation that would have been calculated under the pre-existing tax sharing
arrangement. In connection with the Distribution, the Tax Sharing Agreement
will be amended to provide that the Company will be treated as if it had been
a party to the Tax Sharing Agreement effective July 1, 1995.
On February 22, 1995, the assets (primarily property and equipment) and
liabilities comprising PRIMESTAR By TCI were transferred from certain
subsidiaries of TCIC to the predecessor of TSEI. Such transfer was recorded at
TCIC's carryover basis for financial reporting purposes. In connection with
such transfer, the Company recorded an $12,136,000 non-cash increase to the
intercompany amount owed to TCIC, and an $12,136,000 non-cash decrease to the
Company's deferred tax liability.
(7) COMMITMENTS AND CONTINGENCIES
At June 30, 1996, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $56,000,000.
In 1994, the Company began to engage master sales agents (the "Master
Agents") to recruit, train and maintain a network of sub-agents to sell
services on behalf of the Company and to install, service and maintain
equipment located at the premises of the subscribers. As part of the
compensation paid for such services, the Company has agreed to pay certain
residual sales commissions equal to a percentage of the programming revenue
collected from a subscriber installed by a Master Agent during specified
periods following the initiation of service (generally five years). Residual
payments to Master Agents aggregated $4,597,000 and $400,000 during the six
months ended June 30, 1996 and 1995, respectively.
As described in note 2, TCI UA 1 has arranged for the issuance of the TCI UA
1 Letter of Credit to support the Company's pro rata share of the PRIMESTAR
Credit Facility. The amount of the TCI UA 1 Letter of Credit
F-48
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
was $141,250,000 at June 30, 1996. In connection with the Distribution, the
Company will agree to indemnify TCI UA 1 for any loss, claim or liability that
TCI UA 1 may incur by reason of the TCI UA 1 Letter of Credit. See notes 2, 4,
and 5.
TCIC has arranged for the issuance of a standby letter of credit to support
the Company's share of PRIMESTAR Partners' obligations under the GE-2
Agreement with respect to PRIMESTAR Partners' use of GE-2. The original
maximum drawable amount of such letter of credit is approximately $25,000,000,
increasing to approximately $75,000,000 if PRIMESTAR Partners exercises the
End-Of-Life Option, as described in note 4. Pursuant to one of the
Indemnification Agreements to be entered into by the Company in connection
with the Distribution, the Company will be required to reimburse TCIC for any
amounts drawn under this standby letter of credit. See note 2.
At June 30, 1996, the Company had guaranteed approximately $4,200,000 of
certain minimum commitments of PRIMESTAR Partners to purchase satellite
reception equipment.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. 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 combined financial statements.
(8) SUBSEQUENT EVENTS
Change in Accounting
During the fourth quarter of 1996, the Company began to assess the
accounting for a recently implemented marketing program that allows
subscribers to purchase the Company's proprietary satellite reception
equipment at a price that is less than the Company's costs.
After considering current accounting practices in similar industries,
relevant accounting literature and other factors, the Company concluded that
the most appropriate depreciation policy for its subscriber installation costs
was to depreciate subscriber installation costs on a straight line basis over
the estimated average life of a subscriber, and charge to depreciation expense
the unamortized balance of installation costs associated with customers who
have terminated service with the Company. The Company believes the new policy
is more appropriate than the prior method since, under the new policy,
subscriber installation costs associated with subscribers whose service has
been terminated are no longer carried on the Company's balance sheet after the
date of termination. This change will be adopted effective October 1, 1996 and
will be treated as a change in accounting policy that is inseparable from a
change in estimate. Accordingly, the cumulative effect of such change for
periods prior to October 1, 1996, together with the fourth quarter 1996 effect
of such change, will be included in the Company's depreciation expense for the
fourth quarter of 1996. Had the new policy been applied as of June 30, 1996,
the inception-to-date effect of such application would have resulted in
increases to the Company's depreciation expense and net loss of $29,703,000
(including $8,754,000 related to periods prior to January 1, 1996) and
$17,956,000 (including $5,292,000 related to periods prior to January 1,
1996), respectively. The ultimate effect of this change in accounting will, in
part, be a function of the subscriber churn rate experienced by the Company
during the remainder of 1996.
In connection with the aforementioned discussion of the Company's accounting
policies with respect to subscriber installation costs, the Company also
determined that a reduction in the estimated useful life of certain satellite
reception equipment was appropriate in light of certain changes in the
Company's expectations with respect to technological and other factors. This
change in estimate will be given effect on a prospective basis as of October
1, 1996. Based on the June 30, 1996 historical cost of the satellite reception
equipment that is subject to such change in useful life, the Company estimates
that the annualized effect of such change will be a $16,899,000 and
$10,215,000 increase to depreciation expense and net loss, respectively.
F-49
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Resnet Transaction
Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet Communications, Inc., a Delaware
corporation ("ResNet") for a purchase price of $5,396,000. ResNet was formed
by LodgeNet Entertainment Corporation, a Delaware corporation, in February
1996 to engage in the business of providing video services to subscribers in
multiple dwelling units (the "ResNet Business"). ResNet agreed to purchase
from the Company up to $40 million in satellite reception equipment to be used
in connection with the ResNet Business exclusively, over a five year period
(subject to a one-year extension at the option of ResNet if ResNet has not
purchased the full $40 million in equipment during the five-year initial
term). The Company also agreed to make a subordinated convertible term loan to
ResNet, in the principal amount of $34,604,000, the proceeds of which can be
used only to purchase such equipment from the Company. The term of the loan is
five years with an option by ResNet to extend the term for one additional
year. The total principal and accrued and unpaid interest under the loan is
convertible over a four-year period into shares of common stock of ResNet that
will provide the Company with the right to acquire an additional 32% of the
issued and outstanding common stock of ResNet. The Company's only recourse
with respect to repayment of the loan is conversion into ResNet stock or
warrants as described below. Under current interpretations of the FCC rules
and regulations related to restrictions on the provision of cable and
satellite master antenna television services in certain areas. The Company
could be prohibited from holding 5% or more of the stock of ResNet and
consequently could not exercise the conversion rights under the convertible
loan agreement. The Company is required to convert the convertible loan at
such time as conversion would not violate such currently applicable regulatory
restrictions. In addition, ResNet granted the Company an option to acquire an
additional 13.01% of the issued and outstanding common stock of ResNet at
appraised fair market value at the time of exercise of the option. The option
is exercisable between December 21, 1999 and the maturity of the convertible
loan. Upon the maturity date of the convertible loan, if the Company has been
prevented from converting the loan or exercising the option in full due to the
previously described regulatory restrictions, ResNet will issue warrants to
the Company to acquire the stock that has not been issued pursuant to
conversion of the loan and the stock that the Company has a right to acquire
by exercise of the option. The exercise price of the warrants will be de
minimis, and the exercise price of the warrants to be issued in respect of the
option will be equivalent to the exercise price under such option. The Company
has agreed to customary standstill provisions with respect to acquisitions of
more than 10% of the outstanding stock of LodgeNet and any additional shares
of ResNet.
The Company also entered into a long-term signal availability agreement with
ResNet, pursuant to which the Company will transport to certain defined
private cable systems owned and operated by ResNet, the satellite signal used
by PRIMESTAR Partners to transmit the PRIMESTAR(R) programming service (the
"PRIMESTAR Satellite Signal") or the signal of a substantially comparable
service. The Company is acting solely to make the PRIMESTAR Satellite Signal
available to ResNet and is not acting as a distributor of any PRIMESTAR(R)
programming services to ResNet. ResNet must obtain its own rights from the
applicable programming networks to receive the programming services and to
distribute them to ResNet's subscribers. WTCI has the right from PRIMESTAR
Partners to use the PRIMESTAR Satellite Signal for delivery of programming for
the benefit of third parties, including private cable systems (the
"Simultaneous Use Rights"). WTCI has agreed with the Company that private
cable systems designated by the Company, including the ResNet private cable
systems, will receive the transport of the PRIMESTAR Satellite Signal by WTCI
in exchange for the payment by the Company of a per subscriber per video
program signal. The agreement between the Company and WTCI is coexistive with
the agreement between WTCI and PRIMESTAR Partners expiring on March 31, 2001,
and there is no assurance that the Company will continue to have the ability
to make the PRIMESTAR Satellite Signal available after that date. In its
agreement with ResNet, the Company has committed to make the PRIMESTAR
F-50
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Satellite Signal or the signal of a substantially comparable service available
for a term that extends substantially beyond March 31, 2001. If the Company
loses its contractual ability to make the PRIMESTAR Satellite Signal available
and is not able to make the signal of a substantially comparable service
available, the Company is obligated to reimburse ResNet for its costs in
obtaining a digital signal from another source, including the cost of
replacement equipment if the new digital signal is not comparable with
ResNet's equipment. While it is not possible at this time to quantify the
amount that the Company would be obligated to pay to ResNet under the
circumstances described above, the Company believes that the costs could be
significant, particularly if it were to lose its ability to make a signal
available towards the end of its agreement with ResNet.
Counsel to PRIMESTAR Partners has advised the Company of the Partnership's
position that there are certain preconditions to WTCI's Simultaneous Use
Rights which have not yet been satisfied and that such rights are not
assignable by WTCI to the Company. The Company believes that its transaction
with ResNet and similar transactions are permitted under the agreements
between WTCI and PRIMESTAR Partners. The Company does not believe that any
potential dispute with the Partnership regarding this issue is likely to have
a material adverse effect on the Company.
F-51
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
PRIMESTAR Partners, L.P.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' capital and of cash flows present fairly,
in all material respects, the financial position of PRIMESTAR Partners, L.P.
at December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 2 to the
financial statements, the Partnership has suffered recurring losses from
operations and its 1996 operating budget reflects cash requirements in excess
of the current aggregate capital commitment of its partners. These matters
raise substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
March 11, 1996, except as to Note 16,
which is as of April 25, 1996
F-52
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents.................... $ 10,956 $ 25,970
Restricted cash........... 689 391
Accounts receivable, re-
lated parties, net....... 60,444 12,199
Prepaid and other current
assets................... 549 1,196
--------- ---------
Total current assets.... 72,638 39,756
Property and equipment,
net........................ 9,990 7,703
Costs of satellites under
construction (notes 6 and
15)........................ 419,256 289,607
Deposits.................... 73 830
Deferred financing fees,
net........................ 684 1,262
Other assets, net........... 13,321 4,917
--------- ---------
$ 515,962 $ 344,075
========= =========
LIABILITIES AND PARTNERS'
CAPITAL
Current liabilities:
Accounts payable and other
accrued expenses......... $ 33,822 $ 14,621
Accrued payroll........... 2,373 1,222
Accrued interest.......... 1,716 1,238
--------- ---------
Total current liabili-
ties................... 37,911 17,081
Borrowings under long-term
credit facility............ 419,000 290,000
Deferred rent--related par-
ty......................... 7,210 11,178
--------- ---------
Total liabilities....... 464,121 318,259
--------- ---------
Commitments and contingen-
cies
Partners' capital:
Contributed capital....... 251,968 183,906
Accumulated loss.......... (200,127) (158,090)
--------- ---------
Total partners' capi-
tal.................... 51,841 25,816
--------- ---------
$ 515,962 $ 344,075
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Subscriber revenues, related parties............ $180,595 $ 27,841 $ 10,861
Interest........................................ 1,252 405 131
-------- -------- --------
181,847 28,246 10,992
-------- -------- --------
Expenses:
Operating....................................... 147,948 41,832 22,469
Selling, general and administrative............. 68,152 36,343 15,964
Depreciation and amortization................... 2,890 2,700 1,849
Interest expense................................ 8 61
Loss on deferred option payments................ 4,886 1,767
Loss on disposal of property and equipment...... 1,259
-------- -------- --------
223,884 83,962 40,282
-------- -------- --------
Net loss.......................................... $(42,037) $(55,716) $(29,290)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
CONTRIBUTED ACCUMULATED
CAPITAL LOSS TOTAL
----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1992................. $ 71,206 $ (73,084) $ (1,878)
Capital contributions........................ 34,400 34,400
Net loss..................................... (29,290) (29,290)
-------- --------- --------
Balance at December 31, 1993................. 105,606 (102,374) 3,232
Capital contributions........................ 78,300 78,300
Net loss..................................... (55,716) (55,716)
-------- --------- --------
Balance at December 31, 1994................. 183,906 (158,090) 25,816
Capital contributions........................ 68,062 68,062
Net loss..................................... (42,037) (42,037)
-------- --------- --------
Balance at December 31, 1995................. $251,968 $(200,127) $ 51,841
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (42,037) $ (55,716) $(29,290)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 2,890 2,700 1,849
Loss on deferred option payments............. 4,886 1,767
Loss on disposal of property and equipment... 1,259
Change in assets and liabilities:
Accounts receivable, related parties........ (48,245) (10,379) (570)
Deposits.................................... 757 (808)
Prepaid and other assets.................... (13,024) (1,220) (564)
Accounts payable, accrued expenses, and
accrued interest........................... 20,830 10,611 1,299
Deferred rent............................... (3,968) (2,598) (590)
--------- --------- --------
Net cash used in operating activities...... (77,911) (54,384) (27,866)
--------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment and
payments
on satellite construction.................... (133,867) (224,097) (72,336)
--------- --------- --------
Cash flows from financing activities:
Increase in deferred financing fees........... (1,573) (160)
Loans from partners........................... 48,184 71,164
Repayment of loans from partners.............. (119,348)
Capital contributions......................... 68,062 78,300 34,400
Borrowings under credit facility.............. 129,000 290,000
Increase in restricted cash................... (298) (391)
--------- --------- --------
Net cash provided by financing activities.. 196,764 295,172 105,404
--------- --------- --------
Net (decrease) increase in cash and cash
equivalents................................... (15,014) 16,691 5,202
Cash and cash equivalents at beginning of
year.......................................... 25,970 9,279 4,077
--------- --------- --------
Cash and cash equivalents at end of year....... $ 10,956 $ 25,970 $ 9,279
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BUSINESS
Formation:
PRIMESTAR Partners, L.P. (the Partnership), was formed on February 8, 1990
as a Delaware limited partnership.
The purpose of the Partnership is to engage in the business of acquiring,
originating and/or providing television programming services delivered by
satellite to subscribers through a network of distributors throughout the
continental United States. Presently, there are approximately 630 such
distributors, all of which are owned by the Partnership's partners.
Capital contributions:
In accordance with the limited partnership agreement (the Agreement),
capital contributions by the partners are required as follows:
. Cash contributions: Nine of the Partnership's ten partners made initial
contributions of an aggregate $38,000 in cash. Eight of those nine
partners and one former partner have contributed an additional aggregate
$207,300 in cash as of December 31, 1995 and have agreed to make minimum
additional aggregate cash contributions of $24,000 (see note 17).
. In-kind contribution: In return for an initial 15% ownership interest in
the Partnership, a partner leased certain satellite transponders to the
Partnership at below market rates. This in-kind contribution was
recorded at its estimated fair market value of $6,700 as of the
inception of the Partnership. (See notes 7 and 12.)
Distributions and allocations:
Net profits and net losses are allocated to each partner in accordance with
their stated percentage ownership interests, as defined by the Agreement. The
amount of annual cash distributions, if any, is determined by the Partners
Committee. Such distributions are made to the partners on a pro rata basis, in
accordance with partners' respective stated percentage ownership interests as
of the date of such distributions. Liquidation distributions and distributions
of any net proceeds from capital transactions are made pro rata to partners
with positive capital account balances (as defined), until such balances have
been reduced to zero; the balance of such distributions, if any, is
distributed pro rata in proportion to the partners' stated percentage
ownership interests. For purposes of all distributions and allocations,
respective partners' percentage ownership interests are determined as outlined
in the Agreement.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY
Basis of accounting and liquidity:
The Partnership prepares its financial statements on the accrual basis of
accounting. The financial statements have been prepared assuming that the
Partnership will continue as a going concern. The Partnership has suffered
recurring losses from operations and its 1996 operating budget reflects cash
requirements which are in excess of the current aggregate capital commitment
of its partners. These matters raise substantial doubt about the Partnership's
ability to continue as a going concern. Management believes that the
Partnership has adequate capital to continue normal operating activity through
approximately May 1996. (See note 17.) Presently, the partners determine the
amount of additional capital commitments on a quarterly basis.
F-57
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
Revenue recognition:
Subscriber revenues are billed to distributors and recognized when related
programming services are delivered. Included in accounts receivable at
December 31, 1995 and 1994 is $27,244 and $5,811, respectively, of unbilled
programming services.
Cash and cash equivalents and restricted cash:
Cash and cash equivalents are defined as short-term, highly liquid
investments with original maturities of three months or less. Restricted cash
represents unexpended borrowings under the credit facility which must be used
for the satellite construction project and interest and fees associated with
the credit facility.
Property and equipment:
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the assets (5-7 years) using the straight-line
method. Maintenance and repairs are expensed as incurred and the cost of
betterments are capitalized.
Intangible assets:
The intangible asset associated with the in-kind capital contribution is
being amortized over the term of the related lease agreement (see note 7).
Deferred financing fees:
Deferred financing fees of $1,732 at December 31, 1995 and 1994, relate to
securing of the credit facility associated with the satellite construction
project (see note 8). Fees are being amortized over the life of the credit
facility. Amortization expense was $577 and $470 for the years ended December
31, 1995 and 1994, respectively. See note 6 regarding capitalization of
deferred financing fees.
Income tax reporting:
Federal and state income taxes are payable by the individual partners;
therefore, no provision or liability for income taxes is reflected in the
financial statements. Differences between bases of assets and liabilities for
tax and financial reporting purposes result primarily from expensing of option
payments, capitalization of startup costs and recognition of expense relating
to operating leases for tax purposes.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Long-lived assets:
The Partnership plans to adopt Statement of Financial Accounting Standards
No. 121 (FAS 121), "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" in 1996. FAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain intangibles to be disposed of. Under FAS 121,
the Partnership will periodically review its long-lived assets to assess
recoverability through a non-discounted cash flow analysis and any perceived
impairment will be charged to operations in the
F-58
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
period such impairment becomes evident. The Partnership does not expect a
material effect to result from the adoption of FAS 121.
(3) ACCOUNTS RECEIVABLE--RELATED PARTIES
Accounts receivable, related parties, represent amounts due from
distributors, all of whom are owned by the partners, for programming services.
The partners and distributors are engaged in the business of providing
television programming through cable and satellite to subscribers. Sales to
the 5 largest of these distributors represented approximately 9%, 11% and 17%
of the Partnership's subscriber revenues for 1995, 1994 and 1993,
respectively. The allowance for doubtful accounts was $812 and $146 at
December 31, 1995 and 1994, respectively.
(4) NOTES RECEIVABLE
On November 15, 1990, the Partnership assumed from a partner two revolving
credit promissory notes (the "Notes") related to amounts due from a third
party. In connection with the assumption, the Partnership agreed to reimburse
the partner for the total of all advances made to date under the Notes plus
accrued interest on such advances at a rate of 10% per annum. Such
reimbursement totaled approximately $767 and was paid in January 1991. The
Partnership also advanced approximately $151 to the third party. Because of
uncertainty regarding the ultimate collectibility of aggregate advances, the
Company had recorded a reserve for the full amount of the notes.
Under the terms of the revolving credit promissory note with one of the
third parties, the principal balance and all unpaid, accrued interest is due
and payable in the event the third party enters into an agreement to transfer
its DBS construction permit or license. During 1994, one of the third parties
entered into an agreement to transfer the permit and, as a result, in 1995,
the Partnership recovered $450 representing principal of $375 and interest of
$75 through the repayment date. The balance of the remaining Note and related
reserve as of December 31, 1995 is approximately $543.
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994 comprise the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Construction-in-progress--engineering laboratory........... $ 416
Control center, compression equipment...................... 7,807 $ 6,082
Other furniture and equipment.............................. 5,540 3,463
------- -------
13,763 9,545
Accumulated depreciation................................... (3,773) (1,842)
------- -------
$ 9,990 $ 7,703
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $1,932, $1,271 and $891, respectively.
(6) COSTS OF SATELLITES UNDER CONSTRUCTION
In 1993, through various arrangements entered into with and by a wholly-
owned subsidiary of a partner (the "Related Party"), the Partnership obtained
the rights to a fixed price contract with Space Systems/Loral,
F-59
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
Inc. for the construction and launch of two satellites. Under that
arrangement, each satellite could be constructed either as a Fixed Satellite
Service (FSS) or Broadcast Satellite Service (BSS) system and would provide
the Partnership in the range of 100-200 channels. The expected cost of the
three year construction and subsequent launch of the satellites was to range
from $450,000 to $482,000 (excluding capitalized interest), depending on
whether the satellites were ultimately finished as FSS or BSS spacecraft.
Under the Partnership's original plan, receipt of necessary authorizations
from the Federal Communications Commission ("FCC") for orbital locations
desired by the Partnership would be the major factor which determined the
satellites' final construction specifics. As discussed in note 7, the
Partnership has discontinued the dual build program and has decided to build
two BSS satellites. Through December 31, 1995 and 1994, the Partnership has
reimbursed the Related Party $382,900 and $278,772, respectively, for the
construction of the satellites (see note 15).
The total amount of interest cost (including amortization of deferred
financing fees and commitment fees) capitalized in conjunction with the
satellite construction project for the years ended December 31, 1995, 1994 and
1993 was $25,521, $10,432 and $403, respectively.
Satellites are subject to significant risks, including manufacturing defects
affecting the satellite or its components; launch failure resulting in damage
to, or destruction of, the satellite, or incorrect orbital placement; and
damage in orbit caused by asteroids, space debris or electrostatic storms.
Such factors may prevent or limit commercial operation or reduce the
satellite's useful life.
The satellite currently being used by the Partnership is nearing the end of
its operational life, and is expected to be ultimately replaced by another
medium power satellite that an affiliate of a Partner expects to launch in
January 1997, to be operational 30 to 60 days thereafter (See Note 7). In
November 1996, the current satellite is expected to be temporarily replaced by
another existing medium power satellite.
Limited on-board fuel capacity is a major factor limiting the useful life of
satellites. When on-board fuel supplies get low, a satellite may be placed
into inclined orbit to extend its useful life for an additional period. The
Partnership expects the temporary satellite it will be using in January 1997
could begin inclined orbit operations as early as January 1997 and continue
for a period of five months thereafter. If the medium power satellite
scheduled for launch in January 1997 is unavailable, the continued usage of
the temporary satellite will likely result in subscribers experiencing
unacceptable outage levels commencing in the month of June 1997. In this
circumstance, a delay in the launch of the medium power satellite in January
1997 could have a material adverse effect on the Partnership. However, it is
reasonably possible that the temporary satellite may not be required to be
placed into inclined orbit until May 1997. In such case, a delay of less than
2-3 months the launch of the medium power satellite in January 1997 may not
have an adverse effect on the Partnership.
(7) OTHER ASSETS
Other assets at December 31, 1995 and 1994 comprise the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Bargain element of transponder lease (see note 12)......... $ 6,706 $ 6,706
Less: accumulated amortization............................. (5,747) (4,790)
------- -------
Net...................................................... 959 1,916
Deferred option payments................................... 3,001
Prepaid transponder space.................................. 12,362
------- -------
$13,321 $ 4,917
======= =======
</TABLE>
F-60
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
In 1990, the Partnership entered into an option agreement with the Related
Party. The Related Party ultimately became a FCC authorized BSS satellite
licensee with a permit to construct and operate BSS satellites within an 11
channel authorization. The option agreement requires the Partnership to pay
the Related Party actual costs incurred by the Related Party related to the
agreement, not to exceed $2,000. Under the option agreement, the Partnership
retains exclusive rights to lease or purchase all channel capacity in
satellite locations allocated to the Related Party under the FCC permit.
Within 120 days of the exercise of the option, the Partnership shall pay an
additional $1,000 to the Related Party and use its best efforts to negotiate
and execute an agreement to lease or buy the channel capacity. The Partnership
is also required to pay the Related Party $1,000 if the Partnership leases,
acquires or enters into a legally binding commitment or option for similar
channel capacity from another party without exercising the option with the
Related Party. Since the option agreement is considered an integral part of
the Partnership's strategy to upgrade the distribution of its programming from
the low-powered satellite presently in use to high-power satellite technology,
cumulative payments under the option agreement are capitalized and are to be
assigned to the cost of the leased or purchased channel capacity and amortized
over the life of the leased or purchased asset.
In 1994, an affiliate of the Related Party entered into a proposed merger
agreement with another FCC BSS licensee which controlled a BSS construction
permit and 27 channel authorization at another location. The Partnership
agreed to reimburse and otherwise make the Related Party whole for the
associated cost, interest and tax expense incurred by the Related Party
(whether by merger or by lease) in having the 27 channel capacity available
for its use. Through December 31, 1995, the Partnership has capitalized as
reimbursement of costs to the Related Party approximately $4,900, of which
$4,600 remains in accounts payable. Costs related to this transaction were to
be assigned to the cost of the leased or purchased channel capacity.
Based on representations made by the Related Party (and its affiliates), the
Partnership, as a beneficiary in this transaction, formally resolved in 1994
to (1) elect that its K-1 successor satellite program (see note 6) would be at
BSS with the utilization of either the 11 or 27 channel authorizations; (2)
terminate the FSS/BSS dual build program; and (3) subject to certain
conditions, to reimburse the Related Party for the associated cost, interest
and tax expense incurred by the Related Party (whether by merger or lease) in
having the 27 authorizations available for the Partnership's use.
As a result of the above, management determined that it is unlikely that the
Partnership will pursue channel capacity at both satellite locations.
Accordingly, approximately $1,800 was established as a reserve on amounts
capitalized under the agreement in 1994.
In October 1995, the FCC terminated the license held by the FCC BSS licensee
and subsequently sold such license at public auction to another party. The
Partnership, the Related Party and the BSS licensee are currently engaged in
appeal of the FCC's decision. (See note 17.) Accordingly, approximately $4,900
was established as a reserve on amounts capitalized under the agreement in
1995.
In 1995, the Partnership entered into an agreement with an affiliate of a
Partner for the lease of transponder space beginning in 1997 on an unlaunched
satellite. Payments of $12,362 were made in 1995 and recorded in other assets
and additional payments of $16,198 will be made in 1996. Prior to October
1996, subject to the occurrence of certain events, the Partnership may cancel
the agreement with a refund of all payments made.
(8) CREDIT FACILITY
On March 9, 1994, the Partnership entered into a $565,000 credit facility
with a consortium of 25 banks to provide financing for the construction and
launch of the satellites as described in note 6. The facility matures
F-61
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
June 30, 1997 and borrowings are collateralized by letters of credit issued by
each of the general partners (or an affiliate) (the Partners/Partner
Affiliates)(see note 15). Borrowings bear interest, at the option of the
Partnership, at a rate per annum equal to any of the following:
1. The greater of the following (the "Alternate Base Rate")
(i) The prime rate of Chemical Bank
(ii) The weighted average of the rates for overnight funds plus 0.5%;
or
(iii) The secondary market rate for three-month certificates of
deposit plus 1%;
2. The sum of (a) 7/16% plus (b) LIBOR for interest periods of one, two,
three, six or, if made available by each of the banks, twelve months; or
3. The sum of (a) 9/16% plus (b) the CD rate for certificates of deposit
having a term of 30, 60, 90 or 180 days.
Interest is payable, to the extent bearing interest based on the Alternate
Base Rate, quarterly, in arrears and to the extent bearing interest based on
LIBOR or the CD rate, on the last day of the applicable interest period (and,
in the case of a CD or LIBOR rate loan having an interest period longer than
90 days or three months, respectively, at intervals of 90 days and three
months, respectively, after the first day of such interest period). Borrowings
and prepayments shall be in the amount of $5,000 in the case of LIBOR and CD
rate loans and $1,000 in the case of Alternate Base Rate loans, or in each
case, any greater multiple of $1,000. The Partnership will pay quarterly, in
arrears, a commitment fee of 3/16% per annum on the daily unused portion of
the facility.
At December 31, 1995 and 1994, borrowings outstanding totaled $419,000 and
$290,000, respectively, which bear interest at rates ranging from 6.13% to
7.88% and mature at varying dates through March 28, 1996 (subsequently
extended through June 1996). As borrowings mature, the Partnership intends to
refinance them under the same facility as provided by the agreements,
therefore, borrowings have been classified as long-term (see note 15).
Interest expense for the years ended December 31, 1995 and 1994 totaled
$24,511 and $8,435, respectively. Commitment fees for the years ended December
31, 1995 and 1994 totaled $419 and $573, respectively. The interest expense
and commitment fees were capitalized into costs of satellites under
construction.
(9) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that are subject to fair value disclosure requirements
are carried in the financial statements at amounts that approximate fair
value. The fair value of the Partnership's borrowings under the credit
facility was estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Partnership for debt of
the same remaining maturities at December 31, 1995 and 1994, respectively.
(10) NOTES PAYABLE, RELATED PARTIES
The Partnership entered into Promissory Notes, payable to the Partners/
Partner Affiliates of the Partnership for the purpose of providing bridge
financing for the construction and launch of up to two satellites (see note
6). The total amount of the Notes entered into was $48,184 during 1994. In
March 1994, these Notes and related interest of $1,400 were repaid in full
with borrowings under the credit facility described in note 8.
F-62
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
(11) RELATED PARTY TRANSACTIONS
A subsidiary of a partner provides satellite uplink services to the
Partnership. Total payments for such services were approximately $10,581,
$5,610 and $1,282 in 1995, 1994 and 1993, respectively.
See notes 1, 2, 3, 4, 6, 7, 8, 10, 12, 15 and 17 for additional related
party transactions.
(12) COMMITMENTS
The Partnership has long-term lease commitments for office space, equipment
and transponders (see note 7) which are accounted for as operating leases.
At December 31, 1995, future minimum lease payment commitments under these
leases, excluding amounts described in note 7, are as follows:
<TABLE>
<CAPTION>
YEAR TRANSPONDERS OTHER
---- ------------ ------
<S> <C> <C>
1996..................................................... $30,800 $1,368
1997..................................................... 1,391
1998..................................................... 1,387
1999..................................................... 794
2000..................................................... 242
------- ------
Total minimum rentals.................................. $30,800 $5,182
======= ======
</TABLE>
The transponder lease arrangement provides for fixed payments, as well as
payments which escalate over the term of the lease; further, the agreement
provides for a deferral of payments until later years. The Partnership
recognizes the expense related to this agreement by amortizing the total
commitments on a straight-line basis. Deferred rent-related party in the
accompanying balance sheet represents the difference between the straight-line
amortization and cash payments.
In addition to the fixed minimum rentals above, the transponder lease
includes variable charges, based upon the number of subscribers to the
Partnership's programming service, of one dollar per subscriber per month for
all subscribers up to and including 750,000 subscribers, fifty cents per
subscriber per month for all subscribers over 750,000 up to a maximum of
2,000,000 subscribers, and no variable charge with respect to any subscribers
over 2,000,000. Such variable charges for the years ended December 31, 1995,
1994 and 1993 were approximately $5,550, $1,035 and $660, respectively.
Rent expense under operating leases for the years ended December 31, 1995,
1994 and 1993 was approximately $23,500, $22,208 and $16,730, respectively.
The Partnership has commitments to purchase equipment for use by its
subscribers in receiving satellite transmissions. At December 31, 1995, future
minimum purchase commitments under this agreement, which certain of the
Partners have guaranteed, are approximately $12,000.
(13) BENEFIT PLANS
In 1991, the Partnership established a 401(k) Retirement Savings Plan
covering substantially all employees who have completed one year of service.
The Plan permits eligible employees to contribute up to 10% of their annual
pre-tax compensation and the Partnership makes matching contributions of up to
50% of participants first
F-63
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
5% of annual pre-tax compensation. The Partnership may also make discretionary
contributions to the Plan. The Partnership's contributions to the Plan for the
years ended December 31, 1995, 1994 and 1993 totaled approximately $80, $61
and $53, respectively.
In 1995, the Partnership adopted a Long-Term Incentive Compensation Program
for senior management. The program awards units with a value of $1 based upon
meeting certain performance objectives. Awarded units vest pro rata at the end
of years three through five subsequent to the year of award. As of December
31, 1995, 2,115 units have been awarded with a value of $2,115 of which
approximately $471 represents compensation expense through December 31, 1995.
No units are vested at December 31, 1995. Unit holders have the option to
convert all or a part of their accumulated and unpaid awards to common stock
at the initial offering price in the event of a public offering for the
Partnership.
(14) LITIGATION AND CONTINGENT LIABILITIES
The Antitrust Division of the Department of Justice and the antitrust
bureaus of several states began a formal investigation into the affairs of the
Partnership in 1990. The Partnership complied with the discovery demands and
cooperated in the investigations. On June 9, 1993, complaints and consent
judgments were filed by the Department of Justice and the attorneys general of
forty states in the federal court for the Southern District of New York
alleging violations of federal and state antitrust law by the Partnership and
the partners in PRIMESTAR Partners. Five additional states and the District of
Columbia filed similar complaints in the same court on August 18, 1993. The
defendants agreed to settle the allegations in all the complaints for, and the
Partnership paid, $4,750, without any admission of wrongdoing. Final consent
judgments were entered by the District Court (over the objections of certain
third parties and attempted intervenors) in all of the state actions on
September 14, 1993. The time to appeal the judgments in the state actions has
expired. The final consent judgment in the Department of Justice matter was
entered by the District Court (over the objections of certain third parties)
on April 5, 1994. The time to appeal the judgment expired on June 4, 1994.
On March 16, 1994, the Partnership received a Civil Investigative Demand
(CID) from the Antitrust Division of the Department of Justice (DOJ) relative
to the DOJ's investigation of "agreements in restraint of trade and attempted
monopolization in markets relating to the delivery of analog and digital video
programming." The CID issued by the DOJ does not identify the Partnership as
the subject of the investigation or indicate the entities being investigated
as possible participants in the alleged agreements. Management does not
believe that the Partnership has engaged in any unlawful conduct. The
Partnership, nonetheless, cooperated with the DOJ in its investigation and
provided certain documents, responded to interrogatories proposed by the DOJ
and made certain employees available for depositions. Although the DOJ staff
preliminarily found a Section 1 Sherman Act violation in July, 1995, upon
further review, the DOJ informed the Partnership on January 24, 1996 that it
had concluded that it would not take any further action at that time nor did
it presently intend to institute any legal proceedings against the
Partnership. The DOJ further informed the Partnership that the investigation
would remain open and that it would continue to monitor developments in this
area.
The Partnership, along with several other satellite carriers, is in
discussion with national broadcast television networks and their affiliates
concerning compliance with the Satellite Home Viewer Act of 1994 which amended
the Satellite Home Viewer Act of 1988. At present, those discussions which
focus on reporting and signal measurement issues do not appear to involve any
matter that would constitute a material loss contingency. In complying with
the Act, the Partnership is required to discontinue network service to certain
of its subscribers who are able to receive network services over-the-air. The
Satellite Home Viewer Act, as amended, does provide
F-64
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
for remedies for infringement under the Copyright Act of 1976, as amended,
under certain circumstances. The remedies are per claim and such remedies can
include actual damages, injunctions, and statutory damages. Statutory damages
per claim are limited to five dollars per subscriber per month or $250 in a
six-month period. At present, the Partnership is unable to determine upon what
basis such damages would be calculated or what their amount might be; however,
the Partnership has received approximately 114,000 challenges from 350 network
affiliates. Currently, in response to such challenges, the Partnership has
disconnected 40,000 subscribers. None of the networks or affiliates has
asserted any claim for damages under applicable law against the Partnership.
Management is unable at this time to assess the impact, if any, of the
unasserted claim on the Partnership's results of operations, financial
position or cash flows.
See notes 15, 16 and 17.
(15) SUBSEQUENT EVENT--TEMPO OPTION AGREEMENT
On February 29, 1996, the Partnership received notification from the Related
Party which notification positioned that, assuming the Tempo Option Agreement
dated February 8, 1990 had expired, the Related Party: a) had determined to
proceed with a direct broadcast satellite system under the BSS Construction
Agreement between the Related Party and Space Systems/ Loral (see note 6); b)
had issued a stop work order under the BSS Construction Agreement; c) would
reimburse the Partnership for progress payments, milestone payments and
termination liability payments under the BSS Construction Agreement as well as
payments to Telesat or a similar organization under the BSS Construction
Agreement for consulting and monitoring services; d) would hold the
Partnership and its partners harmless for all indebtedness for amounts
borrowed by the Partnership under its credit facility to the extent used to
fund such payments (see note 8); and e) would arrange for the cancellation of
all promissory notes and/or other instruments evidencing such indebtedness and
the release of all letters of credit posted by the Partnership or any Funding
Partner. The Partnership believes that the Related Party's assumption that the
Option Agreement has terminated is without foundation and directed the Related
Party to withdraw any stop work order that has been issued. (Management's
understanding, based on representations made by the Related Party, is that the
stop work order was immediately rescinded after its issuance.) The Partnership
subsequently informed the Related Party that it intends to continue to make
payments related to the satellite construction program, and, to the extent not
invoiced, the Partnership will make payments of amounts it estimates in good
faith will otherwise be due.
The Partnership and the Related Party have exchanged additional
correspondences detailing the legal and factual basis for their respective
claims, with the Partnership taking the position that, notwithstanding the
Related Party's assertion, the Option Agreement has in fact been exercised
unconditionally. At present, neither the Related Party or the Partnership have
indicated what next steps will be taken in this matter. Therefore, management
is unable at this time to assess the impact, if any, of this matter on the
Partnership's results of operations or financial position or cash flows.
(16) SUBSEQUENT EVENTS--LITIGATION AND CONTINGENT LIABILITIES
On April 16, 1996, the Partnership was served with a complaint from a third
party, now pending in the United States District Court. The Plaintiff claims
that the Partnership has infringed a patent on an "audio storage and
distribution system," supposedly involving the Partnership's digital satellite
TV systems. No specific amount of damages is claimed, but the plaintiff
requests compensatory damages (trebled), attorneys' fees and costs, and
injunctive relief. This is one of at least 18 similar cases pending against
different defendants. The Partnership has made a claim for indemnification
against a subsidiary of the equipment provider, which sold the systems in
F-65
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
question to the Partnership. Management is unable at this time to assess the
impact, if any, of the aforesaid claim on the Partnership's results of
operations or financial position or cash flows.
On April 25, 1996, the Partnership received oral notification of a claim
from a third party for alleged patent infringement in an unspecified amount
or, in the alternative, a claim for past and future license fees in an amount
to be negotiated, arising out of the Partnership's (and its distributors)
utilization of DigiCipher Equipment for the provision of the Partnership's
service to its distributors (and their customers). The Partnership intends to
make a claim for indemnification against the supplier of the DigiCipher
Equipment to the Partnership. Management is unable at this time to assess the
impact, if any, of the aforesaid claim on the Partnership's results of
operations or financial position or cash flows.
(17) UNAUDITED SUBSEQUENT EVENTS
SUBSEQUENT CAPITAL CONTRIBUTIONS AND BORROWINGS:
The Partnership received an additional $63,000 in capital contributions
during the period from January 1, 1996 though September 30, 1996. The
Partnership also borrowed an additional $26,000 under its credit facility
during the period from January 1, 1996 through November 7, 1996 (See Note 8).
These notes payable which matured through October 1996 have been extended to
various dates through January 1997. Management currently believes that the
Partnership has adequate capital to continue normal operating activity through
January 1997.
LITIGATION AND CONTINGENT LIABILITIES:
As described in Note 14, in complying with the Satellite Home Viewer Act of
1994, the Partnership is required to discontinue network service to certain of
its subscribers who are able to receive network services over the air. Through
October 1996, the Partnership has received approximately 350,000 challenges
from 375 network affiliates. In response to such challenges, the Partnership
has disconnected 70,000 subscribers. None of the networks or affiliates has
asserted any claim for damages under applicable law against the Partnership.
However, public announcements by the National Association of Broadcasters,
representing the affiliates and networks, indicate an intention to initiate
legal action against violators to enforce the Satellite Home Viewers Act of
1988, as amended. However, discussions are continuing between representatives
of the Partnership and representatives of the networks and their affiliates
concerning reporting and signal measurement issues under the Act. Management
believes it is possible that those discussions will yield an agreement
resolving those issues. In that event, management believes that it is unlikely
that the networks and their affiliates will initiate litigation against the
Partnership. In the event those discussions are not successful, management
believes it is likely that the networks and their affiliates will initiate
litigation against the Partnership. The Act provides for remedies which can
include actual damages, injunctions, and statutory damages. Statutory damages
per claim are limited to five dollars per subscriber, per month, or $250 in a
six month period. At present the Partnership remains unable to determine upon
what basis such damages would be calculated or what their amount might be.
Therefore, management is unable at this time to assess the impact, if any, of
the unasserted claim on the Partnership's results of operations, financial
position or cash flows.
OPTION AGREEMENT:
As described in Note 7, the Partnership, the Related Party and the BSS
licensee appealed the FCC's decision to terminate the license held by the BSS
licensee. The appellate court denied the appeal.
F-66
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
TEMPO OPTION AGREEMENT:
The Related Party earlier represented to management that it had entered into
agreements with a Canadian company to sell the satellites under construction
and subject to both U.S. and Canadian regulatory approvals, to launch one or
both of the satellites into one or more orbital positions controlled directly
or indirectly by the Canadian company (see Notes 6 and 15). Recently, in that
regard, the Related Party failed to receive the required regulatory approvals
necessary to complete that transaction. Notwithstanding such events, the
Partnership's position with respect to its legal claims regarding access to
the capacity, as well as control, of the satellites has not changed. Although
the Parties have had favorable conceptual discussions with respect to
resolving their legal claims and utilizing one of the Satellites for launch
into the 119(degrees) West Longitude orbital location available under the
original Tempo Option Agreement dated February 8, 1990, the Parties have not
approved or executed a written agreement with respect to any such resolution
of their dispute, and there can be no assurance that any such resolution can
be reached, or can be reached on terms acceptable to the Partnership (See Note
15). Management is unable at this time to assess, the impact, if any, of this
matter on the Partnership's results of operations, financial position or cash
flows.
SATELLITE:
As described in Note 7, in 1996 the Partnership has entered into an
agreement with an affiliate of a Partner, pursuant to which the affiliate has
agreed to provide the Partnership with service on satellite transponders,
subject to the successful launch of the satellite. The satellite, which is
currently scheduled to launch on January 31, 1997 and to be operational within
60 days thereafter, will replace the current satellite which is nearing the
end of its useful life. The agreement is for an initial term of four years
from the date on which service is made available, and has an annual rate of
$46.8 million when the satellite is fully utilized. The term is extendable for
the remainder of the useful life of the satellite at the option of the
Partnership if exercised prior to the later of December 31, 1996 and 45 days
after written notice from the affiliate to the Partnership that delivery of
the satellite has occurred under the contract.
F-67
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 15, 1996
TCI SATELLITE ENTERTAINMENT, INC.
By: /s/ Gary S. Howard
-----------------------
GARY S. HOWARD
President and Chief
Executive Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
- -------
No.
- ---
2.1* Form of Reorganization Agreement, dated as of ______________, 1996,
among Tele-Communications, Inc. ("TCI"), TCI Communications,
Inc.("TCIC"), Tempo Enterprises, Inc., TCI Digital Satellite
Entertainment, Inc., Old TCI SE, Inc., TCI K-1, Inc. ("TCI K-1"),
United Artists K-1 Investments, Inc. ("UA K-1"), TCISE Partner 1,
Inc., TCISE Partner 2, Inc. and TCI Satellite Entertainment, Inc. (the
"Company").*
2.2 Form of Trade Name and Service Mark License Agreement dated as of
_______________, 1996, between TCI and the Company.*
2.3 Form of Transition Services Agreement dated as of ________________,
1996, between TCI and the Company.*
2.4 Fulfillment Agreement dated as of August 30, 1996, between TCIC
and the Company.*+
2.5 Tax Sharing Agreement effective July 1, 1995, among TCIC and certain
other subsidiaries of TCI.*
2.5.1 First Amendment to Tax Sharing Agreement dated as of October__, 1995,
among TCIC and certain other subsidiaries of TCI.*
2.5.2 Form of Second Amendment to Tax Sharing Agreement dated as of
October__,1996, among TCIC and certain other subsidiaries of TCI.*
2.6 Form of Credit Agreement dated as of ________________, 1996, between
TCIC and the Company.*
2.7 Form of Share Purchase Agreement dated as of ________________, 1996,
between TCI and the Company.*
2.8 Form of Option Agreement dated as of ________________, 1996,
between TCI and the Company.*
3.1 Amended and Restated Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Specimen form of certificate representing shares of Series A Common
Stock of the Company.*
4.2 Specimen form of certificate representing shares of Series B Common
Stock of the Company.*
4.3 TPO-1-290 BSS Construction Agreement dated as of February 22, 1990,
between Tempo and Space Systems/Loral, Inc.*+
- ---------------------------
* Previously filed.
+ This document has been redacted and is the subject of a Request for
Confidential Treatment filed with the Securities and Exchange Commission.
<PAGE>
4.4 Intentionally Omitted.
4.5 Intentionally Omitted.
4.6 Limited Partnership Agreement dated February 8, 1990, among ATC
Satellite Inc., Comcast DBS, Inc., Continental Satellite Company,
Inc., Cox Satellite, Inc., G.E. Americom Services, Inc., New Vision
Satellite, TCI K-1, UA K-1, Viacom K-Band, Inc. and Warner Cable SSD,
Inc.*
4.6.1 Amendment to Limited Partnership Agreement dated September 1,
1993.*
4.6.2 Amendment to Limited Partnership Agreement dated December 15,
1993.*
4.6.3 Amendment to Limited Partnership Agreement dated October 18, 1996.*
4.7 Tag Along Agreement dated as of February 8, 1990, among Cox
Enterprises, Inc., Comcast Corporation, Continental Cablevision, Inc.,
Newhouse Broadcasting Corporation, Tempo, TCI Development Corporation
and TCI.*
4.8 Option Agreement dated February 8, 1990, between Tempo and K Prime
Partners, L.P.*
4.9 Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to FSS.*
4.10 Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to BSS.*
4.11 Amended and Restated Reimbursement Agreement dated March 1, 1995,
between TCI UA 1, Inc., Chemical Bank and The Toronto Dominion Bank.*
10.1 Form of Indemnification Agreement dated as of ________________, 1996,
by and between the Company and TCI UA 1, Inc.*
10.2 Intentionally Omitted.
10.3 Form of Indemnification Agreement dated as of _____________, 1996,
between the Company and TCIC.*
10.4 TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan.*
10.5 Form of Qualified Employee Stock Purchase Plan.*
10.6 Form of Idemnification Agreement dated ________________, 1996, by and
between TCI and Gary S. Howard.*
10.7 Form of Option Agreement, dated as of November _____, 1996, by and
between the Company and Gary S. Howard.*
10.8 Form of Option Agreement, dated as of November _____, 1996, by and
between the Company and Larry E. Romrell.*
10.9 Form of Option Agreement, dated as of November _____, 1996, by and
between the Company and Brendan R. Clouston.*
10.10 Form of Option Agreement, dated as of November _____, 1996, by and
between the Company and David P. Beddow.*
- --------------------
* Previously filed.
<PAGE>
10.11 1996 Ancillary Agreement Among Partners dated as of October 18, 1996,
among PRIMESTAR Partners, L.P., the Participating Partners named
therein, GE American Services, Inc. and its affiliate GE American
Communications, Inc.*
10.11.1 Annex A to the 1996 Ancillary Agreement Among Partners.*
10.12 Equipment Sale Agreement, dated as of October 21, 1996, between ResNet
Communications, Inc. ("ResNet") and the Company.*
10.13 Subordinated Convertible Term Loan Agreement, dated as of October 21,
1996, by and between ResNet, as Borrower, and the Company, as
Lender.*
10.14 Option Agreement, dated as of October 21, 1996, between ResNet and the
Company.*
10.15 Standstill Agreement, dated as of October 21, 1996, by and between
LodgeNet Entertainment Corporation ("LodgeNet") and the Company.*
10.16 Stockholders' Agreement, dated as of October 21, 1996, between
LodgeNet and the Company.*
10.17 Subscription Agreement, dated as of October 21, 1996, between ResNet
and the Company.*
21 List of subsidiaries of the Company.*
27 Financial Data Schedule
- --------------------
* Previously filed.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMENDED
FORM 10 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<CASH> 6,335 1,801
<SECURITIES> 0 0
<RECEIVABLES> 19,180 29,192
<ALLOWANCES> 4,241 4,819
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,153,064 946,235
<DEPRECIATION> 105,361 57,015
<TOTAL-ASSETS> 1,098,177 933,443
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 614,750 483,584
<TOTAL-LIABILITY-AND-EQUITY> 1,098,177 933,443
<SALES> 0 0
<TOTAL-REVENUES> 193,647 208,903
<CGS> 0 0
<TOTAL-COSTS> 101,736 96,050
<OTHER-EXPENSES> 53,527 55,488
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (47,758) (69,365)
<INCOME-TAX> (14,870) (21,858)
<INCOME-CONTINUING> (32,888) (47,507)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (32,888) (47,507)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
