<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-21317
TCI SATELLITE ENTERTAINMENT, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1299995
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8085 South Chester, Suite 300
Englewood, Colorado 80112
- ---------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 712-4600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days [X] Yes [ ] No
The number of shares outstanding of TCI Satellite Entertainment, Inc.'s
common stock as of July 31, 1997, was:
Series A common stock - 58,174,354 shares; and
Series B common stock - 8,465,564 shares.
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
amounts in thousands
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 53,143 6,560
Accounts receivable 24,717 24,731
Less allowance for doubtful accounts 4,089 4,666
---------- ---------
20,628 20,065
---------- ---------
Prepaid expenses 845 927
Investment in, and related advances to,
PRIMESTAR Partners L.P.
("PRIMESTAR Partners") (note 7) 23,707 32,240
Property and equipment, at cost:
Satellite reception equipment 600,529 595,249
Subscriber installation costs 196,727 175,553
Support equipment 33,883 28,332
Satellites (note 8) 462,950 457,685
---------- ---------
1,294,089 1,256,819
Less accumulated depreciation 211,282 149,165
---------- ---------
1,082,807 1,107,654
---------- ---------
Other assets, net of accumulated
amortization (note 9) 29,884 12,827
---------- ---------
$1,211,014 1,180,273
========== =========
</TABLE>
(continued)
I-1
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
amounts in thousands
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Accounts payable $ 12,473 18,860
Accrued charges from PRIMESTAR
Partners (note 7) 42,869 37,943
Accrued charges from TCI
Communications, Inc. ("TCIC")
(note 11) 9,915 8,381
Accrued interest payable 7,862 70
Other accrued expenses 20,972 15,497
Subscriber advance payments 26,967 22,249
Due to PRIMESTAR Partners (note 8) 462,950 457,685
Debt (note 10) 361,054 247,230
---------- ---------
Total liabilities 945,062 807,915
---------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value;
authorized 5,000,000;
none issued -- --
Series A common stock, $1 par value;
authorized 185,000,000; issued
58,172,006 in 1997, and
57,946,044 in 1996 58,172 57,946
Series B common stock, $1 par value;
authorized 10,000,000 shares; issued
8,465,564 in 1997 and
8,466,564 in 1996 8,466 8,467
Additional paid-in capital 522,683 521,724
Accumulated deficit (323,369) (215,779)
---------- ---------
Total stockholders' equity 265,952 372,358
---------- ---------
Commitments and contingencies
(notes 2, 3, 7, 8, 10, 11 and 12)
$1,211,014 1,180,273
========== =========
</TABLE>
See accompanying notes to financial statements.
I-2
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1997 1996 1997 1996
---------- -------- --------- --------
amounts in thousands
<S> <C> <C> <C> <C>
Revenue:
Programming and equipment
rental $126,729 80,613 240,230 156,870
Installation 10,652 17,275 20,415 36,777
-------- ------- -------- -------
137,381 97,888 260,645 193,647
-------- ------- -------- -------
Operating costs and expenses:
Charges from PRIMESTAR
Partners (note 7):
Programming 42,665 30,067 81,988 57,464
Satellite, marketing and
distribution 20,445 15,357 40,381 29,422
Other operating:
TCIC (note 11) 1,875 5,098 4,490 10,505
Other 2,940 2,363 6,582 4,345
Selling, general and administrative:
TCIC (note 11) 7,845 5,099 12,192 9,752
Other 39,540 37,929 79,581 75,314
Stock compensation (note 11) 1,158 (11) 1,552 (176)
Depreciation (note 4) 58,643 29,338 113,266 53,527
-------- ------- -------- -------
175,111 125,240 340,032 240,153
-------- ------- -------- -------
Operating loss (37,730) (27,352) (79,387) (46,506)
Other income (expense):
Interest expense (12,025) -- (21,408) --
Interest income 1,019 100 1,770 194
Share of losses of PRIMESTAR
Partners (note 7) (5,768) (1,068) (7,929) (1,446)
Other, net (555) -- (636) --
-------- ------- -------- -------
(17,329) (968) (28,203) (1,252)
-------- ------- -------- -------
Loss before income taxes (55,059) (28,320) (107,590) (47,758)
Income tax benefit -- 9,003 -- 14,870
-------- ------- -------- -------
Net loss $(55,059) (19,317) (107,590) (32,888)
======== ======= ======== =======
Net loss per common share (note 5):
Historical $ (.83) -- (1.61) --
======== ======= ======== =======
Pro forma $ -- (.29) -- (.50)
======== ======= ======== =======
</TABLE>
See accompanying notes to financial statements.
I-3
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Consolidated Statement of Stockholders' Equity
Six months ended June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Common stock Additional Total
----------------------- paid-in Accumulated stockholders'
Series A Series B capital deficit equity
------------ --------- ----------- ----------- -------------
amounts in thousands
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $57,946 8,467 521,724 (215,779) 372,358
Net loss -- -- -- (107,590) (107,590)
Recognition of stock compensation
related to stock options and
restricted stock awards -- -- 959 -- 959
Issuance of Series A Common Stock upon
conversion of convertible securities
of a TCIC subsidiary 225 -- -- -- 225
Conversion of Series B common stock
into Series A common stock 1 (1) -- -- --
------- -------- ----------- ------------- --------
Balance at June 30, 1997 $58,172 8,466 522,683 (323,369) 265,952
======= ======== =========== ============= ========
</TABLE>
See accompanying notes to financial statements.
I-4
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1997 1996
----------- ---------
amounts in thousands
(see note 6)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(107,590) (32,888)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation 113,266 53,527
Share of losses of PRIMESTAR
Partners 7,929 1,446
Accretion of debt discount 6,644 --
Deferred income tax expense -- 11,463
Other non-cash items 3,514 (163)
Changes in operating assets and
liabilities:
Change in receivables (563) 9,434
Change in prepaids 82 (267)
Change in accruals and payables 16,053 14,359
Change in subscriber advance
payments 4,718 4,427
--------- --------
Net cash provided by operating
activities 44,053 61,338
--------- --------
Cash flows from investing activities:
Capital expended for satellites (5,265) (36,684)
Capital expended for property and
equipment (85,804) (175,339)
Additional investments in and advances
to PRIMESTAR Partners (6,991) (12,330)
Repayment received on advances to
PRIMESTAR Partners 7,663 --
--------- --------
Net cash used in investing
activities (90,397) (224,353)
--------- --------
Cash flows from financing activities:
Borrowings of debt 405,061 --
Repayments of debt (299,172) --
Payment of deferred financing costs (18,452) --
Increase in due to PRIMESTAR Partners 5,265 3,319
Proceeds from issuance of common stock 225 --
Increase in due to TCIC -- 164,230
--------- --------
Net cash provided by financing
activities 92,927 167,549
--------- --------
Net increase in cash and cash
equivalents 46,583 4,534
Cash and cash equivalents:
Beginning of period 6,560 1,801
--------- --------
End of period $ 53,143 6,335
========= ========
</TABLE>
See accompanying notes to financial statements.
I-5
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
June 30, 1997
(unaudited)
(1) Basis of Presentation
---------------------
The accompanying financial statements of TCI Satellite Entertainment, Inc.
("TSAT") include the historical financial information of (i) certain
satellite television assets (collectively, "TCI SATCO") of TCIC, a
subsidiary of Tele-Communications, Inc. ("TCI") for periods prior to the
December 4, 1996 consummation of the distribution transaction (the
"Distribution") described in note 3, and (ii) TSAT and its consolidated
subsidiaries for the period following such date. Upon consummation of the
Distribution, TSAT became the owner of the assets that comprise TCI SATCO,
which assets included (i) a 100% ownership interest in 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 permit (the "FCC Permit") issued by the Federal
Communications Commission ("FCC") authorizing the construction, launch and
operation 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 Tempo arranged
for the construction of two high power communications satellites (the
"Company Satellites") and has an option to purchase up to three additional
satellites. PRIMESTAR Partners, which was formed as a limited partnership
in 1990 by subsidiaries of TCIC, subsidiaries of several other cable
operators, and a subsidiary of General Electric Company, broadcasts
satellite entertainment services that are delivered to subscribers through
TSAT and certain other authorized distributors.
In the following text, the "Company" may, as the context requires, refer to
"TCI SATCO" (prior to the December 4, 1996 completion of the Distribution),
TSAT and its consolidated subsidiaries (subsequent to the December 4, 1996
completion of the Distribution) or both. See note 3. Additionally,
unless the context indicates otherwise, references to "TCI" and "TCIC"
herein are to TCI and TCIC and their respective consolidated subsidiaries
(other than the Company).
All significant inter-entity and intercompany transactions have been
eliminated.
As further discussed in note 11, the accompanying 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.
(continued)
I-6
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
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.
The accompanying financial statements of the Company are unaudited. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) have been made which are necessary to present fairly the
financial position of the Company as of June 30, 1997 and the results of
its operations for the six months ended June 30, 1997 and 1996. The
results of operations for any interim period are not necessarily indicative
of the results for the entire year.
These financial statements should be read in conjunction with the financial
statements and related notes thereto included in the Company's December 31,
1996 Annual Report on Form 10-K.
(2) Proposed Transactions
---------------------
PRIMESTAR Partners Roll-up
On June 11, 1997, the Company entered into a binding letter agreement,
including an attached summary of business terms (collectively, the "Roll-up
Agreement") with PRIMESTAR Partners, affiliates of each of the other
partners of PRIMESTAR Partners, and a stockholder of the Company. The
Roll-up Agreement sets forth the principal terms and conditions of a
proposed transaction (the "Roll-up Transaction"), through which PRIMESTAR
Partners, the Company and the PRIMESTAR(R)-related distribution businesses
of such affiliates will be consolidated into a newly-formed company. The
other parties to the Roll-up Agreement include Time Warner Cable ("TWC"),
Advance/Newhouse Partnership ("Newhouse," and, together with TWC,
"TWC/Newhouse"), Cox Communications, Inc. ("Cox"), Comcast Corporation
("Comcast"), MediaOne of Delaware Inc. ("MediaOne"), and GE American
Communications, Inc. ("GE Americom"). Affiliates of the Company, TWC,
Newhouse, Cox, Comcast, MediaOne and GE Americom are general and limited
partners of PRIMESTAR Partners, and the COMPANY, TWC/Newhouse, Cox, Comcast
and MediaOne (or their affiliates) are also distributors of PRIMESTAR
Partners' medium power satellite television service.
(continued)
I-7
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
The Roll-up Agreement provides for the formation of a new corporation ("New
PRIMESTAR"), which will initially be a wholly-owned subsidiary of the
Company. New PRIMESTAR will acquire the PRIMESTAR partnership interests,
subscribers and related assets, as applicable, of the other parties to the
Roll-up Transaction in exchange for (i) cash (or the assumption of debt),
(ii) shares of Series A Common Stock of New PRIMESTAR and (iii) except for
GE Americom, shares of Series C Common Stock of New PRIMESTAR, in each case
in an amount determined pursuant to the Roll-up Agreement. Concurrently,
the Company would merge with a wholly-owned subsidiary of New PRIMESTAR,
with the Company surviving, and the outstanding shares of Series A Common
Stock and Series B Common Stock of the Company would be converted into
Series A Common Stock and Series B Common Stock of New PRIMESTAR,
respectively. It is expected that upon consummation of the Roll-up
Transaction, shares of the Series A Common Stock and Series B Common Stock
of New PRIMESTAR will be publicly traded on the Nasdaq National Market tier
of The Nasdaq Stock Market.
The Roll-up Agreement provides that the board of directors of New PRIMESTAR
will initially consist of eleven members, of which three (the "Class B
Directors") will be elected by holders of the Series B Common Stock of New
PRIMESTAR and six (the "Class C Directors") will be elected by holders of
the Series C Common Stock of New PRIMESTAR. Of the six Class C Directors,
three will be nominated by TWC/Newhouse and one will be nominated by each
of Cox, Comcast and MediaOne. The remaining two directors (the "Common
Directors") will be nominated by a super-majority vote of the Class B
Directors and Class C Directors, and elected by the holders of the Series A
Common Stock, Series B Common Stock and Series C Common Stock, voting
together as a single class. The number of Class B Directors will decrease
as the number of shares of Series B Common Stock outstanding decreases, and
the number of Class C Directors will decrease as the number of shares of
Series C Common Stock outstanding decreases, in each case in accordance
with a schedule set forth in the Roll-Up Agreement. The special class
rights of the holders of Series B Common Stock and Series C Common Stock,
each voting as a separate class, to elect the Class B Directors and Class C
Directors, respectively, will automatically terminate at such time as the
holders of the Series C Common Stock, voting as a class, shall no longer be
entitled to elect at least three Class C Directors. At any time that the
maximum number of Class B Directors or Class C Directors is decreased, the
number of Common Directors will be correspondingly increased, so that the
total number of directors constituting the whole board of directors of New
PRIMESTAR remains eleven.
(continued)
I-8
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
The Series A Common Stock of New PRIMESTAR will be substantially identical
to the Series A Common Stock of the Company, and the Series B Common Stock
and Series C Common Stock of New PRIMESTAR will be substantially identical
to the Series A Common Stock of New PRIMESTAR, except in each case with
respect to the election of directors as provided above and except in each
case as follows: (i) holders of the Series B Common Stock and Series C
Common Stock will be entitled to ten votes per share, while holders of the
Series A Common Stock will be entitled to one vote per share, on all
matters as to which such holders are entitled to vote; (ii) each share of
Series B Common Stock will be convertible into one share of Series A Common
Stock at the option of the holder, and each share of Series C Common Stock
will be convertible into one share of Series B Common Stock or one share of
Series A Common Stock at the option of the holder, but the Series A Common
Stock will not be convertible; and (iii) the affirmative vote of the
holders of a majority of the outstanding shares of Series B Common Stock
and 83% of the outstanding shares of Series C Common Stock, each voting as
a separate class, will be required to approve certain actions by New
PRIMESTAR, including substantive charter and by-law amendments, mergers and
consolidations, the sale of substantially all the assets of New PRIMESTAR,
dissolution, certain stock issuances, the filing of a voluntary bankruptcy
petition, and, with certain exceptions, engagement by New PRIMESTAR in any
business outside the Satellite Television Business (as defined in the Roll-
up Agreement). On the tenth anniversary of the first issue of Series C
Common Stock, all Series C Common Stock will be mandatorily converted into
Series B Stock on a one-to-one basis.
Under the terms of the Roll-up Agreement, current stockholders of the
Company would hold approximately 37% common equity ownership of New
PRIMESTAR at the closing of the Roll-up Transaction, and TWC/Newhouse,
Comcast, MediaOne, Cox and GE would own approximately 30%, 10%, 10%, 9% and
4% respectively, of New PRIMESTAR common equity at closing, subject in each
case to adjustments based on closing subscriber counts, inventory amounts
and other factors.
Although the parties contemplate the negotiation, execution and delivery of
definitive documentation with respect to the Roll-up Transaction, such
documentation is not a condition to the closing of the Roll-up Transaction,
and in the absence of such documentation, the Roll-up Agreement will remain
a binding agreement among the parties. The consummation of the Roll-up
Transaction is however subject to certain closing conditions, including
receipt of necessary regulatory approvals, approval of the Company's
stockholders and certain due diligence matters. In connection with the
execution of the Roll-up Agreement, John C. Malone, a stockholder of the
Company and the Chairman of its Board of Directors, has agreed to vote all
shares of common stock of the Company owned by him in favor of the Roll-up
Transaction, in any vote of the stockholders of the Company to approve such
transaction.
(continued)
I-9
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Acquisition of Certain Satellite Assets
On June 11, 1997, PRIMESTAR Partners announced that it had entered into a
binding asset acquisition agreement (the "ASkyB Agreement") with The News
Corporation Limited ("News Corp"), MCI Telecommunications Corporation
("MCI"), American Sky Broadcasting LLC, a joint venture between News Corp.
and MCI ("ASkyB"), PRIMESTAR Partners, and, for certain purposes only, each
of the general and limited partners of PRIMESTAR Partners. The ASkyB
Agreement provides for the sale and transfer to New PRIMESTAR of two high
power communications satellites currently under construction, certain
authorizations granted to MCI by the FCC to operate a direct broadcast
satellite business at the 110 degrees West longitude orbital location using
28 transponder channels (the "110 degrees License"), and certain related
contracts (collectively, the "ASkyB Transaction"). In consideration, ASkyB
will receive non-voting convertible securities of New PRIMESTAR with a
total liquidation value of approximately $1.1 billion, comprising
approximately $600 million liquidation value of non-voting convertible
preferred stock (convertible into approximately 52 million shares of non-
voting common stock of New PRIMESTAR, subject to adjustment) and
approximately $500 million principal amount of convertible subordinated
notes (convertible into approximately 43 million shares of non-voting
common stock of New PRIMESTAR, subject to adjustment). The preferred stock
will pay cumulative dividends at the annual rate of 5% of the liquidation
value of such shares and the subordinated notes will have an interest rate
of 5%. dividends on the preferred stock and interest on the subordinated
notes will be payable in cash or, at the option of New PRIMESTAR, in shares
of non-voting common stock of New PRIMESTAR, for a period of four years.
Thereafter, all dividend and interest payments will be made solely in cash.
Shares of non-voting common stock issued to ASkyB or any of its affiliates
upon conversion of such convertible preferred stock and subordinated notes,
or in payment of dividend or interest obligations thereunder, shall in turn
automatically convert into shares of the series a common stock of New
PRIMESTAR, on a one-to-one basis, upon transfer to any person other than
ASkyB, News Corp. or any of their respective affiliates.
Consummation of the transactions contemplated by the ASkyB Agreement is
contingent on, among other things, receipt of all necessary government and
regulatory approvals.
(continued)
I-10
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
(3) Distribution Transaction
------------------------
General
On June 17, 1996, the Board of Directors of TCI announced its intention to
distribute 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"). On December
4, 1996, the Distribution was effected as a distribution by TCI to holders
of record of its TCI Group Common Stock as of the close of business on
November 12, 1996 (the "Record Date") 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 did
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.
TCI Group Stockholders on the Record Date received 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 were not issued. Fractions of one-half or greater of a
share were rounded up and fractions of less than one-half of a share were
rounded down to the nearest whole number of shares of Series A Common Stock
and Series B Common Stock. Immediately following the Distribution,
57,941,044 shares of Series A Common Stock and 8,466,564 shares of Series B
Common Stock were issued and outstanding.
(continued)
I-11
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Subsequent to the Distribution, the Company and TCI have operated independently.
For purposes 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 have entered into various agreements, including
the "Reorganization Agreement" (see below), the "Fulfillment Agreement" (see
note 11), the "Indemnification Agreements" (see note 12), the "TCIC Credit
Facility" (see note 10), the "Transition Services Agreement" (see note 11), and
an amendment to TCI's existing "Tax Sharing Agreement" (see note 11).
Reorganization Agreement
The Reorganization Agreement provided 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 was payable by the Company for these
transfers, except that two subsidiaries of the Company purchased TCIC's
partnership interests in PRIMESTAR Partners for consideration payable by
delivery of promissory notes issued by such subsidiaries, which notes were
assumed by TCI on or before the Distribution Date in the form of a capital
contribution to the Company. The Reorganization Agreement also provides 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 makes 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 having been a subsidiary of TCI.
Pursuant to the Reorganization Agreement, on the Distribution Date, the Company
issued 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. On December 31, 1996, the Company entered into a bank
credit agreement with respect to a senior secured reducing revolving credit
facility (the "Bank Credit Facility") and used a portion of the borrowing
availability thereunder to repay in full all principal and interest due to TCIC
pursuant to the Company Note. See note 10.
(continued)
I-12
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Pursuant to the Reorganization Agreement, the remainder of the Company's
intercompany balance owed to TCIC on the Distribution Date (other than
certain advances made to the Company by TCIC in 1996 to fund certain
construction and related costs associated with the Company Satellites, as
described in note 8) was assumed by TCI. A portion of such assumption of
debt was affected in the form of a capital contribution to the Company; the
remainder was affected as consideration for (i) the assumption by the
Company of 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, 1,660,190 shares of Series A
Common Stock and (ii) the granting by the Company to TCI of an option to
purchase up to 4,765,000 shares of Series A Common Stock, at an exercise
price of $1.00 per share, as required by TCI from time to time to meet its
obligations under the conversion features of certain convertible securities
of TCI as such conversion features were adjusted as a result of the
Distribution.
(4) Changes in Accounting
----------------------
During the fourth quarter of 1996, the Company re-evaluated certain of its
depreciation policies. After considering relevant accounting literature,
current accounting practices in similar industries, 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 was adopted effective October 1, 1996 and was
treated as a change in accounting policy that was 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, was 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 was given effect on a prospective
basis as of October 1, 1996.
(continued)
I-13
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
(5) Net Loss Per Common Share
-------------------------
As described in note 3, TSAT issued 66,407,608 shares of Company Common
Stock pursuant to the Distribution. The pro forma net loss per share
amounts set forth in the accompanying statements of operations assume that
the shares issued pursuant to the Distribution were issued and outstanding
since January 1, 1996. Accordingly, the calculation of the pro forma net
loss per share assumes 66,407,608 weighted average shares were outstanding
during the three and six months ended June 30, 1996. The historical net
loss per common share is based on 66,630,929 and 66,625,103 weighted
average shares outstanding during the three and six months ended June 30,
1997, respectively.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
No. 128"). Statement No. 128 requires the presentation of basic earnings
per share ("EPS") and, for companies with potentially dilutive securities,
such as convertible debt, options and warrants, diluted EPS. Statement No.
128 is effective for annual and interim periods ending after December 31,
1997. The Company does not believe that the adoption of Statement No. 128
will significantly impact the calculation of the Company's net loss per
common share.
(6) Supplemental Disclosures to Combined Statements of Cash Flows
-------------------------------------------------------------
Cash paid for interest was $5,913,000 during the six months ended June 30,
1997, and ,was not significant during the six months ended June 30, 1996.
Cash paid for income taxes was not significant during the six months ended
June 30, 1997 and 1996.
With the exception of certain non-cash stock compensation obligations (see
note 11), transactions effected through the intercompany account with TCIC
for periods prior to the Distribution have been considered to be
constructive cash receipts and payments for purposes of the accompanying
statements of cash flows.
(continued)
I-14
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
(7) Investment in PRIMESTAR Partners
--------------------------------
Summarized unaudited operating information for PRIMESTAR Partners is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Results of Operations
- ---------------------
Revenue $ 292,169 185,981
Operating, selling, general and
administrative expenses (312,210) (191,571)
Depreciation and amortization (1,958) (1,626)
--------- --------
Operating loss (21,999) (7,216)
Other income (expense), net (7,212) 765
--------- --------
Net loss $ (29,211) (6,451)
========= ========
</TABLE>
The bank credit facility of PRIMESTAR Partners (the "PRIMESTAR Credit
Facility") was obtained by PRIMESTAR Partners to finance advances to Tempo
for payments due in respect of the construction of the Company Satellites,
and is supported by letters of credit arranged for by affiliates of all but
one of the partners of PRIMESTAR Partners. At June 30, 1997, PRIMESTAR
Partners' indebtedness under the PRIMESTAR Credit Facility aggregated
$547,000,000, including amounts borrowed to pay interest charges. The
maturity date of the PRIMESTAR Credit Facility has been extended from June
30, 1997 to December 31, 1997. See notes 8 and 12.
Since March 10, 1997, PRIMESTAR Partners has broadcast from a medium power
satellite ("GE-2") that was launched on January 30, 1997 by GE Americom.
Pursuant to an Amended and Restated Memorandum of Agreement, effective as
of October 18, 1996, between PRIMESTAR Partners and GE Americom, with
respect to PRIMESTAR Partners' use of transponders on GE-2 (the "GE-2
Agreement"), PRIMESTAR Partners will be required to make minimum lease
payments for an initial term of six years from the date of commercial
operation, extendible, at the option of PRIMESTAR Partners for the
remainder of the operational life of GE-2 (the "End-Of-Life Option"). The
End-Of-Life Option expires if not exercised by December 31, 1997.
PRIMESTAR Partners provides programming services to the Company and other
authorized distributors in exchange for a fee based upon the number of
subscribers receiving programming services. In addition, PRIMESTAR Partners
arranges for satellite capacity and uplink services, and provides national
marketing and administrative support services in exchange for a separate
authorization fee.
(continued)
I-15
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Under 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, 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. 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.
As described in note 2, the Company has entered into a binding letter
agreement with respect to the Roll-up Transaction, whereby the Company,
PRIMESTAR Partners and the PRIMESTAR(R)-related distribution businesses of
affiliates of the other partners of PRIMESTAR Partners will be consolidated
into a newly-formed company.
(8) Satellites
------------
Tempo DBS System
The Company, through Tempo, holds the FCC Permit authorizing construction
of a high power DBS system consisting of two or more satellites delivering
DBS service in 11 frequencies at the 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 the entire continental U.S.; 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 arranged for the construction of 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 "Satellites" in the accompanying
balance sheets.
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 220 watts per channel). Either such configuration can be selected at
any time, either before or after launch.
(continued)
I-16
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
One of the Company Satellites ("Tempo DBS-1") was outfitted with an antenna
designed for operation at the 119 degrees W.L. orbital location, and was
launched into geosynchronous orbit on March 8, 1997. The satellite is
currently undergoing in-orbit testing pursuant to the Satellite
Construction Agreement. Assuming the successful in-orbit testing of Tempo
DBS-1, the Company currently intends to operate such satellite in "paired
transponder" mode, broadcasting on 11 of the 16 available transponder
pairs, in accordance with the FCC Permit. The remaining five transponder
pairs would be available as in-orbit spares. Operating in paired
transponder mode and broadcasting on 11 transponders Tempo DBS-1 would
initially be able to deliver approximately 100 channels of digital video
and music programming. If advances in compression technology currently
being tested become commercially available, Tempo DBS-1 would be able to
deliver up to 150 channels of programming. The Company intends, directly or
through PRIMESTAR Partners, to use Tempo DBS-1 as a platform to provide
high-power digital video programming services to residential customers, as
well as multiple dwelling units, commercial customers and resellers. The
implementation of any high-power strategy, either alone, with PRIMESTAR
Partners, or in conjunction with the consummation of the ASkyB Transaction,
is subject to regulatory approval. No assurance can be given that such
approval will be obtained, or if obtained, that such approval will not be
conditioned upon modifications to the Company's high-power strategy. See
note 2.
Following an unusually intense solar disturbance on April 11, 1997, Loral
notified the Company of some reduction of electrical power on Tempo DBS-1.
Although it is possible that this power reduction could eventually affect
the operation of Tempo DBS-1, either alone or together with other events
that may arise during the expected life of the satellite, the Company does
not believe that the value or utility of Tempo DBS-1 is materially
impaired, and it is not likely that this power reduction will materially
interfere with the use of the satellite as currently contemplated by the
Company and PRIMESTAR Partners.
In light of the pendency of the Roll-up Transaction and ASkyB Transaction
(see note 2), the Company and PRIMESTAR Partners are evaluating alternative
future plans with respect to the second Company Satellite, which presently
serves as a ground spare for Tempo DBS-1.
(continued)
I-17
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Satellite Launches
As noted above, Tempo DBS-1 was launched on March 8, 1997 and is currently
in the process of in-orbit testing. Under the Satellite Construction
Agreement, 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. Tempo DBS-1 has not yet
been accepted, but it is anticipated that Tempo DBS-1 will be accepted
during the third quarter of 1997. The Company believes that Tempo DBS-1
does not fully comply with specifications, but has not yet determined the
extent of such non-compliance. 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 and receive a
refund. 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 180-day period following the
launch of the satellite. Such risk insurance is required to 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 fixed contract 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.
(continued)
I-18
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Tempo Option
In February 1990, Tempo entered into the Tempo Option Agreement with
PRIMESTAR Partners 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 FCC Permit. Under the Tempo Option Agreement, upon the exercise of the
Tempo Option, PRIMESTAR Partners was obligated to pay Tempo $1,000,000 (the
"Exercise Fee") and to lease or purchase the entire capacity of the DBS
system with the purchase price (or aggregate lease payments) being
sufficient to cover the costs of constructing, launching and operating such
DBS system. In connection with the Tempo 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 is 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 ($462,950,000 at
June 30, 1997) is reflected in "Due to PRIMESTAR Partners" in the
accompanying balance sheets. At June 30, 1997, the amount borrowed by
PRIMESTAR Partners under the PRIMESTAR Credit Facility was $547,000,000,
including amounts borrowed to pay interest charges. See notes 7 and 12.
During 1996, TCIC made intercompany advances to the Company to fund the
majority of the construction and related costs associated with the Company
Satellites. Prior to 1996, PRIMESTAR Partners had funded substantially all
of the construction and related costs associated with the Company
Satellites. In connection with the Distribution, a determination was made
that such 1996 advances from TCIC would be repaid by the Company to TCIC,
to the extent (and only to the extent) that Tempo received corresponding
advances from PRIMESTAR Partners. As a result of negotiations between the
Company and PRIMESTAR Partners to resolve a disagreement concerning the
Company Satellites, PRIMESTAR Partners advanced $73,786,000 to Tempo in
December 1996 to reimburse Tempo for all of the 1996 costs which previously
had been funded by TCIC. Upon receipt, such advance was paid to TCIC by
Tempo in repayment of such 1996 advances by TCIC.
(continued)
I-19
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
On February 7, 1997, the Partners Committee of PRIMESTAR Partners adopted a
resolution (i) affirming that PRIMESTAR Partners had unconditionally
exercised the Tempo Option, (ii) approving the proposed launch of Tempo
DBS-1 into the 119 degrees W.L. orbital position and the use of Satellite
No. 2 as a spare or back-up for Tempo DBS-1, pending other deployment or
disposition as determined by PRIMESTAR Partners, and (iii) authorizing the
payment by PRIMESTAR Partners to Tempo of the Exercise Fee and other
amounts in connection with the Tempo Option and the Tempo Letter
Agreements, including funding of substantially all construction and related
costs relating to the Company Satellites not previously funded by PRIMESTAR
Partners. Such amounts have been paid to the Company.
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
to Tempo against any payments due under the Tempo Option with respect to
such purchase or lease of satellite capacity. Although the Company and
PRIMESTAR Partners have not entered into an agreement with respect to the
lease or purchase of 100% of the capacity of the proposed Tempo DBS system
pursuant to the Tempo Option, the Company believes that its obligations to
PRIMESTAR Partners with respect to such advances will be satisfied in
connection with the completion of such purchase or lease. However, if
notwithstanding the exercise of the Tempo Option such purchase or lease of
satellite capacity is not completed, the Company believes that alternative
courses of action are available that would allow the Company to recover the
Company's costs of constructing the Company Satellites. See note 2.
(9) Other Assets
------------
The components of other assets are as follows (amounts in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Deferred financing costs, net of accumulated
amortization $24,393 7,000
Investment in, and advances to, ResNet
Communications, Inc. 5,491 5,827
------- ------
$29,884 12,827
======= ======
</TABLE>
(continued)
I-20
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
(10) Debt
----
The components of debt are as follows (amounts in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Bank Credit Facility (a) $ -- 246,000
Senior Subordinated Notes (b) 200,000 --
Senior Subordinated Discount Notes (b) 158,705 --
Other 2,349 1,230
-------- -------
$361,054 247,230
======== =======
</TABLE>
(a) Bank Credit Facility
On December 31, 1996, the Company entered into the Bank Credit
Facility. As a result of the February 1997 issuance of the Notes and
the March 1997 determination that GE-2 was commercially operational,
the maximum commitments under the Bank Credit Facility were increased
from $350,000,000 to $750,000,000. At June 30, 1997, $720,000,000 of
such maximum commitments was unused. The availability of such
commitments for borrowing is subject to the Company's compliance with
operating and financial covenants and other customary conditions.
Commencing March 31, 2001, aggregate commitments will be reduced
quarterly in accordance with a schedule, until final maturity at June
30, 2005. The Company's initial borrowings under the Bank Credit
Facility were used to repay in full the principal amount of and
accrued interest on the Company Note and to fund financing costs
associated with the arrangement of the facility.
Borrowings under the Bank Credit Facility bear interest at variable
rates. In addition, the Company is required to pay a commitment fee
equal to 0.375% on the average daily unused portion of the available
commitments, payable quarterly in arrears and at maturity. Such
commitment fees aggregated $1,069,000 during the six months ended June
30, 1997.
(continued)
I-21
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Borrowings under the Bank Credit Facility are guaranteed by TSAT's
restricted subsidiaries (currently all of the Company's subsidiaries except
Tempo) (the "Restricted Subsidiaries"), and secured by collateral
assignments or other security interests in (i) all capital stock of certain
of the Company's Restricted Subsidiaries and (ii) substantially all of the
Company's assets (other than the Company Satellites). The Bank Credit
Facility contains affirmative covenants regarding minimum subscribers,
revenue per subscriber and debt service coverage, as well as negative
covenants that restrict the Company and its Restricted Subsidiaries from,
among other things, (i) incurring indebtedness, (ii) creating liens and
other encumbrances, (iii) entering into merger or consolidation
transactions, (iv) entering into transactions with affiliates, (v) making
investments, (vi) making capital expenditures, (vii) paying dividends and
making other distributions, (viii) redeeming stock, (ix) redeeming or
purchasing of subordinated debt (except under certain limited
circumstances) (x) paying interest on or principal of subordinated debt
during the continuation of (A) an event of default under the Bank Credit
Facility or (B) a default under the Bank Credit Facility of which
management of the Company has actual or constructive notice, (xi) entering
into sale and leaseback transactions and (xii) engaging in non-designated
activities. The Bank Credit Facility also contains customary events of
default and provisions for mandatory prepayments and commitment reductions
in the event of certain asset sales.
The Company anticipates that it will be required to refinance and/or amend
the Bank Credit Facility prior to the consummation of the Roll-up
Transaction described in note 2. No assurance can be given that any such
refinancing and/or amendment will be completed on terms acceptable to the
Company.
During the first quarter of 1997, two letters of credit with an aggregate
drawable amount of $30,000,000 were issued for the account of TSAT pursuant
to the Bank Credit Facility. See note 12.
(b) Notes
On February 20, 1997, the Company issued 10-7/8% Senior Subordinated Notes
due 2007 having an aggregate principal amount of $200,000,000 the ("Senior
Subordinated Notes") and 12-1/4% Senior Subordinated Discount Notes due
2007 having an aggregate principal amount at maturity of $275,000,000 (the
"Senior Subordinated Discount Notes", and together with the Senior
Subordinated Notes, the "Notes"). The net proceeds from the issuance of the
Notes (approximately $340,500,000 after deducting offering expenses) were
initially held in escrow and were subsequently released to the Company on
March 17, 1997. The Company initially used $244,404,000 of such net
proceeds to repay amounts outstanding under the Bank Credit Facility.
(continued)
I-22
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Cash interest on the Senior Subordinated Notes will be payable semi-
annually in arrears on February 15 and August 15, commencing August
15, 1997. Cash interest will not accrue or be payable on the Senior
Subordinated Discount Notes prior to February 15, 2002. Thereafter
cash interest will accrue at a rate of 12-1/4% per annum and will be
payable semi-annually in arrears on February 15 and August 15,
commencing August 15, 2002, provided however, that at any time prior
to February 15, 2002, the Company may make a Cash Interest Election
(as defined) on any interest payment date to commence the accrual of
cash interest from and after the Cash Election Date (as defined). The
Notes will be redeemable at the option of the Company, in whole or in
part, at any time after February 15, 2002 at specified redemption
prices. In addition, prior to February 15, 2000, the Company may use
the net cash proceeds from certain specified equity transactions to
redeem up to 35% of the Notes at specified redemption prices. The
Notes were not originally registered under the Securities Act of 1933,
as amended (the "Securities Act"), but contained a covenant requiring
the Company to exchange the Notes for substantially identical notes
that are so registered ("Exchange Notes") or, alternatively, to
register the Notes under the Securities Act. Due to the pendency of
the Roll-up Transaction, the Company is currently unable to register
the Notes or the Exchange Notes under the Securities Act. Accordingly,
effective July 5, 1997, the Company began to incur additional interest
on the Notes. During the 90-day period ended September 3, 1997,
additional interest on the Notes will be accrued at the rate of $0.05
per $1000 principal amount per week and will aggregate approximately
$200,000 during such 90-day period. For each subsequent 90-day period
in which the Notes are not registered under the Securities Act or
exchanged for registered Exchange Notes, the additional interest on
the notes will be increased by $0.05 per $1000 principal amount per
week up to a maximum of $0.50 per $1000 principal amount per week. The
Company currently expects that it will not be able to comply with the
registration requirements under the Notes, and accordingly, will not
be able to cease the accrual of additional interest, until the first
quarter of 1998.
With the exception of the Notes, which had an aggregate fair value of
$360,413,000 at June 30, 1997, the Company believes that the fair value and
the carrying value of the Company's debt were approximately equal at June
30, 1997.
(continued)
I-23
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
(11) Transactions with Related Parties
---------------------------------
Through the Distribution Date, the effects of all transactions between the
Company and TCI were reflected as adjustments to a non-interest bearing
intercompany account. As described in note 3, all but $250,000,000 of this
intercompany account was forgiven in connection with the Distribution
(other than certain advances relating to construction of the Company
Satellites, which were repaid from advances subsequently received from
PRIMESTAR Partners). Subsequent to the Distribution Date, the effects of
transactions between the Company and TCI will be reflected in a non-
interest bearing account to be settled periodically in cash.
TCIC provides certain installation, maintenance, retrieval and other
customer fulfillment services to the Company. During the six months ended
June 30, 1997 and 1996, the Company's capitalized installation costs
included amounts charged by TCIC to the Company of $32,009,000 and
$23,319,000, respectively. Maintenance, retrieval and other operating
expenses charged by TCIC to the Company aggregated $4,490,000 and
$10,505,000 during the six months ended June 30, 1997 and 1996,
respectively. Prior to the Distribution, the foregoing charges were
allocated from TCIC to the Company based upon a standard charge for each of
the customer fulfillment activities performed by TCIC.
(continued)
I-24
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Since January 1, 1997, TCIC has provided, pursuant to the Fulfillment
Agreement, fulfillment services on an exclusive basis to TSAT since the
Distribution with respect to customers of the PRIMESTAR(R) medium power
service. Such services include installation, maintenance, retrieval,
inventory management and other customer fulfillment services. 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 TSAT,
allowing for on-line scheduling and dispatch of installation and other
service calls, and (iii) provides scheduled rates to be charged to TSAT for
the various customer fulfillment services to be provided by TCIC.
From January 1, 1997 through July 21, 1997, charges for customer
fulfillment services provided by TCIC were made pursuant to the Fulfillment
Agreement originally entered into by the Company and TCIC in connection
with the Distribution (the "Original Fulfillment Agreement"). The Original
Fulfillment Agreement had an initial term of two years and was terminable,
on 180 days notice to TCIC, by the Company at any time during the six month
period ended June 30, 1997. The cost to the Company of the services
provided by TCIC under the Original Fulfillment Agreement exceeded the
standard charges allocated to the Company for such services through
December 31, 1996. Effective July 22, 1997, the Original Fulfillment
Agreement was amended to, among other items, (i) change the termination
date to December 31, 1997 and, (ii) reduce the scheduled rates for the
customer fulfillment services provided by TCIC to rates that are comparable
to those that were used to allocate fulfillment charges to the Company
prior to the Distribution. The Company is currently seeking to arrange for
unaffiliated third parties to perform the customer fulfillment services
that will no longer be performed by TCIC following the termination of the
amended Fulfillment Agreement. There can be no assurance that comparable
services can be obtained by the Company from third parties on acceptable
terms.
TCIC also provides corporate administrative services to the Company. The
charges for such administrative services aggregated $9,919,000 and
$9,752,000 during the six months ended June 30, 1997 and 1996,
respectively. Prior to the Distribution, such administrative expenses were
allocated from TCIC to the Company based on the estimated cost of providing
the service.
(continued)
I-25
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
Since the Distribution Date, charges for administrative services provided
by TCIC have been made pursuant to the Transition Services Agreement
entered into by the Company and TCI in connection with the Distribution.
Pursuant to the Transition Services Agreement between TCI and the Company,
TCI is obligated to 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 is required to
pay TCI a monthly fee of $1.50 per qualified subscribing household or other
residential or commercial unit (counted as one subscriber regardless of the
number of satellite receivers), up to a maximum of $3,000,000 per month,
and to reimburse TCI quarterly for direct, out-of-pocket expenses incurred
by TCI to third parties in providing the services. The Transition Services
Agreement continues 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. Pursuant to the terms of
the Transition Services Agreement, TCI has the right to terminate the
agreement upon the consummation of the Roll-up Transaction. The Company
believes that TCI will exercise its right to terminate the Transition
Services Agreement concurrently with the consummation of the Roll-up
Transaction. The Company does not believe that any such termination will
have a material adverse effect on the Company.
Beginning in March 1997, TCIC began providing the company with customer
support services from its Boise, Idaho call center ( the "Boise Call
Center"). The Boise Call Center responds to calls that exceed the
capacity of the Company's National Call Center. Amounts charged by TCIC to
the Company for such services aggregated $2,273,000 during the six months
ended June 30, 1997.
(continued)
I-26
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
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 aggregated $688,000 and
$(176,000) during the six months ended June 30, 1997 and 1996,
respectively.
A tax sharing agreement (the "Tax Sharing Agreement") among TCI, 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. In connection with the
Distribution, the Tax Sharing Agreement was 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, TSAT is
responsible to TCI for its share of current consolidated income tax
liabilities through the Distribution Date, and TCI is responsible to the
extent that TSAT's income tax attributes generated after the effective date
and through the Distribution Date are utilized by TCI to reduce its
consolidated income tax liabilities. 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.
(12) Commitments and Contingencies
-----------------------------
At June 30, 1997, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $43,500,000.
The Company engages master sales 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 a 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 sales agent during specified periods following the initiation
of service (generally five years). During the six months ended June 30,
1997 and 1996, respectively, residual sales commissions to such master
sales agents aggregated $8,204,000 and $4,597,000, respectively, and were
charged to expense in the accompanying statements of operations.
(continued)
I-27
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
On the Distribution Date, the Company entered into Indemnification
Agreements (the "Indemnification Agreements") with TCIC and TCI UA 1, Inc.,
an indirect subsidiary of TCIC, ("TCI UA 1"). The Indemnification Agreement
with TCIC provides 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 the GE-2 Agreement. The drawable amount of such letter of credit is
$25,000,000. See note 7.
During the first quarter of 1997, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the
account of TSAT to support the Company's share of PRIMESTAR Partners'
obligations under the GE-2 Agreement. The initial drawable amount of this
letter of credit is $25,000,000, increasing to $50,000,000 if PRIMESTAR
Partners exercises the End-Of-Life Option. See notes 7 and 10.
The Indemnification Agreement with TCI UA 1 provides 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 the PRIMESTAR Credit Facility. The drawable
amount of the TCI UA 1 Letter of Credit was $141,250,000 at June 30, 1997.
See notes 7 and 8.
During the first quarter of 1997, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the
account of TSAT to support the PRIMESTAR Credit Facility. The drawable
amount of this letter of credit is $5,000,000. See notes 7 and 10.
The Indemnification Agreements 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 are
subordinated in right of payment with respect to the obligations of the
Company under the Bank Credit Facility. See note 10.
(continued)
I-28
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
During the first quarter of 1997, TCI agreed to cause TCI UA 1 to renew the
letter of credit arranged by it on the Company's behalf, through December
31, 1997. During such period the Company and/or PRIMESTAR Partners will
seek to obtain permanent financing for the Company Satellites (to the
extent not sold to a person other than PRIMESTAR Partners) on a basis that
does not require the Company to post a letter of credit with respect
thereto. If such permanent financing is not available, under certain
maintenance covenants contained in the Bank Credit Facility, the Company
would be unable to provide or arrange for such a letter of credit unless
(i) the lenders under the Bank Credit Facility were to agree to amend or
waive such covenants to permit the posting of such letter of credit by the
Company, (ii) TCI were to agree to renew the TCI UA 1 Letter of Credit for
an additional period, or (iii) the Company were to achieve a greater than
anticipated increase in operating income before depreciation and stock
compensation. If the Company and/or PRIMESTAR Partners are unable to
refinance the Company Satellites (to the extent not sold to a person other
than PRIMESTAR Partners) without a letter of credit and is unable to post
(or arrange for the posting of) such a letter of credit, the Company could
be adversely affected. See notes 7, 8 and 10.
The International Bureau of the FCC (the "International Bureau") has
granted EchoStar Satellite Corporation, a subsidiary of EchoStar
Communications Corp. (together with its consolidated subsidiaries,
"EchoStar") a conditional authorization to construct, launch and operate a
Ku-band domestic fixed satellite into the orbital position at 83 degrees
W.L., immediately adjacent to that occupied by GE-2. Contrary to previous
FCC policy, EchoStar was authorized to operate at a power level of 130
watts. If EchoStar were to launch its high power satellite authorized to 83
degrees W.L. and commence operations at that location at a power level of
130 watts, it would likely cause harmful interference to the reception of
the GE-2 PRIMESTAR(R) signal by subscribers to such service.
Subsequently, GE Americom and PRIMESTAR Partners separately requested
reconsideration of the International Bureau's authorization for EchoStar to
operate at 83 degrees W.L. These requests were opposed by EchoStar and
others. These requests currently are pending at the International Bureau.
In addition, GE Americom and PRIMESTAR Partners have attempted to resolve
potential coordination problems directly with EchoStar. It is uncertain
whether any coordination between PRIMESTAR Partners and EchoStar will
resolve such interference. There can be no assurance that the International
Bureau will change slot assignments, or power levels, in a fashion that
eliminates the potential for harmful interference. Although the ultimate
outcome of this matter cannot presently be predicted, the Company believes
that any such outcome would not have a material adverse effect on the
Company's financial condition and results of operations.
(continued)
I-29
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1)
Notes to Financial Statements
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to
the accompanying financial statements.
I-30
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
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 (i) the accompanying financial statements of the Company,
and (ii) the financial statements, and related notes thereto, of the Company,
and Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations included in the Company's Annual Report on Form 10-K for the year
- ----------
ended December 31, 1996.
Certain statements in this Quarterly Report on Form 10-Q constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of the Company, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other factors include, among others: general economic and business conditions
and industry trends; the continued strength of the multichannel video
programming distribution industry and the satellite services industry and the
growth of the market for satellite delivered television programming;
uncertainties inherent in proposed business strategies and development plans,
including uncertainties regarding the Roll-up Transaction, the ASkyB
Transaction, the Company's high-power strategy, future financial performance,
including availability, terms and deployment of capital; the ability of vendors
to deliver required equipment, software and services; product launches;
availability of qualified personnel; changes in, or the failure or the inability
to comply with, government regulation, including, without limitation,
regulations of the Federal Communications Commission, 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; and
other factors referenced in this Report. These forward-looking statements speak
only as of the date of this Report. The Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
I-31
<PAGE>
TCI SATELLITE ENTERTAINMENT,INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations
- -----------------------------------------
As described in note 2 to the accompanying financial statements of the
Company, the Company has entered into binding letter agreements with respect to
the Roll-up Transaction and the ASkyB Transaction. Upon consummation of the
Roll-up Transaction and the ASkyB Transaction, the Company will be consolidated
into New PRIMESTAR and the Company will no longer be a separate public company.
New PRIMESTAR will be a significantly larger entity than the Company, and it is
anticipated that New PRIMESTAR will initially incur significantly greater losses
than the Company due primarily to disproportionately higher levels of
depreciation, amortization and interest expense. In addition, it is anticipated
that New PRIMESTAR will develop a high-power DBS service, and that New PRIMESTAR
may determine to migrate some or all of the existing medium-power PRIMESTAR(R)
customers to such high-power service. Under such circumstances, New PRIMESTAR
would necessarily be operating under a different cost structure than that of the
Company's medium-power business. No assurance can be given that the Roll-up
Transaction and ASkyB Transaction will be consummated. The following discussion
focuses on the results of operations of the Company as a stand-alone entity
without giving effect to the pending Roll-up Transaction and ASkyB Transaction.
As described in greater detail below, the Company reported net losses of
$107,590,000 and $32,888,000 during the six months ended June 30, 1997 and 1996,
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.
Management expects that the costs of acquiring subscribers will continue to be
significant so long as the Company maintains its rapid growth. The high cost of
obtaining new subscribers also magnifies the negative effects of subscriber
churn.
During the six months ended June 30, 1997 and 1996, and the years ended
December 31, 1996, 1995 and 1994, (i) the Company's annualized subscriber churn
rate (which represents the annualized number of subscriber terminations divided
by the weighted average number of subscribers during the period) was 29.5%,
40.3%, 38.5%, 24.7% and 16.1%, respectively, and (ii) the average subscriber
life implied by such subscriber churn rate was 3.4 years, 2.5 years, 2.6 years,
4.1 years and 6.2 years, respectively.
I-32
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
As set forth above, the Company experienced a higher rate of subscriber
churn in 1996, as compared to the first six months of 1997 and prior periods.
The Company believes that the higher 1996 churn rate is primarily attributable
to the fact that subscribers were allowed to initiate service with no credit
approval during the fourth quarter of 1995 and the first six months of 1996.
Service to a significant number of such subscribers was terminated during 1996
after their accounts became delinquent. 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.
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 that churn rates
for the remainder of 1997 and future periods will improve from the levels
experienced in 1996. If the Company's churn rates were to return to, or increase
from, such 1996 levels, 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 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 872,000
and 659,000 at June 30, 1997 and 1996, respectively, and 805,000, 535,000 and
100,000 at December 31, 1996, 1995 and 1994, 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.
I-33
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- ------------------------------------------------------
As further described in note 11 to the accompanying financial statements of
the Company, TCIC has historically provided the Company with certain fulfillment
services with respect to customers of the PRIMESTAR(R) programming service. From
January 1, 1997 through July 21, 1997, charges for customer fulfillment services
provided by TCIC were made pursuant to the Original Fulfillment Agreement. The
scheduled rates for the services provided by TCIC under the Original Fulfillment
Agreement exceeded the scheduled rates upon which charges, historically, were
allocated to the Company for such services. The Original Fulfillment Agreement
had an initial term of two years, and was terminable, on 180 days notice to
TCIC, by the Company at any time during the six-month period ended June 30,
1997. Effective July 22, 1997, the Original Fulfillment Agreement was amended
to, among other items, (i) change the termination date to December 31, 1997 and,
(ii) reduce the scheduled rates for the customer fulfillment services provided
by TCIC to rates that are comparable to those that were used to allocate
fulfillment charges to the Company prior to the Distribution. The Company is
currently seeking to arrange for unaffiliated third parties to perform the
customer fulfillment services that will no longer be performed by TCIC following
the termination of the amended Fulfillment Agreement. There can be no assurance
that comparable services can be obtained by the Company from third parties on
acceptable terms.
Installation charges from TCIC include direct and indirect costs of
performing installations. Through the Distribution Date, the Company
capitalized a portion of such charges as subscriber installation costs based
upon amounts charged by unaffiliated third parties to perform similar services.
Subsequent to the Distribution Date, the Company has capitalized the full amount
of installation fees paid to TCIC.
I-34
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------------
1997 1996
----------------------- -----------------------
Percentage Percentage
of total of total
Amount revenue Amount revenue
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Programming and equipment rental $ 240,230 92% $156,870 81%
Installation 20,415 8 36,777 19
--------- ---- -------- ----
Total revenue 260,645 100 193,647 100
--------- ---- -------- ----
Operating costs and expenses:
Charges from PRIMESTAR Partners:
Programming (81,988) (31) (57,464) (30)
Satellite, national marketing and
distribution (40,381) (15) (29,422) (15)
--------- ---- -------- ----
(122,369) (46) (86,886) (45)
Other operating:
Allocations from TCIC (4,490) (2) (10,505) (5)
Other (6,582) (3) (4,345) (2)
--------- ---- -------- ----
(11,072) (5) (14,850) (7)
--------- ---- -------- ----
Selling, general and administrative:
Selling and regional marketing (51,901) (20) (53,251) (28)
Bad debt (9,831) (4) (9,779) (5)
Allocations from TCIC (12,192) (5) (9,752) (5)
Other general and administrative (17,849) (7) (12,284) (6)
--------- ---- -------- ----
(91,773) (36) (85,066) (44)
--------- ---- -------- ----
Operating Cash Flow (1) 35,431 13 6,845 4
Stock compensation (1,552) (1) 176 --
Depreciation (113,266) (43) (53,527) (28)
--------- ---- -------- ----
Operating loss $ (79,387) (31)% $(46,506) (24)%
========= ==== ======== ====
</TABLE>
____________________
(1) Operating Cash Flow, which represents operating income before depreciation
and stock compensation, is a commonly used measure of value and borrowing
capacity. Operating Cash Flow 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.
I-35
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Revenue increased $66,998,000 or 35% during the six months ended June 30,
1997, as compared to the corresponding prior year period. Such increase
represents the net effect of a $83,360,000 or 53% increase in programming and
equipment rental revenue and a $16,362,000 or 44% decrease in installation
revenue. The increase in programming and equipment rental revenue is primarily
the result of an increase from the 1996 period to the 1997 period in the average
number of Authorized Units. Additionally, the Company's average monthly
programming and equipment rental revenue per Authorized Unit increased from $44
during the 1996 period to $48 during the 1997 period. Such increase was
primarily the result of rate increases implemented in May 1997 as well as an
increase in the average monthly revenue derived from pay-per-view services. The
decrease in installation revenue is primarily attributable to a reduction from
the 1996 period to the 1997 period in the number of installations performed and
a decrease from $153 during the 1996 period to $110 during the 1997 period in
the average installation revenue from each Authorized Unit installed. Such
decrease in average installation revenue is primarily attributable to certain
promotional campaigns that were in effect during 1997.
PRIMESTAR Partners provides programming services to the Company and other
authorized distributors in exchange for a fee based upon the number of customers
receiving 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
authorized distributor, including the Company, based on such distributor's total
number of Authorized Units. The aggregate charges for such services increased
$35,483,000 or 41% during the six months ended June 30, 1997, as compared to the
corresponding prior year period. The average aggregate monthly amount per
Authorized Unit charged by PRIMESTAR Partners was $24 during each of the six
month periods ended June 30, 1997 and 1996. 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, decreased $3,778,000 or 25%
during the six months ended June 30, 1997, as compared to the corresponding
prior year period. Such decrease is primarily attributable to the fact that the
Company's other operating costs and expenses for the six months ended June 30,
1996 included $4,894,000 of installation fees paid to TCIC that were not
capitalized. Other operating costs and expenses for the six months ended June
30, 1997 do not include a similar amount since the Company has capitalized the
full amount of installation fees paid to TCIC subsequent to the Distribution
Date. As described above, the charges for installation and other customer
fulfillment services provided by TCIC have been made pursuant to the Fulfillment
Agreement since January 1, 1997.
I-36
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
Selling, general and administrative expenses increased $6,707,000 or 8%
during the six months ended June 30, 1997, as compared to the corresponding
prior year period. Selling and regional marketing expenses, which represented
20% of revenue during the 1997 period, include sales commissions, marketing and
advertising expenses, and costs associated with the operation of customer
service call center and five regional sales offices. Bad debt expense
represented 4% of revenue during the 1997 period. In total, selling, general
and administrative expenses represented 36% and 44% of revenue during the six
months ended June 30, 1997 and 1996, respectively. The decrease in such
percentage is primarily attributable to (i) lower sales commission due to a 23%
decrease in installations in 1997 as compared to 1996, and (ii) the relatively
fixed nature of certain components of the Company's selling, general and
administrative expenses.
The selling, general and administrative charges from TCIC during the six
months ended June 30, 1997 include $9,919,000 that was charged to the Company
pursuant to the Transition Services Agreement and $2,273,000 that was charged to
the Company pursuant to a March 1997 agreement to use TCIC's Boise Call Center
to respond to calls that exceed the capacity of the Company's National Call
Center. Through the Distribution Date, general and administrative allocations
from TCIC were based upon the estimated cost of the general and administrative
services provided to the Company. The amounts charged to the Company pursuant
to the Transition Services Agreement are in excess of the amounts that would
have been allocated by TCIC to the Company under the arrangement that was in
effect through the Distribution Date. If the Transition Services Agreement had
been effective as of January 1, 1996, general and administrative charges from
TCIC would have been approximately $12,055,000 for the six months ended June 30,
1996. For additional information, see note 11 to the accompanying financial
statements of the Company.
The $59,739,000 or 112% increase in depreciation during the six months
ended June 30, 1997, 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
and subscriber installation costs. Changes in the Company's depreciation
policies also contributed to the increase. Effective October 1, 1996, the
Company (i) changed the method used to depreciate its subscriber installation
costs, and (ii) reduced the estimated useful life of certain satellite reception
equipment. The inception-to-date effect on depreciation expense of the change
in depreciation method was recorded during the fourth quarter of 1996. The
effect of the reduction in estimated useful life was accounted for on a
prospective basis. For additional information concerning such accounting
changes, see note 4 to the accompanying financial statements of the Company.
The Company incurred interest expense of $21,408,000 during the six months
ended June 30, 1997. Substantially all of such interest was attributable to the
December 31, 1996 completion of the Bank Credit Facility and the February 1997
issuance of the Notes. The Company expects that it will continue to incur
significant levels of interest expense in future periods.
I-37
<PAGE>
TCI SATELLITE ENTERTAINMENT,INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
The Company's share of PRIMESTAR Partners' net losses increased $6,483,000
or 448% during the six months ended June 30, 1997, as compared to the
corresponding prior year period. Such increase is primarily attributable to
increases in PRIMESTAR Partners' interest expense and operating loss. The
increase in interest expense is attributable to interest incurred on borrowings
under the PRIMESTAR Credit Facility that were used to fund the construction of
Satellite No. 2. Prior to the January 1, 1997 determination that construction
of Satellite No. 2 was substantially complete, interest incurred on the
applicable borrowings under the PRIMESTAR Credit Facility had been capitalized.
The increase in PRIMESTAR Partners' operating loss occurred as the increase in
PRIMESTAR Partners' revenue did not fully offset increases in selling, marketing
and certain other expenses. 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 recognized no income tax benefit during the six months ended
June 30, 1997 and an income tax benefit of $14,870,000 during the six months
ended June 30, 1996. The effective tax rate associated with the 1996 benefit
was 31%. The Company's income tax benefit for the six months ended June 30,
1996 includes intercompany allocations from TCI of current income tax benefits
of $26,333,000. As a result of the Distribution, the Company is no longer a
part of the TCI consolidated tax group, and accordingly, is only able to realize
income tax benefits for financial reporting purposes to the extent that such
benefits offset the Company's income tax liabilities or the Company generates
taxable income. For financial reporting purposes, all of the Company's income
tax liabilities had been fully offset by income tax benefits at December 31,
1996 and June 30, 1997. Additionally, 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. In connection with the Distribution, the Company
became a party to the Tax Sharing Agreement that currently exists among TCI,
TCIC and certain other subsidiaries of TCI. For additional information, see
note 11 to the accompanying financial statements of the Company.
I-38
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Position
- --------------------------------------
As described in note 2 to the accompanying financial statements of the
Company, the Company has entered into binding letter agreements with respect to
the Roll-up Transaction and the ASkyB Transaction. Upon consummation of the
Roll-up Transaction and the ASkyB Transaction, the Company will be consolidated
into New PRIMESTAR and the Company will no longer be a separate public company.
New PRIMESTAR will be a significantly larger entity than the Company and will
have significant financial obligations. In this regard, New PRIMESTAR will
incur significant indebtedness in connection with the Roll-up Transaction and
will issue approximately $1.1 billion liquidation value of preferred stock and
subordinated convertible notes in connection with the ASkyB Transaction. The
debt to be assumed by New PRIMESTAR in connection with the Roll-up Transaction
will include the Notes and any amounts outstanding under the Bank Credit
Facility. In addition to the foregoing obligations, New PRIMESTAR will be
responsible for payments due under the GE-2 Agreement and various other
commitments and contingent liabilities associated with the businesses and assets
that will comprise New PRIMESTAR following consummation of the Roll-up
Transaction and the ASkyB Transaction. To the extent not earlier refinanced by
the Company and/or PRIMESTAR Partners, it is anticipated that New PRIMESTAR will
also be required to refinance the Bank Credit Facility and the PRIMESTAR Credit
Facility. New PRIMESTAR will also require significant capital in order to fund
its business strategies, including the development of a high-power DBS service,
and any possible migration of some or all of the existing medium-power
PRIMESTAR(R) customers to such high-power service. No assurance can be given
that the Roll-up Transaction and the ASkyB Transaction will be consummated or
that, if consummated, New PRIMESTAR will be able to obtain sufficient financial
resources in order to satisfy its short- and long-term liquidity requirements.
The following discussion focuses on the liquidity and capital resources of the
Company as a stand-alone entity without giving effect to the pending Roll-up
Transaction and the ASkyB Transaction.
Prior to the Distribution Date, the Company relied upon non-interest
bearing advances from TCIC in order to fund the majority of the Company's
working capital requirements and capital expenditures. On the Distribution
Date, the Company issued the Company Note to TCIC and TCIC agreed to provide the
Company with financing pursuant to the TCIC Credit Facility. The TCIC Credit
Facility provided for TCIC's commitment to make revolving loans to the Company
(the "TCIC Revolving Loans") and the Company's obligations with respect to the
TCIC Revolving Loans and the Company Note, including the Company's best efforts
obligations to refinance the TCIC Credit Facility. On December 31, 1996, the
Company entered into the Bank Credit Facility and used proceeds therefrom to
repay the Company Note in full. In connection with the February 1997 issuance
of the Notes and the March 1997 determination that GE-2 was commercially
operational, borrowing availability pursuant to the TCIC Credit Facility was
terminated. Accordingly, TCI is not expected to be a source of financing for
the Company in future periods.
The Company also has relied upon advances from PRIMESTAR Partners to
finance the cost of constructing the Company Satellites. Such advances, which
aggregated $462,950,000 at June 30, 1997, are reflected as a liability in the
balance sheets in the accompanying financial statements of the Company. See
related discussion below.
I-39
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Position (continued)
- --------------------------------------------------
On February 20, 1997, the Company issued the 10-7/8% Senior Subordinated
Notes due 2007 having an aggregate principal amount of $200,000,000 and the 12-
1/4% Senior Subordinated Discount Notes due 2007 having an aggregate principal
amount at maturity of $275,000,000. The net proceeds from the issuance of the
Notes (approximately $340,500,000 after deducting offering expenses) were
initially held in escrow and were subsequently released to the Company on March
17, 1997. The Company initially used $244,404,000 of such net proceeds to repay
amounts outstanding under the Bank Credit Facility and expects to use the
remaining net proceeds to fund capital expenditures and operations and to
provide for working capital and for other general corporate purposes.
Cash interest on the Senior Subordinated Notes will be payable semi-
annually in arrears on February 15 and August 15, commencing August 15, 1997.
Cash interest will not accrue or be payable on the Senior Subordinated Discount
Notes prior to February 15, 2002. Thereafter cash interest will accrue at a
rate of 12-1/4% per annum and will be payable semi-annually in arrears on
February 15 and August 15, commencing August 15, 2002, provided however, that at
any time prior to February 15, 2002, the Company may make a Cash Interest
Election (as defined) on any interest payment date to commence the accrual of
cash interest from and after the Cash Election Date (as defined). The Notes
will be redeemable at the option of the Company, in whole or in part, at any
time after February 15, 2002 at specified redemption prices. In addition, prior
to February 15, 2000, the Company may use the net cash proceeds from certain
specified equity transactions to redeem up to 35% of the Notes at specified
redemption prices. The Notes were not originally registered under the
Securities Act, but contained a covenant requiring the Company to exchange the
Notes for Exchange Notes, or, alternatively, to register the Notes under the
Securities Act. Due to the pendency of the Roll-up Transaction, the Company is
currently unable to register the Notes or the Exchange Notes under the
Securities Act. Accordingly, effective July 5, 1997, the Company began to incur
additional interest on the Notes. During the 90-day period ended September 3,
1997, additional interest on the Notes will be accrued at the rate of $0.05 per
$1000 principal amount per week and will aggregate approximately $200,000 during
such 90-day period. For each subsequent 90-day period in which the Notes are
not registered under the Securities Act, or exchanged for registered Exchange
Notes, the additional interest on the Notes will be increased by $0.05 per $1000
principal amount per week up to a maximum of $0.50 per $1000 principal amount
per week. The Company currently expects that it will not be able to comply with
the registration requirements under the Notes, and accordingly, will not be able
to cease the accrual of additional interest, until the first quarter of 1998.
I-40
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Position (continued)
- --------------------------------------------------
At June 30, 1997, there were no outstanding borrowings under the Bank
Credit Facility. As a result of the February 1997 issuance of the Notes and the
March 1997 determination that GE-2 was commercially operational, the maximum
available commitments under the Bank Credit Facility were increased from
$350,000,000 to $750,000,000. At June 30, 1997, $720,000,000 of such maximum
commitments was unused. The availability of such commitments for borrowing is
subject to the Company's compliance with operating and financial covenants and
other customary conditions. Commencing March 31, 2001, aggregate commitments
under the Bank Credit Facility will be reduced quarterly in accordance with a
schedule, until final maturity at June 30, 2005. The Company anticipates that
it will be required to refinance and/or amend the Bank Credit Facility prior to
the consummation of the Roll-up Transaction described in note 2. No assurance
can be given that any such refinancing and/or amendment will be completed on
terms acceptable to the Company. For additional information concerning the Bank
Credit Facility, see note 10 to the accompanying financial statements of the
Company.
During the six months ended June 30, 1997 and 1996, the Company's operating
activities provided cash of $44,053,000 and $61,338,000, respectively. A
significant portion of the cash provided by the Company's operating activities
during the 1996 period is attributable to the $26,333,000 intercompany
allocation of current income tax benefits from TCI. 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. Additionally,
changes in the Company's receivables, prepaids, accruals and payables and
subscriber advance payments ("Operating Assets and Liabilities") accounted for
$20,290,000 and $27,953,000 of the cash provided by the Company's operating
activities during the six months ended June 30, 1997 and 1996, respectively.
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 cash of $23,763,000 and $7,052,000 during the six
months ended June 30, 1997 and 1996, respectively.
During the six months ended June 30, 1997 and 1996, the Company used cash
of $5,265,000 and $36,684,000, respectively, to fund the cost of constructing
the Company Satellites and $85,804,000 and $175,339,000, respectively, to fund
(i) the acquisition and installation of satellite reception equipment, and (ii)
certain other capital expenditures. The Company expects that the majority of
future capital expenditures with respect to the Company's medium-power business
will be used to fund the acquisition and installation of satellite reception
equipment. The actual amount of capital to be required will be primarily a
function of (i) subscriber growth and churn rates, and (ii) the actual cost of
purchasing and installing satellite reception equipment.
I-41
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Position (continued)
- --------------------------------------------------
The Company intends, directly or through PRIMESTAR Partners, to use Tempo
DBS-1 as a platform to provide high-power digital video programming services to
residential customers, as well as multiple dwelling units, commercial customers
and resellers. The Company presently is unable to reasonably estimate the
amount of capital expenditures that would be required in connection with any
high-power strategy that might be pursued by the Company. As discussed above,
the Company's capital expenditure requirements would be significantly impacted
by the consummation of the Roll-up Transaction and the ASkyB Transaction. In
addition, the Company's capital expenditure requirements would be impacted if
the Company were to complete any singificant acquisitions or enter into any
other significant business activities.
At June 30, 1997, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $43,500,000.
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, 1997 and 1996,
residual sales commissions to such master sales agents aggregated $8,204,000 and
$4,597,000, respectively, and were charged to expense in the accompanying
statements of operations of the Company.
In connection with the Distribution, the Company entered into the
Indemnification Agreements with TCIC and TCI UA 1. The Indemnification
Agreement with TCIC provides for the Company to reimburse TCIC for any amounts
drawn under an irrevocable transferable letter of credit for the account of TCIC
to support the Company's share of PRIMESTAR Partners' obligations under the GE-2
Agreement. The drawable amount of such letter of credit is $25,000,000.
During the first quarter of 1997, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the account
of TSAT to support the Company's share of PRIMESTAR Partners' obligations under
the GE-2 Agreement. The initial drawable amount of this letter of credit is
$25,000,000, increasing to $50,000,000 if PRIMESTAR Partners exercises the End-
Of-Life Option.
The Indemnification Agreement with TCI UA 1 provides 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. At June 30, 1997, the drawable
amount of the TCI UA 1 Letter of Credit was $141,250,000.
During the first quarter of 1997, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the account
of TSAT to support the PRIMESTAR Credit Facility. The drawable amount of this
letter of credit is $5,000,000.
I-42
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Position (continued)
- --------------------------------------------------
The Indemnification Agreements 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, respectively, under such Indemnification Agreements are subordinated
in right of payment with respect to the obligations of the Company under the
Bank Credit Facility.
The amounts advanced by PRIMESTAR Partners to the Company to fund the cost
of constructing the Company Satellites ($462,950,000 at June 30, 1997) have been
financed by PRIMESTAR Partners' borrowings under the PRIMESTAR Credit Facility,
which is in turn supported by letters of credit arranged for by affiliates of
all but one of the partners of PRIMESTAR Partners. At June 30, 1997, PRIMESTAR
Partners' indebtedness under the PRIMESTAR Credit Facility aggregated
$547,000,000, including amounts borrowed to pay interest charges. The maturity
date of the PRIMESTAR Credit Facility has been extended from June 30, 1997 to
December 31, 1997, and long-term financing alternatives with respect to the
Company Satellites are currently being evaluated. No assurance can be given
that any such long-term financing will be available on acceptable terms.
During the first quarter of 1997, TCI agreed to cause TCI UA 1 to renew the
letter of credit arranged by it on the Company's behalf, through December 31,
1997. The Company believes (but cannot assure) that during such period the
Company and/or PRIMESTAR Partners will be able to obtain permanent financing for
the Company Satellites (to the extent not sold to a person other than PRIMESTAR
Partners) on a basis that does not require the Company to post a letter of
credit with respect thereto. If such permanent financing is not available, under
certain maintenance covenants contained in the Bank Credit Facility, the Company
would be unable to provide or arrange for such a letter of credit unless (i) the
lenders under the Bank Credit Facility were to agree to amend or waive such
covenants to permit the posting of such letter of credit by the Company, (ii)
TCI were to agree to renew the TCI UA 1 Letter of Credit for an additional
period, or (iii) the Company were to achieve a greater than anticipated increase
in Operating Cash Flow. If the Company and/or PRIMESTAR Partners are unable to
refinance the Company Satellites (to the extent not sold to a person other than
PRIMESTAR Partners) without a letter of credit and is unable to post (or arrange
for the posting of) such a letter of credit (a "Letter of Credit Event"), the
Company could be adversely affected.
I-43
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Position (continued)
- --------------------------------------------------
Under 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, 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 7 and 12 to the
accompanying financial statements of the Company.
The International Bureau of the FCC has granted EchoStar a conditional
authorization to construct, launch and operate a Ku-band domestic fixed
satellite into the orbital position at 83 degrees W.L., immediately adjacent to
that occupied by GE-2. Contrary to previous FCC policy, EchoStar was authorized
to operate at a power level of 130 watts. If EchoStar were to launch its high
power satellite authorized to 83 degrees W.L. and commence operations at that
location at a power level of 130 watts, it would likely cause harmful
interference to the reception of the GE-2 PRIMESTAR(R) signal by subscribers to
such services.
Subsequently, GE Americom and PRIMESTAR Partners separately requested
reconsideration of the International Bureau's authorization for EchoStar to
operate at 83 degrees W.L. These requests were opposed by EchoStar and others.
These requests currently are pending at the International Bureau. In addition,
GE Americom and PRIMESTAR Partners have attempted to resolve potential
coordination problems directly with EchoStar. It is uncertain whether any
coordination between PRIMESTAR Partners and EchoStar will resolve such
interference. There can be no assurance that the International Bureau will
change slot assignments, or power levels, in a fashion that eliminates the
potential for harmful interference. Although the ultimate outcome of this matter
cannot presently be predicted, the Company believes that any such outcome would
not have a material adverse effect on the Company's financial condition and
results of operations.
At June 30, 1997, approximately 9,881,000 shares of Series A Common Stock
were reserved for issuance pursuant to certain option and restricted stock
agreements, and certain arrangements with TCIC.
I-44
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Position (continued)
- --------------------------------------------------
Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet Communications, Inc. ("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 ("LodgeNet").
ResNet was formed by LodgeNet in February 1996 to engage in the business of
providing video services to subscribers in multiple dwelling units (the "ResNet
Busienss"). ResNet agreed to purchase from the Company up to $40,000,000 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 $40,000,000 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
representing 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. 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.
At June 30, 1997, the Company held aggregate cash and cash equivalents of
$53,143,000. The Company believes that such cash and cash equivalents, together
with borrowing availability pursuant to the Bank Credit Facility and any funds
generated by the Company's operating activities will be sufficient through
December 31, 1998, to fund the Company's working capital, debt service and
currently projected capital expenditure requirements associated with its medium-
power satellite distribution business. However, to the extent that the Company
(i) funds all or any significant portion of the cost of the Company Satellites,
(ii) pursues a strategy with respect to the high power segment of the digital
satellite industry that requires significant capital expenditures, (iii)
completes any significant acquisitions, (iv) enters into any other business
activities that require significant capital investments, (v) suffers a Letter of
Credit Event or is required to meet other significant future liquidity
requirements in addition to those described above, the Company anticipates that
it would be required to obtain additional debt or equity financing. No
assurance can be given, however, that the Company would be able to obtain
additional financing on terms acceptable to it, or at all. As described above,
the Company's liquidity and capital resources would be significantly impacted by
the consummation of the pending Roll-up Transaction and ASkyB Transaction. See
also note 2 of the accompanying financial statements of the Company.
I-45
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Position (continued)
- --------------------------------------------------
The Company is highly leveraged. The degree to which the Company is
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 repay or refinance its debt will require
the Company to increase its Operating Cash Flow or to obtain additional debt or
equity financing. 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 sufficient additional debt or equity financing to enable it
to repay or refinance its debt. See related discussion above and note 2 to the
accompanying financial statements of the Company.
I-46
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
- ------- ----------------------
During the three months ended June 30, 1997, TSAT issued 9,961 shares
of Series A Common Stock to TCI for aggregate consideration of $9,961.
Such shares were issued pursuant to a "Share Purchase Agreement"
between TSAT and TCI to allow TCI to meet its obligations under the
conversion features of certain convertible securities of TCI. The
issuance was made in reliance on the exemption from registration
afforded by Section 4(2) of the Securities Act.
The Bank Credit Facility contains a negative covenant that restricts
the Company and its Restricted Subsidiaries from paying dividends and
making other distributions.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
10 - Material Contracts
10.1 Form of Non-Qualified Stock Option Agreement -
1997 Nonemployee Director Stock Option Plan of TSAT
10.2 Form of 1997 Nonemployee Director Stock Option
Plan of TSAT
10.3 Form of Restricted Stock Award Agreement -
TSAT 1996 Stock Incentive Plan
10.4 Amendment No. 1 to Fulfillment Agreement between
TSAT and TCIC dated as of July 22, 1997
27 - Financial Data Schedule
(b) Reports on Form 8-K filed during quarter ended June 30, 1997 -
None
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI SATELLITE ENTERTAINMENT, INC.
Date: August 11, 1997 By: /s/ Gary S. Howard
-----------------------------
Gary S. Howard
President and
Chief Executive Officer
Date: August 11, 1997 By: /s/ Kenneth G. Carroll
-----------------------------
Kenneth G. Carroll
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 11, 1997 By: /s/ Scott D. Macdonald
-----------------------------
Scott D. Macdonald
Vice President and Controller
(Chief Accounting Officer)
II-2
<PAGE>
EXHIBIT 10.1
1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
OF TCI SATELLITE ENTERTAINMENT, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT ("Agreement") is made as of February 3, 1997, by and between
TCI SATELLITE ENTERTAINMENT, INC., a Delaware corporation (the "Company") and
the person signing adjacent to the caption "Grantee" on the signature page
hereof ("Grantee").
The Company has adopted the 1997 Nonemployee Director Stock Option Plan of
TCI Satellite Entertainment, Inc. (the "Plan"), a copy of which is appended to
this Agreement as Exhibit A and by this reference made a part hereof, for the
benefit of independent directors on the Board of Directors of the Company.
Options granted pursuant to the Plan and this Agreement are subject to approval
of the Plan by the stockholders of the Company. Capitalized terms used and not
otherwise defined herein shall have the meaning ascribed thereto in the Plan.
Pursuant to the Plan, the option hereby granted is provided to Grantee as
additional remuneration for services rendered, to encourage Grantee to remain a
director of the Company and to increase Grantee's personal interest in the
continued success and progress of the Company.
NOW, THEREFORE, the Company and Grantee agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions herein, the Company
grants to the Grantee during the period commencing on February 3, 1997 (the
"Option Date") and expiring at 5 p.m., Denver, Colorado time ("Close of
Business") February 2, 2007 (the "Option Term"), subject to earlier termination
as provided in paragraph 5 below, an option to purchase from the Company, at the
price per share set forth on Schedule 1 hereto (the "Option Price"), the number
of shares of Series A Common Stock of the Company set forth on said Schedule 1
(the "Option Shares"). The Option Price and Option Shares are subject to
adjustment pursuant to paragraph 8 below. This option is as a "Nonqualified
Stock Option" and is hereinafter referred to as the "Option."
2. CONDITIONS OF EXERCISE. The Option is exercisable only in accordance
with the conditions stated in this paragraph and paragraph 8(b).
(a) Except as otherwise provided in paragraph 8(b) or in the last
sentence of this subparagraph (a), the Option shall not be exercisable
until February 3, 1998, and on such date and thereafter the Option may only
be exercised to the extent the Option Shares have become available for
purchase in accordance with the following schedule:
-1-
<PAGE>
Date Percentage of Option Shares
____ Available for Purchase
___________________________
February 3, 1998 20%
February 3, 1999 40%
February 3, 2000 60%
February 3, 2001 80%
February 3, 2002 100%
Notwithstanding the foregoing, all Option Shares shall become available for
purchase if Grantee's status as a Director shall cease for any reason other
than voluntary termination of Director status by Grantee.
(b) To the extent the Option becomes exercisable, such Option may be
exercised in whole or in part (at any time or from time to time, except as
otherwise provided herein) until expiration of the Option Term or earlier
termination of the Option pursuant to paragraph 5.
3. MANNER OF EXERCISE. The Option shall be considered exercised (as to the
number of Option Shares specified in the notice referred to in subparagraph (a)
below) on the latest of (i) the date of exercise designated in the written
notice referred to in subparagraph (a) below, (ii) if the date so designated is
not a business day, the first business day following such date or (iii) the
earliest business day by which the Company has received all of the following:
(a) Written notice to the Secretary of the Company designating,
among other things, the date of exercise and the number of Option Shares to
be purchased; and
(b) Payment of the Option Price for each Option Share to be
purchased in cash or by means of tendering theretofore owned Series A
Common Stock or a combination thereof; provided, however, that any shares
-------- -------
of Series A Common Stock delivered in payment of the Option Price shall be
shares that the Grantee has owned for a period of at least six months prior
to the date of exercise.
4. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all
items referred to in paragraph 3, the Company shall deliver to the Grantee
certificates issued in Grantee's name for the number of Option Shares purchased
by exercise of the Option. If delivery is by mail, delivery of shares of Series
A Common Stock shall be deemed effected for all purposes when a stock transfer
agent of the Company shall have deposited the certificates in the United States
mail, addressed to the Grantee, and any cash payment shall be deemed effected
when a Company check, payable to Grantee and in an amount equal to the amount of
the cash payment, shall have been deposited in the United States mail, addressed
to the Grantee.
-2-
<PAGE>
5. EARLY TERMINATION OF OPTION. The Option shall terminate, prior to the
expiration of the Option Term, at the time specified below:
(a) If Grantee ceases to serve as a Director during the Option Term
by reason of voluntary termination of Director status by Grantee, then the
Option shall terminate at the Close of Business on the first business day
following the expiration of the three-month period which began on the date
of termination of Grantee's status as a Director;
(b) If Grantee ceases to serve as a Director during the Option Term
for any reason other than voluntary termination of Director status by
Grantee, the Option shall terminate at the Close of Business on the first
business day following the expiration of the one-year period which began on
the date of termination of Grantee's status as a Director.
In any event in which the Option remains exercisable for a period of
time following the voluntary termination of Nonemployee Director status by
Grantee, the Option may be exercised during such period of time only to the
extent the Option was exercisable as provided in paragraph 2 above on such date
of termination of Grantee's status as a Director. Notwithstanding any period of
time referenced in this paragraph 5 or any other provision of this paragraph
that may be construed to the contrary, the Option shall in any event terminate
upon the expiration of the Option Term.
6. NONTRANSFERABILITY OF OPTION. During Grantee's lifetime, the Option is
not transferable (voluntarily or involuntarily) other than pursuant to a
qualified domestic relations order and, except as otherwise required pursuant to
a qualified domestic relations order, is exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death
and may change such designation from time to time by filing a written
designation of beneficiary or beneficiaries with the Secretary of the Company on
the form annexed hereto as Exhibit B or such other form as may be prescribed for
purposes of the Plan, provided that no such designation shall be effective
unless so filed prior to the death of Grantee. If no such designation is made or
if the designated beneficiary does not survive the Grantee's death, the Option
shall pass by will or the laws of descent and distribution. Following Grantee's
death, the Option, if otherwise exercisable, may be exercised by the person to
whom such Option passes accordingly to the foregoing and such person shall be
deemed the Grantee for purposes of any applicable provisions of this Agreement.
7. NO STOCKHOLDER RIGHTS. The Grantee shall not be deemed for any purpose
to be, or to have any of the rights of, a stockholder of the Company with
respect to any shares of Series A Common Stock as to which this Agreement
relates until such shares shall have been issued to Grantee by the Company.
Furthermore, the existence of this Agreement shall not affect in any way the
right or power of the Company or its stockholders to accomplish any corporate
act.
-3-
<PAGE>
8. ADJUSTMENTS.
(a) The Option shall be subject to adjustment (including, without
limitation, as to the number of Option Shares and the Option Price per
share) in the sole discretion of the Board of Directors and in such manner
as the Board of Directors may deem equitable and appropriate in connection
with the occurrence of any of the events described in Section 10(b) of the
Plan following the Option Date.
(b) In the event of any Change in Control, the Option shall become
exercisable in full without regard to paragraph 2(a).
9. RESTRICTIONS IMPOSED BY LAW. Without limiting the generality of
Section 14 of the Plan, the Grantee agrees that Grantee will not exercise the
Option and that the Company will not be obligated to deliver any shares of
Series A Common Stock or make any cash payment, if counsel to the Company
determines that such exercise, delivery or payment would violate any applicable
law or any rule or regulation of any governmental authority or any rule or
regulation of, or agreement of the Company with, any securities exchange or
association upon which the Series A Common Stock is listed or quoted. The
Company shall in no event be obligated to take any affirmative action in order
to cause the exercise of the Option or the resulting delivery of shares of
Series A Common Stock or other payment to comply with any such law, rule,
regulation or agreement.
10. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
TCI Satellite Entertainment, Inc.
c/o Corporate Counsel
8085 South Chester Street, Suite 300
Englewood, Colorado 80112
or
(b) sent by first class mail, postage prepaid and addressed as
follows:
TCI Satellite Entertainment, Inc.
c/o Corporate Counsel
8085 South Chester Street, Suite 300
Englewood, Colorado 80112
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to
-4-
<PAGE>
Grantee's address as listed in the records of the Company on the Option Date,
unless the Company has received written notification from the Grantee of a
change of address.
11. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Board of Directors, consistent with the provisions of Section 13 of the Plan
regarding amendment of the Plan. Without limiting the generality of the
foregoing, without the consent of the Grantee, this Agreement may be amended or
supplemented (i) to cure any ambiguity or to correct or supplement any provision
herein which may be defective or inconsistent with any other provision herein,
or (ii) to add to the covenants and agreements of the Company for the benefit of
Grantee or surrender any right or power reserved to or conferred upon the
Company in this Agreement, subject, however, to any required approval of the
------- -------
Company's stockholders and, provided, in each case, that such changes or
--------
corrections shall not adversely affect the rights of Grantee with respect to the
Option evidenced hereby, or (iii) to make such other changes as the Company,
upon advice of counsel, determines are necessary or advisable because of the
adoption or promulgation of, or change in or of the interpretation of, any law
or governmental rule or regulation, including any applicable federal or state
securities laws.
12. GRANTEE STATUS AS A DIRECTOR. Nothing contained in this Agreement,
and no action of the Company with respect hereto, shall confer or be construed
to confer on the Grantee any right to continue as a member of the Board or
interfere in any way with the right of the Company to terminate the Grantee's
status as a member of the Board at any time, with or without cause; subject,
--------
however, to the provisions of applicable law.
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13. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware.
14. CONSTRUCTION. References in this Agreement to "this Agreement" and
the words "herein," "hereof," "hereunder" and similar terms include all Exhibits
and Schedules appended hereto, including the Plan. This Agreement is entered
into, and the Option evidenced hereby is granted, pursuant to the Plan and shall
be governed by and construed in accordance with the Plan. Unless otherwise
expressly stated herein, in the event of any inconsistency between the terms of
the Plan and this Agreement, the terms of the Plan shall control. The headings
of the paragraphs of this Agreement have been included for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions hereof.
15. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number
of copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement.
16. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of
all prior discussions and agreements, oral or written, between the Company and
Grantee. Grantee and the Company hereby declare and represent that no promise or
agreement not herein expressed has
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been made and that this Agreement contains the entire agreement between the
parties hereto with respect to the Options and replaces and makes null and void
any prior agreements between Grantee and the Company regarding the Options.
17. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and
conditions of this Agreement by signing in the space provided at the end hereof
and returning a signed copy to the Company.
ATTEST: TCI SATELLITE ENTERTAINMENT, INC.
By:
- -------------------------- ------------------------------
Assistant Secretary Name:
Title:
_________________________________________________
ACCEPTED:
---------------------------------
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Schedule 1 to Non-Qualified Stock Option
Agreement dated as of February 3, 1997
1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
OF TCI SATELLITE ENTERTAINMENT, INC.
Grantee:
Option Date: February 3, 1997
Option Price: $8.00 per share
Option Shares: 50,000 shares of Series A Common Stock of the Company, $1.00
par value per share.
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Exhibit B to Non-Qualified Stock Option
Agreement dated as of February 3, 1997
1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
OF TCI SATELLITE ENTERTAINMENT, INC.
DESIGNATION OF BENEFICIARY
I, (the "Grantee"), hereby
-------------------------------------------
declare that upon my death (the
----------------------------------------
Name
"Beneficiary") of
----------------------------------------------------------
Street Address City State Zip Code
who is my shall be entitled
--------------------------------------------
Relationship to Grantee
to the Option and all other rights accorded the Grantee by the above-referenced
grant agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant to
the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of the Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to the Grantee's will or the laws
of descent and distribution.
It is further understood that all prior designations of beneficiary under
the Agreement are hereby revoked and that this Designation of Beneficiary may
only be revoked in writing, signed by the Grantee, and filed with the Company
prior to the Grantee's death.
- ----------------------------- --------------------------------------
Date Grantee
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EXHIBIT 10.2
1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
OF
TCI SATELLITE ENTERTAINMENT, INC.
1. Purpose of the Plan. This Nonemployee Director Stock Option Plan
(the "Plan") is intended as an incentive to retain and attract persons of
training, experience and ability to serve as independent directors on the Board
of Directors of TCI Satellite Entertainment, Inc., a Delaware corporation (the
"Company"), to encourage the sense of proprietorship of such persons and to
stimulate the active interest of such persons in the development and financial
success of the Company. It is further intended that the options granted pursuant
to this Plan (the "Options") will be nonqualified options within the meaning of
Section 83 of the Internal Revenue Code of 1986, as amended (the "Code").
2. Effective Date. This Plan shall be effective as of the date (the
"Effective Date") it was approved by the Board of Directors of the Company;
provided however, that all options granted pursuant to this Plan are subject to
the approval of the Plan by the stockholders of the Company.
3. Designation of Participants; Automatic Grant of Options. Each
director of the Company who is not an employee of the Company or any Subsidiary
(as hereinafter defined) of the Company (any such director being hereinafter
referred to as a "Nonemployee Director") shall be granted Options as described
hereunder. Each Nonemployee Director who is a director as of the Effective Date
shall automatically be granted Options to purchase 50,000 shares of the Series A
Common Stock of the Company (the "Common Stock") at the Effective Date.
Thereafter, each individual who becomes a Nonemployee Director shall
automatically be granted Options to purchase 50,000 shares of Common Stock
(subject to adjustment as provided in Paragraph 10) on the date such person
first becomes a Nonemployee Director. Notwithstanding the foregoing, in the case
of any grant of Options made on a date subsequent to the Effective Date, such
grant shall only be made if the number of shares then subject to future grant
under this Plan is sufficient to make all automatic grants required to be made
pursuant to this Plan on such date of grant. As used herein, the term
"Subsidiary" of the Company means any present or future subsidiary (as defined
in Section 424(f) of the Code) of the Company, or any business entity in which
the Company owns, directly or indirectly, 50% or more of the voting, capital or
profits interests. An entity shall be deemed a subsidiary of the Company for
purposes of this definition only for such periods as the requisite ownership or
control relationship is maintained.
4. Option Agreement. Each Option granted hereunder shall be embodied in
a written option agreement ("Option Agreement"), which shall be subject to the
terms and conditions set forth above and shall be signed by the Optionee (as
hereinafter defined) and by the
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Chief Executive Officer, the Chief Operating Officer, or any Vice President of
the Company for and on behalf of the Company. As used herein, the term
"Optionee" means any Nonemployee Director to whom Options are granted hereunder.
5. Common Stock Reserved for the Plan. Subject to adjustment as
provided in Paragraph 10 hereof, a total of 500,000 shares of Common Stock shall
be reserved for issuance upon the exercise of Options granted pursuant to this
Plan. The Board of Directors and the appropriate officers of the Company shall
from time to time take whatever actions are necessary to execute, acknowledge,
file and deliver any documents required to be filed with or delivered to any
governmental authority or any stock exchange or transaction reporting system on
which shares of Common Stock are listed or quoted in order to make shares of
Common Stock available for issuance to an Optionee pursuant to this Plan. Common
Stock subject to Options that are forfeited or terminated or expire unexercised
shall immediately become re-available for the granting of Options hereunder, to
the extent that such forfeited, terminated or expired Options were unexercised
at the time of such forfeiture, termination or expiration and did not otherwise
result in the issuance of any shares of Common Stock to the Optionee or any
other person.
6. Option Price.
(a) The purchase price of each share of Common Stock that is subject
to an Option granted pursuant to this Plan shall be the Fair Market Value (as
defined in Paragraph 6(b)) of such share of Common Stock on the date the Option
is granted.
(b) The Fair Market Value of a share of Common Stock on a particular
date means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of Common Stock, as
applicable, on such day (or, if such day is not a trading day, on the next
preceding trading day) as reported on the Nasdaq Stock Market or, if not
reported on the Nasdaq Stock Market, as quoted by the National Quotation Bureau
Incorporated, or if the Common Stock is listed on an exchange, on the principal
exchange on which the Common Stock is listed.
7. Option Period. Each Option granted pursuant to this Plan shall
terminate and be of no force and effect with respect to any shares of Common
Stock not purchased by the Optionee at 5 p.m., Denver, Colorado time, on the
earliest to occur of the following: (a) the day that immediately precedes the
tenth anniversary of the date upon which the Option is granted; (b) the first
business day following the expiration of the one-year period which begins on the
date upon which the Optionee ceases to be a Director for any reason other than
voluntary termination of Director status; or (c) the first business day
following the expiration of the three-month period which begins on the date upon
which the Optionee voluntarily terminates his Director status.
8. Exercise of Options.
(a) Options granted pursuant to this Plan shall be exercisable, on a
cumulative basis, as follows: (i) with respect to 20% of the total number of
shares of Common Stock
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initially subject to any Option, such Option shall be exercisable on the first
anniversary of the date of grant; and (ii) with respect to the remaining shares
of Common Stock subject to any Option, such Option shall be exercisable with
respect to an additional 20% of the total number of shares initially subject
thereto as of the second, third, fourth and fifth anniversaries of the date of
the grant.
(b) An Option may be exercised solely by the Optionee during his
lifetime or after his death by the person or persons entitled thereto under his
will or the laws of descent and distribution, subject to any enforceable
provisions of a QDRO as defined in Section 9 below.
(c) In the event that, prior to the occurrence of any Change of
Control, an Optionee voluntarily ceases his status as a Director, an Option
granted to such Optionee may be exercised only to the extent such Option was
exercisable at the time he ceased to serve in such capacity.
(d) In the event that an Optionee ceases to serve as a Director for
any reason other than voluntary termination of Director status, at a time when
an Option granted hereunder is still in force and unexpired under the terms of
Paragraph 7 hereof, the vesting and exercisability of each such unmatured Option
shall be accelerated. Such acceleration shall be effective immediately prior to
the effective termination of Director status and each Option so accelerated
shall be exercisable in full for so long as it is still in force and unexpired
under the terms of Paragraph 7 hereof.
(e) Upon the occurrence of a Change in Control, as defined in
Paragraph 10(c), the vesting and exercisability of all Options previously
granted and still in force and unexpired under the terms of Paragraph 7 hereof
shall be accelerated effective as of such Change in Control.
(f) The purchase price of the shares as to which an Option is
exercised shall be paid in full at the time of the exercise. The method or
methods of payment of the purchase price for the shares to be purchased upon
exercise of an Option shall be determined by the Board of Directors and may
consist of (i) cash, (ii) check, (iii) promissory note, (iv) whole shares of
Common Stock or of Series B Common Stock of the Company already owned by the
Optionee, (v) the withholding of shares of Common Stock issuable upon such
exercise of the Option, (vi) the delivery, together with a properly executed
exercise notice, of irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the purchase
price, (vii) any combination of the foregoing methods of payment, or (viii) such
other consideration and method of payment as may be permitted for the issuance
of shares under the Delaware General Corporation Law. The permitted method or
methods of payment of the amounts payable upon exercise of an Option, if other
than in cash, shall be set forth in the applicable Agreement and may be subject
to such conditions as the Board of Directors deems appropriate. Without
limiting the generality of the foregoing, if an Optionee is permitted to elect
to have shares of Common Stock issuable upon exercise of an Option withheld to
pay all or any part of the amounts payable in connection with such exercise,
then the Board of Directors shall
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<PAGE>
have the sole discretion to approve or disapprove such election, which approval
or disapproval shall be given after such election is made. No holder of an
Option shall be, or have any of the rights or privileges of, a stockholder of
the Company in respect of any shares subject to any Option unless and until
certificates evidencing such shares shall have been issued by the Company to
such holder.
9. Assignability. No Option shall be assignable or otherwise
transferable except by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order ("QDRO") as defined by the Code or Title
I of the Employee Retirement Income Security Act, or the rules thereunder. Any
attempted assignment of an Option in violation of this Paragraph 9 shall be null
and void.
10. Adjustments.
(a) The existence of outstanding Options shall not affect in any
manner the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the capital stock of the Company or its business or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred stock
or other debt or equity securities (whether or not such issue is prior to, on a
parity with or junior to the Common Stock) or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding of any kind, whether or not
of a character similar to that of the acts or proceedings enumerated above.
(b) If the Company subdivides its outstanding shares of Common Stock
into a greater number of shares of Common Stock (by stock dividend, stock split,
reclassification or otherwise) or combines its outstanding shares of Common
Stock into a smaller number of shares of Common Stock (by reverse stock split,
reclassification or otherwise), or if the Board of Directors determines that any
stock dividend, extraordinary cash dividend, reclassification, recapitalization,
reorganization, split-up, spin-off, combination, merger, consolidation, exchange
of shares, warrants or rights offering to purchase Common Stock, or other
similar corporate event affects the Common Stock such that an adjustment is
required in order to preserve the benefits or potential benefits intended to be
made available under this Plan, then the Board of Directors shall, in its sole
discretion and in such manner as the Board of Directors may deem equitable and
appropriate, make such adjustments to any or all of (i) the number and kind of
shares reserved under this Plan, (ii) the number and kind of shares subject to
any outstanding Options, and (iii) the exercise price with respect to any
outstanding Options, provided, however, that the number of shares subject to any
Option shall always be a whole number. The Board of Directors may, if deemed
appropriate, provide for a cash payment to any Optionee in connection with any
adjustment made pursuant to this Section 10(b). In the event of a corporate
merger, consolidation, acquisition of property or stock, reorganization,
liquidation or similar transaction, the Board of Directors shall be authorized
to issue or assume stock options by means of substitution of new options for
previously issued
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<PAGE>
options or an assumption of previously issued options, or to make provision for
the acceleration of the exercisability of, or lapse of restrictions with respect
to, the termination of unexercised options in connection with such transaction.
(c) An Option shall become fully exercisable upon a Change in
Control of the Company. As used herein, "Change in Control" means the
occurrence of any of the following events: (i) after the Effective Date, any
person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), corporation
or other entity (other than the Company, any Subsidiary, any employee benefit
plan sponsored by the Company or any Subsidiary, or any Controlling Person)
shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power of the then outstanding
securities of the Company ordinarily (and apart from rights accruing under
special circumstances) having the right to vote in the election of directors
(calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of
rights to acquire the Company's securities); (ii) the Company is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which members of the Board of Directors in office
immediately prior to such transaction or event constitute less than a majority
of the Board of Directors thereafter; or (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the entire Board of Directors cease for any reason to constitute a majority
thereof unless the election, or the nomination for election, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period. For purposes
of this definition, "Controlling Person" means each of (a) the Chairman of the
Board, the President and each of the directors of the Company as of the
Effective Date of this Plan, (b) John C. Malone, (c) the respective family
members, estates and heirs of each of the persons referred to in clauses (a) and
(b) above, and of Bob Magness, and any trust or other investment vehicle for
the primary benefit of the persons referred to in clauses (a) and (b) above, and
of Bob Magness, or their respective family members or heirs and (d) Kearns-
Tribune Corporation, a Delaware corporation. As used with respect to any
person, the term "family member" means the spouse, siblings and lineal
descendants of such person.
11. Purchase for Investment. Unless the Options and shares of Common
Stock covered by this Plan have been registered under the Securities Act of
1933, as amended, each person exercising an Option under this Plan may be
required by the Company to give a representation in writing in form and
substance satisfactory to the Company to the effect that he is acquiring such
shares for his own account for investment and not with a view to, or for sale in
connection with, the distribution of such shares or any part thereof.
12. Taxes. The Company may make such provisions as it may deem
appropriate for the withholding of any taxes that it determines is required in
connection with any Options granted to any Optionee hereunder.
13. Amendments or Termination. The Board of Directors of the Company
may amend, alter or discontinue this Plan, except that (a) no amendment or
alteration that would
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impair the rights of any Optionee under any Option that he has been granted
shall be made without his consent, (b) no amendment or alteration shall be
effective prior to approval by the Company's stockholders to the extent such
approval is then required pursuant to Rule 16b-3 (or any successor provision)
under the Exchange Act in order to preserve the applicability of any exemption
provided by such Rule to any Option then outstanding (unless the holder of such
Option consents) or to the extent stockholder approval is otherwise required by
applicable legal requirements, and (c) the Plan shall not be amended more than
once every six months to the extent such limitation is required by Rule 16b-
3(c)(2)(ii) (or any successor provision) under the Exchange Act as then in
effect.
14. Government Regulations. This Plan, and the granting and exercise
of Options hereunder, and the obligation of the Company to sell and deliver
shares of Common Stock under such Options, shall be subject to all applicable
laws, rules and regulations, and to such approvals on the part of any
governmental agencies or national securities exchanges or transaction reporting
systems as may be required.
15. Governing Law. This Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Code or the securities laws of the United States, shall be
governed by and construed in accordance with the laws of the State of Delaware.
16. Miscellaneous. The granting of any Option shall not impose upon
the Company, the Board of Directors of the Company or any other directors of the
Company any obligation to nominate any Optionee for election as a director, and
the right of the stockholders of the Company to remove any person as a director
of the Company shall not be diminished or affected by reason of the fact that an
Option has been granted to such person.
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EXHIBIT 10.3
TCI SATELLITE ENTERTAINMENT, INC.
1996 STOCK INCENTIVE PLAN
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the 3rd day of February,
1997 (the "Grant Date"), by and between TCI SATELLITE ENTERTAINMENT, INC., a
Delaware corporation (the "Company"), and the person signing adjacent to the
caption "Grantee" on the signature page hereof (the "Grantee").
The Company has adopted the TCI Satellite Entertainment, Inc. 1996
Stock Incentive Plan (the "Plan"), a copy of which is appended to this Agreement
as Exhibit A and by this reference made a part hereof, for the benefit of
eligible employees of the Company and its Subsidiaries. Capitalized terms used
and not otherwise defined herein shall have the meaning ascribed thereto in the
Plan.
Pursuant to the Plan, the Compensation Committee of the Board (the
"Committee"), which has been assigned responsibility for administering the Plan,
has determined that it is in the interests of the Company and its stockholders
to award shares of common stock to Grantee, subject to the conditions and
restrictions set forth herein and in the Plan, in order to provide Grantee with
additional remuneration for services rendered, to encourage Grantee to remain in
the employ of the Company or its Subsidiaries and to increase Grantee's personal
interest in the continued success and progress of the Company.
The Company and Grantee therefore agree as follows:
1. AWARD; ESTABLISHMENT OF RESTRICTED SHARE ACCOUNT. Pursuant to the
terms of the Plan and in consideration of the covenants and promises of Grantee
herein contained, the Company hereby awards to Grantee as of the Grant Date (the
"Award"), the right to receive, at the end of the Restricted Period relating
thereto, the number of shares of Series A Common Stock of the Company ("Common
Stock") set forth on Schedule 1 hereto, subject to the conditions and
restrictions set forth below and in the Plan (the "Restricted Shares"). The
rights awarded to Grantee pursuant to this Agreement shall be implemented by
credit to a bookkeeping account maintained by the Company evidencing the accrual
to Grantee of unsecured and unfunded rights to receive the Restricted Shares,
which rights shall be subject to the terms, conditions and restrictions set
forth in the Plan and to the further terms, conditions and restrictions set
forth in this Agreement. In this connection, the Company has set up an account
in the name of Grantee (the "Restricted Share Account") which reflects the
number of Restricted Shares subject to the Award granted herein.
2. ISSUANCE OF RESTRICTED SHARES AT END OF THE RESTRICTION PERIOD. Upon
issuance of the Restricted Shares, the stock certificate or certificates
representing such Restricted Shares
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shall be registered in the name of Grantee and delivered to Grantee pursuant to
the provisions of Paragraph 9.
3. RESTRICTIONS. Restricted Shares shall not constitute issued and
outstanding shares of Common Stock until issued in accordance with this
Agreement and the Plan. Grantee will not have the right to vote any Restricted
Shares, to receive or retain any dividends or distributions paid or distributed
on issued and outstanding shares of Common Stock or to exercise any other
rights, powers and privileges of a Holder of Common Stock with respect to any
Restricted Shares.
4. VESTING AND FORFEITURE OF RESTRICTED STOCK: Subject to earlier vesting
in accordance with the provisions of Paragraph 7(b) below, Grantee shall become
vested as to 50% of the Restricted Shares subject to this Agreement as of
January 1, 2001, and Grantee shall become vested as to the remaining 50% of the
Restricted Shares subject to this Agreement as of January 1, 2002, each such
date being a Vesting Date; provided, however, that Grantee shall not vest,
pursuant to this Paragraph 4, in shares of Restricted Shares as to which Grantee
would otherwise vest as of a given date if Grantee has not been continuously
employed by the Company or its Subsidiaries from the date of this Agreement
through such date (the vesting or forfeiture of such shares to be governed
instead by the provisions of Paragraph 5).
5. EARLY TERMINATION OF AWARD. Unless otherwise determined by the
Committee in its sole discretion, the Award shall terminate, to the extent not
theretofore vested, prior to the expiration of the Restricted Period, at the
time specified below:
(a) If Grantee dies while employed by the Company or a Subsidiary,
then the Award, to the extent not theretofore vested, shall immediately
become fully vested;
(b) If Grantee's employment with the Company terminates by reason of
Disability, then the Award, to the extent not theretofore vested, shall
immediately become fully vested;
(c) If Grantee's employment is terminated (i) by Grantee (x) with
"good reason" (as defined herein), (y) with the written consent of the
Company or the applicable Subsidiary or (z) pursuant to provisions of a
written employment agreement, if any, between the Grantee and the Company
which expressly permit the Grantee to terminate such employment upon the
occurrence of specified events (other than the giving of notice and passage
of time), or (ii) by the Company without "cause" (as defined in Section
11.2(b) of the Plan), then the Award, to the extent not theretofore vested,
shall immediately become fully vested; and
(d) If Grantee's employment with the Company and its Subsidiaries is
terminated by the Company for "cause" (as defined in Section 11.2(b) of the
Plan), or otherwise under circumstances under which none of paragraphs
5(a), (b) or (c) apply, then the Award, to the extent not theretofore
vested, shall be forfeited immediately to the
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Company, and Grantee shall not thereafter have any rights whatsoever with
respect to any Restrict Shares so forfeited.
"Good reason" for purposes of the Agreement shall be deemed to
have occurred upon the happening of any of the following:
(i) any reduction in Grantee's annual rate of salary;
(ii) either (x) a failure of the Company to continue in effect
any employee benefit plan in which Grantee was participating or (y)
the taking of any action by the Company that would adversely affect
Grantee's participation in, or materially reduce Grantee's benefits
under, any such employee benefit plan, unless such failure or such
taking of any action, adversely affects the senior members of the
corporate management of the Company generally;
(iii) the assignment to Grantee of duties and
responsibilities that are materially more oppressive or onerous than
those attendant to Grantee's position immediately after the date
hereof;
(iv) the relocation of the office location as assigned to
Grantee by the Company to a location more than 20 miles from Grantee's
current location without Grantee's consent; or
(v) the failure of the Company to obtain, prior to the time of
any reorganization, merger, consolidation, disposition of all or
substantially all of the assets of the Company or similar transaction
effective after the date hereof, in which the Company is not the
surviving person, the unconditional assumption in writing or by
operation of law of the Company's obligations to Grantee under this
Agreement by each direct successor to the Company in any such
transaction.
6. COMPLETION OF THE RESTRICTION PERIOD. On the Vesting Date with respect
to each award of Restricted Shares, and the satisfaction of any other applicable
restrictions, terms and conditions set forth herein and in the Plan: (a) all or
the applicable portion of such Restricted Shares shall become vested; and (b)
the Company shall immediately instruct the Company's Transfer Agent with respect
to the Common Stock to issue to Grantee a certificate or certificates
representing in the aggregate the number of Restricted Shares in Grantee's
Restricted Share Account that have so vested. The issuance of such shares shall
be in consideration of labor done by Grantee and, following the issuance of such
shares pursuant to due authorization in accordance with the terms and provisions
of the Plan and this Agreement, such shares will be validly issued, fully paid
and non-assessable. The Committee may, in its discretion, provide that the
delivery of any Restricted Shares that shall have become vested shall be
deferred until such date or dates as the recipient may elect. Any election of a
recipient pursuant to the preceding sentence shall be filed in writing with the
Committee in accordance with such rules and
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regulations, including any deadline for the making of such an election, as the
Committee may provide.
7. ADJUSTMENTS.
(a) The Restricted Shares shall be subject to adjustment (including,
without limitation, as to the number of Restricted Shares) in the sole
discretion of the Committee and in such manner as the Committee may deem
equitable and appropriate in connection with the occurrence of any of the events
described in Section 4.2 of the Plan following the Grant Date.
(b) In the event of any Approved Transaction, Board Change or Control
Purchase, the restrictions in Paragraph 3 shall immediately and automatically
lapse. Notwithstanding the foregoing, prior to the occurrence of any Approved
Transaction, Board Change or Control Purchase, the Committee may, in its
discretion, determine that the restrictions in Paragraph 3 will not lapse on an
accelerated basis in connection with an Approved Transaction if the Board or the
surviving or acquiring corporation, as the case may be, shall have taken or made
effective provision for the taking of such action as in the opinion of the
Committee is equitable and appropriate to substitute a new Award for the Award
evidenced by this Agreement or to assume this Agreement and the Award evidenced
hereby and in order to make such new or assumed Award, as nearly as may be
practicable, equivalent to the Award evidenced by this Agreement as then in
effect (but before giving effect to any acceleration of the exercisability
hereof unless otherwise determined by the Committee), taking into account, to
the extent applicable, the kind and amount of securities, cash or other assets
into or for which the Common Stock may be changed, converted or exchanged in
connection with the Approved Transaction.
8. MANDATORY WITHHOLDING FOR TAXES. Upon the expiration of the
Restriction Period, Grantee (or Beneficiary, as defined in Paragraph 10 below)
must remit to the Company the amount of all federal, state and other
governmental withholding tax requirements imposed upon the Company with respect
to the vesting of Restricted Shares, unless provisions to so pay such
withholding requirements have been made to the satisfaction of the Committee.
9. DELIVERY BY THE COMPANY. As soon as practicable after the vesting of
Restricted Shares pursuant to Paragraphs 4 or 5, and subject to the withholding
referred to in Paragraph 8, the Company shall deliver to Grantee certificates
issued in Grantee's name for the number of Restricted Shares. If delivery is by
mail, delivery of shares of Common Stock shall be deemed effected for all
purposes when the Company or the Company's transfer agent for the Common Stock
shall have deposited the certificates in the United States mail, addressed to
Grantee.
10. NONTRANSFERABILITY OF RESTRICTED SHARES BEFORE VESTING. Before
vesting and during Grantee's lifetime, the Restricted Shares are not
transferable (voluntarily or involuntarily) other than pursuant to a domestic
relations order and, except as otherwise required pursuant to a domestic
relations order, are exercisable only by Grantee or Grantee's court appointed
legal representative. The Grantee may designate a beneficiary or beneficiaries
to whom the Restricted Shares shall pass upon Grantee's death and may change
such designation from time to time by
-4-
<PAGE>
filing a written designation of beneficiary or beneficiaries with the Committee
on the form annexed hereto as Exhibit B or such other form as may be prescribed
by the Committee, provided that no such designation shall be effective unless so
filed prior to the death of Grantee. Following Grantee's death, the Restricted
Shares shall pass accordingly to the designated beneficiary and such person
shall be deemed the Grantee for purposes of any applicable provisions of this
Agreement. If no such designation is made or if the designated beneficiary does
not survive the Grantee's death, the Restricted Shares shall pass by will or the
laws of descent and distribution.
11. COMPANY'S RIGHTS. The existence of this Agreement shall not affect in
any way the right or power of the Company or its stockholders to accomplish any
corporate act, including, without limitation, the acts referred to in Section
11.17 of the PLAN.
12. LIMITATION OF RIGHTS. Nothing in this Agreement or the Plan shall be
construed to:
(a) give Grantee any right to be awarded any further restricted stock
or other award, other than in the sole discretion of the Committee; or
(b) give Grantee or any other person any interest in any fund or in
any specified asset or assets of the Company or any subsidiary of the
Company.
13. PREREQUISITES TO BENEFITS: Neither Grantee nor any person claiming
through Grantee shall have any right or interest in the Restricted Shares
awarded hereunder, unless and until all the terms, conditions and provisions of
this Agreement and the Plan which affect the Grantee or such other person shall
have been complied with as specified herein.
14. RESTRICTIONS IMPOSED BY LAW. Without limiting the generality of
Section 11.9 of the Plan, Grantee agrees that Grantee will not require the
Company to deliver any restricted shares and that the Company will not be
obligated to deliver any Restricted Shares or make any cash payment, if counsel
to the Company determines that such exercise, delivery or payment would violate
any applicable law or any rule or regulation of any governmental authority or
any rule or regulation of, or agreement of the Company with, any securities
exchange or association upon which the Common Stock is listed or quoted. The
Company shall in no event be obligated to take any affirmative action in order
to cause the delivery of any Restricted Shares or other payment to comply with
any such law, rule, regulation or agreement.
15. NOTICE. Unless the Company notifies Grantee in writing of a different
procedure, any notice or other communication to the Company with respect to this
Agreement shall be in writing and shall be:
-5-
<PAGE>
(a) delivered personally to the following address:
TCI Satellite Entertainment, Inc.
Attn: Corporate Counsel
8085 South Chester Street, Suite 300
Englewood, Colorado 80112
or
(b) sent by first class mail, postage prepaid and addressed as
follows:
TCI Satellite Entertainment, Inc.
Attn: Corporate Counsel
8085 South Chester Street, Suite 300
Englewood, Colorado 80112
Any notice or other communication to Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Grant Date, unless the Company has received written
notification from Grantee of a change of address.
16. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Committee as contemplated by Section 11.8(b) of the Plan. Without limiting the
generality of the foregoing, without the consent of Grantee,
(a) this Agreement may be amended or supplemented (i) to cure any
ambiguity or to correct or supplement any provision herein which may be
defective or inconsistent with any other provision herein, or (ii) to add
to the covenants and agreements of the Company for the benefit of Grantee
or surrender any right or power reserved to or conferred upon the Company
in this Agreement, subject, however, to any required approval of the
------- -------
Company's stockholders and, provided, in each case, that such changes or
--------
corrections shall not adversely affect the rights of Grantee with respect
to the Award evidenced hereby, or (iii) to make such other changes as the
Company, upon advice of counsel, determines are necessary or advisable
because of the adoption or promulgation of, or change in or of the
interpretation of, any law or governmental rule or regulation, including
any applicable federal or state securities laws; and
(b) subject to Section 11.8(b) of the Plan and any required approval
of the Company's stockholders, the Award evidenced by this Agreement may be
canceled by the Committee and a new Award made in substitution therefor,
provided that the Award so substituted shall satisfy all of the
--------
requirements of the Plan as of the date such new Award is made and no such
action shall adversely affect the Restricted Shares to the extent then
vested.
-6-
<PAGE>
17. GRANTEE EMPLOYMENT. Nothing contained in this Agreement, and no
action of the Company or the Committee with respect hereto, shall confer or be
construed to confer on Grantee any right to continue in the employ of the
Company or any of its Subsidiaries or interfere in any way with the right of the
Company or any employing Subsidiary to terminate Grantee's employment at any
time, with or without cause; subject, however, to the provisions of any
------- -------
employment agreement between Grantee and the Company or any Subsidiary.
18. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware.
19. CONSTRUCTION. References in this Agreement to "this Agreement" and
the words "herein," "hereof," "hereunder" and similar terms include all Exhibits
and Schedules appended hereto, including the Plan. This Agreement is entered
into, and the Award evidenced hereby is granted, pursuant to the Plan and shall
be governed by and construed in accordance with the Plan and the administrative
interpretations adopted by the Committee thereunder. All decisions of the
Committee upon questions regarding the Plan or this Agreement shall be
conclusive. Unless otherwise expressly stated herein, in the event of any
inconsistency between the terms of the Plan and this Agreement, the terms of the
Plan shall control. The headings of the paragraphs of this Agreement have been
included for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
20. DUPLICATE ORIGINALS. The Company and Grantee may sign any number of
copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement.
21. RULES BY COMMITTEE. The rights of Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Committee may adopt from time to time hereafter.
22. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of
all prior discussions and agreements, oral or written, between the Company and
Grantee. Grantee and the Company hereby declare and represent that no promise
or agreement not herein expressed has been made and that this Agreement contains
the entire agreement between the parties hereto with respect to the Restricted
Shares and replaces and makes null and void any prior agreements between Grantee
and the Company regarding the Restricted Shares.
-7-
<PAGE>
23. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and
conditions of this Agreement by signing in the space provided at the end hereof
and returning a signed copy to the Company.
ATTEST: TCI SATELLITE ENTERTAINMENT, INC.
_____________________________ By:___________________________________
Pamela J. Strauss Gary S. Howard
Assistant Secretary President & Chief Executive Officer
GRANTEE:
______________________________________
-8-
<PAGE>
Schedule 1 to Restricted Stock Award
Agreement dated as of February 3, 1997
TCI SATELLITE ENTERTAINMENT, INC. 1996 STOCK INCENTIVE PLAN
Grantee:
Grant Date: February 3, 1997
Restricted Shares: _________ shares of Series A Common Stock of TCI Satellite
Entertainment, Inc., $1.00 par value per share.
<PAGE>
EXHIBIT B TO RESTRICTED STOCK AWARD
AGREEMENT DATED AS OF FEBRUARY 3, 1997
TCI SATELLITE ENTERTAINMENT, INC. 1996 STOCK INCENTIVE PLAN
DESIGNATION OF BENEFICIARY
I, ________________________________________ (the "Grantee"), hereby declare
that upon my death ______________________________________ (the "Beneficiary") of
Name
_____________________________________________________________________________,
Street Address City State Zip Code
who is my ___________________________________________, shall be entitled to the
Relationship to Grantee
Restricted Shares and all other rights accorded the Grantee by the above-
referenced grant agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant to
the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of the Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to the Grantee's will or the laws
of descent and distribution.
It is further understood that all prior designations of beneficiary under
the Agreement are hereby revoked and that this Designation of Beneficiary may
only be revoked in writing, signed by the Grantee, and filed with the Company
prior to the Grantee's death.
_________________________ ________________________________________________
Date Grantee
<PAGE>
EXHIBIT 10.4
AMENDMENT #1 TO FULFILLMENT AGREEMENT
THIS AMENDMENT #1 shall be effective as of July 22, 1997, ("Amendment #1")
and shall amend the terms and conditions of the Fulfillment Agreement dated
August 30, 1996, (the "Fulfillment Agreement") between TCI SATELLITE
ENTERTAINMENT, INC., a Delaware corporation, ("Satellite") and TCI
COMMUNICATIONS, INC., a Delaware corporation, ("TCI") (collectively, the
"Parties").
For good and mutual consideration, the Parties agree to amend the Agreement
as follows:
1. Section 3(f) shall be deleted in its entirety and replaced with the
following:
f. System personnel shall appear for all scheduled installation,
maintenance and other service call appointments at the scheduled time. System
personnel shall make as many telephone calls as necessary, up to three (3), to
the Satellite Subscriber prior to the scheduled appointment to confirm the
appointment, noting in CSG the date and time of each attempt to contact the
Satellite Subscriber. If System personnel are unable to confirm the scheduled
appointment after three (3) attempts, System personnel shall cancel the work
order in CSG, and enter a corresponding note on the CSG account reflecting the
System's cancellation of the work order due to inability to confirm the
appointment. If the Satellite Subscriber later contacts the System to reschedule
the appointment, the System shall expedite the Satellite Subscriber's
appointment request.
When System personnel are able to confirm the appointment with
the Satellite Subscriber, the System must:
(i) confirm directions to the Satellite Subscriber's location;
(ii) confirm the amount, if any, that the Satellite Subscriber
will owe to Satellite once the work has been completed;
(iii) confirm that a person 18 years of age or older will be at
the location at the time of the appointment;
(iv) in the event of an installation, confirm that the account
holder will be at the location to sign the subscriber
agreement and other required documents.
2. Section 7(d) shall be deleted in its entirety.
3. Section 9 shall be deleted in its entirety and replaced with the
following:
<PAGE>
9. TERM. The term of this Agreement shall commence on January 1,
----
1997, and terminate on December 31, 1997.
4. EXHIBIT A shall be deleted in its entirety and replaced with
---------
EXHIBIT A-1 attached hereto.
- -----------
5. In order to meet the termination date of this Agreement, TSAT and
TCI agree to make a good faith effort to begin transitioning the Systems'
contractual obligations to third parties designated by TSAT in accordance with
the transition plan set forth in EXHIBIT C attached hereto (the "Transition
---------
Plan"), which shall be subject to any changes mutually agreed upon by TSAT and
TCI.
6. Defined terms in this Amendment #1 shall have the same meaning assigned
to them in the Agreement. If the terms set forth in this Amendment #1 conflict
with the terms of the Agreement, the terms of this Amendment #1 shall control.
This Agreement is effective as of the date first written above.
TCI SATELLITE ENTERTAINMENT, INC., TCI COMMUNICATIONS, INC.,
a Delaware corporation a Delaware corporation
/s/ Lloyd S. Riddle III /s/ Colleen Abdoullah
- ---------------------------------- -------------------------------------
Lloyd S. Riddle III Colleen Abdoullah
Sr. Vice President & COO Sr. Vice President & Assistant to COO
Date: July 28, 1997 Date: July 25, 1997
----------------------------- --------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 53,143
<SECURITIES> 0
<RECEIVABLES> 24,717
<ALLOWANCES> 4,089
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,294,089
<DEPRECIATION> 211,282
<TOTAL-ASSETS> 1,211,014
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 66,638
<OTHER-SE> 199,314
<TOTAL-LIABILITY-AND-EQUITY> 1,211,014
<SALES> 0
<TOTAL-REVENUES> 260,645
<CGS> 0
<TOTAL-COSTS> 133,441
<OTHER-EXPENSES> 58,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (107,590)
<INCOME-TAX> 0
<INCOME-CONTINUING> (107,590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (107,590)
<EPS-PRIMARY> (1.61)
<EPS-DILUTED> (1.61)
</TABLE>
