<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1997
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
TCI SATELLITE ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4841 84-1299995
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
(303) 712-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
GARY S. HOWARD
TCI SATELLITE ENTERTAINMENT, INC.
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
(303) 712-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPY TO:
MARC A. LEAF, ESQ.
BAKER & BOTTS, L.L.P.
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
(212) 705-5000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding Company and there is compliance with
General Instruction G, check the following box: [_]
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT PRICE(1) FEE(1)
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<S> <C> <C> <C> <C>
10 7/8% Senior Subordi-
nated Notes due 2007... $200,000,000 100% $200,000,000 $60,606
- ------------------------------------------------------------------------------
12 1/4% Senior Subordi-
nated Discount Notes
due 2007............... $154,514,500 100% $154,514,500 $46,823
</TABLE>
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- --------------------------------------------------------------------------------
(1) In accordance with Rule 457(f)(2), the registration fee is calculated based
on the book value of the securities as of April 9, 1997.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CROSS-REFERENCE SHEET
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
S-4 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
--------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Cross-Reference Sheet; Outside Front
Cover Page of Prospectus................. Front Cover Page of
Registration Statement; Cross-
Reference Sheet; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front Cover Page of
Prospectus; Outside Back Cover
Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............ Prospectus Summary; Risk
Factors; Selected Financial
Data
4. Terms of the Transaction.................. Prospectus Summary; Risk
Factors; The Exchange Offer;
Certain Federal Income Tax
Considerations; Description of
the Exchange Notes
5. Pro Forma Financial Information........... Prospectus Summary; Selected
Financial Data
6. Material Contracts with the Company Being
Acquired................................. *
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Plan of Distribution
8. Interests of Named Experts and Counsel.... Validity of Exchange Notes;
Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. *
10. Information with Respect to S-3
Registrants.............................. *
11. Incorporation of Certain Information by
Reference................................ *
12. Information with Respect to S-2 or S-3
Registrants.............................. *
13. Incorporation of Certain Information by
Reference................................ *
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants........ Prospectus Summary; Risk
Factors; The Exchange Offer;
Use of Proceeds;
Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Business; Management; Security
Ownership of Certain
Beneficial Owners and
Management; Certain
Relationships and Related
Transactions; Description of
Certain Indebtedness;
Description of the Exchange
Notes
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
S-4 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
--------------------------- ----------------------
<C> <S> <C>
15. Information with Respect to S-3
Companies................................ *
16. Information with Respect to S-2 or S-3
Companies................................ *
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies.......... *
18. Information if Proxies, Consents or
Authorizations are to be Solicited....... *
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer..................... Management; Security Ownership
of Certain Beneficial Owners
and Management; Certain
Relationships and Related
Transactions
</TABLE>
- --------
* Item is omitted because response is negative or item is inapplicable.
ii
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL , 1997
PROSPECTUS
LOGO
---------------------------------
TCI SATELLITE ENTERTAINMENT, INC.
OFFER TO EXCHANGE (I) $1,000 PRINCIPAL AMOUNT OF 10 7/8% SENIOR SUBORDINATED
NOTES DUE 2007 FOR EACH $1,000 PRINCIPAL AMOUNT OF ITS OUTSTANDING 10
7/8% SENIOR SUBORDINATED NOTES DUE 2007, AND (II) $1,000 PRINCIPAL
AMOUNT AT MATURITY OF 12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE
2007 FOR EACH $1,000 PRINCIPAL AMOUNT AT MATURITY OF ITS
OUTSTANDING 12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997,
UNLESS EXTENDED.
TCI Satellite Entertainment, Inc., a Delaware corporation (the "Company" or
"TSAT"), hereby offers (the "Exchange Offer"), upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), (i) to exchange up to an aggregate
principal amount of $200,000,000 of its 10 7/8% Senior Subordinated Notes due
February 15, 2007 (the "Senior Subordinated Exchange Notes") for an equal
principal amount of its outstanding 10 7/8% Senior Subordinated Notes due
February 15, 2007 (the "Senior Subordinated Notes"), in integral multiples of
$1,000, and (ii) to exchange up to an aggregate principal amount at maturity
of $275,000,000 of its 12 1/4% Senior Subordinated Discount Notes due February
15, 2007 (the "Senior Subordinated Discount Exchange Notes," and, together
with the Senior Subordinated Exchange Notes, the "Exchange Notes") for an
equal principal amount at maturity of its outstanding 12 1/4% Senior
Subordinated Discount Notes due February 15, 2007 (the "Senior Subordinated
Discount Notes," and, together with the Senior Subordinated Notes, the
"Notes"), in integral multiples of $1,000. The Exchange Notes will be
unsecured obligations of the Company and will rank junior to, and be
subordinated in right of payment to, all existing and future Senior
Indebtedness (as defined) of the Company. As of March 31, 1997, the Company
had approximately $32,614,000 of Senior Indebtedness outstanding. The forms
and terms of the Exchange Notes (including principal amount, interest rate,
maturity and redemption rights) are substantially identical to those of the
Notes for which they may be exchanged pursuant to this Exchange Offer, except
that (i) the offering and sale of the Exchange Notes have been registered
under the Securities Act of 1933, as amended (the "Securities Act") and,
therefore, shall not bear any legends restricting the transfer thereof, and
(ii) holders of Exchange Notes will not be entitled to certain rights of
holders under Registration Rights Agreements of the Company dated as of
February 20, 1997 (the "Registration Rights Agreements"). The Notes have been
issued under Indentures dated as of February 20, 1997 (each, an "Indenture,"
and, together, the "Indentures"), between the Company and The Bank of New
York, as trustee (the "Trustee"). The Exchange Notes shall be entitled to
substantially the identical benefits of the Indentures (other than such
changes as are necessary to comply with any requirements of the SEC to effect
or maintain the qualification of each Indenture under the Trust Indenture Act
of 1939 ("TIA")), which have been qualified under the TIA. See "Description of
the Exchange Notes." The Company will receive no proceeds from this Exchange
Offer; however, pursuant to the Registration Rights Agreements, the Company
will bear certain expenses of this Exchange Offer.
--------------
SEE "RISK FACTORS," COMMENCING ON PAGE 24, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER NOTES IN THIS EXCHANGE
OFFER.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIESAND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSEDUPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
The Company will accept for exchange any and all validly tendered Notes on
or prior to 5:00 p.m., New York City time, on , 1997, unless extended
(the "Expiration Date"). Tenders of Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date; otherwise such
tenders are irrevocable. The Bank of New York will act as exchange agent (in
such capacity, the "Exchange Agent") in connection with the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of
Notes being tendered for exchange, but is otherwise subject to certain
customary conditions.
The Notes were sold by the Company (the "Notes Offering") on February 20,
1997, in transactions not registered under the Securities Act in reliance upon
the exemption provided in Section 4(2) of the Securities Act. The Notes were
subsequently placed with qualified institutional buyers, as defined in Rule
144A under the Securities Act, and institutional "accredited investors," as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, in
reliance upon Rule 144A under the Securities Act. Accordingly, the Notes may
not be reoffered, resold or otherwise transferred in the United States unless
so registered or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered hereunder in order to satisfy certain obligations of the Company under
the Registration Rights Agreements. See "The Exchange Offer."
Cash interest on the Senior Subordinated Exchange Notes will accrue at a
rate of 10 7/8% per annum from February 20, 1997, and will be payable semi-
annually in arrears on each February 15 and August 15, commencing August 15,
1997. The Senior Subordinated Discount Notes, which, upon their tender by the
holders thereof, will be exchanged for an equal principal amount at maturity
of Senior Subordinated Discount Exchange Notes pursuant to the Exchange Offer,
were issued at a discount to their aggregate principal amount at maturity,
with a yield to maturity calculated from the issuance date of 12 1/4%
(computed on a semi-annual bond equivalent basis). Cash interest does not
accrue and is not payable on the Senior Subordinated Discount Notes--and
accordingly, will not accrue or be payable on the Senior Subordinated Discount
Exchange Notes exchanged for Senior Subordinated Discount Notes--prior to
February 15, 2002. Thereafter, cash interest on the Senior Subordinated
Discount Exchange Notes will accrue at a rate of 12 1/4% per annum and will be
payable semi-annually in arrears on each 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 Interest Election Date (as defined), in which case the principal
amount at maturity of each Senior Subordinated Discount Exchange Note will on
such interest payment date be reduced to the Accreted Value (as defined) of
such Senior Subordinated Discount Exchange Note as of such interest payment
date, and cash interest (accruing at a rate of 12 1/4% per annum from the Cash
Interest Election Date) will be payable with respect to such Senior
Subordinated Discount Exchange Note on each interest payment date thereafter.
The Exchange Notes and the Notes will be redeemable at the Company's option,
in whole or in part, at any time on or after February 15, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest thereon,
if any, to the redemption date. In addition, prior to February 15, 2000, the
Company, other than in any circumstance resulting in a Change of Control (as
defined), may redeem Senior Subordinated Exchange Notes and Senior
Subordinated Notes in an aggregate principal amount of up to 35% of the
aggregate principal amount of the Senior Subordinated Notes originally issued
at a redemption price equal to 110.875% of the principal amount so redeemed,
plus accrued and unpaid interest thereon, if any, to the redemption date, and
the Company may redeem Senior Subordinated Discount Exchange Notes and Senior
Subordinated Discount Notes in an aggregate principal amount of up to 35% of
the aggregate principal amount at maturity of the Senior Subordinated Discount
Notes originally issued at a redemption price equal to 112.250% of the
Accreted Value at the redemption date of the Senior Subordinated Discount
Exchange Notes and the Senior Subordinated Notes so redeemed (or, if a Cash
Interest Election has been made, 112.250% of the principal amount at maturity
so redeemed, plus accrued and unpaid interest thereon, if any, to the
redemption date), in each case with the net cash proceeds of (i) one or more
Public Equity Offerings (as defined) of common equity of the Company or (ii) a
sale or series of related sales of Qualified Equity Interests (as defined) of
the Company to Strategic Equity
2
<PAGE>
Investors (as defined), in any such case resulting in gross cash proceeds to
the Company of at least $100.0 million in the aggregate, in each case subject
to certain applicable provisions of the Indentures.
Upon the occurrence of a Change of Control, the Company will be obligated to
make an offer to purchase all outstanding Exchange Notes and Notes at a
purchase price in cash equal to (i) with respect to the Senior Subordinated
Exchange Notes and the Senior Subordinated Notes, 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the date of purchase and (ii) with respect to the Senior Subordinated Discount
Exchange Notes and the Senior Subordinated Discount Notes, 101% of the
Accreted Value on the date of purchase (unless the date of purchase is on or
after the earlier to occur of February 15, 2002 and the Cash Interest Election
Date, in which case such purchase price shall be equal to 101% of the
aggregate principal amount at maturity thereof, plus accrued and unpaid
interest thereon, if any, to the date of purchase). In addition, the Company
will, under certain circumstances, be required to make an offer to purchase
Exchange Notes and Notes with the net cash proceeds of certain asset sales or
other dispositions. See "Description of the Exchange Notes."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC") set forth in no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to this Exchange
Offer may be offered for resale, resold and otherwise transferred by a holder
who is not an affiliate of the Company without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the Exchange Notes in its ordinary
course of business and has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes. Persons wishing to exchange Notes in the Exchange Offer
must represent to the Company that such conditions have been met.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of Exchange Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Notes where such Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
date of this Prospectus, it will use its commercially reasonably best efforts
to make this Prospectus, as so amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. As a
result, the Company cannot determine whether an active public market will
develop for the Exchange Notes. The Company has common stock listed on the
Nasdaq National Market tier of the Nasdaq Stock Market (the "Nasdaq National
Market") under the symbols "TSAT A" and "TSAT B."
ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN
OUTSTANDING. TO THE EXTENT THAT ANY NOTES ARE TENDERED AND ACCEPTED IN THE
EXCHANGE OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY
AFFECTED. FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES
WILL CONTINUE TO BE SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF
AND THE COMPANY WILL HAVE NO FURTHER OBLIGATION TO SUCH HOLDERS TO PROVIDE FOR
THE REGISTRATION UNDER THE SECURITIES ACT OF THE NOTES HELD BY THEM. SEE "The
Exchange Offer--Consequences of Failure to Exchange."
The Company expects that the Exchange Notes issued pursuant to this Exchange
Offer generally will be issued in the form of Global Exchange Notes (as
defined herein), which will be deposited with, or on behalf of, The Depository
Trust Company (the "Depository") and registered in its name or in the name of
Cede & Co., its nominee. Beneficial interests in the Global Exchange Notes
representing the Exchange Notes will be shown on, and transfers thereof will
be effected through, records maintained by the Depository and its
participants.
3
<PAGE>
Notwithstanding the foregoing, Notes held in certificated form will be
exchanged solely for Exchange Notes in certificated form. After the initial
issuance of the Global Exchange Notes, Exchange Notes in certificated form
will be issued in exchange for the Global Exchange Notes on the terms set
forth in the Indentures. See "Description of the Exchange Notes--Form,
Denomination and Book-Entry Procedures."
----------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT
THERE HAS BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
Until 1997 (90 days after commencement of this Exchange Offer), all
dealers effecting transactions in the Exchange Notes, whether or not
participating in the Exchange Offer, may be required to deliver a Prospectus.
FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business" and
elsewhere 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, new product launches and development plans, including
uncertainties regarding the Company's proposed "Cable Plus Strategy" described
in this Prospectus; future financial performance, including availability,
terms and deployment of capital; the ability of vendors to deliver required
equipment, software and services; availability of qualified personnel; changes
in, or the failure or inability to comply with, government regulations,
including, without limitation, regulations of the Federal Communications
Commission (the "FCC"), and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and joint
venturers; competitor responses to the Company's products and services, and
the overall market acceptance of such products and services, including
acceptance of the pricing of such products and services; possible interference
by satellites in adjacent orbital positions with the satellite currently being
used for the Company's existing medium power satellite television business;
and other factors referenced in this Prospectus. See "Risk Factors." These
forward-looking statements (and such risks, uncertainties and other factors)
speak only as of the date of this Prospectus. 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.
4
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the SEC. Such reports and
other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can also be obtained by mail at prescribed
rates by writing to the Public Reference Section of the SEC, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC
maintains a Web site on the Internet that contains reports and other
information regarding registrants (including the Company) that file
electronically with the SEC. The address of the SEC's Web site is
http://www.sec.gov. In addition, materials filed by the Company should be
available for inspection at the offices of the National Association of
Securities Dealers, Inc., Reports Section, 1735 K Street, N.W., Washington,
D.C. 20006.
The Company has filed with the SEC a Registration Statement on Form S-4
under the Securities Act for the registration of the Exchange Notes offered
hereby (the "Registration Statement"). This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement, certain items of which are contained
in exhibits and schedules to the Registration Statement as permitted by the
rules and regulations of the SEC. For further information with respect to the
Company or the Exchange Notes offered hereby, reference is made to the
Registration Statement, including any amendments, schedules and exhibits filed
as a part thereof, which is available for public inspection as indicated
above. Statements made in this Prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the SEC as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, the Company is required to furnish the information required
to be filed with the SEC to the Trustee and the holders of the Notes and the
Exchange Notes. The Company has agreed that, even if it is entitled under the
Exchange Act not to furnish such information to the SEC, it will nonetheless
continue to furnish information that would be required to be furnished by the
Company by Section 13 of the Exchange Act to the Trustee and the holders of
the Notes and Exchange Notes as if it were subject to such periodic reporting
requirements.
In addition, the Company has agreed that, for so long as any of the Notes
remain outstanding, the Company will make available to any prospective
purchaser of the Notes or beneficial owner of the Notes in connection with any
sale thereof the information required by Rule 144A(d)(4) under the Securities
Act, until such time as the Company has either exchanged the Notes for the
Exchange Notes or until such time as the holders thereof have disposed of such
Notes pursuant to an effective registration statement filed by the Company.
THIS PROSPECTUS REFERS TO DOCUMENTS WHICH ARE NOT PRESENTED IN FULL HEREIN
OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM TIME TO
TIME FROM TCI SATELLITE ENTERTAINMENT, INC., 8085 SOUTH CHESTER, SUITE 300,
ENGLEWOOD, COLORADO 80112, TELEPHONE NUMBER (303) 712-4600. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE AT LEAST FIVE
BUSINESS DAYS PRIOR TO THE EXPIRATION DATE.
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the financial statements and the notes thereto,
appearing elsewhere in this Prospectus. Prior to December 4, 1996 (the
"Distribution Date"), the Company was a wholly owned subsidiary of Tele-
Communications, Inc. ("TCI"). Unless the context otherwise requires, references
in this Prospectus to "the Company" refer to (i) certain businesses of TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI, constituting TCI's
collective interests ("TCI SATCO") in the Digital Satellite Business before the
Distribution Date and (ii) the Company and its consolidated subsidiaries on and
after the Distribution Date. As used herein, "Digital Satellite Business" means
the business of distributing multichannel programming services directly to
consumers in the United States via digital medium power or high power
satellite, including the rental and sale of customer premises equipment
relating thereto. Additionally, references in this Prospectus to "TCI" and
"TCIC" are to TCI and TCIC, respectively, and each of their respective
consolidated subsidiaries unless the context indicates otherwise. References to
TCI prior to August 4, 1994, refer to TCI's predecessor. References in this
Prospectus to "Authorized Units" refer to the number of active authorized
satellite receivers, more than one of which may be installed in a subscribing
household. For definitions of certain terms used in the satellite industry and
this Prospectus, see "Glossary of Terms." Holders of Notes, before tendering
their Notes in the Exchange Offer, should carefully consider the matters
described under the heading "Risk Factors."
THE COMPANY
The Company is a leading provider of digital satellite-based entertainment
programming in the United States. The Company distributes the PRIMESTAR(R)
programming service ("PRIMESTAR(R)"), a medium power digital satellite service,
under the brand names "PRIMESTAR By TCI" and "PRIMESTAR By TSAT" and owns an
aggregate 20.86% partnership interest in PRIMESTAR Partners L.P. ("PRIMESTAR
Partners" or the "Partnership"), which owns and operates the PRIMESTAR(R)
service. As of December 31, 1996, the Company was the largest distributor of
PRIMESTAR(R), with an installed base of approximately 805,000 Authorized Units,
which represented approximately 45% of PRIMESTAR Partners' estimated 1.8
million Authorized Units as of such date.
PRIMESTAR(R). PRIMESTAR Partners was formed by direct or indirect
subsidiaries of TCI and several other large cable operators, and G.E. Americom
Services, Inc. ("GEAS"), an indirect subsidiary of General Electric Company
("G.E."), in 1990. In 1994, PRIMESTAR Partners was among the first satellite
television providers to use digital transmission and compression technology to
offer superior delivery of picture and sound. Today, PRIMESTAR Partners
provides 95 channels of entertainment programming throughout the continental
U.S., via medium power satellite, to home satellite dishes ("dishes" or "HSDs")
of approximately 36 inches in diameter. In April 1997, using the additional
capacity of the GE-2 satellite (described below), PRIMESTAR Partners will
increase its offerings to approximately 150 channels of programming while
reducing its dish size to approximately 27 to 29 inches for subscribers in the
majority of the U.S.
The PRIMESTAR(R) service is distributed through distributors
("Distributors"), all of which are currently affiliated with the Partnership's
partners other than GEAS. The Distributors operate in non-exclusive territories
assigned by PRIMESTAR Partners, which territories generally comprise areas in
and around localities in which affiliates of such Distributors (or, in the case
of the Company, affiliates of TCI) have cable television franchises. The
Company's territories cover approximately 45% of the geographic area of the
United States. PRIMESTAR Partners performs certain administrative functions for
Distributors, including program acquisition, national marketing, transponder
leasing and certain technical functions, and passes along the costs relating
thereto to the Distributors. See "Business--PRIMESTAR By TSAT--The PRIMESTAR(R)
Service."
Through March 9, 1997, the PRIMESTAR(R) service was broadcast from Satcom K-2
("K-2"), a medium power satellite that was nearing the end of its normal
operational life. Since March 10, 1997, the PRIMESTAR(R)
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service has been broadcast from GE-2 ("GE-2"), a medium power satellite that
was launched into the 85(degrees) West Longitude ("W.L.") orbital position on
January 30, 1997. The additional transponders on GE-2 provide the PRIMESTAR(R)
service with the capacity to increase the number of channels of programming to
approximately 150, as compared to 95 under K-2. Each of K-2 and GE-2 is owned
by GE American Communications, Inc. ("GE Americom"), which is a subsidiary of
G.E. and the parent company of GEAS.
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 competitor of the
Company, 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, the satellite now used to
provide the PRIMESTAR(R) service. 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 PRIMESTAR(R) signal by subscribers to such
service. See "Risk Factors--Potential Interference with Satellite Signal,"
"Risk Factors--Competitive Nature of Industry" and "Business--Competition."
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 reconsideration requests 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 remove 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.
Tempo. Through its wholly owned subsidiary, Tempo Satellite, Inc. ("Tempo"),
the Company holds a construction permit issued by the FCC, authorizing
construction of a high power direct broadcast satellite ("DBS") system
consisting of two or more satellites delivering DBS service in 11 frequencies
at the 119(degrees) West Longitude ("W.L.") orbital position and 11 frequencies
at the 166(degrees) W.L. orbital position (the "FCC Permit"). The 119(degrees)
W.L. orbital position is one of three such orbital positions available for DBS
service to the U.S. that have a view of the entire continental U.S. Tempo is
also a party to a satellite construction agreement (the "Satellite Construction
Agreement") with Space Systems/Loral, Inc. ("Loral") dated as of February 22,
1990, pursuant to which Tempo has arranged for the construction of two high
power direct broadcast satellites (each, a "Company Satellite" and together,
the "Company Satellites"). On March 8, 1997, one of the Company Satellites
("Tempo DBS-1"), was launched into the Company's high power orbital position at
119(degrees) W.L. Construction of the other Company Satellite ("Satellite No.
2") is substantially complete.
Tempo DBS-1 is currently undergoing in-orbit acceptance testing. Assuming
successful in-orbit testing, Tempo DBS-1 is expected to begin commercial
operations in the second half of 1997. Operating in "paired transponder mode,"
at current levels of digital compression, Tempo DBS-1 would be able to deliver
70 to 85 channels of digital, video and music programming, depending on the mix
of programming content, to a dish of less than 14 inches in diameter. If
statistical multiplexing or other advances in digital compression technology
currently under development by third parties become commercially available in
the future, Tempo DBS-1 would be able to deliver up to 150 channels of
programming. As part of its high power strategy, the Company intends to operate
Tempo DBS-1, either directly or through PRIMESTAR Partners, as a complementary
service to basic cable and other channel-constrained analog services, providing
DBS services on a wholesale basis to those system operators wishing to avoid
the high cost of digital plant upgrades (the "Cable Plus Strategy"), or,
subject to future advances in compression technology, as a stand-alone DBS
service. The Company believes that, if successfully implemented, the Cable Plus
Strategy will provide it with a competitive advantage by offering such cable
customers the expanded channel selection and higher signal quality provided by
a digital service, together with the local broadcast channels currently
provided by their cable operator, which are unavailable to
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most DBS subscribers today. In addition to the Cable Plus Strategy, the Company
intends to market its high power DBS services directly to consumers. See "Risk
Factors--Risks Regarding Deployment of High Power Satellites--Uncertainty
Regarding Alternative Strategies." Pursuant to an option agreement between
Tempo and PRIMESTAR Partners (the "Tempo Option Agreement"), the Company has
agreed to sell or lease 100% of the capacity of Tempo DBS-1 to PRIMESTAR
Partners. See "Business--High Power Satellites."
The Company has had discussions regarding the possible sale of Satellite No.
2, but has not reached agreement regarding any such transaction. Any such
transaction would be subject to the successful operation of Tempo DBS-1 (for
which Satellite No. 2 currently serves as ground spare), the prior approval of
PRIMESTAR Partners and prior regulatory approvals and other conditions.
Pursuant to the Tempo Option Agreement, any net cash proceeds received by the
Company from the sale of Satellite No. 2 would be paid to PRIMESTAR Partners to
satisfy certain advances by PRIMESTAR Partners to the Company to fund
construction of the Company Satellites. There can be no assurance that the
Company will be able to sell Satellite No. 2 on terms acceptable to the
Company. See "Risk Factors--Risks Regarding Deployment of High Power
Satellites--Uncertainty Regarding Alternative Strategies."
The Company and other partners in the Partnership are currently discussing
the possibility of a transaction that would consolidate the business of
PRIMESTAR Partners and the PRIMESTAR(R) distribution business of each of its
authorized Distributors into the Company. As currently contemplated, any such
transaction would not be intended to constitute a "Change of Control" as
defined in the Indentures. See "Description of the Exchange Notes--Certain
Definitions." Any such transaction would be subject to numerous conditions,
including the negotiation, execution and delivery of definitive documentation,
consents from third parties and regulatory requirements. No agreement has yet
been reached regarding any such transaction, and there can be no assurance that
any such transaction will be consummated.
BUSINESS STRATEGY
The Company's primary objective is to maintain its position in the market as
one of the leading providers of satellite delivered entertainment programming
and to continue to grow its subscriber base. To achieve this objective, the
Company has adopted the following strategy:
Provide High Quality Digital Programming at an Attractive Price. The Company
offers consumers the PRIMESTAR(R) service, which consists of a wide variety of
high quality programming, delivered digitally for laser-disc quality image and
compact-disc quality sound, for a competitive price. The Company believes that
the image and sound quality of the PRIMESTAR(R) service is superior to that
provided by most existing cable systems and wireless cable providers, which
transmit analog signals to their subscribers, and is comparable to that of
other digital satellite television providers, including those using compression
methods based on the MPEG-2 digital compression architecture. The Company
further believes that its combination of price and services provides consumers
with greater value than the respective price and service offerings of other
current digital satellite service providers. In April 1997, PRIMESTAR(R) will
increase its channel offerings from 95 video and audio channels to
approximately 150 channel offerings and will begin offering subscribers in the
majority of the U.S. the opportunity to use HSDs of approximately 27 to 29
inches in diameter, as compared to 36 inches currently. See "Risk Factors--
Potential Interference with Satellite Signal," "Risk Factors--Risks of
Satellite Failure," "Risk Factors--Risks of Adverse Government Regulations and
Adjudications" and "Business--PRIMESTAR By TSAT--The PRIMESTAR(R) Service."
Continue to Develop and Expand Diverse Distribution Channels. The Company
continues to increase its customer base through its multiple sales and
distribution channels, which include master sales agents and their sub-agents,
direct sales representatives, telemarketing agents and consumer retail outlets.
The Company also distributes its services on a non-exclusive basis through
Radio Shack, a unit of Tandy Corporation and one of
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the nation's largest consumer electronics retailers. In February 1996,
PRIMESTAR Partners entered into a national agreement with Radio Shack under
which PRIMESTAR(R) is expected to be sold through more than 6,500 Radio Shack
stores nationwide. As of December 31, 1996, PRIMESTAR(R) was available for sale
in approximately 2,300 Radio Shack stores located in the Company's authorized
distribution territories, and the Company estimates that when the arrangement
is fully implemented, PRIMESTAR(R) will be available for sale in over 2,500
such stores. The Company supports its multiple distribution channels with a
wide variety of advertising, marketing and promotional activities. The Company
intends to expand on its existing satellite retailer distribution network and
presence with additional consumer electronics outlets. See "Business--PRIMESTAR
By TSAT--Distribution" and "Business--PRIMESTAR By TSAT--Marketing."
Focus Marketing Effort on Customers Underserved by Multichannel
Programming. The Company seeks to maximize penetration in the "underserved"
marketplace, defined by the Company as those areas not passed by cable, or
served by cable systems with fewer than 40 channels. To date, the Company's
primary market focus has been the rural market, which is underserved for
variety, choice and convenience in audio and video entertainment programming.
Differentiate the Company's Offerings through Superior Customer Service. The
Company believes that providing outstanding service, convenience and value are
essential to developing long term customer relationships. The Company offers
consumers a "one-stop shopping" service which includes programming,
installation, maintenance, reliable customer service and satellite reception
equipment. The Company maintains access to a national call center, which
currently consists of its two Colorado-based facilities ("the National Call
Center"), providing customers with round-the-clock telephone support for sales,
installation, authorization and billing, as well as scheduling of repair and
customer service calls, 365 days per year. See "Business--PRIMESTAR By TSAT--
Distribution."
Provide Subscribers Attractive Alternatives to Obtain Digital Satellite
Equipment. The Company's equipment rental program, which includes free
maintenance and repair, provides significant benefits to customers, who are not
required to buy satellite equipment in order to receive the PRIMESTAR(R)
service. Because PRIMESTAR(R) is marketed as a service, with programming,
equipment rental, maintenance and 24-hour customer service included in the
monthly charge, the up-front costs to new subscribers of PRIMESTAR By TSAT are
generally lower than the up-front costs to new subscribers of the Company's
competitors, who must typically purchase and install HSDs, satellite receivers
and related equipment. Moreover, since the Company generally owns, services and
installs all customer premises equipment for its rental customers, the Company
protects its subscribers from the inconvenience of equipment failure,
maintenance concerns, obsolete technology, self-installation and expired
warranties. See "Business--PRIMESTAR By TSAT--Equipment and Installation."
Expand Commercial Opportunities for Digital Satellite Service. The Company
believes that the commercial marketplace (including hotels, motels, bars,
restaurants, multiple dwelling units ("MDUs"), businesses and schools)
(collectively, the "Commercial Market") offers a substantial opportunity for
growth and is therefore of strategic importance. With the enhanced channel
capacity in its audio and video entertainment programming provided by GE-2, the
Company anticipates having the ability to successfully penetrate the Commercial
Market. The Company also intends to pursue opportunities to provide private
network service to businesses, and to participate in the growing market for
distance learning. In that connection, the Company is exploring opportunities
to work together with At Home Corporation, a joint venture among TCI, Kleiner
Perkins Caufield & Byers, Comcast Corporation ("Comcast") and Cox
Communications, Inc. ("Cox"), to deliver Internet content to personal
computers, and ETC w/tci, Inc., a majority-owned subsidiary of TCI, formed to
develop and distribute content and technology applications for education,
training and communications, as well as other Internet and educational content
providers.
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Form Alliances with Strategic Marketing Partners. The Company intends to
broaden its product and service offerings to further complement its existing
video service offerings by forming alliances with strategic partners, such as
its existing non-exclusive relationship with the Bose Corporation ("Bose"). See
"Business--PRIMESTAR By TSAT--Marketing." The Company believes that such
alliances can be important not only to expand the market awareness of the
Company's name and service offerings, but also to increase the Company's
potential market by expanding the scope of the use of its product and services.
Pursue High Power DBS Opportunities. The Company continues to assess
strategies for delivering high power digital satellite signals to the
consumer's home. The Company's current strategy is to implement a high power
DBS system, either directly or through PRIMESTAR Partners, by using Tempo DBS-
1, pursuant to the Company's proposed Cable Plus Strategy, to provide a DBS
service offering a mix of sports, multiplexed movies, pay-per-view and popular
cable networks that could be marketed as an adjunct to traditional off-the-air
(i.e., broadcast) television, basic cable and other analog programming
services. The Company believes that, if successfully implemented, such a
complementary service could be effectively marketed by cable operators
(particularly those with limited channel capacity and a relatively low density
of subscribers per head-end) as an alternative to a digital cable upgrade,
which could require costly improvements by the operator to cable plant and
head-end equipment. A cable operator that distributed the Company's high power
service could offer its customers a digital upgrade without reducing the number
of analog cable channels available to customers who choose not to take the new
service. In contrast, if such an operator were to upgrade its cable system
directly and provide digital service comparable to the Company's proposed
service, the cable operator would be required to drop up to 11 channels from
its existing analog service, degrading the value of that service and alienating
those customers that choose to continue with their existing analog service. To
facilitate such a complementary service, the Company is currently working with
manufacturers to develop designs and specifications for a new set-top box that
would accommodate separate inputs from an analog cable system and a digital
satellite dish, and allow the customer to switch between digital programming
and analog channels (including the local programming currently not generally
available by satellite) with a single remote control unit. The Company expects
that such a combination cable converter/IRD will be available in commercial
quantities by the fall of 1997. However, the Company has not entered into a
purchase contract with any potential manufacturers, and there can be no
assurance that this equipment will be available on schedule. In addition to the
Cable Plus Strategy, the Company intends to market its high power DBS services
directly to consumers. The Company is currently in discussions, but has not
entered into any agreements, with cable operators, programming suppliers and
PRIMESTAR Partners with respect to the establishment of such a high power
digital satellite service to be marketed in part by cable and other system
operators as described above.
MARKET FOR DIGITAL SATELLITE SERVICES
As of December 31, 1996, the installed base for digital satellite services
consisted of approximately 4.4 million Authorized Units nationwide. This
installed base represented a nearly 100% increase from the approximately 2.2
million units as of the end of 1995 and more than eight times the approximately
500,000 units installed as of the end of 1994. The Company believes that the
market for digital satellite products and services is growing and that there is
significant unsatisfied demand for high quality, reasonably priced television
programming. According to industry sources, there are approximately 98 million
television households in the U.S., and it is estimated that approximately 64
million cable subscribers pay an average of approximately $33 per month for
multichannel programming services. The Company believes that the potential
market in the U.S. for video, audio and data programming services via satellite
consists of (i) the approximately 8 to 11 million households that do not have
access to cable television (not "passed by cable"), (ii) the approximately 21
million households currently passed by cable television systems with fewer than
40 channels of programming, (iii) other existing cable subscribers who desire a
greater variety of programming, improved video and audio quality, better
customer service and fewer transmission interruptions, (iv) the Commercial
Market, and (v) the approximately
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2.2 million low-power C-band subscribers who may desire to migrate to digital
service. The large base of potential customers enhances the Company's
opportunity to increase its installed base of Authorized Units. See "The
Digital Satellite Television Industry--Market for Digital Satellite Services."
FINANCING PLAN
BANK CREDIT FACILITY
On December 31, 1996, the Company completed a senior secured reducing
revolving bank financing arrangement (the "Bank Credit Facility"), underwritten
by The Bank of Nova Scotia, NationsBank of Texas, N.A. and Credit Lyonnais New
York Branch. The Bank Credit Facility, which is guaranteed by all the direct
and indirect subsidiaries of the Company except Tempo, provides for aggregate
commitments of up to $750 million, subject to the Company's compliance with
operating and financial covenants and other customary conditions. The Company's
initial borrowings under the Bank Credit Facility were used (i) to repay in
full the principal amount of, and accrued interest on, a promissory note in the
principal amount of $250 million issued by the Company to TCIC, the subsidiary
of TCI that owns and operates cable systems in the U.S., on the Distribution
Date (the "Company Note"), and (ii) to fund financing costs associated with
arrangement of the Bank Credit Facility. Additional amounts available under the
Bank Credit Facility will be used to provide working capital and to fund the
future growth of the Company's Digital Satellite Business. As of March 31,
1997, there were no borrowings outstanding under the Bank Credit Facility. See
"Description of Certain Indebtedness--Bank Credit Facility."
NOTES OFFERING
The issuance of the Notes pursuant to the Notes Offering resulted in net
proceeds to the Company of approximately $340,500,000, after deducting offering
expenses. The Company 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 (i) fund capital expenditures (including the cost of purchasing and
installing satellite reception equipment related to the Company's medium power
satellite business), (ii) fund operations, and (iii) provide for working
capital and for other general corporate purposes. See "Use of Proceeds."
The Company believes that the net proceeds from the Notes Offering, 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 and the proposed Cable Plus Strategy, if
implemented as described herein. 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 other than, or in addition to, the Cable Plus Strategy,
(iii) completes any significant acquisitions, (iv) enters into any other
business activities, other than the Cable Plus Strategy and the Company's
existing medium power satellite distribution business, (v) suffers a Letter of
Credit Event (as hereinafter defined) 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.
THE DISTRIBUTION
The Company was formed to own and operate TCI SATCO in connection with the
distribution (the "Distribution") by TCI to certain of its stockholders of all
the issued and outstanding shares of the Series A Common Stock, $1.00 par value
per share, of the Company (the "Series A Common Stock"), and all the issued and
outstanding shares of Series B Common Stock, $1.00 par value per share, of the
Company (the "Series B
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Common Stock" and, together with the Series A Common Stock, the "Company Common
Stock"). The Distribution was made on December 4, 1996, as a dividend to the
holders of record of shares of Tele-Communications, Inc., Series A TCI Group
Common Stock, $1.00 par value per share (the "Series A TCI Group Common
Stock"), and to the holders of record of shares of Tele-Communications, Inc.,
Series B TCI Group Common Stock, $1.00 par value per share (the "Series B TCI
Group Common Stock" and, together with the Series A TCI Group Common Stock, the
"TCI Group Common Stock"), other than certain subsidiaries of TCI that waived
such dividend, at the close of business on November 12, 1996 (the "Record
Date"), on the basis of one share of Series A Common Stock for each ten shares
of Series A TCI Group Common Stock, and one share of Series B Common Stock for
each ten shares of Series B TCI Group Common Stock, held by such holders on the
Record Date.
On the Distribution Date, the Company issued to TCIC the Company Note in the
principal amount of $250,000,000, representing a portion of the Company's
intercompany balance owed to TCIC on such date. The remainder of such
intercompany balance (other than interim advances of $73,786,000 made in
connection with the funding of the Company Satellites, which have since been
repaid) was assumed by TCI on the Distribution Date, in part in the form of a
capital contribution to the Company and in part as consideration for the
Company's assumption of TCI's obligations under certain stock options. The
Company and TCI entered into a number of intercompany agreements in connection
with the Distribution covering, among other things, such matters as tax
sharing, indemnification, services provided by TCI, the use of the "TCI" name
and share purchase rights. See "Certain Relationships and Related
Transactions."
The Company was incorporated in Delaware in November 1996. Prior to the
Distribution, the Company was a wholly owned subsidiary of TCI, which, through
various subsidiaries, was engaged in the business of distributing PRIMESTAR(R)
from December 1990 until the consummation of the Distribution. The Company's
predecessor was incorporated in February 1995 to consolidate TCI's PRIMESTAR(R)
distribution business in one subsidiary, and was merged into the Company in
connection with the Distribution. The principal executive office of the Company
is at 8085 South Chester, Suite 300, Englewood, Colorado 80112, and its
telephone number is (303) 712-4600.
THE NOTES OFFERING
THE NOTES ............ The Notes were sold by the Company on February 20,
1997, pursuant to the Notes Offering and were
subsequently resold to qualified institutional buyers
(as defined in Rule 144A under the Securities Act) and
institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities
Act), pursuant to Rule 144A under the Securities Act.
As of the date hereof, there are $200,000,000 aggregate
principal amount of Senior Subordinated Notes and
$275,000,000 aggregate principal amount at maturity of
Senior Subordinated Discount Notes outstanding.
The Senior Subordinated Notes were issued at par. The
Senior Subordinated Discount Notes were issued at a
discount to their aggregate principal amount at
maturity, with a yield to maturity calculated from the
issuance date of 12 1/4% (computed on a semi-annual
bond equivalent basis).
REGISTRATION RIGHTS
AGREEMENTS .......... In connection with the Notes Offering, the Company
entered into the Registration Rights Agreements, which
grant the holders of the Notes certain exchange and
registration rights. The Exchange Offer is intended to
satisfy such exchange and registration rights, which
terminate upon the consummation of the Exchange Offer.
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THE EXCHANGE OFFER
SECURITIES OFFERED ... $200,000,000 aggregate principal amount of 10 7/8%
Senior Subordinated Notes due February 15, 2007 and
$275,000,000 aggregate principal amount at maturity of
12 1/4% Senior Subordinated Discount Notes due February
15, 2007.
THE EXCHANGE OFFER ... $1,000 principal amount of the Senior Subordinated
Exchange Notes in exchange for each $1,000 principal
amount of Senior Subordinated Notes, and $1,000
principal amount at maturity of the Senior Subordinated
Discount Exchange Notes in exchange for each $1,000
principal amount at maturity of Senior Subordinated
Discount Notes. The Company will issue the Exchange
Notes to holders on or promptly after the Expiration
Date.
Based on an interpretation by the staff of the SEC set
forth in no-action letters issued to third parties, the
Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for Notes may be offered
for resale, resold and otherwise transferred by any
holder thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's
business and that such holder does not intend to
participate and has no arrangement or understanding
with any person to participate in the distribution of
such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its
own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired by
such broker-dealer as a result of market-making
activities or other trading activities. The Company has
agreed that, for a period of 180 days after the
Expiration Date, the Company will make this Prospectus
available to any broker-dealer for use in connection
with any such resale.
Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Exchange Notes
could not rely on the position of the staff of the SEC
enunciated in Exxon Capital Holdings Corporation
(available April 13, 1989), Morgan Stanley & Co., Inc.
(available June 5, 1991) or similar no-action letters
and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery
requirements of the Securities Act in connection with
the resale transaction. Failure to comply with such
requirements in such instance may result in such holder
incurring liability under the Securities Act for which
the holder is not indemnified by the Company.
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EXPIRATION DATE ...... 5:00 p.m., New York City time, on 1997, unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
CONDITIONS TO THE
EXCHANGE OFFER ...... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions."
PROCEDURES FOR
TENDERING NOTES ..... Each holder of Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the Notes
and any other required documentation to the Exchange
Agent at the address set forth herein. By executing the
Letter of Transmittal, each holder will represent to
the Company that, among other things, the holder or the
person receiving such Exchange Notes, whether or not
such person is the holder, is acquiring the Exchange
Notes in the ordinary course of business and that
neither the holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
In lieu of physical delivery of the certificates
representing Notes, tendering holders may transfer
Notes pursuant to the procedure for book-entry transfer
as set forth under "The Exchange Offer--Procedures for
Tendering."
SPECIAL PROCEDURES
FOR BENEFICIAL
OWNERS .............. Any beneficial owner whose Notes are registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender
should contact such registered holder promptly and
instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of
Transmittal and delivering its Notes, either make
appropriate arrangements to register ownership of the
Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The
transfer of registered ownership may take considerable
time.
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GUARANTEED DELIVERY
PROCEDURES .......... Holders of Notes who wish to tender their Notes and
whose Notes are not immediately available or who cannot
deliver their Notes, the Letter of Transmittal or any
other documents required by the Letter of Transmittal
to the Exchange Agent (or comply with the procedures
for book-entry transfer) prior to the Expiration Date
must tender their Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS .... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date
pursuant to the procedures described under "The
Exchange Offer--Withdrawal of Tenders."
ACCEPTANCE OF NOTES
AND DELIVERY OF
EXCHANGE NOTES ...... The Company will accept for exchange any and all Notes
that are properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered on or prior to five
days following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
FEDERAL INCOME TAX
CONSEQUENCES ........ The exchange pursuant to the Exchange Offer should not
be a taxable event for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
EFFECT ON HOLDERS OF
NOTES ............... As a result of the making of this Exchange Offer, the
Company will have fulfilled certain of its obligations
under the Registration Rights Agreements, and holders
of Notes who do not tender their Notes will not have
any further registration rights under the Registration
Rights Agreements or otherwise. Such holders will
continue to hold the untendered Notes and will be
entitled to all the rights and subject to all the
limitations applicable thereto under the Indentures,
except to the extent such rights or limitations, by
their terms, terminate or cease to be in effect as a
result of the Exchange Offer. All untendered Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, if any Notes are tendered and
accepted in the Exchange Offer, the trading market, if
any, for the untendered Notes could be adversely
affected.
EXCHANGE AGENT ....... The Bank of New York.
15
<PAGE>
SUMMARY OF TERMS OF EXCHANGE NOTES
The Exchange Notes are substantially identical with respect to their form and
the terms contained therein (including principal amounts, interest rate,
maturity and redemption rights) to the Notes for which they may be exchanged
pursuant to the Exchange Offer, except that (i) the offering and sale of the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof and (ii) the holders of
Exchange Notes will not be entitled to further registration rights under the
Registration Rights Agreements, which rights will be satisfied when the
Exchange Offer is consummated. The Exchange Notes will evidence the same debt
as the Notes and will be entitled to the benefits of the Indentures (other than
such changes as are necessary to comply with any requirements of the SEC to
effect or maintain the qualification of such trust indenture under the TIA),
which will be qualified under the TIA. See "Description of the Exchange Notes."
SECURITIES OFFERED.... $200,000,000 aggregate principal amount of 10 7/8%
Senior Subordinated Notes due February 15, 2007 and
$275,000,000 aggregate principal amount at maturity of
12 1/4% Senior Subordinated Discount Notes due February
15, 2007.
ISSUER................ TCI Satellite Entertainment, Inc.
MATURITY
Senior Subordinated
Exchange Notes....... February 15, 2007
Senior Subordinated
Discount Exchange
Notes................ February 15, 2007
INTEREST PAYMENT DATES
Senior Subordinated
Exchange Notes....... Cash interest on the Senior Subordinated Exchange Notes
will accrue from February 20, 1997 at a rate of 10 7/8%
per annum and will be payable semi-annually in arrears
on each February 15 and August 15, commencing August
15, 1997. See "Description of the Exchange Notes--
Maturity, Interest and Principal of the Senior
Subordinated Notes."
Senior Subordinated
Discount Exchange
Notes................ Cash interest will not accrue or be payable on the
Senior Subordinated Discount Exchange Notes prior to
February 15, 2002. Thereafter, cash interest on the
Senior Subordinated Discount Exchange Notes will accrue
at a rate of 12 1/4% per annum and will be payable
semi-annually in arrears on each 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 on any interest payment
date to commence the accrual of cash interest from and
after the Cash Interest Election Date, in which case
the outstanding principal amount at maturity of each
Senior Subordinated Discount Exchange Note will on such
interest payment date be reduced to the Accreted Value
of such Senior Subordinated Discount Exchange Note as
of such interest payment date, and cash interest
(accruing at a rate of 12 1/4% per annum from the Cash
Interest Election Date) shall be payable with respect
to such Senior Subordinated Discount Exchange Note on
each interest payment date thereafter. See "Description
of the Exchange Notes--Maturity, Interest and Principal
of the Senior Subordinated Discount Notes."
16
<PAGE>
OPTIONAL REDEMPTION
..................... The Exchange Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or
after February 15, 2002 at the redemption prices set
forth under "Description of the Exchange Notes--
Optional Redemption," plus accrued and unpaid interest
thereon, if any, to the date of redemption. In
addition, prior to February 15, 2000, the Company,
other than in any circumstance resulting in a Change of
Control, may redeem the Senior Subordinated Exchange
Notes and the Senior Subordinated Notes in an aggregate
amount of up to 35% of the principal amount of Senior
Subordinated Notes originally issued at a redemption
price equal to 110.875% of the principal amount so
redeemed, plus accrued and unpaid interest thereon, if
any, to the redemption date and may redeem the Senior
Subordinated Discount Exchange Notes and the Senior
Subordinated Discount Notes in an aggregate amount of
up to 35% of the principal amount at maturity of Senior
Subordinated Discount Notes originally issued at a
redemption price equal to 112.250% of the Accreted
Value thereof on the redemption date (or, if a Cash
Interest Election has been made, 112.250% of the
principal amount at maturity so redeemed, plus accrued
and unpaid interest thereon, if any, to the date of
redemption), in each case with the net cash proceeds of
(a) one or more Public Equity Offerings of common
equity of the Company or (b) a sale or series of
related sales of Qualified Equity Interests of the
Company to Strategic Equity Investors, in any such case
resulting in gross cash proceeds to the Company of at
least $100.0 million in the aggregate; provided,
however, that (i) immediately after giving effect to
the redemption, the sum of the outstanding principal
amount of the Senior Subordinated Notes plus the
outstanding principal amount of the Senior Subordinated
Exchange Notes equals at least 65% of the originally
issued principal amount of Senior Subordinated Notes
and (ii) immediately after giving effect to the
redemption, the sum of the outstanding principal amount
at maturity of the Senior Subordinated Discount Notes
plus the outstanding principal amount at maturity of
the Senior Subordinated Discount Exchange Notes equals
at least 65% of the originally issued principal amount
at maturity of Senior Subordinated Discount Notes. See
"Description of the Exchange Notes--Optional
Redemption."
MANDATORY SINKING
FUND ................ None.
FORM AND DENOMINATION
..................... The Exchange Notes will be fully registered as to
principal and interest in minimum denominations of
$1,000 and integral multiples thereof. The Exchange
Notes will be initially issued in the form of one or
more global notes and deposited with a custodian for
and registered in the name of the nominee of The
Depository Trust Company. The Exchange Notes will not
be issued in certificated, fully registered form,
except in the circumstances provided for in the
Indentures. See "Description of the Exchange Notes--
Form, Denomination and Book-Entry Procedures."
CHANGE OF CONTROL .... Following the occurrence of a Change of Control, the
Company will be required to make an offer to purchase
all outstanding Notes and Exchange Notes of each
tranche at a purchase price in cash equal to (x) with
respect to the Senior Subordinated Exchange Notes and
Senior Subordinated Notes, 101% of the aggregate
principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of purchase and
(y) with respect to the
17
<PAGE>
Senior Subordinated Discount Exchange Notes and Senior
Subordinated Discount Notes, 101% of the Accreted Value
on the date of purchase (unless the date of purchase is
on or after the earlier to occur of February 15, 2002
and the Cash Interest Election Date, in which case such
purchase price shall be equal to 101% of the aggregate
principal amount at maturity thereof, plus accrued and
unpaid interest thereon, if any, to the date of
purchase). See "Description of the Exchange Notes--
Offer to Purchase upon Change of Control."
ASSET SALE PROCEEDS
..................... The Company will, under certain circumstances, be
required to make an offer to purchase Exchange Notes
and Notes with the net cash proceeds of certain asset
sales or other dispositions of assets at a purchase
price in cash equal to (x) with respect to the Senior
Subordinated Exchange Notes and the Senior Subordinated
Notes, 100% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon, if any, to
the date of purchase and (y) with respect to the Senior
Subordinated Discount Exchange Notes and the Senior
Subordinated Discount Notes, 100% of the Accreted Value
on the date of purchase (unless the date of purchase is
on or after the earlier to occur of February 15, 2002
and the Cash Interest Election Date, in which case such
purchase price shall be equal to 101% of the aggregate
principal amount at maturity thereof, plus accrued and
unpaid interest thereon, if any, to the date of
purchase). See "Description of the Exchange Notes--
Certain Covenants--Disposition of Proceeds of Asset
Sales."
CERTAIN COVENANTS .... The Indentures contain certain covenants that, among
other things, limit the ability of the Company and its
Restricted Subsidiaries (as defined) to incur
additional Indebtedness (as defined), create certain
Liens (as defined), make certain Restricted Payments
(as defined), permit dividend and other payment
restrictions to apply to such Restricted Subsidiaries,
enter into certain transactions with Affiliates (as
defined) and certain other related persons or
consummate certain merger, consolidation or similar
transactions. These covenants are subject to a number
of significant exceptions and qualifications. See
"Description of the Exchange Notes--Certain Covenants."
RANKING .............. The Exchange Notes will rank junior to, and be
subordinated in right of payment to, all existing and
future Senior Indebtedness (as defined) of the Company,
pari passu in right of payment with all senior
subordinated Indebtedness of the Company and senior in
right of payment to all Subordinated Indebtedness (as
defined) of the Company. As of March 31, 1997, the
Company had approximately $32,614,000 of Senior
Indebtedness outstanding. At March 31, 1997, there were
no borrowings outstanding under the Bank Credit
Facility. The Company will not be permitted to incur
any debt that is subordinated in right of payment to
any Senior Indebtedness of the Company and senior in
right of payment to the Exchange Notes and Notes. See
"Risk Factors--Subordination of the Exchange Notes" and
"Description of the Exchange Notes--Subordination of
the Exchange Notes." All borrowings under the Bank
Credit Facility are guaranteed on a senior basis by all
direct and indirect subsidiaries of the Company other
than Tempo. The Exchange Notes will not be entitled to
the benefit of any guarantees, except under the
circumstances described under "Description of the
Exchange Notes--Certain Covenants--Limitation on
Indebtedness."
18
<PAGE>
SECURITY ............. The Notes are not, and the Exchange Notes will not be,
entitled to any security.
USE OF PROCEEDS ...... This Exchange Offer is intended to satisfy certain of
the Company's obligations under the Registration Rights
Agreements. The Company will not receive any cash
proceeds from the issuance of the Exchange Notes
offered hereby. In consideration for issuing the
Exchange Notes contemplated in this Prospectus, the
Company will receive Notes in like principal amount
from the holders thereof, the form and terms of which
are the same as the form and terms of the Exchange
Notes (which they replace), except as otherwise
described herein. The Notes surrendered in exchange for
Exchange Notes will be retired and canceled by the
Company and cannot be reissued. Accordingly, issuance
of the Exchange Notes will not result in any increase
or decrease in the indebtedness of the Company.
Of the net proceeds to the Company from the Notes
Offering of approximately $340,500,000 (after deducting
offering expenses), $244,404,000 have been used to
repay amounts outstanding under the Bank Credit
Facility, and the Company expects to use the remaining
net proceeds to (i) fund capital expenditures
(including the cost of purchasing and installing
satellite reception equipment related to the Company's
medium power satellite business), (ii) fund operations,
and (iii) provide for working capital and for other
general corporate purposes.
19
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The following table presents summary financial data relating to the Company's
historical results of operations for each of the years in the three-year period
ended December 31, 1996. In addition, the following table presents summary
financial data relating to the Company's unaudited pro forma results of
operations for the year ended December 31, 1996. The historical financial data
for each of the years in the three-year period ended December 31, 1996, is
derived from the Financial Statements of the Company for the corresponding
periods, which financial statements have been audited by KPMG Peat Marwick LLP,
independent auditors. The unaudited pro forma statement of operations data
gives effect to (i) the Distribution, and (ii) the "Fulfillment Agreement," the
"Transition Services Agreement," and the "Stock Option Agreements"
(collectively, the "TCI Intercompany Agreements"), as of January 1, 1996. The
unaudited pro forma statement of operations does not purport to be indicative
of the results of operations that may be obtained in the future or that
actually would have been obtained had such transactions occurred on such dates.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
is qualified in its entirety by reference to the historical financial
statements and pro forma statement of operations of the Company, including the
notes thereto, included elsewhere in this Prospectus. For a description of the
TCI Intercompany Agreements, see "Certain Relationships and Related
Transactions."
20
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA(1) HISTORICAL
--------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1996 1995 1994
----------------------------- ------------ -----------
AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AND PER AUTHORIZED UNIT AMOUNTS
<S> <C> <C> <C> <C>
SUMMARY OPERATING DATA:
Revenue................. $ 417,461 417,461 208,903 30,279
Operating, selling,
general and
administrative
expenses............... (406,481) (410,390) (214,117) (25,106)
Depreciation............ (212,155) (191,355) (55,488) (14,317)
------------- ------------ ------------ -----------
Operating loss...... (201,175) (184,284) (60,702) (9,144)
Interest expense........ (2,023) (2,023) -- --
Share of loss of
PRIMESTAR Partners..... (3,275) (3,275) (8,969) (11,722)
Other, net.............. 3,641 3,641 306 306
Income tax benefit(2)... 45,937 45,937 21,858 6,872
------------- ------------ ------------ -----------
Net loss............ $ (156,895) (140,004) (47,507) (13,688)
============= ============ ============ ===========
Pro forma net loss per
common share(3)........ $ (2.36) (2.11) (.72)
============= ============ ============
OTHER DATA:
Capital expenditures:
Satellite reception
equipment............ $ 326,621 442,782 109,184
Construction of
satellites........... $ 74,785 104,128 207,608
------------ ------------ -----------
$ 401,406 546,910 316,792
============ ============ ===========
Average monthly revenue
per Authorized
Unit(4)................ $ 44 41 28
Authorized Units at end
of period.............. 805 535 100
Ratio of earnings to
fixed charges(5)....... -- -- --
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
----------------------
DECEMBER 31,
----------------------
1996 1995
----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
SUMMARY BALANCE SHEET DATA:
Cash...................................................... $ 6,560 1,801
Property and equipment, net............................... $ 1,107,654 889,220
Due to PRIMESTAR Partners(6).............................. $ 457,685 382,900
Debt(7)................................................... $ 247,230 --
Equity.................................................... $ 372,358 483,584
</TABLE>
- --------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Statement of Operations of the Company,
included elsewhere in this Prospectus.
(2) The Company's income tax benefits include significant intercompany current
income tax benefit allocations from TCI. 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 current income tax benefits to the
extent that the Company generates taxable income. During the first several
years following the Distribution, the Company believes that it will incur
net losses for income tax purposes, and accordingly, will not be in a
position to realize income tax benefits on a current basis. For a
quantification of such intercompany income tax benefits, see "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
21
<PAGE>
(3) The pro forma net loss per common share amounts assume that the 66,407,608
shares of Company Common Stock issued pursuant to the Distribution were
outstanding since January 1, 1995. Accordingly, the calculation of the pro
forma net loss per common share assumes weighted average shares outstanding
of 66,408,025 and 66,407,608 for the years ended December 31, 1996 and
1995, respectively.
(4) Represents average monthly revenue (exclusive of installation revenue)
divided by the average number of Authorized Units.
(5) For the ratio calculations, earnings available for fixed charges consists
of losses before income taxes plus fixed charges. Fixed charges consist of
(i) interest (including capitalized interest) on debt, including interest
on debt of less than 50%-owned affiliates for which the Company is
contingently obligated, and (ii) that portion of rental expense the Company
believes to be representative of interest (one-third of rental expense).
The ratio was below 1.00 for all periods. See "Risk Factors--Deficiency of
Earnings to Fixed Charges" for a quantification of the deficiencies of
earnings to fixed charges.
(6) Represents advances received by Tempo from PRIMESTAR Partners to fund
Tempo's obligations under the Satellite Construction Agreement and certain
related costs. PRIMESTAR Partners financed such advances to Tempo through
borrowings under the PRIMESTAR Credit Facility, which was in turn supported
by letters of credit arranged for by affiliates of partners of PRIMESTAR
Partners. The Company was liable for drawings under letters of credit
supporting such facility in the face amount of $146,250,000 at December 31,
1996. For additional information, see notes 6, 7 and 13 to the Financial
Statements of the Company, included elsewhere in this Prospectus.
(7) In addition to the debt reported on the Company's balance sheet, certain
contingent liabilities of the Company including the face amount of all
outstanding letters of credit for which the Company is directly or
indirectly liable, are defined as indebtedness of the Company for purposes
of the Indentures and/or the Bank Credit Facility. See notes 6, 7 and 13 to
the Financial Statements of the Company, included elsewhere in this
Prospectus.
22
<PAGE>
ORGANIZATION
The following chart illustrates the organizational structure of the Company
and each entity's operational assets:
[ORGANIZATION FLOW-CHART APPEARS HERE]
23
<PAGE>
RISK FACTORS
Prospective holders of the Exchange Notes should pay careful attention to
the following factors in addition to considerations bearing on their
individual situations and the other information contained herein.
LIMITED OPERATING HISTORY; OPERATING LOSSES OF THE COMPANY
The Company has had a limited history as a separate operating entity. From
1990 to December 4, 1996, TCI's business of distributing PRIMESTAR(R) was
operated by TCIC. During this period of time, such business sustained
significant operating losses.
The Company has sustained significant losses in recent periods. The
Company's operating losses were $184,284,000, $60,702,000 and $9,144,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. The Company
had net losses of $140,004,000, $47,507,000 and $13,688,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Further, assuming the
Distribution and the TCI Intercompany Agreements were effective on January 1,
1996, the Company would have incurred (i) pro forma operating losses of
$193,262,000 and (ii) pro forma net losses of $148,982,000, during the year
ended December 31, 1996. Improvements in the Company's results of operations
are largely dependent upon its ability to increase its customer base while
maintaining its price structure, reducing the rate at which subscribers
terminate the Company's service ("churn") and effectively managing the
Company's costs. No assurance can be given that any such improvements will
occur. In addition, the Company incurs significant sales commission and
installation costs when its customers initially subscribe to the service.
Accordingly, management expects that operating costs will remain high as a
percentage of revenue so long as the Company maintains its rapid growth in
subscribers. The high cost of obtaining new subscribers also magnifies the
negative effects of subscriber churn. See "--Ability to Manage Growth;
Subscriber Churn."
POTENTIAL INTERFERENCE WITH SATELLITE SIGNAL
The International Bureau 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 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.
RISKS OF SATELLITE FAILURE
Limited Life of Satellites. All satellites have limited useful lives, which
vary as a result of their construction, the durability of their components,
the capability of their solar arrays and batteries, the amount of
stationkeeping fuel remaining once in orbit, the launch vehicle used and the
accuracy of the launch. Through March 9, 1997, the PRIMESTAR(R) service was
broadcast from K-2, a medium power satellite that was nearing the end of its
normal operational life. Since March 10, 1997, the PRIMESTAR(R) service has
been broadcast from GE-2, a medium power satellite that was launched into the
85(degrees) W.L. orbital position on January 30, 1997. The ability of
PRIMESTAR Partners to increase the number of channels in the PRIMESTAR(R)
programming service
24
<PAGE>
from 95 to approximately 150 channels is dependent upon the successful
operation of GE-2, and the deployment of the additional channels could be
adversely affected by an operational failure of the satellite's transponders
while in orbit. GE-2 was declared commercially operational in March 1997. The
minimum design life of GE-2 is 15 years. There can be no assurance however
that such satellite will achieve its minimum design life, and the contract
with GE Americom does not guarantee the minimum useful life of GE-2. The
Company could be adversely affected if GE-2 or any other satellite used in
connection with its business failed prior to its minimum design life. See
"Business--PRIMESTAR By TSAT--The PRIMESTAR(R) Service."
Risks of Satellite Defect, Loss or Reduced Performance. Satellites are
subject to significant risks, including: manufacturing defects affecting the
satellite or its components; launch failure resulting in damage to, or
destruction of, the satellite or incorrect orbital placement; and damage in
orbit caused by asteroids, space debris or electrostatic storms. Such factors
may prevent or limit commercial operation or reduce the satellite's useful
life. Neither the Company nor PRIMESTAR Partners is entitled to the benefit of
any insurance relating to the operation of GE-2.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged. Assuming the Company's sale of the Notes
pursuant to the Notes Offering and the application of a portion of the
resulting net proceeds to repay the outstanding balance of the Bank Credit
Facility had occurred on December 31, 1996, the Company would have had
approximately $353,291,000 million of debt as of such date. See
"Capitalization."
In addition, on the Distribution Date, the Company entered into
indemnification agreements (together, the "Indemnification Agreements") with
TCIC and TCI UA 1, Inc., a subsidiary of TCI ("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 by The Bank of
New York for the account of TCIC (the "TCIC Letter of Credit") to support the
Company's share of PRIMESTAR Partners' obligations under the Amended and
Restated Memorandum of Agreement, effective as of October 18, 1996, between
the Partnership and GE Americom (the "GE-2 Agreement"), pursuant to which GE
Americom has agreed to provide the Partnership with service on up to 24
transponders on GE-2. The amount of the TCIC Letter of Credit was $25,000,000
at December 31, 1996. 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 by Chemical Bank for the account of TCI
UA 1 (the "TCI UA 1 Letter of Credit"), which supports a bank credit facility
(the "PRIMESTAR Credit Facility") that was obtained by PRIMESTAR Partners to
finance advances to
25
<PAGE>
Tempo for payments due in respect of the construction of the Company
Satellites and that is supported by letters of credit arranged for by
affiliates of the partners of the Partnership (other than GEAS). The amount of
the TCI UA 1 Letter of Credit was $141,250,000 at December 31, 1996. In
addition, the Company has posted an additional letter of credit in the amount
of $25,000,000, increasing to $50,000,000 if PRIMESTAR Partners exercises the
End-of-Life Option (as hereinafter defined), in connection with the GE-2
Agreement and an additional letter of credit in the amount of $5,000,000 in
connection with the PRIMESTAR Credit Facility. See "Business--PRIMESTAR By
TSAT--The PRIMESTAR(R) Service."
The amounts advanced by PRIMESTAR Partners to the Company to fund the cost
of constructing the Company Satellites ($457,685,000 at December 31, 1996)
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 the partners of PRIMESTAR Partners other than GEAS. At
December 31, 1996, PRIMESTAR Partners' indebtedness under the PRIMESTAR Credit
Facility aggregated $521,000,000, including amounts borrowed to pay interest
charges. The PRIMESTAR Credit Facility matures on June 30, 1997, and the
Company and PRIMESTAR Partners are currently evaluating long-term refinancing
alternatives with respect to the Company Satellites. In the interim, it is
anticipated that PRIMESTAR Partners will seek to extend the maturity date of
the PRIMESTAR Credit Facility. No assurance can be given that the maturity
date of the PRIMESTAR Credit Facility will be extended on terms that are
acceptable to PRIMESTAR Partners or that the Company and PRIMESTAR Partners
will be successful in obtaining long-term financing for the Company
Satellites.
In connection with the amendment to the TCIC Credit Facility, 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 Tempo 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 such a letter
of credit unless (i) the lenders under the Bank Credit Facility agreed to
amend or waive such covenants to permit the posting of such letter of credit
by the Company, (ii) TCI agrees to renew the TCI UA 1 Letter of Credit for an
additional period, or (iii) the Company achieves a greater than anticipated
increase in operating income before depreciation and amortization ("Operating
Cash Flow"). If the Company is 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.
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. In addition, the failure of the Company to have
adequate access to capital may adversely affect the Company's ability, or
choice, to launch proposed products and services in the time frames discussed
herein. Further, the failure to comply with the covenants and other provisions
of its debt instruments could result in events of default under such
instruments. Such events of default could permit acceleration of the debt
under such instruments and, in some cases, acceleration of debt under other
instruments that contain cross-default or cross-acceleration provisions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Bank Credit Facility requires the Company to maintain certain financial
ratios and other operating performance tests. In addition, the Bank Credit
Facility restricts the ability of the Company to redeem or purchase
subordinated indebtedness, including the Notes. The failure of the Company to
maintain such ratios or comply with such tests or restriction would constitute
events of default under the Bank Credit Facility notwithstanding
26
<PAGE>
the ability of the Company to meet its debt service obligations. An event of
default under the Bank Credit Facility would allow the lenders thereunder to
accelerate the maturity of the indebtedness thereunder. In such event, a
significant portion of the Company's other indebtedness (including the
Exchange Notes and any outstanding Notes) may be declared immediately due and
payable. See "Description of Certain Indebtedness--Bank Credit Facility." The
Bank Credit Facility provides for aggregate borrowings of up to $750 million.
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 arrangement of the facility.
In addition to the above-described Indemnification Agreements, the Company
has significant contingent obligations pursuant to certain other arrangements.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and notes 6, 7 and 13 to the Financial Statements of the
Company, included elsewhere in this Prospectus.
The Company believes that the net proceeds from the sale of the Notes,
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 and the proposed Cable Plus
Strategy, if implemented as described herein. 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, other than, or in addition to, the Cable Plus
Strategy, (iii) completes any significant acquisitions, (iv) enters into any
other business activities, other than the Cable Plus Strategy and the
Company's existing medium power satellite distribution business, (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.
ABILITY TO MANAGE GROWTH; SUBSCRIBER CHURN
The Company's business has grown rapidly since 1994, when PRIMESTAR Partners
completed its adoption of digital technology, and must continue to expand to
achieve the Company's business objectives. The Company believes that such
rapid growth has been a factor in the increases it has experienced in both
subscriber churn and bad-debt write-offs. Whether the Company can meet its
goal of increasing its customer base while maintaining its price structure,
reducing its churn rate and managing costs will depend upon, among other
things, the Company's ability to manage its growth effectively. To manage
growth effectively, the Company must continue to develop its internal and
external sales force, installation capability, customer service team and
information systems, maintain its relationships with third party vendors and
implement efficient procedures to mitigate subscriber credit risk. The Company
will also need to continue to grow, train and manage its employee base, and
its management will be required to assume greater levels of responsibility. If
the Company is unable to manage its growth effectively, the Company's business
and results of operations could be materially adversely effected.
During 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 38.5%, 24.7% and 16.1%, respectively, and (ii) the
average subscriber life implied by such subscriber churn rate was 2.6 years,
4.1 years and 6.2 years, respectively. As set forth above, the Company has
experienced an increase during 1996 in the rate of subscriber churn, as
compared to prior periods. The Company believes that the higher 1996 churn
rate is primarily attributable to identifiable circumstances that are not
expected to have a continuing impact. In general, these circumstances stemmed
from the Company's efforts to maximize its subscriber growth during the fourth
quarter of 1995 and the first three quarters of 1996. Although no assurance
can be given, the Company expects future churn rates to improve from levels
experienced in 1996. If the Company's churn rates were to continue at 1996
levels or increase, the Company believes that its financial condition and
results of operations would be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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SUBORDINATION OF THE EXCHANGE NOTES
The Exchange Notes will be junior and subordinated in right of payment to
all existing and future Senior Indebtedness of the Company, including
borrowings under the Bank Credit Facility. By reason of such subordination, in
the event of a bankruptcy, insolvency, liquidation or other reorganization of
the Company, the assets of the Company will be available to pay obligations on
the Exchange Notes only after all Senior Indebtedness has been paid in full,
and there may not be sufficient assets remaining to pay amounts due on all or
any of the Exchange Notes then outstanding. The Company will not make any
payment with respect to the principal of, or interest on, the Exchange Notes
if (i) an event of default exists in the payment of principal or interest with
respect to any Senior Indebtedness or (ii) the holders of Designated Senior
Indebtedness (as defined) shall have issued a Payment Blockage Notice (as
defined). See "Description of the Exchange Notes--Subordination of the
Exchange Notes." In addition, under certain circumstances, the payments of
principal of, or interest on, the Exchange Notes during the continuation of a
default or an event of default under the Bank Credit Facility will constitute
an event of default under the Bank Credit Facility.
As of March 31, 1997, total Senior Indebtedness was $32,614,000. There were
no outstanding borrowings under the Bank Credit Facility at March 31, 1997.
All borrowings under the Bank Credit Facility are guaranteed on a senior basis
by the Company's restricted subsidiaries (currently all of the Company's
subsidiaries except Tempo). Additional Senior Indebtedness may be incurred by
the Company and guaranteed by its subsidiaries on a senior basis from time to
time, subject to certain restrictions.
The Exchange Notes will not be secured by any of the Company's assets. Under
the Bank Credit Facility, the obligations of the Company and all domestic
subsidiaries of the Company (except Tempo) that are at least 80% owned,
directly or indirectly, by the Company, on a fully diluted basis, will be
secured by substantially all the assets of the Company and such subsidiaries.
If the Company becomes insolvent or is liquidated, or if payment under the
Bank Credit Facility is accelerated, the lenders under the Bank Credit
Facility would be entitled to exercise the remedies available to a secured
lender under applicable law and pursuant to the terms of the Bank Credit
Facility. Accordingly, any claims of such lenders with respect to such assets
will be prior to any claim of the holders of the Exchange Notes with respect
to such assets. There can be no assurance that the Company's assets could be
sold quickly enough, or for sufficient amounts, to enable the Company to meet
its obligations (including its obligations with respect to the Exchange Notes
and any outstanding Notes). See "Description of Certain Indebtedness."
The Exchange Notes will not be guaranteed by any of the Company's
subsidiaries. All of the Company's subsidiaries other than Tempo have
unconditionally guaranteed the Bank Credit Facility and, accordingly, claims
of holders of Exchange Notes will be structurally subordinated to the claims
of such subsidiaries' creditors, including the lenders under the Bank Credit
Facility and trade creditors of such subsidiaries. See "Description of the
Exchange Notes--Certain Covenants."
REFINANCING RISKS
All the indebtedness under the Bank Credit Facility will mature prior to the
maturity of the Exchange Notes and any remaining outstanding Notes. The
Company expects that such indebtedness and the Exchange Notes and any
outstanding Notes will need to be refinanced at their maturity. The Company's
ability to refinance such indebtedness will depend on, among other things, its
financial condition at the time, the restrictions in the instruments governing
its indebtedness and other factors, including market conditions, beyond the
control of the Company. The Exchange Notes are not subject to the benefit of
any sinking fund.
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. In addition, the
failure of the Company to have adequate access to capital may adversely affect
the Company's ability, or choice, to
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commercially launch proposed products and services in the time frames
discussed herein. See "--Substantial Leverage," "--Limited Operating History;
Operating Losses of the Company" and "--Deficiency of Earnings to Fixed
Charges."
In addition, in the event the Company's operating activities do not generate
sufficient funds to meet its debt service requirements, the Company may need
to seek additional financing not currently contemplated. There can be no
assurance that any such financing or refinancing could be obtained on terms
that are acceptable to the Company, if at all. In the absence of such
financing or refinancing, the Company could be forced to dispose of assets in
order to cover any shortfall in the payments due on its indebtedness and such
disposition may occur under circumstances that might not be favorable to
realizing the highest price for such assets.
DEFICIENCY OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges of the Company was less than 1.00 for
the years ended December 31, 1996, 1995 and 1994. Thus, earnings available for
fixed charges were inadequate to cover fixed charges for such periods. The
amounts of the coverage deficiencies were $185,941,000, $69,365,000, and
$20,560,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company has agreed to reimburse TCI UA 1 for any amounts drawn under the
TCI UA 1 Letter of Credit, which supports the PRIMESTAR Credit Facility. Fixed
charges relating to such agreement of $8,475,000, $9,888,000 and $3,374,000
for the years ended December 31, 1996, 1995 and 1994, respectively, have been
included in fixed charges.
DEPENDENCE ON PRIMESTAR PARTNERS
The Company's relationship with PRIMESTAR Partners is critical to the
Company and its business. The Company owns an aggregate 20.86% partnership
interest in PRIMESTAR Partners and substantially all the current revenue of
the Company is derived from its activities as a Distributor of PRIMESTAR(R)
programming and equipment, under the names PRIMESTAR By TCI and PRIMESTAR By
TSAT. Subsidiaries of the Company, as general partners of PRIMESTAR Partners,
would be liable for the Partnership's debts in the event of the Partnership's
bankruptcy, insolvency, liquidation or other reorganization.
In addition to the Company and GEAS, the partners of PRIMESTAR Partners
include Cox Satellite, Inc, a subsidiary of Cox, Comcast DBS, Inc., a
subsidiary of Comcast, Continental Satellite Company, Inc., a subsidiary of
Continental Cablevision, Inc. ("Continental"), New Vision Satellite, a
partnership controlled by a subsidiary of Newhouse Broadcasting Corporation
("Newhouse"), and TW Programming Co., a partnership controlled by a subsidiary
of Time Warner Inc. ("Time Warner"). Time Warner has substantial interests,
through its subsidiaries and controlled partnerships, in video programming and
distribution, and is the second largest operator of cable systems in the U.S.
(in terms of numbers of basic subscribers), after TCI. Cox, Comcast and
Continental are also among the five largest cable system operators in the U.S.
In 1995, the cable systems formerly controlled by Newhouse were contributed to
a partnership controlled by Time Warner. In 1996, Continental was acquired by
U.S. WEST, Inc., a regional bell operating company.
Pursuant to the Limited Partnership Agreement of PRIMESTAR Partners dated as
of February 8, 1990, as amended (the "PRIMESTAR Partnership Agreement"), if
the Company fails to pay its share of capital contributions or loans that the
partners agree to require or that are contemplated by budgets or business
plans approved by the partners, or that are otherwise necessary in order to
satisfy partnership commitments, the Company's interest in the Partnership
will be diluted and, if such interest is diluted to less than 5%, its right to
vote or exercise certain other rights may be forfeited. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
note 6 to the Financial Statements of the Company, included elsewhere in this
Prospectus.
Although the PRIMESTAR Partnership Agreement contemplates that PRIMESTAR(R)
will be marketed and distributed primarily by affiliates of the Partnership's
partners, there are no written distribution agreements
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between PRIMESTAR Partners and any of its Distributors. Any dispute between
PRIMESTAR Partners and the Company regarding the Company's right to distribute
PRIMESTAR(R), or any material dispute regarding the terms and conditions of
such distribution rights, could have a material adverse effect on the Company,
and no assurance can be given that such a dispute could not arise in the
future. However, as the Company is currently the largest Distributor of
PRIMESTAR(R), serving about 45% of PRIMESTAR Partners' estimated 1.8 million
Authorized Units as of December 31, 1996, the Company does not anticipate that
any such dispute would call into question the Company's right to continue to
distribute PRIMESTAR(R).
PRIMESTAR Partners historically has relied upon funding provided by the
PRIMESTAR Credit Facility and its partners in order to meet its liquidity
requirements. To the extent that future subscriber growth does not generate
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 programming and
authorization fees charged by PRIMESTAR Partners to the Company and other
authorized Distributors. However, there can be no assurance that additional
funding from external sources will be available or that the partners of the
Partnership will authorize additional capital contributions and/or fees in an
aggregate amount sufficient to fund such operating deficit, and if such
amounts were not available, there would necessarily be some doubt as to the
ability of PRIMESTAR Partners to continue as a going concern on its current
basis. Under the PRIMESTAR Partnership Agreement, the Company has agreed to
fund its share of any capital contributions and/or loans to PRIMESTAR Partners
that might be agreed upon from time to time by the partners of PRIMESTAR
Partners.
The Company and other partners in the Partnership are currently discussing
the possibility of a transaction that would consolidate the business of
PRIMESTAR Partners and the PRIMESTAR(R) distribution business of each of its
authorized Distributors into the Company. As currently contemplated, any such
transaction would not be intended to constitute a "Change of Control" as
defined in the Indentures. See "Description of the Exchange Notes--Certain
Definitions." Any such transaction would be subject to numerous conditions,
including the negotiation, execution and delivery of definitive documentation,
consents from third parties and regulatory requirements. No agreement has yet
been reached regarding any such transaction, and there can be no assurance
that any such transaction will be consummated.
COMPETITIVE NATURE OF INDUSTRY
The industry in which the Company operates is highly competitive, and the
Company expects to face strong competition from existing and potential
competitors. The Company's competitors comprise a broad range of companies
engaged in communications and entertainment, including cable operators, other
digital satellite programming distributors, wireless cable operators,
broadcast television networks and home video products companies, as well as
companies developing new technologies. Certain of these competitors and
potential competitors are well established companies and have significantly
greater financial, marketing and programming resources than the Company. Cable
operators generally have large installed customer bases, and many cable
operators have significant investments in, and access to, programming.
According to industry sources, cable television service is currently available
to more than 90% of the approximately 98 million U.S. television households,
and approximately 65% of total U.S. television households currently subscribe
to cable. In order to substantially increase its subscriber base, the Company
will be required to attract customers who currently subscribe to cable and to
develop commercial accounts, including hotels, motels, bars and restaurants as
well as MDUs. There can be no assurance that the Company will be able to
substantially increase its subscriber base or successfully attract customers
in competition with cable operators.
The Company also competes with companies offering programming through
various other satellite broadcasting systems, including DirecTv, Inc.
("DirecTv"), United States Satellite Broadcasting Corporation ("USSB") and
EchoStar, which transmit from high power satellites and generally use smaller
dishes to receive their signals. Alphastar, Inc. ("Alphastar") began offering
medium power service in the second quarter of 1996. In February 1997, EchoStar
announced that it would combine its DBS business with the related assets of
MCI
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Communications Corp. ("MCI") and The News Corporation Limited ("News Corp."),
which had previously announced the formation of a joint venture to provide DBS
services.
There can be no assurance that the Company will be able to compete
successfully against current and prospective providers of digital satellite
programming services, some of which will have access to greater resources
and/or have secured the rights to broadcast from a greater number of satellite
transponder frequencies. If the transaction between EchoStar and the MCI/News
Corp. joint venture is completed on the basis announced, the resulting entity,
known as "Sky," will have authorizations for 48 of the 96 transponder channels
allocated to domestic DBS services that are visible to the entire continental
U.S. and a total of seven satellites in orbit or under construction. EchoStar
and News Corp. contend that the new Sky service, scheduled to launch in early
1998, will offer 500 channels of digital television, Internet services and
local broadcast network television signals. See Business--Competition."
In addition, the territories in which the Company is authorized to
distribute PRIMESTAR(R) are assigned on a non-exclusive basis. Accordingly,
although only approximately 5% of the distribution territories assigned by
PRIMESTAR Partners' management currently overlap, there can be no assurance
that the Company will not in the future face substantial competition from
other existing and/or prospective authorized distributors of PRIMESTAR(R). See
"The Digital Satellite Television Industry--Market for Digital Satellite
Services" and "Business--Competition."
RISKS REGARDING DEPLOYMENT OF HIGH POWER SATELLITES
Uncertainty Regarding Alternative Strategies. Although the Company's current
primary focus is the distribution of the PRIMESTAR(R) medium power programming
service, the Company plans to participate in the high power segment of the
digital satellite industry, directly or through PRIMESTAR Partners. See
"Business--High Power Satellites."
Tempo DBS-1 was outfitted with an antenna designed for the 119(degrees) W.L.
orbital location and 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 intends to operate such satellite in "paired transponder mode,"
which, at current levels of digital compression, will permit Tempo DBS-1 to
deliver 70 to 85 channels of digital, video and music programming, depending
on the mix of programming content, to a dish of less than 14 inches in
diameter. If statistical multiplexing or other advances in digital compression
technology currently under development by third parties become commercially
available in the future, Tempo DBS-1 would be able to deliver up to 150
channels of programming. Pursuant to the proposed Cable Plus Strategy, the
Company intends to operate Tempo DBS-1, either directly or through PRIMESTAR
Partners, as a complementary service to basic cable and other channel-
constrained analog services, providing DBS services on a wholesale basis to
those system operators wishing to avoid the high cost of digital plant
upgrades, or, subject to future advances in high compression technology, as a
stand-alone DBS service. To facilitate such a complementary service, the
Company is currently working with manufacturers to develop designs and
specifications for a new set-top box that would accommodate separate inputs
from an analog cable system and a digital satellite dish, and allow the
customer to switch between digital programming and analog channels (including
the local programming generally not available by satellite) with a single
remote control unit. The Company expects that the combination cable
converter/IRD will be available in commercial quantities by the fall of 1997.
However, the Company has not entered into a purchase contract with any
potential manufacturers, and there can be no assurance that this equipment
will be available on schedule. In addition to the Cable Plus Strategy, the
Company intends to market its high power DBS services directly to consumers.
Pursuant to the Tempo Option Agreement, the Company has agreed to sell or
lease 100% of the capacity of Tempo DBS-1 to PRIMESTAR Partners. See
"Business--High Power Satellites--Tempo Option." The Company is currently in
discussions, but has not entered into any agreements, with cable operators,
programming suppliers or other parties regarding any satellite service to be
delivered through Tempo DBS-1 by the Company or PRIMESTAR Partners and is
currently exploring various potential business strategies regarding the
proposed
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use of Tempo DBS-1. No assurance can be given that the Company will not
significantly change the direction of its high power strategy or that any high
power strategy will be successful. See "Business--High Power Satellites."
The Company has had discussions regarding the sale of Satellite No. 2, but
has not reached agreement regarding any such transaction. Any such transaction
would be subject to successful operation of Tempo DBS-1 (for which Satellite
No. 2 serves as ground spare), the prior approval of PRIMESTAR Partners and
prior regulatory approvals and other conditions. Pursuant to the Tempo Option
Agreement, any net cash proceeds received by the Company from the sale of
Satellite No. 2 would be paid to PRIMESTAR Partners, to satisfy certain
advances by PRIMESTAR Partners to the Company to fund construction of the
Company Satellites. There can be no assurance that the Company will be able to
sell Satellite No. 2 on terms acceptable to the Company.
Risks of Satellite Defect, Loss or Reduced Performance. Tempo DBS-1 was
outfitted with an antenna suitable for operation at the 119(degrees) W.L.
orbital location and was launched into geosynchronous orbit on March 8, 1997
on an Atlas rocket from Cape Canaveral by International Launch Services on
behalf of Lockheed Martin Corporation. Tempo DBS-1 is currently undergoing in-
orbit testing pursuant to the Satellite Construction Agreement. A launch
defect or damage affecting Tempo DBS-1 could prevent or postpone the Company's
entrance into the high power segment of the digital satellite industry. See
"--Risks of Satellite Failure--Risks of Satellite Defect, Loss or Reduced
Performance."
The Company is entitled to the benefit of certain limited warranties and
insurance coverage pursuant to the Satellite Construction Agreement with
Loral. However, such warranties and insurance coverage might not be sufficient
to compensate the Company for all of its losses in the event of a partial or
total satellite failure or casualty, even if such failure or casualty were a
covered loss. See "Business--High Power Satellites--Satellite Launches."
Limited Life of Satellites. The minimum design life of each of the Company
Satellites is 12 years. There can be no assurance, however, that either
Company Satellite will achieve its minimum design life, and the contract with
Loral does not guarantee the minimum useful life of the Company Satellites.
See "--Risks of Satellite Failure--Limited Life of Satellites."
RISKS OF ADVERSE GOVERNMENT REGULATIONS AND ADJUDICATIONS
General. The construction and launch of broadcasting satellites and the
operation of satellite broadcasting systems are subject to substantial
regulation by the FCC. FCC rules are subject to change in response to industry
developments, new technology and political considerations. The Company's
business and business prospects could be adversely affected by the adoption of
new laws, policies, and regulations. While Tempo has generally been successful
to date with respect to compliance with regulatory matters, there can be no
assurance that the Company will succeed in obtaining all requisite regulatory
approvals for its operations without the imposition of restrictions on, or
adverse consequences to, the Company. There can also be no assurance that
material adverse changes in regulations affecting the digital satellite
television industry or the Company will not occur in the future. See "--
Potential Interference with Satellite Signal" and "Regulatory Matters."
FCC Permit. Tempo holds the FCC Permit, which authorizes construction of a
DBS system with 11 frequency channels at 119(degrees) W.L. and 11 frequency
channels at 166(degrees) W.L. The 119(degrees) W.L. orbital position is
generally visible to HSDs 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. The FCC's DBS construction
permits are conditioned on the satisfaction of ongoing construction and
related obligations. The FCC Permit expires in May 1998, and if Tempo's
satellites are not launched by then, there can be no assurance that an
extension of the FCC Permit would be granted. Tempo DBS-1 was launched on
March 8, 1997, and is stationed in Tempo's DBS slot at 119(degrees) W.L. At
present, Tempo must continue to demonstrate that it is exercising due
diligence in progressing toward the completion of its DBS system at
166(degrees) W.L. Tempo believes it is currently meeting this requirement
through its Satellite Construction Agreement with Loral.
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There can be no assurance that Tempo will be able to comply with the FCC's
due diligence obligations for 166(degrees) W.L. or that the FCC will determine
that Tempo has complied with such due diligence obligations. Tempo's FCC
Permit and its compliance with construction due diligence requirements have
been contested in FCC proceedings by current and potential DBS competitors. If
Tempo is unable to meet the terms of the FCC Permit, it would be required to
apply to the FCC for an extension of time to complete its DBS system at
166(degrees) W.L. Tempo cannot be certain that an extension would be granted.
In an order released February 24, 1997, the International Bureau of the FCC
granted, subject to conditions, Tempo's request to launch and operate DBS-1 at
119(degrees) W.L. and to test the satellite at 109.8(degrees) W.L. for eight
weeks. The International Bureau also granted Tempo authority to modify its
satellite design, as requested in a July 1993 application, and denied the
oppositions filed by certain of Tempo's competitors.
Tempo also will be required to file an application for a license to operate
its satellites in orbit. Tempo expects that the FCC will approve any such
request but cannot assure the ultimate outcome. FCC licenses must be renewed
at the end of each ten-year license term. Generally, FCC licenses are renewed
in the ordinary course, absent misconduct by the licensee.
State Taxes. In addition to being subject to FCC regulation, operators of
satellite broadcast systems in the U.S. may be affected by imposition of state
and/or local sales taxes on satellite-delivered programming. According to the
Satellite Broadcasting and Communications Association ("SBCA"), several
states, including Maryland, Missouri, North Dakota, New York and Washington
have either adopted or proposed such taxes. Other states are in various stages
of considering proposals that would tax providers of satellite-delivered
programming and other communications providers. The adoption of state imposed
sales taxes could have adverse consequences to the Company's business.
There can be no assurance that additional government regulations affecting
the digital satellite television industry will not occur in the future.
RISK OF SIGNAL PIRACY
In common with all providers of subscription television programming, the
Company faces the risk that the PRIMESTAR(R) programming signal will be
obtained by unauthorized users. If signal piracy became widespread, the
Company's revenue and Operating Cash Flow could be adversely affected. While
management believes that the encryption method utilized by PRIMESTAR Partners,
which was developed by an affiliate of General Instrument Corporation ("GI"),
has been effective in minimizing signal piracy, and there have been no
published reports of breaches in PRIMESTAR(R) security, there can be no
assurance that changes in technology will not render less effective the anti-
piracy efforts associated with PRIMESTAR(R).
RISK OF TECHNOLOGICAL CHANGES
Technology in the digital satellite television industry is subject to rapid
change, and new technologies are continuously being developed. Some
competitors of the Company may have or may obtain access to proprietary
technologies that are perceived by the market for satellite services as
superior to, or more desirable than, the technology of the Company and/or the
technology used in the PRIMESTAR(R) system. There can be no assurance that the
Company and/or PRIMESTAR Partners could obtain access to any such technology
or that the lack of any such technology would not adversely affect the ability
of the Company to compete with such competitors.
RELATIONSHIP WITH TCI
On or before the Distribution Date, the Company and TCI entered into various
agreements in connection with the Distribution, including a reorganization
agreement (the "Reorganization Agreement"), a transition services agreement
(the "Transition Services Agreement") and other agreements described under
"Certain Relationships and Related Transactions." These agreements provide,
among other things, for TCI and the Company to indemnify each other from tax
and other liabilities relating to their respective businesses following
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the Distribution, and for TCI to provide to the Company certain services and
other benefits, including certain administrative and other services that were
provided to the Company by TCI prior to the Distribution. In addition, the
Company entered into a fulfillment agreement with TCIC (the "Fulfillment
Agreement"), pursuant to which TCIC is obligated to provide installation,
maintenance and other customer fulfillment services to customers of the
Company with respect to the PRIMESTAR(R) medium power service. See "Certain
Relationships and Related Transactions--Fulfillment Agreement." The terms of
the agreements that govern the relationship between the Company and TCI or
TCIC, as applicable, were established by TCI and TCIC in consultation with the
Company's management prior to the Distribution, when the Company was a wholly-
owned subsidiary of TCI, and are not the result of arms'-length negotiations.
Accordingly, although the Company believes that the terms and conditions of
these arrangements taken as a whole are reasonable, there can be no assurance
that the terms and conditions of these agreements are not more or less
favorable to the Company than those that might have been obtained from
unaffiliated third parties. In addition, there can be no assurance that
comparable services could be obtained from third parties if the Transition
Services Agreement or the Fulfillment Agreement were to be terminated.
Although the Company believes that its relationship with TCI is excellent,
adverse developments or material disputes with TCI could have a material
adverse effect on the Company.
Pursuant to the Transition Services Agreement, the Company is obligated to
pay to TCI a per subscriber per month fee, commencing with the Distribution
Date, up to a maximum monthly fee of $3 million, and to reimburse TCI for its
direct out-of-pocket expenses to third parties in providing the services to
the Company contemplated by that agreement. The Transition Services Agreement
will expire on December 31, 1999, unless earlier terminated. Pursuant to the
Fulfillment Agreement, the Company is obligated to pay TCIC for installation
and other fulfillment services in accordance with scheduled rates. If the
Fulfillment Agreement had been in effect on January 1, 1996, the estimated
installation fees payable by the Company to TCIC would have been $86,186,000
during the year ended December 31, 1996. The scheduled rates for services to
be provided by TCIC under the Fulfillment Agreement exceed the scheduled rates
upon which charges have been historically allocated to the Company, reflecting
in part the value to the Company, as determined by Company management, of the
performance standards, exclusivity, termination right and certain other
provisions included in the Fulfillment Agreement. The amounts payable in
future periods by the Company to TCIC under the Fulfillment Agreement will be
dependent upon the level of fulfillment services provided by TCIC to the
Company. The Fulfillment Agreement has an initial term of two years and is
terminable by the Company on 180 days notice to TCIC at any time during the
first six months following the Distribution Date. The Company and TCIC are
currently discussing certain proposed changes to the Fulfillment Agreement,
but there can be no assurances that any such changes will be agreed to or that
the Company will not exercise its right to terminate the Fulfillment Agreement
if an acceptable amendment is not agreed to prior to the end of the Company's
six-month termination window. See "Certain Relationships and Related
Transactions" and the Condensed Pro Forma Combined Statement of Operations of
the Company, included elsewhere in this Prospectus.
POTENTIAL CONFLICTS OF INTEREST
Following the Distribution, the Company faces potential conflicts of
interest with TCI. Pursuant to the Fulfillment Agreement, TCIC, the subsidiary
of TCI that owns and operates cable systems in the U.S., continues to provide
certain customers of the Company with installation, maintenance and other
customer fulfillment services. Although the Company believes that the
Fulfillment Agreement provides the Company with significant benefits, such
agreement may result in a potential for conflicts of interest since in those
parts of the Company's territories served by cable television, the Company
competes for subscribers with the cable systems owned and operated by TCIC.
However, in order to offset this potential for conflicts of interest, the
Fulfillment Agreement contains specific performance standards designed to
ensure that the Company's customers receive appropriate service from TCIC's
employees when they perform installation, maintenance and other functions for
the Company. See "--Relationship with TCI" and "Certain Relationships and
Related Transactions--Fulfillment Agreement."
In addition, John Malone is the Chairman of the Board and a director of TCI
and is also the Chairman of the Board and a director of the Company. See
"Management--Directors and Executive Officers." Dr. Malone is also a principal
stockholder of both TCI and the Company. As of December 31, 1996, Dr. Malone
beneficially
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owned (i) shares of TCI common stock representing approximately 4.1% of the
issued and outstanding common stock of TCI and approximately 17.3% of the
total voting power attributable to such issued and outstanding common stock
and certain other voting securities of TCI, and (ii) shares of the Company
Common Stock representing approximately 4.1% of the shares of Company Common
Stock outstanding and approximately 17.9% of the total voting power of the
shares of Company Common Stock outstanding. See "Principal Stockholders." No
formal policies or guidelines have been adopted by the Board of Directors of
the Company (the "Board") to deal with Board actions that may involve actual
or potential conflicts of interest between the Company and TCI. The directors
of the Company, however, have fiduciary obligations under Delaware law to the
Company and all of its stockholders. Dr. Malone will also have fiduciary
obligations, when acting as a TCI director, to TCI and its stockholders.
The Company may also face potential conflicts of interest with PRIMESTAR
Partners. The Company holds a 20.86% interest in the Partnership, but its
customers, at December 31, 1996, represented approximately 45% of PRIMESTAR
Partners' estimated installed Authorized Units. PRIMESTAR Partners may have an
interest in maximizing the economic benefit to the Partnership of its dealings
with its Distributors, which could result in a potential conflict with the
Company. However, the PRIMESTAR Partnership Agreement requires, in connection
with many material decisions, a supermajority vote of the Partners Committee,
which manages and controls the business and affairs of the Partnership and is
composed of representatives of each of the partners and two independent
members (the "Partners Committee"). The supermajority vote requirement of the
Partners Committee may help offset any such potential conflicts of interest.
The Company alone, however, would not have sufficient votes to block any
action subject to such requirement. See "Business--PRIMESTAR Partnership
Agreement." In addition, affiliates of each of the other partners of the
Partnership, individually and in joint ventures with each other, TCI and
others, have substantial other interests in the communications and
entertainment industries, some of which may compete with the business of, or
provide programming to, PRIMESTAR Partners and/or the Company. See "--
Dependence on PRIMESTAR Partners" and "Business--High Power Satellites--Tempo
Option."
REPURCHASE OF THE EXCHANGE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be obligated to
make an offer to purchase all Exchange Notes and any remaining Notes
outstanding at a purchase price in cash equal to (i) with respect to the
Senior Subordinated Notes and Senior Subordinated Exchange Notes, 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon,
if any, to the date of purchase and (ii) with respect to the Senior
Subordinated Discount Notes and the Senior Subordinated Discount Exchange
Notes, 101% of the Accreted Value on the date of purchase (unless the date of
purchase is on or after the earlier to occur of February 15, 2002 and the Cash
Interest Election Date, in which case such purchase price shall be equal to
101% of the aggregate principal amount at maturity thereof, plus accrued and
unpaid interest thereon, if any, to the date of purchase). See "Description of
the Exchange Notes--Offer to Purchase upon Change of Control." There can be no
assurance that the Company will have sufficient funds available at the time of
any Change of Control to pay for all of the Exchange Notes and the Notes that
might be tendered by holders of Exchange Notes and Notes seeking to accept
such offer to purchase. In addition, the Bank Credit Facility contains a
covenant prohibiting the Company from repurchasing any subordinated
indebtedness of the Company, including the Exchange Notes and the Notes, the
violation of which constitutes an event of default thereunder.
A "change of control" will constitute an event of default under the Bank
Credit Facility, permitting the lenders thereunder to accelerate the repayment
of indebtedness thereunder, in which case the subordination provisions of the
Exchange Notes and the Notes would require the payment in full of the Bank
Credit Facility and any other Senior Indebtedness before the Company could
distribute cash to purchase the Exchange Notes and the Notes. See "Description
of the Exchange Notes--Subordination of the Exchange Notes" and "Description
of Certain Indebtedness--Bank Credit Facility."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES OF SENIOR SUBORDINATED DISCOUNT NOTES
The Senior Subordinated Discount Notes were issued at a discount from their
principal amount at maturity. Upon exchange, holders of Senior Subordinated
Discount Notes shall receive Senior Subordinated Exchange
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Notes having an aggregate principal amount at maturity equal to the aggregate
principal amount at maturity of the Senior Subordinated Discount Notes
exchanged. Although cash interest is not expected to accrue on the Senior
Subordinated Discount Notes (or the Senior Subordinated Discount Exchange
Notes exchanged therefor) prior to February 15, 2002, and there are not
expected to be any periodic payments of interest on such Notes or such
Exchange Notes prior to August 15, 2002 (unless a Cash Interest Election shall
have been made), original issue discount (the difference between the "stated
redemption price at maturity" and the "issue price," as such terms are defined
in the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), and Treasury Regulations thereunder) ("OID") of the Senior
Subordinated Discount Exchange Notes and Senior Subordinated Discount Notes
will accrete from the issue date of such Exchange Notes and such Notes up to
February 15, 2002. Consequently, purchasers of Senior Subordinated Discount
Exchange Notes, along with the holders of Senior Subordinated Discount Notes
not tendered for Exchange Notes, generally will be required to include amounts
in gross income for United States federal income tax purposes in advance of
their receipt of the cash payments to which the income is attributable. Such
amounts in the aggregate will be equal to the difference between the "stated
redemption price at maturity" and the "issue price" (inclusive of stated
interest). See "Certain Federal Income Tax Considerations" for a more detailed
discussion of the federal income tax consequences of the purchase, ownership
and disposition of the Senior Subordinated Discount Exchange Notes.
In the event a bankruptcy case is commenced by or against the Company under
the United States Bankruptcy Code (the "Bankruptcy Code") after the issuance
of the Senior Subordinated Discount Exchange Notes, the claim of a holder of
Senior Subordinated Discount Exchange Notes and the claim of a holder of
Senior Subordinated Discount Notes may be limited to an amount equal to the
sum of (i) the initial offering price and (ii) that portion of the OID which
is not deemed to constitute "unmatured interest" for purposes of the
Bankruptcy Code. Any OID that was not amortized as of the date of any such
bankruptcy filing would constitute "unmatured interest." To the extent that
the Bankruptcy Code differs from the Code in determining the method of
amortization of OID, any such holder may realize taxable gain or loss on
payment of such holder's claim in bankruptcy.
RISK OF INABILITY TO RECEIVE POSTBANKRUPTCY INTEREST
Under the Bankruptcy Code, interest accruing after the date of the
commencement of bankruptcy proceedings on unsecured or undersecured debt does
not give rise to an allowable claim. Accordingly, in the event that the
Company becomes the subject of proceedings under the Bankruptcy Code, it is
expected that interest on the Exchange Notes and any remaining Notes
outstanding accruing after the date of commencement of bankruptcy proceedings
will not be allowable as a claim, and that no payment or distribution will be
made with respect to such postbankruptcy interest.
RESTRICTIONS ON TRANSFER
The Notes were offered and sold by the Company in a private offering exempt
from registration pursuant to Section 4(2) of the Securities Act and have been
resold pursuant to Rule 144A under the Securities Act. As a result, the Notes
may not be reoffered or resold by purchasers except pursuant to an effective
registration statement under the Securities Act, or pursuant to an applicable
exemption from such registration, and the Notes are legended to restrict
transfer as aforesaid. Each holder of Notes (other than any holder who is an
affiliate or promoter of the Company) who duly exchanges Notes for Exchange
Notes in the Exchange Offer will receive Exchange Notes that are not
"restricted securities" under the Securities Act and regulations promulgated
thereunder. Holders of Notes who participate in the Exchange Offer should be
aware, however, that if they tender securities in the Exchange Offer with the
intention to participate, or for the purpose of participating, in a
distribution, the Exchange Notes may not be publicly reoffered or resold
without complying with the registration and prospectus delivery requirements
of the Securities Act. As a result, each holder of Notes accepting the
Exchange Offer will be deemed to have represented, by its acceptance of the
Exchange Offer that it acquired the Exchange Notes in the ordinary course of
business and that it is not engaged in, and does not intend to engage in, a
distribution of the Exchange Notes. If existing SEC interpretations permitting
transferability of the Exchange Notes without further registration under the
Securities Act are changed prior to consummation of the
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Exchange Offer, the Company will use its best efforts to register the Notes
for resale under the Securities Act. See "The Exchange Offer" and "Description
of the Exchange Notes--Registration Rights; Exchange Offer."
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes will have been registered under the Securities Act.
However, the Exchange Notes will constitute a new issue of securities with no
established trading market. If a trading market does not develop or is not
maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may be discontinued at any
time. Although the Initial Purchasers (Donaldson, Lufkin & Jenrette Securities
Corporation, Merrill Lynch, Pierce Fenner & Smith Incorporated, NationsBanc
Capital Markets, Inc. and Scotia Capital Markets (USA) Inc.) have advised the
Company that they currently intend to make a market in the Exchange Notes,
they are not obligated to do so and may discontinue such market making
activity at any time without notice. In addition, such market making activity
will be subject to the limits imposed by the Securities Act and the Exchange
Act and may be limited during the Exchange Offer and the pendency of any
Registration Statement with respect to resale of the Notes. Accordingly, there
can be no assurance as to the development or liquidity of any market for the
Exchange Notes. The liquidity of any market for the Exchange Notes will depend
upon the number of holders of such Exchange Notes, the interest of securities
dealers in making a market in the Exchange Notes and other factors. The
liquidity of, and trading markets for, the Exchange Notes may also be
negatively affected by general declines in the market for noninvestment grade
debt independent of the financial performance of, or prospects for, the
Company. The Company does not intend to list the Exchange Notes on any
national securities exchange or to seek the admission thereof to trading in
the National Association of Securities Dealers Automated Quotation System. The
Notes currently may be sold pursuant to the restrictions set forth in Rule
144A or Regulation S, or pursuant to another available exemption under the
Securities Act, without registration under the Securities Act. See "Risk
Factors--Restrictions on Transfer."
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Notes pursuant to the
Exchange Offer will be made only after the timely receipt by the Company of
such Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Notes desiring to
tender such Notes in exchange for Exchange Notes should allow sufficient time
to ensure timely delivery. The Company is under no duty to give notification
of defects or irregularities with respect to the tenders of Notes for
exchange. Notes that are not tendered or are tendered but not accepted will,
following the consummation of the Exchange Offer, continue to be subject to
the existing restrictions upon transfer thereof and, upon consummation of the
Exchange Offer, the registration rights under the Registration Rights
Agreements generally will terminate. In addition, any holder of Notes who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Notes, where such Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. To the extent that Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Notes could be adversely affected. See "The Exchange
Offer."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were sold by the Company on February 20, 1997, and were
subsequently placed with qualified institutional buyers in reliance on Rule
144A under the Securities Act. In connection with the Notes Offering, the
Company entered into the Registration Rights Agreements, which require, among
other things, that promptly following the sale of the Notes, the Company would
(i) file with the SEC a registration statement under the Securities Act with
respect to corresponding new notes of the Company identical in all material
respects to the Notes, (ii) use its best efforts to cause such registration
statement to become effective under the Securities Act and (iii) upon the
effectiveness of such registration statement, offer to the holders of the
Notes the opportunity to exchange their Notes for a like principal amount of
Exchange Notes, which would be issued without a restrictive legend and may be
reoffered and resold by the holder without restrictions or limitations under
the Securities Act (other than in the case of any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act). Copies of the Registration Rights Agreements have been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
The Exchange Offer is for any and all Notes, and thus, the number of Notes
tendered and exchanged in the Exchange Offer will reduce the principal amount
of Notes outstanding. Following the consummation of the Exchange Offer,
holders of the Notes who did not tender their Notes will not have any further
registration rights under the Registration Rights Agreements, and such Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Notes could be adversely affected. The
Notes are currently eligible for sale pursuant to Rule 144A through the PORTAL
System of the National Association of Securities Dealers, Inc. In light of the
absence of resale restrictions on the Exchange Notes under the Securities Act,
the Company anticipates that most holders of Notes will elect to exchange such
Notes for Exchange Notes, and accordingly, the Company anticipates that the
liquidity of the market for any Notes remaining after the consummation of the
Exchange Offer may be substantially limited.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m. New York City time on
the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for $1,000 principal amount of outstanding Notes
accepted in the Exchange Offer. Holders may tender some or all of their Notes
pursuant to the Exchange Offer. However, Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer
thereof thereunder and (ii) the holders of the Exchange Notes will not be
entitled to certain rights under the Registration Rights Agreements (such
rights are hereafter referred to as "Registration Rights"). Holders of Notes
currently have Registration Rights under the Registration Rights Agreement,
but such Registration Rights will generally terminate upon consummation of the
Exchange Offer. The Exchange Notes will evidence the same debt as the Notes
and will be entitled to the benefits set forth in the Indentures, except such
benefits that, by their terms, terminate or cease to have any effectiveness as
a result of the Exchange Offer.
As of the date of this Prospectus, (i) $200,000,000 aggregate principal
amount of the Senior Subordinated Notes was outstanding, all of which was
registered in the name of Cede & Co., as nominee for the Depository, and (ii)
$275,000,000 aggregate principal amount at maturity of the Senior Subordinated
Discount Notes was outstanding, all of which was registered in the name of
Cede & Co., as nominee for the Depository. The Company has fixed the close of
business on , 1997 as the record date for the Exchange Offer for purposes
of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially.
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Holders of Notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the Indentures in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the SEC thereunder, including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Notes when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on ,
1997, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time,
on the next business day after the previously scheduled expiration date.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "--Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent and (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and, depending
upon the significance of the amendment and the manner of disclosure to the
registered holders, the Company will extend the Exchange Offer for a period of
five to ten business days if the Exchange Offer would otherwise expire during
such five to ten business day period.
If the Company does not consummate the Exchange Offer, or, in lieu thereof,
the Company does not file and cause to become effective a resale shelf
registration for the Notes within the time periods set forth herein, special
interest will accrue and be payable on the Notes either temporarily or
permanently. See "Description of Exchange Notes--Registration Covenant;
Exchange Offer."
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON EXCHANGE NOTES
Cash interest on the Senior Subordinated Exchange Notes will accrue at a
rate of 10 7/8% per annum, commencing February 20, 1997, the date of issuance
of the Notes, and will be payable semi-annually in arrears
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on each February 15 and August 15, commencing August 15, 1997. See
"Description of the Exchange Notes--Maturity, Interest and Principal of the
Senior Subordinated Notes." Accordingly, holders of Senior Subordinated Notes
that are accepted for exchange will not receive interest that is accrued but
unpaid on such Notes at the time of tender.
Cash interest will not accrue or be payable on the Senior Subordinated
Discount Exchange Notes prior to February 15, 2002. Thereafter, cash interest
on the Senior Subordinated Discount Exchange Notes will accrue at a rate of 12
1/4% per annum and will be payable semi-annually in arrears on each 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
on any interest payment date to commence the accrual of cash interest from and
after the Cash Interest Election Date, in which case the outstanding principal
amount at maturity of each Senior Subordinated Discount Exchange Note will on
such interest payment date be reduced to the Accreted Value of such Senior
Subordinated Discount Exchange Note as of such interest payment date, and cash
interest (accruing at a rate of 12 1/4% per annum from the Cash Interest
Election Date) shall be payable with respect to such Senior Subordinated
Discount Exchange Note on each interest payment date thereafter. See
"Description of the Exchange Notes --Maturity, Interest and Principal of the
Senior Subordinated Discount Notes."
The Senior Subordinated Notes were issued at par. The Senior Subordinated
Discount Notes were issued at a discount to their aggregate principal amount
at maturity, with a yield to maturity calculated from the issuance date of 12
1/4% (computed on a semi-annual bond equivalent basis). In the Exchange Offer,
properly tendering holders will receive Senior Subordinated Discount Exchange
Notes having an aggregate principal amount at maturity equal to the aggregate
principal amount at maturity of the Senior Subordinated Discount Notes so
tendered. Accordingly, holders of Senior Subordinated Discount Notes that are
accepted for exchange will not receive payment for any increase in Accreted
Value on such Notes at the time of tender.
PROCEDURES FOR TENDERING
Only a holder of Notes may tender such Notes in the Exchange Offer. To
tender in the Exchange Offer, a holder must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed
if required by the Letter of Transmittal and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. To be tendered effectively, the Notes, Letter of
Transmittal and other required documents must be received by the Exchange
Agent at the address set forth below under "Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date. Delivery of the Notes may be
made by book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the Company
the representation set forth below in the second paragraph under the heading
"Resale of Exchange Notes."
The tender by a holder and the acceptance thereof by the Company will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
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Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Notes listed therein, such Notes must be endorsed or accompanied
by a properly completed bond power, signed by such registered holder as such
registered holder's name appears on such Notes with the signature thereon
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Notes at the Depository (the "Book-Entry Transfer Facility") for the purpose
of facilitating the Exchange Offer, and subject to the establishment thereof,
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Notes by causing the
Book-Entry Transfer Facility to transfer such Notes into the Exchange Agent's
account with respect to the Notes in accordance with the Book-Entry Transfer
Facility's procedures for such transfer. Although delivery of the Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee and all
other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will
be determined by the Company in its sole discretion, which determination will
be final and binding. The Company reserves the absolute right to reject any
and all Notes not properly tendered or any Notes the Company' acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the right to waive any defects, irregularities or
conditions of tender as to particular Notes. The Company's interpretation of
the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Notes must
be cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Notes, neither the Company, the Exchange Agent nor any other person shall
incur any liability for failure to give such notification. Tenders of Notes
will not be deemed to have been made until such defects or irregularities have
been cured or waived. Any Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Notes and the principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof), together with the certificates(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility) and any other documents required by the Letter of Transmittal,
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility) and all other documents required by the Letter of Transmittal,
are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at
its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Notes to be withdrawn (the "Depositor"), (ii)
identify the Notes to be withdrawn (including the certificate number(s) and
principal amount of such Notes, or, in the case of Notes transferred by book-
entry transfer, the name and number of the account at the Book-Entry Transfer
Facility to be credited), (iii) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal by which such Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Notes
register the transfer of such Notes into the name of the person withdrawing
the tender and (iv) specify the name in which any such Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Notes so withdrawn are validly
retendered. Any Notes which have been tendered but which are not accepted for
exchange will be returned to the holder thereof without cost to such holder as
soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Notes may be retendered by following
one of the procedures described above under "--Procedures for Tendering" at
any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange Exchange Notes for, any
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Notes, if:
42
<PAGE>
(a) any law, statute, rule, regulation or interpretation by the staff of
the SEC is proposed, adopted or enacted, which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(b) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Notes
and return all tendered Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such
Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver
by means of a prospectus supplement that will be distributed to the registered
holders, and, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, the Company will extend the Exchange
Offer for a period of five to ten business days if the Exchange Offer would
otherwise expire during such five to ten business-day period.
EXCHANGE AGENT
The Bank of New York will act as Exchange Agent for the Exchange Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent, addressed as
follows:
By Registered or Certified Mail:
The Bank of New York
101 Barclay Street, 7E
New York, New York 10286
By Overnight Mail or Courier Service:
The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground Level
Attention: Reorganization Section
New York, New York 10286
In Person by Hand:
The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground Level
Attention: Reorganization Section
New York, New York 10286
By Facsimile (Eligible Institutions Only):
The Bank of New York
(212) 571-3080
Confirm: (212) 815-6333
43
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional
solicitations may be made by telegraph, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith
and pay other registration expenses, including fees and expenses of the
Trustee, filing fees, blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Notes pursuant to the Exchange Offer. If, however, certificates
representing the Exchange Notes or the Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued
in the name of, any person other than the registered holder of the Notes
tendered, or if tendered Notes are registered in the name of any person other
than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of the Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other person) will be payable by the tendering
holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Notes,
as reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the SEC set forth in no-action
letters issued to third parties, the Company believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange for Notes may be offered for
resale, resold and otherwise transferred by any holder of such Exchange Notes
(other than any such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and such holder does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating,
in a distribution of the Exchange Notes may not rely on the position of the
staff of the SEC enunciated in Exxon Capital Holdings Corporation (available
April 13, 1989) and Morgan Stanley & Co., Incorporated (available June 5,
1991), or similar no-action letters, but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In addition, any such resale
transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Notes, where such Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, may be a statutory underwriter and must acknowledge
that it will deliver a prospectus in connection with any resale of such
Exchange Notes.
By tendering in the Exchange Offer, each holder will represent to the
Company that, among other things, (i) any Exchange Notes to be received by the
holder are being acquired in the ordinary course of its business, (ii) the
holder has no arrangement or understanding with any person to participate in a
distribution (within the meaning of the Securities Act) of Exchange Notes to
be received in the Exchange Offer, and (iii) if
44
<PAGE>
the holder is not a broker-dealer, the holder is not engaged in, and does not
intend to engage in, a distribution (within the meaning of the Securities Act)
of such Exchange Securities. By tendering Notes pursuant to the Exchange Offer
and executing the Letter of Transmittal, a holder of Notes which is a broker-
dealer represents and agrees, consistent with certain interpretive letters
issued by the staff of the Division of Corporation Finance of the Securities
and Exchange Commission to third parties, that (a) such Notes held by the
broker-dealer are held only as a nominee or (b) such Notes were acquired by
such broker-dealer for its own account as a result of market-making activities
or other trading activities and it will deliver a copy of this prospectus in
connection with any resale of Exchange Securities (provided that, by so
acknowledging and by delivering a prospectus, such broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act). Further, by tendering in the Exchange Offer, each holder that
may be deemed an "affiliate" (as defined under Rule 405 of the Securities Act)
of the Company will represent to the Company that such holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that holder without registration under the Securities
Act or an exemption therefrom.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreements, and
holders of Notes who do not tender their Notes will not have any further
registration rights under the Registration Rights Agreements or otherwise.
Accordingly, any holder of Notes that does not exchange that holder's Notes
for Exchange Notes will continue to hold the untendered Notes and will be
entitled to all the rights and limitations applicable thereto under the
applicable Indenture, except to the extent such rights or limitations that, by
their terms, terminate or cease to have further effectiveness as a result of
the Exchange Offer.
The Notes that are not exchanged for Exchange Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Notes may be resold
only (i) to the Company (upon redemption thereof or otherwise), (ii) pursuant
to an effective registration statement under the Securities Act, (iii) so long
as the Notes are eligible for resale pursuant to Rule 144A, to a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act
in a transaction meeting the requirements of Rule 144A, (iv) outside the
United States to a foreign person pursuant to the exemption from the
registration requirements of the Securities Act provided by Regulation S
thereunder, (v) to an institutional accredited investor that, prior to such
transfer, furnishes to the Bank of New York, as Trustee, a signed letter
containing certain representations and agreements relating to the restrictions
on transfer of the Notes evidenced thereby (the form of which letter can be
obtained from such Trustee) or (vi) pursuant to another available exemption
from the registration requirements of the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
Accordingly, if any Notes are tendered and accepted in the Exchange Offer,
the trading market for the untendered Notes could be adversely affected.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Notes are urged to
consult their financial and tax advisors in making their own decision on what
action to take.
The Company may in the future seek to acquire untendered Notes in open
market or privately negotiated transactions, through subsequent exchange
offers or otherwise. However, the Company has no present plans to acquire any
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Notes.
45
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreements. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange Notes contemplated in this
Prospectus, the Company will receive, with respect to each tranche of Notes,
Notes in like principal amount, the form and terms of which are the same as
the form and terms of the Exchange Notes (which they replace), except as
otherwise described herein. The Notes surrendered in exchange for Exchange
Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase or decrease in
the indebtedness of the Company.
The net proceeds to the Company from the sale of the Notes sold pursuant to
the Notes Offering were approximately $193.8 million with respect to the
Senior Subordinated Notes and approximately $146.7 million with respect to the
Senior Subordinated Discount Notes, in each case after deducting estimated
discounts, commissions and offering expenses. The Company initially used
$244,404,000 of such net proceeds to repay amounts outstanding under the Bank
Credit Facility. The remaining net proceeds will be used by the Company to (i)
fund capital expenditures (including the cost of purchasing and installing
satellite reception equipment related to the Company's medium power satellite
business), (ii) fund operations and (iii) provide for working capital and for
other general corporate purposes.
46
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of December 31, 1996; (ii) the historical capitalization of the
Company as of December 31, 1996, as adjusted to give effect to the sale of the
Notes pursuant to the Notes Offering, and the application of a portion of the
resulting net proceeds ($340,500,000 after deducting offering expenses) to
repay the outstanding balance of the Bank Credit Facility. The table should be
read in conjunction with the Financial Statements, including the notes
thereto, of the Company, included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Notes surrendered for Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, the issuance of the Exchange
Notes will not result in any increase or decrease in the indebtedness of the
Company. As such, no effect has been given to the Exchange Offer in the
capitalization table.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
AS
HISTORICAL ADJUSTED (1)
---------- ------------
<S> <C> <C>
Cash................................................. $ 6,560 101,060
========== =========
Due to PRIMESTAR Partners(2)......................... $ 457,685 457,685
Bank Credit Facility(3).............................. 246,000 --
TCIC Credit Facility(4).............................. -- --
10 7/8% Senior Subordinated Notes due 2007 sold
pursuant to the Notes Offering...................... -- 200,000
12 1/4% Senior Subordinated Discount Notes due 2007
sold pursuant to the Notes Offering................. -- 152,061
Other debt........................................... 1,230 1,230
Equity:
Common Stock ($1.00 par value):
Series A; 185,000,000 shares authorized; 57,946,044
issued............................................ 57,946 57,946
Series B; 10,000,000 shares authorized; 8,466,564
issued............................................ 8,467 8,467
Additional paid-in capital.......................... 521,724 521,724
Accumulated deficit................................. (215,779) (215,779)
---------- ---------
Total equity..................................... 372,358 372,358
---------- ---------
Total capitalization(5).......................... $1,077,273 1,183,334
========== =========
</TABLE>
- --------
(1) The "As adjusted" column gives effect to the sale of the Notes pursuant to
the Notes Offering, and the application of a portion of the resulting net
proceeds ($340,500,000 after deducting offering expenses) to repay the
outstanding balance of the Bank Credit Facility.
(2) Represents advances received by Tempo from PRIMESTAR Partners to fund the
majority of Tempo's obligations under the Satellite Construction Agreement
and certain related costs. PRIMESTAR Partners financed such advances to
Tempo through borrowings under the PRIMESTAR Credit Facility, which was in
turn supported by letters of credit arranged for by affiliates of partners
of PRIMESTAR Partners. The Company is liable for drawings under letters of
credit supporting such facility in the aggregate face amount of
$146,250,000 at December 31, 1996. For additional information, see note 6,
7 and 13 to the Financial Statements of the Company, included elsewhere in
this Prospectus.
(3) The Bank Credit Facility provides for aggregate commitments of up to
$750,000,000, subject to the Company's compliance with operating and
financial covenants and other customary conditions. For additional
information concerning the Bank Credit Facility, see "Description of
Certain Indebtedness--Bank Credit Facility."
(4) 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 credit agreement between TCIC and the Company
(the "TCIC Credit Facility") was terminated. For additional information
concerning the TCIC Credit Facility, see "Certain Relationships and
Related Transactions--TCIC Credit Facility."
(5) In addition to the debt reflected in this table, certain contingent
liabilities of the Company, including the face amount of all outstanding
letters of credit for which the Company is directly or indirectly liable,
are defined as indebtedness of the Company for purposes of the Indentures
and/or the Bank Credit Facility. See notes 6, 7 and 13 to the Financial
Statements of the Company, included elsewhere in this Prospectus.
47
<PAGE>
SELECTED FINANCIAL DATA
The following table presents summary financial data relating to the
Company's historical financial position and results of operations as of and
for each of the years in the five-year period ended December 31, 1996. In
addition, the following table presents summary financial data relating to the
Company's unaudited pro forma results of operations for the year ended
December 31, 1996. The historical financial data for each of the years in the
three-year period ended December 31, 1996, and as of December 31, 1996 and
1995, is derived from the Financial Statements of the Company for the
corresponding periods, which financial statements have been audited by KPMG
Peat Marwick LLP, independent auditors. The unaudited pro forma statement of
operations data gives effect to the Distribution and the TCI Intercompany
Agreements, as of January 1, 1996. The unaudited pro forma statement of
operations does not purport to be indicative of the results of operations that
may be obtained in the future or that actually would have been obtained had
such transactions occurred on such dates. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is qualified in its entirety by
reference to the historical financial statements and pro forma combined
statement of operations, including the notes thereto, of the Company, included
elsewhere in this Prospectus. For a description of the TCI Intercompany
Agreements, see "Certain Relationships and Related Transactions."
<TABLE>
<CAPTION>
PRO
FORMA (1) HISTORICAL
---------- -------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1996 1995 1994 1993 1992
---------- -------- -------- ------- ------ ------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF
OPERATIONS DATA:
Revenue................. $ 417,461 417,461 208,903 30,279 11,679 4,614
Operating, selling,
general and
administrative
expenses............... (406,481) (410,390) (214,117) (25,106) (7,069) (2,268)
Depreciation............ (212,155) (191,355) (55,488) (14,317) (6,513) (2,602)
---------- -------- -------- ------- ------ ------
Operating loss.......... (201,175) (184,284) (60,702) (9,144) (1,903) (256)
Interest expense........ (2,023) (2,023) -- -- -- --
Share of losses of
PRIMESTAR Partners..... (3,275) (3,275) (8,969) (11,722) (5,524) (4,561)
Other, net.............. 3,641 3,641 306 306 88 --
Income tax benefit (2).. 45,937 45,937 21,858 6,872 2,505 1,581
---------- -------- -------- ------- ------ ------
Net loss................ $ (156,895) (140,004) (47,507) (13,688) (4,834) (3,236)
========== ======== ======== ======= ====== ======
Pro forma net loss per
common share (3)....... $ (2.36) (2.11) (.72)
========== ======== ======== ======= ====== ======
Ratio of earnings to
fixed charges (4)...... -- -- -- -- -- --
========== ======== ======== ======= ====== ======
<CAPTION>
HISTORICAL
-----------------------------------------------
DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET
DATA:
Property and equipment,
net.................... $1,107,654 889,220 397,798 95,323 15,791
Investment in, and
related advances to
PRIMESTAR Partners..... $ 32,240 17,963 9,793 19,625 485
Total assets............ $1,180,273 933,443 410,105 116,495 18,583
Due to PRIMESTAR
Partners............... $ 457,685 382,900 278,772 71,164 --
Debt.................... $ 247,230 -- -- -- --
Equity.................. $ 372,358 483,584 120,526 43,349 17,537
</TABLE>
- --------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Statement of Operations of the Company,
included elsewhere in this Prospectus.
(2) The Company's income tax benefits include significant intercompany current
income tax benefit allocations from TCI. 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 current income tax benefits to the
extent that the Company generates taxable income. During the first several
years following the Distribution, the Company believes that it will incur
net losses for income tax purposes, and accordingly, will not be in a
position to realize income tax benefits on a current basis. For a
quantification of such intercompany income tax benefits, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) The pro forma net loss per common share amounts assume that the 66,407,608
shares of Company Common Stock issued pursuant to the Distribution were
outstanding since January 1, 1995. Accordingly, the calculation of the pro
forma net loss per common share assumes weighted average shares
outstanding of 66,408,025 and 66,407,608 for the years ended December 31,
1996 and 1995, respectively.
(4) For the ratio calculations, earnings available for fixed charges consists
of losses before income taxes plus fixed charges. Fixed charges consist of
(i) interest (including capitalized interest) on debt, including interest
on debt of less than 50%-owned affiliates for which the Company is
contingently obligated, and (ii) that portion of rental expense the
Company believes to be representative of interest (one-third of rental
expense). The ratio was below 1.00 for all periods. See "Risk Factors--
Deficiency of Earnings to Fixed Charges" for a quantification of the
deficiencies of earnings to fixed charges.
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be
read in conjunction with the accompanying financial statements of the Company.
SUMMARY OF OPERATIONS
The Company reported net losses of $140,004,000, $47,507,000 and $13,688,000
during the years ended December 31, 1996, 1995 and 1994, respectively.
Improvements in the Company's results of operations are largely dependent upon
its ability to increase its customer base while maintaining its pricing
structure, reducing subscriber churn and effectively managing the Company's
costs. No assurance can be given that any such improvements will occur. In
addition, the Company incurs significant sales commission and installation
costs when its customers initially subscribe to the service. Accordingly,
management expects that operating costs will remain high as a percentage of
revenue so long as the Company maintains its rapid growth in subscribers. The
high cost of obtaining new subscribers also magnifies the negative effects of
subscriber churn.
During the 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 38.5%, 24.7% and 16.1%, respectively, and (ii) the
average subscriber life implied by such subscriber churn rate was 2.6 years,
4.1 years and 6.2 years, respectively.
As set forth above, the Company has experienced an increase during 1996 in
the rate of subscriber churn, as compared to prior periods. The Company
believes that the higher 1996 churn rate is primarily attributable to
identifiable circumstances that are not expected to have a continuing impact.
In general, these circumstances stemmed from the Company's efforts to maximize
its subscriber growth during the fourth quarter of 1995 and the first six
months of 1996.
One result of the Company's subscriber maximization efforts, which included,
for example, marketing programs that allowed subscribers to initiate service
by paying 33% of the normal installation fee with no credit approval, was that
the Company added, during the fourth quarter of 1995 and the first six months
of 1996, a significant number of customers whose service was terminated during
the first six months of 1996 after their accounts became delinquent. As set
forth below, such delinquent accounts contributed to a significant increase in
the Company's bad debt expense during 1996. The Company has addressed this
issue by implementing more stringent credit policies. In this regard, the
Company began to institute more selective credit policies during the third
quarter of 1996 and further tightened such policies during the fourth quarter
of 1996. The Company believes that a significant percentage of the subscribers
whose service was terminated during 1996 would not have been allowed to
initiate service if the credit policies that are currently in effect had been
in place during 1995.
Although no assurance can be given, the Company expects future churn rates
to improve from levels experienced in 1996. If the Company's churn rates were
to continue at the 1996 levels or to increase, the Company believes that its
financial condition and results of operations would be adversely affected.
In October 1996, the Company initiated a marketing program that allows
subscribers to purchase the Company's proprietary satellite reception
equipment at a price that is less than the Company's cost. There is no
assurance that the difference between the Company's costs and the revenue
generated from the sale of the 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.
49
<PAGE>
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 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. See "Risk Factors--Competitive Nature of Industry" and "Business--
Competition."
TCIC has historically provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force or the National Call Center. Charges for such services have been
allocated to the Company by TCIC based on scheduled rates. TCIC continues to
provide fulfillment services on an exclusive basis to the Company following
the Distribution with respect to customers of the PRIMESTAR(R) medium power
service, pursuant to the Fulfillment Agreement. Such services, which include
installation, maintenance, retrieval, inventory management and other customer
fulfillment services, are to be performed in accordance with specified
performance standards. The Fulfillment Agreement has an initial term of two
years, and is terminable, on 180 days notice to TCIC, by the Company at any
time during the first six months following the Distribution Date. The Company
and TCIC are currently discussing certain proposed changes to the Fulfillment
Agreement, but there can be no assurance that any such changes will be agreed
to or that the Company will not exercise its right to terminate the
Fulfillment Agreement if an acceptable amendment is not agreed to prior to the
end of the Company's six-month termination window. There can be no assurance
that the terms of the Fulfillment Agreement are not more or less favorable
than those which could be obtained from unaffiliated third parties, or that
comparable services could be obtained by the Company from third parties on any
terms if the Fulfillment Agreement is terminated. See "Risk Factors--Potential
Conflicts of Interest" and "Risk Factors--Relationship with TCI."
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. Additionally, the scheduled
rates for the services provided by TCIC under the Fulfillment Agreement, as
currently executed, exceed the scheduled rates upon which charges,
historically, were allocated to the Company for such services. In this regard,
installation charges allocated to the Company by TCIC aggregated $62,461,000
during the year ended December 31, 1996. If the Fulfillment Agreement had been
in effect on January 1, 1996, the estimated installation fees payable by the
Company to TCIC would have been $86,186,000. The amounts payable in future
periods by the Company to TCIC under the Fulfillment Agreement will be
dependent upon the level of fulfillment services provided by TCIC to the
Company. For additional information concerning the pro forma effect of the
Fulfillment Agreement, see the Condensed Pro Forma Combined Statement of
Operations of the Company, included elsewhere in this Prospectus.
In connection with the Distribution, the Company and TCI also entered into
the "Transition Services Agreement" and certain other agreements. In general,
such agreements will result in increases in the expenses to be incurred by the
Company following the Distribution, as compared to the amounts allocated to
the Company by TCI prior to the Distribution. For additional information
concerning the pro forma effect of such agreements, see the Condensed Pro
Forma Combined Statement of Operations of the Company, included elsewhere in
this Prospectus.
50
<PAGE>
Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- -------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ---------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Programming and
equipment rental..... $ 351,548 84 % $133,688 64 % $18,641 62 %
Installation.......... 65,913 16 75,215 36 11,638 38
--------- --- -------- --- ------- ---
Total revenue....... 417,461 100 208,903 100 30,279 100
--------- --- -------- --- ------- ---
Operating costs and
expenses:
Programming,
satellite, national
marketing and
distribution charges
from PRIMESTAR
Partners............. (188,724) (45) (78,250) (37) (11,632) (38)
Other operating:
Allocations from
TCIC................ (20,365) (5) (15,916) (8) (4,367) (14)
Other................ (8,181) (2) (1,884) (1) -- --
--------- --- -------- --- ------- ---
(28,546) (7) (17,800) (9) (4,367) (14)
Selling, general and
administrative:
Selling and regional
marketing........... (106,562) (25) (79,189) (38) (1,777) (6)
Bad debt............. (19,235) (5) (10,549) (5) (1,529) (5)
Allocations from
TCIC................ (18,120) (4) (7,817) (4) (1,080) (4)
Other general and
administrative...... (49,203) (12) (20,512) (9) (4,721) (16)
--------- --- -------- --- ------- ---
(193,120) (46) (118,067) (56) (9,107) (31)
--------- --- -------- --- ------- ---
Operating Cash Flow
(deficit)(1)........... 7,071 2 (5,214) (2) 5,173 17
Depreciation.......... (191,355) (46) (55,488) (27) (14,317) (47)
--------- --- -------- --- ------- ---
Operating loss.......... $(184,284) (44)% $(60,702) (29)% $(9,144) (30)%
========= === ======== === ======= ===
</TABLE>
- --------
(1) Operating Cash Flow is a commonly used measure of value and borrowing
capacity within the Company's industry, and is not intended to be a
substitute for a measure of performance in accordance with generally
accepted accounting principles and should not be relied upon as such.
Revenue increased $208,558,000 or 100% and $178,624,000 or 590% during 1996
and 1995, as compared to the corresponding prior year. Exclusive of
installation revenue, the Company's average monthly revenue per Authorized
Unit was $44, $41 and $28 during 1996, 1995 and 1994, respectively. The 7%
increase from 1995 to 1996 in the average monthly revenue per Authorized Unit
was primarily a result of the positive effects of (i) an increase in the
average monthly revenue derived from premium and pay-per-view services, and
(ii) a March 1995 increase in the monthly equipment rental fee. Such positive
effects more than offset the effects of a 1996 promotional campaign that
provided certain new customers with one month of free service. The 46%
increase from 1994 to 1995 in the average monthly revenue per Authorized Unit
is primarily attributable to (i) the full year effect of the higher basic
service rates and the increased availability of premium and pay-per-view
services that followed the July 1994 completion of the conversion from an
analog to a digital signal, and (ii) a March 1995 increase in the monthly
equipment rental fee. The average installation revenue from each Authorized
Unit installed was $127, $161 and $175 during 1996, 1995 and 1994,
respectively. The decrease from 1995 to 1996 is primarily attributable to
certain promotional campaigns that were in effect during 1996. See related
discussion above.
PRIMESTAR Partners provides programming services to the Company and other
authorized Distributors in exchange for a fee based upon the number of
Authorized Units receiving programming services. PRIMESTAR
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<PAGE>
Partners also arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services, in exchange
for a separate authorization fee from each Distributor, including the Company,
based on such Distributor's total number of Authorized Units. The aggregate
charges for such services increased $110,474,000 or 141% and $66,618,000 or
573% during 1996 and 1995, respectively, as compared to the corresponding
prior year. The average aggregate monthly amount per Authorized Unit charged
by PRIMESTAR Partners was $23, $24 and $17 during 1996, 1995 and 1994,
respectively. The increase in the amount charged per Authorized Unit from 1994
to 1995 reflects higher programming expenses that PRIMESTAR Partners began to
incur following the July 1994 completion of the conversion from an analog to a
digital signal. For additional information concerning the operations of
PRIMESTAR Partners, see related discussion below.
Other operating expenses, which are primarily comprised of amounts related
to customer fulfillment activities, increased $10,746,000 or 60% and
$13,433,000 or 308% during 1996 and 1995, respectively, as compared to the
corresponding prior year. Most of such operating costs and expenses were
allocated from TCIC to the Company based upon a standard charge for each of
the various customer fulfillment activities performed by TCIC. As discussed
above, TCIC and the Company have entered into a Fulfillment Agreement with
respect to installation, maintenance, retrieval and other customer fulfillment
services provided by TCIC following the Distribution.
Selling, general and administrative expenses increased $75,053,000 or 64%
and $108,960,000 or 1,196% during 1996 and 1995, respectively, as compared to
the corresponding prior year. During 1996 and 1995, selling and marketing
expenses represented 25% and 38%, respectively, of revenue and bad debt
expense represented 5% and 5%, respectively, of revenue. Such relatively high
percentages are attributable to the Company's efforts to increase its
subscriber base. See related discussion above.
Through December 31, 1996, general and administrative allocations from TCIC
were generally based upon the estimated cost of the general and administrative
services provided to the Company. Effective January 1, 1997, charges for
administrative services provided by TCIC will be made pursuant to the
Transition Services Agreement. The amounts charged to the Company pursuant to
the Transition Services Agreement are expected to significantly exceed the
amounts that were allocated by TCIC to the Company during 1996. If the
Transition Services Agreement had been effective as of January 1, 1996, the
general and administrative charges from TCIC would have been approximately
$23,200,000 for the year ended December 31, 1996.
The $135,867,000 or 245% and $41,171,000 or 288% increases in depreciation
during 1996 and 1995, respectively, as compared to the corresponding prior
year, are the result of changes in the Company's depreciation policies (as
described below) and increases in the Company's depreciable assets due
primarily to capital expenditures with respect to the Company's satellite
reception equipment. Effective October 1, 1996, the Company (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 aggregated $55,304,000, and 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 the nature and
quantified effects of such accounting changes, see note 3 to the Financial
Statements of the Company, included elsewhere in this Prospectus.
The Company's 20.86% share of PRIMESTAR Partners' net losses decreased
$5,694,000 or 63% and $2,753,000 or 23% during 1996 and 1995, respectively, as
compared to the corresponding prior year periods. Such decrease is primarily
attributable to a significant increase in the revenue derived by PRIMESTAR
Partners from the Company and other Distributors of the PRIMESTAR(R) service.
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 subscriber 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.
52
<PAGE>
The Company incurred interest expense of $2,023,000 during 1996.
Substantially all of such interest expense was incurred on the borrowings
outstanding pursuant to the Company Note. As a result of the December 31, 1996
completion of the Bank Credit Facility and February 1997 issuance of the
Notes, the Company expects that its interest expense in 1997 and future
periods will significantly exceed the amount incurred during 1996. See "--
Liquidity and Capital Resources" below.
The Company recognized interest income of $2,648,000, $306,000 and $306,000
during 1996, 1995 and 1994, respectively. The 1996 amount is primarily
comprised of interest income from PRIMESTAR Partners.
The Company's income tax benefit was $45,937,000, $21,858,000 and $6,872,000
during 1996, 1995 and 1994, respectively. The effective tax rates associated
with such benefits were 25%, 32% and 33% respectively. In connection with the
Distribution, the Company became a party to the Tax Sharing Agreement that
exists among TCI, TCIC and certain other subsidiaries of TCI (the "Tax Sharing
Agreement"). For additional information, see note 11 to the accompanying
financial statements of the Company. The Company's income tax benefits include
intercompany allocations from TCI of current income tax benefits of
$70,645,000, $36,530,000 and $9,611,000 for 1996, 1995 and 1994, respectively.
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 current
income tax benefits to the extent that the Company generates taxable income.
During the first several years following the Distribution, the Company
believes that it will incur net losses for income tax purposes, and
accordingly, will not be in a position to realize income tax benefits on a
current basis.
LIQUIDITY AND CAPITAL RESOURCES
In recent periods, the Company has relied upon non-interest bearing advances
from TCI in order to fund the majority of the Company's working capital
requirements and capital expenditures. During the years ended December 31,
1996, 1995 and 1994, such advances aggregated $250,189,000, $397,529,000 and
$90,952,000, respectively. 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, which 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.
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 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
53
<PAGE>
Election on any interest payment date to commence the accrual of cash interest
from and after the Cash Election Date. 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 Senior Subordinated Notes and up to
35% of the Senior Subordinated Discount Notes at specified redemption prices.
The Notes were not originally registered under the Securities Act and the
Company will incur interest penalties if the Exchange Notes are not issued in
the Exchange Offer by July 5, 1997 and under certain other circumstances
relating to the registration of the Exchange Notes under the Securities Act.
At December 31, 1996, the Company's aggregate borrowings under the Bank
Credit Facility were $246,000,000. As a result of the February 1997 issuance
of the Notes and the March 1997 determination that GE-2 was commercially
operational, the available commitments under the Bank Credit Facility were
increased from $350,000,000 to $750,000,000, 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. For additional information concerning the
Bank Credit Facility, see note 9 to the Financial Statements of the Company,
included elsewhere in this Prospectus.
The Company also has relied upon advances from PRIMESTAR Partners to finance
the cost of constructing the Company Satellites. Such advances, which
aggregate $457,685,000 at December 31, 1996, are reflected as a liability in
the balance sheets included in the accompanying financial statements of the
Company. See related discussion below.
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 to provide 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 made by TCIC.
During the years ended December 31, 1996, 1995 and 1994, the Company's
operating activities provided cash of $115,201,000, $64,193,000 and
$20,122,000, respectively. Most of the cash provided by the Company's
operating activities during such periods is attributable to the intercompany
allocation of current income tax benefits from TCI, and to changes in the
Company's receivables, prepaids, accruals and payables and subscriber advance
payments ("Operating Assets and Liabilities"). As described above, during the
first several years following the Distribution, the Company believes that it
will not be in a position to realize income tax benefits on a current basis.
In addition, the timing and amount of changes in the balances of the Company's
Operating Assets and Liabilities are subject to a variety of factors, certain
of which are outside of the control of, or not easily predicted by, the
Company. Exclusive of the effects of intercompany allocations of current
income tax benefits, and changes in the Company's Operating Assets and
Liabilities, the Company's operating activities provided (used) cash of
$8,378,000, $(4,007,000) and $5,392,000 during the years ended December 31,
1996, 1995 and 1994, respectively. For the first several years following the
Distribution, the Company believes that its operating activities will
represent a reliable source of liquidity only to the extent that the Company
is able to generate Operating Cash Flow.
During the years ended December 31, 1996, 1995 and 1994, the Company used
cash of $74,785,000, $104,128,000 and $207,608,000, respectively, to fund the
cost of constructing the Company Satellites and $326,621,000, $442,782,000 and
$109,184,000, respectively, to fund (i) the acquisition and installation of
satellite reception equipment, and (ii) certain other capital expenditures.
Based upon current business plans, the Company estimates that its aggregate
capital expenditures will range from $630,000,000 to $670,000,000 for its
54
<PAGE>
medium power satellite business during the two-year period ended December 31,
1998. The Company expects that the majority of such estimated capital
expenditures 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. Accordingly, no assurance can be given that the Company's actual
capital expenditures during the two-year period ended December 31, 1998 will
not exceed the estimated capital expenditures set forth above. As described
above, the scheduled rates for the services to be provided by TCIC pursuant to
the Fulfillment Agreement exceed the schedule rates upon which charges were
allocated to the Company for such services through December 31, 1996.
Pursuant to the Company's Cable Plus Strategy, the Company intends to
operate Tempo DBS-1, either directly or through PRIMESTAR Partners, as a
complementary service to basic cable and other channel constrained analog
services, providing DBS services on a wholesale basis to those system
operators wishing to avoid the high cost of digital plant upgrades.
Additionally, subject to future advances in high compression digital
statistical multiplexing technology, the Company may elect to operate Tempo
DBS-1 as a stand-alone DBS offering. The aforementioned estimated capital
expenditure amounts do not include any amounts that would be required if the
Company were to pursue the Cable Plus Strategy or another strategy with
respect to the high power segment of the digital satellite industry, to
complete any significant acquisitions, or to enter into any other business
activities. The Company presently is unable to reasonably estimate the amount
of capital expenditures that would be required in connection with any such
high power satellite strategy, acquisitions or other business activities that
might be pursued by the Company.
At December 31, 1996, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $10,600,000.
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 years ended December 31, 1996 and
1995, residual payments to such master sales agents aggregated $11,848,000 and
$2,178,000, respectively and were charged to expense in the period paid.
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 issued by the Bank of
New York for the account of TCIC to support the Company's share of PRIMESTAR
Partners' obligations under the GE-2 Agreement. The drawable amount of such
letter of credit is $25,000,000.
Subsequent to December 31, 1996, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the
account of the Company 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 December 31, 1996, the
drawable amount of the TCI UA 1 Letter of Credit was $141,250,000.
Subsequent to December 31, 1996, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the
account of the Company to support the PRIMESTAR Credit Facility. The drawable
amount of this letter of credit is $5,000,000.
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,
55
<PAGE>
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 ($457,685,000 at December 31, 1996) 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 December
31, 1996, PRIMESTAR Partners' indebtedness under the PRIMESTAR Credit Facility
aggregated $521,000,000, including amounts borrowed to pay interest charges.
The PRIMESTAR Credit Facility matures on June 30, 1997, and the Company and
PRIMESTAR Partners are currently evaluating long-term refinancing alternatives
with respect to the Company Satellites. In the interim, it is anticipated that
PRIMESTAR Partners will seek to extend the maturity date of the PRIMESTAR
Credit Facility. No assurance can be given that the maturity date of the
PRIMESTAR Credit Facility will be extended on terms that are acceptable to
PRIMESTAR Partners or that the Company and PRIMESTAR Partners will be
successful in obtaining long-term financing for the Company Satellites.
Subsequent to December 31, 1996, 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 suffers a Letter of Credit Event, the Company could be adversely
affected.
Under the PRIMESTAR Partnership Agreement, the Company has agreed to fund its
share of any capital contributions and/or loans to PRIMESTAR Partners that
might be agreed upon from time to time by the partners of PRIMESTAR Partners.
Additionally, those subsidiaries of the Company that are general partners of
PRIMESTAR Partners are liable as a matter of partnership law for all debts of
PRIMESTAR Partners in the event the liabilities of PRIMESTAR Partners were to
exceed its assets. The Company has additional contingent liabilities related to
PRIMESTAR Partners. See notes 6 and 13 to the Financial Statements of the
Company, included elsewhere in this Prospectus.
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 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 or results of operations.
56
<PAGE>
At December 31, 1996, 9,027,439 shares of Series A Common Stock were
reserved for issuance pursuant to certain option agreements and certain
arrangements with TCIC. See note 10 to the Financial Statements of the
Company, included elsewhere in this Prospectus.
Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet for a purchase price of $5,396,000.
Prior to the investment by the Company, ResNet was a wholly owned subsidiary
of LodgeNet. ResNet was formed by LodgeNet in February 1996 to engage in the
ResNet Business. 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 as described below. Under current
interpretations of the FCC rules and regulations related to restrictions on
cross-ownership of cable and satellite master antenna television operations,
the Company would be prohibited from holding 5% or more of the stock of ResNet
and consequently could not exercise the conversion rights under the
convertible loan agreement. The Company is required to convert the convertible
loan at such time as conversion would not violate such currently applicable
regulatory restrictions. For additional information concerning this
transaction, see note 8 to the Financial Statements of the Company, included
elsewhere in this Prospectus.
The Company believes that the net proceeds from the sale of the Notes,
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 and the proposed Cable Plus
Strategy, if implemented as described herein. 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 other than, or in addition to, the Cable Plus
Strategy, (iii) completes any significant acquisitions, (iv) enters into any
other business activities, other than the Cable Plus Strategy and the
Company's existing medium power satellite distribution business, (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.
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
"Risk Factors--Substantial Leverage," "Risk Factors--Limited Operating
History; Operating Losses of the Company," "Risk Factors--Refinancing Risks"
and "Risk Factors--Deficiency of Earnings to Fixed Charges."
57
<PAGE>
THE DIGITAL SATELLITE TELEVISION INDUSTRY
INDUSTRY OVERVIEW
Digital satellite television services use communications satellites,
broadcasting at Ku-band or higher frequencies, to transmit multichannel video
programming directly to consumers, who receive such signals on home satellite
dishes or HSDs. Such satellites operate in geosynchronous orbit above the
equator, from orbital positions or "slots" allocated by international
agreement to the U.S. and other national governments and assigned by such
governments in accordance with local law. Orbital slots are designated by
their location East or West of the zero meridian, measured in degrees of
longitude, and comprise both a physical location and an assignment of
broadcast spectrum in the applicable frequency band. The assigned spectrum is
divided into 32 frequency channels, each with a useable bandwidth of 24
megahertz. Such frequency channels are sometimes referred to as "transponders"
because each transponder on a satellite generally transmits on one of such
channels. At standard levels of digital compression technology currently
deployed, each frequency channel can be converted on average into five or more
analog channels of video programming, thereby enabling the digital satellite
service operator to offer a broader variety of programming choices than analog
satellite systems. Advanced compression technologies currently being tested
are expected to result in substantially greater compression ratios. Digital
technology enables subscribers to receive laser disc-quality picture and
compact disc-quality sound from the satellite.
The operator of a digital satellite television service typically enters into
agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellite, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming sharing a
given transponder. Each transponder's signal is then uplinked, or transmitted,
to the transponder owned or leased by the service operator on the service's
satellite, which receives and transmits the signal to HSDs configured and
authorized to receive it.
In order to receive programming, a subscriber requires (i) a properly
installed HSD, which includes a dish-shaped antenna, low noise block converter
("LNB") and related equipment, (ii) an integrated receiver/decoder ("IRD,"
sometimes referred to herein as the "satellite receiver" or "set-top box"),
which receives the data stream from each broadcasting transponder, separates
it into separate digital programming signals, decrypts and decompresses those
signals that the subscriber is authorized to receive and converts such digital
signals into analog radio frequency signals, and (iii) a television set, to
view and listen to the programming contained in such analog signals. A
subscriber's IRD is generally connected to the digital satellite service
operator's authorization center by telephone, to report the purchase of pay-
per-view channels.
The FCC authorizes two types of satellite services for transmission of
television programming: Broadcast Satellite Service ("BSS"), which operates at
high power in the Ku-band, and Fixed Satellite Service ("FSS"), which includes
medium power services transmitting in the Ku-band, as well as low power analog
services transmitting in the C-band. Both high power BSS satellites and medium
power FSS satellites are used for digital satellite television services. High
power signals can generally be received by HSDs of approximately 13 1/2 to 18
inches in diameter (depending on the geographical location of the HSD and
wattage per channel), while medium power signals generally require HSDs of 27
to 39 inches in diameter (depending on the geographical location of the HSD
and wattage per channel).
Generally, both high power and medium power digital satellite services
provide the same high video and audio quality. However, in certain situations
medium power services may be more susceptible to interference from adjacent
satellites than high power services. High power services have the benefit of
certain regulatory safeguards instituted by the FCC to protect BSS broadcast
signals from interference from other sources. Under the FCC's current policy,
BSS orbital locations are spaced at greater intervals than FSS orbital
locations. There are 9(degrees) of longitude between adjacent BSS orbital
slots, as compared to 2(degrees) between adjacent FSS locations. The
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smaller interval between FSS orbital locations, together with their lower
power, requires the use of a relatively large HSD to prevent interference.
Newly assigned FSS license holders are required to coordinate their satellite
designs with the satellites previously existing at adjacent orbital locations.
However, such coordination efforts between FSS license holders may not be
sufficient to resolve any interference that may occur, and an FSS license
holder may not have adequate recourse if the FCC assigns an adjacent location
to another user that results in signal interference.
In 1982, the FCC allocated a spectrum within the Ku-band for BSS services.
Eight BSS orbital slots, each with 32 frequencies, have been reserved by the
FCC for use by domestic DBS providers. Three of those orbital slots
(101(degrees) W.L., 110(degrees) W.L. and 119(degrees) W.L.) are considered
the most desirable for national broadcasting because they are the only U.S.
allocated locations for BSS that provide full coverage of the entire
continental United States (known as "full CONUS"). DirecTV and USSB are the
only entities licensed for the 101(degrees) W.L. orbital slot with a total of
32 transponders. MCI, in partnership with New Corp., has acquired
authorization to build a DBS service at the 110(degrees) W.L. orbital
location, using 27 transponders. EchoStar's DBS service uses 21 transponders
at the 119(degrees) W.L. orbital location and Tempo's FCC Permit authorizes it
to build a DBS service using the remaining 11 transponders at 119(degrees)
W.L.
MARKET FOR DIGITAL SATELLITE SERVICES
As of December 31, 1996, the installed base for digital satellite services
consisted of approximately 4.4 million Authorized Units nationwide. This
installed base represented a nearly 100% increase from the approximately 2.2
million units as of the end of 1995 and more than eight times the
approximately 500,000 units installed as of the end of 1994. According to
industry sources, there are approximately 98 million television households in
the U.S. and it is estimated that approximately 64 million cable subscribers
pay an average of approximately $33 per month for multichannel programming
services. The Company believes that the potential market in the U.S. for
video, audio and data programming services via satellite consists of (i) the
approximately 8 to 11 million households that do not have access to cable
television (not "passed by cable"), (ii) the approximately 21 million
households currently passed by cable television systems with fewer than 40
channels of programming, (iii) other existing cable subscribers who desire a
greater variety of programming, improved video and audio quality, better
customer service and fewer transmission interruptions, (iv) the Commercial
Market, and (v) the approximately 2.2 million low power C-band subscribers who
may desire to migrate to digital service. The large base of potential
customers enhances the Company's opportunity to increase its installed base of
Authorized Units, but there can be no assurances that the Company will be
successful in increasing its installed base.
PRIMESTAR Partners estimates that, based on the number of Authorized Units
installed, its share of current digital satellite television subscribers was
approximately 39.8%, as of December 31, 1996, as compared to an estimated
51.7% share for DirecTv combined with USSB, an estimated 7.9% share for
EchoStar and an estimated 0.6% share for Alphastar, as of such date.
The Company believes that the following factors will contribute to the
growth of the market for digital satellite services:
Unserved or Underserved by Cable. Approximately 8 to 11 million households
are not passed by cable and approximately 21 million households are in areas
served by cable systems with fewer than 40 channels. Cable systems with
sufficient channel capacity (generally 54 or more channels) and good quality
cable plant will not require costly upgrades to add bandwidth or incur
significant maintenance costs in order to offer digital programming services.
The Company believes, however, that based on current compression technology,
the number of channels that a cable system would have to remove from its
existing service offerings in order to use them for digital services may, in
the case of cable systems with limited channel capacity, degrade the value of
their analog programming offering and alienate subscribers. Accordingly,
pending the availability of advances in digital compression technology now
under development, such smaller cable systems will be required to incur
substantial costs to upgrade their plant to expand channel capacity before
they can introduce digital services.
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Due to the substantial capital investment required for wide scale deployment
of fiber-based digital services, several cable companies have delayed
originally-announced deployment schedules. Accordingly, the Company believes
that households not passed by cable or served by cable systems with fewer than
40 channels continue to provide an opportunity for market growth.
Commercial Market. The Company believes that digital satellite services are
well suited for hotels, motels, bars, MDUs, schools and other organizations
within the Commercial Market. The Company expects that some commercial
organizations will in the future provide a market for educational, foreign
language, and other niche video and audio programming, as well as data
services, in addition to the Company's wide variety of entertainment, sports,
news and other general programming.
Demand for More Choice in Television Programming, Reliable Service and
Better Quality Picture and Sound. Prior to the growth of cable television
services, television viewers were offered a relatively limited number of
channels. As the number of channels increased, consumer demand for more
programming choices also increased. As a result, the multichannel video market
has experienced significant growth, both in terms of the number of content
producers creating programming and the number of channels available to
viewers. The Company expects that this trend will continue and that consumers
will desire even more programming choices than are available through cable
television. The Company believes consumers are also demanding more reliable
service and improved picture quality compared to what has historically been
offered by over-the-air VHF and UHF broadcasters and by cable.
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BUSINESS
GENERAL
The Company is a leading provider of digital satellite-based entertainment
programming in the United States. The Company distributes PRIMESTAR(R), a
medium power digital satellite service, under the brand names "PRIMESTAR By
TCI" and "PRIMESTAR By TSAT" and owns an aggregate 20.86% partnership interest
in PRIMESTAR Partners, which owns and operates the PRIMESTAR(R) service. As of
December 31, 1996, the Company was the largest distributor of PRIMESTAR(R),
with an installed base of approximately 805,000 Authorized Units, which
represented approximately 45% of PRIMESTAR Partners' estimated 1.8 million
Authorized Units as of such date.
The Company currently plans also to participate, directly or through
PRIMESTAR Partners, in the high power segment of the digital satellite
industry. Through its wholly owned subsidiary, Tempo, the Company 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) W.L. orbital position and 11 frequencies at the 166(degrees) W.L.
orbital position. The 119(degrees) W.L. orbital position is one of three such
orbital positions available for DBS service to the U.S. which have a view of
the entire continental U.S. Tempo DBS-1, one of two DBS satellites constructed
for Tempo by Loral pursuant to the Satellite Construction Agreement, was
launched into the Company's high power slot at 119(degrees) W.L. on March 8,
1997, and is currently undergoing in-orbit acceptance testing. Assuming
successful in-orbit testing, Tempo DBS-1 is expected to begin commercial
operations in the second half of 1997. The 11 transponders available to Tempo
under the FCC Permit are sufficient to broadcast 70 to 85 channels of digital
video and music programming at current compression ratios, depending on the
mix of programming content. Pursuant to the Tempo Option Agreement, the
Company has agreed to sell or lease to the Partnership 100% of the capacity of
Tempo DBS-1. See "--High Power Satellites."
BUSINESS STRATEGY
The Company's primary objective is to maintain its position in the market as
one of the leading providers of satellite delivered entertainment programming
and to continue to grow its subscriber base. To achieve this objective, the
Company has adopted the following strategy:
Provide High Quality Digital Programming at an Attractive Price. The Company
offers consumers the PRIMESTAR(R) service, which consists of a wide variety of
high quality programming, delivered digitally for laser-disc quality image and
compact-disc quality sound, for a competitive price. The Company believes that
the image and sound quality of the PRIMESTAR(R) service is superior to that
provided by most existing cable systems and wireless cable providers, which
transmit analog signals to their subscribers, and is comparable to that of
other digital satellite television providers, including those using
compression methods based on the MPEG-2 digital compression architecture. The
Company further believes that its combination of price and services provides
consumers with greater value than the respective price and service offerings
of other current digital satellite service providers. In April 1997,
PRIMESTAR(R) will increase its channel offerings from 95 video and audio
channels to approximately 150 channel offerings and will begin offering
subscribers in the majority of the U.S. the opportunity to use HSDs of
approximately 27 to 29 inches, as compared to 36 inches currently. See "--
PRIMESTAR By TSAT--The PRIMESTAR(R) Service," "Risk Factors--Potential
Interference with Satellite Signal," "Risk Factors--Risks of Satellite
Failure" and "Risk Factors--Risks of Adverse Governmental Regulations and
Adjudications."
Continue to Develop and Expand Diverse Distribution Channels. The Company
continues to increase its customer base through its multiple sales and
distribution channels, which include master sales agents and their sub-agents,
direct sales representatives, telemarketing agents and consumer retail
outlets. The Company also distributes its services through Radio Shack, a unit
of Tandy Corporation and one of the nation's largest consumer electronics
retailers. In February 1996, PRIMESTAR Partners entered into a national
agreement with Radio Shack under which PRIMESTAR(R) is expected to be sold
through more than 6,500 Radio Shack stores nationwide. As of December 31,
1996, PRIMESTAR(R) was available for sale in approximately 2,300 Radio Shack
stores located in the Company's authorized distribution territories, and the
Company estimates that when
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the arrangement is fully implemented, PRIMESTAR(R) will be available for sale
in over 2,500 such stores. The Company supports its multiple distribution
channels with a wide variety of advertising, marketing and promotional
activities. The Company intends to expand on its existing satellite retailer
distribution network and presence with consumer electronics outlets. See "--
PRIMESTAR By TSAT--Distribution" and "--PRIMESTAR By TSAT--Marketing."
Focus Marketing Effort on Customers Underserved by Multichannel
Programming. The Company seeks to maximize penetration in the "underserved"
marketplace, defined by the Company as those areas not passed by cable, or
served by cable systems with fewer than 40 channels. To date, the Company's
primary market focus has been the rural market, which is underserved for
variety, choice and convenience in audio and video entertainment programming.
Differentiate the Company's Offerings through Superior Customer Service. The
Company believes that providing outstanding service, convenience and value are
essential to developing long term customer relationships. The Company offers
consumers a "one-stop shopping" service which includes programming,
installation, maintenance, reliable customer service and satellite reception
equipment. The Company maintains access to a National Call Center, providing
customers with round-the-clock telephone support for sales, installation,
authorization and billing, as well as scheduling of repair and customer
service calls, 365 days per year. See "--PRIMESTAR By TSAT--Distribution."
Provide Subscribers Attractive Alternatives to Obtain Digital Satellite
Equipment. The Company's equipment rental program, which includes free
maintenance and repair, provides significant benefits to customers, who are
not required to buy satellite equipment in order to receive the PRIMESTAR(R)
service. Because PRIMESTAR(R) is marketed as a service, with programming,
equipment rental, maintenance and 24-hour customer service included in the
monthly charge, the up-front costs to new subscribers of PRIMESTAR By TSAT are
generally lower than the up-front costs to new subscribers of the Company's
competitors, who must typically purchase and install HSDs, satellite receivers
and related equipment. Moreover, since the Company generally owns, services
and installs all customer premises equipment for its rental customers, the
Company protects its subscribers from the inconvenience of equipment failure,
maintenance concerns, obsolete technology, self-installation and expired
warranties. See "--PRIMESTAR By TSAT--Equipment and Installation."
Expand Commercial Opportunities for Digital Satellite Service. The Company
believes that the Commercial Market offers a substantial opportunity for
growth and is therefore of strategic importance. With the enhanced channel
capacity in its audio and video entertainment programming provided by GE-2,
the Company anticipates having the ability to successfully penetrate the
Commercial Market. The Company also intends to pursue opportunities to provide
private network service to businesses, and to participate in the growing
market for distance learning. In that connection, the Company is exploring
opportunities to work together with At Home Corporation, a joint venture among
TCI, Kleiner Perkins Caufield & Byers, Comcast and Cox, to deliver Internet
content to personal computers, and ETC w/tci, Inc., a majority-owned
subsidiary of TCI, formed to develop and distribute content and technology
applications for education, training and communications, as well as other
Internet and educational content providers.
Form Alliances with Strategic Marketing Partners. The Company intends to
broaden its product and service offerings to further complement its existing
video services by forming alliances with strategic partners, such as its
existing non-exclusive relationship with Bose. See "--PRIMESTAR By TSAT--
Marketing." The Company believes that such alliances can be important not only
to expand the market awareness of the Company's name and service offerings,
but also to increase the Company's potential market by expanding the scope of
the use of its product and services.
Pursue High Power DBS Opportunities. The Company continues to assess
strategies for delivering high power digital satellite signals to the
consumer's home. The Company's current strategy is to implement a high power
DBS system, either directly or through PRIMESTAR Partners, by using Tempo DBS-
1, pursuant to the
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Company's proposed Cable Plus Strategy, to provide a DBS service offering a
mix of sports, multiplexed movies, pay-per-view and popular cable networks
that could be marketed as an adjunct to traditional off-the-air (i.e.,
broadcast) television, basic cable and other analog programming services. The
Company believes that, if successfully implemented, such a complementary
service could be effectively marketed by cable operators (particularly those
with limited channel capacity and a relatively low density of subscribers per
head-end) as an alternative to a digital cable upgrade, which could require
costly improvements by the operator to cable plant and head-end equipment. A
cable operator that distributed the Company's high power service could offer
its customers a digital upgrade without reducing the number of analog cable
channels available to customers who choose not to take the new service. In
contrast, if such an operator were to upgrade its cable system directly and
provide digital service comparable to the Company's proposed service, the
cable operator would be required to drop up to 11 channels from its existing
analog service, degrading the value of that service and alienating those
customers that choose to continue with their existing analog service. To
facilitate such a complementary service, the Company is currently working with
manufacturers to develop designs and specifications for a new set-top box that
would accommodate separate inputs from an analog cable system and a digital
satellite dish, and allow the customer to switch between digital programming
and analog channels (including the local programming currently not generally
available by satellite) with a single remote control unit. The Company expects
that such a combination cable converter/IRD will be available in commercial
quantities by the fall of 1997. However, the Company has not entered into a
purchase contract with any potential manufacturers, and there can be no
assurance that this equipment will be available on schedule. In addition to
the Cable Plus Strategy, the Company intends to market its high power DBS
services directly to consumers. The Company is currently in discussions, but
has not entered into any agreements, with cable operators, programming
suppliers and PRIMESTAR Partners with respect to the establishment of such a
high power digital satellite service to be marketed in part by cable and other
system operators as described above.
PRIMESTAR BY TSAT
The PRIMESTAR(R) Service. PRIMESTAR Partners was formed as a limited
partnership in 1990 by direct or indirect subsidiaries of TCI and several
other large cable operators and GEAS, an indirect subsidiary of G.E.
Initially, PRIMESTAR Partners' product was an analog service limited to seven
broadcast television superstations, TV Japan and three pay-per-view stations.
In 1994, PRIMESTAR Partners was among the first satellite television providers
to use digital transmission and compression technology to offer superior
delivery of picture and sound. Through March 9, 1997, the PRIMESTAR(R) service
was broadcast from K-2, a medium power satellite that was nearing the end of
its normal operational life. Since March 10, 1997, the PRIMESTAR(R) service
has been broadcast from GE-2, a medium power satellite that was launched into
the 85(degrees) W.L. orbital position on January 30, 1997. In April 1997,
using the additional capacity of GE-2, PRIMESTAR(R) will increase its
offerings to approximately 150 channels of programming (as compared to 95
channels under K-2), and will begin to offer subscribers in the majority of
the U.S. the opportunity to use HSDs of approximately 27 to 29 inches in
diameter. Dishes of 27 to 29 inches can be attached more easily to a
subscriber's wall or roof than the 36 inch dishes currently used by
PRIMESTAR(R).
PRIMESTAR(R) includes a variety of advertiser-supported networks (sometimes
referred to as "basic cable" channels), a broad selection of movie services,
national and regional sports packages and other premium services, and
multiplexed pay-per-view programming. See "--Programming." PRIMESTAR Partners
secures its rights to broadcast such programming via satellite by entering
into non-exclusive affiliation agreements with programming vendors. In
addition to video services, PRIMESTAR(R) includes digital audio and data
services, including Ingenius, which provides access to news, business news,
stock quotes, sports, weather and entertainment information to subscribers
through their personal computers.
PRIMESTAR Partners currently broadcasts from GE-2, a medium power Ku-band
satellite owned and operated by GE Americom. Digital satellite television
service requires that subscribers install HSDs for a clear line of sight to
the transmitting satellite. GE-2 is located at 85(degrees) W.L. in the FSS
orbital arc and provides coverage to the entire continental U.S. with
favorable "look" angles, meaning that the satellite is viewable from the
entire continental U.S. at angle elevations high enough to facilitate
installation of HSDs in most areas. Additionally,
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GE-2's orbital location over the East coast of the U.S. is considered
favorable because the signal travels a shorter path through the relatively
moist air of the Eastern seaboard, minimizing potential interference from bad
weather. The overall PRIMESTAR(R) system is designed for high availability
and, based on PRIMESTAR Partners' experience with GE-2's predecessor, K-2,
operates consistently without any significant interference approximately 99.8%
of the time.
PRIMESTAR Partners currently uses proprietary authorization, encryption and
digital compression technology developed by an affiliate of GI. The Company
believes that the digital compression technology used by PRIMESTAR Partners,
which is known as DigiCipher-1(R), produces picture and sound quality
comparable to that of other digital satellite television providers, including
those using compression methods based on the MPEG-2 digital compression
architecture. Uplinking, encoding and compression services are provided by
National Digital Television Center, Inc., a subsidiary of TCI, and formerly
Western Tele-Communications, Inc. ("NDTC"), under a Master Digital
Transmission Agreement between NDTC and the Partnership. Although the
DigiCipher-1(R) satellite receiver used by PRIMESTAR(R) customers is not
currently compatible with MPEG-2 compression systems, it can be upgraded to be
compatible through equipment provided by GI, the cost of which is projected to
range from $150 to $200 at commercial volumes.
PRIMESTAR Partners has entered into the GE-2 Agreement, pursuant to which GE
Americom has agreed to provide the Partnership with service on 24 transponders
on GE-2, subject to an interim period during which one of the transponders
will be unavailable. GE-2 was launched on January 30, 1997 and accepted as
commercially operational, effective March 6, 1997. See "Risk Factors--Risks of
Satellite Failure--Risks of Satellite Defect, Loss or Reduced Performance."
The Partnership is currently entitled to nonpreemptible service on 18 of the
transponders on GE-2 and preemptible service on five transponders, with a
sixth preemptible transponder available on or about August 1, 1997.
Preemptible transponders are transponders that may be reassigned to restore
service to protected customers if such protected customers experience
satellite failure. The Company does not believe that, during the early stages
of GE-2's operational life, the use of preemptible transponders by PRIMESTAR
Partners is likely to interfere in any material respect with the operation of
the PRIMESTAR(R) service.
As currently in effect, the GE-2 Agreement provides for an initial term of
six years from the availability of GE-2, extendible for the remainder of the
useful life of GE-2 at the option of PRIMESTAR Partners (the "End-of-Life
Option"). The End-of-Life Option expires if not exercised by December 31,
1997.
Under the GE-2 Agreement, if PRIMESTAR Partners does not exercise the End-
of-Life Option, it will not be entitled to any in-orbit spare for GE-2.
However, if PRIMESTAR Partners exercises the End-of-Life Option, GE Americom
will be required to make available another communications satellite, GE-3, to
serve as an in-orbit spare for GE-2 at the 85(degrees) W.L. orbital position,
providing the Partnership with "orbital location protected service," effective
upon the successful launch of another GE Americom medium power satellite, GE-
4. If such orbital location protected service becomes effective, the
Partnership's transponders will become nonpreemptible and the Partnership will
be entitled to restoration on GE-3 of any transponders on GE-2 that suffer a
transponder failure. If PRIMESTAR Partners exercises the End-of-Life Option,
during the period between the launch of GE-3 and the launch of GE-4, the
Partnership will be entitled to protection for GE-2 transponder failures, but
its preemptible transponders will remain preemptible. If PRIMESTAR Partners
exercises the End-of-Life Option, PRIMESTAR Partners will have a further right
to negotiate to obtain capacity on any successor satellite to GE-2 launched by
GE Americom at 85(degrees) W.L.
If, after exercise of the End-of-Life Option, PRIMESTAR Partners intends to
use more than six of its transponders for uses other than providing the
PRIMESTAR(R) service, GE Americom may reduce service from orbital location
protected service to nonpreemptible or preemptible service, as the case may
be.
The Partnership does not distribute its programming directly, but utilizes
authorized Distributors to market the PRIMESTAR(R) service and contract with
subscribers. Currently, affiliates of each of the Partnership's partners other
than GEAS, including the Company, are authorized Distributors of PRIMESTAR(R).
However, the
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PRIMESTAR Partnership Agreement does not require that Distributors be
affiliated with the Partnership's partners. None of the Distributors currently
has a formal written distribution agreement with PRIMESTAR Partners, although
PRIMESTAR Partners and the Distributors have attempted to negotiate such an
agreement from time to time since 1990. All of the Partnership's distribution
arrangements are currently non-exclusive. The PRIMESTAR Partnership Agreement
also contemplates the possibility that the Partnership may establish a
separate national marketing company to distribute PRIMESTAR(R); however, the
Partnership has not taken any action to create such a national marketing
company, and the creation of such a national marketing company would require a
supermajority vote of the Partners Committee of PRIMESTAR Partners.
The Company and other Distributors set their own retail pricing and are
responsible in their respective territories for installation, maintenance and
retrieval of customer premises equipment, authorization of subscribers, and
billing and collection of monthly and other fees, and bear all risks of loss
relating thereto. The Partnership negotiates and enters into agreements with
programmers, arranges for satellite capacity through its agreements with GE
Americom and is responsible, through its Master Digital Transmission Agreement
with NDTC, for the uplinking and compression of programming signals. In
addition, the Partnership provides marketing and administrative support,
including national advertising and a national toll-free number, "1-800-
PRIMESTAR," that automatically transfers potential customers to one of the
Distributors, based on the potential customers' zip codes. Potential customers
in the Company's service areas who call the "1-800" number and key in their
zip codes are transferred automatically to the National Call Center. In return
for such services, the Partnership collects from the Distributors a monthly
programming fee based on the number of Authorized Units receiving such
programming plus a separate monthly authorization fee based on each
Distributor's total number of Authorized Units.
The Company markets and distributes the Partnership's equipment and services
to households and businesses in its assigned territories under the names
"PRIMESTAR By TCI" and "PRIMESTAR By TSAT." The Company's territories as a
PRIMESTAR(R) Distributor comprise communities in the vicinity of TCI's cable
television franchise areas and other areas assigned by the management of
PRIMESTAR Partners, in each case on a non-exclusive basis. The Company's
territories cover approximately 45% of the geographic area of the U.S., as of
December 31, 1996. The Company estimates that approximately 38% of the
country's 98 million television households reside in the Company's
territories.
Programming. At December 31, 1996, the Company offered consumers three
primary programming packages, which provide a wide variety of programming
selections, as detailed in the chart below. The PrimeFamilySM package offers
75 channels of programming with 14 commercial-free premium movie channels in
addition to a selection of other channels. The PrimeEntertainmentSM package
offers 65 channels of programming and gives the customer four commercial-free
movie channels as well as a combination of a number of popular channels.
Lastly, the PrimeValueSM package offers customers 53 channels of expanded
programming. Each of the packages includes a free monthly programming guide.
As of December 31, 1996, the monthly prices for the PrimeFamilySM package, the
PrimeEntertainmentSM package and the PrimeValueSM package were $44.99, $29.99
and $22.99, respectively. Most of the Company's customers rent their equipment
and pay an additional $10 monthly charge for equipment rental, which includes
free maintenance and 24-hour customer service.
The Company also offers nine channels of pay-per-view movies and events and
niche services on an a la carte basis such as ABC, NBC, CBS, FOX and PBS (to
those subscribers unable to receive such networks through local affiliates),
The Golf Channel, TV Japan and Ingenius.
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At December 31, 1996, the Company's three primary programming packages
consisted of the following:
<TABLE>
<CAPTION>
PRIMEVALUE(SM) PRIMEENTERTAINMENT(SM) PRIMEFAMILY(SM)
PACKAGE PACKAGE PACKAGE
53 CHANNELS 65 CHANNELS 75 CHANNELS
- --------------------------------------------------------------------------------
<S> <C> <C>
A&E All PrimeEntertainmentSM
All PrimeValueSM Channels Channels
Cartoon Plus: Plus:
CNBC
CNN Classic Sports Cinemax-Multichannel (2)
Comedy Central CMT Cinemax Selecciones (3)
Discover CNN International/CNN-FN HBO-Multichannel (3)
Disney (2) E! HBO en Espanol (3)
ESPN Encore
Family Channel Encore Multiplex (2)
Headline News ESPN 2
Learning Channel Sci-Fi
Lifetime STARZ!
MTV TCM
Nickelodeon The Weather Channel
Odyssey
Prevue
QVC
Regional Sports Net-
works (14)
TBS
TNN
TNT
TV Land
Univision
USA
Digital Audio Channels (14)
</TABLE>
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Utilizing the additional transponder capacity provided by GE-2, PRIMESTAR
Partners has announced that it will increase its total channel offerings to
approximately 150 in April 1997. Based on the proposed new line-up, the
Company expects that its primary programming packages will be revised as
follows:
<TABLE>
<CAPTION>
PRIMEVALUE(SM) PRIMEENTERTAINMENT(SM)
PACKAGE PACKAGE PRIMEHITS(SM) PACKAGE
76 CHANNELS 96 CHANNELS 101 CHANNELS
- -------------------------------------------------------------------------------
<S> <C> <C>
A&E All PrimeEntertainmentSM
All PrimeValueSM Channels Channels
AMC Plus: Plus any two of the following:
BET
Cartoon Classic Sports Multichannel Showtime (2)
CNBC CMT Multichannel Cinemax (2)
CNN CNN International/CNN-FN Multichannel HBO (3)
CNN Headline News Court TV
Comedy Central E!
CSPAN1 Encore
CSPAN2 Encore Multiplex (2)
Discovery ESPN2
Disney (2) Game Show Network
ESPN HG-TV
Family Channel Independent Film Channel
Learning Channel Outdoor Life
Lifetime Sci-Fi
Local Regional Sports
Network (1) Speedvision
MSNBC STARZ!
MTV Sundance
Much Music TCM
Nickelodeon The Weather Channel
Odyssey WGN
Prevue
QVC
Regional Weather (10)
Romance Classics
TBS
TNN
TNT
TV Food
TV Land
Univision
USA
VH-1
Digital Audio Channels
(30)
</TABLE>
The expanded channel offerings will also include 21 channels of pay-per-view
movies and events, a 24 channel sports tier and niche services on an a la
carte basis such as ABC, NBC, CBS, FOX and PBS (to those subscribers unable to
receive such networks through local affiliates), The Golf Channel and TV
Japan. The monthly prices for the expanded PrimeHitsSM package, the Prime
EntertainmentSM package and the PrimeValueSM package in 1997 will be $49.99,
$33.99 and $24.99, respectively.
As of December 31, 1996, the Company had an installed base of approximately
805,000 Authorized Units, of which approximately 44% received the Company's
premier programming package, the PrimeFamilySM package. Exclusive of
installation revenue, the Company's average monthly revenue per Authorized
Unit was
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$44 and $41 for the years ended December 31, 1996 and 1995, respectively. At
December 31, 1996, the Company's Authorized Units represented approximately
45% of PRIMESTAR Partners' estimated 1.8 million installed Authorized Units.
The Company contracts with and bills its residential and commercial
subscribers directly for the PRIMESTAR(R) service. Most residential
subscribers may terminate their service at any time upon notice to the
Company. Commercial subscribers' service contracts automatically renew for
successive terms unless the commercial subscribers provide 90 days' prior
written notice to the Company of their intent to terminate their service at
the end of the current term. In addition, a commercial customer can terminate
the contract prior to the expiration of the contractual term by paying 75% of
the remaining amount due.
Satellite reception equipment reclaimed from terminating subscribers is
tested, refurbished as necessary and placed back into service.
Distribution. The Company distributes PRIMESTAR(R) services through multiple
distribution channels. The Company's Master Agent Program, direct sales force,
its access to the National Call Center for orders, information and customer
service and its agreement with Radio Shack form a wide-reaching distribution
network. The Company has engaged four master sales agents, Metron Digital
Services, Inc., CVS Systems, Inc., Resource Electronics, Inc. and Recreation
Sports and Imports, Inc. (collectively, the "Master Agents"), each of which
has extensive experience distributing C-band direct-to-home satellite
equipment. Master Agents generally do not sell directly to customers, but
recruit, train and maintain a network of sub-agents comprised generally of
full service independent satellite retailers in the Company's target markets,
including rural and other areas that are not served or are underserved by
cable television. The sub-agents sell PRIMESTAR(R) services on behalf of the
Company and install, service and maintain customer premises equipment for the
Company's subscribers. Authorization of new customers is provided by the
National Call Center. At December 31, 1996, the Company's Master Agents had
over 1,700 active sub-agents, and in the year ended December 31, 1996, the
Master Agent Program accounted for approximately 49% of the Company's new
business.
The Company believes that the Master Agents, who are responsible for the
acts of their sub-agents, are currently able to manage the diverse network of
satellite retailers more effectively than the Company could do so directly.
Master Agents are responsible for maintaining their sub-agents' inventories of
HSDs and other customer premises equipment, which are provided by the Company
on consignment. The Company pays the Master Agents commissions on equipment
leased or sold by their sub-agents, as well as an installation reimbursement
to cover the cost of each new installation and a 10% commission on monthly
programming revenue received from subscribers enrolled through the Master
Agent Program, for a contractually determined period of time (generally five
years). Master Agents are responsible for compensating their sub-agents.
The Company's direct sales force solicits potential subscribers by
telephone, makes door-to-door sales calls, sets up booths at special events
and otherwise markets the Company's products and services to customers in
target markets in its authorized distribution areas. At December 31, 1996, the
direct sales force consisted of approximately 760 employees throughout the
Company's service areas operating out of the Company's five regional offices
and several field offices. To date, the main focus of the direct sales force
has been rural and semi-rural communities. Direct sales employees are paid
pursuant to a tiered compensation plan with varying commission arrangements
based on productivity. New subscriptions obtained by the direct sales force
are referred to the National Call Center for authorization, which in turn
dispatches the new orders to the nearest TCI cable system or third party
contractor for installation.
In order to support its direct sales force, the Company obtains
installation, maintenance, retrieval, inventory management and other customer
fulfillment services from TCIC and certain other third party contractors for
Company customers enrolled by its direct sales force or National Call Center.
In connection with the Distribution, the Company and TCIC entered into the
Fulfillment Agreement with respect to customers of the PRIMESTAR(R) medium
power service. The Fulfillment Agreement, among other things, sets forth the
responsibilities of TCIC with respect to fulfillment services, including
performance standards and penalties for nonperformance, and provides scheduled
rates to be charged to the Company for the various customer fulfillment
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services to be provided by TCIC. The Company retains sole control under the
Fulfillment Agreement to establish the retail prices and other terms and
conditions on which installation and other services will be provided to the
Company's customers. The Fulfillment Agreement has an initial term of two
years and is terminable by the Company, on 180 days notice to TCIC at any time
during the first six months following the Distribution Date. The Company and
TCIC are currently discussing certain proposed changes to the Fulfillment
Agreement, but there can be no assurances that any such changes will be agreed
to or that the Company will not exercise its right to terminate the
Fulfillment Agreement if an acceptable amendment is not agreed to prior to the
end of the Company's six-month termination window. There can be no assurance
that the terms of the Fulfillment Agreement are not more or less favorable
than those which could be obtained by the Company from third parties, or that
comparable services could be obtained by the Company from third parties on any
terms if the Fulfillment Agreement is terminated. See "Certain Relationships
and Related Transactions."
The National Call Center, which, as of December 31, 1996, housed more than
560 employees, takes subscription orders and provides both sales support and
customer service. The National Call Center offers customers round-the-clock
telephone support for sales, installation, authorization and billing, as well
as for repair and customer service, 365 days per year. During the year ended
December 31, 1996, the National Call Center handled over 3.7 million customer
service calls and over 1.1 million sales calls. In addition, the Company
engages a teleservices vendor to assist the Company in providing these
services. The Company trains the employees of the teleservices vendor and
works closely with such employees to ensure that its existing and potential
subscribers receive quality customer service.
On March 20, 1997, the Company announced its intention to contribute its
National Call Center to a new joint venture to be owned by the Company and
TCI. The new joint venture, which would be run as a separate company, would
own and operate customer service call centers and provide services to TCI, the
Company and other potential clients on an out-sourcing basis. In addition to
the two Englewood, Colorado based facilities of the Company's National Call
Center, the new venture would initially include call center facilities
contributed by TCI in Denver, Colorado, Boise, Idaho and Tucson, Arizona. See
"Certain Relationships and Related Transactions."
In addition to the Master Agent Program, direct sales force and National
Call Center, the Company distributes its services through certain national
consumer electronics retailers. In February 1996, PRIMESTAR Partners entered
into a national agreement with Radio Shack, a unit of Tandy Corporation and
one of the nation's largest consumer electronics retailers, under which
PRIMESTAR(R) is expected to be available on a non-exclusive basis through more
than 6,500 Radio Shack stores nationwide. Under this agreement, Radio Shack is
compensated based on the number of installations generated. As of December 31,
1996, PRIMESTAR(R) is available for sale in approximately 2,300 Radio Shack
stores located in the Company's authorized distribution territories, and the
Company estimates that when the arrangement is fully implemented, PRIMESTAR(R)
will be available for sale in over 2,500 such stores. The Company's
distribution network is further supported by approximately 1,130 local market
retailers, such as hardware stores and convenience stores, which promote the
Company's services and further assist the Company in its distribution efforts.
The Company believes that its use of a number of different distribution
channels has been an important factor in the success of its sales efforts over
the past two years and will continue to fuel subscriber growth. During the two
year period from December 1994 to December 1996, the Company expanded its
points of sale over fifteen times, from 325 to approximately 5,160.
Furthermore, the Company's sub-agents ranked highest in customer satisfaction
in a study conducted by the SBCA in August 1995. The Company's sub-agents
scored highest for post-sale customer support and salesperson knowledge of the
industry and technology, as well as programming. Moreover, the SBCA research
showed that the Company's service strategy ranked first as the customer's
choice for a "better buying experience." The Company intends to continue to
target multiple distribution channels and to expand on its existing satellite
retailer distribution network and presence with consumer electronics outlets.
Equipment and Installation. Unlike other digital satellite television
services, PRIMESTAR(R) does not require consumers to purchase or finance the
equipment needed to receive its programming. The Company provides the HSD,
satellite receiver and remote control to subscribers for a monthly rental fee
($10 per month at December 31, 1996), which includes ongoing maintenance and
service at no additional charge. The monthly
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equipment rental fee is normally included in a service package that includes
various levels of basic and premium programming. Satellite receivers are
manufactured by GI, and packaged by GI with remote controls, and HSDs are
manufactured by multiple vendors, under agreements with PRIMESTAR Partners.
Pursuant to such agreements, each Distributor orders and purchases its
inventory of customer premises equipment directly from the vendor, and is
responsible for certain minimum purchases based on forecasts provided to the
vendor through PRIMESTAR Partners.
Approximately 99% of the Company's subscribers currently elect to rent their
equipment from the Company, and the Company believes that the ability to
obtain PRIMESTAR(R) without a large initial cash outlay is a significant
factor in the Company's early acceptance by consumers. However, for those
subscribers who would prefer to own their equipment, the Company currently
provides two alternative purchase options: (i) subscribers who agree to
purchase the PrimeEntertainmentSM or PrimeFamilySM package for one year and
who pay in full for such package in advance are given the option to purchase a
single satellite receiver for $199 plus an installation charge of $199 and
(ii) subscribers who wish to purchase two satellite receivers are given the
option to purchase the first receiver for $199 and a second used receiver for
$325, with the installation charge of the first receiver set at $199 and the
installation price of the second receiver set at $75, and such subscribers are
not required to commit to a one-year subscription and may purchase either the
PrimeValueSM, PrimeEntertainmentSM or PrimeFamilySM package. In both cases,
the Company from time to time provides a promotional offer of $149 for the
installation of the first receiver. For those customers who elect one of the
purchase options described above, the Company currently provides a free one-
year in-home service warranty for the purchased equipment.
In addition to monthly fees for programming and the purchase or lease of
equipment, the Company generally charges new subscribers an installation fee
ranging from $99 to $199. Installation of the second receiver is generally
available at a reduced price ($75 at December 31, 1996). In order to insure
that HSDs are properly pointed and aligned to receive the PRIMESTAR(R) signal,
the Company strongly recommends professional installation. The Company, from
time to time, offered qualified subscribers an opportunity to enter into
subscription contracts that allowed for the option of paying their
installation fee over time. Further, from time to time, the Company offers
special installation prices on a promotional basis. The Company is currently
running a promotional offer of $149 for the installation of the first
receiver. Certain of the Company's competitors offer consumers the option of
self-installation of the HSD and other equipment for their digital satellite
systems, with an installation kit that retails for approximately $70.
Marketing. The Company engages in extensive local and regional marketing,
advertising and promotional activities to increase consumer awareness of
PRIMESTAR(R), to promote the sale and lease of PRIMESTAR(R) equipment and to
generate subscriptions to PRIMESTAR(R). To complement the national marketing
support received from PRIMESTAR Partners, the Company operates a central
advertising strategy that also supports regional marketing efforts. The
Company's advertising strategy focuses on five important selling points for
potential subscribers: (i) program variety, (ii) good value, (iii) digital
quality picture and sound, (iv) no equipment to buy, and (v) on-going
equipment maintenance and service at no extra charge. The Company also
provides its network of sub-agents and direct sales force with marketing
support ranging from cooperative advertising funds to customized advertising
campaigns. The Company intends to continue these efforts in the future.
The Company's current regional and local advertising strategy includes
television, print and radio advertisements, direct mail campaigns, handouts of
brochures and flyers and participation in local events, including the display
of posters, banners and pop-up displays. The Company has engaged a media
agency to provide media counsel and services to aid the Company in planning,
placing and measuring results in regional and local advertising and media
programs. The Company has also engaged an advertising agency to develop all
strategic and creative efforts in advertising and a marketing fulfillment
agency to provide direct mail, collateral materials and other marketing
services.
The Company, from time to time, promotes subscriptions to its programming
service by offering discounts or free services for a limited period of time.
For example, the Company has offered a discount for annual
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subscriptions, whereby customers, by paying annually, have been entitled to
get one month for free. In addition, the Company has provided coupons to new
customers which offer programming discounts, providing customers with the
opportunity to try many of the Company's premium services. Additionally, the
Company has also provided free pay-per-view movies to new subscribers for a
limited period of time.
The Company engages independent retailers as display representatives who
display promotional materials about the Company. The Company uses such display
representatives to promote its service and to attain customer referrals. The
Company pays the display representative a one time referral fee for each
eligible subscriber who installs the service within sixty days of the
referral.
The Company has initiated a joint marketing alliance with Bose under the co-
brand name "PRIMESTAR/Bose Home Theater systems." Pursuant to this alliance,
the Company and Bose offer a home theater system which includes the Bose
Companion satellite surround system, a complete surround sound system designed
specifically for use with home satellite systems.
The Company also engages in two joint marketing efforts with TCI. First, the
Company, since March 1996, has been distributing Kid Control(TM), a child-size
remote control unit supplied by TCI. The Kid Control(TM) units are channel
selectors designed solely for children and help parents monitor and control
television viewing. They are pre-programmed with the most popular children's
programming to provide a secure lineup of age-appropriate entertainment.
Second, as a sign of its commitment to education, the Company, along with TCI,
launched the PRIMESTAR Goes To School program which provides schools not wired
for cable with free access to PRIMESTAR(R) equipment and 500 hours of
commercial-free "Cable in the Classroom" programming per month. This
educational package is offered free of charge. The program is designed to
provide educational programming and data services and offer access to training
to inner city, rural and other schools that do not have access to cable and
that are within the Company's territories. From its inception in November 1995
through December 31, 1996, over 2,000 schools have enrolled in the program.
The Company intends to continue and increase its joint marketing efforts to
bundle products and services to the marketplace. The Company believes such
efforts will assist the Company in maximizing its potential market share.
ResNet Transaction. Effective as of October 21, 1996, the Company acquired
4.99% of the issued and outstanding capital stock of ResNet. ResNet was formed
by LodgeNet in February 1996 to engage in the business of operating as a
"private cable operator" under applicable federal law, providing video on
demand, basic and premium cable television programming, and other interactive,
multi-media entertainment and information services to subscribers in multiple
dwelling units with facilities that do not use any public right-of-way. ResNet
agreed to purchase from the Company, at a price that approximates the
Company's cost, up to $40 million in satellite reception equipment, to be used
in connection with the ResNet Business exclusively, over a five-year period
(subject to a one-year extension at the option of ResNet if ResNet has not
purchased the full $40 million in equipment during the five-year initial
term).
The Company also agreed to make a subordinated convertible term loan to
ResNet, the proceeds of which can be used only to purchase such equipment from
the Company. The term of the loan is five years with an option by ResNet to
extend the term for one additional year. The total principal and accrued and
unpaid interest under the loan is convertible over a four-year period into
shares of common stock of ResNet 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 as
described below. Under current interpretations of the FCC rules and
regulations related to restrictions on the provision of cable and satellite
master antenna television services in certain areas, the Company could be
prohibited from holding 5% or more of the stock of ResNet and consequently
could not exercise the conversion rights under the convertible loan agreement.
The Company is required to convert the convertible loan at such time as
conversion would not violate such currently applicable regulatory
restrictions.
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In addition, ResNet granted the Company an option to acquire an additional
13.01% of the issued and outstanding common stock of ResNet at the appraised
fair market value of such stock at the time of exercise of the option. The
option is exercisable between December 21, 1999 and the maturity of the
convertible loan. Upon the maturity date of the convertible loan, if the
Company has been prevented from converting the loan or exercising the option
in full due to the previously described regulatory restrictions, ResNet will
issue warrants to the Company to acquire the stock that has not been issued
pursuant to conversion of the loan and the stock that the Company has a right
to acquire by exercise of the option. The exercise price of the warrants to be
issued in respect of the convertible loan will be de minimis, and the exercise
price of the warrants to be issued in respect of the option will be equivalent
to the exercise price under such option. The Company has agreed to customary
standstill provisions with respect to acquisitions of more than 10% of the
outstanding stock of LodgeNet and any additional shares of ResNet.
The Company also entered into a long-term signal availability agreement with
ResNet, pursuant to which the Company is committed to transport for a fee to
"private cable systems" owned and operated by ResNet, the satellite signal
used by PRIMESTAR Partners to transmit its programming services (the
"PRIMESTAR Satellite Signal") or the signal of a substantially comparable
service. "Private cable system" means a satellite master antenna television
system that provides television programming services to residential MDUs
through cable plant or other equipment that is located entirely on private
property and does not constitute a direct-to-home distribution system or a
franchised cable system. The Company is acting solely to make the PRIMESTAR
Satellite Signal available to ResNet and is not acting as a distributor of any
PRIMESTAR(R) programming services to ResNet. ResNet must obtain its own rights
from the applicable programming networks to receive the programming services
and to distribute them to ResNet's subscribers.
NDTC has the right from PRIMESTAR Partners to use the PRIMESTAR Satellite
Signal for delivery of programming for the benefit of third parties, including
private cable systems (the "simultaneous use rights"). NDTC has agreed with
the Company that private cable systems designated by the Company, including
the ResNet private cable systems, will receive the transport of the PRIMESTAR
Satellite Signal by NDTC in exchange for the payment by the Company of a fee
per subscriber per video program signal. The agreement between the Company and
NDTC is coextensive with the agreement between NDTC and PRIMESTAR Partners,
which expires on March 31, 2001, and there is no assurance that the Company
will continue to have the ability to make the PRIMESTAR Satellite Signal
available after that date.
In its agreement with ResNet, the Company has committed to make the
PRIMESTAR Satellite Signal or the signal of a substantially comparable service
available for a term that extends substantially beyond March 31, 2001. If the
Company loses its contractual ability to make the PRIMESTAR Satellite Signal
available and is not able to make the signal of a substantially comparable
service available, the Company is obligated to reimburse ResNet for its costs
in obtaining a digital signal from another source, including the cost of
replacement equipment if the new digital signal is not compatible with
ResNet's equipment. While it is not possible at this time to quantify the
amount that the Company would be obligated to pay to ResNet under the
circumstances described above, the Company believes that the costs could be
significant, particularly if it were to lose its ability to make a signal
available towards the end of its agreement with ResNet.
The Company has also entered into a shorter term signal availability
agreement with one other customer and intends to pursue other signal
availability opportunities as they arise.
Counsel to PRIMESTAR Partners has advised the Company of the Partnership's
position that there are certain preconditions to NDTC's simultaneous use
rights which have not yet been satisfied and that such rights are not
assignable by NDTC to the Company. The Company believes that its transaction
with ResNet and similar transactions are permitted under the agreement between
NDTC and the Partnership. The Company does not believe that any potential
dispute with the Partnership regarding this issue is likely to have a material
adverse effect on the Company.
Use of PRIMESTAR(R) Name and Marks. The Company markets and distributes the
Partnership's equipment and services to households and businesses in its
assigned territories under the names PRIMESTAR
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By TCI and PRIMESTAR By TSAT. PRIMESTAR(R) is a registered service mark of
PRIMESTAR Partners. The Company believes that it has the right to use the
PRIMESTAR(R) name and certain related trademarks and service marks as a
Distributor, in substantially the same manner as it has been using such name
and marks, pursuant to its existing understandings with PRIMESTAR Partners.
However, the Company does not have a written license to use the PRIMESTAR(R)
name and marks, and there can be no assurance that the Company will be
entitled to continue to use the PRIMESTAR(R) name and marks in the future.
HIGH POWER SATELLITES
Tempo DBS System. The Company currently plans to participate, directly or
through PRIMESTAR Partners, in the high power segment of the digital satellite
industry. 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) W.L. orbital
position and 11 frequencies at the 166(degrees) W.L. orbital position. The
119(degrees) W.L. orbital position is generally visible to HSDs throughout 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 Tempo DBS-1 and
Satellite No. 2 and has an option to purchase up to three additional
satellites. As constructed, each Company Satellite can operate in either
"single transponder" mode (with 32 transponders broadcasting at 113 watts per
channel) or in "paired transponder" mode (with 16 transponders broadcasting at
226 watts per channel). Either such configuration can be selected at any time,
either before or after launch.
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 from Cape Canaveral on an Atlas rocket by International
Launch Services on behalf of Lockheed Martin Corporation. 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 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, at current levels of
digital compression, Tempo DBS-1 would be able to deliver 70 to 85 channels of
digital video and music programming, depending on the mix of programming
content, to HSDs of less than 14 inches in diameter. If statistical
multiplexing or other advances in digital compression technology currently
under development by third parties become commercially available in the
future, Tempo DBS-1 would be able to deliver up to 150 channels of
programming. Pursuant to its Cable Plus Strategy, the Company intends to
operate Tempo DBS-1, either directly or through PRIMESTAR Partners, as a
complementary service to basic cable and other channel-constrained analog
services, providing DBS services on a wholesale basis to those system
operators wishing to avoid the high cost of digital plant upgrades, or,
subject to future advances in compression technology, as a stand-alone DBS
service. See "--Cable Plus Strategy," "--Competitive Position of the Company's
Proposed High Power DBS System" and "Risk Factors--Risks Regarding Deployment
of High Power Satellites."
The Company has had discussions regarding the possible sale of Satellite No.
2, but has not reached agreement regarding any such transaction. Any such
transaction would be subject to the successful operation of Tempo DBS-1 (for
which Satellite No. 2 currently serves as ground spare), the prior approval of
PRIMESTAR Partners and prior regulatory approvals and other conditions.
Pursuant to the Tempo Option Agreement, any net cash proceeds received by the
Company from the sale of Satellite No. 2 would be paid to PRIMESTAR Partners
to satisfy certain advances by PRIMESTAR Partners to the Company to fund
construction of the Company Satellites. There can be no assurance that the
Company will be able to sell Satellite No. 2 on terms acceptable to the
Company. See "Risk Factors--Risks Regarding Deployment of High Power
Satellites--Uncertainty Regarding Alternative Strategies."
Cable Plus Strategy. At current compression ratios, the Company's
transponder frequencies at 119(degrees) W.L. may be used to broadcast 70 to 85
channels of digital video and music programming, depending on the mix of
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programming content. Operating Tempo DBS-1 in paired transponder mode at 226
watts per channel (higher than any current DBS services), the Company believes
that its signal could be received by households in the majority of the U.S.
using HSDs of less than 14 inches in diameter. The Company is currently
developing a plan to use its proposed high power DBS system to provide a mix
of sports, multiplexed movies, pay-per-view and popular cable networks that
could be marketed as an adjunct to traditional off-the-air (i.e., broadcast)
television, basic cable and other analog programming services. The Company
believes that, if successfully implemented, such a complementary service could
be effectively marketed by cable operators (particularly those with limited
channel capacity and a relatively low density of subscribers per head-end) as
an alternative to a digital cable upgrade, which could require costly
improvements by the operator to cable plant and head-end equipment. A cable
operator that distributed the Company's high power service could offer its
customers a digital upgrade without reducing the number of analog cable
channels available to customers who choose not to take the new service (in
contrast to upgrading the cable system directly, which could require up to 11
channels to be dropped from the operator's analog service to provide digital
service comparable to that expected to be offered by the Company). To
facilitate such a complementary service, the Company is currently working with
manufacturers to develop designs and specifications for a new set-top box that
would accommodate separate inputs from an analog cable system and a digital
satellite dish, and allow the customer to switch between digital programming
and analog channels (including the local programming generally not available
by satellite) with a single remote control unit. The Company expects that the
combination cable converter/IRD will be available in commercial quantities by
the fall of 1997. However, the Company has not entered into a purchase
contract with any potential manufacturers, and there can be no assurance that
this equipment will be available on schedule. The Company is currently in
discussions, but has not entered into any agreements, with cable operators,
programming suppliers and PRIMESTAR Partners with respect to the establishment
of a high power digital satellite service to be marketed in part by cable and
other system operators as described above.
Competitive Position of the Company's Proposed High Power DBS System. It is
expected that the Company's proposed high power DBS system will broadcast from
11 transponders at the 119(degrees) W.L. orbital position. At current
compression ratios, the Company's 11 transponders could be used to broadcast
70 to 85 channels of entertainment and/or information programming, depending
on the type of programming. Although such a programming service would have
relatively limited channel capacity compared to DirecTv and the proposed
service to be offered by the recently announced alliance of EchoStar, News
Corp. and MCI, the Company believes that such potential competitive
disadvantage may be offset in part (i) by the possibility of using HSDs
smaller (less than 14 inches in diameter) than those currently offered by
DirecTv and EchoStar, (ii) by offering programming such as multiplexed premium
movies, sports, pay-per-view and a selection of popular cable networks, which
may be marketed on an a-la-carte basis and (iii) by marketing such service as
an adjunct to cable service in areas served by cable systems with relatively
limited channel capacity. See "--Cable Plus Strategy."
However, the Company does not currently have any agreements with PRIMESTAR
Partners or any programming vendors with respect to the operation of any such
DBS programming service, and does not currently have agreements with any
antenna manufacturers with respect to the purchase of HSDs of less than 14
inches. No assurances can be given that any such agreements can be obtained on
terms satisfactory to the Company, or that the Company or PRIMESTAR Partners
will be successful in pursuing such a strategy, or will not elect to pursue an
alternative strategy with respect to one or both of the Company Satellites.
Moreover, although statistical multiplexing or other advances in digital
compression technology currently under development by third parties may in the
future enable the Company to obtain greater channel capacity from the 11
transponders on Tempo DBS-1, there can be no assurance that such new
technology will be successfully implemented or that, if implemented, the
Company or PRIMESTAR Partners will be able to obtain the rights to use such
technology on satisfactory terms. However, NDTC has agreed that if, prior to
September 1, 1997, the Company engages NDTC to provide digitization,
compression and uplinking services for any high power DBS system operated by
the Company, and NDTC is authorized to use certain proprietary technology of
Imedia Corporation currently under development (the "Imedia Technology") or
other proprietary technologies to provide multiplexing of digitally compressed
video signals for the Company, NDTC shall provide such
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multiplexing services to the Company for an agreed fee, based on NDTC's
incremental costs and other factors. The Company's rights under its agreement
with NDTC are assignable by the Company to any affiliate of the Company,
including for this purpose PRIMESTAR Partners.
If advances in digital compression technology become available to the
Company, such technology (or similar technology) will likely also be made
available to cable operators and/or other competitors of the Company and
PRIMESTAR Partners.
Satellite Launches. Pursuant to the Satellite Construction Agreement, Loral
must conduct in-orbit testing following the launch of a satellite. Tempo DBS-1
was launched on March 8, 1997 and is currently in the process of in-orbit
testing. Delivery of a satellite takes place upon Tempo's acceptance of such
satellite after completion of in-orbit testing ("Delivery"). Subject to
certain limits, Loral must reimburse Tempo for Tempo's actual and reasonable
expenses directly incurred as a result of any delays in the Delivery of
satellites. The in-orbit useful life of each satellite is designed to be a
minimum of 12 years. If in-orbit testing confirms that the satellite conforms
fully to specifications and the service life of the satellite will be at least
12 years, Tempo is required to accept the satellite. If in-orbit testing
determines that the satellite does not fully conform to specifications but at
least 50% of its transponders are functional and the service life of the
satellite will be at least six years, Tempo is required to accept the
satellite but is entitled to receive a proportionate decrease in the purchase
price. If Loral fails to deliver a satellite, it has 29 months to deliver, at
its own expense, a replacement satellite. Loral may make four attempts to
launch the two Company Satellites; however, if the two Company Satellites are
not delivered in such four attempts, Tempo may terminate the Satellite
Construction Agreement. Tempo also may terminate the contract in the event of
two successive satellite failures.
Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has also warranted
that all items other than the satellites delivered under the Satellite
Construction Agreement will be free from defects in materials or workmanship
for one year from the date of their acceptance and will perform in accordance
with the applicable performance specifications. Loral bears the risk of loss
of the Company Satellites until Delivery. Upon Delivery, title and risk of
loss pass to Tempo. However, Loral is obligated to carry risk insurance on
each satellite covering the period from the launch of the satellite through an
operating period of 180 days. Such risk insurance will cover (i) the cost of
any damages due under the Satellite Construction Agreement; (ii) the cost of
delivery of a replacement satellite in the event of a satellite failure; and
(iii) the refund of the full purchase price for each undelivered Company
Satellite if Loral fails to deliver both Company Satellites after four
attempts. Loral is also required to obtain insurance indemnifying Tempo from
any third party claims arising out of the launch of a satellite.
Tempo Option. In February 1990, Tempo entered into 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 is 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) for
such capacity sufficient to cover the costs of constructing, launching and
operating such DBS system. In connection with the Tempo Option and certain
related matters, Tempo and PRIMESTAR Partners subsequently entered into two
letter agreements (the "Tempo Letter Agreements"), which provided for, among
other things, the funding by PRIMESTAR Partners of milestone and other
payments due under the Satellite Construction Agreement, and certain related
costs, through advances by the Partnership to Tempo. The Partnership financed
such advances to Tempo through borrowings under the PRIMESTAR Credit Facility,
which was obtained by PRIMESTAR Partners to finance advances to Tempo for
payments due in respect of the construction of the Company Satellites, and
which in turn is supported by letters of credit arranged for by affiliates of
the partners of the Partnership (other than GEAS). At December 31, 1996, the
aggregate funding provided to Tempo by PRIMESTAR Partners was $457,685,000,
and the balance due under the PRIMESTAR Credit Facility was $521,000,000,
including amounts borrowed to pay interest charges.
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The Tempo Letter Agreements permit the Partnership to apply its advances to
Tempo against any payments (other than the Exercise Fee) due under the Tempo
Option (which the Company believes has been exercised) and would not require
Tempo to repay such advances. In the event that it is determined that the
Tempo Option has not been exercised in accordance with its terms, Tempo, in
lieu of repaying such advances, could elect to assign all of its rights
relating to the Company Satellites to the Partnership.
On February 7, 1997, the Partners Committee 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 to Tempo 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 the Partnership. See "Certain
Relationships and Related Transactions."
The Company currently intends to pursue its high power strategy through
PRIMESTAR Partners, consistent with such resolution. 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 Tempo DBS-1 pursuant to the Tempo
Option, or the implementation of the Cable Plus Strategy, and there can be no
assurances that areas of potential disagreement will not arise as such
agreements are negotiated, the Company does not currently believe that any
such potential disagreement is reasonably likely to have a material adverse
effect on the Company.
Regardless of the outcome of any uncertainties with respect to the Company
Satellites, the Company believes that, although no assurance can be given,
alternative courses of action are available that would allow the Company to
recover the costs of constructing the Company Satellites.
COMPETITION
The business of providing subscription and pay television programming is
highly competitive. The Company faces competition from numerous other
companies offering video, audio and data products and services. The Company's
existing and potential competitors comprise a broad range of companies engaged
in communications and entertainment, including cable operators, other digital
satellite program providers, wireless cable operators, television networks and
home video products companies, as well as companies developing new
technologies. Many of the Company's competitors have greater financial,
marketing and programming resources than the Company. The Company expects that
quality and variety of programming, quality of picture and service and cost
will be the key bases of competition. See "Risk Factors--Competitive Nature of
Industry."
Cable Television. Cable television is currently available for purchase by
more than 90% of the approximately 98 million U.S. television households. The
cable television industry is an established provider of multichannel
programming, with approximately 65% of total U.S. television households
subscribing. Cable systems typically offer 25 to 78 channels of programming at
an average monthly subscription price of approximately $33.
The Company expects to encounter a number of challenges in competing with
cable television providers. First, cable television providers benefit from
their entrenched position in the domestic consumer marketplace. Second,
satellite television systems generally have not yet found it efficient to
provide any local broadcast programming and, third, the Satellite Home Viewer
Act of 1994 ("SHVA") prohibits the retransmission by a satellite carrier of a
television broadcast signal of a network television station to households that
receive an adequate quality over-the-air signal of a television broadcast
station affiliated with such network and to households that receive (or within
the past 90 days had received) through a cable system the signal of a
television station affiliated with such network. Accordingly, most
PRIMESTAR(R) subscribers cannot obtain such programming without utilizing a
standard television antenna (traditional rooftop or set-top antenna) or
purchasing some level of cable service. Furthermore, since reception of
digital satellite signals requires clear line of sight to the satellite, it
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may not be possible for some households served by cable to receive
PRIMESTAR(R) as a result of large adjacent structures or other obstacles. In
addition to households lacking a clear line of sight to the satellite,
PRIMESTAR(R) is not available to households in apartment complexes or other
MDUs that do not facilitate or allow the installation of satellite television
equipment. Lastly, because IRDs are currently significantly more expensive
than analog cable converters, existing cable operators are able to offer their
subscribers the ability to have fully functional cable on multiple television
sets in a household without significant additional cost.
While cable companies currently serve a majority of the U.S. television
market, the Company believes many may not be able to provide the quality and
variety of programming offered by digital satellite service providers until
they significantly upgrade their coaxial systems. Many cable television
providers are in the process of upgrading their systems and other cable
operators have announced their intentions to make significant upgrades. Many
proposed upgrades, such as conversion to digital format, fiber optic cabling,
advanced compression technology and other technological improvements, when
fully completed, will permit cable companies to increase channel capacity,
thereby increasing programming alternatives, and to deliver a better quality
signal. However, although cable systems with adequate channel capacity may
offer digital service without major rebuilds, the Company believes that, given
the limits of current compression technology, other cable systems that have
limited channel capacity will have to be upgraded to add bandwidth in order to
provide digital service, and that such upgrades will require substantial
investments of capital and time to complete industry-wide. As a result, the
Company believes that there will be a substantial delay before cable systems
can offer programming services equivalent to digital satellite television
providers on a national basis and that some cable systems may never be
upgraded, subject to advances in compression technology currently under
development.
The Company believes that its current strategy of targeting rural and other
unpassed or underserved communities, which may avoid head-to-head competition
with major cable television systems, partially offsets the cable industry's
entrenched position in the domestic consumer marketplace. The Company also
believes that anticipated advances of cable television, such as interactivity
and expanded channel capacity, may not be widely available in the near term at
a reasonable cost to the consumer. Moreover, if the substantial capital costs
of those advances, when available, are passed on to the consumer, it will
ultimately enhance the attractiveness of digital satellite television
programming.
Other Digital Satellite Service Providers. In addition to the Company,
several other companies offer, or are expected to offer, digital satellite
services and are, or will be, positioned to compete with the Company for home
satellite subscribers.
DirecTv successfully launched its first satellite in December 1993, its
second satellite in August 1994 and a third satellite in June 1995 as an in-
orbit spare. The third satellite may also be operated by DirecTv to provide
additional capacity. DirecTv's satellites, which are high power satellites,
are located at 101(degrees) W.L. DirecTv operates 27 transponders on each of
its existing satellites, enabling it to offer over 200 channels of digital
programming. As of December 31, 1996, according to trade publications, DirecTv
served approximately 2.3 million Authorized Units.
AT&T Corp. ("AT&T") and DirecTv have entered into an exclusive agreement for
AT&T to market and distribute DirecTv's DBS service and related equipment to
AT&T's large customer base. As part of the agreement, AT&T is making an
initial investment of approximately $137.5 million to acquire 2.5% of the
equity of DirecTv with an option to increase its investment up to 30% over
five years. This agreement provides a significant base of potential customers
for the DirecTv DBS system and allows AT&T and DirecTv to offer customers a
package of digital entertainment and communications services. As a result, the
Company is at a competitive disadvantage marketing to these customers. AT&T
and DirecTv also announced plans to jointly develop new multimedia services
for DirecTv under the agreement. In addition, affiliates of the National Rural
Telecommunications Cooperative have acquired territories in rural areas of the
U.S. as distributors of DirecTv programming.
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USSB owns and operates five transponders on DirecTv's first satellite and
offers a programming service separate from DirecTv's service, with over 25
channels of premium video programming not available from DirecTv. USSB's
selection of programming services (and its use of transponders on the same
satellite used by DirecTv, which enables subscribers to receive both DirecTv
and USSB signals with a single HSD) allows it to be marketed as complementary
to DirecTv, partially offsetting the competitive handicap caused by its
relatively limited channel capacity. As of December 31, 1996, approximately
53% of DirecTv's 2.3 million Authorized Units receive USSB programming. In
addition, USSB has a construction permit from the FCC that would allow it to
build and launch two high power DBS systems, one at 110(degrees) W.L. (with
three transponders) and one at 148(degrees) W.L. (with eight transponders).
The 110(degrees) W.L. orbital location would enable USSB to provide a second
high power DBS service to the continental U.S., although with limited channel
capacity. The 148(degrees) W.L. slot would allow USSB to transmit signals to
viewers in Alaska and Hawaii and could provide programming between the U.S.
and certain locations on the Pacific Rim.
EchoStar launched a high power satellite in December 1995, commenced
national broadcasting of programming channels in March 1996 and, as of
December 31, 1996, broadcasts over 120 such channels. EchoStar was assigned 11
transponders at 119(degrees) W.L., the same orbital location as Tempo, and
acquired 10 transponders at such location, one transponder at 110(degrees)
W.L. and 11 transponders at 175(degrees) W.L. through a merger with DirectSat
Corporation ("DirectSat"). Following such merger, DirectSat, which became an
EchoStar subsidiary, launched a second satellite into the 119(degrees) W.L.
orbital location in September 1996. EchoStar is expected to increase its
program offering to approximately 125 channels when the EchoStar/DirectSat
system is fully operational. In addition, EchoStar acquired 24 frequencies at
148(degrees) W.L. for $52.3 million in an FCC auction held in January 1996
(the "FCC Auction"), and in August 1996, the FCC approved the prior assignment
of Direct Broadcasting Satellite Corporation's DBS permit for 11 frequencies
at 61.5(degrees) W.L. and 11 frequencies at 175(degrees) W.L. to another
subsidiary of EchoStar.
In addition, the International Bureau 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, the satellite now used to provide the PRIMESTAR(R)
service. 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 PRIMESTAR(R) signal by subscribers to
such service. See "Risk Factors--Potential Interference with Satellite Signal"
and "Risk Factors--Competitive Nature of Industry."
MCI acquired 28 frequencies at 110(degrees) W.L. in the FCC Auction for
$682.5 million. Thereafter, MCI entered into a joint venture with News Corp.
to build and launch a high power digital satellite system at 110(degrees) W.L.
On February 24, 1997, News Corp. and EchoStar announced that News Corp. will
purchase 50% of EchoStar in a transaction valued at $1 billion. Pursuant to
the proposed transaction, the companies will combine their DBS businesses into
a new company, which will operate under the name "Sky." EchoStar's
shareholders will own approximately 50% of Sky, News Corp. will own
approximately 40% of Sky and MCI, which already owns 13.5% of News Corp., will
hold 20% of News Corp.'s 50% interest of EchoStar, or approximately 10% of
Sky. According to the terms of the transaction, News Corp. will contribute its
American Sky Broadcasting subsidiary, the joint venture that News Corp. owns
with MCI, with satellites, cash and transmission stations valued at $1
billion, to the new company. The new Sky service, which is scheduled to launch
in early 1998, is expected to include seven satellites and have authorizations
for 48 of the 96 full CONUS domestic BSS transponders. The two companies
contend that Sky will offer 500 channels of digital television, Internet
services and local broadcast network television signals, capable of reaching
more than 50% of all television households upon the launch of Sky and 75% of
all television households by the end of 1998. In a separate transaction,
British Telecommunications, plc, a United Kingdom company, has proposed to
acquire control of MCI. Regulatory approval of these transactions, and of
Sky's business plan, will be necessary, and the outcome cannot be predicted.
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Alphastar commenced offering approximately 100 digital video and audio
channels of programming via a medium power FSS satellite in mid-1996 and plans
to expand to 200 channels by the end of 1997. The Alphastar service uses MPEG
2/DVB digital compression technology. Alphastar subscribers must generally use
36 inch satellite dishes, similar in size to those currently used by
PRIMESTAR(R) subscribers, rather than the 18 inch satellite dishes used by
customers of the high power services of DirecTv, USSB and EchoStar. satellite
dishes, similar in size to those currently used by PRIMESTAR(R) subscribers,
rather than the 18 inch satellite dishes used by customers of the high power
services of DirecTv, USSB and EchoStar.
In 1996, the United States entered into a bilateral agreement with Mexico
which would allow, subject to certain conditions, the use of satellites
licensed in Mexico to provide DBS service to U.S. consumers. According to
press reports, Mexico is expected to begin licensing procedures for its DBS
satellites later this year. The Company is unable to predict the effect of
such existing and future DBS service upon its operations.
In addition, other potential competitors may provide television programming
at any time by leasing transponders from an existing satellite operator.
However, the number of transponders available for lease on any one satellite
is generally limited, making it difficult to provide sufficient channels of
programming for a viable system.
The Company believes that the PRIMESTAR(R) medium power service can
successfully compete with other digital satellite service providers. Unlike
other current suppliers of digital satellite television, the Company does not
require customers to buy satellite reception equipment. PRIMESTAR(R) is
marketed as a service, with programming, equipment rental, maintenance and 24-
hour customer service included in the monthly price, which, as of December 31,
1996, ranged from $32.99 to $54.99. In addition, each of the PRIMESTAR(R)
programming packages includes a free monthly programming guide. The up-front
costs to new subscribers of PRIMESTAR(R), who are charged only an installation
fee and the first month's programming and equipment rental fees, are generally
lower than the up-front costs to new subscribers of PRIMESTAR(R)'s
competitors, who typically must purchase and install an HSD, IRD and related
equipment. Moreover, since the Company generally owns, services and installs
all home reception equipment, the Company protects its subscribers from the
inconvenience of equipment failure, maintenance concerns, obsolete technology,
self-installation and expired warranties. The Company believes that when the
cost of equipment is factored in, its service is priced competitively,
compared to the respective prices of other current digital satellite service
providers.
C-band Satellite Program Distributors. The Company also competes with C-band
satellite program distributors. C-band systems have been popular (mostly in
rural and semi-rural areas) since the late 1970s, and in the aggregate serve
approximately 2.2 million subscribers. However, digital satellite television
systems use Ku-band frequencies that can be received by less expensive systems
with significantly smaller dishes than those used with C-band frequencies. As
a result of the smaller dish size, digital satellite television systems are
more widely accepted by consumers than C-band systems, particularly in urban
and suburban areas.
Wireless Cable Systems. Other potential competitors of the Company are
multi-channel multi-point distribution systems ("MMDS"), which deliver
programming services over microwave channels to subscribers with special
antennas, and other so-called "wireless cable" systems. According to Wireless
Cable Association International, there are currently an estimated 190 wireless
cable systems operating in the U.S., serving an estimated 950,000 subscribers,
mostly with limited channel, analog service. However, the number of wireless
cable systems is likely to increase as virtually all markets have been
licensed or tentatively licensed, and developments in high compression digital
statistical multiplexing technology will significantly increase the number of
channels and video and audio quality of wireless cable systems. Moreover,
wireless cable systems may provide their customers with local programming, a
potential advantage over digital satellite television systems. In 1995,
several large telephone companies acquired significant ownership interests in
numerous wireless cable companies. This infusion of money into the wireless
cable industry can be expected to accelerate its growth and its competitive
impact. However, while it is expected that most large wireless operators
backed by local telephone companies will upgrade to digital technology over
the next several years, such upgrades will require the installation of new
digital decoders in customers' homes and modifications to transmission
facilities, at a potentially significant cost. Wireless cable also generally
requires direct line of sight from the receiver to the transmitter tower,
which creates the potential for substantial interference from terrain,
buildings and foliage.
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Telephone Companies. In addition to the DBS system planned by the recently
announced alliance of EchoStar, News Corp. and MCI, and AT&T's agreement with,
and investment in, DirecTv, certain regional telephone companies and other
long distance telephone companies have expressed an interest in becoming
subscription television providers and could become significant competitors in
the future. Legislation recently passed by Congress removes barriers to entry
which previously inhibited telephone companies from competing, or made it more
difficult for telephone companies to compete, in the provision of video
programming and information services. Certain telephone companies have
received authorization to test market video and other services in certain
geographic areas using fiber optic cable and digital compression over existing
telephone lines. Estimates for the timing of wide-scale deployment of such
multichannel video service vary, as several telephone companies have delayed
originally announced deployment schedules.
As more telephone companies begin to provide subscription television
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial financial
resources, and an existing infrastructure and may be able to subsidize the
delivery of programming through their position as the sole source of telephone
service to the home.
VHF/UHF Broadcasters. Most areas of the U.S. are covered by traditional
territorial over-the-air VHF/UHF broadcasters. Consumers can receive from
three to ten channels of over-the-air programming in most markets. These
stations provide local, network and syndicated programming free of charge, but
each major market is generally limited in the number of available programming
channels. Congress is expected to consider the release of additional digital
spectrum for use by VHF/UHF broadcasters later this year.
PRIMESTAR PARTNERSHIP AGREEMENT
Pursuant to the PRIMESTAR Partnership Agreement, the business and affairs of
the Partnership are managed and controlled by the Partners Committee, composed
of representatives of each of the partners and two independent members. The
Company has two voting representatives on the Partners Committee, Time Warner
has two voting representatives, and Cox, Comcast, Continental, Newhouse and
G.E. each have one voting representative. Ordinary decisions of the Partners
Committee require the consent of a majority of the members of the Partners
Committee, which majority must include a majority of the representatives of
the partners. Certain extraordinary decisions of the Partners Committee,
including, without limitation, decisions regarding the dissolution, merger or
sale of substantially all the assets of the Partnership; the admission of
additional partners; calls for capital contributions; the approval of the
annual budget; the appointment or dismissal of Partnership senior management;
the determination of the Partnership's policies with respect to the
distribution of its programming services; the selection of satellites
(including successor satellite capacity, the decision whether the Partnership
should provide services at BSS or higher frequencies and the decision to
exercise the End-of-Life Option); the determination to take any action that
would cause the amount of the letters of credit required to be issued in
connection with the Partnership's obligations under the GE-2 Agreement to
exceed $100,000,000; the decision to effect certain material changes to the
GE-2 Agreement and certain related agreements with respect to the letters of
credit issued in connection with the GE-2 Agreement; and the decision to
provide any optional letters of credit, or pledge, grant a security interest
in or otherwise create a lien on any material assets of the Partnership to
secure the payment of reimbursement obligations of the Partnership with
respect to letters of credit issued in connection with the GE-2 Agreement
require, in addition to a majority vote, the affirmative vote of at least six
of the nine partner representatives on the Partners Committee (assuming that
no partner representative is required to abstain in such vote), or such other
vote as shall be required by the PRIMESTAR Partnership Agreement if one or
more partner representatives are required to abstain in such vote under the
terms of the PRIMESTAR Partnership Agreement because of such partner's, or an
affiliate's, interest in the outcome thereof.
Pursuant to the PRIMESTAR Partnership Agreement, if the Company fails to pay
its share of capital contributions or loans that the partners agree to require
or that are contemplated by budgets or business plans approved by the
partners, or that are otherwise necessary in order to satisfy partnership
commitments, the Company's interest in the Partnership will be diluted and, if
such interest is diluted to less than 5%, its right to vote or exercise
certain other rights may be forfeited. See "Risk Factors--Dependence on
PRIMESTAR Partners."
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The Company and other partners in the Partnership are currently discussing
the possibility of a transaction that would consolidate the business of
PRIMESTAR Partners and the PRIMESTAR(R) distribution business of each of its
Distributors into the Company. As currently contemplated, any such transaction
would not be intended to constitute a "Change of Control" as defined in the
Indentures. See "Description of the Exchange Notes--Certain Definitions." Any
such transaction would be subject to numerous conditions, including the
negotiation, execution and delivery of definitive documentation, consents from
third parties and regulatory requirements. No agreement has yet been reached
regarding any such transaction and there can be no assurance that any such
transaction will be consummated.
CERTAIN AGREEMENTS
The Company is subject to the provisions of certain agreements that may
limit the ability of the Company to engage in, or invest in entities that
engage in, certain businesses, other than through the Partnership.
Tag-Along Agreement. Tempo is a party to the Tag-Along Agreement, originally
entered into by and among Cox Enterprises, Inc., Comcast, Continental and
Newhouse (subsidiaries of each of which are partners of the Partnership),
Tempo, TCIC and TCI Development Corporation, a subsidiary of TCIC (the "Tag-
Along Agreement"). The Tag-Along Agreement provides that if any party to the
agreement, directly or indirectly through any person controlled by such party
(an "Investing Party"), engages in, or makes an equity investment in any
entity engaging or proposing to engage in, the business of providing
television programming by uplink to BSS or higher frequency domestic satellite
transponders, or otherwise becomes entitled to exercise a management role with
respect to any such entity, at any time that such party or a person controlled
by such party is a partner in the Partnership, or within one year after it
ceases to be a partner, then, subject to certain exceptions, such party shall
provide the other parties with a written offer to participate in such
investment or other transaction on terms and conditions comparable to those
available to the Investing Party, pro rata in accordance with their respective
percentage interests in the Partnership at the time of such offer. The Tag-
Along Agreement further provides that if a party transfers assets to a person
that is not majority owned or controlled by such party but which person either
is the "ultimate parent" of, or has the same "ultimate parent" as, such party,
then such party must cause such affiliate to become a party to the Tag-Along
Agreement. The term "ultimate parent" as used in the Tag-Along Agreement has
the meaning ascribed to such term in the Hart-Scott-Rodino Antitrust
Improvements Act of 1974, as amended ("HSR Act"). Generally under the HSR Act,
the "ultimate parent" of a person is an entity that directly or indirectly
owns at least 50% of the voting securities of such person or has the
contractual right to designate 50% or more of a board of directors of such
person. The Tag-Along Agreement will terminate upon the termination or
dissolution of the Partnership, or, if earlier, when the parties to the Tag-
Along Agreement and their affiliates cease to be partners of the Partnership.
Partnership Agreement Provisions Regarding Investments in Similar
Businesses. The PRIMESTAR Partnership Agreement provides, among other things,
that if any partner, or an affiliate of a partner, engages in, or makes an
equity investment in any entity engaging or proposing to engage in, the
business of providing television programming by uplink to FSS, BSS or higher
frequency domestic satellite transponders, directly or indirectly to HSDs, or
otherwise becomes entitled to exercise a management role with respect to any
such entity, then such partner (the "Notifying Partner") shall be required to
give notice of such investment or other transaction to the Partnership and the
other partners, and the Partnership, by vote of the Partners Committee, with
the Notifying Partner abstaining, shall have the right, but not the
obligation, to elect one of the following courses of action: (i) to remove the
Notifying Partner's representative from the Partners Committee, in which case
the Notifying Partner will no longer be entitled to make capital contributions
to the Partnership or to receive any financial or other information about the
Partnership, other than audited year-end financial statements and tax-related
information; or (ii) to purchase the Notifying Partner's entire interest in
the Partnership for a purchase price equal to the fair market value thereof,
payable in cash or, at the option of the Partnership, for a combination of
cash and a three-year promissory note. Notwithstanding the foregoing, the
Partnership will not have the right to exercise either of the foregoing
alternatives if the Notifying Partner, or its affiliate, acquires an equity
interest in an entity that engages in, or proposes to engage in, the business
of uplinking television programming to BSS
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or higher frequency domestic satellite transponders, and the Partnership does
not then uplink its programming to BSS or higher frequency transponders and
does not, within 120 days thereafter, make a commitment to such transmission
method comparable to the commitment of such other entity. The Partnership will
also not have the right to exercise either of such remedies if the Notifying
Partner, or its affiliate, offers each other partner who did not vote against
the Partnership making a commitment to such transmission method, or its
affiliate, an opportunity to participate with the Notifying Partner or its
affiliate in its equity interest in such BSS business.
EMPLOYEES
The Company had approximately 1,800 employees as of December 31, 1996. None
of the Company's employees are represented by a union, and the Company
believes its employee relations are good.
Pursuant to the Transition Services Agreement and the Fulfilment Agreement,
TCI provides certain services to the Company. See "Certain Relationships and
Related Transactions."
PROPERTIES
The Company owns no real property. The Company has entered into
noncancellable operating leases for all of its facilities, all of which expire
at various times through 2001. The Company believes that such facilities are
in good condition and are suitable and adequate for its business operations
for the foreseeable future.
The following table sets forth certain information concerning the Company's
principal properties as of December 31, 1996:
<TABLE>
<CAPTION>
APPROXIMATE EXPIRATION
DESCRIPTION/USE LOCATION SQUARE FOOTAGE OF LEASE
--------------- -------- -------------- ----------
<S> <C> <C> <C>
Corporate Headquarters.. Englewood, Colorado 56,371 6/30/2001
National Call Center.... Englewood, Colorado 50,009 6/30/2001(1)
National Call Center.... Englewood, Colorado 33,745 12/31/1997(1)
Northwest Regional
Office................. Lake Oswego, Oregon 3,236 3/31/1998
Northeast Regional
Office................. State College, Pennsylvania 7,073 8/31/2000
Great Lakes Regional
Office................. St. Charles, Missouri 4,300 2/28/1998
South Central Regional
Office................. Farmers Branch, Texas 4,328 8/31/1998
Southeast Regional
Office................. Atlanta, Georgia 5,308 1/31/2002
Stand-Alone Office...... Hazelhurst, Georgia 2,300 7/01/2000(2)
</TABLE>
- --------
(1) The Company has entered into an agreement in principle to contribute this
facility to a newly-formed joint venture with TCI. See "Certain
Relationships and Related Transactions--Call Center LLC."
(2) The lease for the Stand-Alone Office in Hazelhurst, Georgia was entered
into by TCI Cablevision of Georgia for the use and benefit of the Company.
The Company pays the rent on this facility.
The Company leases additional properties as field offices to support its
sales force.
LEGAL PROCEEDINGS
Other than certain legal proceedings in the ordinary course of business, the
Company is not a party to any litigation that the Company believes will have a
material adverse effect on the Company's financial position or results of
operations.
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REGULATORY MATTERS
GENERAL
Tempo, as the holder of the FCC Permit, and NDTC, as the holder of an
authorization to construct a new facility to uplink signals to satellites to
provide DBS service to the U.S., are subject to the regulatory authority of
the FCC. Authorizations and permits issued by the FCC are required for the
operation of Tempo's satellites and for its and NDTC's uplink facilities that
will be used to transmit signals to such satellites. As a distributor of DBS
programming, Tempo and its affiliates may also be affected by numerous laws
and regulations, including the Communications Act of 1934, as amended (the
"Communications Act").
Although the non-technical aspects of high power DBS operations are
generally subject to less regulation than terrestrial broadcasting, some
regulations do apply and others are proposed. For example, high power DBS
operators which control the video programs they distribute, and DBS licensees
or permittees which are licensed as broadcasters, are subject to equal
employment opportunity requirements and alien ownership restrictions. In
December 1996, the International Bureau of the FCC concluded that foreign
ownership restrictions do not apply to subscription DBS service. This
decision, however, is subject to a pending review by the FCC. Regulations
proposed by the FCC (but not yet adopted) include access requirements for
federal political candidates, limitations on charges for advertising by
political candidates and (subject to the outcome of a pending constitutional
challenge) a requirement that high power DBS providers reserve four to seven
percent of channel capacity for noncommercial programming of an educational
and informational nature. In addition, other regulations may affect the
distribution of programming by a satellite carrier. For example, SHVA
prohibits the retransmission by a satellite carrier of a television broadcast
signal of a network television station to households that receive an adequate
quality over-the-air signal of a television broadcast station affiliated with
such network and to households that receive (or within the past 90 days had
received) through a cable system the signal of a television station affiliated
with such network. PRIMESTAR Partners, EchoStar and NetLink reportedly have
agreed to develop with broadcasters pre-screening techniques for customers
based on zip codes and maps in order to ensure compliance with SHVA. It has
also been reported that the four major television networks and certain of
their affiliates have commenced action against a competitor of the Company,
PrimeTime 24, under the SHVA. No similar action has been taken, or to the
knowledge of the Company, threatened against the Company.
While Tempo and NDTC have generally been successful to date with respect to
compliance with regulatory matters, there can be no assurance that they will
succeed in obtaining all requisite regulatory approvals for their operations
without the imposition of restrictions on or other adverse consequences to
Tempo, NDTC or the Company.
FCC PERMITS AND LICENSES
Tempo holds the FCC Permit, authorizing construction of two or more
satellites to operate 11 transponders at the 119(degrees) W.L. orbital
location and 11 transponders at the 166(degrees) W.L. orbital location. As the
holder of a DBS permit, Tempo is subject to FCC jurisdiction and review
primarily for: (i) authorization of individual satellites (i.e., meeting
minimum financial, legal, and technical standards) and earth stations, (ii)
avoiding interference with other radio frequency transmitters, (iii) complying
with rules the FCC has established specifically for holders of U.S. DBS
authorizations and (iv) complying with applicable provisions of the
Communications Act. The FCC's DBS construction permits are also conditioned on
satisfaction of ongoing construction and related obligations. The FCC's DBS
rules applicable to Tempo require that a DBS permittee place its satellites in
operation within six years following the initial grant of a construction
permit. Tempo's FCC Permit was issued in May 1992, and the permit would expire
in May 1998, absent completion of the system or an approved extension of time.
Tempo DBS-1 was launched on March 8, 1997, and will be stationed in Tempo's
DBS slot at 119(degrees) W.L. following the completion of in-orbit testing. At
present, Tempo must continue to demonstrate that it is exercising due
diligence in progressing toward the completion of its system at 166(degrees)
W.L. Tempo believes it is currently meeting this requirement through the
Satellite Construction Agreement with Loral.
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<PAGE>
There can be no assurance that Tempo will be able to comply with the FCC's
due diligence obligations for 166(degrees) W.L. or that the FCC will determine
that Tempo has complied with such due diligence obligations. Tempo's permit
and its compliance with construction due diligence requirements have been
contested in FCC proceedings by current and potential DBS competitors. If
Tempo is unable to meet the terms of its permit, it would be necessary to
apply to the FCC for an extension of time to complete its DBS system at
166(degrees) W.L. Tempo cannot be certain that such an extension would be
granted.
In addition to the general conditions placed on DBS permits, Tempo's permit
was originally subject to the condition that in areas served by TCI-affiliated
cable systems, Tempo or any related entities shall not offer or provide its
DBS service (i) to subscribers exclusively or primarily as an ancillary or
supplementary cable service, and (ii) in a manner that would allow subscribers
of TCI-affiliated cable systems to receive Tempo's DBS service under terms and
conditions different from those offered or provided to consumers who are not
subscribers to TCI-affiliated cable systems.
In a rulemaking proceeding concluded in December 1995, the FCC removed the
marketing conditions set forth above. The FCC noted, however, that it could in
the future, reimpose such restrictions on Tempo or any other DBS operator.
DirecTv has appealed the FCC's decision to the U.S. Court of Appeals for the
District of Columbia Circuit, arguing, among other things, that the FCC's
decision to remove the conditions on Tempo's permit was arbitrary and
capricious. Tempo cannot predict whether the Court of Appeals will uphold the
FCC's order or whether the FCC will reimpose such restrictions in the future.
In an order, released February 24, 1997, the International Bureau of the FCC
granted, subject to certain conditions, Tempo's request to launch and operate
its satellite at 119(degrees) W.L. and to test its satellite at
109.8(degrees) W.L. for eight weeks. In addition, the International Bureau
required Tempo to submit to the Commission information required to initiate
advance publication and notification of Tempo's operations in accordance with
the Radio Regulations of the International Telecommunications Union. In the
February 1997 order, the International Bureau also granted Tempo authority to
modify its satellite design, as requested in a July 1993 application, and
denied oppositions which had been filed by numerous existing and potential DBS
competitors.
Tempo will also be required to file an application for a license to operate
its satellites in orbit. Tempo expects that the FCC will approve any such
request, but cannot assure the ultimate outcome. FCC licenses must be renewed
at the end of each ten-year license term. FCC licenses are generally renewed
in the ordinary course, absent misconduct by the licensee.
In a rulemaking proceeding concluded in December 1995, the FCC announced
that it would auction 28 channels at 110(degrees) W.L. and 24 channels at
148(degrees) W.L. In adopting an auction, the FCC abandoned its previous
policy of reassigning DBS channels through a method of pro rata distribution
to other DBS permittees, without charge. EchoStar and DirecTv appealed the
FCC's decision to the U.S. Court of Appeals for the District of Columbia
Circuit. The case was heard on October 1, 1996, however, no decision has been
rendered and the outcome cannot be predicted. In January 1996, the FCC
auctioned 28 channels at 110(degrees) W.L. to MCI for $682.5 million, and 24
channels at 148(degrees) W.L. to EchoStar for $52.3 million.
In the December rulemaking, the FCC also adopted several new service rules
for U.S.-licensed DBS operators. The FCC established a requirement that all
new DBS permittees provide service to Alaska and Hawaii if such service is
technically feasible. The FCC also required that all existing U.S.-licensed
DBS permittees provide service to Alaska and Hawaii from at least one of their
currently assigned orbital positions. Finally, the FCC revised its rules with
respect to the use of DBS systems to provide non-DBS services, which revised
rules are expected to make it easier for DBS permittees to use portions of
their satellite capacity for non-DBS services such as data transfer. Tempo
cannot predict how application of these rules will affect its operations, or
the operations of its competitors.
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On November 21, 1996, the International Bureau of the FCC 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, the satellite now used to provide the
PRIMESTAR(R) service. 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 PRIMESTAR(R) signal by subscribers to
such service.
On December 23, 1996, 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 reconsideration requests 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 remove 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.
THE TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 ("1996 Telecom Act") clarifies that the
FCC has exclusive jurisdiction over direct-to-home satellite services, and
that criminal penalties may be imposed for piracy of direct-to-home satellite
services. The 1996 Telecom Act also preempted local (but not state)
governments from imposing taxes or fees on direct-to-home services, including
DBS, and directed the FCC to promulgate regulations prohibiting local
(including state) governments from maintaining zoning or other regulations
that impair a viewer's ability to receive video programming services through
the use of DBS receive-only dishes in residential areas. The FCC has adopted
rules it believes comply with the statutory requirements. Finally, the 1996
Telecom Act required that multichannel video programming distributors such as
DBS operators scramble or block channels providing indecent or sexually
explicit adult programming.
ANTITRUST DECREES
PRIMESTAR Partners and the partners of the Partnership named in the actions
described below are subject to the jurisdiction of the U.S. District Court for
the Southern District of New York to ensure compliance with two antitrust
consent decrees. In United States v. PRIMESTAR Partners, L.P., et al., 93 Civ.
3913 (SDNY, 1993) (the "Federal Decree"), the Partnership and such partners
agreed to refrain from (i) enforcing any provisions of the PRIMESTAR
Partnership Agreement that affect the availability, price, terms or conditions
of sale of programming to any provider of multichannel subscription
television, or (ii) entering into certain other agreements restricting the
availability of programming services. The Federal Decree expires in April
1999. In The States of New York, et al. v. PRIMESTAR Partners, L.P., et al.,
93 Civ. 3068-3907 (SDNY 1994) (the "State Decree" and, together with the
Federal Decree, the "Decrees"), the Partnership and such partners agreed,
among other things, to provide access to certain related programming services
on reasonable terms to other digital satellite service and MMDS providers, to
make certain changes to PRIMESTAR Partners' management structure and the
PRIMESTAR Partnership Agreement, and to limit the use of exclusive programming
agreements. The State Decree expires in part in October 1997, with the
remainder expiring on or before October 1, 1999. The Company was not named as
a defendant in either of the above actions, but may be subject to certain
provisions of one or both of the Decrees as a successor-in-interest to TCI K-
1, Inc. and United Artists K-1 Investments, Inc., indirect subsidiaries of TCI
that were original partners in PRIMESTAR Partners and named defendants in the
actions. The Company believes that it is currently in compliance with the
Decrees in all material respects and that the Decrees do not currently have a
material adverse effect on the Company or its operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME BIRTH DATE POSITION
---- ---------- --------
<S> <C> <C>
Gary S. Howard........... February 22, 1951 President and Chief Executive Officer; Director
Kenneth G. Carroll....... April 21, 1955 Senior Vice President and Chief Financial Officer
Lloyd S. Riddle III...... September 16, 1960 Senior Vice President and Chief Operating Officer
Christopher Sophinos..... January 26, 1952 Senior Vice President
William D. Myers......... March 23, 1958 Vice President and Treasurer
John C. Malone........... March 7, 1941 Chairman of the Board and Director
David P. Beddow.......... December 27, 1943 Director
William E. Johnson....... June 23, 1941 Director
John W. Goddard.......... May 4, 1941 Director
</TABLE>
The following is a five-year employment history for the directors and
executive officers of the Company, including any directorships held in other
public companies.
Gary S. Howard has served as President of the Company since February 1995, a
director of the Company since November 1996 and Chief Executive Officer of the
Company since December 1996. Mr. Howard served as Senior Vice President of
TCIC from October 1994 to December 1996 and as Vice President of TCIC from
December 1991 through October 1994.
Kenneth G. Carroll has served as Senior Vice President and Chief Financial
Officer of the Company since February 1995. Since December 1994, Mr. Carroll
has served as Vice President of TCI K-1, Inc. and as Vice President of United
Artists K-1 Investments, Inc. From April 1994 through January 1995, Mr.
Carroll served as Vice President of Business Operations and Chief Financial
Officer of Netlink USA, a subsidiary of TCI, and from July 1992 to May 1994,
Mr. Carroll served as Senior Director of Finance and Business Operations of
Netlink. From 1990 to July 1992, Mr. Carroll served as Vice President of
Finance of Midwest CATV.
Lloyd S. Riddle III has served as Senior Vice President and Chief Operating
Officer of the Company since February 1995. Mr. Riddle served as State Manager
of TCI of New York from February 1993 to February 1995, Area Manager of TCI of
Iowa from January 1992 to February 1993 and General Manager of TCI of St.
Charles, MO from January 1990 to January 1992.
Christopher Sophinos has served as Senior Vice President of the Company
since February 1996. Mr. Sophinos has served as the President of Boats
Unlimited since November 1993 and as a director of Sophinos & Sons, Inc. since
November 1993. Mr. Sophinos served as the President of Midwest CATV, a
division of UNR Industries, Inc., from July 1987 to November 1993.
William D. Myers has served as Vice President and Treasurer of the Company
since September 1996. Mr. Myers served as Vice President of TCI Cable
Management Corporation from November 1994 through August 1996. Mr. Myers
served as Director of Finance of TCI from December 1991 to November 1994.
John C. Malone has served as Chairman of the Board and a director of the
Company since December 1996. Dr. Malone has served as Chief Executive Officer
of TCI since January 1994, and as Chairman of the Board of TCI since November
1996. Dr. Malone served as President of TCI from January 1994 to March 1997,
as Chief Executive Officer of TCIC from March 1992 to October 1994 and as
President of TCIC from 1973 to October 1994. Dr. Malone has also served as
Chairman of the Board and as a director of Tele-Communications International,
Inc. since May 1995. Dr. Malone is also a director of TCI, TCIC, TCI Pacific
Communications, Inc., BET Holdings, Inc. and The Bank of New York.
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David P. Beddow has served as a director of the Company since December 1996.
Mr. Beddow has served as Senior Vice President of TCI Technology Ventures,
Inc., a Delaware corporation and a subsidiary of TCI ("TCITV") and NDTC since
February 1995. Mr. Beddow served as Vice President of TCI Technology, Inc.
from June 1993 to February 1995 and as Executive Vice President and Chief
Operating Officer of PRIMESTAR Partners from March 1990 to June 1993. Mr.
Beddow has served as president of United Video Satellite Group, Inc. ("UVSG"),
a subsidiary of TCI, since February 1997 and as a director of UVSG since
January 1996.
William E. Johnson has served as a director of the Company since December
1996. Mr. Johnson served as Chief Executive Officer of Scientific Atlanta,
Inc. from January 1987 to December 1992, at which time he retired. Mr. Johnson
has served as a director of Intelligent Electronic, Inc. since November 1994
and as a director of ATX, Inc. since January 1993. Mr. Johnson was a director
of I.C.T. from 1991 to 1993.
John W. Goddard has served as a director of the Company since December 1996.
Mr. Goddard served as President and Chief Executive Officer of the cable
division of Viacom International, Inc. from 1980 through July 1996, at which
time he retired. Mr. Goddard has served as a director of StarSight Telecast,
Inc. since May 1994.
The directors of the Company will hold office until the next annual meeting
of stockholders of the Company and until their successors are duly elected and
qualified. The executive officers named above will be elected to serve in such
capacities until the next annual meeting of the Board, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office.
There is no family relationship between any of the directors.
BOARD COMPOSITION
The Company's charter provides for a classified Board of not less than three
members, divided into three classes of approximately equal size, with each
class to be elected for a three year term at each annual meeting of
stockholders. The exact number of directors, currently five, is fixed by
resolution of the Board. On the Distribution Date, the number of directors on
the Board was fixed at five. For purposes of determining their terms,
directors are divided into three classes. The Class I director, whose term
expires at the 1997 annual stockholders' meeting, is Mr. Beddow. The Class II
directors, whose terms expire at the 1998 annual stockholders' meeting, are
Messrs. Howard and Johnson. The Class III directors, whose terms expire at the
1999 annual stockholders' meeting, are Dr. Malone and Mr. Goddard. Each
director elected at an annual stockholders' meeting will serve for a term
ending on the date of the annual stockholders' meeting held in the third year
following the year of his election or until his earlier death, resignation or
removal.
COMMITTEES OF THE COMPANY'S BOARD OF DIRECTORS
The Company's Board currently has an Audit Committee and a Compensation
Committee, both of which were established in December 1996.
The Audit Committee of the Board, whose present members are Messrs. Goddard
(Committee Chairman) and Johnson, consists of only nonemployee directors. The
Audit Committee meets periodically with management and representatives of the
Company's independent auditors. The Audit Committee reviews the scope and
approach of external audit activities and the results of such audits and is
responsible for making the annual recommendation to the Company's Board of the
firm of independent accountants to be retained by the Company to perform the
annual audit.
The Compensation Committee, whose present members are Messrs. Johnson
(Committee Chairman) and Goddard, consists of only nonemployee directors. The
Compensation Committee is responsible for recommending the salaries and
compensation programs for executive officers to the Board. This committee is
also responsible for administering the Company's stock incentive plan and
certain other benefit programs. None of the members of the Compensation
Committee are entitled to participate in any of the Company's employee benefit
plans administered by the Compensation Committee.
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<PAGE>
The Company's Board may from time to time establish certain other committees
of the Board and may fill any vacancies on any committee of the Board as it
deems advisable.
COMPENSATION OF DIRECTORS
Members of the Board who are also full-time employees of the Company or TCI,
or any of their respective subsidiaries, do not receive any additional
compensation for their services as directors. Directors who are not full-time
employees of the Company or TCI, or any of their respective subsidiaries,
receive a retainer of $30,000 per year. All members of the Board are also
reimbursed for expenses incurred to attend any meetings of the Board or any
committee thereof.
See also "Certain Relationships and Related Transactions--Other
Arrangements."
EXECUTIVE COMPENSATION
Summary Compensation Table. Certain directors, officers and employees of TCI
and its subsidiaries (including the Company, prior to the Distribution) have
been granted options to purchase shares of Series A TCI Group Common Stock
("TCI Options") and stock appreciation rights with respect to shares of Series
A TCI Group Common Stock ("TCI SARs"). The TCI Options and TCI SARs have been
granted pursuant to various stock plans of TCI (the "TCI Plans"). The TCI
Plans give the committee of the Board of Directors of TCI (the "TCI Board")
that administers the TCI Plans (the "TCI Plan Committee") the authority to
make equitable adjustments to outstanding TCI Options and TCI SARs in the
event of certain transactions, of which the Distribution was one.
The TCI Plan Committee and the TCI Board determined that, immediately prior
to the Distribution, each TCI Option would be divided into two separately
exercisable options: (i) an option to purchase Series A Common Stock (an "Add-
on Company Option"), exercisable for the number of shares of Series A Common
Stock that would have been issued in the Distribution in respect of the shares
of Series A TCI Group Common Stock subject to the applicable TCI Option, if
such TCI Option had been exercised in full immediately prior to the Record
Date, and containing substantially equivalent terms as the existing TCI
Option, and (ii) an option to purchase Series A TCI Group Common Stock (an
"Adjusted TCI Option"), exercisable for the same number of shares of Series A
TCI Group Common Stock as the corresponding TCI Option had been. The aggregate
exercise price of each TCI Option was allocated between the Add-on Company
Option and the Adjusted TCI Option into which it was divided, and all other
terms, including date of grant, of the Add-on Company Option and Adjusted TCI
Option are in all material respects the same as the terms of such TCI Option,
except that references therein to TCI generally refer to the Company with
respect to Adjusted TCI Options and Add-on Company Options (and related stock
appreciation rights ("SARs") held by Company Employees (as defined below).
Similar adjustments were made to the outstanding TCI SARs, resulting in the
holders thereof holding Adjusted TCI SARs and Add-on Company SARs instead of
TCI SARs, and to outstanding restricted share awards, resulting in the holders
thereof holding restricted shares of Series A Common Stock in addition to
restricted shares of Series A TCI Group Common Stock, effective immediately
prior to the Distribution. The foregoing adjustments were made pursuant to the
anti-dilution provisions of the TCI Plans pursuant to which the respective TCI
Options and TCI SARs were granted.
As a result of the foregoing, certain persons who remained TCI employees or
non-employee directors after the Distribution and certain persons who were TCI
employees prior to the Distribution but became Company employees after the
Distribution hold both Adjusted TCI Options and separate Add-on Company
Options and/or hold both Adjusted TCI SARs and separate Add-on Company SARs.
The obligations with respect to the Adjusted TCI Options, Add-on Company
Options, Adjusted TCI SARs and Add-on Company SARs held by TCI employees and
non-employee directors are obligations solely of TCI. The obligations with
respect to the Adjusted TCI Options, Add-on Company Options, Adjusted TCI SARs
and Add-on Company SARs held by persons who were Company employees at the time
of the Distribution and following the Distribution are no longer TCI employees
("Company Employees") are obligations solely of the Company. Prior to the
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<PAGE>
Distribution, TCI and the Company entered into an agreement to sell to each
other from time to time at the then current market price shares of Series A
TCI Group Common Stock and Series A Common Stock, respectively, as necessary
to satisfy their respective obligations under such securities. See "Certain
Relationships and Related Transactions."
TCI, in addition to the TCI Group Common Stock, has two other series of
common stock outstanding--the Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, $1.00 par value per share ("Series A Liberty Media Group
Common Stock"), and the Tele-Communications, Inc. Series B Liberty Media Group
Common Stock, $1.00 par value per share ("Series B Liberty Media Group Common
Stock"), which are intended to reflect the separate performance of TCI's
programming and electronic retailing businesses (the "Liberty Media Group").
Prior to the Distribution, the Company was a member of the group of TCI
businesses not attributed to the Liberty Media Group (the "TCI Group") and all
of the assets and businesses transferred to the Company were included in the
TCI Group. Accordingly, the Distribution was made to the TCI Group
Stockholders and the holders of Liberty Media Group Common Stock did not
participate in the Distribution.
The following table is a summary of all forms of compensation paid by the
Company (or by TCI or any other subsidiary of TCI) to the officers named
therein for services rendered in all capacities to the Company (and, prior to
the Distribution, TCI) for the fiscal years ended December 31, 1996 and 1995
(total of five persons).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------- ---------------------------------
OTHER ALL
ANNUAL RESTRICTED OTHER
COMPEN- STOCK SECURITIES COMPEN-
NAME AND PRINCIPAL SATION AWARD UNDERLYING SATION
POSITION WITH THE COMPANY YEAR SALARY($) BONUS ($) ($)(1) ($)(2) OPTIONS/SARS ($)(5)
- ------------------------- ---- --------- --------- ------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary S. Howard.......... 1996 $275,000 $23,210(6) $4,230 664,076(3) $15,000
(President and Chief 1995 $262,500 $23,210(6) $3,415 $309,375 165,000(4) $15,000
Executive Officer)
Lloyd S. Riddle III..... 1996 $140,000 $41,212 $3,263 $ -- -- $15,000
(Senior Vice President 1995 $123,078 $34,478 $1,557 $ -- 19,250(4) $13,439
and Chief Operating Of-
ficer)
Kenneth G. Carroll...... 1996 $119,423 $33,150 $ -- $ -- -- $ 9,500
(Senior Vice President 1995 $ 98,845 $27,199 $ 861 $ -- 19,250(4) $ 3,668
and Chief Financial
Officer)
William D. Myers........ 1996 $115,010 $ 5,000 $2,683 $ -- -- $ 8,639
(Vice President and 1995 $108,130 $ -- $2,425 $ -- 11,000(4) $ 8,839
Treasurer)
Christopher Sophinos.... 1996 $ 96,865(7) $10,750(7) $ -- $ -- -- $ --
(Senior Vice President)
</TABLE>
- --------
(1) Consists of amounts reimbursed during the year for the payment of taxes.
(2) Pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan (the
"TCI 1994 Plan"), on December 13, 1995, Mr. Howard was granted 15,000
restricted shares of Series A TCI Group Common Stock, and in connection
with the Distribution, received 1,500 restricted shares of Series A Common
Stock. Such restricted shares vest as to 50% of such shares on December
13, 1999 and as to the remaining 50% on December 13, 2000. The value of
such restricted shares at the end of 1996 was $210,750. TCI and the
Company have not paid cash dividends on the Series A TCI Group Common
Stock and Series A Common Stock, respectively, and do not anticipate
declaring and paying cash dividends on the Series A TCI Group Common Stock
and Series A Common Stock, respectively, at any time in the foreseeable
future.
(3) For additional information regarding this award, see "--Option and SAR
Grants in Last Fiscal Year," below.
(4) On December 13, 1995, pursuant to the Tele-Communications, Inc. 1995 Stock
Incentive Plan, certain key employees of TCI were granted an aggregate of
2,757,500 options in tandem with stock appreciation rights
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to acquire shares of Series A TCI Group Common Stock. Messrs. Howard,
Riddle, Carroll and Myers were granted 150,000, 17,500, 17,500 and 10,000
options, respectively. In connection with the Distribution, Messrs. Howard,
Riddle, Carroll and Myers received 15,000, 1,750, 1,750 and 1,000 Add-on
Company Options, respectively. Each such grant of options with tandem stock
appreciation rights vests evenly over five years with such vesting period
beginning August 4, 1995, first became exercisable on August 4, 1996 and
expires on August 4, 2005. Notwithstanding the vesting schedule as set
forth in the option agreement, the option shares shall become available for
purchase if the grantee's employment with the Company (a) shall terminate
by reason of (i) termination by the Company without cause (ii) termination
by the grantee for good reason (as defined in the agreement) or (iii)
disability, (b) shall terminate pursuant to provisions of a written
employment agreement, if any, between the grantee and the Company which
expressly permits the grantee to terminate such employment upon occurrence
of specified events (other than the giving of notice and passage of time),
or (c) if the grantee dies while employed by the Company. Further, the
option shares will become available for purchase in the event of an
Approved Transaction, Board Change, or Control Purchase (each as defined
with reference to TCI), unless in the case of an Approved Transaction, the
Compensation Committee of TCI under the circumstances specified determines
otherwise.
(5) The accounts in the TCI Employee Stock Purchase Plan ("TCI ESPP") of all
employees of the Company became vested in full as of the effective time of
the Distribution. Directors who are not employees of TCI are ineligible to
participate in the TCI ESPP. The TCI ESPP, a defined contribution plan,
enables participating employees to acquire a proprietary interest in TCI
and benefits upon retirement. Under the terms of the TCI ESPP, employees
are eligible for participation after one year of service. The TCI ESPP's
normal retirement age is 65 years. Participants may contribute up to 10%
of their compensation and TCI (by annual resolution of the TCI Board) may
contribute up to a matching 100% of the participants' contributions. The
TCI ESPP includes a salary deferral feature in respect of employee
contributions. Forfeitures (due to participants' withdrawal prior to full
vesting) are used to reduce TCI's otherwise determined contributions.
Although TCI has not expressed an intent to terminate the TCI ESPP, it may
do so at any time. Effective January 1, 1997, TSAT adopted an Employee
Stock Purchase Plan, and, effective as of the Distribution Date, employees
of the Company discontinued making contributions to the TCI ESPP.
(6) This amount reflects the amortization of obligations under an employment
contract between Mr. Howard and a prior employer, which obligations were
assumed by TCI in connection with the acquisition of such prior employer,
and were assumed by the Company in connection with the Distribution.
(7) Mr. Sophinos commenced employment on February 27, 1996, and accordingly,
the 1996 compensation information included in the table reflects ten
months of employment.
Option and SARs Grants in Last Fiscal Year. On the Distribution Date, the
Company Board adopted, and TCI, as the sole stockholder of the Company prior
to the Distribution, approved, the TCI Satellite Entertainment, Inc. 1996
Stock Incentive Plan (the "1996 Plan"). The 1996 Plan provides for awards to
be made in respect of a maximum of 3,200,000 shares of Series A Common Stock
(subject to certain anti-dilution adjustments). Awards may be made as grants
of stock options, SARs, restricted shares, stock units, performance awards or
any combination thereof (collectively, "Awards"). Awards may be made to
employees and to consultants and advisors to the Company who are not
employees. Shares of Series A Common Stock that are subject to Awards that
expire, terminate or are annulled for any reason without having been exercised
(or deemed exercised, by virtue of the exercise of a related SAR), or are
forfeited prior to becoming vested, will return to the pool of such shares
available for grant under the 1996 Plan.
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The following table discloses information regarding stock options granted in
tandem with stock appreciation rights during the year ended December 31, 1996
to each of the named executive officers of the Company in respect of shares of
Series A Common Stock under the 1996 Plan.
<TABLE>
<CAPTION>
NO. OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR MARKET PRICE
OPTIONS EMPLOYEES IN BASE PRICE ON GRANT GRANT DATE
NAME GRANTED 1995 ($/SH) DATE ($/SH) EXPIRATION DATE PRESENT VALUE $
- ---- ---------- ------------ ----------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Howard.......... 664,076 28.6%(1) $8.86 $12.625(2) February 1, 2006 $5,806,083(3)
</TABLE>
- --------
(1) On the Distribution Date, Mr. Howard was granted an option to purchase
shares of Series A Common Stock representing 1.0% of the number of shares
of Company Common Stock issued and outstanding on the Distribution Date,
determined immediately after giving effect to the Distribution, but before
giving effect to the exercise of such option or certain other options. For
additional information concerning such grant, see "Certain Relationships
and Related Transactions--Other Arrangements."
(2) Represents the closing market price per share of Series A Common Stock on
December 5, 1996, the first day of trading following the date of grant.
(3) The value shown is based on the Black-Scholes model and is stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 6.22% discount rate; (b) a 35% volatility factor; (c) the 10-year
option term; (d) the closing price of Series A Common Stock on December 5,
1996; and (e) a per share exercise price of $8.86. The actual value an
executive may realize will depend upon the extent to which the stock price
exceeds the exercise price on the date the option is exercised.
Accordingly, the value, if any, realized by an executive will not
necessarily be the value determined by the model.
Effective February 3, 1997, certain key employees of TSAT were granted,
pursuant to the 1996 Plan, an aggregate of 820,000 options in tandem with
stock appreciation rights to acquire shares of Series A Common Stock at a per
share exercise price of $8.00 per share and an aggregate of 325,000 restricted
shares of Series A Common Stock (the "1997 Grant"). Mr. Howard was granted
125,000 restricted shares, and each of Messrs. Riddle, Carroll, Myers and
Sophinos were granted 100,000 options in tandem with stock appreciation rights
and 50,000 restricted shares. Each such grant of options with tandem stock
appreciation rights vests evenly over five years with such vesting period
beginning January 1, 1997, first becomes exercisable on January 1, 1998 and
expires on December 31, 2006. Each such grant of restricted shares vests as to
50% on January 1, 2001 and as to the remaining 50% on January 1, 2002.
Notwithstanding the vesting schedule as set forth in the option agreement, the
option shares shall become available for purchase if the grantee's employment
with the Company (a) shall terminate by reason of (i) termination by the
Company without cause (ii) termination by the grantee for good reason (as
defined in the agreement) or (iii) disability, (b) shall terminate pursuant to
provisions of a written employment agreement, if any, between the grantee and
the Company which expressly permits the grantee to terminate such employment
upon occurrence of specified events (other than the giving of notice and
passage of time), or (c) if the grantee dies while employed by the Company.
Further, the option shares will become available for purchase in the event of
an Approved Transaction, Board Change, or Control Purchase (each as defined),
unless in the case of an Approved Transaction, the Compensation Committee of
the Company under the circumstances specified determines otherwise.
91
<PAGE>
Aggregated TCI Option/SAR Exercises and Fiscal Year-End TCI Option/SAR
Values. The following table provides, for the executives named in the Summary
Compensation Table, information on the exercise during the year ended December
31, 1996, of Add-on Company Options, Adjusted TCI Options and options to
purchase Series A Liberty Media Group Common Stock, the number of shares of
Series A Common Stock, Series A TCI Group Common Stock and Series A Liberty
Media Group Common Stock represented by unexercised options owned by them at
December 31, 1996, and the value of those options as of the same date. The
number of options granted to purchase shares of Series A Liberty Group Common
Stock and the price to purchase such options has been adjusted to give effect
to the distribution on January 14, 1997 by TCI of one share of Series A
Liberty Media Group Common Stock for each two shares of Series A Liberty Media
Group Common Stock held of record and one share of Series A Liberty Media
Group Common Stock for each two shares of Series B Liberty Media Group Common
Stock held of record.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS/SARS AT OPTIONS/SARS
ACQUIRED ON REALIZED DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996 ($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(1)
---- ------------ -------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Gary S. Howard
Exercisable
Series A............ -- -- 12,750 $ --
Series A TCI Group.. -- -- 127,500 $179,219
Series A Liberty
Media.............. -- -- 36,563 $261,865
Unexercisable
Series A............ -- -- 681,326 $674,037
Series A TCI Group.. -- -- 172,500 $ 52,031
Series A Liberty
Media.............. -- -- 19,687 $115,685
Lloyd S. Riddle III
Exercisable
Series A............ -- -- 510 $ --
Series A TCI Group.. -- -- 5,100 $ --
Series A Liberty
Media.............. -- -- 600 $ 2,623
Unexercisable
Series A............ -- -- 1,640 $ --
Series A TCI Group.. -- -- 16,400 $ --
Series A Liberty
Media.............. -- -- 900 $ 3,935
Kenneth G. Carroll
Exercisable
Series A............ -- -- 510 $ --
Series A TCI Group.. -- -- 5,100 $ --
Series A Liberty
Media.............. -- -- 600 $ 2,623
Unexercisable
Series A............ -- -- 1,640 $ --
Series A TCI Group.. -- -- 16,400 $ --
Series A Liberty
Media.............. -- -- 900 $ 3,935
William D. Myers
Exercisable
Series A............ -- -- 560 $ --
Series A TCI Group.. -- -- 5,600 $ --
Series A Liberty
Media.............. -- -- 1,350 $ 5,902
Unexercisable
Series A............ -- -- 1,340 $ --
Series A TCI Group.. -- -- 13,400 $ --
Series A Liberty
Media.............. -- -- 2,025 $ 8,853
</TABLE>
- --------
(1) Share numbers and values do not include any amounts with respect to the
1997 Grant. See "--Option and SARs Grants in Last Fiscal Year" above.
92
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following table lists stockholders believed by the Company to be the
beneficial owners of more than five percent of the outstanding Company Common
Stock as of December 31, 1996. Shares issuable upon exercise of options and
upon vesting of restricted shares are deemed to be outstanding for the purpose
of computing the percentage ownership and overall voting power of persons
believed to beneficially own such securities, but have not been deemed to be
outstanding for the purpose of computing the percentage ownership or overall
voting power of any other person. Voting power in the table is computed with
respect to a general election of directors. The number of shares in the table
of Dr. Malone includes interests in shares held by the trustee of the TCI
ESPP. So far as is known to the Company, the persons indicated below have sole
voting and investment power with respect to the shares indicated as believed
to be owned by them except as otherwise stated in the notes to the table, and
except for the shares held by the trustee of the TCI ESPP for the benefit of
Dr. Malone, which shares are voted at the discretion of the trustee.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
SHARES OF VOTING
NAME AND ADDRESS TITLE BENEFICIALLY CLASS POWER
OF BENEFICIAL OWNER OF CLASS OWNED (1) (1)
------------------- -------- ------------ ------- ------
<S> <C> <C> <C> <C>
Donne F. Fisher (individually and Series A 411,069(2)(3) * 22.0%
as Co-Personal
Representative of the Estate of Series B 3,103,493(2) 36.7%
Bob Magness)
5619 DTC Parkway
Englewood, Colorado
Daniel L. Ritchie (as Co-Personal Series A 352,432(2) * 21.8%
Representative
of the Estate of Bob Magness) Series B 3,078,586(2) 36.4%
5619 DTC Parkway
Englewood, Colorado
John C. Malone, Chairman of the Series A 217,271(4)(5) * 17.9%
Board
5619 DTC Parkway Series B 2,533,208(6) 29.9%
Englewood, Colorado
Kearns-Tribune Corporation Series A 879,251(7) 1.5% 7.0%
400 Tribune Building Series B 911,250(7) 10.8%
Salt Lake City, Utah
The Associated Group, Inc. Series A 1,247,997(7) 2.2% 5.8%
200 Gateway Towers Series B 707,185(8) 8.4%
Pittsburgh, Pennsylvania
Kim Magness (individually and as Series A 231,533(9) * 5.0%
Personal
Representative of the Estate of Series B 686,421(9) 8.1%
Betsy Magness)
4000 E. Belleview
Greenwood Village, Colorado
J. P. Morgan & Co., Incorporated Series A 6,804,348(10) 11.7% 4.8%
60 Wall Street Series B -- --
New York, New York
Wellington Management Company, LLP Series A 3,075,820(11) 5.3% 2.2%
75 State Street Series B -- --
Boston, Massachusetts
The Capital Group Companies, Inc. Series A 2,996,060(12) 5.2% 2.1%
333 South Hope Street Series B -- --
Los Angeles, California
</TABLE>
93
<PAGE>
- --------
*Less than one percent.
(1) Based on 57,946,044 shares of Series A Common Stock and 8,466,564 shares
of Series B Common Stock outstanding as of December 31, 1996.
(2) Includes 352,432 shares of Series A Common Stock and 3,078,586 shares of
Series B Common Stock held by the Estate of Bob Magness. Messrs. Fisher
and Ritchie are each deemed to have beneficial ownership over such shares
as Co-Personal Representatives of the Estate of Bob Magness. Assumes the
exercise in full of all Add-On Company Options and Add-On Company SARs,
whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1992 to acquire 100,000 shares of Series A Common
Stock; and (ii) stock options granted in tandem with stock appreciation
rights in December of 1995 to acquire 100,000 shares of Series A Common
Stock. All options became fully vested upon the death of Bob Magness and,
pursuant to the applicable TCI Plans, must be exercised within one year.
(3) Assumes the exercise in full of all Add-On Company Options and Add-on
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with stock
appreciation rights in November of 1994 to acquire 20,000 shares of
Series A Common Stock, of which options to acquire 8,000 shares are
currently exercisable; and (ii) stock options granted in January of 1996
to acquire 5,000 shares of Series A Common Stock, of which options to
acquire 1,000 shares are currently exercisable. Also includes 20,000
shares of Series A Common Stock held by Mr. Fisher's children, of which
Mr. Fisher disclaims any beneficial ownership.
(4) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 100,000 shares of
Series A Common Stock, of which options to acquire 80,000 shares are
currently exercisable; and (ii) stock options granted in tandem with
stock appreciation rights in December of 1995 to acquire 100,000 shares
of Series A Common Stock, of which options to purchase 20,000 shares are
currently exercisable.
(5) On February 27 and 28, 1997, Dr. Malone purchased in open market
transactions 1,450,000 shares of Series A Common Stock for an aggregate
purchase price of $11,587,500. If such purchases had been included in the
foregoing table, Dr. Malone's percentage ownership of the outstanding
Series A Common Stock would have increased to 2.9% and Dr. Malone's
voting interests with respect to the outstanding Company Common Stock
would have increased to 18.9%.
(6) Includes 117,300 shares of Series B Common Stock held by Dr. Malone's
wife, Mrs. Leslie Malone, but Dr. Malone disclaims any beneficial
ownership of such shares.
(7) The number of shares in the table is based on information provided by the
respective stockholder.
(8) The number of shares in the table is based upon a Schedule 13D, dated
December 12, 1996, filed by The Associated Group, which Schedule 13D
reflects that said corporation has shared voting power and dispositive
power over 707,185 shares of Series B Common Stock.
(9) Includes 210,533 shares of Series A Common Stock and 634,621 shares of
Series B Common Stock held by the Estate of Betsy Magness. Mr. Magness is
deemed to have beneficial ownership over such shares as Personal
Representative of the Estate of Betsy Magness. Also assumes the exercise
in full of all Add-on Company Options and Add-on Company SARs, whether or
not then exercisable or in-the-money of stock options granted in November
of 1994 to acquire 5,000 shares of Series A Common Stock, of which
options to acquire 2,000 shares are currently exercisable.
(10) The number of shares in the table is based upon a Schedule 13G, dated
December 31, 1996, filed by J.P. Morgan & Co. Incorporated, which
Schedule 13G reflects that said corporation has sole voting power over
4,386,198 shares, shared voting power over 53,773 shares, sole
dispositive power over 6,717,998 shares and shared dispositive power over
82,560 shares of Series A Common Stock.
(11) The number of shares in the table is based upon a Schedule 13G, dated
January 24, 1997, filed by Wellington Management Company, LLP which
Schedule 13G reflects that said corporation has shared voting power over
2,629,137 shares and shared dispositive power over 3,075,820 shares of
Series A Common Stock.
(12) The number of shares in the table is based upon a Schedule 13G, dated
February 12, 1997, filed by The Capital Group Companies, Inc. which
Schedule 13G reflects that said corporation has sole voting power over
286,920 shares and sole dispositive power over 2,996,060 shares of Series
A Common Stock.
94
<PAGE>
Security Ownership of Management. The following table lists the number of
shares of Company Common Stock believed to be owned beneficially by each
director, each of the executive officers named in the above Summary
Compensation Table, and all directors and executive officers as a group as of
December 31, 1996, according to data furnished by the persons named. Shares
issuable upon exercise of options and upon vesting of restricted shares are
deemed to be outstanding for the purpose of computing the percentage ownership
and overall voting power of persons believed to beneficially own such
securities, but have not been deemed to be outstanding for the purpose of
computing the percentage ownership or overall voting power of any other
person. Voting power in the table is computed with respect to a general
election of directors. The number of shares in the table is based on amounts
which include interests of the named directors or executive officers or
members of the group of directors and executive officers in shares held by the
trustee of the TCI ESPP and shares held by the trustee of the United Artist
Entertainment Employee Stock Ownership Plan for their respective accounts. So
far as is known to the Company, the persons indicated below have sole voting
and investment power with respect to the shares indicated as believed to be
owned by them except for the shares held by the trustee of the TCI ESPP for
the benefit of such person, which shares are voted at the discretion of the
trustee.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT OF CLASS(1)
-------------------------- -------------------- VOTING
NAME SERIES A(2) SERIES B SERIES A(2) SERIES B POWER(1)2)
---- ----------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Directors:
John C. Malone........ 217,271(3)(4) 2,533,208(5) * 29.9% 17.9%
Gary S. Howard........ 699,986(6) -- 1.2% -- *
David P. Beddow....... 364,526(7) -- * -- *
William E. Johnson.... 1,900 10 * * *
John W. Goddard....... 1,408(8) 1,425(8) * * *
Other Named Executive
Officers:
Kenneth G. Carroll.... 2,340(9) -- * -- *
Lloyd S. Riddle III... 2,736(9) -- * -- *
William D. Myers...... 2,386(10) -- * -- *
Christopher Sophinos.. -- -- -- -- --
All directors and
executive officers as a
group (nine persons)... 1,292,553(11) 2,534,643(5)(6) 2.2% 29.9% 18.5%
</TABLE>
- --------
*Less than one percent.
(1) Based on 57,946,044 shares of Series A Common Stock and 8,466,564 shares
of Series B Common Stock outstanding as of December 31, 1996.
(2) Amounts and percentages do not give effect to the 1997 Grant. If the
shares underlying the options in tandem with SARs, and the restricted
stock awards granted to all directors and executive officers as a group
had been included in the foregoing table, (i) the aggregate number of
shares of Series A Common Stock beneficially owned by such persons would
have increased to 2,017,553; (ii) the aggregate percentage of Series A
Common Stock beneficially owned by such persons would have increased to
3.4%; and the aggregate voting interests of such persons with respect to
the Company Common Stock would have increased to 19.1%. See "--Options and
SARs Grants in Last Fiscal Year."
(3) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 100,000 shares of
Series A Common Stock, of which options to acquire 80,000 shares are
currently exercisable; and (ii) stock options granted in tandem with stock
appreciation rights in December of 1995 to acquire 100,000 shares of
Series A Common Stock, of which options to purchase 20,000 shares are
currently exercisable.
(4) On February 27 and 28, 1997, Dr. Malone purchased in open market
transactions 1,450,000 shares of Series A Common Stock for an aggregate
purchase price of $11,587,500. If such purchases had been included in the
foregoing table, Dr. Malone's percentage ownership of Series A Common
Stock would have increased
95
<PAGE>
to 2.9% and Dr. Malone's voting interests with respect to Company Common
Stock would have increased to 18.9%.
(5) Includes 117,300 shares of Series B Common Stock held by Dr. Malone's
wife, Mrs. Leslie Malone, but Dr. Malone disclaims any beneficial
ownership of such shares.
(6) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 5,000 shares of Series
A Common Stock, of which options to acquire 4,000 shares are currently
exercisable; (ii) stock options in tandem with stock appreciation rights
granted in October of 1993 to acquire 5,000 shares of Series A Common
Stock, of which options to acquire 3,750 shares are currently exercisable;
(iii) stock options in tandem with stock appreciation rights granted in
November of 1994 to acquire 5,000 shares of Series A Common Stock, of
which options to acquire 2,000 shares are currently exercisable; (iv)
stock options granted in tandem with stock appreciation rights in December
of 1995 to purchase 15,000 shares of Series A Common Stock, of which
options to acquire 3,000 shares are currently exercisable; and (v) stock
options granted in December of 1996 to purchase 664,076 shares of Series A
Common Stock, of which options to acquire 132,815 shares are currently
exercisable. Additionally assumes the vesting in full of 1,500 restricted
shares of Series A Common Stock, none of which are currently vested. Also
includes 1,022 shares of Series A Common Stock held by trusts in which Mr.
Howard is beneficial owner as trustee for his children.
(7) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with stock
appreciation rights in October of 1993 to acquire 750 shares of Series A
Common Stock, of which options to acquire 562 shares are currently
exercisable; (ii) stock options granted in tandem with stock appreciation
rights in November of 1994 to acquire 5,000 shares of Series A Common
Stock, of which options to purchase 2,000 shares are currently
exercisable; (iii) stock options granted in tandem with stock appreciation
rights in December of 1995 to purchase 25,000 shares of Series A Common
Stock, of which options to purchase 5,000 shares are currently
exercisable; and (iv) stock options granted in December of 1996 to
purchase 332,038 shares of Series A Common Stock, of which options to
acquire 66,407 shares are currently exercisable. Additionally assumes the
vesting in full of 1,500 restricted shares of Series A Common Stock, none
of which are currently vested.
(8) Includes 478 shares of Series A Common Stock held by Mr. Goddard's wife,
of which Mr. Goddard is beneficial owner, and 129 shares of Series B
Common Stock held by a trust in which Mr. Goddard is beneficial owner as
trustee.
(9) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with stock
appreciation rights in November of 1994 to acquire 400 shares of Series A
Common Stock, of which options to acquire 160 shares of Series A Common
Stock are currently exercisable; and (ii) stock options granted in tandem
with stock appreciation rights in December of 1995 to purchase 1,750
shares of Series A Common Stock, of which options to purchase 350 shares
of Series A Common Stock are currently exercisable.
(10) Assumes the exercise in full of all Add-On Company Options and Add-On
Company SARs, whether or not then exercisable or in-the-money, in respect
of the following: (i) stock options granted in tandem with stock
appreciation rights in November of 1994 to acquire 900 shares of Series A
Common Stock, of which options to acquire 360 shares of Series A Common
Stock are currently exercisable; and (ii) stock options granted in tandem
with stock appreciation rights in December of 1995 to purchase 1,000
shares of Series A Common Stock, of which options to purchase 200 shares
are currently exercisable.
(11) See notes (2), (3), (4), (5), (6), (7), (8), (9) and (10) above.
96
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
John Malone is currently the Chairman of the Board and a director of TCI and
is also the Chairman of the Board and a director of the Company. Dr. Malone is
also a principal stockholder of both TCI and the Company. See "Management---
Directors and Executive Officers," "Security Ownership of Certain Beneficial
Owners and Management" and "Risk Factors---Potential Conflicts of Interest."
In addition, as an officer of TCIC prior to the Distribution, Gary Howard, the
President and a director of the Company, had the benefit of certain
undertakings of indemnification from TCI and TCIC, which have survived the
Distribution. See "--Other Arrangements."
The Company was formed to own and operate TCI SATCO in connection with the
Distribution. On the Distribution Date, TCI distributed all the shares of
Company Common Stock held by TCI to the holders of record of TCI Group Common
Stock (other than certain subsidiaries of TCI that waived their right to
participate in such distribution) at the close of business on the Record Date,
without any consideration being paid by such holders, on the basis of one
share of Series A Common Stock for each ten shares of Series A TCI Group
Common Stock, and one share of Series B Common Stock for each ten shares of
Series B TCI Group Common Stock held by such holders on the Record Date.
TCI, through various subsidiaries, was engaged in the business of
distributing PRIMESTAR(R) from December 1990 until the consummation of the
Distribution. TCI Digital Satellite Entertainment, Inc., a Colorado
corporation ("Digital"), was incorporated in February 1995 in order to
consolidate the PRIMESTAR By TCI distribution business into one subsidiary. In
connection with the Distribution, Digital was merged with and into the
Company, as a means of reincorporating Digital in Delaware.
Since the consummation of the Distribution, the Company and TCI have
operated independently, and neither has any stock ownership, beneficial or
otherwise, in the other. However, for the purposes of governing certain of the
ongoing relationships between the Company and TCI after the Distribution, and
to provide mechanisms for an orderly transition, the Company and TCI have
entered into various agreements, including the "Reorganization Agreement," the
"Transition Services Agreement," an amendment to TCI's existing "Tax Sharing
Agreement," the "Indemnification Agreements," the "Trade Name and Service Mark
Agreement" and the "Share Purchase Agreement," all of which are described
below. In addition, TCIC continues to provide installation, maintenance,
retrieval and other customer fulfillment services for certain customers of the
Company, pursuant to the "Fulfillment Agreement," and entered into the "TCIC
Credit Facility" with the Company, both of which are described below.
Reorganization Agreement. On the Distribution Date, TCI, TCIC and a number
of other TCI subsidiaries, including the Company, entered into the
Reorganization Agreement, which provided for, among other things, the
principal corporate transactions required to effect the Distribution, the
conditions thereto and certain provisions governing the relationship between
the Company and TCI with respect to and resulting from the Distribution.
Certain of the Company's assets relating to the Digital Satellite Business
were historically owned by subsidiaries of TCI other than the Company and its
predecessors. These assets include the capital stock of Tempo and the 20.86%
partnership interests in PRIMESTAR Partners. The Reorganization Agreement
provided for, among other things, the transfer of these assets to the Company
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 TCI's partnership interests in PRIMESTAR Partners for
consideration payable by delivery of promissory notes issued by such
subsidiaries (the "K-1 Notes"), which promissory notes were assumed by TCI on
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 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
97
<PAGE>
liabilities of the Company which are not related to the Digital Satellite
Business, including, for example, liabilities arising as a result of the
Company's having been a subsidiary of TCI. The Reorganization Agreement
further provided for each of the Company and TCI to preserve the
confidentiality of all confidential or proprietary information of the other
party, for five years following the Distribution, subject to customary
exceptions, including disclosures required by law, court order or government
regulation.
Pursuant to the Reorganization Agreement, on the Distribution Date, the
Company issued to TCIC the Company Note, in the principal amount of
$250,000,000, representing a portion of the Company's intercompany balance
owed to TCIC on such date. See "--TCIC Credit Facility" below. Pursuant to the
Reorganization Agreement, the remainder of the Company's intercompany balance
owed to TCIC on the Distribution Date (other than certain advances to the
Company made by TCIC in 1996 to fund certain construction and related costs
associated with the Company Satellites, as described below under "--
Reimbursement of Certain Satellite Expenses"), and the indebtedness
represented by the K-1 Notes, were assumed by TCI as (i) a $100 million
capital contribution to the Company, (ii) consideration for the Company's
assumption of TCI's obligations under options granted to Brendan R. Clouston,
Larry E. Romrell and David P. Beddow to purchase shares of Series A Common
Stock representing 1.0%, 1.0% and 0.5%, respectively, of the shares of Company
Common Stock issued and outstanding on the Distribution Date, determined
immediately after giving effect to the Distribution but before giving effect
to the issuance of the shares of Series A Common Stock issuable upon exercise
of such options, and (iii) consideration for the Company's grant of an option
to TCI to purchase up to 4,765,000 shares of Series A Common Stock (as such
number may be adjusted to reflect stock dividends, stock splits and the like),
for a purchase price equal to the par value of such shares, as necessary to
satisfy TCI's obligations to deliver shares of Series A Common Stock upon
conversion of certain convertible securities of TCI as a result of the
Distribution. See "--Other Arrangements" and the Condensed Pro Forma Combined
Statement of Operations of the Company, included elsewhere in this Prospectus.
Transition Services Agreement. 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. Such
services include (i) tax reporting, financial reporting, payroll, employee
benefit administration, workers' compensation administration, telephone, fleet
management, package delivery, management information systems, billing, lock
box, remittance processing and risk management services, (ii) other services
typically performed by TCI's accounting, finance, treasury, corporate, legal,
tax, benefits, insurance, facilities, purchasing, fleet management and
advanced information technology department personnel, (iii) use of
telecommunications and data facilities and of systems and software developed,
acquired or licensed by TCI from time to time for financial forecasting,
budgeting and similar purposes, including without limitation any such software
for use on personal computers, in any case to the extent available under
copyright law or any applicable third-party contract, (iv) technology support
and consulting services, and (v) such other management, supervisory, strategic
planning or other services as the Company and TCI may from time to time
mutually determine to be necessary or desirable.
Pursuant to the Transition Services Agreement, TCI has also agreed to
provide the Company with certain most-favored-customer rights to programming
services that TCI or a wholly owned subsidiary of TCI may own in the future
and access to any volume discounts that may be available to TCI for purchase
of HSDs, satellite receivers and other equipment.
As compensation for services rendered to the Company and for the benefits
made available to the Company pursuant to the Transition Services Agreement,
the Company is required to pay TCI a fee of $1.50 per qualified subscribing
household or other residential or commercial unit (counted as one subscriber
regardless of the number of satellite receivers) per month, commencing with
the Distribution Date, up to a maximum of $3 million 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
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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. During the period commencing with the Distribution
Date and ending on December 31, 1996, the Company paid $763,000 to TCIC
pursuant to the Transition Services Agreement.
Tax Sharing Agreement. Through the Distribution Date, the Company's results
of operations were included in TCI's consolidated U.S. federal income tax
returns, in accordance with the existing tax sharing arrangements among TCI
and its consolidated subsidiaries. Effective July 1, 1995, TCI, TCIC and
certain other subsidiaries of TCI entered into the Tax Sharing Agreement,
which formalized such pre-existing tax sharing arrangements and implemented
additional procedures for the allocation of certain consolidated income tax
attributes and the settlement of certain intercompany tax allocations. The Tax
Sharing Agreement encompasses U.S. Federal, state, local and foreign tax
consequences and relies upon the Code and any applicable state, local and
foreign tax law and related regulations. Prior to the Distribution Date, the
Tax Sharing Agreement was amended to provide that the Company be treated as if
it had been a party to the Tax Sharing Agreement, effective July 1, 1995.
Indemnification Agreements. On the Distribution Date, 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
issued by The Bank of New York for the account of TCIC to support the
Company's share of PRIMESTAR Partners' obligations under the GE-2 Agreement,
with respect to PRIMESTAR Partners' use of transponders on GE-2. At December
31, 1996, the drawable amount of such letter of credit was $25,000,000. See
"Risk Factors---Risks of Satellite Failure," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business---
PRIMESTAR By TSAT--The PRIMESTAR(R) Service."
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 that was obtained by PRIMESTAR
Partners to finance advances to Tempo for payments due in respect of the
construction of the Company Satellites and that is supported by letters of
credit arranged for by affiliates of the partners of the Partnership (other
than GEAS). The amount of the TCI UA 1 Letter of Credit was $141,250,000 at
December 31, 1996.
The Indemnification Agreements further provide for the Company to indemnify
and hold harmless TCIC and TCI UA 1 and certain related persons from and
against any losses, claims, and liabilities arising out of the respective
letters of credit or any drawings thereunder. The payment obligations of the
Company to TCIC and TCI UA 1, under such Indemnification Agreements are
subordinated in right of payment with respect to certain future obligations of
the Company to financial institutions. During the year ended December 31,
1996, the aggregate amount paid by the Company to TCI under the
Indemnification Agreements was $124,000. Such amount represents the aggregate
fees incurred by TCI with respect to the TCI UA 1 Letter of Credit from the
Distribution Date through December 31, 1996.
Trade Name and Service Mark License Agreement. Pursuant to the Trade Name
and Service Mark License Agreement (the "License Agreement"), TCI granted to
the Company, for an initial term of three years following the Distribution, a
non-exclusive non-assignable license to use certain trade names and service
marks specifically identified in the License Agreement, including the mark
"TCI" in the context of the Digital Satellite Business. The License Agreement
provides, among other things, that all advertising, promotion and use of
certain of TCI's trade names and service marks by the Company shall be
consistent with TCI guidelines and standards, as well as subject to TCI
approval in certain circumstances.
Fulfillment Agreement. TCIC has historically provided the Company with
certain customer fulfillment services for PRIMESTAR customers enrolled by the
Company's direct sales force or the National Call Center. Charges for such
services have been allocated to the Company by TCIC based on scheduled rates.
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Pursuant to the Fulfillment Agreement entered into by TCIC and the Company,
TCIC continues to provide fulfillment services to the Company following 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. The Fulfillment Agreement
became effective on January 1, 1997. Among other matters, the Fulfillment
Agreement (i) sets forth the responsibilities of TCIC with respect to
fulfillment services, including performance standards and penalties for
nonperformance, (ii) provides for TCIC's fulfillment sites to be connected to
the billing and information systems used by the Company, allowing for on-line
scheduling and dispatch of installation and other service calls, and (iii)
provides scheduled rates to be charged to the Company for the various customer
fulfillment services to be provided by TCIC. The Company retains sole control
under the Fulfillment Agreement to establish the retail prices and other terms
and conditions on which installation and other services are provided to the
Company's customers. The Fulfillment Agreement also provides that, during the
term of the Fulfillment Agreement, TCIC will not provide fulfillment services
to any other Ku-band, Ka-band, DBS, BSS, FSS, C-band, wireless or other
similar or competitive provider or distributor of television programming
services (other than traditional cable). The Fulfillment Agreement has an
initial term of two years and is terminable, on 180 days notice to TCIC, by
the Company at any time during the first six months following the Distribution
Date. The scheduled rates for the services to be provided by TCIC under the
Fulfillment Agreement exceed the scheduled rates upon which charges
historically have been allocated to the Company for such services, reflecting
in part the value to the Company, as determined by Company management, of the
performance standards, exclusivity, termination right and certain other
provisions included in the Fulfillment Agreement. The Company and TCIC are
currently discussing certain proposed changes to the Fulfillment Agreement,
but there can be no assurance that any such changes will be agreed to or that
the Company will not exercise its rights to terminate the Fulfillment
Agreement if an acceptable amendment is not agreed to prior to the end of the
Company's six-month termination window. There can be no assurance that the
terms of the Fulfillment Agreement are not more or less favorable than those
which could be obtained from unaffiliated third parties, or that comparable
services could be obtained by the Company from third parties on any terms if
the Fulfillment Agreement is terminated. See "Risk Factors---Relationship with
TCI," "Risk Factors---Potential Conflicts of Interest," and the Condensed Pro
Forma Combined Statement of Operations of the Company, included elsewhere in
this Prospectus. During the year ended December 31, 1996, the aggregate amount
paid or allocated by the Company to TCIC for fulfillment services was
$74,049,000 (including $6,432,000 paid subsequent to the Distribution Date).
TCIC Credit Facility. In connection with the Distribution, the Company and
TCIC entered into the TCIC Credit Facility to provide for the terms of the
Company Note and the TCIC Revolving Loans. The TCIC Credit Facility required
the Company to use its best efforts to obtain external debt or equity
financing after the Distribution Date and provided for mandatory prepayment of
the TCIC Revolving Loans and the Company Note from the proceeds thereof. The
initial borrowings under the Bank Credit Facility were used 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.
Borrowings under the TCIC Revolving Loans bore interest at 10% per annum,
compounded semi-annually. Commitment fees equal to 3/8% of the average
unborrowed availability under the TCIC Credit Facility were payable to TCIC
annually. Commitment fees paid to TCIC during the year ended December 31, 1996
aggregated $141,000. From the Distribution Date through December 31, 1996, the
aggregate amount of interest paid by the Company to TCIC pursuant to the TCIC
Credit Facility was $1,946,000.
Reimbursement of Certain Satellite Expenses. 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 to provide that such 1996 advances from
TCIC would be repaid by the Company to TCIC (notwithstanding the
Reorganization Agreement), to the extent (and only to the extent) that Tempo
received corresponding advances from PRIMESTAR Partners.
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As a result of negotiations between the Company and PRIMESTAR Partners,
PRIMESTAR Partners advanced $73,786,000 to Tempo in December 1996 to reimburse
Tempo for all 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
advance by TCIC. See "Business--High Power Satellites."
Call Center LLC. In March 1997, the Company and TCI agreed to form a limited
liability company (the "Call Center LLC") through which the Company and TCI
are expected to conduct various customer call service operations. The initial
ownership interests of the Company and TCI in the Call Center LLC are expected
to be 28% and 72%, respectively, subject to adjustment based on various
categories of operating data for the last three quarters of 1997, including
call center volume attributable to their customers. The Call Center LLC is
expected to be managed by a four-member board of directors, two members of
which are to be appointed by TCI and two members of which are to be appointed
by the Company. Any decision by the board of directors is expected to require
approval by all four directors. Initially, the Call Center LLC is expected to
provide customer call services only for TCI cable subscribers and the Company
DBS subscribers, but it is expected that those services in the future will be
made available to third parties, including, for example, unaffiliated cable
companies. The hourly rates for services to be provided by the Call Center LLC
to the Company and TCI through December 31, 1997, are expected to be fixed
based on their respective expense budgets for those services. Thereafter, the
Company and TCI expect that the rates charged to them will be fair market
rates, as established by agreement between the Company and TCI.
TCI has agreed to contribute assets comprising certain currently operating
call center facilities, as well as a facility under construction. The assets
to be contributed by TCI include two operating call centers and the facility
under construction. The Company has agreed to contribute assets comprising two
currently operating call center facilities. At December 31, 1996, the
historical cost of the assets to be contributed by the Company to the Call
Center LLC was approximately $7,200,000. Transfers of various of the call
center assets to the Call Center LLC will be subject to receipt of consents of
third parties, including governmental authorities. Pending receipt of any
required third-party consents and regulatory approvals the Company and TCI
have agreed to provide to the Call Center LLC the use of the call center
assets to be contributed under services agreements or similar arrangements to
the extent feasible. Operating obligations relating to the contributed assets,
including leases of real and personal property (but not including any
indebtedness for borrowed money), are expected to be assumed by the Call
Center LLC.
No definitive agreement has yet been reached regarding the above described
transaction, and there can be no assurance that any such transaction will be
consummated. In the event such transaction is not consummated, the Company
intends to operate its National Call Center consistent with its past
operation, and the Company does not believe that the failure to consummate
such transaction would have a material adverse effect on the Company.
Other Arrangements. On the Distribution Date, TCI and the Company entered
into the Share Purchase Agreement, which obligates TCI and the Company to sell
to each other from time to time, at the then current market price, shares of
Series A TCI Group Common Stock and Series A Common Stock, respectively, as
necessary to satisfy their respective obligations under Adjusted TCI Options
and Add-on Company Options held after the Distribution Date by their
respective employees and non-employee directors.
Certain officers of the Company who were officers or directors of TCI and/or
TCIC prior to the Distribution received undertakings of indemnification from
TCI and/or TCIC. Such undertakings survived the Distribution.
In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the acquisition
by each of Brendan R. Clouston and Larry E. Romrell, executive officers of
TCI, of 1.0% of the net equity of the Company. The TCI Board also approved the
acquisition by Gary S. Howard, an executive officer of TCIC prior to the
Distribution Date and chief executive officer and a director of the Company,
of 1.0% of the net equity of the Company and the acquisition by David P.
Beddow, an executive officer of certain TCI subsidiaries and a director of the
Company, of 0.5% of the net equity of the Company. The TCI Board determined to
structure such transactions as grants to such persons of options to purchase
shares of Series A Common Stock representing 1.0% (in the case of each of
Messrs. Clouston, Romrell and Howard) and 0.5% (in the case of Mr. Beddow) of
the shares of Series A Common Stock and Series B Common Stock issued and
outstanding on the Distribution
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Date, determined immediately after giving effect to the Distribution, but
before giving effect to any exercise of such options ("Distribution Date
Options"). The aggregate exercise price for each such option is equal to 1.0%
(in the case of each of Messrs. Clouston, Romrell and Howard) and 0.5% (in the
case of Mr. Beddow) of TCI's Net Investment as of the Distribution Date, but
excluding any portion of TCI's Net Investment that as of such date was
represented by a promissory note or other evidence of indebtedness from the
Company to TCI. Distribution Date Options to purchase 2,324,266 shares of
Series A Common Stock at a per share price of $8.86 were granted on the
Distribution Date, will vest in 20% cumulative increments on each of the first
five anniversaries of February 1, 1996, and will be exercisable for up to ten
years following February 1, 1996. Pursuant to the Reorganization Agreement,
and (in the case of the options granted to Messrs. Clouston, Romrell and
Beddow) in partial consideration for the capital contribution made by TCI to
the Company in connection with the Distribution, the Company agreed, effective
as of the Distribution Date, to bear all obligations under such options and to
enter into stock option agreements with respect to such options with each of
Messrs. Clouston, Romrell, Howard and Beddow.
NDTC, an indirect subsidiary of TCI, has obtained a nontransferable,
nonexclusive license to use the Imedia Technology of Imedia Corporation
currently under development. Although there can be no assurance that the
Imedia Technology will be successfully implemented, if successful, such
technology would increase the number of digital program signals that could be
transmitted simultaneously over a single satellite transponder, thus
effectively increasing the digital compression ratio. See "The Digital
Satellite Television Industry---Industry Overview." NDTC has agreed that if,
prior to September 1, 1997, the Company engages NDTC to provide digitization,
compression and uplinking services for any high power DBS system operated by
the Company, and NDTC is authorized to use Imedia Technology or other
proprietary technologies to provide multiplexing of digitally compressed video
signals for the Company, NDTC shall provide such multiplexing services to the
Company for an agreed fee, based on NDTC's incremental costs and other
factors. The Company's rights to receive multiplexing services under its
agreement with NDTC are assignable by the Company to any affiliate of the
Company, including for this purpose PRIMESTAR Partners.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
BANK CREDIT FACILITY
On December 31, 1996, the Company entered into the Bank Credit Facility with
The Bank of Nova Scotia, as administrative agent, NationsBank of Texas, N.A.,
as syndication agent, Credit Lyonnais New York Branch, as documentation agent,
and the lenders named therein, with respect to a senior secured reducing
revolving credit facility. The Bank Credit Facility, which is guaranteed by
all direct and indirect subsidiaries of the Company except Tempo, provides for
aggregate commitments of up to $750 million, 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 arrangement of the
facility. Additional amounts available will be used to provide working capital
and to fund the future growth of the Company's Digital Satellite Business. As
of March 31, 1997, there were no borrowings outstanding under the Bank Credit
Facility.
At the option of the Company, borrowings under the Bank Credit Facility bear
interest at a rate per annum equal to (i) the London interbank offered rate
(LIBOR), (ii) the CD Rate, which is the rate per annum equal to the average of
the bid rates for certificates of deposit of the administrative agent (and two
reference banks) plus statutory reserves and FDIC assessments, or (iii) the
Base Rate, which is the higher of (a) the administrative agent's established
base rate and (b) the Federal Funds effective rate plus 1/2%, plus in each
case an Applicable Margin (as defined in the Bank Credit Facility). In
addition, the Company must pay a commitment fee equal to 0.250% on unavailable
commitments and 0.375% on the average daily unused portion of the available
commitments, payable quarterly in arrears and at maturity.
Borrowings under the Bank Credit Facility are guaranteed by all restricted
subsidiaries of the Company (defined under the Bank Credit Facility to mean
each domestic subsidiary of the Company (other than Tempo, unless Tempo
becomes a restricted subsidiary under any subordinated or senior subordinated
indebtedness of the Company) of which the Company owns directly or indirectly
at least 80% of the outstanding capital stock), and secured by collateral
assignments or other security interests in (i) all material contracts to which
the Company and the restricted subsidiaries are parties, (ii) all equipment
and other tangible assets of the Company (including, without limitation,
satellite dishes and related reception and decoding equipment), (iii) all
receivables of the Company and (iv) all intellectual property and other
general intangible assets of the Company. In addition, borrowings under the
Bank Credit Facility will be secured by security interests in all capital
stock of each of the Company's restricted subsidiaries, upon PRIMESTAR
Partners' consent with respect thereto. Further, if a restricted subsidiary
increases its assets by $5 million or all restricted subsidiaries increase
their assets in the aggregate by $10 million, such Restricted Subsidiaries are
required to pledge all their assets to the banks.
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 other distributions,
(viii) redeeming stock, (ix) redeeming or purchasing subordinated debt, (x)
paying interest on or principal of subordinated debt (including the Notes and
the Exchange Notes) 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 contains customary events of default, including but
not limited to, (i) nonpayment of principal or interest, (ii) violation of
covenants, (iii) material breach of representations and warranties, (iv)
failure of security, (v) cross-default to any debt in excess of $15 million
under any other agreement governing
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indebtedness of the Company, any of its subsidiaries or PRIMESTAR Partners,
(vi) material judgments, (vii) certain defaults under the Employee Retirement
Income Security Act of 1974 ("ERISA"), (viii) bankruptcy, insolvency or a
material adverse change of the Company, any of its subsidiaries or PRIMESTAR
Partners, and (ix) a Change of Control (as defined therein). In addition, it
is an event of default under the Bank Credit Facility if the agents
thereunder, in their sole discretion have not agreed in writing to a plan of
continued operation of the PRIMESTAR(R) business by June 30, 1997. The Bank
Credit Facility also contains provisions for mandatory prepayments and
commitment reductions in the event of certain asset sales. The Bank Credit
Facility defines "Change in Control" as (i) the acquisition by any person, or
two or more persons acting in concert, of beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of 25% or more of the outstanding
shares of voting stock of the Company, provided, however, that the acquisition
of 25% or more of the outstanding shares of voting stock of the Company by
John Malone, the legal heirs of Bob Magness, PRIMESTAR Partners so long as the
partners thereof were partners as of the closing date thereunder, and/or one
or more of the partners on the closing date of PRIMESTAR Partners shall not
constitute a Change in Control, (ii) the event of both Gary Howard and John
Malone ceasing to be directors or ceasing to hold the same or similar offices
with the Company as they did on the closing date, or (iii) the event that,
during any consecutive two-year period, individuals who at the beginning of
such period constituted the Board of Directors of the Company (together with
any new directors whose election by the Board of Directors or whose nomination
for election by the stockholders of the Company was approved by a vote of at
least a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
The Bank Credit Facility is anticipated to be syndicated in the bank market
in early 1997.
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DESCRIPTION OF THE EXCHANGE NOTES
Each tranche of the Exchange Notes will be issued as a separate series of
notes pursuant to the same Indenture governing the corresponding tranche of
Notes for which each such tranche of Exchange Notes was exchanged. The form
and the terms of the Exchange Notes and the Notes will be substantially
identical to each other (including with respect to principal amount, interest
rate, maturity and redemption rights), except that (i) the offering and sale
of the Exchange Notes have been registered under the Securities Act and,
therefore, shall not bear legends restricting the transfer thereof and (ii)
the holders of Exchange Notes will not be entitled to further registration
rights under the Registration Rights Agreements, which rights will be
satisfied when the Exchange Offer is consummated, except for transferability.
Under the terms of the Indentures, the covenants and events of default will
apply equally to the Exchange Notes and the Notes, and the Exchange Notes and
the Notes will be treated as one class for all actions to be taken by the
holders thereof and for determining their respective rights under the
Indentures, including, without limitation, amendments, waivers and
redemptions. For purposes of this Description of Exchange Notes all references
herein to "Notes" shall be deemed to refer collectively to Notes and Exchange
Notes, all references to "Senior Subordinated Notes" shall be deemed to refer
collectively to Senior Subordinated Notes and Senior Subordinated Discount
Notes, and all references herein to "Senior Subordinated Discount Notes" shall
be deemed to refer collectively to Senior Subordinated Discount Notes and
Senior Subordinated Discount Exchange Notes, unless in any such case the
context otherwise requires. The terms of the Notes include those set forth in
the Indentures and those made a part of the Indentures by reference to the
Trust Indenture Act of 1939, as amended and as in effect on the date of the
Indentures (the "TIA").
The following summary of certain provisions of the Indentures and the
Registration Rights Agreements does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the TIA, and to all of
the provisions of the Indentures and the Registration Rights Agreements,
including the definitions of certain terms therein and those terms made a part
of the Indentures by reference to the TIA, as in effect on the date of the
Indentures. The Notes are subject to all such terms, and holders of the Notes
are referred to the Indentures, a copy of which has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part and is
available in the manner described under "Available Information." Certain
defined terms used primarily in this section are set forth below under "--
Certain Definitions." Unless otherwise indicated, references under this
caption to sections, "(S)" or articles are references to sections and articles
of the Indentures. References in this "Description of the Exchange Notes"
section to "the Company" mean only TCI Satellite Entertainment, Inc. and not
any of its Subsidiaries.
Upon any exchange of Notes for Exchange Notes pursuant to the Exchange
Offer, the Notes so exchanged shall be canceled and shall no longer be deemed
outstanding for any purpose. In no event shall the aggregate principal amount
of all Senior Subordinated Notes and Senior Subordinated Exchange Notes
outstanding exceed $200,000,000, and in no event shall the aggregate principal
amount at maturity of all Senior Subordinated Discount Notes and Senior
Subordinated Discount Exchange Notes outstanding exceed $275,000,000.
If the Company does not consummate the Exchange Offer, or, in lieu thereof,
the Company does not file and cause to become effective a resale shelf
registration for the Notes within the time periods set forth herein, special
interest will accrue and be payable on the Notes either temporarily or
permanently. See "--Registration Rights; Exchange Offer."
Transfers of Notes may be made only by presentation of the Notes, duly
endorsed, to the Trustee for registration of transfer on the Security Register
maintained by the Trustee for such purposes. Unless and until a Note is duly
presented to the Trustee for registration of transfer, the Company and the
Trustee may treat the Person in whose name such Note is registered on the
Security Register as the sole owner thereof for all purposes under the
applicable Indenture, notwithstanding any notice to the contrary.
GENERAL
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. The Company will
appoint The Bank of New York to serve as registrar and paying agent under the
Indentures at its offices at 101 Barclay Street, New York, New York 10281. No
service charge will be made for any registration of transfer or exchange of
the Notes, except for any tax or other governmental charge that may be imposed
in connection therewith.
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RANKING
The Notes will rank junior to, and be subordinated in right of payment to,
all existing and future Senior Indebtedness of the Company, pari passu in
right of payment with all senior subordinated Indebtedness of the Company and
senior in right of payment to all Subordinated Indebtedness of the Company. As
of March 31, 1997, the Company had approximately $32,614,000 of Senior
Indebtedness outstanding. As of March 31, 1997, there were no borrowings
outstanding under the Bank Credit Facility. The Bank Credit Facility is
guaranteed by all the direct and indirect Subsidiaries of the Company, other
than Tempo, and, therefore, the Notes are structurally subordinated to all
obligations under the Bank Credit Facility. The Company will not be permitted
to incur any debt that is subordinated in right of payment to any Senior
Indebtedness of the Company and senior in right of payment to the Notes.
The Notes will not be entitled to any security and will not be entitled to
the benefit of any guarantees, except under the circumstances described under
"--Certain Covenants--Limitation on Indebtedness."
MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes will be limited to $200,000,000 aggregate
principal amount (the "Senior Subordinated Aggregate Principal Amount") and
will mature on February 15, 2007. Cash interest on the Senior Subordinated
Notes will accrue at a rate of 10 7/8% per annum and will be payable semi-
annually in arrears on each February 15 and August 15, commencing August 15,
1997, to the holders of record at the close of business on February 1 and
August 1, respectively, immediately preceding such interest payment date. Cash
interest will accrue from the most recent interest payment date to which
interest has been paid or, if no interest has been paid, from February 20,
1997. Interest will be computed on the basis of a 360-day year of twelve 30-
day months.
MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR SUBORDINATED DISCOUNT NOTES
The Senior Subordinated Discount Notes will be limited to $275,000,000
aggregate principal amount at maturity (the "Senior Subordinated Discount
Aggregate Principal Amount") and will mature on February 15, 2007. The Senior
Subordinated Discount Notes were issued at a discount to their aggregate
principal amount at maturity and generated gross proceeds to the Company of
approximately $152,061,250. Based on the issue price thereof, the yield to
maturity of the Senior Subordinated Discount Notes and all Senior Subordinated
Discount Exchange Notes issued in exchange therefor is 12 1/4% (computed on a
semi-annual bond equivalent basis), calculated from February 20, 1997. See
"Certain Federal Income Tax Considerations."
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 each February 15 and August 15, commencing on August 15, 2002, to
the holders of record at the close of business on the February 1 and August 1,
respectively, immediately preceding such interest payment date; provided,
however, that at any time prior to February 15, 2002, the Company may elect
(the "Cash Interest Election") on any interest payment date (the date of such
Cash Interest Election, the "Cash Interest Election Date") to commence the
accrual of cash interest from and after the Cash Interest Election Date, in
which case the principal amount at maturity of each Senior Subordinated
Discount Note will on such interest payment date be reduced to the Accreted
Value of such note as of such interest payment date, and cash interest
(accruing at a rate of 12 1/4% per annum from the Cash Interest Election Date)
shall be payable with respect to such Senior Subordinated Discount Note on
each interest payment date thereafter. Cash interest will accrue from the most
recent interest payment date to which interest has been paid or, if no
interest has been paid, from February 15, 2002 or the Cash Interest Election
Date, if earlier. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
OPTIONAL REDEMPTION
Optional Redemption of Senior Subordinated Notes. The Senior Subordinated
Notes will be redeemable at the option of the Company, in whole or in part, at
any time on or after February 15, 2002, at the redemption
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prices (expressed as a percentage of principal amount) set forth below, plus
accrued and unpaid interest thereon, if any, to the redemption date, if
redeemed during the 12-month period beginning on February 15 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002.......................................................... 105.438%
2003.......................................................... 103.625%
2004.......................................................... 101.813%
2005 and thereafter........................................... 100.000%
</TABLE>
In addition, prior to February 15, 2000, the Company may, other than in any
circumstance resulting in a Change of Control, redeem up to 35% of the Senior
Subordinated Aggregate Principal Amount at a redemption price equal to
110.875% of the principal amount of the Senior Subordinated Notes so redeemed,
plus accrued and unpaid interest thereon, if any, to the redemption date with
the net cash proceeds of (a) one or more Public Equity Offerings of common
equity of the Company or (b) a sale or series of related sales of Qualified
Equity Interests of the Company to Strategic Equity Investors, in any such
case resulting in gross cash proceeds to the Company of at least $100.0
million in the aggregate; provided, however, that Senior Subordinated Notes in
an aggregate principal amount not less than the 65% of the Senior Subordinated
Aggregate Principal Amount would remain outstanding immediately after giving
effect to any such redemption (excluding any Senior Subordinated Notes owned
by the Company or any of its Affiliates). Notice of any such redemption must
be given within 60 days after the date of the last Public Equity Offering or
sale of Qualified Equity Interests of the Company to Strategic Equity
Investors resulting in gross cash proceeds to the Company, when aggregated
with all prior Public Equity Offerings and sales of Qualified Equity Interests
of the Company to Strategic Equity Investors, of at least $100.0 million.
Optional Redemption of Senior Subordinated Discount Notes. The Senior
Subordinated Discount Notes will be redeemable at the option of the Company,
in whole or in part, at any time on or after February 15, 2002, at the
redemption prices (expressed as a percentage of principal amount at maturity)
set forth below, plus accrued and unpaid interest thereon, if any, to the
redemption date, if redeemed during the 12-month period beginning on February
15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002.......................................................... 106.125%
2003.......................................................... 104.083%
2004.......................................................... 102.042%
2005 and thereafter........................................... 100.000%
</TABLE>
In addition, prior to February 15, 2000, the Company may, other than in any
circumstance resulting in a Change of Control, redeem up to 35% of the
originally issued principal amount at maturity of the Senior Subordinated
Discount Notes at a redemption price equal to 112.250% of the Accreted Value
of the Senior Subordinated Discount Notes so redeemed at the redemption date
or, if a Cash Interest Election has been made, 112.250% of the principal
amount at maturity of the Senior Subordinated Discount Notes so redeemed, plus
accrued and unpaid interest thereon, if any, to the redemption date, with the
net cash proceeds of (a) one or more Public Equity Offerings of common equity
of the Company or (b) a sale or series of related sales of Qualified Equity
Interests of the Company to Strategic Equity Investors, in any such case
resulting in gross cash proceeds to the Company of at least $100.0 million in
the aggregate; provided, however, that at least 65% of the originally issued
principal amount at maturity of the Senior Subordinated Discount Notes would
remain outstanding immediately after giving effect to any such redemption
(excluding any Senior Subordinated Discount Notes owned by the Company or any
of its Affiliates). Notice of any such redemption must be given within 60 days
after the date of the last Public Equity Offering or sale of Qualified Equity
Interests of the Company to Strategic Equity Investors resulting in gross cash
proceeds to the Company, when aggregated with all prior Public Equity
Offerings and sales of Qualified Equity Interests of the Company to Strategic
Equity Investors, of at least $100.0 million.
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SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of either tranche of the Notes are to be
redeemed at any time pursuant to an optional redemption, selection of such
Notes for redemption will be made by the applicable Trustee in compliance with
the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a
national securities exchange, on a pro rata basis, by lot or by such method as
the applicable Trustee shall deem fair and appropriate; provided, however,
that no Notes of a principal amount or principal amount at maturity, as the
case may be, of $1,000 or less shall be redeemed in part; provided, further,
however, that if a partial redemption is made with the proceeds of a Public
Equity Offering or sale or series of related sales of Qualified Equity
Interests of the Company to Strategic Equity Investors, selection of the Notes
of either tranche or portions thereof for redemption shall be made by the
applicable Trustee only on a pro rata basis or on as nearly a pro rata basis
as is practicable (subject to the procedures of The Depository Trust Company),
unless such method is otherwise prohibited. Notice of redemption shall be
mailed by first-class mail at least 30 but not more than 60 days before the
redemption date to each holder of Notes of the tranche to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount or principal amount at maturity, as the case may be, thereof to be
redeemed. A new Note of the applicable tranche in a principal amount or
principal amount at maturity, as the case may be, equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption as
long as the Company has deposited with the applicable paying agent for the
Notes funds in satisfaction of the applicable redemption price pursuant to the
applicable Indenture.
SUBORDINATION OF THE NOTES
The payment of the principal of, premium, if any, and interest on the Notes
is subordinated in right of payment, to the extent and in the manner provided
in each Indenture, to the prior payment in full in cash of all Senior
Indebtedness.
Upon any payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities (excluding any
payment or distribution of Permitted Junior Securities), upon any dissolution
or winding-up or liquidation or reorganization of the Company, whether
voluntary or involuntary or in bankruptcy, insolvency, receivership or other
proceedings, all Senior Indebtedness shall first be paid in full in cash
before the holders of the Notes or the applicable Trustee on behalf of such
holders shall be entitled to receive any payment by the Company of the
principal of, premium, if any, or interest on the Notes, or any payment by the
Company to acquire any of the Notes for cash, property or securities, or any
distribution by the Company with respect to the Notes of any cash, property or
securities (excluding any payment or distribution of Permitted Junior
Securities). Before any payment may be made by, or on behalf of, the Company
of the principal of, premium, if any, or interest on the Notes upon any such
dissolution or winding-up or total liquidation or reorganization, any payment
or distribution of assets or securities of the Company of any kind or
character, whether in cash, property or securities (excluding any payment or
distribution of Permitted Junior Securities), to which the holders of the
Notes or the applicable Trustee on their behalf would be entitled, but for the
subordination provisions of the applicable Indenture, shall be made by the
Company or by any receiver, trustee in bankruptcy, liquidation trustee, agent
or other Person making such payment or distribution, directly to the holders
of the Senior Indebtedness (pro rata to such holders on the basis of the
respective amounts of Senior Indebtedness held by such holders) or their
representatives or to the trustee or trustees or agent or agents under any
agreement or indenture pursuant to which any of such Senior Indebtedness may
have been issued, as their respective interests may appear, to the extent
necessary to pay all such Senior Indebtedness in full in cash after giving
effect to any prior or concurrent payment, distribution or provision therefor
to or for the holders of such Senior Indebtedness.
No direct or indirect payment (excluding any payment or distribution of
Permitted Junior Securities) by or on behalf of the Company of principal of,
premium, if any, or interest on the Notes, whether pursuant to the terms of
the Notes, upon acceleration or otherwise, will be made if, at the time of
such payment, there exists an
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event of default in the payment of all or any portion of the obligations on
any Designated Senior Indebtedness, whether at maturity, on account of
mandatory redemption or prepayment, acceleration or otherwise, and such event
of default shall not have been cured or waived or the benefits of this
sentence waived by or on behalf of the holders of such Designated Senior
Indebtedness. In addition, during the continuance of any non-payment event of
default with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may be immediately accelerated, and upon receipt by the
applicable Trustee of written notice (a "Payment Blockage Notice") from the
holder or holders of such Designated Senior Indebtedness or the trustee or
agent acting on behalf of such Designated Senior Indebtedness, then, unless
and until such event of default has been cured or waived or has ceased to
exist or such Designated Senior Indebtedness has been discharged or repaid in
full in cash or the benefits of these provisions have been waived by the
holders of such Designated Senior Indebtedness, no direct or indirect payment
(excluding any payment or distribution of Permitted Junior Securities) will be
made by or on behalf of the Company of principal of, premium, if any, or
interest on the Notes, except from those funds held in trust for the benefit
of holders of any Notes pursuant to the procedures set forth under "--
Satisfaction and Discharge of Indentures; Defeasance" below, to such holders,
during a period (a "Payment Blockage Period") commencing on the date of
receipt of such notice by the applicable Trustee and ending 179 days
thereafter. Notwithstanding anything in the subordination provisions of the
Indentures or the Notes to the contrary, (x) in no event will a Payment
Blockage Period extend beyond 179 days from the date the Payment Blockage
Notice in respect thereof was given, (y) there shall be a period of at least
181 consecutive days in each 360-day period when no Payment Blockage Period is
in effect and (z) not more than one Payment Blockage Period may be commenced
with respect to the Notes during any period of 360 consecutive days. No event
of default that existed or was continuing on the date of commencement of any
Payment Blockage Period with respect to the Designated Senior Indebtedness
initiating such Payment Blockage Period (to the extent the holder of
Designated Senior Indebtedness, or trustee or agent, giving notice commencing
such Payment Blockage Period had knowledge of such existing or continuing
event of default) may be, or be made, the basis for the commencement of any
other Payment Blockage Period by the holder or holders of such Designated
Senior Indebtedness or the trustee or agent acting on behalf of such
Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such event of default has been cured or waived for a
period of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
Notes by reason of the provisions of the Indentures described under this
"Subordination of the Notes" heading will not be construed as preventing the
occurrence of any Event of Default in respect of either tranche of the Notes.
See "--Events of Default" below.
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to holders
of the Notes will be paid to the holders of Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full in cash, and the Company may
be unable to fully meet its obligations with respect to the Notes.
As of March 31, 1997, the Company had approximately $32,614,000 of Senior
Indebtedness outstanding. As of March 31, 1997, there were no outstanding
borrowings under the Bank Credit Facility. Subject to the restrictions set
forth in the Indentures, in the future, the Company may issue additional
Senior Indebtedness to refinance existing Indebtedness or for other corporate
purposes.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Following the occurrence of a Change of Control as defined in the Indentures
(the date of such occurrence being the "Change of Control Date"), the Company
shall notify the holders of the Notes of such occurrence in the manner
prescribed by the Indentures and shall, within 20 days after the Change of
Control Date, make an Offer to Purchase all Notes of each tranche then
outstanding at a purchase price in cash equal to (x) with respect to the
Senior Subordinated Notes, 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the Purchase Date and (y)
with respect to the Senior Subordinated Discount Notes, 101% of the Accreted
Value on the Purchase Date, unless the Purchase Date is on or after the
earlier to occur of
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February 15, 2002 and the Cash Interest Election Date, in which case such
purchase price shall be equal to 101% of the aggregate principal amount at
maturity thereof, plus accrued and unpaid interest thereon, if any, to the
Purchase Date. The Company's obligations may be satisfied if a third party
makes the Offer to Purchase in the manner, at the times and otherwise in
compliance with the requirements of the Indentures applicable to an Offer to
Purchase made by the Company and purchases all Notes validly tendered and not
withdrawn under such Offer to Purchase.
If a Change of Control occurs which also constitutes an event of default
under the Bank Credit Facility, the lenders under the Bank Credit Facility
would be entitled to exercise the remedies available to a secured lender under
applicable law and pursuant to the terms of the Bank Credit Facility.
Accordingly, any claims of such lenders with respect to the assets of the
Company will be prior to any claim of the holders of the Notes with respect to
such assets.
If an Offer to Purchase is made, there can be no assurance that the Company
will have available funds sufficient to pay for all of the Notes that might be
tendered by holders of Notes seeking to accept the Offer to Purchase. If the
Company fails to repurchase all of the Notes tendered for purchase upon the
occurrence of a Change of Control, such failure will constitute an Event of
Default under the applicable Indenture. See "--Events of Default" below.
If the Company makes an Offer to Purchase, the Company will comply with all
applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable Federal or state securities laws and regulations and any applicable
requirements of any securities exchange on which the Notes are listed, and any
violation of the provisions of the Indentures relating to such Offer to
Purchase occurring as a result of such compliance shall not be deemed an Event
of Default or an event that, with the passing of time or giving of notice, or
both, would constitute an Event of Default.
Except as described above with respect to a Change of Control, the
Indentures do not contain provisions that permit the holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
CERTAIN COVENANTS
Limitation on Restricted Payments. Under the terms of the Indentures, the
Company shall not, and shall not cause or permit any Restricted Subsidiary to,
directly or indirectly,
(i) declare or pay any dividend or any other distribution on any Equity
Interests of the Company or any Restricted Subsidiary or make any payment
or distribution to the direct or indirect holders (in their capacities as
such) of Equity Interests of the Company or any Restricted Subsidiary
(other than any dividends, distributions and payments made to the Company
or any Restricted Subsidiary and dividends or distributions payable to any
Person solely in Qualified Equity Interests of the Company or in options,
warrants or other rights to purchase Qualified Equity Interests of the
Company);
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any Restricted Subsidiary (other than any such
Equity Interests owned by the Company or any Restricted Subsidiary);
(iii) purchase, redeem, defease or retire for value, or make any
principal payment on, prior to any scheduled maturity, scheduled repayment
or scheduled sinking fund payment, any Subordinated Indebtedness (other
than any Subordinated Indebtedness held by any Restricted Subsidiary); or
(iv) make any Investment (other than Permitted Investments) in any Person
(other than in the Company, any Restricted Subsidiary or a Person that
becomes a Restricted Subsidiary, or is merged with or into or consolidated
with the Company or a Restricted Subsidiary (provided the Company or a
Restricted Subsidiary is the survivor) as a result of or in connection with
such Investment)
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(such payments or any other actions (other than the exceptions thereto)
described in (i), (ii), (iii) and (iv) collectively, "Restricted Payments"),
unless
(a) no Default or Event of Default shall have occurred and be continuing
at the time or after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the
Company would be able to Incur $1.00 of Indebtedness (other than Permitted
Indebtedness) under the Debt to Operating Cash Flow Ratio of the first
paragraph of "--Limitation on Indebtedness" below; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date does not exceed an amount equal to the sum of (1) the
difference between (x) the Cumulative Operating Cash Flow determined at the
time of such Restricted Payment and (y) 150% of cumulative Consolidated
Interest Expense of the Company determined for the period commencing on the
Issue Date and ending on the last day of the most recent fiscal quarter
immediately preceding the date of such Restricted Payment for which
consolidated financial information of the Company is available, plus (2)
the aggregate net cash proceeds received by the Company either (x) as
capital contributions to the Company after the Issue Date or (y) from the
issue and sale (other than to a Restricted Subsidiary) of its Qualified
Equity Interests after the Issue Date (excluding the net proceeds from any
issuance and sale of Qualified Equity Interests financed, directly or
indirectly, using funds borrowed from the Company or any Restricted
Subsidiary until and to the extent such borrowing is repaid), plus (3) the
principal amount (or accrued or accreted amount, if less) of any
Indebtedness of the Company or any Restricted Subsidiary Incurred after the
Issue Date which has been converted into or exchanged for Qualified Equity
Interests of the Company, plus (4) in the case of the disposition or
repayment of any Investment constituting a Restricted Payment made after
the Issue Date, an amount (to the extent not included in the computation of
Cumulative Operating Cash Flow) equal to the lesser of: (i) the return of
capital with respect to such Investment and (ii) the amount of such
Investment which was treated as a Restricted Payment, in either case, less
the cost of the disposition of such Investment and net of taxes, plus (5)
so long as the Designation thereof was treated as a Restricted Payment made
after the Issue Date, with respect to any Unrestricted Subsidiary that has
been redesignated as a Restricted Subsidiary after the Issue Date in
accordance with "--Designation of Unrestricted Subsidiaries; Designation of
Tempo as a Restricted Subsidiary" below, the Company's proportionate
interest in an amount equal to the excess of (x) the total assets of such
Subsidiary, valued on an aggregate basis at the lesser of book value and
Fair Market Value, over (y) the total liabilities of such Subsidiary,
determined in accordance with GAAP (and provided that such amount shall not
in any case exceed the Designation Amount with respect to such Restricted
Subsidiary upon its Designation), plus (6) (to the extent not included in
the computation of Cumulative Operating Cash Flow) the amount of cash
dividends or cash distributions (other than to pay taxes) received from any
Unrestricted Subsidiary since the Issue Date, minus (7) the greater of (i)
$0 and (ii) the Designation Amount (measured as of the date of Designation)
with respect to any Subsidiary of the Company which has been designated as
an Unrestricted Subsidiary after the Issue Date in accordance with "--
Designation of Unrestricted Subsidiaries; Designation of Tempo as a
Restricted Subsidiary" below.
The foregoing provisions will not prevent (i) the payment of any dividend or
distribution on, or redemption of, Equity Interests within 60 days after the
date of declaration of such dividend or distribution or the giving of formal
notice of such redemption, if at the date of such declaration or giving of
formal notice such payment or redemption would comply with the provisions of
the Indentures; (ii) the purchase, redemption, retirement or other acquisition
of any Equity Interests of the Company in exchange for, or out of the net cash
proceeds of the substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of, Qualified Equity Interests of the Company;
provided, however, that any such net cash proceeds and the value of any Equity
Interests issued in exchange for such retired Equity Interests are excluded
from clause (c)(2) of the preceding paragraph (and were not included therein
at any time); (iii) the purchase, redemption, retirement, defeasance or other
acquisition of Subordinated Indebtedness, or any other payment thereon, made
in exchange for, or out of the net cash proceeds of, a substantially
concurrent issue and sale (other than to a Restricted Subsidiary) of (x)
Qualified Equity Interests of the Company; provided, however, that any such
net cash proceeds and the value of any Equity
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Interests issued in exchange for Subordinated Indebtedness are excluded from
clauses (c)(2) and (c)(3) of the preceding paragraph (and were not included
therein at any time) or (y) other Subordinated Indebtedness having no stated
maturity for the payment of principal thereof prior to the final stated
maturity of the Notes; (iv) Investments in PRIMESTAR Partners required
pursuant to a vote of the partners of PRIMESTAR Partners, not to exceed $60.0
million in the aggregate since the Issue Date; (v) Investments made within
three years of the Issue Date in Persons engaged in the provision of C-band
direct-to-home television programming services (any such Person, a "C-Band
Entity"); provided, however, that (x) immediately after giving effect to such
Investment the Company or a Restricted Subsidiary owns not less than 50.0% of
the voting power of the outstanding Voting Equity Interests in such C- Band
Entity and not less than 50.0% of the outstanding economic Equity Interests in
such C-Band Entity and (y) the aggregate amount of such Investments made since
the Issue Date shall not exceed $90.0 million (any such Investment made
pursuant to this clause (v) a "C-Band Investment"); (vi) Investments in ResNet
so long as ResNet is engaged in whole or in substantial part in the business
of providing entertainment, data, information and/or telecommunications
services to MDUs and other commercial markets, not to exceed $45.0 million in
the aggregate since the Issue Date; (vii) any Investment to the extent that
the consideration therefor consists of the net cash proceeds of the
substantially concurrent issue and sale (other than to a Restricted
Subsidiary) of Qualified Equity Interests of the Company; provided, however,
that any such net cash proceeds are excluded from clause (c)(2) of the
preceding paragraph (and were not included therein at any time); (viii) the
purchase, redemption or other acquisition, cancellation or retirement for
value of Equity Interests, or options, warrants, equity appreciation rights or
other rights to purchase or acquire Equity Interests, of the Company or any
Restricted Subsidiary, or similar securities, held by officers or employees or
former officers or employees of the Company or any Restricted Subsidiary (or
their estates or beneficiaries under their estates), upon death, disability,
retirement or termination of employment, not to exceed $3.0 million in any
calendar year and $15.0 million in the aggregate since the Issue Date; (ix)
the acquisition of any general or limited partnership interest in PRIMESTAR
Partners with the net proceeds of any Indebtedness Incurred pursuant to clause
(i) of the second paragraph of "--Limitation on Indebtedness" below; (x)
Investments in any Unrestricted Subsidiary that holds any high power satellite
or the governmental authorizations relating thereto to be used solely to pay
the operating and financing expenses of such Unrestricted Subsidiary in an
amount not to exceed the product of (x) the Company's percentage equity
interest in such Unrestricted Subsidiary, times (y) such Unrestricted
Subsidiary's share of satellite construction and financing costs; provided,
however, that the funds used for such Investments shall be derived solely from
Consolidated Operating Cash Flow since the Issue Date of the High Power
Satellite Transmission Subsidiary (so long as such Consolidated Operating Cash
Flow of the High Power Satellite Transmission Subsidiary shall not have been
otherwise expended); provided, however, that no such Investment pursuant to
this clause (x) shall be permitted to the extent that the Consolidated
Operating Cash Flow of the High Power Satellite Transmission Subsidiary to be
utilized to effect such Investment was included in the calculation of the
Cumulative Operating Cash Flow at any time prior to the making of such
Investment; (xi) Investments in any other Person engaged in the satellite,
telecommunications, entertainment, electronics or any related industry, not to
exceed $50.0 million in the aggregate outstanding at any time; provided,
however, that so long as no Default or Event of Default shall have occurred
and be continuing, such amount shall be increased to a maximum of (I) $75.0
million in the aggregate outstanding at any time if, as of the end of the most
recently completed fiscal quarter of the Company after the Issue Date, the
Company shall have provided an Officers' Certificate to the Trustees that the
Company and the Restricted Subsidiaries had as of such date in excess of 1.2
million subscribers or (II) $90.0 million in the aggregate outstanding at any
time if, as of the end of the most recently completed fiscal quarter of the
Company after the Issue Date, the Company shall have provided an Officers'
Certificate to the Trustees that the Company and the Restricted Subsidiaries
had as of such date in excess of 1.6 million subscribers; (xii) the payment of
dividends in any period (I) on preferred stock of the Company issued in
connection with any C-Band Investment in a C-Band Entity, but only up to the
amount of cash dividends ("C-Band Dividends") received by the Company from
such C-Band Entity in the same period (to the extent that such cash dividends
have not otherwise been expended by the Company) or (II) issued in connection
with any C-Band Investment which results in any C-Band Entity becoming a
Restricted Subsidiary (such Restricted Subsidiary, a "Restricted C-Band
Subsidiary"), but only up to the amount of Consolidated Operating Cash Flow
received as cash dividends by the Company from the Restricted C-Band
Subsidiaries in the same period (to the extent that such cash dividends have
not otherwise been expended by the Company);
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provided, however, that no such dividends pursuant to this clause (xii) shall
be permitted to the extent that C-Band Dividends or the Consolidated Operating
Cash Flow of any Restricted C-Band Subsidiary to be utilized to effect any
such dividends was included in the calculation of Cumulative Operating Cash
Flow at any time prior to the payment of such dividends; or (xiii) the
repurchase of Equity Interests of the Company in an amount not to exceed $10.0
million in the aggregate since the Issue Date; provided, however, that in the
case of each of clauses (ii), (iii), (iv), (v), (vi), (vii), (x), (xi), (xii),
and (xiii) no Default or Event of Default shall have occurred and be
continuing or would arise therefrom. For purposes of this paragraph, any
Investment made in any Person that subsequently becomes a Restricted
Subsidiary shall be deemed not to be outstanding so long as such Person is a
Restricted Subsidiary.
For purposes of clause (x) of the preceding paragraph, in determining
Consolidated Operating Cash Flow of the High Power Satellite Transmission
Subsidiary, the definition of "Consolidated Operating Cash Flow" shall be
used, but references in such definition to the Company and the Restricted
Subsidiaries shall be deemed to refer to the High Power Satellite Transmission
Subsidiary and its Subsidiaries. The Company shall not calculate such
Consolidated Operating Cash Flow of the High Power Satellite Transmission
Subsidiary in any manner, or take any other action, that would result in such
Consolidated Operating Cash Flow being greater than what it would have been if
the High Power Satellite Transmission Subsidiary were an Affiliate of the
Company that was not a Restricted Subsidiary. For purposes of clause (xii) of
the preceding paragraph, in determining Consolidated Operating Cash Flow of
any Restricted C-Band Subsidiary, the definition of "Consolidated Operating
Cash Flow" shall be used, but references in such definition to the Company and
the Restricted Subsidiaries shall be deemed to refer to the Restricted C-Band
Subsidiary and its Subsidiaries. The Company shall not calculate such
Consolidated Operating Cash Flow of any Restricted C-Band Subsidiary in any
manner, or take any other action, that would result in such Consolidated
Operating Cash Flow being greater than what it would have been if such
Restricted C-Band Subsidiary were an Affiliate of the Company that was not a
Restricted Subsidiary.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (viii), (x), and (xiii) of
the second preceding paragraph shall be included as Restricted Payments and
amounts expended pursuant to clauses (ii), (iii), (iv), (v), (vi), (vii),
(ix), (xi), and (xii) shall be excluded. The amount of any non-cash Restricted
Payment shall be deemed to be equal to the Fair Market Value thereof at the
date of the making of such Restricted Payment. If after the date of making any
Investment made in compliance with this covenant which is a guarantee, letter
of credit or other credit support any payments are made in respect of such
Investment, such payment shall not be deemed an additional Restricted Payment
to the extent the amount thereof, when added together with all other payments
made in respect of such Investment since the date such Investment was made, is
not in excess of the amount of the Investment.
Limitation on Indebtedness. The Company shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness) or issue any Disqualified
Equity Interests except for Permitted Indebtedness; provided, however, that
the Company may Incur Indebtedness and the Company may issue Disqualified
Equity Interests if, at the time of and immediately after giving pro forma
effect to such Incurrence of Indebtedness or issuance of Disqualified Equity
Interests and the application of the proceeds therefrom, the Debt to Operating
Cash Flow Ratio would be less than or equal to (i) 7.25 to 1.0 if the date of
such Incurrence is on or before December 31, 1999, (ii) 6.50 to 1.0 if the
date of such Incurrence is after December 31, 1999 and on or prior to December
31, 2001 and (iii) 5.75 to 1.0 if the date of such Incurrence is after
December 31, 2001.
The foregoing limitations will not apply to the Incurrence by the Company
(or any Restricted Subsidiary with respect to clauses (b), (d), (e), (g), (i),
(j), (l) and (m) below of this paragraph) of any of the following
(collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(a) Indebtedness under the Senior Subordinated Notes and the Senior
Subordinated Discount Notes and the Indentures;
(b) Existing Indebtedness;
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(c) Indebtedness under the Bank Credit Facility in an aggregate principal
amount at any one time outstanding not to exceed the sum of (A) $750.0
million, which amount shall be reduced by (x) any permanent reduction of
commitments thereunder and (y) any other repayment accompanied by a
permanent reduction of commitments thereunder (other than in connection
with any refinancing thereof where the aggregate principal amount
outstanding and commitments thereunder immediately prior thereto are not
greater than such amounts immediately thereafter) and increased by any
increase in the aggregate commitments under the Bank Credit Facility agreed
to in connection with the occurrence of a Replacement Satellite Event (as
defined in the Bank Credit Facility as in effect on the Issue Date)
thereunder (provided that such increase shall not be effective for purposes
of this paragraph (a) until (x) the successful launch and commencement of
operations of a permanent substitute satellite to GE-2 pursuant to a
procedure of acceptance substantially similar to the procedure regarding
acceptance of GE-2 or (y) the successful implementation, as certified by
the Company to the Trustees, of a plan of continued operation of the
PRIMESTAR(R) business agreed to in writing by the Company and the arranging
agents under the Bank Credit Facility, plus (B) any amounts outstanding
under the Bank Credit Facility that utilize subparagraph (o) of this
paragraph of this covenant;
(d) (x) Indebtedness of any Restricted Subsidiary owed to and held by the
Company or any Restricted Subsidiary and (y) Indebtedness of the Company
owed to and held by any Restricted Subsidiary which is unsecured and
subordinated in right of payment to the payment and performance of the
Company's obligations under any Senior Indebtedness, the Indentures and the
Notes (or pledged to secure any Senior Indebtedness); provided, however,
that an Incurrence of Indebtedness that is not permitted by this clause (d)
shall be deemed to have occurred upon (i) any sale or other disposition of
any Indebtedness of the Company or any Restricted Subsidiary referred to in
this clause (d) to a Person (other than the Company or any Restricted
Subsidiary); (ii) any sale or other disposition of Equity Interests of any
Restricted Subsidiary which holds Indebtedness of the Company or another
Restricted Subsidiary such that such Restricted Subsidiary ceases to be a
Restricted Subsidiary or (iii) the designation of a Restricted Subsidiary
which holds Indebtedness of the Company or any other Restricted Subsidiary
as an Unrestricted Subsidiary;
(e) guarantees by any Restricted Subsidiary of Senior Indebtedness of the
Company; provided, however, that if any such guarantee shall be Incurred in
respect of any Senior Indebtedness of the Company which has registration
rights (including the requirement to effect an exchange offer registered
under the Securities Act) or which is registered under the Securities Act,
such Restricted Subsidiary shall guarantee the Notes on a senior
subordinated basis as provided in the Indentures;
(f) Interest Rate Protection Obligations of the Company relating to
Indebtedness of the Company (which Indebtedness (i) bears interest at
fluctuating interest rates and (ii) is otherwise permitted to be Incurred
under this covenant); provided, however, that the notional principal amount
of such Interest Rate Protection Obligations does not exceed the principal
amount of the Indebtedness to which such Interest Rate Protection
Obligations relate;
(g) Purchase Money Indebtedness and Capitalized Lease Obligations which
do not exceed $35.0 million in the aggregate at any one time outstanding;
(h) Indebtedness or Disqualified Equity Interests to the extent
representing a replacement, renewal, refinancing or extension
(collectively, a "refinancing") of outstanding Indebtedness or Disqualified
Equity Interests Incurred in compliance with the Debt to Operating Cash
Flow Ratio of the first paragraph of this covenant or clause (a), (b), (i),
(j), (k), (l) or (m) of this paragraph of this covenant; provided, however,
that (i) any such refinancing shall not exceed the sum of the principal
amount (or, if such Indebtedness or Disqualified Equity Interests provide
for a lesser amount to be due and payable upon a declaration of
acceleration thereof at the time of such refinancing, an amount no greater
than such lesser amount) of the Indebtedness or Disqualified Equity
Interests being refinanced, plus the amount of accrued interest or
dividends thereon, plus the amount of any reasonably determined prepayment
premium necessary to accomplish such refinancing and such reasonable fees
and expenses incurred in connection therewith, (ii) Indebtedness
representing a refinancing of Indebtedness other than Senior Indebtedness
shall have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the
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Indebtedness being refinanced, (iii) Indebtedness that is pari passu with
the Notes may only be refinanced with Indebtedness that is made pari passu
with or subordinate in right of payment to the Notes and Subordinated
Indebtedness or Disqualified Equity Interests may only be refinanced with
Subordinated Indebtedness or Disqualified Equity Interests; (iv) no
Restricted Subsidiary may Incur Indebtedness to refinance Indebtedness of
the Company; and (v) with respect to any refinancing of Indebtedness
Incurred pursuant to clauses (i), (j), (k) or (l) of this paragraph, such
refinancing pursuant to this clause (h) shall also be deemed to be Incurred
pursuant to clause (i), (j), (k) or (l), as the case may be, of this
paragraph (for the avoidance of doubt, the result of which is that a
refinancing does not create new debt Incurrence capacity under such
clauses);
(i) Indebtedness (including Acquired Indebtedness) not to exceed $180.0
million in aggregate principal amount at any time outstanding, Incurred in
connection with the acquisition by the Company or any Restricted Subsidiary
of partnership interests in PRIMESTAR Partners not owned by the Company or
any Restricted Subsidiary (including, without limitation, the acquisition
of a Person (other than the Company or any Restricted Subsidiary) that owns
partnership interests in PRIMESTAR Partners); provided, however, that (i)
after giving effect to such purchase the Company or a Restricted Subsidiary
owns such partnership interests and all right and title with respect
thereto (including the income and profits therefrom); and (ii) any such
Indebtedness Incurred by any Restricted Subsidiary shall only be permitted
to be Incurred if it is Acquired Indebtedness and shall not be Incurred if
such Acquired Indebtedness was Incurred in connection with, in
contemplation of or with a view to such transaction;
(j) Indebtedness (including Acquired Indebtedness) Incurred in connection
with the acquisition of any Person distributing PRIMESTAR(R) television
programming or the acquisition of any subscribers of any distributor of
PRIMESTAR(R) television programming and the right to distribute
PRIMESTAR(R) television programming to such subscribers (and related assets
and rights); provided, however, that (i) the aggregate amount of any such
Indebtedness Incurred in connection with any such acquisition shall not
exceed $750.00 per subscriber acquired in such acquisition; (ii) such
acquisition is effected through the Company or any Restricted Subsidiary or
a Person that becomes a Restricted Subsidiary; and (iii) any such
Indebtedness Incurred by any Restricted Subsidiary shall only be permitted
to be Incurred if it is Acquired Indebtedness and shall not be Incurred if
such Acquired Indebtedness was Incurred in connection with, in
contemplation of or with a view to such transaction;
(k) Indebtedness to fund purchases of inventory of integrated receiver
decoders and other related subscriber equipment to be used in the business
of the Company and the Restricted Subsidiaries not to exceed in the
aggregate at any time outstanding the lesser of (x) 50% of the aggregate
cost of such decoders and equipment and (y) $50.0 million;
(l) Indebtedness (including Acquired Indebtedness) Incurred to effect the
acquisition of other satellite communications businesses (or Persons
engaged in such business) (a "Related Acquisition") or to make C-Band
Investments (so long as such C-Band Investment results in the ownership by
the Company or any Restricted Subsidiary of not less than 50% of the
economic and Voting Equity Interests in the subject Person or is made to
fund the acquisition of other satellite communications businesses by such
Person in whom the C-Band Investment is being made (so long as such
acquisition is effected by such Person or one of its subsidiaries));
provided, however, that (i) the aggregate amount of any such Indebtedness
Incurred to effect any such Related Acquisition shall not exceed (x)
$750.00 per subscriber acquired in such acquisition if such Related
Acquisition is in the medium or high power segment of the satellite
communications industry or (y) $500.00 per subscriber acquired in such
Related Acquisition if such Related Acquisition is in the C-band segment of
the satellite communications industry; (ii) such Related Acquisition is
effected through the Company or any Restricted Subsidiary or a Person that
becomes a Restricted Subsidiary; (iii) the aggregate amount of any such
indebtedness Incurred to effect any C-Band Investments shall not exceed (x)
if such C-Band Investment is the initial Investment in the Person in whom
the C-Band Investment is being made, $250.00 per subscriber existing at the
time thereof of such Person in whom such C-Band Investment is being made
and (y) $250.00 per subscriber acquired if such C-Band Investment is made
to fund the acquisition by the Person in whom such C-Band Investment is
being made of other satellite communications
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businesses; and (iv) any such Indebtedness Incurred by any Restricted
Subsidiary shall only be permitted to be Incurred if it is Acquired
Indebtedness and shall not be Incurred if such Acquired Indebtedness was
Incurred in connection with, in contemplation of or with a view to such
transaction;
(m) Indebtedness under any guarantee, letter of credit or other credit
support with respect to (x) any obligations of PRIMESTAR Partners under the
Partnership Credit Agreement (or any refinancing thereof) to the extent
such obligation was Incurred by PRIMESTAR Partners to finance any Company
Satellite or (y) any obligations of PRIMESTAR Partners under the GE-2
Agreement, in each case, to the extent the provision thereof is a Permitted
Investment under clause (n) of the definition of "Permitted Investments";
and
(n) in addition to the items referred to in clauses (a) through (m)
above, Indebtedness of the Company (including any Indebtedness under the
Bank Credit Facility that utilizes this subparagraph (n)) having an
aggregate principal amount not to exceed $50.0 million at any time
outstanding; provided, however, that so long as no Default or Event of
Default shall have occurred and be continuing, such amount shall be
increased to a maximum of $100.0 million if, as of the end of the most
recently completed fiscal quarter of the Company after the Issue Date, the
Company shall have provided an Officers' Certificate to the Trustees that
the Company and the Restricted Subsidiaries had as of such date in excess
of 1.2 million subscribers.
Indebtedness of any Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary (or is merged into or consolidated
with the Company or any Restricted Subsidiary), whether or not such
Indebtedness was incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary (or being merged into or consolidated
with the Company or any Restricted Subsidiary), shall be deemed Incurred at
the time any such Person becomes a Restricted Subsidiary or merges into or
consolidates with the Company or any Restricted Subsidiary; provided, however,
that any Indebtedness of any Unrestricted Subsidiary existing at the time of
its designation as a Restricted Subsidiary pursuant to the Required
Designation shall not be deemed Incurred at such time for purposes of the
covenant.
If the Company Incurs any Indebtedness pursuant to the Debt to Operating
Cash Flow Ratio of the first paragraph of this covenant and included in the
calculation thereof the Consolidated Operating Cash Flow of the High Power
Satellite Transmission Subsidiary, C-Band Dividends or the Consolidated
Operating Cash Flow of any Restricted C-Band Subsidiary, then such
Indebtedness will be deemed to not have been Incurred in compliance with this
covenant (unless otherwise incurrable at such time under any of subparagraphs
(a)-(o) of the second paragraph of this covenant) if the Company or any
Restricted Subsidiary thereafter makes any Restricted Payment pursuant to
clause (x) or (xii) of the second paragraph of "--Limitation on Restricted
Payments" above and such Indebtedness could not have been Incurred at the time
of its Incurrence if any such Investment were made immediately prior to such
Incurrence.
Limitation on Senior Subordinated Indebtedness. The Company shall not,
directly or indirectly, Incur any Indebtedness that by its terms would
expressly rank senior in right of payment to the Notes and expressly rank
subordinated in right of payment to any Senior Indebtedness.
Limitations on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions to the Company or any other Restricted Subsidiary on its Equity
Interests or with respect to any other interest or participation in, or
measured by, its profits, or pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (b) make loans or advances to, or guarantee any
Indebtedness or other obligations of, the Company or any other Restricted
Subsidiary or (c) transfer any of its properties or assets to the Company or
any other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of (i) the Bank Credit Facility, any Basic
Document or any other agreement of the Company or the Restricted Subsidiaries
outstanding on the Issue Date, in each case as in effect on the Issue Date,
and any amendments, restatements, renewals, replacements or refinancings
thereof; provided, however, that any such amendment, restatement, renewal,
replacement or
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refinancing is no more restrictive in the aggregate with respect to such
encumbrances or restrictions than those contained in the Bank Credit Facility
on the Issue Date; (ii) applicable law; (iii) any instrument governing
Indebtedness or Equity Interests of an Acquired Person acquired by the Company
or any Restricted Subsidiary as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred by such Acquired Person
in connection with, as a result of or in contemplation of such acquisition);
provided, however, that such encumbrances and restrictions are not applicable
to the Company or any Restricted Subsidiary, or the properties or assets of
the Company or any Restricted Subsidiary, other than the Acquired Person; (iv)
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices; (v) Purchase Money
Indebtedness for property acquired in the ordinary course of business that
only imposes encumbrances and restrictions on the property so acquired; (vi)
any agreement for the sale or disposition of the Equity Interests or assets of
any Restricted Subsidiary; provided, however, that such encumbrances and
restrictions described in this clause (vi) are only applicable to such
Restricted Subsidiary or assets, as applicable, and any such sale or
disposition is made in compliance with "--Disposition of Proceeds of Asset
Sales" below to the extent applicable thereto; (vii) refinancing Indebtedness
permitted under clause (h) of the second paragraph of "--Limitation on
Indebtedness" above; provided, however, that the encumbrances and restrictions
contained in the agreements governing such Indebtedness are no more
restrictive in the aggregate than those contained in the agreements governing
the Indebtedness being refinanced immediately prior to such refinancing;
(viii) the Notes Indentures; or (ix) any such customary encumbrance or
restriction existing under any other security agreement, instrument or
document hereafter in effect; provided, however, that the terms and conditions
of any such encumbrance or restriction are not more restrictive than those
contained in the Bank Credit Facility as in effect on the Issue Date. Anything
contained herein to the contrary notwithstanding, the Company and its
Subsidiaries shall in no event be prohibited or restrained from granting, and
causing to be effective, any lien or security interest securing the
obligations of the Company and the Restricted Subsidiaries under the Bank
Credit Facility.
Designation of Unrestricted Subsidiaries; Designation of Tempo as a
Restricted Subsidiary. (a) Tempo and its Subsidiaries are initially designated
by the Company as Unrestricted Subsidiaries as of the Issue Date. The Company
may designate after the Issue Date any other Subsidiary of the Company as an
"Unrestricted Subsidiary" under the Indentures (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Designation;
(ii) at the time of and after giving effect to such Designation, the
Company could Incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the Debt to Operating Cash Flow Ratio of the first
paragraph of "--Limitation on Indebtedness" above; and
(iii) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of "--
Limitation on Restricted Payments" above in an amount (the "Designation
Amount") equal to the Fair Market Value of the Company's proportionate
interest in the net worth of such Subsidiary on such date calculated in
accordance with GAAP.
Notwithstanding the above, no Subsidiary of the Company shall be designated
an Unrestricted Subsidiary which (i) holds the partnership interest in (or any
debt or equity interest in) PRIMESTAR Partners or distributes, directly or
indirectly, PRIMESTAR(R) television programming service or has any right,
title or interest in the revenue or profits in, or holds any Lien in respect
of, such partnership interests or such distribution or (ii) conducts, directly
or indirectly, the High Power Satellite Transmission Business or the business
of distributing high power DBS services to subscribers (or, if the proposed
Cable Plus strategy is implemented, the business of distributing the Cable
Plus service to cable system operators), or has any interest in any such
business or the right to receive the income or profits therefrom.
Neither the Company nor any Restricted Subsidiary shall at any time (x)
provide credit support for, subject any of its property or assets (other than
the Equity Interests of any Unrestricted Subsidiary) to the satisfaction of,
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or guarantee, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (z) be directly or indirectly liable for any Indebtedness which
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a default
with respect to any Indebtedness of any Unrestricted Subsidiary (other than
Tempo pursuant to the Bank Credit Facility), except, in the case of clause (x)
or (y), to the extent otherwise permitted under the terms of the Indentures,
including, without limitation, pursuant to "--Limitation on Restricted
Payments" above and "--Disposition of Proceeds of Asset Sales" below, and
except for any non-recourse guarantee given solely to support the pledge by
the Company or any Restricted Subsidiary of the Equity Interests of any
Unrestricted Subsidiary.
(b) The Company shall designate (the "Required Designation") Tempo (or any
other Unrestricted Subsidiary which owns any Company Satellite or any right or
interest therein or holds a Lien in respect thereof or the right to receive
income or profits therefrom (Tempo or any such Unrestricted Subsidiary, the
"Satellite Subsidiary")) as a Restricted Subsidiary and revoke its designation
as an Unrestricted Subsidiary if as of the end of any complete fiscal quarter
of such Satellite Subsidiary after the Issue Date, the remainder of (x)
Consolidated Operating Cash Flow of such Satellite Subsidiary for the
immediately preceding complete fiscal quarter, minus (y) Consolidated Interest
Expense of such Satellite Subsidiary for such immediately preceding complete
fiscal quarter, minus (z) any scheduled principal payments in respect of
Indebtedness of such Satellite Subsidiary made during such immediately
preceding complete fiscal quarter is greater than $1.0 million. For purposes
of determining Consolidated Operating Cash Flow and Consolidated Interest
Expense of any Satellite Subsidiary pursuant to the immediately preceding
sentence, the definitions "Consolidated Operating Cash Flow" and "Consolidated
Interest Expense" shall be used, but references to the Company and the
Restricted Subsidiaries in such definitions shall be deemed to refer to the
relevant Satellite Subsidiary and its Subsidiaries.
(c) The Company may revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation") if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of and after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at
such time, have been permitted to be Incurred for all purposes of the
Indentures; provided, however, that the foregoing shall not apply to the
Required Designation.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustees certifying
compliance with the foregoing provisions.
Limitation on Liens. The Company shall not, and shall not cause or permit
any Restricted Subsidiary to, directly or indirectly, Incur any Liens of any
kind against or upon any of their respective properties or assets now owned or
hereafter acquired, or any proceeds therefrom or any income or profits
therefrom, to secure any Indebtedness unless contemporaneously therewith
effective provision is made to secure the Notes equally and ratably with such
Indebtedness with a Lien on the same properties and assets securing
Indebtedness for so long as such Indebtedness is secured by such Lien, except
for (i) Liens securing any Senior Indebtedness or any guarantee of Senior
Indebtedness by any Restricted Subsidiary and (ii) Permitted Liens.
Disposition of Proceeds of Asset Sales. (a) The Company shall not, and shall
not cause or permit any Restricted Subsidiary to, directly or indirectly, make
any Asset Sale, unless (i) the Company or such Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets sold or otherwise disposed of and
(ii) at least 85% of such consideration consists of (A) cash or Cash
Equivalents, (B) properties and capital assets to be used in the same lines of
business being conducted by the Company or any Restricted Subsidiary at such
time or (C) Equity Interests in one or more Persons which thereby become
Restricted Subsidiaries whose assets consist primarily of properties and
capital assets used in the same line of business being conducted by the
Company or any Restricted Subsidiary at such
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time. The amount of any (i) Indebtedness (other than any Subordinated
Indebtedness) of the Company or any Restricted Subsidiary that is actually
assumed by the transferee in such Asset Sale and from which the Company and
the Restricted Subsidiaries are fully released shall be deemed to be cash for
purposes of determining the percentage of cash consideration received by the
Company or the Restricted Subsidiaries and (ii) notes or other similar
obligations received by the Company or the Restricted Subsidiaries from such
transferee that are immediately converted, sold or exchanged (or are
converted, sold or exchanged within thirty days of the related Asset Sale) by
the Company or the Restricted Subsidiaries into cash shall be deemed to be
cash, in an amount equal to the net cash proceeds realized upon such
conversion, sale or exchange for purposes of determining the percentage of
cash consideration received by the Company or the Restricted Subsidiaries.
The Company or such Restricted Subsidiary, as the case may be, may (i) apply
the Net Cash Proceeds of any Asset Sale within 375 days of receipt thereof to
repay Senior Indebtedness and permanently reduce any related commitment, (ii)
commit in writing to acquire, construct or improve properties and capital
assets to be used in the same line of business being conducted by the Company
or any Restricted Subsidiary at such time and so apply such Net Cash Proceeds
within 375 days after the receipt thereof, or (iii) apply the Net Cash
proceeds of any Asset Sale within 375 days after receipt thereof to the making
of any Investment which is permitted to be made under "--Limitation on
Restricted Payments" above.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied within 375 days of such Asset Sale as described in clause (i), (ii) or
(iii) of the immediately preceding paragraph (such Net Cash Proceeds, the
"Unutilized Net Cash Proceeds"), the Company shall, within 20 days after such
375th day, make an Offer to Purchase all outstanding Notes of each tranche up
to a maximum principal amount (in the case of the Senior Subordinated Notes)
or Accreted Value (in the case of the Senior Subordinated Discount Notes)
(expressed as a multiple of $1,000) of Notes equal to the Securities Portion
of Unutilized Net Cash Proceeds, at a purchase price in cash equal to (x) with
respect to the Senior Subordinated Notes, 100% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the Purchase
Date, and (y) with respect to the Senior Subordinated Discount Notes, 100% of
the Accreted Value on the Purchase Date, unless the Purchase Date is on or
after the earlier to occur of February 15, 2002 and the Cash Interest Election
Date, in which case such purchase price shall be equal to 100% of the
principal amount at maturity thereof, plus accrued and unpaid interest
thereon, if any, to the Purchase Date; provided, however, that the Offer to
Purchase may be deferred until there are aggregate Unutilized Net Cash
Proceeds equal to or in excess of $15.0 million, at which time the entire
amount of such Unutilized Net Cash Proceeds, and not just the amount in excess
of $15.0 million, shall be applied as required pursuant to this paragraph.
In the event that any other Indebtedness of the Company which ranks pari
passu with either tranche of the Notes (including the other tranche of the
Notes) (the "Other Indebtedness") requires that an offer to repurchase such
Indebtedness be made upon the consummation of any Asset Sale, the Company may
apply the Unutilized Net Cash Proceeds otherwise required to be applied to an
Offer to Purchase to offer to purchase such Other Indebtedness and to an Offer
to Purchase so long as the amount of such Unutilized Net Cash Proceeds applied
to repurchase the Notes of such tranche is not less than the Securities
Portion of Unutilized Net Cash Proceeds. With respect to any Unutilized Net
Cash Proceeds, the Company shall make the Offer to Purchase in respect thereof
at the same time under each Indenture and at the same time as the analogous
offer to purchase is made under any Other Indebtedness and the Purchase Date
in respect thereof shall be the same under each Indenture and the same as the
purchase date in respect thereof pursuant to any Other Indebtedness.
For purposes of this covenant, "Securities Portion of Unutilized Net Cash
Proceeds" means, with respect to either tranche of the Notes, the amount of
the Unutilized Net Cash Proceeds equal to the product of (x) the Unutilized
Net Cash Proceeds and (y) a fraction the numerator of which is the principal
amount or Accreted Value of all Notes of such tranche tendered pursuant to the
Offer to Purchase related to such Unutilized Net Cash Proceeds (the
"Securities Amount") and the denominator of which is the sum of the Securities
Amount and the lesser of the aggregate principal face amount or accreted value
as of the relevant purchase date of all Other Indebtedness tendered pursuant
to a concurrent offer to purchase such Other Indebtedness made at the time of
such Offer to Purchase.
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With respect to any Offer to Purchase effected pursuant to this covenant,
among the Senior Subordinated Notes, to the extent the aggregate principal
face amount of Senior Subordinated Notes tendered pursuant to such Offer to
Purchase exceeds the Securities Portion of Unutilized Net Cash Proceeds to be
applied to the repurchase thereof, such Notes shall be purchased pro rata
based on the aggregate principal face amount of such Senior Subordinated Notes
tendered by each holder, and, as among the Senior Subordinated Discount Notes,
to the extent that the Accreted Value as of the Purchase Date (or principal
amount at maturity after February 15, 2002 or, if a Cash Interest Election
shall have been made, the Cash Interest Election Date) of the Senior
Subordinated Discount Notes tendered pursuant to such Offer to Purchase
exceeds the Securities Portion of Unutilized Net Cash Proceeds with respect
thereto, such Notes shall be purchased pro rata based on the Accreted Value as
of the Purchase Date (or principal amount at maturity after February 15, 2002
or, if a Cash Interest Election shall have been made, the Cash Interest
Election Date) of such Senior Subordinated Discount Notes tendered by each
holder.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1
under, the Exchange Act, and any violation of the provisions of the Indentures
relating to such Offer to Purchase occurring as a result of such compliance
shall not be deemed an Event of Default or an event that with the passing of
time or giving of notice, or both, would constitute an Event of Default.
(b) Each holder shall be entitled to tender all or any portion of the Notes
owned by such holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a Note tendered must be tendered in an
integral multiple of $1,000 principal amount and subject to any proration
among tendering holders as described above.
(c) So long as there are any amounts owed or due by the Company or any
Subsidiary to PRIMESTAR Partners under the Tempo Letter Agreements, or the
Company or any Restricted Subsidiary is directly or indirectly obligated,
contingently or otherwise, for any obligations under the Partnership Credit
Agreement (pursuant to any letter of credit, guarantee or other credit support
or otherwise), for purposes of the foregoing covenant, the sale or lease of
either or both of the Company Satellites (whether or not the Subsidiary owning
such Company Satellite is a Restricted Subsidiary), or any transponder thereon
or capacity thereof, to PRIMESTAR Partners or any other Person shall be
considered an Asset Sale unless (i) if such sale or lease is to PRIMESTAR
Partners of both Company Satellites, any balance due by the Company or any
Subsidiary to PRIMESTAR Partners under the Tempo Letter Agreements shall be
permanently extinguished and if such sale or lease is to PRIMESTAR Partners of
only one Company Satellite, then 100% of the net proceeds thereof are applied
to the balance due by the Company or any Subsidiary to PRIMESTAR Partners
under the Tempo Letter Agreements and (ii) if such sale or lease is to any
other Person, 100% of the net proceeds thereof are applied to the balance due
under the Partnership Credit Agreement to the extent that the Company or any
Restricted Subsidiary has any letter of credit, guarantee or other credit
support outstanding in respect thereof and thereafter to the balance due by
the Company or any Subsidiary to PRIMESTAR Partners under the Tempo Letter
Agreements. The Company shall not and shall not cause or permit any Subsidiary
to enter into or suffer to exist any agreement, instrument, encumbrance or
restriction which would, directly or indirectly, limit, prohibit or restrict
the compliance by the Company and its Subsidiaries with the foregoing
sentence.
(d) If the Company or any Restricted Subsidiary is engaged in the High Power
Satellite Transmission Business, the Company shall not and shall not cause or
permit any such High Power Satellite Transmission Subsidiary to sell, convey,
transfer, lease, assign, or otherwise encumber (i) any Company Satellite (or
any contract rights related to the construction, launch or insurance thereof),
(ii) any orbital slot owned by the Company or any Subsidiary, (iii) the Equity
Interests of any Subsidiary which owns any Company Satellite or any orbital
slot or any right, license, authorization or permit with respect to any such
orbital slot owned by such Subsidiary, or any other interest in an orbital
slot which may be sold or otherwise disposed of in compliance with all
applicable law (including the Communications Act and the rules and regulations
promulgated thereunder) or (iv) the income or profits of any of the foregoing,
unless in any such case, immediately after such a transaction the Company or
such High Power Satellite Transmission Subsidiary has in place a binding
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agreement providing for dedicated satellite capacity sufficient to serve its
High Power Satellite Transmission Business at least until the stated maturity
of the Notes and files such agreement with the Trustee together with an
Officers' Certificate certifying that such agreement meets the foregoing
criteria.
Amendments to Certain Agreements. The Company shall not, and shall not cause
or permit any Restricted Subsidiary to, amend, modify or waive, or refrain
from enforcing, any provision of the Basic Documents in any manner adverse to
the Company or any of its Subsidiaries or the holders of the Notes in any
material respect as determined by the Board of Directors of the Company. This
covenant shall not be construed to prohibit the Company or any Restricted
Subsidiary from terminating any of the Basic Documents, if a majority of the
disinterested members of the Board of Directors of the Company shall determine
that it is in the best interests of the Company to do so.
Company Satellites; Maintenance of Insurance. (a) Prior to 180 days
following the successful launch of any Company Satellite (which, in the case
of Tempo DBS-1, occurred on March 8, 1997), the Company shall not terminate
the Satellite Construction Agreement or amend, modify or refrain from
enforcing any provision thereof in any manner adverse to the Company or any of
its Subsidiaries or the holders of the Notes in any material respect, as
determined by the Board of Directors of the Company, and shall not amend,
modify or refrain from enforcing any provision thereof regarding the rights of
the Company under the Satellite Construction Agreement (if any) with respect
to any failure of any Company Satellite that may occur during the 180 day
period immediately thereafter.
(b) If the Company or any Subsidiary is engaged in the High Power Satellite
Transmission Business, so long as a ground spare satellite of comparable
quality and capacity has not been completely constructed and available to be
launched and to provide (pursuant to a binding agreement, a copy of which has
been filed with the Trustees) sufficient capacity to the Company or the
Subsidiary conducting the High Power Satellite Transmission Business to
conduct such business on a competitive basis and service its subscribers, then
within 30 days after the acceptance of any Company Satellite by the Company or
any Subsidiary after completion of in-orbit testing by the builder thereof the
Company shall, or shall cause a Restricted Subsidiary to, obtain (to the
extent commercially available upon reasonable terms), and thereafter maintain,
In-Orbit Insurance with respect to the Company Satellite (or any permanent
replacement thereof) providing the servicing capacity with respect to such
High Power Satellite Transmission Business. The Company or such Restricted
Subsidiary shall be named as the insured under such In-Orbit Insurance
(provided that only a senior secured creditor of the Company or a Restricted
Subsidiary may also be designated as a named insured under such In-Orbit
Insurance).
(c) In the event that the Company or any of its Subsidiaries receives any
damages or other amounts due under the Satellite Construction Agreement
(including, without limitation, the refund of the full purchase price of any
Company Satellite which has not been delivered pursuant to the terms thereof)
all such amounts shall be deemed to be Net Cash Proceeds from an Asset Sale
and the Company shall apply such proceeds as required by the second and third
full paragraphs under subparagraph (a) of "--Disposition of Proceeds of Asset
Sales" above, except as provided by subparagraph (c) thereof.
Merger, Sale of Assets, etc. The Company shall not consolidate with or merge
with or into (whether or not the Company is the Surviving Person) any other
entity and the Company shall not and shall not cause or permit any Restricted
Subsidiary to, sell, convey, assign, transfer, lease or otherwise dispose of
all or substantially all of the Company's properties and assets (determined on
a consolidated basis for the Company and the Restricted Subsidiaries) to any
entity in a single transaction or series of related transactions, unless: (i)
either (x) the Company shall be the Surviving Person or (y) the Surviving
Person (if other than the Company) shall be a corporation organized and
validly existing under the laws of the United States of America or any State
thereof or the District of Columbia, and shall, in any such case, expressly
assume by a supplemental indenture, the due and punctual payment of the
principal of, premium, if any, and interest on all the Notes and the
performance and observance of every covenant of the Indentures and the
Registration Rights Agreements to be performed or observed on the part of the
Company; (ii) immediately thereafter, no Default or Event of Default shall
have occurred and be continuing; and (iii) immediately after giving effect to
any such transaction involving
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the Incurrence by the Company or any Restricted Subsidiary, directly or
indirectly, of additional Indebtedness (and treating any Indebtedness not
previously an obligation of the Company or any Restricted Subsidiary in
connection with or as a result of such transaction as having been Incurred at
the time of such transaction), the Surviving Person could Incur, on a pro
forma basis after giving effect to such transaction as if it had occurred at
the beginning of the latest fiscal quarter for which consolidated financial
statements of the Company are available, at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the Debt to Operating
Cash Flow Ratio of the first paragraph of "--Limitation on Indebtedness"
above; provided, however, that the condition set forth in this clause (iii)
need not be satisfied in connection with the merger or consolidation with or
into the Company or any Restricted Subsidiary of any Person holding
partnership interests in PRIMESTAR Partners if (x) such merger or
consolidation is effected for the purpose of acquiring the partnership
interests in PRIMESTAR Partners held by such Person (provided that the amount
of partnership interests in PRIMESTAR Partners held by such Person on the date
of such merger or consolidation is not less than the amount held by such
Person on the Issue Date otherwise than pursuant to the transfer of
partnership interests in PRIMESTAR Partners to another Person who has been or
simultaneously therewith will be merged or consolidated with or into the
Company or any Restricted Subsidiary or the dilution of such Person's
partnership interests in PRIMESTAR Partners solely due to its failure to pay
capital contributions required by the Partnership Agreement) and (y) in
connection with such acquisition of such partnership interests the Company or
a Restricted Subsidiary acquires all rights of such Person (and its
Affiliates) to distribute PRIMESTAR(R) programming services.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries the Equity Interest of which constitutes all or substantially all
the properties and assets of the Company shall be deemed to be the transfer of
all or substantially all the properties and assets of the Company.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the second immediately preceding
paragraph in which the Company is not the Surviving Person and the Surviving
Person is to assume all the Obligations of the Company under the Notes, the
Notes Indentures and the Registration Rights Agreements pursuant to a
supplemental indenture, such Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Company and
the Company shall be discharged from its Obligations under the Notes
Indentures and the Notes.
Transactions with Affiliates. The Company shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into any transaction (or series of related transactions)
with or for the benefit of any of their respective Affiliates or any
beneficial holder of 10% or more of the Equity Interests of the Company or any
officer, director or employee of the Company or any Restricted Subsidiary
(each an "Affiliate Transaction"), unless such Affiliate Transaction is on
terms which are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than would be available in a comparable
transaction with an unaffiliated third party. If such Affiliate Transaction
(or series of related Affiliate Transactions) involves aggregate payments or
other consideration having a Fair Market Value in excess of $15.0 million, the
Company shall not, and shall not cause or permit any Restricted Subsidiary to,
enter into such Affiliate Transaction, unless a majority of the disinterested
members of the Board of Directors of the Company shall have approved such
Affiliate Transaction and determined that such Affiliate Transaction complies
with the foregoing provisions; provided, however, that if such Affiliate
Transaction is in the ordinary course of business consistent with the past
practice of any business of the Company or a Restricted Subsidiary, including
the High Power Satellite Transmission Business, then there shall be no need to
comply with this sentence. In the event that the Company obtains a written
opinion from an Independent Financial Advisor (and files the same with the
Trustees) stating that the terms of an Affiliate Transaction are fair, from a
financial point of view, to the Company or the Restricted Subsidiary involved
in such Affiliate Transaction, as the case may be, such opinion will
conclusively meet the requirements of the first sentence of this paragraph and
there shall be no need to comply with the second sentence of this paragraph.
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Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and any
Restricted Subsidiary or between or among Restricted Subsidiaries; (ii)
customary directors' fees, indemnification and similar arrangements,
consulting fees, employee salaries, bonuses or employment agreements,
compensation or employee benefit arrangements and incentive arrangements with
any officer, director or employee of the Company entered into in the ordinary
course of business (including customary benefits thereunder) and payments
under any indemnification arrangements permitted by applicable law; (iii) the
Basic Documents, each as in effect on the Issue Date, including any amendment
or extension thereof that does not otherwise violate any other covenant set
forth in the Indentures, and any transactions undertaken pursuant to any other
contractual obligations in existence on the Issue Date (as in effect on the
Issue Date); (iv) the issue and sale by the Company to its stockholders of
Qualified Equity Interests; (v) any Restricted Payments made in compliance
with "--Limitation on Restricted Payments" above; (vi) loans and advances to
officers, directors and employees of the Company and the Restricted
Subsidiaries for travel, entertainment, moving and other relocation expenses,
in each case made in the ordinary course of business and consistent with past
business practices; (vii) the Incurrence of intercompany Indebtedness
permitted pursuant to clause (d) of the second paragraph of "--Limitation on
Indebtedness" above; and (viii) the pledge of Equity Interests of Unrestricted
Subsidiaries to support the Indebtedness thereof.
Provision of Financial Information. Whether or not the Company is subject to
Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the SEC (if permitted by SEC practice and
applicable law and regulations) the annual reports, quarterly reports and
other documents which the Company would have been required to file with the
SEC pursuant to such Section 13(a) or 15(d) or any successor provision thereto
if the Company were so subject, such documents to be filed with the SEC on or
prior to the respective dates (the "Required Filing Dates") by which the
Company would have been required so to file such documents if the Company were
so subject. The Company shall also in any event (a) within 15 days of each
Required Filing Date (whether or not permitted or required to be filed with
the SEC) (i) transmit (or cause to be transmitted) by mail to all holders, as
their names and addresses appear in the Note Register, without cost to such
holders, and (ii) file with the Trustees, copies of the annual reports,
quarterly reports and other documents which the Company is required to file
with the SEC pursuant to the preceding sentence, or, if such filing is not so
permitted, information and data of a similar nature, and (b) if,
notwithstanding the preceding sentence, filing such documents by the Company
with the SEC is not permitted by SEC practice or applicable law or
regulations, promptly upon written request supply copies of such documents to
any holder. In addition, for so long as any Notes remain outstanding, the
Company will furnish to the holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act, and, to any beneficial
holder of Notes, if not obtainable from the SEC, information of the type that
would be filed with the SEC pursuant to the foregoing provisions, upon the
request of any such holder.
Payments for Consent. Neither the Company nor any of its Subsidiaries may,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of a Note for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indentures or the Notes unless such consideration is offered
to be paid or agreed to be paid to all holders of the Notes that consent,
waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
EVENTS OF DEFAULT
The occurrence of any of the following will be defined as an "Events of
Default" under each Indenture: (a) failure to pay principal of (or premium, if
any, on) any Note when due (whether or not prohibited by the provisions of the
Indentures described under "--Subordination of the Notes" above); (b) failure
to pay any interest on any Note when due, continued for 30 days or more
(whether or not prohibited by the provisions of the Indentures described under
"--Subordination of the Notes" above); (c) default in the payment of principal
of or interest on Notes required to be purchased pursuant to any Offer to
Purchase required by the Indentures when due and payable or failure to pay on
the Purchase Date the Purchase Price for any Note validly tendered pursuant to
any Offer to Purchase (whether or not prohibited by the provisions of the
Indentures described under
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"--Subordination of the Notes" above); (d) failure to perform or comply with
any of the provisions described under "--Certain Covenants--Merger, Sale of
Assets, etc." above; (e) failure to perform any other covenant, warranty or
agreement of the Company or the Guarantors under the Indentures, or in the
Notes continued for 30 days or more after written notice to the Company by the
applicable Trustee or holders of at least 25% in aggregate principal face
amount of the outstanding Senior Subordinated Notes or holders of at least 25%
of the aggregate principal amount at maturity of the Senior Subordinated
Discount Notes, as the case may be, under the applicable Indenture; (f)
default or defaults under the terms of one or more instruments evidencing or
securing Indebtedness of the Company or any of its Significant Restricted
Subsidiaries or, so long as the Company or any Significant Restricted
Subsidiary is a general partner thereof or is (directly or indirectly)
obligated in any way (contingently or otherwise) with respect to its
Indebtedness, PRIMESTAR Partners having an outstanding principal amount of
$15.0 million or more individually or in the aggregate that has resulted in
the acceleration of the payment of such Indebtedness or failure by the Company
or any of its Significant Restricted Subsidiaries or, so long as the Company
or any Significant Restricted Subsidiary is a general partner thereof or is
(directly or indirectly) obligated in any way (contingently or otherwise) with
respect to its Indebtedness, PRIMESTAR Partners to pay principal when due at
the stated maturity of any such Indebtedness; provided, however, that it shall
not be an Event of Default if such Indebtedness shall have been repaid in full
or such acceleration shall have been rescinded within 20 days; (g) the
rendering of a final judgment or judgments (not subject to appeal) against the
Company or any of its Significant Restricted Subsidiaries in an amount of
$15.0 million or more (net of any amounts covered by reputable and
creditworthy insurance companies) which remains undischarged or unstayed for a
period of 60 days after the date on which the right to appeal has expired; or
(h) certain events of bankruptcy, insolvency or reorganization affecting the
Company or any of its Significant Restricted Subsidiaries or, so long as the
Company or any Significant Restricted Subsidiary is a general partner thereof
or is (directly or indirectly) obligated in any way (contingently or
otherwise) with respect to its Indebtedness, PRIMESTAR Partners. Subject to
the provisions of the Indentures relating to the duties of the Trustees, in
case an Event of Default shall occur and be continuing, each Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture to which it is a party at the request or direction of any of the
holders of Notes issued thereunder, unless such holders shall have offered to
such Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the applicable Trustee, the holders of a majority in
aggregate principal face amount of the outstanding Senior Subordinated Notes
or the holders of a majority in aggregate principal amount at maturity of the
Senior Subordinated Discount Notes, as the case may be, will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the applicable Trustee, as the case may be, or exercising any
trust or power conferred on such Trustee.
If an Event of Default with respect to the Notes (other than an Event of
Default with respect to the Company described in clause (h) of the preceding
paragraph) occurs and is continuing, the applicable Trustee or the holders of
at least 25% in aggregate principal face amount of the outstanding Senior
Subordinated Notes or the holders of at least 25% in aggregate principal
amount at maturity of the outstanding Senior Subordinated Discount Notes, as
the case may be, by notice in writing to the Company may declare the unpaid
principal of (and premium, if any) and accrued interest to the date of
acceleration on all the outstanding Senior Subordinated Notes and Senior
Subordinated Discount Notes, as the case may be, to be due and payable
immediately and, upon any such declaration, such principal amount (and
premium, if any) and accrued interest, notwithstanding anything contained in
the applicable Indenture or the Senior Subordinated Notes and Senior
Subordinated Discount Notes, as the case may be, to the contrary, but subject
to the provisions limiting payment described above under "--Subordination of
the Notes," will become immediately due and payable; provided, however, that
so long as the Bank Credit Facility shall be in full force and effect, if an
Event of Default shall have occurred and be continuing (other than an Event of
Default with respect to the Company described in clause (h) of the preceding
paragraph), the Notes shall not become due and payable until the earlier to
occur of (x) five Business Days following delivery of written notice of such
acceleration of the Notes to the agent under the Bank Credit Facility and (y)
the acceleration (ipso facto or otherwise) of any Indebtedness under the Bank
Credit Facility. If an Event or Default specified in clause (h) of the
preceding paragraph with respect to the Company occurs under an Indenture, the
Notes outstanding thereunder will ipso facto become immediately due and
payable without any declaration or other act on the part of the Trustee
thereunder or any holder of such Notes.
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Any such declaration with respect to the Notes may be annulled and past
Events of Default and Defaults (except, unless theretofore cured, an Event of
Default or a Default in payment of principal of (and premium, if any) or
interest on the Notes) may be waived by the holders of a majority of the
principal amount of the outstanding Senior Subordinated Notes or a majority of
the principal amount of maturity of the outstanding Senior Subordinated
Discount Notes, as the case may be, upon the conditions provided in the
applicable Indenture. For information as to waiver of defaults, see "--
Modification and Waiver" above.
Each Indenture provides that the Trustee thereunder shall, within 30 days
after the occurrence of any Default or Event of Default with respect to the
Notes outstanding thereunder, give the holders of such Notes thereof notice of
all uncured Defaults or Events of Default thereunder known to it; provided,
however, that, except in the case of an Event of Default in payment with
respect to such Notes or a Default or Event of Default in complying with "--
Certain Covenants--Merger, Sale of Assets, etc." above, the applicable Trustee
shall be protected in withholding such notice if and so long as a committee of
its trust officers in good faith determines that the withholding of such
notice is in the interest of the holders of the applicable Notes.
No holder of any Note will have any right to institute any proceeding with
respect to the relevant Indenture or for any remedy thereunder, unless such
holder shall have previously given to the applicable Trustee written notice of
a continuing Event of Default thereunder and unless the holders of at least
25% of the aggregate principal face amount of the outstanding Senior
Subordinated Notes or the holders of at least 25% of the aggregate principal
amount of maturity of the outstanding Senior Subordinated Discount Notes, as
the case may be, under such Indenture shall have made written request, and
offered reasonable indemnity, to the relevant Trustee to institute such
proceeding as Trustee, and such Trustee shall have not have received from the
holders of a majority in aggregate principal face amount of such outstanding
Senior Subordinated Notes or the holders of a majority in aggregate principal
amount at maturity of such outstanding Senior Subordinated Discount Notes, as
the case may be, a direction inconsistent with such request and shall have
failed to institute such proceeding within 60 days. However, such limitations
do not apply to a suit instituted by a holder of such a Note for enforcement
of payment of the principal of and premium, if any, or interest on such Note
on or after the respective due dates expressed in such Note.
The Company will be required to furnish to each Trustee annually a statement
as to the performance by it of certain of its obligations under the applicable
Indenture and as to any default in such performance.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any of its Affiliates, as such, shall have any liability for any
obligations of the Company or any of its Affiliates under the Notes or the
Notes Indentures or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes.
SATISFACTION AND DISCHARGE OF NOTES INDENTURES; DEFEASANCE
The Company may terminate its substantive obligations in respect of either
tranche of the Notes by delivering all outstanding Notes of such tranche to
the applicable Trustee for cancellation and paying all sums payable by it on
account of principal of, premium, if any, and interest on all Notes of such
tranche or otherwise. In addition to the foregoing, the Company may, provided
that no Default or Event of Default has occurred and is continuing or would
arise therefrom (or, with respect to a Default or Event of Default specified
in clause (i) of "--Events of Default" above, occurs at any time on or prior
to the 91st calendar day after the date of such deposit (it being understood
that this condition shall not be deemed satisfied until after such 91st day))
under the applicable Indenture and provided that no default under any Senior
Indebtedness would result therefrom, terminate its substantive obligations in
respect of the Notes issued under such Indenture (except for its obligations
to pay the principal of (and premium, if any, on) and the interest on such
Notes) by (i) depositing with the relevant Trustee, under the terms of an
irrevocable trust agreement, money or United States Government
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Obligations sufficient (without reinvestment) to pay all remaining
indebtedness on such Notes; (ii) delivering to the relevant Trustee either an
Opinion of Counsel or a ruling directed to such Trustee from the Internal
Revenue Service to the effect that the holders of the relevant Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and termination of obligations; (iii) delivering to the relevant
Trustee an Opinion of Counsel to the effect that the Company's exercise of its
option under this paragraph will not result in any of the Company, the
relevant Trustee or the relevant trust created by the Company's deposit of
funds pursuant to this provision becoming or being deemed to be an "investment
Company" under the Investment Company Act of 1940, as amended (the "Investment
Act"); and (iv) complying with certain other requirements set forth in such
Indenture. In addition, the Company may, provided that no Default or Event of
Default has occurred and is continuing or would arise therefrom (or, with
respect to a Default or Event of Default specified in clause (i) of "--Events
of Default" above, occurs at any time on or prior to the 91st calendar day
after the date of such deposit (it being understood that this condition shall
not be deemed satisfied until after such 91st day)) under the applicable
Indenture and provided that no default under any Senior Indebtedness would
result therefrom, terminate all of its substantive obligations in respect of
the Notes issued under such Notes Indenture (including its obligations to pay
the principal of (and premium, if any, on) and interest on such Notes) by (i)
depositing with the relevant Trustee, under the terms of an irrevocable trust
agreement, money or United States Government Obligations sufficient (without
reinvestment) to pay all remaining Indebtedness on such Notes; (ii) delivering
to the relevant Trustee either a ruling directed to such Trustee from the
Internal Revenue Service to the effect that the holders of such Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and termination of obligations or an Opinion of Counsel addressed
to the relevant Trustee based upon such a ruling or based on a change in the
applicable federal tax law since the date of such Indenture, to such effect;
(iii) delivering to the relevant Trustee an Opinion of Counsel to the effect
that the Company's exercise of its option under this paragraph will not result
in any of the Company, such Trustee or the relevant trust created by the
Company's deposit of funds pursuant to this provision becoming or being deemed
to be an "investment Company" under the Investment Act; and (iv) complying
with certain other requirements set forth in such Indenture.
The Company may make an irrevocable deposit pursuant to this provision
pursuant to either Indenture only if at such time it is not prohibited from
doing so under the subordination provisions of such Indenture or certain
covenants in the Senior Indebtedness and the Company has delivered to the
applicable Trustee and any Paying Agent an Officers' Certificate to that
effect.
GOVERNING LAW
The Indentures and the Notes will be governed by the laws of the State of
New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of either Indenture may be made by the Company
and the Trustee thereunder with the consent of the holders of a majority in
aggregate principal face amount of the Senior Subordinated Notes outstanding
thereunder or of the holders of a majority in aggregate principal amount at
maturity of the Senior Subordinated Discount Notes outstanding thereunder, as
the case may be (including consents obtained in connection with a tender offer
or exchange offer for such Notes); provided, however, that no such
modification or amendment to the applicable Indenture may, without the consent
of the holder of each Note affected thereby, (a) change the maturity of the
principal of or any installment of interest on any such Note or alter the
optional redemption or repurchase provisions of any such Note or such
Indenture in a manner adverse to the holders of such Notes; (b) reduce the
principal amount of (or the premium) of any such Note (except pursuant to the
Cash Election); (c) reduce the rate of or extend the time for payment of
interest on any such Note or make any change to the definition of Accreted
Value; (d) change the place or currency of payment of principal of (or
premium) or interest on any such Note; (e) modify any provisions of such
Indenture relating to the waiver of past defaults (other than to add sections
of such Indenture or such Notes subject thereto) or the right of the holders
of Notes outstanding thereunder to institute suit for the enforcement of any
payment on or with respect
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to any such Note in respect thereof or the modification and amendment
provisions of such Indenture and such Notes (other than to add sections of
such Indenture or such Notes which may not be amended, supplemented or waived
without the consent of each holder herein affected); (f) reduce the percentage
of the principal amount of outstanding Notes necessary for amendment to or
waiver of compliance with any provision of the applicable Indenture or the
Notes outstanding thereunder or for waiver of any Default in respect thereof;
(g) waive a default in the payment of principal of, interest on, or redemption
payment with respect to, such Note (except a rescission of acceleration of the
relevant Notes by the holders thereof as provided in such Indenture and a
waiver of the payment default that resulted from such acceleration); (h)
modify the ranking or priority of any Note or modify the definition of Senior
Indebtedness or Guarantor Senior Indebtedness or amend or modify the
subordination provisions of the applicable Indenture in any manner adverse to
the holders of the applicable Notes; or (i) modify the provisions of any
covenant (or the related definitions) in the applicable Indenture requiring
the Company to make an Offer to Purchase in a manner materially adverse to the
holders of Notes thereunder affected thereby.
The holders of a majority in aggregate principal face amount of the
outstanding Senior Subordinated Notes and the holders of a majority in
aggregate principal amount at maturity of the outstanding Senior Subordinated
Discount Notes, on behalf of all holders of Notes of such tranche, may waive
compliance by the Company with certain restrictive provisions of the
applicable Indenture. Subject to certain rights of the relevant Trustee, as
provided in the applicable Indenture, the holders of a majority in aggregate
principal amount of the Senior Subordinated Notes and the holders of a
majority in aggregate principal amount at maturity of the Senior Subordinated
Discount Notes, on behalf of all holders of Notes of such tranche outstanding
thereunder, may waive any past default under such Indenture (including any
such waiver obtained in connection with a tender offer or exchange offer for
such Notes), except a default in the payment of principal, premium or interest
or a default arising from failure to purchase any Notes of such tranche
tendered pursuant to an Offer to Purchase pursuant thereto, or a default in
respect of a provision that under such Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding thereunder that is
affected.
THE TRUSTEES
Except during the continuance of a Default, each Trustee will perform only
such duties as are specifically set forth in the Indenture to which it is a
party. During the existence of a Default under an Indenture, the applicable
Trustee will exercise such rights and powers vested in it under such Indenture
and use the same degree of care and skill in their exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indentures and provisions of the TIA incorporated by reference therein
contain limitations on the rights of the Trustees, should they become a
creditor of the Company or any other obligor upon the Notes, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claim as Note or otherwise. Each Trustee is permitted to
engage in other transactions with the Company or an Affiliate of the Company;
provided, however, that if it acquires any conflicting interest (as defined in
each Indenture or in the TIA), it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the Indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means (a) as of any date prior to the Cash Interest
Election Date, if any (the "Specified Date") with respect to each $1,000
principal face amount at maturity of Senior Subordinated Discount Notes:
(i) if the Specified Date is one of the following dates (each a "Semi-
Annual Accrual Date"), the amount set forth opposite such date below:
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<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
------------ ---------
<S> <C>
Issue Date..................................................... $ 552.95
August 15, 1997................................................ 585.66
February 15, 1998.............................................. 621.52
August 15, 1998................................................ 659.59
February 15, 1999.............................................. 700.00
August 15, 1999................................................ 742.87
February 15, 2000.............................................. 788.37
August 15, 2000................................................ 836.66
February 15, 2001.............................................. 887.90
August 15, 2001................................................ 942.29
February 15, 2002.............................................. $1,000.00
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the sum of (a) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (b) an amount equal to the
product of (x) the Accreted Value for the Semi-Annual Accrual Date
immediately following the Specified Date less the Accreted Value for the
Semi-Annual Accrual Date immediately preceding the Specified Date and (y) a
fraction, the numerator of which is the number of days actually elapsed
from the immediately preceding Semi-Annual Accrual Date to the Specified
Date, using a 360-day year of twelve 30-day months, and the denominator of
which is 180; and
(iii) if the Specified Date is after February 15, 2002, $1,000; and
(b) on and after the Cash Interest Election Date, with respect to each $1,000
principal face amount of Securities, the Accreted Value determined in
accordance with the foregoing as of such Cash Interest Election Date (without
any further accretion).
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an Acquisition from such Person or (b) existing at the time
such Person becomes a Restricted Subsidiary or is merged or consolidated with
or into the Company or any Restricted Subsidiary.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Equity
Interests of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Restricted Subsidiary
or shall be consolidated, merged with or into the Company or any Restricted
Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary
of the assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of the
ordinary course of business.
"Additional Interest" has the meaning provided in Section 4(a) of each
Registration Rights Agreement.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such person, whether
through the ownership of voting securities, by agreement or otherwise;
provided, however, that (i) beneficial ownership of 10.0% or more of the
voting power of the then outstanding voting securities of a person shall be
deemed to be control; (ii) so long as the Company or any Subsidiary of the
Company owns a partnership interest in PRIMESTAR Partners, PRIMESTAR Partners
shall be deemed an Affiliate of the Company; (iii) so long as any of the
Permitted holders
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is an Affiliate of TCI and the Company, TCI shall be deemed an Affiliate of
the Company and its Subsidiaries; and (iv) no individual, other than a
director of the Company or an officer of the Company with a policy making
function, shall be deemed an Affiliate of the Company or any of its
Subsidiaries, solely by reason of such individual's employment, position or
responsibilities by or with respect to the Company or any of its Subsidiaries.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including,
without limitation, any merger, consolidation or sale-leaseback transaction)
to any Person other than the Company or a Wholly Owned Restricted Subsidiary,
in one transaction or a series of related transactions, of (i) any Equity
Interest of any Restricted Subsidiary; (ii) any material license, franchise or
other authorization of the Company or any Restricted Subsidiary; (iii) any
assets of the Company or any Restricted Subsidiary which constitute
substantially all of an operating unit or line of business of the Company or
any Restricted Subsidiary; or (iv) any other property or asset of the Company
or any Restricted Subsidiary outside of the ordinary course of business
(including the receipt of proceeds paid on account of the loss of or damage to
any property or asset and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceedings). The term "Asset Sale"
shall also include the receipt of any damages or other amounts due under the
Satellite Construction Agreement to the Company or any Subsidiary (including,
without limitation, the refund of the full purchase price of any Company
Satellite which has not been delivered pursuant to the terms thereof) from a
Person other than the Company or its Subsidiaries. The term "Asset Sale" shall
not include (a) any transaction consummated in compliance with "--Certain
Covenants--Merger, Sale of Assets, etc." above and the creation of any Lien
not prohibited by "--Certain Covenants--Limitation on Liens" above; provided,
however, that any transaction consummated in compliance with "--Certain
Covenants--Merger, Sale of Assets, etc.", above involving a sale, conveyance,
assignment, transfer, lease or other disposal of less than all of the
properties or assets of the Company and the Restricted Subsidiaries shall be
deemed to be an Asset Sale with respect to the properties or assets of the
Company and Restricted Subsidiaries that are not so sold, conveyed, assigned,
transferred, leased or otherwise disposed of in such transaction; (b) sales of
property or equipment that has become worn out, obsolete or damaged or
otherwise unsuitable for use in connection with the business of the Company or
any Restricted Subsidiary, as the case may be; (c) any transaction consummated
in compliance with "--Certain Covenants--Limitation on Restricted Payments"
above; and (d) sales of accounts receivable for cash at fair market value. In
addition, solely for purposes of "--Certain Covenants--Disposition of Proceeds
of Asset Sales" above, any sale, conveyance, transfer, lease or other
disposition of any property or asset, whether in one transaction or a series
of related transactions, involving assets with a Fair Market Value not in
excess of $10.0 million in any fiscal year shall be deemed not to be an Asset
Sale.
"Bank Credit Facility" means the Credit Agreement, dated as of December 31,
1996, between the Company, the lenders named therein, and The Bank of Nova
Scotia, as Agent, including any deferrals, renewals, waivers, extensions,
replacements, refinancings or refundings thereof, or amendments, modifications
or supplements thereto and any agreement providing therefor, whether by or
with the same or any other lender, creditor, group of lenders or group of
creditors, and including related notes, guarantees, security agreements,
pledge agreements, mortgages, other collateral documents (including all Loan
Documents (as defined in the Credit Agreement)) and note agreements and other
instruments and agreements executed in connection therewith.
"Basic Documents" means the Reorganization Agreement, the Transition
Services Agreement, the Tax Sharing Agreement, the Indemnification Agreements,
the Trade Name and Service Mark License Agreement, the Fulfillment Agreement,
the TCIC Credit Facility, the Share Purchase Agreement, the Partnership
Agreement, the Partnership Credit Agreement, the Tempo Option, the Tag-Along
Agreement and the Tempo Letter Agreements.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Cash Equivalents" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency
or instrumentality thereof having maturities of not more than six months
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from the date of acquisition; (c) certificates of deposit and eurodollar time
deposits with maturities of six months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight
bank deposits, in each case with any domestic commercial bank having capital
and surplus in excess of $500 million; (d) repurchase obligations with a term
of not more than seven days for underlying securities of the types described
in clauses (b) and (c) entered into with any financial institution meeting the
qualifications specified in clause (c) above; and (e) commercial paper rated
P-1, A-1 or the equivalent thereof by Moody's Investors Service, Inc. or
Standard & Poor's Corporation, respectively, and in each case maturing within
six months after the date of acquisition.
"Cash Interest Election" has the meaning set forth under "--Maturity,
Interest and Principal of the Senior Subordinated Discount Notes" above.
"Cash Interest Election Date" has the meaning set forth under "--Maturity,
Interest and Principal of the Senior Subordinated Discount Notes" above.
"C-Band Dividend" has the meaning set forth under "--Certain Covenants--
Limitation on Restricted Payments" above.
"C-Band Entity" has the meaning set forth under "--Certain Covenants--
Limitation on Restricted Payments" above.
"C-Band Investment" has the meaning set forth under "--Certain Covenants--
Limitation on Restricted Payments" above.
"Change of Control" shall mean the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company): (a) any
"person" or "group" (as such terms are used in Section 13(d) and 14(d) of the
Exchange Act or any successor provision to either of the foregoing, including
any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act),
excluding Permitted holders, is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such Person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time upon the happening of an event or otherwise),
directly or indirectly, of more than 35% of the total voting power of the then
outstanding Voting Equity Interests of the Company; (b) the Company
consolidates with, or merges with or into, another Person or the Company or
one of the Restricted Subsidiaries sells, assigns, conveys, transfers, leases
or otherwise disposes of all or substantially all of the assets of the Company
and the Restricted Subsidiaries (determined on a consolidated basis) to any
Person (other than a Wholly Owned Restricted Subsidiary), or any Person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which the outstanding Voting Equity Interests of
the Company is converted into or exchanged for cash, Notes or other property,
other than any such transaction where (i) the outstanding Voting Equity
Interests of the Company is converted into or exchanged for (1) Qualified
Equity Interests of the surviving or transferee corporation or (2) cash, notes
or other property in an amount which could be paid by the Company as a
Restricted Payment under the Indentures and (ii) immediately after such
transaction the Person or Persons that "beneficially owned" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time) immediately prior to such transaction, directly or
indirectly, a majority of the total voting power of the then outstanding
Voting Equity Interests of the Company "beneficially own" (as so determined) a
majority of the total voting power of the then outstanding Voting Equity
Interests of the surviving or transferee Person; (c) during any consecutive
two-year period, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election by the Board of Directors of the Company or whose nomination for
election by the stockholders of the Company was approved by a vote of at least
a majority of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason (other than by action of the
Permitted
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holders) to constitute a majority of the Board of Directors of the Company
then in office; (d) the liquidation or dissolution of the Company. Anything
contained herein to the contrary notwithstanding, the issuance of voting
Equity Interests of the Company to Permitted holders in connection with the
acquisition of all the partnership interests in PRIMESTAR Partners held by
such Permitted holder (provided that the amount of partnership interests held
by such Permitted holder on the date of such acquisition is not less than the
amount held by such Permitted holder on the Issue Date otherwise than pursuant
to the transfer of partnership interests in PRIMESTAR Partners to another
Permitted holder whose partnership interests have been or simultaneously
therewith will be acquired by the Company or any Restricted Subsidiary or the
dilution of such Permitted holder's partnership interests in PRIMESTAR
Partners solely due to its failure to pay capital contributions required by
the Partnership Agreement), so long as in connection with such acquisition of
such partnership interests the Company or a Restricted Subsidiary acquires all
rights of such Permitted holder (and its Affiliates) to distribute the
PRIMESTAR(R) programming services, shall not constitute a Change of Control
for purposes of the Indentures or the Notes.
"Change of Control Date" has the meaning set forth under "--Offer to
Purchase upon Change of Control" above.
"Company Satellite" means either of the two high power direct broadcast
satellites which Tempo has agreed to purchase from Loral pursuant to the
Satellite Construction Agreement.
"Consolidated Income Tax Expense" means, with respect to the Company for any
period, the provision for federal, state, local and foreign income taxes
payable by the Company and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP, including, without limitation, (a)
any amortization of debt discount; (b) the net cost under Interest Rate
Protection Obligations (including any amortization of discounts); (c) the
interest portion of any deferred payment obligation; (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit
and bankers' acceptance financing; and (e) all capitalized interest and all
accrued interest; (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by the Company and the
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP; and (iii) dividends and distributions in
respect of Disqualified Equity Interests actually paid in cash by the Company
during such period as determined on a consolidated basis in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and the Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included
in calculating such net income, by excluding, without duplication, (a) all
extraordinary gains or losses and all gains and losses from the sales or other
dispositions of assets out of the ordinary course of business (net of taxes,
fees and expenses relating to the transaction giving rise thereto) for such
period; (b) that portion of such net income derived from or in respect of
investments in Persons other than Restricted Subsidiaries, except to the
extent actually received in cash by the Company or any Restricted Subsidiary
(subject, in the case of any Restricted Subsidiary, to the provisions of
clause (e) of this definition); (c) the portion of such net income (or loss)
allocable to minority interests in any Person (other than a Restricted
Subsidiary) for such period, except to the extent actually received in cash by
the Company or any Restricted Subsidiary (subject, in the case of any
Restricted Subsidiary, to the provisions of clause (e) of this definition);
(d) net income (or loss) of any other Person combined with the Company or any
Restricted Subsidiary on a "pooling of interests" basis attributable to any
period prior to the date of combination; and (e) the net income of any
Restricted Subsidiary to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is not at
the time (regardless of any waiver) permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its Equity Interest holders.
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"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication) by the
sum of (a) Consolidated Income Tax Expense for such period to the extent
deducted in determining Consolidated Net Income for such period; (b)
Consolidated Interest Expense for such period to the extent deducted in
determining Consolidated Net Income for such period; (c) all dividends on
Preferred Equity Interests to the extent not taken into account for computing
Consolidated Net Income for that period; and (d) depreciation, amortization
and any other non cash items for such period to the extent deducted in
determining Consolidated Net Income for such period (other than any non cash
item which requires the accrual of, or a reserve for, cash charges for any
future period) of the Company and the Restricted Subsidiaries, including,
without limitation, amortization of capitalized debt issuance costs for such
period, all of the foregoing determined on a consolidated basis in accordance
with GAAP minus non cash items to the extent they increase Consolidated Net
Income (including the partial or entire reversal of reserves taken in prior
periods) for such period. Consolidated Operating Cash Flow for the Company for
any period shall be calculated by subtracting therefrom (1) the Consolidated
Operating Cash Flow for such period of the High Power Satellite Transmission
Subsidiary to the extent that Investments have been made pursuant to clause
(x) of the second paragraph of "--Certain Covenants--Limitation on Restricted
Payments" above with such Consolidated Operating Cash Flow and (2) any
dividends received for any C-Band Entity in such period and the Consolidated
Operating Cash Flow for such period of each Restricted C-Band Subsidiary in
each case to the extent that Restricted Payments have been made pursuant to
clause (xii) of the second paragraph of "--Certain Covenants--Limitation on
Restricted Payments" above with such dividends or such Consolidated Operating
Cash Flow.
"Cumulative Operating Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the Issue Date and ending on the last day of the most
recent fiscal quarter immediately preceding the date of determination for
which consolidated financial information of the Company is available or, if
such cumulative Consolidated Operating Cash Flow for such period is negative,
the negative amount by which cumulative Consolidated Operating Cash Flow is
less than zero.
"DBS" means direct broadcast satellite.
"Debt to Operating Cash Flow Ratio" means the ratio of (a) the Total
Consolidated Indebtedness as of the date of calculation (the "Determination
Date") to (b) four times the Consolidated Operating Cash Flow for the latest
fiscal quarter for which financial information is available immediately
preceding such Determination Date (the "Measurement Period"). For purposes of
calculating Consolidated Operating Cash Flow for the Measurement Period
immediately prior to the relevant Determination Date, (I) any Person that is a
Restricted Subsidiary on the Determination Date (or would become a Restricted
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed to have been a Restricted Subsidiary at all times during such
Measurement Period, (II) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed not to
have been a Restricted Subsidiary at any time during such Measurement Period,
and (III) if the Company or any Restricted Subsidiary shall have in any manner
(x) acquired (including through an Acquisition or the commencement of
activities constituting such operating business) or (y) disposed of (including
by way of an Asset Sale or the termination or discontinuance of activities
constituting such operating business) any operating business during such
Measurement Period or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Acquisition or the commencement
of activities constituting such operating business, all such transactions had
been consummated on the first day of such Measurement Period and, in the case
of an Asset Sale or termination or discontinuance of activities constituting
such operating business, all such transactions had been consummated prior to
the first day of such Measurement Period; provided, however, that such pro
forma adjustment shall not give effect to the Operating Cash Flow of any
Acquired Person to the extent that such Person's net income would be excluded
pursuant to clause (e) of the definition of Consolidated Net Income. For
purposes of determining Total Consolidated Indebtedness as of any
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Determination Date, the sum of all Indebtedness outstanding under the Bank
Credit Facility on such Determination Date and all amounts that the Company or
any Restricted Subsidiary could borrow under the Bank Credit Facility on such
Determination Date (assuming the satisfaction of all conditions precedent
under the Bank Credit Facility other than conditions relating solely to
incremental amounts being available under the Bank Credit Facility) shall be
deemed to be outstanding and added to Total Consolidated Indebtedness on such
Determination Date (but without duplication).
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (a) any Indebtedness outstanding
under the Bank Credit Facility and (b) any other Senior Indebtedness which, at
the time of determination, has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least $25.0
million, if the instrument governing such Senior Indebtedness expressly states
that such Indebtedness is "Designated Senior Indebtedness" for purposes of the
Indentures and a Board Resolution setting forth such designation by the
Company has been filed with the Trustees.
"Designation" has the meaning set forth in "--Certain Covenants--Designation
of Unrestricted Subsidiaries; Designation of Tempo as a Restricted Subsidiary"
above.
"Designation Amount" has the meaning set forth in "--Certain Covenants--
Designation of Unrestricted Subsidiaries; Designation of Tempo as a Restricted
Subsidiary" above.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such
Person is the Surviving Person) or the sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of such Person's
assets.
"Disqualified Equity Interest" means any Equity Interest which, by its terms
(or by the terms of any security into which it is convertible or for which it
is exchangeable at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof,
in whole or in part, or exchangeable into Indebtedness on or prior to the
earlier of the maturity date of the Notes or the date on which no Notes remain
outstanding.
"Distribution" means the distribution by TCI on December 4, 1996, in the
form of a dividend, to the holders of record of Tele-Communications, Inc.
Series A TCI Group Common Stock and Tele-Communications, Inc. Series B TCI
Group Common Stock on November 12, 1996 (other than certain subsidiaries of
TCI that waived such dividend) of all the issued and outstanding shares of
Company common stock.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated Investment Grade at the time as of
which any investment or rollover therein is made.
"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited,
in such Person, including any Preferred Equity Interests.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Existing Indebtedness" means any Indebtedness of the Company and its
Subsidiaries in existence on the Issue Date until such amounts are repaid
(including, without limitation, obligations pursuant to the Indemnification
Agreements and the Reorganization Agreement).
"Expiration Date" has the meaning set forth in the definition of "Offer to
Purchase" below.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction; provided, however, that the Fair
Market Value of any such asset or assets shall be determined conclusively by
the Board of Directors of the Company acting in good faith, and shall be
evidenced by resolutions of the Board of Directors of the Company delivered to
the applicable Trustee.
"FCC Permit" means the construction permit held by Tempo and issued by the
FCC to build, launch and operate a DBS system.
"Fulfillment Agreement" means the agreement dated as of August 30, 1996
between TCIC and the Company, pursuant to which TCIC provides fulfillment
services to the Company with respect to certain customers of the PRIMESTAR(R)
medium power service, as amended and in effect from time to time.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"GE Americom" means GE American Communications, Inc., a Delaware
corporation, and its successors.
"GEAS" means GE Americom Services, Inc., a Delaware corporation and a
partner of PRIMESTAR Partners, and its successors.
"GE-2 Agreement" means the Amended and Restated Memorandum of Agreement,
effective as of October 18, 1996, between PRIMESTAR Partners and GE Americom
and, upon the execution of the Service Agreement (as defined in the GE-2
Agreement) between PRIMESTAR Partners and GE Americom contemplated therein,
shall include such Service Agreement, as amended and in effect from time to
time.
"GE-2" means the GE Americom medium power satellite currently being used by
PRIMESTAR Partners.
"GE-3 Satellite" means the GE Americom medium power satellite that is
expected to serve as an in-orbit spare for the GE-2 Satellite. The GE-3
Satellite is still under construction and is expected to be available for
launch in the fourth quarter of 1997.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee shall include,
without limitation, any agreement to maintain or preserve any other person's
financial condition or to cause any other Person to achieve certain levels of
operating results.
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"High Power Satellite Transmission Business" means the business of the
acquisition, transmission and sale of programming in the high power direct
broadcast satellite business utilizing broadcast satellite service operating
in the Ku-band (including any provision of such services to cable operators or
other media providers) which may utilize all or part of satellites owned or
leased by PRIMESTAR Partners or a Subsidiary and all other activities relating
thereto or arising therefrom other than the construction, sale or financing of
broadcast satellites.
"High Power Satellite Transmission Subsidiary" means a direct, wholly-owned
Restricted Subsidiary of the Company which engages in, or acts as a
distributor for, the High Power Satellite Transmission Business.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to
GAAP or otherwise, of any such Indebtedness or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing).
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and
whether or not contingent, (a) every obligation of such Person for money
borrowed; (b) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses; (c) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person; (d) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable
incurred in the ordinary course of business and payable in accordance with
industry practices, or other accrued liabilities arising in the ordinary
course of business which are not overdue or which are being contested in good
faith); (e) every Capital Lease Obligation of such Person; (f) every net
obligation under interest rate swap or similar agreements or foreign currency
hedge, exchange or similar agreements of such Person; (g) every obligation of
the type referred to in clauses (a) through (f) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has guaranteed or is responsible or liable for, directly or indirectly, as
obligor, guarantor or otherwise; and (h) any and all deferrals, renewals,
extensions and refundings of, or amendments, modifications or supplements to,
any liability of the kind described in any of the preceding clauses (a)
through (g) above. Indebtedness (a) shall never be calculated taking into
account any cash and cash equivalents held by such Person; (b) shall not
include obligations of any Person (x) arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course of
business, provided that such obligations are extinguished within two Business
Days of their incurrence unless covered by an overdraft line, (y) resulting
from the endorsement of negotiable instruments for collection in the ordinary
course of business and consistent with past business practices and (z) under
stand-by letters of credit to the extent collateralized by cash or Cash
Equivalents; (c) which provides that an amount less than the principal amount
thereof shall be due upon any declaration of acceleration thereof shall be
deemed to be incurred or outstanding in an amount equal to the accreted value
thereof at the date of determination; (d) shall include the liquidation
preference and any mandatory redemption payment obligations in respect of any
Disqualified Equity Interests of the Company or any Restricted Subsidiary; and
(e) shall not include obligations under performance bonds, performance
guarantees, surety bonds and appeal bonds, letters of credit or similar
obligations, incurred in the ordinary course of business (other than
obligations under or in respect of any direct or indirect credit support for
obligations of PRIMESTAR Partners or any Unrestricted Subsidiary). For
avoidance of doubt, Indebtedness of the Company or any Restricted Subsidiary
shall not include Indebtedness of PRIMESTAR Partners (so long as PRIMESTAR
Partners is not insolvent) solely by virtue of the Company or such Restricted
Subsidiary being a general partner of PRIMESTAR Partners to the extent that
there does not exist any judgment or other adjudication of liability against
the Company or any Restricted Subsidiary that is a general partner of
PRIMESTAR Partners or any of its properties.
"Indemnification Agreements" means the indemnification agreements between
(i) the Company and TCI UA 1, dated as of December 4, 1996, which supports the
PRIMESTAR Credit Facility and (ii) the Company and TCIC, dated as of December
4, 1996, relating to a letter of credit issued for the account of two
subsidiaries of
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TCI to support the Company's share of PRIMESTAR Partners' obligations under
the GE-2 Agreement, with respect to PRIMESTAR Partners' use of transponders on
GE-2, as amended and in effect from time to time.
"Independent Financial Advisor" means a nationally recognized, accounting,
appraisal, investment banking firm or consultant engaged in the satellite
business that is, in the judgment of the Company's Board of Directors,
qualified to perform the task for which it has been engaged (i) which does
not, and whose directors, officers and employees or Affiliates do not, have a
direct or indirect financial interest in the Company and (ii) which, in the
judgment of the Board of Directors of the Company, is otherwise independent
and qualified to perform the task for which it is to be engaged.
"In-Orbit Insurance" means, with respect to a Company Satellite (or any
replacement thereof), In-Orbit insurance providing coverage beginning not
earlier than 180 days after the launch of such Company Satellite (or any
replacement thereof) in an amount which is equal to or greater than the cost
of construction, launch and insurance of such Company Satellite (or any
replacement thereof), which insurance shall provide pro rata benefits to the
insured upon a loss of more than 20% of the capacity of such Company Satellite
(or any replacement thereof) and shall compensate the insured for a total loss
upon a loss of more than 50% of the capacity of such Company Satellite (or any
replacement thereof).
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"interest" means, with respect to the Notes, the sum of any cash interest
and any Additional Interest on the Notes.
"Interest Rate Protection Obligations" means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements, and (ii)
other agreements or arrangements designed to protect such Person against
fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect loan,
advance, guarantee or other extension of credit or capital contribution to (by
means of transfers of cash or other property or assets to others or payments
for property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any other Person. The
amount of any Investment shall be the original cost of such Investment, plus
the cost of all additions thereto, and minus the amount of any portion of such
Investment repaid to such Person in cash as a repayment of principal or a
return of capital, as the case may be, but without any other adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment. In determining the amount of any investment
involving a transfer of any property or asset other than cash, such property
shall be valued at its fair market value at the time of such transfer, as
determined in good faith by the board of directors (or comparable body) of the
Person making such transfer.
"Investment Grade" means with respect to a security, that such security is
rated, by at least two nationally recognized statistical rating organizations,
in one of each such organization's four highest generic rating categories.
"Issue Date" means the original issue date of the Notes.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Marketable Securities" means Government Securities maturing not later than
30 days after the date of acquisition.
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"Maturity Date" means the date, which is set forth on the face of the Notes,
on which the Notes will mature.
"MDUs" means hotels, motels, bars, restaurants, businesses, schools and
other multiple dwelling units.
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or Cash
Equivalents received by the Company or any Restricted Subsidiary in respect of
any Asset Sale, including all cash or Cash Equivalents received upon any sale,
liquidation or other exchange of proceeds of Asset Sales received in a form
other than cash or Cash Equivalents, net of (a) the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof; (b) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements); (c) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale; (d) amounts deemed, in good faith, appropriate by the Board
of Directors of the Company to be provided as a reserve, in accordance with
GAAP, against any liabilities associated with such assets which are the
subject of such Asset Sale (provided that the amount of any such reserves
shall be deemed to constitute Net Cash Proceeds at the time such reserves
shall have been released or are not otherwise required to be retained as a
reserve); and (e) with respect to Asset Sales by Subsidiaries, the portion of
such cash payments attributable to Persons holding a minority interest in such
Subsidiary.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Offer" has the meaning set forth in the definition of "Offer to Purchase"
below.
"Offer to Purchase" means a written offer (the "Offer") sent by or on behalf
of the Company by first-class mail, postage prepaid, to each holder at his
address appearing in the register for the Notes on the date of the Offer
offering to purchase up to the principal amount of Notes specified in such
Offer at the purchase price specified in such Offer (as determined pursuant to
the applicable Indenture). Unless otherwise required by applicable law, the
Offer shall specify an expiration date (the "Expiration Date") of the Offer to
Purchase, which shall be not less than 20 Business Days nor more than 60 days
after the date of such Offer, and a settlement date (the "Purchase Date") for
purchase of Notes to occur no later than five Business Days after the
Expiration Date. The Company shall notify the Trustee at least 15 Business
Days (or such shorter period as is acceptable to the Trustee) prior to the
mailing of the Offer of the Company's obligation to make an Offer to Purchase,
and the Offer shall be mailed by the Company or, at the Company's request, by
the Trustee in the name and at the expense of the Company. The Offer shall
contain all the information required by applicable law to be included therein.
The Offer shall also contain information concerning the business of the
Company and its Subsidiaries which the Company in good faith believes will
enable such holders to make an informed decision with respect to the Offer to
Purchase (which at a minimum will include (i) the most recent annual and
quarterly financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the document
required to be filed with the trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to
in clause (i) (including a description of the events requiring the Company to
make the Offer to Purchase), (iii) if applicable, appropriate pro forma
financial information concerning the Offer to Purchase and the events
requiring the Company to make the Offer to Purchase and (iv) any other
information required by applicable law to be included therein). The Offer
shall contain all instructions and materials necessary to enable such holders
to tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to Purchase
is being made;
(2) the Expiration Date and the Purchase Date;
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(3) the aggregate principal amount of the outstanding Notes offered to be
purchased by the Company pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such amount has been determined
pursuant to the Section of the Indenture requiring the Offer to Purchase)
(the "Purchase Amount");
(4) (a) in the case of the Senior Subordinated Notes, the purchase price
to be paid by the Company for each $1,000 aggregate principal amount of
Notes accepted for payment (as specified pursuant to the Senior
Subordinated Notes Indenture) (the "Purchase Price" with respect to the
Senior Subordinated Notes) and (b) in the case of the Senior Subordinated
Discount Notes, the purchase price to be paid by the Company for each
$1,000 of Accreted Value (if the Purchase Date is prior to the earlier of
February 15, 2002 and the Cash Interest Election Date) or $1,000 aggregate
principal amount at maturity (if the Purchase Date is on or after such
earlier date) of Notes accepted for payment (as specified pursuant to the
Senior Subordinated Discount Notes Indenture) (the "Purchase Price" with
respect to the Senior Subordinated Discount Notes);
(5) that the holder may tender all or any portion of the Notes registered
in the name of such holder and that any portion of a Note tendered must be
tendered in an integral multiple of $1,000 principal face amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not purchased
by the Company pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such Note
at the place or places specified in the Offer prior to the close of
business on the Expiration Date (such Note being, if the Company or the
Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Trustee
duly executed by, the holder thereof or his attorney duly authorized in
writing);
(10) that holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or its Paying Agent) receives, not later
than the close of business on the fifth Business Day next preceding the
Expiration Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of the Note the
holder tendered, the certificate number of the Note the holder tendered and
a statement that such holder is withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 principal
amount at maturity or integral multiples thereof shall be purchased); and
(12) that in the case of any holder whose Note is purchased only in part,
the Company shall execute and the Trustee shall authenticate and deliver to
the holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer. References above to principal
amount shall mean and refer to principal amount at maturity with respect to
the Senior Subordinated Discount Notes, unless the context otherwise requires.
"Partnership Agreement" means the Limited Partnership Agreement of PRIMESTAR
Partners (then known as K Prime Partners, L.P.), dated as of February 8, 1990,
as amended and in effect from time to time.
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"Partnership Credit Agreement" means the bank credit facility obtained by
PRIMESTAR Partners to finance advances to Tempo for payments due in respect of
the Company Satellites under the Satellite Construction Agreement, and
supported by letters of credit arranged for by affiliates of the partners of
the Partnership (other than GEAS).
"Permitted Holder" means any of (i) the estate or the heirs of Bob Magness
(a shareholder of the Company), (ii) John C. Malone (a shareholder of the
Company, the Chairman of the Board of TCI, and a director of TCI and of the
Company), (iii) the Kearns-Tribune Corporation (a Utah corporation and a
shareholder of the Company), (iv) PRIMESTAR Partners (so long as all the then
other partners in PRIMESTAR Partners were partners in PRIMESTAR Partners on
the Issue Date), (v) Persons who were partners of PRIMESTAR Partners on the
Issue Date, (vi) TCI, (vii) any of the Permitted Transferees of the persons
referred to in clauses (i) through (vi), and (viii) any person or group
controlled by each or any of the Persons referred to in clauses (i) through
(vii).
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; (c)
loans and advances to employees made in the ordinary course of business not to
exceed $1.0 million in the aggregate at any one time outstanding; (d) Interest
Rate Protection Obligations; (e) bonds, notes, debentures or other securities
received as a result of Asset Sales permitted under "--Certain Covenants--
Disposition of Proceeds of Asset Sales" above not to exceed 15% of the total
consideration for such Asset Sales; (f) transactions with officers, directors
and employees of the Company, or any Restricted Subsidiary entered into in
ordinary course of business (including compensation or employee benefit
arrangements with any such director or employee) and consistent with past
business practices; (g) Investments existing as of the Issue Date and any
amendment, extension, renewal or modification thereof to the extent that any
such amendment, extension, renewal or modification does not require the
Company or any Restricted Subsidiary to make any additional cash or non-cash
payments or provide additional services in connection therewith; (h) any
Investment to the extent that the consideration therefor consists of Qualified
Equity Interests of the Company; (i) any Investment consisting of a guarantee
by a Restricted Subsidiary of Senior Indebtedness or any guarantee permitted
under clause (e) of the second paragraph of "--Limitation on Indebtedness"
above; (j) shares of Equity Interests of TCI purchased pursuant to the Share
Purchase Agreement; (k) shares of the common stock of ResNet acquired pursuant
to the conversion of the ResNet Subordinated Loan; (l) warrants of ResNet
acquired pursuant to the conversion of the ResNet Subordinated Loan or the
exercise of the ResNet Option; (m) shares of the common stock of ResNet
acquired pursuant to any exercise of warrants at a de minimis exercise price;
and (n) so long as the Company or any Restricted Subsidiary holds partnership
interests in PRIMESTAR Partners, the provision of any guarantee, letter of
credit or other credit support with respect to (x) an obligation of PRIMESTAR
Partners incurred under the Partnership Credit Agreement (or any refinancing
thereof) to the extent such obligation was incurred by PRIMESTAR Partners to
finance any Company Satellite or (y) any obligation of PRIMESTAR Partners
under the GE-2 Agreement, in each case in an amount not to exceed the product
of (I) a fraction, the numerator of which is the Company's equity interest in
PRIMESTAR Partners, and the denominator of which is all partners' equity
interest in PRIMESTAR Partners except GE Americom Services, Inc., and (II)
such obligation of PRIMESTAR Partners incurred to finance such Company
Satellite or such obligation of PRIMESTAR Partners under the GE-2 Agreement,
as the case may be; provided, however that in no event shall the amount of
such Permitted Investment exceed $75.0 million in the case of the GE-2
Agreement and $146.0 million in the case of such obligation under the
Partnership Credit Agreement (or any refinancing thereof).
"Permitted Junior Securities" means any securities of the Company or any
other Person that are (i) equity securities without special covenants or (ii)
subordinated in right of payment to all Senior Indebtedness that may at the
time be outstanding, to substantially the same extent as, or to a greater
extent than, the Notes are subordinated as provided in this Indenture, in any
event pursuant to a court order so providing and as to which (a) the rate of
interest on such securities shall not exceed the effective rate of interest on
the Notes on the date of the Indentures, (b) such securities shall not be
entitled to the benefits of covenants or defaults materially more beneficial
to the holders of such securities than those in effect with respect to the
Notes on the date of this
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Indenture and (c) such securities shall not provide for amortization
(including sinking fund and mandatory prepayment provisions) commencing prior
to the date six months following the final scheduled maturity date of the
Senior Indebtedness (as modified by the plan of reorganization of readjustment
pursuant to which such securities are issued).
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary; provided, however, that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure
any property or assets of the Company or any Restricted Subsidiary other than
the property or assets subject to the Liens prior to such merger or
consolidation; (b) Liens imposed by law such as carriers', warehousemen's and
mechanics' Liens and other similar Liens arising in the ordinary course of
business which secure payment of obligations not more than 60 days past due or
which are being contested in good faith and by appropriate proceedings; (c)
Liens existing on the Issue Date; (d) Liens securing only the Notes; (e) Liens
in favor of the Company or any Restricted Subsidiary so long as held by the
Company or any Restricted Subsidiary; (f) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted; provided, however, that any reserve or other appropriate
provision as shall be required in conformity with GAAP shall have been made
therefor; (g) easements, reservation of rights of way, restrictions and other
similar easements, licenses, restrictions on the use of properties, or minor
imperfections of title that in the aggregate are not material in amount and do
not in any case materially detract from the properties subject thereto or
interfere with the ordinary conduct of the business of the Company and the
Restricted Subsidiaries; (h) Liens resulting from the deposit of cash or Notes
in connection with contracts, tenders or expropriation proceedings, or to
secure workers' compensation, surety or appeal bonds, costs of litigation when
required by law and public and statutory obligations or obligations under
franchise arrangements entered into in the ordinary course of business; (i)
Liens securing Indebtedness consisting of Capitalized Lease Obligations,
Purchase Money Indebtedness, mortgage financings, industrial revenue bonds or
other monetary obligations, in each case incurred solely for the purpose of
financing all or any part of the purchase price or cost of construction or
installation of assets used in the business of the Company or the Restricted
Subsidiaries, or repairs, additions or improvements to such assets; provided,
however, that (I) such Liens secure Indebtedness in an amount not in excess of
the original purchase price or the original cost of any such assets or repair,
addition or improvement thereto (plus an amount equal to the reasonable fees
and expenses in connection with the incurrence of such Indebtedness), (II)
such Liens do not extend to any other assets of the Company or the Restricted
Subsidiaries (and, in the case of repair, addition or improvements to any such
assets, such Lien extends only to the assets (and improvements thereto or
thereon) repaired, added to or improved), (III) the Incurrence of such
Indebtedness is permitted by "--Certain Covenants--Limitation on Indebtedness"
above, and (IV) such Liens attach within 90 days of such purchase,
construction, installation, repair, addition or improvement; (j) Liens to
secure any refinancings, renewals, extensions, modifications or replacements
(collectively, "refinancing") (or successive refinancings), in whole or in
part, of any Indebtedness secured by Liens referred to in the clauses above so
long as such Lien does not extend to any other property (other than
improvements thereto); (k) Liens securing letters of credit entered into in
the ordinary course of business and consistent with past business practice;
(l) Liens on and pledges of the Equity Interests of any Unrestricted
Subsidiary securing any Indebtedness of such Unrestricted Subsidiary; and (m)
any calls or rights of first refusal with respect to any partnership
interests, and any right of the Partnership to remove a partner's
representative from the partners committee of the Partnership, under the
Partnership Agreement as in effect on the Issue Date.
"Permitted Transferee" means, with respect to any Person: (a) in the case of
any Person who is a natural person, such individual's spouse or children, any
trust for such individual's benefit or the benefit of such individual's spouse
or children, or any corporation or partnership in which the direct and
beneficial owner of all of the equity interest is such Person or such
individual's spouse or children or any trust for the benefit of such persons;
(b) in the case of any Person who is a natural person, the heirs, executors,
administrators or personal representatives upon the death of such Person or
upon the incompetency or disability of such Person for purposes of the
protection and management of such individual's assets; and (c) in the case of
any Person who is not a natural person, any Affiliate of such Person.
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"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock Company, limited liability Company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Post-Petition Interest" means, with respect to any Senior Indebtedness of
any Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding against such Person
in accordance with and at the contract rate (including, without limitation,
any rate applicable upon default) specified in the agreement or instrument
creating, evidencing or governing such Indebtedness, whether or not, pursuant
to applicable law or otherwise, the claim for such interest is allowed as a
claim in such Insolvency or Liquidation Proceeding.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
Equity Interests of any other class in such Person.
"PRIMESTAR Partners" means PRIMESTAR Partners L.P., a Delaware partnership.
"principal" of a debt security means the principal of the security, which in
the case of the Senior Subordinated Discount Notes as of any given date, is
the Accreted Value of the Senior Subordinated Discount Notes as of such date,
plus, when appropriate, the premium, if any, on the security.
"principal amount at maturity" means, with respect to the Senior
Subordinated Discount Notes, $1,000 per $1,000 face amount of Senior
Subordinated Discount Notes; provided, however, that if the Company shall have
made a Cash Interest Election, the principal amount at maturity with respect
to each Senior Subordinated Discount Note shall be the Accreted Value of such
Senior Subordinated Discount Note as of the Cash Interest Election Date.
"Public Equity Offering" means an underwritten public offering of Qualified
Equity Interests of the Company pursuant to an effective registration
statement filed under the Securities Act (excluding registration statements
filed on Form S-8).
"Purchase Amount" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary Incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property
(other than integrated receiver/decoders or related equipment); provided,
however, that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the Fair Market Value of such property or such purchase
price or cost, including any refinancing of such indebtedness that does not
increase the aggregate principal amount (or accreted amount, if less) thereof
as of the date of refinancing.
"Purchase Price" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Reorganization Agreement" means the agreement entered into on December 4,
1996 by TCI, TCIC and a number of other TCI subsidiaries, including the
Company and its subsidiaries, which provided for, among other things, the
principal corporate transactions to effect the Distribution, the conditions
thereto and certain provisions governing the relationship between the Company
and TCI with respect to and resulting from the Distribution, as amended and in
effect from time to time.
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"Required Designation" has the meaning set forth in "--Certain Covenants--
Designation of Unrestricted Subsidiaries; Designation of Tempo as a Restricted
Subsidiary" above.
"ResNet" means ResNet Communications, Inc., a Delaware corporation, and its
successors.
"ResNet Option" means the Option Agreement between the Company and ResNet
dated October 21, 1996, as amended and in effect from time to time.
"ResNet Subordinated Loan" means the subordinated loan in the principal
amount of $36,604,000 made by the Company to ResNet, as amended and in effect
from time to time.
"Restricted C-Band Subsidiary" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments" above.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a resolution of
the Board of Directors of the Company delivered to the Trustee, as an
Unrestricted Subsidiary pursuant to "--Certain Covenants--Designation of
Unrestricted Subsidiaries; Designation of Tempo as a Restricted Subsidiary"
above; provided, however, that Tempo is designated as an Unrestricted
Subsidiary as of the Issue Date. Any such designation may be revoked by a
resolution of the Board of Directors of the Company delivered to the Trustees,
subject to the provisions of such covenant.
"Satellite Construction Agreement" means the fixed price satellite
construction agreement between Loral and Tempo dated as of February 22, 1990,
as amended and in effect from time to time.
"Satellite No. 2" means the Company Satellite outfitted with an antenna
designed for the 82 W.L. orbital location.
"Satellite Subsidiary" has the meaning set forth in "--Certain Covenants--
Designation of Restricted Subsidiaries; Designation of Tempo as a Restricted
Subsidiary" above.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means, at any date, (a) all Obligations of the Company
under the Bank Credit Facility; (b) all Interest Rate Protection Obligations
of the Company; (c) all Obligations of the Company under stand-by letters of
credit; and (d) all other Indebtedness of the Company for borrowed money,
including principal, premium, if any, and interest (including Post-Petition
Interest) on such Indebtedness, unless the instrument under which such
Indebtedness of the Company for money borrowed is Incurred expressly provides
that such Indebtedness for money borrowed is not senior or superior in right
of payment to the Notes, and all renewals, extensions, modifications,
amendments or refinancings thereof. Notwithstanding the foregoing, Senior
Indebtedness shall not include (a) any obligation of the Company under the
TCIC Credit Facility; (b) to the extent that it may constitute Indebtedness,
any Obligation for federal, state, local or other taxes; (c) any Indebtedness
among or between the Company and any Subsidiary of the Company; (d) to the
extent that it may constitute Indebtedness, any Obligation in respect of any
trade payable Incurred for the purchase of goods or materials, or for services
obtained, in the ordinary course of business; (e) that portion of any
Indebtedness that is Incurred in violation of the Indentures; provided,
however, that such Indebtedness shall be deemed not to have been Incurred in
violation of the Indentures for purposes of this clause (e) if (I) the
holder(s) of such Indebtedness or their representative or the Company shall
have furnished to the Trustees an opinion of independent legal counsel,
unqualified in all material respects, addressed to the Trustees (which legal
counsel may, as to matters of fact, rely upon an Officers' Certificate of the
Company) to the effect that the Incurrence of such Indebtedness does not
violate the provisions of the Indentures or (II) in the case of any
Obligations under the Bank Credit Facility, the holder(s) of such Obligations
or their agent or representative shall have received a representation from the
Company to the effect that the Incurrence of such Indebtedness does not
violate the provisions of the
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Indentures; (f) Indebtedness evidenced by the Notes; (g) Indebtedness of the
Company that is expressly subordinate or junior in right of payment to any
other Indebtedness of the Company; (h) to the extent that it may constitute
Indebtedness, any obligation owing under leases (other than Capitalized Lease
Obligations) or management agreements; and (i) any obligation that by
operation of law is subordinate to any general unsecured obligations of the
Company.
"Share Purchase Agreement" means the share purchase agreement entered into
by TCI and the Company on December 4, 1996, as amended and in effect from time
to time.
"Significant Restricted Subsidiary" means, at any date of determination, (a)
any Restricted Subsidiary that, together with its Subsidiaries that constitute
Restricted Subsidiaries (i) for the most recent fiscal year of the Company
accounted for more than 5.0% of the consolidated revenues of the Company and
the Restricted Subsidiaries or (ii) as of the end of such fiscal year, owned
more than 5.0% of the consolidated assets of the Company and the Restricted
Subsidiaries, all as set forth on the consolidated financial statements of the
Company and the Restricted Subsidiaries for such year prepared in conformity
with GAAP, and (b) any Restricted Subsidiary which, when aggregated with all
other Restricted Subsidiaries that are not otherwise Significant Restricted
Subsidiaries and as to which any event described in clause (f), (g) or (h) of
"--Events of Default" above has occurred, would constitute a Significant
Restricted Subsidiary under clause (a) of this definition.
"Stated Maturity", when used with respect to any Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Strategic Equity Investor" means a corporation or entity with an equity
market capitalization, a net asset value or annual revenues of at least $1.5
billion that primarily owns and operates businesses in the telecommunications,
information systems, entertainment, cable television, programming, electronics
or similar or related industries.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (a) any corporation of which
the outstanding Voting Equity Interests having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of
which at least a majority of Voting Equity Interests are at the time, directly
or indirectly, owned by such first named Person.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or
the Person to which such Disposition is made.
"Tag-Along Agreement" means the agreement dated as of February 8, 1990,
originally entered into by and among Cox Enterprises, Inc., Comcast,
Continental, Newhouse, Tempo, TCIC and TCI Development Corporation, a
subsidiary of TCI, as amended and in effect from time to time.
"Tax Sharing Agreement" means the tax sharing agreement effective as of July
1, 1995 among TCI, TCIC and certain other consolidated subsidiaries of TCI, as
amended. In connection with the Distribution, the Tax Sharing Agreement was
amended on December 3, 1996 to provide that the Company be treated as if it
had been a party to the Tax Sharing Agreement effective July 1, 1995, as
amended and in effect from time to time.
"TCI" means Tele-Communications, Inc., a Delaware corporation, and its
successors.
"TCIC Credit Facility" means the credit facility, dated as of December 4,
1996, that provided for the TCIC Revolving Loans and the Company's obligations
with respect to the TCIC Revolving Loans and the Company Note. As a result of
GE-2 Acceptance, availability under the TCIC Credit Facility has been
terminated.
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"Tempo" means Tempo Satellite, Inc., an Oklahoma corporation, and its
successors.
"Tempo DBS-1" means the Company Satellite outfitted with an antenna designed
for the 119 W.L. orbital location.
"Tempo Letter Agreements" means the two letter agreements dated as of July
30, 1993 entered into by Tempo and PRIMESTAR Partners in connection with the
Tempo Option and certain related matters and any refinancings thereof, as
amended and in effect from time to time.
"Tempo Option" means PRIMESTAR Partners' right and option, granted by Tempo
under the option agreement entered into by Tempo and PRIMESTAR Partners in
February 1991, to purchase or lease 100% of the capacity of a DBS system to be
built, launched, and operated by Tempo pursuant to the FCC Permit, as amended
and in effect from time to time.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness and Disqualified
Equity Interests of the Company and the Restricted Subsidiaries outstanding as
of such date of determination.
"Trade Name and Service Mark License Agreement" means the trade name and
service mark license agreement between the Company and TCI dated December 4,
1996, as amended and in effect from time to time.
"Transition Services Agreement" means the agreement dated as of December 4,
1996 between TCI and the Company, pursuant to which TCI provides to the
Company certain services and other benefits, including certain administrative
and other services that were provided to the Company by TCI prior to the
Distribution, as amended and in effect from time to time.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to "--Certain Covenants--Designation of Unrestricted
Subsidiaries; Designation of Tempo as a Restricted Subsidiary" above. Any such
designation may be revoked by a resolution of the Board of Directors of the
Company delivered to the Trustee, subject to the provisions of "--Certain
Covenants--Designation of Unrestricted Subsidiaries; Designation of Tempo as a
Restricted Subsidiary" above.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of
the outstanding Voting Equity Interests (other than directors' qualifying
shares) of which are owned, directly or indirectly, by the Company.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Senior Subordinated Exchange
Notes and the Senior Subordinated Discount Exchange Notes to be issued
pursuant to the Exchange Offer initially will be issued in the form of one or
more senior subordinated global exchange notes and senior subordinated
discount global exchange notes, as the case may be (the "Global Notes"). The
Global Notes will be deposited on the Expiration Date of the Exchange Offer
with, or on behalf of, The Depository Trust Company (the "Depositary") and
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registered in the name of Cede & Co., as nominee of the Depositary (such
nominee being referred to herein the "Global Notes Holder").
Notes that are issued as described below under "--Certificated Notes" will
be issued in the form of registered definitive certificates (the "Certificated
Notes"). Such Certificated Notes may, unless the applicable Global Note has
previously been exchanged for Certificated Notes, be exchanged for an interest
in the applicable Global Note representing the principal amount of Senior
Subordinated Exchange Notes or Senior Subordinated Discount Exchange Notes, as
the case may be, being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in the accounts of such
Participants. The Depositary's Participants include securities brokers and
dealers, banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively,
the "Indirect Participants" or the "Depositary's Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Persons who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through the
Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that, pursuant to procedures established by the
Depositary, ownership of the Senior Subordinated Notes or Senior Subordinated
Discount Notes, as the case may be, evidenced by the Global Notes, will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer Senior
Subordinated Notes or Senior Subordinated Discount Notes, as the case may be,
evidenced by the Global Notes, will be limited to such extent.
So long as the Global Notes Holder is the registered owner of any Notes, the
Global Notes Holder will be considered the sole holder under the applicable
Indenture of any Senior Subordinated Notes or Senior Subordinated Discount
Notes, as the case may be, evidenced by the Global Notes. Beneficial owners of
Notes evidenced by the Global Notes will not be considered the owners or
holders thereof under the applicable Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
applicable agent or trustee thereunder. As a result, the ability of a person
having a beneficial interest in Notes represented by any Global Note to pledge
such interest to persons or entities that do not participate in the
Depositary's system or to otherwise take actions in respect of such interest
may be affected by the lack of a physical certificate evidencing such
interest. Neither the Company nor the Trustees will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of the Notes by the Depositary, or for maintaining, supervising or
reviewing any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Notes Holder on the applicable
record date will be payable by the applicable Trustee to or at the direction
of the Global Notes Holder in its capacity as the registered holder of such
Notes. Under the terms of the Notes Indentures, the Company and the Trustees
may treat the persons in whose names Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustees have or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Company believes, however, that it is currently the
policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holders of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
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Certificated Notes
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the applicable Trustee, exchange such
beneficial interest for Senior Subordinated Notes or Senior Subordinated
Discount Notes, as the case may be, in the form of Certificated Notes. Upon
any such issuance, the applicable Trustee is required to register such
Certificated Notes in the name of, and cause the same to be delivered to, such
person or persons (or the nominee of any thereof). If: (i) the Company
notifies the applicable Trustee in writing that the Depositary is no longer
willing or able to act as a depository and the Company is unable to locate a
qualified successor within 90 days; or (ii) an Event of Default has occurred
and is continuing and the Depositary requests that Certificated Notes be
issued under the applicable Indenture, then, upon surrender by the Global
Notes Holder of the applicable Global Notes, Senior Subordinated Notes and
Senior Subordinated Discount Notes, as the case may be, in such form will be
issued to each person that the Global Notes Holder and the Depositary identify
as being the beneficial owner of the related Senior Subordinated Notes or
Senior Subordinated Discount Notes, as the case may be.
Neither the Company nor the applicable Trustee will be liable for any delay
by the Global Notes Holder or the Depositary in identifying the beneficial
owners of the Senior Subordinated Notes or Senior Subordinated Discount Notes,
as the case may be, and the Company and the applicable Trustee may
conclusively rely on, and will be protected in relying on, instructions from
the Global Notes Holder or the Depositary for all purposes.
REGISTRATION RIGHTS
Exchange Offer
(a) Pursuant to the Registration Rights Agreements executed in connection
with the Notes Offering, the Company has agreed to file with the SEC on or
before the Filing Date, an offer to exchange any and all of the Notes that
constitute Registrable Securities (as defined below) for a like aggregate
principal amount of senior subordinated debt securities of the Company which
are identical to the Notes, and which are entitled to the benefits of a trust
indenture which is identical to the applicable Indenture (other than such
changes as are necessary to comply with any requirements of the SEC to effect
or maintain the qualification of such trust indenture under the TIA) and which
has been qualified under the TIA) (the "Exchange Securities"), except that the
Exchange Securities shall have been registered pursuant to an effective
registration statement under the Securities Act and shall contain no
restrictive legend thereon. The Exchange Notes are intended to constitute
Exchange Securities under the Registration Rights Agreement. The Company has
agreed to use its commercially reasonable best efforts to (i) cause such
registration statement to become effective and commence such exchange offer on
or prior to the Effectiveness Date, (ii) keep such exchange offer open for 20
business days (or longer if required by applicable law) (the last day of such
period, the "Expiration Date") and (iii) exchange Exchange Notes for all Notes
validly tendered and not withdrawn pursuant to such exchange offer on or prior
to the fifth day following the Expiration Date.
The Company has agreed to use its commercially reasonable best efforts to
keep such registration statement effective and to amend and supplement the
prospectus forming a part thereof in order to permit such prospectus to be
lawfully delivered by all persons subject to the prospectus delivery
requirements of the Securities Act for at least 180 days (or such shorter time
as such persons must comply with such requirements in order to resell the
Exchange Securities) (the "Applicable Period").
The Exchange Offer and the Registration Statement (of which this Prospectus
constitutes a part) filed in connection with the Exchange Offer are intended
to satisfy the Company's obligations under the Registration Rights Agreements.
If the Company does not consummate the Exchange Offer, or, in lieu thereof,
the Company does not file and cause to become effective a resale shelf
registration for the Notes within the time periods set forth herein, special
interest will accrue and be payable on the Notes either temporarily or
permanently.
(b) Although the Company has filed the Registration Statement in
satisfaction of its obligations under the Registration Rights Agreements, as
previously described, there can be no assurance that the Registration
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Statement will become effective. If, (i) because of any change in law or in
currently prevailing interpretations of the Staff of the SEC, the Company
reasonably determines in good faith, after consultation with counsel, that it
is not permitted to effect the Exchange Offer, (ii) the Exchange Offer is not
commenced on or prior to the Effectiveness Date, (iii) the Exchange Offer is
not, for any reason, consummated on or prior to the 165th day after the Issue
Date, (iv) any holder of Private Exchange Securities (as defined in the
Registration Rights Agreement) so requests, or (v) in the case of any holder
that participates in the Exchange Offer, such holder does not receive Exchange
Securities on the date of the exchange that may be sold without restriction
under state and federal securities laws (the occurrence of any such event, a
"Shelf Registration Event"), then, in the case of each of clauses (i) to and
including (v) of this sentence, the Company shall promptly deliver to the
holders and the Trustee notice thereof (the "Shelf Notice") and shall
thereafter file an Initial Shelf Registration Statement pursuant to the terms
of the Registration Rights Agreements.
Shelf Registration
If a Shelf Registration Event has occurred (and whether or not this
Registration Statement has become effective, or the Exchange Offer has been
consummated), then:
(a) Initial Shelf Registration Statement. The Company shall promptly
prepare and file with the SEC a Registration Statement for an offering to
be made on a continuous basis pursuant to Rule 415 covering all of the
Registrable Securities (the "Initial Shelf Registration Statement"). The
Company shall file with the SEC the Initial Shelf Registration Statement on
or prior to the Filing Date. The Initial Shelf Registration Statement shall
be on Form S-1 or another appropriate form if available, permitting
registration of such Registrable Securities for resale by such holders in
the manner designated by them (including, without limitation, in one or
more underwritten offerings). The Company shall not permit any securities
other than the Registrable Securities to be included in the Initial Shelf
Registration Statement or any Subsequent Shelf Registration Statement. The
Company shall use its commercially reasonable best efforts to cause the
Initial Shelf Registration Statement to be declared effective under the
Securities Act on or prior to the Effectiveness Date, and to keep the
Initial Shelf Registration Statement continuously effective under the
Securities Act until the date which is 36 months from the Issue Date, or
such shorter period ending when (i) all Registrable Securities covered by
the Initial Shelf Registration Statement have been sold in the manner set
forth and as contemplated in the Initial Shelf Registration Statement or
(ii) a Subsequent Shelf Registration Statement covering all of the
Registrable Securities has been declared effective under the Securities Act
(such 36 month or shorter period, the "Effectiveness Period").
(b) Subsequent Shelf Registration Statements. If the Initial Shelf
Registration Statement or any Subsequent Shelf Registration Statement
ceases to be effective for any reason at any time during the Effectiveness
Period (other than because of the sale of all of the securities registered
thereunder), the Company shall use its best efforts to obtain the prompt
withdrawal of any order suspending the effectiveness thereof, and in any
event the Company shall within 45 days of such cessation of effectiveness
amend the Shelf Registration Statement in a manner reasonably expected to
obtain the withdrawal of the order suspending the effectiveness thereof, or
file an additional "shelf" Registration Statement pursuant to Rule 415
covering all of the Registrable Securities (a "Subsequent Shelf
Registration Statement"). If a Subsequent Shelf Registration Statement is
filed, the Company shall use its commercially reasonable best efforts to
cause the Subsequent Shelf Registration Statement to be declared effective
as soon as reasonably practicable after such filing and to keep such
Registration Statement continuously effective until the end of the
Effectiveness Period. As used herein the term "Shelf Registration
Statement" means the Initial Shelf Registration Statement and any
Subsequent Shelf Registration Statement.
(c) Supplements and Amendments. The Company shall promptly supplement and
amend the Shelf Registration Statement if required by the rules,
regulations or instructions applicable to the registration form used for
such Shelf Registration Statement, if required by the Securities Act, or if
reasonably requested by the holders of a majority in aggregate principal
amount of the Registrable Securities covered by such Registration Statement
or by any underwriter of such Registrable Securities.
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Additional Interest
The Company has agreed to pay, as liquidated damages, additional interest on
the Notes ("Additional Interest") under the circumstances and to the extent
set forth below (each of which shall be given independent effect):
(i) if either the Registration Statement or the Initial Shelf
Registration Statement has not been filed on or prior to the Filing Date
(unless, with respect to the Registration Statement, a Shelf Event
described in clause (i) of paragraph (b) of "--Exchange Offer" above shall
have occurred prior to the Filing Date), Additional Interest shall accrue
on the Notes over and above the stated interest in an amount equal to $0.05
per week (or any part thereof), per $1,000 principal amount of the Senior
Subordinated Notes or $1,000 of Accreted Value (as of the first day of each
such week) with respect to the Senior Subordinated Discount Notes for the
first 90 days immediately following such date, such Additional Interest
increasing by an additional $0.05 per week (or any part thereof) per $1,000
principal amount of the Senior Subordinated Notes or $1,000 of Accreted
Value (as of the first day of each such week) with respect to the Senior
Subordinated Discount Notes for each subsequent 90-day period;
(ii) if either the Registration Statement or the Initial Shelf
Registration Statement is not declared effective by the SEC on or prior to
the Effectiveness Date (unless, with respect to the Registration Statement,
a Shelf Event described in clause (i) of paragraph (b) of "--Exchange
Offer" above shall have occurred), Additional Interest shall accrue on the
Notes included or which should have been included in such Registration
Statement over and above the stated interest in an amount equal to $0.05
per week (or any part thereof) per $1,000 principal amount of Senior
Subordinated Notes or $1,000 of Accreted Value (as of the first day of each
such week) with respect to the Senior Subordinated Discount Notes for the
first 90 days immediately following the day after such date, such
Additional Interest increasing by an additional $0.05 per week (or any part
thereof) per $1,000 principal amount of the Senior Subordinated Notes or
$1,000 of Accreted Value (as of the first day of each such week) with
respect to the Senior Subordinated Discount Notes for each subsequent 90-
day period; and
(iii) if (A) the Company has not exchanged Exchange Securities for all
Notes validly tendered and not withdrawn in accordance with the terms of
the Exchange Offer on or prior to the fifth day after the Expiration Date,
or (B) the Registration Statement ceases to be effective at any time prior
to the Expiration Date, or (C) if applicable, any Shelf Registration
Statement has been declared effective and such Shelf Registration Statement
ceases to be effective at any time during the Effectiveness Period, then
Additional Interest shall accrue on the Notes (over and above any interest
otherwise payable on the Notes) in an amount equal to $0.05 per week (or
any part thereof) per $1,000 principal amount of the Senior Subordinated
Notes or $1,000 of Accreted Value (as of the first day of each such week)
with respect to the Senior Subordinated Discount Notes for the first 90
days commencing on the (x) sixth day after the Expiration Date, in the case
of (A) above, or (y) the day the Registration Statement ceases to be
effective in the case of (B) above, or (z) the day such Shelf Registration
Statement ceases to be effective in the case of (C) above, such Additional
Interest increasing by an additional $0.05 per week (or any part thereof)
per $1,000 principal amount of the Senior Subordinated Notes or $1,000 of
Accreted Value (as of the first day of each such week) with respect to the
Senior Subordinated Discount Notes at the beginning of each such subsequent
90-day period;
provided, however, that the Additional Interest rate on the Notes may not
exceed at any one time in the aggregate $0.50 per week per $1,000 principal
amount of the Senior Subordinated Notes or $1,000 of Accreted Value (as of the
first day of each such week) with respect to the Senior Subordinated Discount
Notes; provided, further, that (1) upon the filing of the Registration
Statement or a Shelf Registration Statement as required hereunder (in the case
of clause (i) of this paragraph), (2) upon the effectiveness of the
Registration Statement or the Shelf Registration Statement as required
hereunder (in the case of clause (ii) of this paragraph) or (3) upon the
exchange of Exchange Securities for all Notes validly tendered and not
withdrawn (in the case of clause (iii)(A) of this paragraph), or upon the
effectiveness of the Registration Statement which had ceased to remain
effective (in the case of (iii)(B) of this paragraph), or upon the
effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of (iii)(C) of paragraph), Additional Interest on the
Notes as a result of such clause (or the relevant subclause thereof), as the
case may be, shall cease to accrue (but any accrued amount shall be payable).
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Definitions
As used in this section, the following terms shall have the following
meanings:
Effectiveness Date: The 135th day after the Closing Date; provided, however,
that, with respect to the Initial Shelf Registration Statement, (i) if the
Filing Date in respect thereof is fewer than 60 days prior to the 135th day
after the Closing Date, then the Effectiveness Date in respect thereof shall
be the 60th day after such Filing Date and (ii) if the Filing Date is after
the filing of the Registration Statement with the SEC, then the Effectiveness
Date in respect thereof shall be the 60th day after such Filing Date.
Closing Date: the closing date of the Notes Offering.
Filing Date: The 45th day after the Closing Date; provided, however, that,
with respect to the Initial Shelf Registration Statement, (i) if a Shelf
Registration Event shall have occurred fewer than 30 days prior to the 45th
day after the Closing Date, then the Filing Date in respect thereof shall be
the 30th day after such Shelf Registration Event and (ii) if a Shelf
Registration Event shall have occurred after the filing of the Registration
Statement with the SEC, then the Filing Date in respect thereof shall be the
45th day after such Shelf Registration Event.
Registrable Securities: The Notes upon original issuance thereof and at all
times subsequent thereto, each Exchange Security as to which clause (v) of
paragraph (b) of "--Exchange Offer" above is applicable upon original issuance
and at all times subsequent thereto and, if issued, the Private Exchange
Securities, until in the case of any such Notes, Exchange Securities or
Private Exchange Securities, as the case may be, (i) a Registration Statement
(other than, with respect to any Exchange Security as to which clause (v) of
paragraph (b) of "--Exchange Offer" above is applicable, the Registration
Statement) covering such Notes, Exchange Securities or Private Exchange
Securities has been declared effective by the SEC and such Notes, Exchange
Securities or Private Exchange Securities, as the case may be, have been
disposed of in accordance with such effective Registration Statement, (ii)
such Notes, Exchange Securities or Private Exchange Securities, as the case
may be, are sold in compliance with Rule 144 under the Securities Act, (iii)
such Note has been exchanged for an Exchange Note pursuant to the Exchange
Offer and clause (v) of paragraph (b) of "--Exchange Offer" above is not
applicable thereto, or (iv) such Notes, Exchange Securities or Private
Exchange Securities, as the case may be, cease to be outstanding.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the principal United States federal income
tax consequences of the ownership and disposition of the Notes and the
Exchange Notes. This summary is based on the Code, administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, changes to any of which subsequent to the date hereof may affect
the tax consequences described below. This summary addresses only initial
holders of the Notes who acquired such Notes at their "issue price," as
defined below, and initial holders of Notes who, upon tendering their Notes in
connection with the Exchange Offer, are issued Exchange Notes in exchange for
such Notes, and discusses only Notes and Exchange Notes held as capital assets
within the meaning of Section 1221 of the Code. It does not discuss all of the
tax consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as
certain financial institutions, insurance companies, dealers in securities or
persons holding the Notes as part of a straddle or a hedging arrangement.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, HOLDERS OF NOTES SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE UNITED STATED FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS, AS WELL AS WITH REGARD TO ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION AND ANY RECENT OR
PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
SENIOR SUBORDINATED DISCOUNT NOTES
Original Issue Discount. The Senior Subordinated Discount Notes were issued
with OID equal to the difference between their "stated redemption price at
maturity" and their "issue price," as such terms are defined in the Code and
Treasury Regulations. The "issue price" of a Senior Subordinated Discount
Note, or a Senior Subordinated Exchange Note issued in exchange therefor
pursuant to the Exchange Offer, is the first price at which a substantial
amount of the Senior Subordinated Discount Notes was sold to the public. For
this purpose, the public does not include bond houses, brokers or similar
persons or organizations acting in the capacity of underwriters, placement
agents or wholesalers.
The "stated redemption price at maturity" of a Senior Subordinated Discount
Note, or of a Senior Subordinated Discount Exchange Note issued in exchange
therefor, is equal to the sum of all payments required under the Senior
Subordinated Discount Note or Senior Subordinated Discount Exchange Note, as
the case may be, other than payments of "qualified stated interest" within the
meaning of the Treasury Regulations. To have "qualified stated interest," an
instrument must, among other requirements, pay interest at least annually
during the entire term of such instrument. Because neither the Senior
Subordinated Discount Notes nor the Senior Subordinated Discount Exchange
Notes will pay interest until September 1, 2002, none of the interest on the
Senior Subordinated Discount Notes or the Senior Subordinated Discount
Exchange Notes will be qualified stated interest. As a result, all payments
made under the Senior Subordinated Discount Notes and the Senior Subordinated
Discount Exchange Notes will be treated as part of the stated redemption price
at maturity, and interest paid on the Senior Subordinated Discount Notes and
the Senior Subordinated Discount Exchange Notes will not be taxable upon
receipt, but the OID rules described below will apply. The total OID on a
Senior Subordinated Discount Note or a Senior Subordinated Discount Exchange
Note, as the case may be, will be equal to the difference between the sum of
all payments required under such Senior Subordinated Discount Note or Senior
Subordinated Discount Exchange Note and the issue price of the Senior
Subordinated Discount Note owned by the holder (or, in the case of a Senior
Subordinated Discount Exchange Note, the issue price of the Senior
Subordinated Discount Note that was exchanged by such holder for a Senior
Subordinated Discount Exchange Note pursuant to the Exchange Offer).
A holder of Senior Subordinated Discount Notes and a holder of Senior
Subordinated Discount Exchange Notes each will be required to include OID in
income for U.S. federal income tax purposes as it accrues, whether or not such
holder uses the accrual method of accounting. OID will accrue in accordance
with a constant yield method based on a compounding of interest. Under this
method, holders of Senior Subordinated Discount Notes and holders of Senior
Subordinated Discount Exchange Notes will be required to include in income
increasingly greater amounts of OID in successive accrual periods. OID
allocable to any accrual period will equal the product
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of the "adjusted issue price" of the Senior Subordinated Discount Notes or the
Senior Subordinated Discount Exchange Notes, as the case may be, as of the
beginning of such period, multiplied by the Senior Subordinated Discount Notes'
or the Senior Subordinated Discount Exchange Notes' respective yield to
maturity. The "adjusted issue price" of the Senior Subordinated Discount Notes,
or the Senior Subordinated Discount Exchange Notes issued in exchange for
Senior Subordinated Discount Notes, as of the beginning of any accrual period,
will, with respect to Senior Subordinated Discount Notes, equal the issue price
of the Senior Subordinated Discount Notes or, with respect to the Senior
Subordinated Discount Exchange Notes, equal the issue price of the Senior
Subordinated Discount Note that was exchanged pursuant to the Exchange Offer,
increased, in each case, by OID previously includible in income and decreased
by any payments under such Notes or Exchange Notes, as the case may be. Because
OID will accrue and be includible in income at least annually and no payments
will be made under the Senior Subordinated Discount Notes and the Senior
Subordinated Discount Exchange Notes until August 15, 2002, the adjusted issue
price of the Senior Subordinated Discount Notes and the Senior Subordinated
Discount Exchange Notes will increase until February 15, 2002. OID includible
in income will therefore increase during each accrual period until February 15,
2002. Thereafter, OID includible in income for each six-month accrual period
will approximate the amount of cash interest due at the end of such period.
The Company may make a Cash Interest Election at any time prior to February
15, 2002, in which case cash interest is payable on each interest payment date
thereafter. Under the OID rules, solely for purposes of determining the amount
of OID that is includible in income by a holder of a note, it is presumed that
the issuer will exercise an option to pay cash interest early if such exercise
will lower the yield-to-maturity of the note. The Company has determined that
the exercise of its option to pay interest early would not lower the yield-to-
maturity of the Senior Subordinated Discount Notes or the yield-to-maturity of
the Senior Subordinated Discount Exchange Notes. On these facts, the Company
would not be presumed to exercise its option to pay interest early. However,
if, contrary to such presumption, the Company exercises such option, then
solely for purposes of the accrual of OID, the yield to maturity of the Senior
Subordinated Discount Notes and the Senior Subordinated Discount Exchange Notes
will be redetermined by treating each of the Senior Subordinated Discount Notes
and the Senior Subordinated Discount Exchange Notes as reissued on such date
for an amount equal to the adjusted issue price on such date.
Effect of Mandatory and Optional Redemption on OID. The Company may redeem
the Senior Subordinated Discount Notes and the Senior Subordinated Discount
Exchange Notes, in whole or in part, at any time on or after February 15, 2002,
at redemption prices specified elsewhere herein, plus accrued and unpaid
interest thereon, if any, to the date of redemption. Treasury Regulations
contain rules for determining the "maturity date" and the stated redemption
price at maturity of an instrument that may be redeemed prior to its stated
maturity date at the option of the issuer. Under the OID rules, solely for
purposes of the accrual of OID, it is assumed that the issuer will exercise any
option to redeem a debt instrument if such exercise will lower the yield-to-
maturity of the debt instrument. The Company has determined that the exercise
of its right to redeem the Senior Subordinated Discount Notes and Senior
Subordinated Discount Exchange Notes prior to their stated maturity under these
rules would not lower the yield-to-maturity of the Senior Subordinated Discount
Notes and the Senior Subordinated Discount Exchange Notes. On these facts, the
Company would not be presumed to exercise its right to redeem the Senior
Subordinated Discount Notes and Senior Subordinated Discount Exchange Notes
prior to their stated maturity under these rules.
In addition, prior to February 15, 2000, the Company, other than in any
circumstance resulting in a Change of Control, may redeem an aggregate
principal amount of Senior Subordinated Discount Notes and Senior Subordinated
Discount Exchange Notes equal to up to 35% of the originally issued principal
amount at maturity of Senior Subordinated Discount Notes at a redemption price
equal to 112.25 % of the Accreted Value thereof at the redemption date (or, if
a Cash Interest Election has been made, 112.25 % of the principal amount at
maturity thereof, plus accrued and unpaid interest thereon, if any, to the
redemption date) with the net cash proceeds of (i) one or more Public Equity
Offerings of common equity of the Company or (ii) a sale or series of related
sales of Qualified Equity Interests of the Company to Strategic Equity
Investors, in any such case resulting in gross cash proceeds to the Company of
at least $100.0 million in the aggregate, provided, however, that at an
aggregate principal amount of Senior Subordinated Discount Notes and Senior
Subordinated Discount Exchange Notes
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equal to at least 65% of the originally issued principal amount at maturity of
Senior Subordinated Discount Notes would remain outstanding immediately after
giving effect to any such redemption (excluding any Senior Subordinated
Discount Notes and Senior Subordinated Discount Exchange Notes owned by the
Company or any of it Affiliates). Such redemption rights and obligations will
be treated by the Company as not affecting the determination of the yield or
maturity of the Senior Subordinated Discount Notes or the Senior Subordinated
Discount Exchange Notes. The Treasury Regulations contain rules for determining
the "maturity date" and the stated redemption price at maturity of an
instrument that may be redeemed prior to its stated maturity date upon the
occurrence of one or more contingencies. Under such Treasury Regulations, if
the timing and amounts of the payments that comprise each payment schedule are
known as of the issue date, the "maturity date" and stated redemption price at
maturity of such an instrument are determined by assuming that payments will be
made according to the instrument's stated payment schedule, unless, based upon
all the facts and circumstances as of the issue date, it is more likely than
not that the instrument's stated payment schedule will not occur. The Company
has determined that the stated maturity date and stated payment schedule of the
Senior Subordinated Discount Notes is more likely than not to occur based on
the facts and circumstances known as of the issue date. On these facts, under
these regulations, the "maturity date" and stated redemption price at maturity
of the Senior Subordinated Discount Notes and the Senior Subordinated Discount
Exchange Notes would be determined on the basis of the stated maturity and
stated payment schedule.
If, notwithstanding the foregoing, it is presumed that the Company will
exercise its option to redeem, then the maturity date of the Senior
Subordinated Discount Notes and the Senior Subordinated Discount Exchange Notes
for the purpose of calculating yield to maturity would be the exercise date of
such call option and the stated redemption price at maturity for each Senior
Subordinated Discount Note and each Senior Subordinated Discount Exchange Note
would equal the amount payable upon such exercise. If subsequently the call
option is not exercised, then for purposes of the OID rules, the issuer would
be treated as having issued on the presumed exercise date of the call option a
new debt instrument in exchange for the existing instrument. The new debt
instrument deemed issued would have an issue price equal to the call price. As
a result, another OID computation would have to be made with respect to the
constructively issued new debt instrument.
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of a
Senior Subordinated Discount Note or of a Senior Subordinated Discount Exchange
Note, a holder will recognize taxable gain or loss equal to the difference
between the amount realized on the sale, exchange or retirement and such
holder's adjusted tax basis in such Senior Subordinated Discount Note or Senior
Subordinated Discount Exchange Note, as the case may be. A holder's adjusted
tax basis in a Senior Subordinated Discount Note or Senior Subordinated
Discount Exchange Note will equal the initial tax basis of the Senior
Subordinated Discount Note or Senior Subordinated Discount Exchange Note,
respectively, increased by the amounts of any OID previously included in income
by the holder with respect to such Senior Subordinated Discount Note or Senior
Subordinated Discount Exchange Note, and reduced by the amounts of any payments
on such Senior Subordinated Discount Note or Senior Subordinated Discount
Exchange Note, respectively, received by such holder.
Gain or loss realized on the sale, exchange or retirement of a Senior
Subordinated Discount Note or Senior Subordinated Discount Exchange Note will
be capital gain or loss if such Senior Subordinated Discount Note or Senior
Subordinated Discount Exchange Note, as the case may be, is held as a capital
asset, and will be long-term capital gain or loss if the Senior Subordinated
Discount Note or Senior Subordinated Discount Exchange Note has been held by
the holder for more than one year as of the date of the sale, exchange or
retirement. Under current law, the excess of net long-term capital gains over
net short-term capital losses is taxed at a lower rate than ordinary income for
certain noncorporate taxpayers. The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, any limitation on the deductibility of capital losses.
SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes were not issued with (and thus do not bear)
OID, and consequently, any Senior Subordinated Exchange Notes issued in
exchange for Senior Subordinated Notes pursuant to the Exchange Offer will not
bear OID. For purposes of this discussion, it is assumed that all the initial
holders of Senior Subordinated Notes purchased their Senior Subordinated Notes
at a price equal to the stated principal amount.
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Holders of Senior Subordinated Notes or Senior Subordinated Exchange Notes
will be required to include stated interest on the Senior Subordinated Notes
or Senior Subordinated Exchange Notes in gross income for federal income tax
purposes in accordance with the holder's method of accounting for tax
purposes.
Sale, Exchange or Retirement Upon the sale, exchange or retirement of a
Senior Subordinated Note or a Senior Subordinated Exchange Note, a holder will
recognize taxable gain or loss equal to the difference between the amount
received in the sale, exchange or retirement (except to the extent the
consideration received is attributable to stated interest not previously taken
into account, which consideration is treated as interest income) and such
holder's adjusted tax basis in the Senior Subordinated Note or Senior
Subordinated Exchange Note, as the case may be. Any gain or loss recognized on
the sale, exchange or retirement of a Senior Subordinated Note or Senior
Subordinated Exchange Note would be capital gain or loss if such Note or
Exchange Note is held as a capital asset and will be long-term capital gain or
loss if the Senior Subordinated Note or Senior Subordinated Exchange Note were
held by the holder for more than one year. For purposes of the foregoing
calculation of capital gain or loss, the applicable holding period for Senior
Subordinated Exchange Notes would begin on the date that such holder was
issued the Senior Subordinated Notes that were subsequently exchanged for such
Senior Subordinated Exchange Notes pursuant to the Exchange Offer.
In certain circumstances, notes issued in connection with the same
transaction or related transactions may be treated as a single note for
purposes of the OID rules. The Company has determined that a substantial
portion of each of the Senior Subordinated Notes and the Subordinated Senior
Discount Notes were issued to purchasers not related to the Company or to
other purchasers and who did not purchase both Senior Subordinated Notes and
Senior Subordinated Discount Notes in connection with the same transaction or
related transactions. Assuming this is the case, the aggregation rules would
not apply with respect to the Notes or the Exchange Notes.
EXCHANGE OF NOTES FOR EXCHANGE NOTES PURSUANT TO THE EXCHANGE OFFER
An exchange of the Notes for the Exchange Notes pursuant to the Exchange
Offer will not be treated as a taxable exchange for federal income tax
purposes because, other than the fact that the Exchange Notes will be
registered under the Securities Act, upon consummation of the Exchange Offer,
the terms of the Exchange Notes will be identical to the terms of the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31% on payments of principal and interest (including OID) and premium on,
and the proceeds of disposition of, a Note. Backup withholding will apply only
if the holder: (i) fails to furnish its Taxpayer Identification Number ("TIN")
which, for an individual, would be his or her Social Security number; (ii)
furnishes an incorrect TIN; (iii) is notified by the Internal Revenue Service
(the "IRS") that it has failed properly to report payments of interest and
dividends; or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Holders of the Notes should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption, if applicable.
The amount of any backup withholding from a payment to a holder of a Note
will be allowed as a credit against the holder's United States federal income
tax liability and may entitle the holder to a refund, provided that the
required information is furnished to the IRS.
OTHER TAX CONSEQUENCES
In addition to the federal income tax considerations described above,
holders of Notes should consider potential state, local, income, franchise,
personal property and other taxation in any state, locality or foreign
jurisdiction and the tax effect of ownership, sale, exchange, or retirement of
Notes or Exchange Notes, or their exchange of Notes for Exchange Notes
pursuant to the Exchange Offer, in any state, locality or foreign
jurisdiction. Prospective purchasers of Notes are advised to consult their own
tax advisors with respect to any state, local or foreign income, franchise,
personal property or other tax consequences arising out of their ownership of
Notes or Exchange Notes.
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PLAN OF DISTRIBUTION
The Exchange Notes are being offered in exchange for Notes pursuant to the
Exchange Offer.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such Exchange Notes. The Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Notes where
such Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchaser or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
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For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company have agreed to pay certain
expenses incident to the Exchange Offer, other than commission or concessions
of any brokers or dealers, and will indemnify the holders of the Exchange
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requires the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agree to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company have amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended
or supplemental Prospectus to such broker-dealer.
VALIDITY OF EXCHANGE NOTES
The validity of the Exchange Notes will be passed upon for the Company by
Baker & Botts, L.L.P., New York, N.Y.
EXPERTS
The balance sheets of TCI Satellite Entertainment, Inc. (as defined in note
1 of the financial statements) as of December 31, 1996 and 1995, and the
related statements of operations, equity, and cash flows for each of the years
in the three-year period ended December 31, 1996, have been included herein
and in the Registration Statement in reliance upon the report, dated March 25,
1997, of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of PRIMESTAR Partners as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
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GLOSSARY OF TERMS
For definitions of certain additional capitalized terms relating to the
Exchange Notes, see "Description of the Exchange Notes--Certain Definitions."
1996 Plan. TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan.
1996 Telecom Act. Telecommunications Act of 1996.
ACC. Advanced Communications Corporation.
Add-on Company Option. Option to purchase Series A Common Stock, issued in
connection with the Distribution to holders of TCI Options. Immediately prior
to the Distribution, each TCI Option was divided into two separately
exercisable options, an Add-on Company Option and an Adjusted TCI Option. An
Add-on Company Option is an option to purchase Series A Common Stock,
exercisable for the number of shares of Series A Common Stock that would have
been issued in the Distribution in respect of the shares of Series A TCI Group
Common Stock subject to the applicable TCI Option, if such TCI Option had been
exercised in full immediately prior to the Record Date, and containing
substantially equivalent terms as the TCI Option.
Adjusted TCI Option. Option to purchase Series A TCI Group Common Stock,
issued in connection with the Distribution. Immediately prior to the
Distribution, each TCI Option was divided into two separately exercisable
options, an Add-on Company Option and an Adjusted TCI Option. An Adjusted TCI
Option is an option to purchase Series A TCI Group Common Stock, exercisable
for the same number of shares of Series A TCI Group Common Stock as the
corresponding TCI Option had been.
AHYDOs. Applicable high yield discount obligations under the rules of
Section 163(e) and 163(i) of the Code.
Alphastar. Alphastar, Inc., a subsidiary of Tee-Com Electronics, Inc., a
Canadian company.
AT&T. AT&T Corp.
Authorized Units. Number of active authorized satellite receivers, more than
one of which may be installed in a subscribing household.
Awards. Grants of Options, SARs, Restricted Shares, Stock Units, Performance
Awards or any combination thereof, made pursuant to the 1996 Plan.
Bank Credit Facility. Credit Agreement dated as of December 31, 1996, among
the Company, the Bank of Nova Scotia, NationsBank of Texas, N.A., Credit
Lyonnais New York Branch and the lenders named therein, with respect to a
senior secured reduced revolving credit facility.
Bankruptcy Code. United States Bankruptcy Code.
basic cable channels. Advertiser-supported networks.
Board. Board of Directors of the Company.
Bose. The Bose Corporation, a Massachusetts corporation.
BSS. Broadcast Satellite Service, which operates at high power in the Ku-
band.
Cable Plus Strategy. The Company's strategy to operate Tempo DBS-1, either
directly or through PRIMESTAR Partners, as a complementary service to basic
cable and other channel-constrained analog services, providing DBS services on
a wholesale basis to those system operators wishing to avoid the high cost of
digital plant upgrades.
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Cash Interest Election. Election by the Company, at any time prior to
February 15, 2002, on any interest payment date, to commence the accrual of
cash interest on the Senior Subordinated Discount Notes, from and after the
Cash Interest Election Date.
Cash Interest Election Date. Interest payment date on which the Company
makes a Cash Interest Election.
churn. Subscriber termination of satellite television service.
Code. Internal Revenue Code of 1986, as amended to the date of this
Prospectus.
Comcast. Comcast Corporation.
Commercial Market. Commercial customers and potential customers of digital
satellite television service, such as restaurants, bars, hotels and motels,
multiple dwelling units, businesses and schools.
Committee. Compensation Committee of the Board, or such other committee as
the Board may in the future appoint to administer the 1996 Plan.
Communications Act. Communications Act of 1934, as amended.
Company. TCI Satellite Entertainment, Inc., a Delaware corporation. Unless
the context otherwise requires, also refers to (i) TCI's collective interests
in the Digital Satellite Business before the Distribution Date, and (ii) TCI
Satellite Entertainment, Inc. and its consolidated subsidiaries on and after
the Distribution Date.
Company Common Stock. Series A Common Stock and Series B Common Stock.
Company Employee. Person who was an Company employee at the time of the
Distribution and following the Distribution was no longer a TCI employee.
Company Note. A promissory note in the principal amount of $250 million (i)
issued by the Company to TCIC on the Distribution Date pursuant to the
Reorganization Agreement and the TCIC Credit Facility, evidencing a portion of
the Company's intercompany balance owed to TCIC on the Distribution Date, and
(ii) repaid in full (including accrued interest) by the Company with its
initial borrowings under the Bank Credit Facility.
Company Satellite Reimbursement Determination. Determination made in
connection with the Distribution to provide that intercompany advances from
TCIC to the Company during 1996, to fund the majority of the construction and
related costs associated with the Company Satellites, would be repaid by the
Company to TCIC to the extent (and only to the extent) that Tempo received
corresponding advances from PRIMESTAR Partners.
Company Satellites. Two high power direct broadcast satellites, build by
Loral pursuant to the Satellite Construction Agreement.
Continental. Continental Cablevision, Inc.
Cox. Cox Communications, Inc.
DBS. Direct Broadcast Satellite.
Decrees. The State Decree and the Federal Decree.
Delivery. Delivery of a satellite by Loral to Tempo, in accordance with the
Satellite Construction Agreement.
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Digital. TCI Digital Satellite Entertainment, Inc., a Colorado corporation,
which was merged with and into the Company, in connection with the
Distribution.
digital compression. Conversion of the standard analog video signal into a
digital signal, and the compression of that signal so as to facilitate
multiple channel transmission through a single transponder.
Digital Satellite Business. Business of distributing multichannel
programming services directly to consumers in the U.S. via digital medium
power or high power satellite, including the rental and sale of customer
premises equipment relating thereto.
DirectSat. DirectSat Corporation.
DirecTv. DirecTv, Inc., a subsidiary of Hughes Electronics Corporation, a
Delaware corporation.
dish. See "HSD."
Distribution. Distribution by TCI on the Distribution Date, in the form of a
dividend, to the holders of record of TCI Group Common Stock on the Record
Date (other than certain subsidiaries of TCI that waived such dividend) of all
of the issued and outstanding Company Common Stock.
Distribution Date. December 4, 1996, the date the Distribution was made.
Distribution Date Options. Options granted by TCI prior to the Distribution
Date to certain TCI executive officers to acquire equity interests in the
Company.
Distributors. Affiliates of each of the partners of PRIMESTAR Partners other
than GEAS, including the Company, who are authorized distributors of
PRIMESTAR(R).
Dividend Equivalents. Cash or property corresponding to all dividends and
distributions (or the economic equivalent thereof) in respect of Restricted
Shares issued at the end of the Restriction Period that would have been paid,
made or declared on such Restricted Shares had such shares been issued at the
beginning of the Restriction Period.
EchoStar. EchoStar Communications Corp., a Nevada corporation, together with
its consolidated subsidiaries.
Eligible Institution. A member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Securities and Exchange Act of 1934, as amended.
Employee Plan. Qualified Employee Stock Purchase Plan established by the
Company.
End-of-Life Option. PRIMESTAR Partners' option, exercisable in accordance
with the GE-2 Agreement, to extend the GE-2 Agreement with respect to the use
of up to 24 transponders on GE-2.
ERISA. Employee Retirement Income Security Act of 1974.
Exchange Act. Securities Exchange Act of 1934, as amended.
Exchange Notes. The Senior Subordinated Exchange Notes and Senior
Subordinated Discount Exchange Notes offered pursuant to the Exchange Offer.
Exchange Offer. Offering of the Exchange Notes in exchange for Notes
pursuant to this Prospectus.
Exercise Fee. $1 million, which PRIMESTAR Partners paid Tempo in connection
with the exercise of the Tempo Option.
FCC. Federal Communications Commission.
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FCC Auction. FCC auction held in January 1996 of 28 frequencies at the 110
W.L. orbital location and 24 frequencies at the 148(degrees) W.L. orbital
location.
FCC Permit. Construction permit held by Tempo and issued by the FCC to
build, launch and operate a DBS system.
Federal Decree. Consent decree entered in United States v. PRIMESTAR
Partners, L.P., et al., 93 Civ. 3913 (SDNY, 1993).
Free Standing SAR. SAR granted under the 1996 Plan to an eligible employee
who is not the holder of an Option.
FSS. Fixed Satellite Service, which includes medium power services
transmitting in the Ku-band, as well as low power services transmitting in the
C-band.
Fulfillment Agreement. Agreement between TCIC and the Company, pursuant to
which TCIC provides fulfillment services to the Company with respect to
certain customers of the PRIMESTAR(R) medium power service.
G.E. General Electric Company.
GE-2. GE Americom medium power satellite that was launched on January 30,
1997, and which was declared commercially operational on March 6, 1997.
GE-2 Agreement. Amended and Restated Memorandum of Agreement, effective as
of October 18, 1996, between PRIMESTAR Partners and GE Americom and, upon its
execution, the User Agreement between PRIMESTAR Partners and GE Americom
contemplated therein.
GE-3. GE Americom medium power satellite that is expected to serve as an in-
orbit spare for GE-2. GE-3 is still under construction and is expected to be
available for launch in the fall of 1997.
GE Americom. GE American Communications, Inc., a Delaware corporation, a
subsidiary of G.E. and the parent company of GEAS.
GEAS. G.E. Americom Services, Inc., a Delaware corporation and a partner of
PRIMESTAR Partners.
GI. General Instruments Corporation, a Delaware corporation.
HSD. Home satellite dish.
HSR Act. Hart-Scott-Rodino Antitrust Improvement Act of 1974, as amended.
Imedia Technology. Proprietary technology of Imedia Corporation currently
under development to provide statistical multiplexing of digitally compressed
video signals.
Incentive Options. Options granted pursuant to the 1996 Plan which are
incentive stock options within the meaning of Section 422 of the Code.
Indemnification Agreements. Indemnification Agreements between (i) the
Company and TCI UA 1, relating to the TCI UA 1 Letter of Credit, which
supports the PRIMESTAR Credit Facility and (ii) the Company and TCIC, relating
to the TCIC Letter of Credit, which supports the Company's share of PRIMESTAR
Partners' obligations under the GE-2 Agreement, with respect to PRIMESTAR
Partners' use of transponders on GE-2.
159
<PAGE>
Initial Purchasers. Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Capital
Markets, Inc. and Scotia Capital Markets (USA) Inc.
International Bureau. International Bureau of the FCC.
IRD. Integrated receiver/decoder; a set-top satellite television receiver.
IRS. Internal Revenue Service.
K-1 Notes. Promissory notes issued in connection with the Distribution by
two subsidiaries of the Company for the purchase of TCIC's partnership
interests in PRIMESTAR Partners, which promissory notes were assumed by TCI on
the Distribution Date in the form of a capital contribution to the Company.
K-2. Satcom K-2, a GE Americom medium power satellite located at 85(degrees)
W.L., from which PRIMESTAR Partners formerly broadcasted.
Letter of Credit Event. Inability of the Company to refinance the Company
Satellites without a letter of credit and the inability of the Company to post
(or arrange for the posting of) such a letter of credit.
Liberty Media Group. TCI's programming and electronic retailing businesses.
License Agreement. Trade Name and Service Mark License Agreement by and
between TCI and the Company.
LMDS. Local multi-point distribution service.
LNB. Low noise block converter; a component of HSDs.
LodgeNet. LodgeNet Entertainment Corporation, a Delaware corporation.
Loral. Space Systems/Loral, Inc., a New York corporation.
Master Agents. Four master sales agents engaged by the Company to distribute
PRIMESTAR(R), including Metron Digital Services, Inc., CVS Systems, Inc.,
Resource Electronics, Inc. and Recreation Sports and Imports, Inc.
MCI. MCI Communications Corp., a Delaware corporation.
MDU. Multiple dwelling unit.
MMDS. Multi-channel multi-point distribution service; a one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
Nasdaq National Market. Nasdaq National Market tier of the Nasdaq Stock
Market.
National Call Center. National call center maintained by the Company for
orders, information and customer service.
NDTC. National Digital Television Center, Inc., a subsidiary of TCI, and
formerly Western Tele-Communications, Inc.
Newhouse. Newhouse Broadcasting Corporation.
News Corp. The News Corporation Limited, an Australian corporation.
Nonqualified Options. Options granted pursuant to the 1996 Plan, which are
nonqualified stock options under Section 422 of the Code.
Notes. The Senior Subordinated Notes and the Senior Subordinated Discount
Notes sold by the Company pursuant to the Notes Offering.
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<PAGE>
Notes Offering. Issuance and Sale by the Company of the Notes on February 20,
1997, in transactions not registered under the Securities Act, in reliance upon
the exemption provided in Section 4(2) of the Securities Act.
OID. Original issue discount of the Senior Subordinated Discount Notes and
the Senior Subordinated Discount Exchange Notes, equal to the difference
between their "stated redemption price at maturity" and their "issue price," as
such terms are defined in the Code and Treasury Regulations.
Operating Assets and Liabilities. Receivables, prepaids, accruals and
payables and subscriber advance payments.
Operating Cash Flow. Operating income before depreciation and amortization.
Operating Cash Flow is a commonly used measure of value and borrowing capacity
within the Company's industry and is not intended to be a measure of
performance in accordance with generally accepted accounting principles and
should not be relied upon as such.
Options. Stock options granted pursuant to the 1996 Plan.
Participant Contributions. Pre-tax contributions, after-tax contributions or
both made by a participant to the Employee Plan.
Partners Committee. Committee of the Partnership, composed of representatives
of the partners of the Partnership and two independent members, that manages
and controls the business and affairs of PRIMESTAR Partners pursuant to the
PRIMESTAR Partnership Agreement.
Partnership. PRIMESTAR Partners, L.P., a Delaware limited partnership.
passed by cable. Connected to a cable distribution system without further
extension of the cable distribution network.
Performance Awards. Performance awards granted pursuant to the 1996 Plan.
PORTAL. Private Offerings, Resales and Trading through Automated Linkages;
the National Association of Securities Dealers screen-based automated market
for trading of securities eligible for resale under Rule 144-A under the
Securities Act.
PRIMESTAR(R). The PRIMESTAR programming service.
PRIMESTAR Credit Facility. Bank credit facility obtained by PRIMESTAR
Partners to finance advances to Tempo for payments due in respect of the
Company Satellites under the Satellite Construction Agreement, and supported by
letters of credit arranged for by affiliates of the partners of the Partnership
(other than GEAS).
PRIMESTAR Partners. PRIMESTAR Partners L.P., a Delaware limited partnership.
PRIMESTAR Partnership Agreement. Limited Partnership Agreement of PRIMESTAR
Partners (then known as K Prime Partners, L.P.), dated as of February 8, 1990,
as amended.
PRIMESTAR Satellite Signal. Satellite signal used by PRIMESTAR Partners to
transmit its programming services.
161
<PAGE>
private cable system. Satellite master antenna television system that
provides television programming services to residential MDUs through cable
plant or other equipment that is located entirely on private property and does
not constitute a direct-to home distribution system or a franchised cable
system.
Record Date. November 12, 1996.
Reorganization Agreement. Agreement entered into on the Distribution Date by
TCI, TCIC and a number of other TCI subsidiaries, including the Company and
its subsidiaries, which provided for, among other things, the principal
corporate transactions required to effect the Distribution, the conditions
thereto and certain provisions governing the relationship between the Company
and TCI with respect to and resulting from the Distribution.
ResNet. ResNet Communications, Inc., a Delaware corporation and subsidiary
of LodgeNet.
ResNet Business. ResNet's business of operating as a "private cable
operator" under applicable federal law, providing video on-demand, basic and
premium cable television programming, and other interactive, multi-media
entertainment and information services to subscribers in multiple dwelling
units with facilities that do not use any public right-of-way.
Restricted Shares. Restricted shares granted pursuant to the 1996 Plan.
Restriction Period. Period of time designated by the Committee at the time
of any Award of Restricted Shares, which period of time must elapse before the
Restricted Shares will become vested.
Retained Distributions. Dividends and distributions made or declared with
respect to Restricted Shares before the end of the Restriction Period, other
than such dividends and other distributions designated by the Committee.
SARs. Stock appreciation rights granted pursuant to the 1996 Plan.
Satellite Construction Agreement. Fixed-price satellite construction
agreement between Loral and Tempo dated as of February 22, 1990, pursuant to
which the Company has agreed to purchase the Company Satellites and has an
option to purchase up to three additional satellites.
Satellite No. 2. The Company Satellite which currently serves as ground
spare for Tempo DBS-1.
satellite receiver. See "IRD."
SBCA. Satellite Broadcasting and Communications Association.
SEC. Securities and Exchange Commission.
Securities Act. Securities Act of 1933, as amended.
Senior Subordinated Discount Notes. The 12 1/4% Senior Subordinated Discount
Notes due 2007.
Senior Subordinated Discount Exchange Notes. The 12 1/4% Senior Subordinated
Discount Exchange Notes due 2007 issuable pursuant to the Exchange Offer in
exchange for the Senior Subordinated Discount Notes.
Senior Subordinated Notes. The 10 7/8% Senior Subordinated Notes due 2007.
Senior Subordinated Exchange Notes. The 10 7/8% Senior Subordinated Exchange
Notes due 2007 issuable pursuant to the Exchange Offer in exchange for the
Senior Subordinated Notes.
162
<PAGE>
Series A Common Stock. TCI Satellite Entertainment, Inc. Series A Common
Stock, $1.00 par value per share.
Series A Liberty Media Group Common Stock. Tele-Communications, Inc. Series
A Liberty Media Group Common Stock, $1.00 par value per share.
Series A TCI Group Common Stock. Tele-Communications, Inc. Series A TCI
Group Common Stock, $1.00 par value per share.
Series B Common Stock. TCI Satellite Entertainment, Inc. Series B Common
Stock, $1.00 par value per share.
Series B Liberty Media Group Common Stock. Tele-Communications, Inc. Series
B Liberty Media Group Common Stock, $1.00 par value per share.
Series B TCI Group Common Stock. Tele-Communications, Inc. Series B TCI
Group Common Stock, $1.00 par value per share.
set-top box. See "IRD."
Share Purchase Agreement. Agreement entered into by TCI and the Company on
the Distribution Date, to sell to each other from time to time, at the then
current market price, shares of Series A TCI Group Common Stock and Series A
Common Stock, respectively, as necessary to satisfy their respective
obligations under Adjusted TCI Options and Add-on Company Options held after
the Distribution Date by their respective employees and nonemployee directors.
SHVA. Satellite Home Viewer Act.
State Decree. Consent decree entered in The States of New York, et al. v.
PRIMESTAR Partners, L.P., et al., 93 Civ. 3068-3907 (SDNY, 1994).
Stock Option Agreements. Stock option agreements between the Company and
each of (i) Brendan R. Clouston, (ii) Larry E. Romrell, (iii) Gary S. Howard
and (iv) David P. Beddow, with respect to options granted by TCI to such
persons to purchase shares of Series A Common Stock representing 1.0% (in the
case of each of Messrs. Clouston, Romrell and Howard) and 0.5% (in the case of
Mr. Beddow) of the shares of Company Common Stock issued and outstanding on
the Distribution Date, determined immediately after giving effect to the
Distribution, but before giving effect to any exercise of such options.
Stock Units. Awards of Series A Common Stock and other awards granted by the
Committee under the 1996 Plan that are valued in whole or in part by reference
to, or are otherwise based on, the value of the Series A Common Stock.
Tag-Along Agreement. Agreement dated as of February 8, 1990, originally
entered into by and among Cox Enterprises, Inc., Comcast, Continental,
Newhouse, Tempo, TCIC and TCI Development Corporation, a subsidiary of TCI.
Tandem SAR. SAR granted under the 1996 Plan to the holder of an Option with
respect to all or a portion of the shares of Series A Common Stock subject to
the related Option.
Tax Sharing Agreement. Tax Sharing Agreement among TCI, TCIC and certain
other consolidated subsidiaries of TCI, as amended. In connection with the
Distribution, the Tax Sharing Agreement was amended to provide that the
Company be treated as if it had been a party to the Tax Sharing Agreement
effective July 1, 1995.
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<PAGE>
TCI. Tele-Communications, Inc., a Delaware corporation.
TCI Board. Board of Directors of TCI.
TCIC. TCI Communications, Inc., a Delaware corporation and the subsidiary of
TCI that owns and operates cable systems in the U.S., and its consolidated
subsidiaries.
TCIC Credit Facility. A credit facility, dated as of the Distribution Date,
that provided for TCIC's commitment to make the TCIC Revolving Loans and the
Company's obligations with respect to the TCIC Revolving Loans and the Company
Note. As a result of GE-2 Acceptance, availability under the TCIC Credit
Facility was terminated as of the date of GE-2 Acceptance.
TCIC Letter of Credit. Irrevocable transferable letter of credit issued by
The Bank of New York for the account of TCIC to support the Company's share of
PRIMESTAR Partners' obligations under the GE-2 Agreement.
TCIC Revolving Loans. Loans that were made by TCIC from time to time
pursuant to the TCIC Credit Facility, originally up to an aggregate
outstanding principal amount of $500 million. Availability under the TCIC
Revolving Loans was eliminated in connection with the February 1997 issuance
of the Notes and the March 1997 determination that GE-2 was commercially
operational.
TCI ESPP. TCI Employee Stock Purchase Plan.
TCI Group. TCI's businesses that are not attributed to the Liberty Media
Group.
TCI Group Common Stock. Series A TCI Group Common Stock and Series B TCI
Group Common Stock.
TCI Intercompany Agreements. The Reorganization Agreement, the Fulfillment
Agreement, the Transition Services Agreement and the Stock Option Agreements.
TCI Options. Options to purchase shares of Series A TCI Group Common Stock.
TCI Plan Committee. Committee of the TCI Board of Directors that administers
the TCI Plans.
TCI Plans. Various stock plans of TCI, other than the TCI 1992 Plan.
TCI SARs. Stock appreciation rights with respect to shares of Series A TCI
Group Common Stock.
TCI SATCO. TCI's collective interests in the Digital Satellite Business
before the Distribution Date.
TCI's Net Investment. Cumulative amount invested by TCI and its predecessor
in the Company and its predecessors prior to and including the applicable date
of determination, less the aggregate amount of all dividends and distributions
made by the Company and its predecessors to TCI and its predecessor prior to
and including such date.
TCITV. TCI Technology Ventures, Inc., a Delaware corporation and a
subsidiary of TCI.
TCI UA 1. TCI UA 1, Inc., a Colorado corporation and a subsidiary of TCI.
TCI UA 1 Letter of Credit. Irrevocable transferable letter of credit issued
by Chemical Bank for the account of TCI UA 1, which supports the PRIMESTAR
Credit Facility.
Tempo. Tempo Satellite, Inc., an Oklahoma corporation and a direct, wholly
owned subsidiary of the Company.
Tempo Option Agreement. Agreement entered into by Tempo and PRIMESTAR
Partners in February 1991, granting PRIMESTAR Partners the Tempo Option.
164
<PAGE>
Tempo DBS-1. The Company Satellite that was launched on March 8, 1997 into
the 119(degrees) W.L. orbital location.
Tempo Letter Agreements. Two letter agreements entered into by Tempo and
PRIMESTAR Partners in connection with the Tempo Option and certain related
matters.
Tempo Option. PRIMESTAR Partners' right and option, granted by Tempo under
the Tempo Option Agreement, upon exercise, to purchase or lease 100% of the
capacity of a DBS system to be built, launched and operated by Tempo pursuant
to the FCC Permit.
TIA. Trust Indenture Act of 1939.
Time Warner. Time Warner, Inc.
Transition Services Agreement. Agreement between TCI and the Company,
pursuant to which TCI provides to the Company certain services and other
benefits, including certain administrative and other services that were
provided to the Company by TCI prior to the Distribution.
transponder. The device on a communications satellite, composed of one or
more traveling wave tube amplifiers and related equipment, that receives and
transmits radio signals. For an analog signal, there is one transmitting
channel per transponder. Using currently available digital compression, one
transponder can be converted on average into five or more analog programming
channels.
USSB. United States Satellite Broadcasting Corporation, a Minnesota
corporation.
wireless cable. Any of a number of methods of distributing multichannel
video programming by land-based radio frequency transmissions, including MMDS
and LMDS.
W.L. West Longitude. Satellite orbital positions are identified by their
position over the equator in degrees of longitude East or West of the zero
meridian.
165
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA STATEMENT OF OPERATIONS
TCI Satellite Entertainment, Inc.
Condensed Pro Forma Combined Statement of Operations (unaudited)........ F-2
Condensed Pro Forma Combined Statement of Operations, Year ended
December 31, 1996 (unaudited).......................................... F-3
Notes to Condensed Pro Forma Combined Statement of Operations, Year
ended December 31, 1996 (unaudited) ................................... F-4
HISTORICAL FINANCIAL STATEMENTS
TCI Satellite Entertainment, Inc.
Independent Auditors' Report............................................ F-8
Balance Sheets, December 31, 1996 and 1995.............................. F-9
Combined Statements of Operations, Years ended December 31, 1996, 1995
and 1994............................................................... F-10
Combined Statements of Equity, Years ended December 31, 1996, 1995 and
1994................................................................... F-11
Combined Statements of Cash Flows, Years ended December 31, 1996, 1995
and 1994............................................................... F-12
Notes to Financial Statements, December 31, 1996, 1995 and 1994......... F-13
PRIMESTAR Partners, L.P.
Report of Independent Accountants....................................... F-33
Balance Sheet, December 31, 1996 and 1995............................... F-34
Statement of Operations, December 31, 1996, 1995 and 1994............... F-35
Statement of Changes in Partners' Capital, Years ended December 31,
1996, 1995 and 1994.................................................... F-36
Statements of Cash Flows, Years ended December 31, 1996, 1995 and 1994.. F-37
Notes to Financial Statements, December 31, 1996, 1995 and 1994......... F-38
</TABLE>
F-1
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
DECEMBER 31, 1996
(UNAUDITED)
The accompanying condensed pro forma combined statement of operations of TCI
Satellite Entertainment, Inc. ("TSAT") includes the historical financial
information of (i) certain satellite television assets (collectively, "TCI
SATCO") of TCI Communications Inc. ("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 1, 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 include (i) a 100%
ownership interest in the TCIC business that distributed the PRIMESTAR(R)
programming service to subscribers within specified areas of the continental
United States, (ii) a 100% ownership interest in Tempo Satellite, Inc., and
(iii) a 20.86% aggregate ownership interest in PRIMESTAR Partners L.P.
("PRIMESTAR Partners").
In the following text, the "Company" may, as the context requires, refer to
"TCI SATCO" (prior to the completion of the Distribution), TSAT (subsequent to
the completion of the Distribution) or both. Additionally, unless the context
indicates otherwise, references to "TCI" and "TCIC" herein are to TCI and
TCIC, together with their respective consolidated subsidiaries (other than the
Company).
The following unaudited condensed pro forma combined statement of operations
of the Company for the year ended December 31, 1996 assume that the (i)
Distribution, and (ii) the "Fulfillment Agreement" (see note 2), the
"Transition Services Agreement" (see note 3) and the "Stock Option Agreements"
(see note 4) (collectively, the "TCI Intercompany Agreements") were effective,
as of January 1, 1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Distribution and
the TCI Intercompany Agreements were effective as of January 1, 1996. This
condensed pro forma combined statement of operations of the Company should be
read in conjunction with the historical financial statements and the related
notes thereto of the Company.
F-2
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue............................... $ 417,461 -- 417,461
Operating, selling, general and admin-
istrative expenses................... (410,390) 10,031 (5) (406,481)
(5,074)(6)
(1,048)(7)
Depreciation.......................... (191,355) (20,800)(8) (212,155)
--------- ------- --------
Operating loss...................... (184,284) (16,891) (201,175)
Interest expense...................... (2,023) -- (2,023)
Interest income....................... 2,648 -- 2,648
Share of losses of PRIMESTAR Part-
ners................................. (3,275) -- (3,275)
Other, net............................ 993 -- 993
--------- ------- --------
Loss before income taxes............ (185,941) (16,891) (202,832)
Income tax benefit.................... 45,937 -- (9) 45,937
--------- ------- --------
Net loss............................ $(140,004) (16,891) (156,895)
========= ======= ========
Pro forma net loss per common share... $ (2.36)(10)
========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined statement of
operations.
F-3
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(1) On June 17, 1996, the Board of Directors of TCI (the "TCI Board")
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
and is intended to qualify as a tax-free spinoff.
Stockholders of record of TCI Group Common Stock 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 be 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.
(2) TCIC historically has provided the Company with certain customer
fulfillment services. Charges for such services have been allocated to
the Company by TCIC based on scheduled rates. Effective January 1, 1997,
charges for customer fulfillment services provided by TCI will be made
pursuant to the Fulfillment Agreement entered into by the Company and
TCIC in connection with the Distribution. Pursuant to the Fulfillment
Agreement, TCIC has continued to provide fulfillment services on an
exclusive basis to the Company following the Distribution with respect to
customers of the PRIMESTAR(R) medium power service. Such services, which
include installation, maintenance, retrieval, inventory management and
other customer fulfillment services, are to be performed in accordance
with specified performance standards. The Fulfillment Agreement has an
initial term of two years and is terminable, on 180 days notice to TCIC,
by the Company at any time during the first six months following the
Distribution Date. The cost to the Company of the services provided by
TCIC under the Fulfillment Agreement will exceed the standard charges
allocated to the Company for such services through December 31, 1996. The
Company and TCIC are currently discussing certain proposed changes to the
Fulfillment Agreement, but there can be no assurance that any such
changes will be agreed to or that the Company will not exercise its right
to terminate the Fulfillment Agreement if an acceptable amendment is not
agreed prior to the end of the Company's six-month termination window.
There can be no assurance that the terms of the Fulfillment Agreement are
not more or less favorable than those which could be obtained by the
Company from third parties, or that comparable services could be obtained
by the Company from third parties on any terms if the Fulfillment
Agreement is terminated.
Installation charges from TCIC include direct and indirect costs of
performing installations. The Company has capitalized a portion of such
charges based upon amounts charged by unaffiliated third parties to
perform similar services. Following the Distribution, the Company has
capitalized the full amount of installation fees paid to TCIC pursuant to
the Fulfillment Agreement. In this regard, the installation charges
allocated to the Company by TCIC aggregated $62,461,000 during the year
ended December 31, 1996. If the Fulfillment Agreement had been in effect
on January 1, 1996, the estimated installation fees payable by the Company
to TCIC would have been $86,186,000 during the year ended December 31,
1996. The
F-4
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS--(CONTINUED)
(UNAUDITED)
amount payable in future periods by the Company to TCIC under the
Fulfillment Agreement will be dependent upon the level of fulfillment
services provided by TCIC to the Company.
(3) 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 administrative and other services that were
provided to the Company prior to the Distribution. Pursuant to the
Transition Services Agreement, TCI has also agreed to provide the Company
with certain most-favored-customer rights to programming services that
TCI or a wholly owned subsidiary of TCI may own in the future and access
to any volume discounts that may be available to TCI for purchase of home
satellite dishes, satellite receivers and other equipment. 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),
commencing with the Distribution Date, up to a maximum of $3 million per
month, and reimburse TCI quarterly for direct, out-of-pocket expenses to
third parties. The Transition Services Agreement 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.
(4) In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the
acquisition by each of two executive officers of TCI who are not
employees of the Company (the "TCI Officers"), of 1.0% of the net equity
of the Company. The TCI Board also approved the acquisition by a former
executive officer of TCIC who is also the chief executive officer and a
director of the Company (the "Company Officer"), of 1.0% of the net
equity of the Company and the acquisition by an executive officer of
certain TCI subsidiaries who is also a director, but not an employee, of
the Company (the "TCI Subsidiary Officer"), of 0.5% of the net equity of
the Company. The TCI Board determined to structure such transactions as
grants by the Company to such persons of options to purchase shares of
Series A Common Stock representing 1.0% (in the case of each of the TCI
Officers and the Company Officer) and 0.5% (in the case of the TCI
Subsidiary Officer) of the shares of Series A Common Stock and Series B
Common Stock issued and outstanding on the Distribution Date, determined
immediately after giving effect to the Distribution, but before giving
effect to any exercise of such options (the "Distribution Date Options").
The aggregate exercise price for each such option is equal to 1.0% (in
the case of each of the TCI Officers and the Company Officer) and 0.5%
(in the case of the TCI Subsidiary Officer) of TCI's Net Investment (as
defined below) as of the first to occur of the Distribution Date and the
date on which such option first becomes exercisable, but excluding any
portion of TCI's Net Investment that as of such date is represented by a
promissory note or other evidence of indebtedness from the Company to
TCI. TCI's Net Investment is defined for this purpose as the cumulative
amount invested by TCI and its predecessor in the Company and its
predecessors prior to and including the applicable date of determination,
less the aggregate amount of all dividends and distributions made by the
Company and its predecessors to TCI and its predecessor prior to and
including such date. Distribution Date Options to purchase 2,324,266
shares of Series A Common Stock at a per share exercise price of $8.86
were granted on the Distribution Date, will vest in 20% cumulative
increments on each of the first five anniversaries of February 1, 1996,
and will be exercisable for up to ten years following February 1, 1996.
Pursuant to the Reorganization Agreement, and (in the case of the TCI
Officers and the TCI Subsidiary Officer) in partial consideration for the
capital contribution made by TCI to the Company in connection with the
Distribution, the Company has agreed,
F-5
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS--(CONTINUED)
(UNAUDITED)
effective as of the Distribution Date, to bear all obligations under such
options and to enter into stock option agreements with respect to such
stock options (collectively, the "Stock Option Agreements") with each of
the TCI Officers, the Company Officer and the TCI Subsidiary Officer.
(5) Eliminates the portion of the installation fees allocated to the Company
by TCIC that was not capitalized in the Company's historical combined
financial statements. See note 2.
(6) Represents the estimated additional charges that would have been incurred
by the Company assuming the Transition Services Agreement had been
effective on January 1, 1996. See note 3.
(7) Represents estimated compensation expense resulting from the vesting of
the stock options that were assumed to be granted to the Company Officer
on January 1, 1996 pursuant to the Stock Option Agreements. The
calculation of the estimated compensation expense is based upon the $12
5/8 per share closing price of the Series A Common Stock on December 5,
1996, the first day of trading following the Distribution. See note 4.
(8) Represents the estimated additional depreciation expense that would have
been incurred by the Company assuming (i) the Fulfillment Agreement had
been effective on January 1, 1996 and (ii) the Company had capitalized
all installation fees paid to TCIC under the Fulfillment Agreement. See
note 2.
(9) As a result of the Distribution, the Company is no longer a part of the
TCI consolidated tax group, and accordingly, it is only able to recognize
income tax benefits for financial reporting purposes to the extent that
such benefits offset 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 as of
December 31, 1996. Additionally, during the first several years following
the Distribution, the Company believes that it will incur losses for
income tax purposes. In light of the foregoing factors, the income tax
benefit associated with the pro forma adjustments has not been recognized
in the accompanying condensed pro forma combined statement of operations.
(10) As described in note 1, the Company issued 66,407,608 shares of common
stock pursuant to the Distribution. The pro forma net loss per share
amounts 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 common share assumes weighted
average shares outstanding of 66,408,025 for the year ended December 31,
1996.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TCI Satellite Entertainment, Inc.:
We have audited the accompanying balance sheets of TCI Satellite
Entertainment, Inc., (as defined in note 1) as of December 31, 1996 and 1995
and the related statements of operations, equity, and cash flows for each of
the years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TCI Satellite
Entertainment, Inc., as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 25, 1997
F-7
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 6,560 1,801
Accounts receivable.................................... 24,731 29,192
Less allowance for doubtful accounts................... 4,666 4,819
----------- --------
20,065 24,373
----------- --------
Prepaid expenses....................................... 927 86
Investment in, and related advances to, PRIMESTAR
Partners L.P., ("PRIMESTAR Partners") (note 6)........ 32,240 17,963
Property and equipment, at cost:
Satellite reception equipment........................ 595,249 422,070
Subscriber installation costs........................ 175,553 128,870
Support equipment.................................... 28,332 12,395
Cost of satellites under construction (note 7)....... 457,685 382,900
----------- --------
1,256,819 946,235
Less accumulated depreciation........................ 149,165 57,015
----------- --------
1,107,654 889,220
----------- --------
Other assets (note 8).................................. 12,827 --
----------- --------
$ 1,180,273 933,443
=========== ========
LIABILITIES AND EQUITY
Accounts payable....................................... $ 18,860 11,378
Accrued charges from PRIMESTAR Partners (note 6)....... 37,943 26,420
Accrued charges from TCI Communications, Inc. ("TCIC")
(note 12)............................................. 8,381 --
Other accrued expenses................................. 15,567 11,483
Subscriber advance payments............................ 22,249 13,244
Due to PRIMESTAR Partners (note 7)..................... 457,685 382,900
Debt (note 9).......................................... 247,230 --
Deferred income taxes (note 11)........................ -- 4,434
----------- --------
Total liabilities.................................. 807,915 449,859
----------- --------
Equity:
Preferred stock, $.01 par value; authorized
5,000,000; none issued.............................. -- --
Series A common stock, $1 par value; authorized
185,000,000;
issued 57,946,044 in 1996........................... 57,946 --
Series B common stock, $1 par value; authorized
10,000,000 shares;
issued 8,466,564 in 1996............................ 8,467 --
Additional paid-in capital........................... 521,724 --
Accumulated deficit.................................. (215,779) (75,775)
Due to TCIC (notes 2 and 12)......................... -- 559,359
----------- --------
Total equity....................................... 372,358 483,584
----------- --------
Commitments and contingencies (notes 2, 6, 7, 8, 9, 10,
12 and 13)
$ 1,180,273 933,443
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue:
Programming and equipment rental................ $ 351,548 133,688 18,641
Installation.................................... 65,913 75,215 11,638
--------- ------- -------
417,461 208,903 30,279
--------- ------- -------
Operating costs and expenses:
Programming and other charges from PRIMESTAR
Partners
(note 6)....................................... 188,724 78,250 11,632
Other operating:
TCIC (note 12)................................ 20,365 15,916 4,367
Other......................................... 8,181 1,884 --
Selling, general and administrative:
TCIC (note 12)................................ 18,120 7,817 1,080
Other......................................... 175,000 110,250 8,027
Depreciation (note 3)........................... 191,355 55,488 14,317
--------- ------- -------
601,745 269,605 39,423
--------- ------- -------
Operating loss.................................. (184,284) (60,702) (9,144)
--------- ------- -------
Other income (expense):
Interest expense:
TCIC (note 9)................................. (1,946) -- --
Other......................................... (77) -- --
Interest income................................. 2,648 306 306
Share of losses of PRIMESTAR Partners (note 6).. (3,275) (8,969) (11,722)
Other, net...................................... 993 -- --
--------- ------- -------
(1,657) (8,663) (11,416)
--------- ------- -------
Loss before income taxes........................ (185,941) (69,365) (20,560)
Income tax benefit (note 11)...................... 45,937 21,858 6,872
--------- ------- -------
Net loss........................................ $(140,004) (47,507) (13,688)
========= ======= =======
Pro forma net loss per common share (note 4)...... $ (2.11) (.72)
========= =======
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
COMBINED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN ACCUMULATED TOTAL
SERIES A SERIES B CAPITAL DEFICIT DUE TO TCIC EQUITY
-------- -------- ---------- ----------- ----------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... $ -- -- -- (14,580) 57,929 43,349
Net loss.............. -- -- -- (13,688) -- (13,688)
Allocation of TCIC
expenses............. -- -- -- -- 5,447 5,447
Allocation of TCIC
installation costs... -- -- -- -- 15,369 15,369
Intercompany income
tax allocation....... -- -- -- -- (9,611) (9,611)
Net cash transfers
from TCIC............ -- -- -- -- 79,660 79,660
------- ----- ------- --------- -------- --------
Balance at December 31,
1994................... -- -- -- (28,268) 148,794 120,526
Net loss.............. -- -- -- (47,507) -- (47,507)
Allocation of TCIC
expenses............. -- -- -- -- 23,733 23,733
Allocation of TCIC
installation costs... -- -- -- -- 57,058 57,058
Intercompany income
tax allocation....... -- -- -- -- (36,530) (36,530)
Recognition of
deferred tax assets
in connection with
Intercompany transfer
of certain property
and equipment........ -- -- -- -- 12,136 12,136
Net cash transfers
from TCIC............ -- -- -- -- 354,168 354,168
------- ----- ------- --------- -------- --------
Balance at December 31,
1995................... -- -- -- (75,775) 559,359 483,584
Net loss.............. -- -- -- (140,004) -- (140,004)
Allocation of TCIC
expenses............. -- -- -- -- 38,485 38,485
Allocation of TCIC
installation costs... -- -- -- -- 53,169 53,169
Intercompany income
tax allocation....... -- -- -- -- (70,645) (70,645)
Net cash transfers
from TCIC............ -- -- -- -- 228,622 228,622
Recognition of
deferred tax assets
upon transfer of
PRIMESTAR Partners
investment in
connection with
Distribution (note
11).................. -- -- -- -- 29,142 29,142
Adjustment to reflect
consummation of
Distribution (note
2)................... 57,941 8,467 521,724 -- (838,132) (250,000)
Issuance of Series A
Common Stock upon
conversion of
convertible notes of
a TCIC subsidiary.... 5 -- -- -- -- 5
------- ----- ------- --------- -------- --------
Balance at December 31,
1996................... $57,946 8,467 521,724 $(215,779) -- 372,358
======= ===== ======= ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 5)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(140,004) (47,507) (13,688)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation................................ 191,355 55,488 14,317
Share of losses of PRIMESTAR Partners....... 3,275 8,969 11,722
Deferred income tax expense................. 24,708 14,672 2,739
Other non-cash charges (credits)............ (311) 901 (87)
Changes in operating assets and
liabilities:
Change in receivables..................... 4,364 (21,859) (1,809)
Change in prepaids........................ (841) (86) --
Change in accruals and payables........... 23,650 42,135 5,624
Change in subscriber advance payments..... 9,005 11,480 1,304
--------- -------- --------
Net cash provided by operating
activities.............................. 115,201 64,193 20,122
--------- -------- --------
Cash flows from investing activities:
Capital expended for construction of
satellites................................... (74,785) (104,128) (207,608)
Capital expended for property and equipment... (326,621) (442,782) (109,184)
Additional investments, in and related
advances to, PRIMESTAR Partners.............. (17,552) (17,139) (32,082)
Investment in ResNet Communications, Inc...... (5,458) -- --
Repayment of advances to PRIMESTAR Partners... -- 30,192
--------- -------- --------
Net cash used in investing activities.... (424,416) (564,049) (318,682)
--------- -------- --------
Cash flows from financing activities:
Increase in due to PRIMESTAR Partners......... 74,785 104,128 207,608
Increase in due to TCIC....................... 250,189 397,529 90,952
Borrowings of debt............................ 259,000 -- --
Repayments of debt............................ (263,000) -- --
Payment of deferred financing costs........... (7,000) -- --
--------- -------- --------
Net cash provided by financing
activities.............................. 313,974 501,657 298,560
--------- -------- --------
Net increase in cash and cash
equivalents............................. 4,759 1,801 --
Cash and cash equivalents:
Beginning of period..................... 1,801 -- --
--------- -------- --------
End of period........................... $ 6,560 1,801 --
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(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 2, 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 include (i) a 100%
ownership interest in the TCIC business that distributed 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, several other cable operators, and General Electric
Company, broadcasts satellite entertainment services that are delivered to the
home 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 2. 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 12, the accompanying combined statements of
operations include allocations of certain costs and expenses of TCI. Although
such allocations are not necessarily indicative of the costs that would have
been incurred by the Company on a stand-alone basis, management believes the
resulting allocated amounts are reasonable.
(2) DISTRIBUTION TRANSACTION
General
On June 17, 1996, the Board of Directors of TCI (the "TCI Board") 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.
F-12
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stockholders of record of TCI Group Common Stock 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.
Subsequent to the Distribution, the Company and TCI have operated
independently, and neither has any stock ownership, beneficial or otherwise,
in the other. For the purposes of governing certain of the ongoing
relationships between the Company and TCI after the Distribution, and to
provide mechanisms for an orderly transition, the Company and TCI have entered
into various agreements, including the "Reorganization Agreement (see below),"
the "Fulfillment Agreement (see note 12)," the "Indemnification Agreements
(see note 13)," the "TCIC Credit Facility (see note 9)," the "Transition
Services Agreement (see note 12)," 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 9
and related discussion below.
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 7)
was assumed by TCI in the form of a capital contribution to the Company. In
addition, the Company (i) assumed TCI's obligations under options to be
granted on the Distribution Date to certain key employees of TCI (who are not
employees of the Company) representing, in aggregate, 2.5% of the shares of
Company Common Stock issued and outstanding on the Distribution Date, after
giving effect to the Distribution, and (ii) granted to TCI an option to
purchase up to 4,765,000 shares of Series A Common Stock, at an exercise price
of $1.00 per share, as required by TCI from time to time to meet its
obligations under the conversion features of certain convertible securities of
TCI as such conversion features were adjusted as a result of the Distribution.
See note 10 for related discussion.
F-13
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) 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. Consequently, this change
in policy resulted in increases to the Company's depreciation expense, net
loss and pro forma net loss per share for the year ended December 31, 1996 of
$55,304,000 ($8,754,000 of which relates to periods prior to January 1, 1996)
$41,478,000 ($6,566,000 of which relates to periods prior to January 1, 1996)
and $.62 ($.10 of which relates to periods prior to January 1, 1996),
respectively.
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. This change in estimate resulted in increases to the Company's
depreciation expense, net loss and pro forma net loss per share for the year
ended December 31, 1996 of $7,796,000, $5,847,000 and $.09, respectively.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.
Investment in PRIMESTAR Partners
The Company uses the equity method to account for its investment in
PRIMESTAR Partners. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's share of the net earnings or
losses of PRIMESTAR Partners as they occur, rather than as dividends or other
distributions are received, limited to the extent of the Company's investment
in, and advances and commitments to, PRIMESTAR Partners. The Company's share
of net earnings or losses of PRIMESTAR Partners includes the amortization of
the difference between the Company's investment and its share of the net
assets of PRIMESTAR Partners.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on a
straight-line basis using estimated useful lives of 4 to 6 years (4 to 8 years
through September 30, 1996) for satellite reception equipment and 3 to 10
years for support equipment. Subscriber installation costs are depreciated
over the estimated average life of a subscriber (4 years). Any subscriber
installation costs that have not been fully depreciated at the time service to
a subscriber is terminated are charged to depreciation expense during the
period in which such termination occurs. See note 3.
F-14
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Repairs and maintenance are charged to operations, and betterments and
additions are capitalized. At the time of ordinary retirements of satellite
reception equipment, sales or other dispositions of property, the original
cost and cost of removal of such property are charged to accumulated
depreciation, and salvage, if any, is credited thereto.
The cost of the Company Satellites under construction is comprised of
amounts paid by the Company pursuant to the Satellite Construction Agreement.
See note 7.
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121") requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. The Company adopted Statement No. 121
effective January 1, 1996. Such adoption did not have a significant effect on
the financial position or results of operations of the Company. In accordance
with Statement No. 121, the Company periodically reviews the carrying amount
of its long-lived assets to determine whether current events or circumstances
warrant adjustments to such carrying amounts. The Company considers historical
and expected future net operating losses to be its primary indicators of
potential impairment. Assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets ("Assets"). The
Company deems Assets to be impaired if the Company is unable to recover the
carrying value of its Assets over their expected remaining useful life through
a forecast of undiscounted future operating cash flows directly related to the
Assets. If Assets are deemed to be impaired, the loss is measured as the
amount by which the carrying amount of the Assets exceeds their fair values.
TSAT generally measures fair value by considering sales prices for similar
assets or by discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows. Accordingly,
actual results could vary significantly from such estimates.
Revenue Recognition
Monthly programming and equipment rental revenue is recognized in the period
that services are delivered. Installation revenue is recognized in the period
the installation services are provided to the extent of direct selling costs.
To date, direct selling costs have exceeded installation revenue.
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred.
Residual Sales Commissions
Residual sales commissions, which become payable upon the collection of
programming revenue from certain subscribers, are expensed during the period
in which such commissions become payable. See note 13.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("Statement No. 123") was issued by the Financial
Accounting Standards Board in October 1995. Statement No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans as well as transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees. As allowed
by Statement No. 123, the Company continued to account for stock-based
employee
F-15
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
compensation pursuant to Accounting Principles Board Opinion No. 25. For the
year ended December 31, 1996, the Company estimates that stock compensation
expense would not be materially different under Statement No. 123.
Pro Forma Net Loss Per Common Share
As described in note 2, 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 combined statements of operations assume that
the shares issued pursuant to the Distribution were issued and outstanding
since January 1, 1995. Accordingly, the calculation of the pro forma net loss
per share assumes weighted average shares outstanding of 66,408,025 and
66,407,608 for the years ended December 31, 1996 and 1995, respectively.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(5) SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
Cash paid for interest was $1,946,000 during the year ended December 31,
1996, and was not significant during the years ended December 31, 1995 and
1994. Cash paid for income taxes was not material during the years ended
December 31, 1996, 1995 and 1994.
With the exception of certain non-cash transactions described in notes 11
and 12, 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 combined statements of
cash flows.
The non-cash effects of the Distribution are set forth in the accompanying
combined statements of equity.
Accrued capital expenditures of $7,713,000 at December 31, 1996 have been
excluded from the accompanying combined statements of cash flows.
(6) INVESTMENT IN PRIMESTAR PARTNERS
Summarized unaudited financial information for PRIMESTAR Partners is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
-------- -------
<S> <C> <C>
Financial Position
------------------
Current assets.............................................. $137,048 72,638
Property and equipment, net................................. 18,131 9,990
Cost of satellites under construction....................... 525,746 419,256
Other assets, net........................................... 7,348 14,078
-------- -------
Total assets.............................................. $688,273 515,962
======== =======
PRIMESTAR Credit Facility expected to be refinanced......... $521,000 419,000
Other current liabilities................................... 63,907 37,911
Other liabilities........................................... 4,227 7,210
Partners' capital........................................... 99,139 51,841
-------- -------
Total liabilities and partners' capital................... $688,273 515,962
======== =======
</TABLE>
F-16
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Results of Operations
---------------------
Revenue....................................... $412,999 180,595 27,841
Operating, selling, general and administrative
expenses..................................... (426,561) (216,100) (78,175)
Depreciation and amortization................. (3,261) (2,890) (2,700)
-------- -------- -------
Operating loss.............................. (16,823) (38,395) (53,034)
Other, net.................................... 1,121 (3,642) (2,682)
-------- -------- -------
Net loss.................................... $(15,702) (42,037) (55,716)
======== ======== =======
</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. The PRIMESTAR Credit Facility matures on
June 30, 1997. PRIMESTAR is currently seeking to extend the maturity date of,
or otherwise refinance the PRIMESTAR Credit Facility. See notes 7 and 13.
Since March 10, 1997, PRIMESTAR Partners has broadcast from a medium power
satellite ("GE-2") that was launched on January 30, 1997 by GE American
Communications, Inc. ("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"), it is anticipated that 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. In April 1994, PRIMESTAR Partners began to separately
identify charges which relate to programming services from those which relate
to other items. During the year ended December 31, 1996 and 1995, the charges
from PRIMESTAR Partners included approximately $124,074,000 and $53,006,000,
respectively, for programming services, and $64,650,000 and $25,244,000,
respectively, for other items.
Under the PRIMESTAR Partners limited partnership agreement, the Company has
agreed to fund its share of any capital contributions and/or loans to
PRIMESTAR Partners that might be agreed upon from time to time by the partners
of PRIMESTAR Partners. Additionally, as a general partner of PRIMESTAR
Partners, the Company is liable as a matter of partnership law for all debts
of PRIMESTAR Partners in the event the liabilities of PRIMESTAR Partners were
to exceed its assets. PRIMESTAR Partners has contingent liabilities related to
legal and other matters arising in the ordinary course of business. Management
of PRIMESTAR Partners is unable at this time to assess the impact, if any, of
such matters on PRIMESTAR Partners' results of operations, financial position,
or cash flows.
(7) SATELLITES UNDER CONSTRUCTION
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
F-17
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
("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 "Cost of satellites under construction" 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.
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 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, at current levels of
digital compression, Tempo DBS-1 would be able to deliver 70 to 85 channels of
digital video and music programming, depending on the mix of programming
content, to home satellite dishes of less than 14 inches in diameter. 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
operate Tempo DBS-1 as a complementary service to basic cable and other
channel-constrained analog services, providing DBS services to those system
operators wishing to avoid the high cost of digital plant upgrades, or,
subject to future advances in high compression digital statistical
multiplexing technology, as a stand-alone DBS service.
The Company has had discussions regarding the possible sale of the other
Company Satellite ("Satellite No. 2"), but has not reached agreement regarding
any such transaction. Any such transaction would be subject to the successful
commercial operation of Tempo DBS-1 (for which Satellite No. 2 serves as
ground spare), the prior approval of PRIMESTAR Partners, prior regulatory
approvals, definitive documentation, and other conditions. Pursuant to an
option agreement between Tempo and PRIMESTAR Partners (the "Tempo Option
Agreement"), any proceeds received by the Company from the sale of Satellite
No. 2 would be paid to PRIMESTAR Partners to satisfy certain advances by
PRIMESTAR Partners to the Company to fund construction of the Company
Satellites. There can be no assurance that the Company will be able to sell
Satellite No. 2 on terms acceptable to the Company.
Satellite Launches
Pursuant to the Satellite Construction Agreement, Loral must conduct in-
orbit testing. As noted above, Tempo DBS-1 was launched on March 8, 1997 and
is currently in the process of in-orbit testing. Delivery of a satellite takes
place upon Tempo's acceptance of such satellite after completion of in-orbit
testing ("Delivery"). Subject to certain limits, Loral must reimburse Tempo
for Tempo's actual and reasonable expenses directly incurred as a result of
any delays in the Delivery of satellites. The in-orbit useful life of each
satellite is designed to be a minimum of 12 years. If in-orbit testing
confirms that the satellite conforms fully to specifications and the service
life of the satellite will be at least 12 years, Tempo is required to accept
the satellite. If in-orbit testing
F-18
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
determines that the satellite does not fully conform to specifications but at
least 50% of its transponders are functional and the service life of the
satellite will be at least six years, Tempo is required to accept the
satellite but is entitled to receive a proportionate decrease in the purchase
price. If Loral fails to deliver a satellite, it has 29 months to deliver, at
its own expense, a replacement satellite. Loral may make four attempts to
launch the two Company Satellites; however, if the two Company Satellites are
not delivered in such four attempts, Tempo may terminate the Satellite
Construction Agreement. Tempo also may terminate the contract in the event of
two successive satellite failures.
Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has warranted that
all items other than the satellites delivered under the Satellite Construction
Agreement will be free from defects in materials or workmanship for one year
from the date of their acceptance and will perform in accordance with the
applicable performance specifications. Loral bears the risk of loss of the
Company Satellites until Delivery. Upon Delivery, title and risk of loss pass
to Tempo. However, Loral is obligated to carry risk insurance on each
satellite covering the period from the launch of the satellite through an
operating period of 180 days. Such risk insurance will cover (i) the cost of
any damages due under the Satellite Construction Agreement; (ii) the cost of
delivery of a replacement satellite in the event of a satellite failure; and
(iii) the refund of the full purchase price for each undelivered Company
Satellite if Loral fails to deliver both Company Satellites after four
attempts. Loral is also required to obtain insurance indemnifying Tempo from
any third party claims arising out of the launch of a satellite.
Tempo Option
In February 1990, Tempo entered into 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 is 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 ($457,685,000 at December 31, 1996) is reflected in "Due to PRIMESTAR
Partners" in the accompanying balance sheets. At December 31, 1996, the amount
borrowed by PRIMESTAR Partners under the PRIMESTAR Credit Facility was
$521,000,000, including amounts borrowed to pay interest charges. See note 6.
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.
F-19
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
to Tempo against any payments (other than the Exercise Fee) due under the
Tempo Option (which the Company believes has been exercised) and would not
require Tempo to repay such advances. In the event that it is determined that
the Tempo Option has not been exercised in accordance with its terms, Tempo,
in lieu of repaying such advances, could elect to assign all of its rights
relating to the Company Satellites to PRIMESTAR Partners.
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.
The Company currently intends to pursue its high power strategy through
PRIMESTAR Partners, consistent with such resolution. 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 Tempo DBS-1 pursuant to the Tempo
Option, and there can be no assurances that potential disagreements will not
arise as such agreements are negotiated, the Company does not currently
believe that any such potential disagreement is reasonably likely to have a
material adverse effect on the Company.
(8) OTHER ASSETS
The components of other assets are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred financing costs (a).................................. $ 7,000
Investment in, and advances to, ResNet Communications, Inc.
("ResNet") (b)............................................... 5,827
-------
$12,827
=======
</TABLE>
(a) Represents deferred financing costs incurred in connection with the
Bank Credit Facility. Such costs are amortized over the term of the
Bank Credit Facility. See note 9.
(b) Effective as of October 21, 1996, the Company acquired 4.99% of the
issued and outstanding capital stock of ResNet for a purchase price of
$5,396,000. ResNet was formed by LodgeNet Entertainment Corporation
("LodgeNet"), a Delaware corporation, in February 1996 to engage in the
business of providing video services to subscribers in multiple
dwelling units (the "ResNet Business"). ResNet agreed to purchase from
the Company, at a price that approximates the Company's cost, up to $40
million in satellite reception equipment to be used in connection with
the ResNet Business exclusively, over a five year period (subject to a
one-year extension at the option of ResNet if ResNet has not purchased
the full $40 million in equipment during the five-year initial term).
The Company also agreed to make a subordinated convertible term loan to
ResNet, in the principal amount of $34,604,000, the proceeds of which
can be used only to purchase such equipment from the Company. The term
of the loan is five years with an option by ResNet to extend the term
for one additional year. The total principal and accrued and unpaid
interest under the loan is convertible over a four-year period into
shares of common stock of ResNet representing an additional 32% of the
issued and outstanding common stock of ResNet. The Company's only
recourse with respect to repayment of the loan is conversion into
ResNet stock or warrants as described below. Under current
F-20
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
interpretations of the FCC rules and regulations related to
restrictions on the provision of cable and satellite master antenna
television services in certain areas, the Company could be prohibited
from holding 5% or more of the stock of ResNet and consequently could
not exercise the conversion rights under the convertible loan
agreement. The Company is required to convert the convertible loan at
such time as conversion would not violate such currently applicable
regulatory restrictions.
In addition, ResNet granted the Company an option to acquire an
additional 13.01% of the issued and outstanding common stock of ResNet
at appraised fair market value at the time of exercise of the option.
The option is exercisable between December 21, 1999 and the maturity of
the convertible loan.
The Company also entered into a long-term signal availability agreement
with ResNet, pursuant to which the Company is committed to transport
for a fee to certain defined private cable systems owned and operated
by ResNet, the satellite signal used by PRIMESTAR Partners to transmit
the PRIMESTAR(R) programming service (the "PRIMESTAR Satellite Signal")
or the signal of a substantially comparable service. The Company is
acting solely to make the PRIMESTAR Satellite Signal available to
ResNet and is not acting as a distributor of any PRIMESTAR(R)
programming services to ResNet. ResNet must obtain its own rights from
the applicable programming networks to receive the programming services
and to distribute them to ResNet's subscribers.
The National Digital Television Center of TCI ("NDTC") has the right
from PRIMESTAR Partners to use the PRIMESTAR Satellite Signal for
delivery of programming for the benefit of third parties, including
private cable systems (the "Simultaneous Use Rights"). NDTC has agreed
with the Company that private cable systems designated by the Company,
including the ResNet private cable systems, will receive the transport
of the PRIMESTAR Satellite Signal by NDTC in exchange for the payment
by the Company of a per subscriber per video program signal. The
agreement between the Company and NDTC is coextensive with the
agreement between NDTC and PRIMESTAR Partners, expiring on March 31,
2001, and there is no assurance that the Company will continue to have
the ability to make the PRIMESTAR Satellite Signal available after that
date.
In its agreement with ResNet, the Company has committed to make the
PRIMESTAR Satellite Signal or the signal of a substantially comparable
service available for a term that extends substantially beyond March
31, 2001. If the Company loses its contractual ability to make the
PRIMESTAR Satellite Signal available and is not able to make the signal
of a substantially comparable service available, the Company is
obligated to reimburse ResNet for its costs in obtaining a digital
signal from another source, including the cost of replacement equipment
if the new digital signal is not compatible with ResNet's equipment.
While it is not possible at this time to quantify the amount that the
Company would be obligated to pay to ResNet under the circumstances
described above, the Company believes that the costs could be
significant, particularly if it were to lose its ability to make a
signal available towards the end of its agreement with ResNet.
Counsel to PRIMESTAR Partners has advised the Company of the
Partnership's position that there are certain preconditions to NDTC's
Simultaneous Use Rights which have not yet been satisfied and that such
rights are not assignable by NDTC to the Company. The Company believes
that its transaction with ResNet and similar transactions are permitted
under the agreements between NDTC and PRIMESTAR Partners. The Company
does not believe that any potential dispute with the Partnership
regarding this issue is likely to have a material adverse effect on the
Company.
F-21
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) DEBT
The components of debt are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Bank Credit Facility (a)........................................ $246,000
TCIC Credit Facility (b)........................................ --
Other........................................................... 1,230
--------
$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 available commitments under the Bank Credit Facility were increased
from $350,000,000 to $750,000,000, 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 (9.75% at December 31, 1996). In addition, the Company is
required to pay a commitment fee equal to 0.250% on unavailable
commitments and 0.375% on the average daily unused portion of the
available commitments, payable quarterly in arrears and at maturity.
Aggregate commitment fees during the year ended December 31, 1996 were
not significant.
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 each 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 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.
Subsequent to December 31, 1996, 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 13.
(b)TCIC Credit Facility
In connection with the Distribution, the Company and TCIC entered into
the TCIC Credit Facility to provide for the terms of the Company Note
and to provide for a revolving credit facility (the "TCIC Revolving
Loans"). The TCIC Credit Facility required the Company to use its best
efforts to obtain
F-22
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
external debt or equity financing after the Distribution Date and
provided for mandatory prepayment of the TCIC Revolving Loans and the
Company Note from the proceeds thereof. As described in (a) above, the
initial borrowings under the Bank Credit Facility were used to repay
the Company Note in full. In connection with the February 1997 issuance
of the Notes (see note 15) and the March 1997 determination that GE-2
was commercially operational, borrowing availability pursuant to the
TCIC Credit Facility was terminated.
As of December 31, 1996, annual maturities of the Company's debt for each of
the next five years were as follows (amounts in thousands):
<TABLE>
<S> <C>
1997................................................................. $321
1998................................................................. 324
1999................................................................. 578
2000................................................................. --
2001................................................................. --
</TABLE>
The Company believes that the fair value and the carrying value of the
Company's debt were approximately equal at December 31, 1996.
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" at maturity, 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 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 Senior
Subordinated Discount Notes at specified redemption prices. The Notes were not
originally registered under the Securities Act of 1933, as amended (the
"Securities Act") and the Company may incur interest penalties in the event
that the Notes are not exchanged by July 5, 1997, for similar securities that
are registered under the Securities Act, and under certain other circumstances
relating to such exchange.
(10) STOCKHOLDERS' EQUITY
Common Stock
The Series A Common Stock has one vote per share and the Series B Common
Stock has ten votes per share. Each share of Series B Common Stock is
convertible, at the option of the holder, into one share of Series A Common
Stock.
F-23
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock
TSAT is authorized to issue 5,000,000 shares of Preferred Stock. The
Preferred Stock may be issued from time to time as determined by the Board of
Directors, without stockholder approval. Such Preferred Stock may be issued in
such series and with such designations, preferences, conversion or other
rights, voting powers, qualifications, limitations, or restrictions as shall
be stated or expressed in a resolution or resolutions providing for the issue
of such series adopted by the Board of Directors. The Board of Directors has
not authorized the issuance of any shares of Preferred Stock and has no
current plans for the issuance of any shares of Preferred Stock.
Employee Benefit Plans
TSAT's Employee Stock Purchase Plan (the "TSAT ESPP"), which became
effective on January 1, 1997, provides eligible employees with an opportunity
to invest in TSAT and to create a retirement fund. Terms of the TSAT ESPP
provide for eligible employees to contribute up to 10% of their compensation
to a trust for investment in TSAT common stock. TSAT, by annual resolution of
the TSAT Board of Directors, may elect to contribute up to 100% of the amount
contributed by employees.
Stock Options
On the Distribution Date, the Company Board adopted, and TCI as the sole
stockholder of the Company prior to the Distribution, approved, the TCI
Satellite Entertainment, Inc. 1996 Stock Incentive Plan (the "1996 Plan"). The
1996 Plan provides for awards to be made in respect of a maximum of 3,200,000
shares of Series A Common Stock (subject to certain anti-dilution
adjustments). Awards may be made as grants of stock options, stock
appreciation rights ("SARs"), restricted shares, stock units, performance
awards or any combination thereof (collectively, "Awards"). Awards may be made
to employees and to consultants and advisors to the Company who are not
employees. Shares of Series A Common Stock that are subject to Awards that
expire, terminate or are annulled for any reason without having been exercised
(or deemed exercised, by virtue of the exercise of a related SAR), or are
forfeited prior to becoming vested, will return to the pool of such shares
available for grant under the 1996 Plan.
In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the acquisition
by each of two executive officers of TCI who are not employees of the Company
(the "TCI Officers"), of 1.0% of the net equity of the Company. The TCI Board
also approved the acquisition by a former executive officer of TCIC who is
also the chief executive officer and a director of the Company (the "Company
Officer"), of 1.0% of the net equity of the Company and the acquisition by an
executive officer of certain TCI subsidiaries who is also a director, but not
an employee, of the Company (the "TCI Subsidiary Officer"), of 0.5% of the net
equity of the Company. The TCI Board determined to structure such transactions
as grants by the Company to such persons of options to purchase shares of
Series A Common Stock representing 1.0% (in the case of each of the TCI
Officers and the Company Officer) and 0.5% (in the case of the TCI Subsidiary
Officer) of the shares of Series A Common Stock and Series B Common Stock
issued and outstanding on the Distribution Date, determined immediately after
giving effect to the Distribution, but before giving effect to any exercise of
such options (the "Distribution Date Options"). The aggregate exercise price
for each such option is equal to 1.0% (in the case of each of the TCI Officers
and the Company Officer) and 0.5% (in the case of the TCI Subsidiary Officer)
of TCI's Net Investment (as defined below) as of the first to occur of the
Distribution Date and the date on which such option first becomes exercisable,
but excluding any portion of TCI's Net Investment that as of such date is
represented by a promissory note or other evidence of indebtedness from the
Company to TCI. TCI's Net Investment is defined for this purpose as the
cumulative amount invested by TCI and its predecessor in the Company and its
predecessors prior to and including the applicable date of determination, less
the aggregate amount of all dividends and distributions made by the Company
and its predecessors to TCI and its predecessor prior to and including such
date. Distribution Date Options to purchase 2,324,266 shares of Series A
Common Stock at a per share price of $8.86 were granted on the Distribution
Date, will vest in 20% cumulative increments
F-24
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
in each of the first five anniversaries of February 1, 1996, and will be
exercisable for up to ten years following February 1, 1996.
The Company Officer received 664,076 of the Distribution Date Options and
such options were granted pursuant to the 1996 Plan. As of the grant date, the
Distribution Date Options received by the Company Officer had an estimated
aggregate fair value of $5,806,000. Such estimated fair value is based on the
Black-Scholes model and is stated in current annualized dollars on a present
value basis. The key assumptions used in the model for purposes of this
calculation include the following: (a) a 6.22% discount rate; (b) a 35%
volatility factor, (c) the 10-year option term; (d) the closing price of
Series A Common Stock on December 5, 1996; and (e) a per share exercise price
of $8.86. The actual value that the Company Officer may realize will depend
upon the extent to which the stock price exceeds the exercise price on the
date the option is exercised. Accordingly, the value realized by the Company
Officer will not necessarily be the value determined by the model.
Compensation expense with respect to the Distribution Date Options held by the
Company Officer aggregated $95,000 during the year ended December 31, 1996.
Pursuant to the Reorganization Agreement, and (in the case of the TCI
Officers and the TCI Subsidiary Officer) in partial consideration for the
capital contribution made by TCI to the Company in connection with the
Distribution, the Company agreed, effective as of the Distribution Date, to
bear all obligations under such options and to enter into stock option
agreements with respect to such options with each of the TCI Officers, the
Company Officer and the TCI Subsidiary Officer
Subsequent to December 31, 1996, certain key employees of TSAT were granted,
pursuant to the 1996 Plan, an aggregate of 820,000 options in tandem with
stock appreciation rights to acquire shares of Series A Common Stock at a per
share exercise price of $8.00, and an aggregate of 325,000 restricted shares
of Series A Common Stock. Each such grant of options with tandem appreciation
rights vests evenly over five years with such vesting period beginning January
1, 1997, first become exercisable on January 1, 1998 and expires on December
31, 2006. Each such grant of restricted shares vests as to 50% on January 1,
2001, and as to the remaining 50% on January 1, 2002.
Other
In connection with the Distribution, TCI and the Company also entered into a
"Share Purchase Agreement" to sell to each other from time to time, at the
then current market price, shares of Series A TCI Group Common Stock and
Series A Common Stock, respectively, as necessary to satisfy their respective
obligations after the Distribution Date under certain stock options and SARS
held by their respective employees and non-employee directors.
At December 31, 1996, there were 2,324,266, 1,938,173 and 4,765,000 shares
of Series A Common Stock reserved for issuance pursuant to the Distribution
Date Options, the Share Purchase Agreements and the Reorganization Agreement,
respectively, (see note 2). In addition, as a result of the above-described
convertibility feature of the Series B Common Stock, one share of Series A
Common Stock is reserved for each share of outstanding Series B Common Stock.
(11) INCOME TAXES
Prior to the Distribution, the Company was included in the consolidated
Federal and state income tax returns of TCI. Income tax benefit for the
Company was based on those items in TCI's consolidated calculation applicable
to the Company. Intercompany tax allocation represented an apportionment of
tax expense or benefit (other than deferred taxes) among subsidiaries of TCI
in relation to their respective amounts of taxable earnings or losses. The
payable or receivable arising from the intercompany tax allocation was
recorded as an increase or decrease in "Due to TCIC," as reflected in the
accompanying balance sheets. Effective as of the Distribution Date, the
Company became a separate tax paying entity, and accordingly, is no longer a
part of the TCI consolidated tax group.
F-25
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. Beginning on the July 1, 1995 effective date, TCIC is
responsible to TCI for its share of current consolidated income tax
liabilities. TCI is responsible to TCIC to the extent that TCIC's income tax
attributes generated after the effective date are utilized by TCI to reduce
its consolidated income tax liabilities. Accordingly, all tax attributes
generated by TCIC's operations after the effective date including, but not
limited to, net operating losses, tax credits, deferred intercompany gains,
and the tax basis of assets are inventoried and tracked for the entities
comprising TCIC. The Company's intercompany income tax allocation has been
calculated in accordance with the Tax Sharing Agreement. 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.
Income tax benefit (expense) for the years ended December 31, 1996, 1995 and
1994 consists of (amounts in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1996:
Intercompany allocation......................... $70,645 -- 70,645
Federal......................................... -- (17,699) (17,699)
State and local................................. -- (7,009) (7,009)
------- ------- -------
$70,645 (24,708) 45,937
======= ======= =======
Year ended December 31, 1995:
Intercompany allocation......................... $36,530 -- 36,530
Federal......................................... -- (11,040) (11,040)
State and local................................. -- (3,632) (3,632)
------- ------- -------
$36,530 (14,672) 21,858
======= ======= =======
Year ended December 31, 1994:
Intercompany allocation......................... $ 9,611 -- 9,611
Federal......................................... -- (2,254) (2,254)
State and local................................. -- (485) (485)
------- ------- -------
$ 9,611 (2,739) 6,872
======= ======= =======
</TABLE>
Income tax benefit (expense) differs from the amounts computed by applying
the Federal income tax rate of 35% as a result of the following (amounts in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax benefit................ $ 65,079 24,278 7,196
State and local income taxes, net of Federal
income tax benefit............................ (2,672) (2,361) (315)
Change in valuation allowance.................. (16,371) -- --
Other.......................................... (99) (59) (9)
--------- ------- ------
$ 45,937 21,858 6,872
========= ======= ======
</TABLE>
F-26
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
-------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards........................ $ 21,628 6,668
Investment in PRIMESTAR Partners:
Due to an increase in tax basis upon transfer from TCIC
to
the Company........................................... 29,142 --
Due principally to losses recognized for financial
statement purposes in excess of losses recognized for
tax purposes.......................................... 957 1,049
Future deductible amounts principally due to accruals
deductible in
later periods........................................... 1,631 1,906
-------- ------
Total deferred tax assets................................ 53,358 9,623
Less-valuation allowance................................. (16,371) --
-------- ------
Net deferred tax assets.................................... 36,987 9,623
Deferred tax liability-
Property and equipment, principally due to differences in
depreciation net of increase in tax basis resulting from
intercompany transfer................................... 36,987 14,057
-------- ------
Net deferred tax liability................................. $ -- 4,434
======== ======
</TABLE>
On February 22, 1995, the assets (primarily property and equipment) and
liabilities comprising the TCIC business that distributed the PRIMESTAR(R)
programming service were transferred from certain subsidiaries of TCIC to the
predecessor of TSAT. Such transfer, which resulted in an increased tax basis
for such assets, was recorded at TCIC's carryover basis for financial
reporting purposes. In connection with such transfers, the Company recorded an
$12,136,000 non-cash increase to the intercompany amount owed to TCIC, and an
$12,136,000 non-cash decrease to the Company's deferred tax liability.
Immediately prior to the Distribution, the investment in PRIMESTAR Partners
was transferred from TCIC to the Company. Such transfer, which resulted in an
increased tax basis for the investment in PRIMESTAR Partners, was recorded at
TCIC's carryover basis for financial reporting purposes. In connection with
such transfer, the Company recorded a $29,142,000 non-cash increase to the
intercompany account owed to TCIC and $29,142,000 non-cash decrease to the
Company's deferred tax liability.
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable
to deductible temporary differences will be realized to the extent of future
reversals of existing taxable temporary differences.
At December 31, 1996, the Company had net operating loss carry forwards for
income tax purposes aggregating approximately $59,790,000 of which, if not
utilized to reduce taxable income in future periods, $13,967,000 expire in
2009, $39,278,000 expire in 2010 and $6,545,000 expire in 2011.
(12) 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 2, all but $250,000,000 of this
intercompany account was forgiven in connection with the Distribution.
Subsequent to the Distribution Date,
F-27
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the effects of all transactions (other than those related to the TCIC Credit
Facility) will be reflected in a non- interest bearing account between the
Company and TCIC to be settled periodically in cash.
TCIC provides certain installation, maintenance, retrieval and other
customer fulfillment services to the Company. The costs associated with such
services have been allocated to the Company based upon a standard charge for
each of the various customer fulfillment activities performed by TCIC. During
the years ended December 31, 1996, 1995 and 1994, the Company's capitalized
installation costs included amounts allocated from TCIC of $53,169,000,
$57,058,000 and $15,369,000, respectively. Maintenance, retrieval and other
operating expenses allocated from TCIC to the Company aggregated $20,365,000,
$15,916,000 and $4,367,000 during the years ended December 31, 1996, 1995 and
1994, respectively.
Effective January 1, 1997, charges for customer fulfillment services
provided by TCI will be made pursuant to the Fulfillment Agreement entered
into by the Company and TCIC in connection with the Distribution. Pursuant to
the Fulfillment Agreement, TCIC has continued to provide fulfillment services
on an exclusive basis to the Company following the Distribution with respect
to customers of the PRIMESTAR(R) medium power service. Such services, which
include installation, maintenance, retrieval, inventory management and other
customer fulfillment services, are to be performed in accordance with
specified performance standards. The Fulfillment Agreement has an initial term
of two years and is terminable, on 180 days notice to TCIC, by the Company at
any time during the first six months following the Distribution Date. The cost
to the Company of the services provided by TCIC under the Fulfillment
Agreement will exceed the standard charges allocated to the Company for such
services through December 31, 1996. The Company and TCIC are currently
discussing certain proposed changes to the Fulfillment Agreement, but there
can be no assurance that any such changes will be agreed to or that the
Company will not exercise its right to terminate the Fulfillment Agreement if
an acceptable amendment is not agreed prior to the end of the Company's six-
month termination window. There can be no assurance that the terms of the
Fulfillment Agreement are not more or less favorable than those which could be
obtained by the Company from third parties, or that comparable services could
be obtained by the Company from third parties on any terms if the Fulfillment
Agreement is terminated.
TCIC also provides corporate administrative services to the Company. Such
administrative expenses, which were allocated from TCIC to the Company based
primarily on the estimated cost of providing the service, aggregated
$18,120,000, $7,817,000 and $1,080,000 during the years ended December 31,
1996, 1995 and 1994, respectively.
Effective on the Distribution Date, charges for administrative services
provided by TCIC are 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
F-28
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Certain key employees of the Company hold stock options in tandem with SARs
with respect to certain common stock of TCI. In connection with the
Distribution, the Company assumed the stock compensation liability with
respect to such TCI options and SARs. Estimates of the compensation related to
the options and/or SARs granted to employees of the Company have been recorded
in the accompanying financial statements, but are subject to future adjustment
based upon the market value of the underlying TCI common stock and,
ultimately, on the final determination of market value when the rights are
exercised. Non-cash increases (decreases) to such estimated stock compensation
liability, which are included in the above-described TCIC administrative
expense allocations, aggregated $(541,000), $901,000 and ($87,000) during the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company has entered into indemnification agreements with TCIC. See note
13.
(13) COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $10,600,000.
In 1994, the Company began to engage 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
subscribers. As part of the compensation for such services, the Company pays
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).
Residual payments to Master Agents aggregated $11,848,000 and $2,178,000
during 1996 and 1995, respectively and were not significant in 1994.
The Company leases business offices and uses certain equipment under lease
arrangements. Rental expense under such arrangements amounted to $2,095,000
and $1,257,000 in 1996 and 1995 and was not significant in 1994. It is
expected that, in the normal course of business, expiring leases will be
renewed or replaced by leases on other properties; thus, it is anticipated
that future minimum lease commitments will not be less than the rental expense
incurred during 1995.
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.
Subsequent to December 31, 1996, 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 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 December 31, 1996. See notes
6 and 7.
F-29
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Subsequent to December 31, 1996, 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 6, 7 and 9.
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 9.
Subsequent to December 31, 1996, TCI agreed to cause TCI UA 1 to renew the
letter of credit arranged by them 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 income before depreciation and
amortization. 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 6 and 7.
The International Bureau (the "International Bureau") of the FCC 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, the satellite now used to provide the PRIMESTAR(R)
service. 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 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 or results of operations.
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.
F-30
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996:
Revenue................................... $ 95,760 97,887 106,602 117,212
Operating loss............................ $(19,154) (27,352) (34,760) (103,018)
Income tax benefit........................ $ 5,867 9,003 10,936 20,131
Net loss.................................. $(13,571) (19,317) (23,706) (83,410)
Pro forma net loss per common share....... $ (.20) (.29) (.36) (1.26)
1995:
Revenue................................... $ 24,098 37,513 58,808 88,484
Operating loss............................ $ (5,676) (9,345) (9,900) (35,781)
Income tax benefit........................ $ 2,563 4,267 3,603 11,425
Net loss.................................. $ (5,411) (7,625) (9,350) (25,121)
Pro forma net loss per common share....... $ (.08) (.12) (.14) (.38)
</TABLE>
The increased net loss during the fourth quarter of 1996 is primarily
attributable to changes in the Company's depreciation policies. See note 3.
The increased net loss during the fourth quarter of 1995 is primarily
attributable to the overall increase in expenses that resulted from the
Company's efforts to increase its subscriber base.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
PRIMESTAR Partners, L.P.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' capital and of cash flows present fairly,
in all material respects, the financial position of PRIMESTAR Partners, L.P.
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 2 to the
financial statements, the Partnership has suffered recurring losses from
operations and its 1997 operating budget reflects cash requirements in excess
of the current aggregate capital commitment of its partners. In addition, the
Partnership's credit facility becomes due in June 1997. These matters raise
substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
February 14, 1997, except as to Note 13,
which is as of March 9, 1997.
F-32
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 12,145 $ 10,956
Restricted cash.......................................... 803 689
Accounts receivable--related parties, net................ 91,024 60,444
Prepaid and other current assets......................... 33,076 549
-------- --------
Total current assets................................... 137,048 72,638
Property and equipment, net................................ 18,131 9,990
Costs of satellites under construction..................... 525,746 419,256
Other assets, net.......................................... 7,348 14,078
-------- --------
$688,273 $515,962
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Borrowings under credit facility expected to be
refinanced.............................................. $521,000
Current portion of satellite obligation.................. 255
Accounts payable and other accrued expenses.............. 47,623 $ 29,132
Accounts payable--related party.......................... 7,501 4,690
Accrued payroll.......................................... 3,990 2,373
Accrued interest......................................... 4,538 1,716
-------- --------
Total current liabilities.............................. 584,907 37,911
Borrowings under long-term credit facility................. 419,000
Long-term obligation--satellite............................ 4,227
Deferred rent--related party............................... 7,210
-------- --------
Total liabilities...................................... 589,134 464,121
-------- --------
Commitments and contingencies
Partners' capital:
Contributed capital...................................... 314,968 251,968
Accumulated loss......................................... (215,829) (200,127)
-------- --------
Total partners' capital.................................... 99,139 51,841
-------- --------
$688,273 $515,962
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Subscriber revenues--related parties........... $412,999 $180,595 $ 27,841
Interest....................................... 1,845 1,252 405
-------- -------- --------
414,844 181,847 28,246
-------- -------- --------
Expenses:
Operating...................................... 316,763 147,948 41,832
Selling, general and administrative............ 109,798 68,152 36,343
Depreciation and amortization.................. 3,261 2,890 2,700
Interest expense............................... 737 8 61
Loss on deferred option payments............... 4,886 1,767
(Gain) loss on disposal of property and
equipment..................................... (13) 1,259
-------- -------- --------
430,546 223,884 83,962
-------- -------- --------
Net loss......................................... $(15,702) $(42,037) $(55,716)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CONTRIBUTED ACCUMULATED
CAPITAL LOSS TOTAL
----------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1993................... $105,606 $(102,374) $ 3,232
Capital contributions.......................... 78,300 78,300
Net loss....................................... (55,716) (55,716)
-------- --------- -------
Balance at December 31, 1994................... 183,906 (158,090) 25,816
Capital contributions.......................... 68,062 68,062
Net loss....................................... (42,037) (42,037)
-------- --------- -------
Balance at December 31, 1995................... 251,968 (200,127) 51,841
Capital contributions.......................... 63,000 63,000
Net loss....................................... (15,702) (15,702)
-------- --------- -------
Balance at December 31, 1996................... $314,968 $(215,829) $99,139
======== ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(15,702) $(42,037) $(55,716)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 4,178 2,890 2,700
Loss on deferred option payments............... 4,886 1,767
(Gain) loss on disposal of property and
equipment..................................... (13) 1,259
Change in assets and liabilities:
Accounts receivable, related parties.......... (30,580) (48,245) (10,379)
Deposits...................................... (28) 757 (808)
Prepaid and other assets...................... (23,637) (13,024) (1,220)
Accounts payable, accrued expenses, and
accrued interest............................. 22,930 18,984 7,767
Accounts payable--related party............... 2,811 1,846 2,844
Deferred rent................................. (7,210) (3,968) (2,598)
-------- -------- --------
Net cash used in operating activities........ (47,251) (77,911) (54,384)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment and payments
on satellite construction...................... (116,345) (133,867) (224,097)
-------- -------- --------
Cash flows from financing activities:
Increase in deferred financing fees............. (1,573)
Loans from partners............................. 48,184
Repayment of loans from partners................ (119,348)
Capital contributions........................... 63,000 68,062 78,300
Borrowings under credit facility................ 102,000 129,000 290,000
Principal payments of long-term satellite
obligation..................................... (101)
Increase in restricted cash..................... (114) (298) (391)
-------- -------- --------
Net cash provided by financing activities.... 164,785 196,764 295,172
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 1,189 (15,014) 16,691
Cash and cash equivalents at beginning of year... 10,956 25,970 9,279
-------- -------- --------
Cash and cash equivalents at end of year......... $ 12,145 $ 10,956 $ 25,970
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BUSINESS
PRIMESTAR Partners, L.P. (the Partnership), was formed on February 8, 1990
as a Delaware limited partnership.
The purpose of the Partnership is to engage in the business of acquiring,
originating and/or providing television programming services delivered by
satellite to subscribers through a network of distributors throughout the
continental United States. Presently, there are approximately 700 such
distributors, all of which are owned by the Partnership's partners. In
addition, the Partnership purchases a portion of its programming services from
affiliates of certain partners.
The Partnership currently delivers programming services from leased
transponders on a medium-powered satellite (K-2). This satellite will be
replaced when another medium-power satellite (GE-2), which was launched
January 30, 1997, becomes operational (see Notes 7 and 13). The Partnership
also has two high-powered satellites under construction, one of which will be
launched in the first quarter of 1997 (see Note 13). The other high-powered
satellite will be used as a ground spare or backup satellite until the
launched high-powered satellite is operational, or otherwise used, deployed or
disposed of as determined by the Partnership (see Note 6).
Satellites are subject to significant risks including manufacturing defects
affecting the satellite or its components, launch failure resulting in damage
to or destruction of the satellite, or incorrect orbital placement, and damage
in orbit caused by asteroids, space debris or electrostatic storms. Such
factors can prevent or limit commercial operation or reduce the satellite's
useful life.
Capital contributions:
In accordance with the limited partnership agreement (the Agreement),
capital contributions by the partners are required as follows:
. Cash contributions: Nine of the Partnership's ten partners made initial
contributions of an aggregate $38,000 in cash. Eight of those nine
partners and one former partner have contributed an additional aggregate
$270,300 in cash as of December 31, 1996 and have made additional
aggregate cash contributions of $28,400 in 1997.
. In-kind contribution: In return for an initial 15% ownership interest in
the Partnership, a partner leased certain satellite transponders to the
Partnership at below market rates. This in-kind contribution was
recorded at its estimated fair market value of $6,700 as of the
inception of the Partnership. (See Notes 7 and 10.)
Distributions and allocations:
Net profits and net losses are allocated to each partner in accordance with
their stated percentage ownership interests, as defined by the Agreement. The
amount of annual cash distributions, if any, is determined by the Partners
Committee. Such distributions are made to the partners on a pro rata basis, in
accordance with partners' respective stated percentage ownership interests as
of the date of such distributions. Liquidation distributions and distributions
of any net proceeds from capital transactions are made pro rata to partners
with positive capital account balances (as defined), until such balances have
been reduced to zero; the balance of such distributions, if any, is
distributed pro rata in proportion to the partners' stated percentage
ownership interests. For purposes of
F-37
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
all distributions and allocations, respective partners' percentage ownership
interests are determined as outlined in the Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY
Basis of Accounting and Liquidity:
The Partnership prepares its financial statements on the accrual basis of
accounting. The financial statements have been prepared assuming that the
Partnership will continue as a going concern. The Partnership has suffered
recurring losses from operations and its 1997 operating budget reflects cash
requirements which are in excess of the current aggregate capital commitment
of its partners. In addition, the Partnership's credit facility becomes due in
June 1997 (see Note 8). These matters raise substantial doubt about the
Partnership's ability to continue as a going concern.
Management believes that the Partnership has adequate capital to continue
normal operating activity through approximately April 1997. Presently, the
partners determine the amount of additional capital commitments on a quarterly
basis. The Partnership is currently negotiating to refinance its credit
facility and management believes either such refinancing will occur prior to
its expiration or that the due date of the current facility will be extended
until refinancing occurs. There can be no assurance the Partnership will be
able to refinance the credit facility.
Revenue Recognition:
Subscriber revenues are billed to distributors and recognized when related
programming services are delivered. Included in accounts receivable at
December 31, 1996 and 1995 are $39,489 and $27,244, respectively, of unbilled
programming services.
Cash and cash equivalents and restricted cash:
Cash and cash equivalents are defined as short-term, highly liquid
investments with original maturities of three months or less. Restricted cash
represents unexpended borrowings under the credit facility which must be used
for the satellite construction project and interest and fees associated with
the credit facility.
Property and Equipment:
Depreciation is provided over the estimated useful lives of the assets (5 to
7 years) using the straight-line method. Maintenance and repairs are expensed
as incurred and the cost of betterments are capitalized.
Intangible assets:
The intangible asset associated with the in-kind capital contribution is
being amortized over the term of the related lease agreement and is fully
amortized as of December 31, 1996 (see Note 7).
Deferred financing fees:
Deferred financing fees of $1,732 at December 31, 1996, 1995 and 1994,
relate to securing of the credit facility associated with the satellite
construction project (see Note 8). Fees are being amortized over the life of
the credit facility. Amortization expense was $577 for the years ended
December 31, 1996 and 1995 and $470 for the year ended December 31, 1994. See
Note 6 regarding capitalization of deferred financing fees.
F-38
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income tax reporting:
Federal and state income taxes are payable by the individual partners;
therefore, no provision or liability for income taxes is reflected in the
financial statements. Differences between bases of assets and liabilities for
tax and financial reporting purposes result primarily from expensing of option
payments, capitalization of startup costs and recognition of expense relating
to operating leases for tax purposes.
Fair value of financial instruments:
Financial instruments that are subject to fair value disclosure requirements
are carried in the financial statements at amounts that approximate fair
value.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Long-lived assets:
The Partnership adopted Statement of Financial Accounting Standards No. 121
(FAS 121), "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" in 1996. FAS 121 establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain intangibles to be disposed of. Under FAS 121, the Partnership will
periodically review its long-lived assets to assess recoverability in the
period such impairment becomes evident. There was no financial statement
effect from the adoption of FAS 121.
3. ACCOUNTS RECEIVABLE--RELATED PARTIES
Accounts receivable--related parties, represents amounts due from
distributors, all of whom are owned by the partners, for programming services.
The partners and distributors are engaged in the business of providing
television programming through cable and satellite to subscribers. Sales to
the 5 largest of these distributors represented approximately 14%, 9% and 11%
of the Partnership's subscriber revenues for 1996, 1995 and 1994,
respectively. The allowance for doubtful accounts was $1,576, $812 and $146 at
December 31, 1996, 1995 and 1994, respectively.
4. NOTES RECEIVABLE
On November 15, 1990, the Partnership assumed from a partner two revolving
credit promissory notes (the "Notes") related to amounts due from a third
party. In connection with the assumption, the Partnership agreed to reimburse
the partner for the total of all advances made to date under the Notes plus
accrued interest on such advances at a rate of 10% per annum. Such
reimbursement totaled approximately $767 and was paid in January 1991. The
Partnership also advanced approximately $151 to the third party. Because of
uncertainty regarding the ultimate collectibility of aggregate advances, the
Company had recorded a reserve for the full amount of the notes.
Under the terms of the revolving credit promissory note with the third
party, the principal balance and all unpaid accrued interest is due and
payable in the event the third party enters into an agreement to transfer its
F-39
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Direct Broadcast Satellite (DBS) construction permit or license. During 1994,
the third party entered into an agreement to transfer the permit and, as a
result, in 1995, the Partnership recovered $450 representing principal of $375
and interest of $75 through the repayment date. The balance of the remaining
Note and related reserve as of December 31, 1996 is approximately $543.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 comprise the following:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Construction in progress--control center.................... $ 6,323 $
Control center, compression/lab equipment................... 9,496 8,223
Other furniture and equipment............................... 7,147 5,540
------- ------
22,966 13,763
Accumulated depreciation.................................... (4,835) (3,773)
------- ------
$18,131 $9,990
======= ======
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was $2,302, $1,932 and $1,271, respectively.
6. COSTS OF SATELLITES UNDER CONSTRUCTION
In 1990, the Partnership entered into an Option Agreement with an affiliate
of a Partner (the "Related Party"). The Related Party ultimately became a FCC
authorized Broadcast Satellite Services (BSS) satellite licensee with a permit
to construct, launch and operate BSS satellites within an 11 transponder
authorization at the 119 degree BSS location. Under the Option Agreement, the
Partnership obtained the exclusive rights to lease or purchase all of the
Related Party's transponder capacity in satellite locations allocated to the
Related Party under the FCC permit. In consideration of these rights, the
Option Agreement required the Partnership to reimburse the Related Party for
actual costs incurred by the Related Party related to maintaining the Option
Agreement, not to exceed $2,000. Since the Option Agreement is considered an
integral part of the Partnership's strategy to improve the distribution of its
programming, cumulative payments under the Option Agreement were capitalized
and are to be assigned to the cost of the leased or purchased channel capacity
and amortized over the life of the leased or purchased asset.
In 1993, through various arrangements entered into through the Related
Party, the Partnership also obtained the rights to a fixed price contract with
Space Systems/Loral, Inc. for the construction and launch of two satellites.
In 1994, the Partnership commenced construction of two BSS satellites. Through
December 31, 1996, 1995 and 1994, the Partnership reimbursed the Related Party
$457,685, $382,840 and $278,772, respectively, for the construction of the
satellites. Included in the cost of the satellites under construction as of
December 31, 1996 is approximately $1,300, representing the amount due under
the Option Agreement and other costs related to the maintenance of the 11
transponder authorization. These costs are included in accounts payable--
related party as of December 31, 1996.
The total amount of interest cost (including amortization of deferred
financing fees and commitment fees) capitalized in conjunction with the
satellite construction project for the years ended December 31, 1996, 1995 and
1994 was $30,448, $25,521 and $10,432, respectively.
F-40
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Partnership also incurred costs related to its pursuit of licenses for
other orbital locations. Through December 31, 1995, such costs totaled
approximately $6,700. Management determined that, for various reasons, such
costs may not be recoverable and reserved approximately $4,900 and $1,800 in
1995 and 1994, respectively. At December 31, 1996, $4,600 of such costs remain
in accounts payable--related party.
On February 7, 1997, the Partnership approved a resolution effective
December 31, 1996 reaffirming that the Partnership had unconditionally
exercised its option pursuant to the Option Agreement, authorized the launch
of one of the BSS satellites (Satellite No. 2) into the 119 degree orbital
location (the only full conus location available to the Partnership) and
ordered Satellite No. 1 to be used either as a spare or back-up for Satellite
No. 2 or to be deployed or disposed of as determined by the Partnership (see
Note 13). In addition, the Related Party and its affiliates confirmed in
writing that Satellite No. 1 would be used as a spare or backup for Satellite
No. 2 or otherwise deployed or disposed of as determined by the Partnership.
Consistent with the resolution, the Partnership paid $73,786 to the Related
Party in December 1996 to reimburse the Related Party for 1996 satellite
construction costs through December. In addition, the Partnership agreed to
reimburse the Related Party $7,535 for the amounts due under the Option
Agreement for the exercise of the option, for deployment of the DBS satellites
and for other consulting, legal and engineering expenses. As of December 31,
1996, Satellite No. 2 was scheduled for launch in the February-March 1997
timeframe.
7. OTHER ASSETS
Other assets at December 31, 1996 and 1995 comprise the following:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Bargain element of transponder lease (see Note 10)........ $ 6,706
Less: accumulated amortization............................ (5,747)
-------- -------
Net....................................................... 959
-------- -------
Prepaid transponder space (see Note 10)................... $ 28,560 12,362
Less: current portion..................................... (21,420)
-------- -------
7,140 12,362
-------- -------
Deposits.................................................. 101 73
Deferred financing fees, net.............................. 107 684
-------- -------
$ 7,348 $14,078
======== =======
</TABLE>
8. SATELLITE CONSTRUCTION CREDIT FACILITY
On March 9, 1994, the Partnership entered into a $565,000 credit facility
with a consortium of 25 banks to provide financing for the construction and
launch of the satellites described in Note 6. The facility matures June 30,
1997 and borrowings are collateralized by letters of credit issued by each of
the general partners (or an affiliate) (the Partners/Partner Affiliates).
Borrowings bear interest, at the option of the Partnership, at a rate per
annum equal to any of the following:
1. The greater of the following (the "Alternate Base Rate")
(i) The prime rate of Chase Manhattan Bank
(ii) The weighted average of the rates for overnight funds plus 0.5%;
or
(iii) The secondary market rate for three-month certificates of
deposit plus 1%;
F-41
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. The sum of (a) 7/16% plus (b) LIBOR for interest periods of one, two,
three, six or, if made available by each of the banks, twelve months; or
3. The sum of (a) 9/16% plus (b) the CD rate for certificates of deposit
having a term of 30, 60, 90 or 180 days.
Interest is payable, to the extent bearing interest based on the Alternate
Base Rate, quarterly, in arrears and to the extent bearing interest based on
LIBOR or the CD rate, on the last day of the applicable interest period (and,
in the case of a CD or LIBOR rate loan having an interest period longer than
90 days or three months, respectively, at intervals of 90 days and three
months, respectively, after the first day of such interest period). Borrowings
and prepayments shall be in the amount of $5 million in the case of LIBOR and
CD rate loans and $1 million in the case of Alternate Base Rate loans, or in
each case, any greater multiple of $1 million. The Partnership will pay
quarterly, in arrears, a commitment fee of 3/16% per annum on the daily unused
portion of the facility.
At December 31, 1996, LIBOR borrowings outstanding bear interest at rates
ranging from 5.94% to 6.06% and mature at varying dates through March 17,
1997. Also outstanding at December 31, 1996 is an Alternate Base Rate
borrowing bearing interest at 8.25%, which matured on January 3, 1997. As
borrowings mature, the Partnership refinances them under the same facility as
provided by the agreements. The Partnership intends to refinance the credit
facility, which matures on June 30, 1997, on a long-term basis.
Interest incurred for the years ended December 31, 1996, 1995 and 1994
totaled $29,607, $24,511 and $8,435, respectively. Commitment fees for the
years ended December 31, 1996, 1995 and 1994 totaled $245, $419 and $573,
respectively. The interest incurred and commitment fees were capitalized into
costs of satellites under construction.
9. LONG-TERM OBLIGATION--SATELLITE
Effective November 1996, the Partnership entered into an agreement which
provides for access to a medium-power satellite (K-2) through June 1997. The
agreement requires the Partnership to make payments of $48 per month through
July 2008. The present value of these payments was recorded as an intangible
asset and a long-term obligation using an interest rate of 7.32%. The
intangible asset will be amortized over the expected service life from mid-
November 1996 through June 1997. Amortization expense for the year ended
December 31, 1996 totaled $917. Future minimum payments under this agreement
are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1997................................................................ $ 575
1998................................................................ 575
1999................................................................ 575
2000................................................................ 575
2001................................................................ 575
Thereafter.......................................................... 3,785
-------
Total minimum payments.............................................. 6,660
Less: amounts representing interest................................. (2,178)
-------
4,482
Less: current portion............................................... (255)
-------
Long-term obligation................................................ $ 4,227
=======
</TABLE>
F-42
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Partnership will also lease transponders on the satellite (see Note 10).
10. COMMITMENTS
The Partnership has long-term lease commitments for office space, satellite
services, equipment and transponders which are accounted for as operating
leases.
At December 31, 1996, future minimum lease payment commitments under these
leases are as follows:
<TABLE>
<CAPTION>
TRANSPONDERS
----------------
YEAR K-2 GE-2 OTHER
---- ------- -------- ------
<S> <C> <C> <C>
1997................................................. $10,500 $ 14,500 $1,710
1998................................................. 42,040 1,671
1999................................................. 46,800 1,088
2000................................................. 46,800 537
2001................................................. 46,800 341
Thereafter........................................... 54,600
------- -------- ------
Total minimum rentals................................ $10,500 $251,540 $5,347
======= ======== ======
</TABLE>
The K-1 transponder lease arrangement, which terminated in November 1996
provided for fixed payments, as well as payments which escalated over the term
of the lease; further, the agreement provided for a deferral of payments until
later years. The Partnership recognized the expense related to this agreement
by amortizing the total commitments on a straight-line basis. Deferred rent-
related party in the accompanying balance sheet represents the difference
between the straight-line amortization and cash payments.
In 1995, the Partnership entered into a satellite transponder service
agreement with an affiliate of a Partner for satellite service on 14
transponders on an FSS medium power satellite (GE-2) to be launched into the
85 degree orbital location. This medium power satellite will replace the
satellite (K-2) currently used by the Partnership, which is nearing the end of
its useful life. Service on GE-2 was scheduled to commence in March 1997 (see
Note 13). Under this agreement, the Partnership obtained unprotected service
on 14 transponders for a period of one year with an option to extend the
service for an additional one-year period. Payments of $16,198 and $12,362
were made to the affiliate in 1996 and 1995, respectively.
In 1996, the Partnership amended this agreement to provide the Partnership
with service on up to 24 transponders on the satellite. The agreement also
extended the initial term to four years at an annual rate of $46,800 when the
satellite is fully utilized. The term of this agreement was extendable at the
option of the Partnership, for the remainder of the useful life of the
satellite, along with protection afforded by another satellite (GE-3) to be
launched in the fourth quarter of 1997 (see Note 13).
At the beginning of 1996, the Partnership's business was being operated on
14 transponders on the K-1 medium power satellite operated at 85 degrees. The
K-1 satellite was expected to reach its useful end of life in the fourth
quarter of 1996. To assure continuity of service, the Partnership, in 1995,
had entered into an agreement with an affiliate of a Partner to provide the
Partnership with temporary satellite service through July 1997 (under certain
conditions) on 14-15 transponders on another medium power satellite (K-2) to
be located at the 85 degree location. In November 1996, all of the
Partnership's operations were transferred from K-1 to K-2 successfully.
Service on this satellite will continue until GE-2 is deemed commercially
operational (see Notes 9 and 13).
F-43
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A subsidiary of a partner provides satellite uplink services to the
Partnership. Total payments for such services were approximately $10,721,
$10,581 and $5,610 for 1996, 1995 and 1994, respectively.
In addition to the fixed minimum rentals above, all of the transponder
leases include variable charges, based upon the number of subscribers to the
Partnership's programming service, of one dollar per subscriber per month for
all subscribers up to and including 750,000 subscribers, fifty cents per
subscriber per month for all subscribers over 750,000 up to a maximum of
2,000,000 subscribers, and no variable charge with respect to any subscribers
over 2,000,000. Such variable charges for the years ended December 31, 1996,
1995 and 1994 were approximately $11,613, $5,550 and $1,035, respectively.
Rent expense under operating leases for the years ended December 31, 1996,
1995 and 1994 was approximately $25,536, $23,500 and $22,208, respectively.
11. BENEFIT PLANS
In 1991, the Partnership established a 401(k) Retirement Savings Plan
covering substantially all employees who have completed one year of service.
The Plan permits eligible employees to contribute up to 10% of their annual
pre-tax compensation and the Partnership makes matching contributions of up to
50% of participants first 5% of annual pre-tax compensation. The Partnership
may also make discretionary contributions to the Plan. The Partnership's
contributions to the Plan for the years ended December 31, 1996, 1995 and 1994
totaled approximately $179, $80 and $61, respectively.
The Partnership has a Long-Term Incentive Compensation Program for senior
management. Under the program participants may be awarded units with a value
of $1 based upon meeting certain performance objectives. Awarded units vest
pro rata at the end of years three through five subsequent to the year of
award. As of December 31, 1996 and 1995, 3,535 and 2,115 units have been
awarded with values of $3,535 and $2,115, respectively. Compensation expense
for the years ended December 31, 1996 and 1995 totaled $755 and $471,
respectively. Through December 31, 1996, 323 units with a value of $323 have
vested. Unit holders have the option to convert all or a part of their
accumulated and unpaid awards to common stock at the initial offering price in
the event of a public offering for the Partnership.
12. LITIGATION AND CONTINGENCIES
The Antitrust Division of the Department of Justice and the antitrust
bureaus of several states began a formal investigation into the affairs of the
Partnership in 1990. The Partnership complied with the discovery demands and
cooperated in the investigations. On June 9, 1993, complaints and consent
judgments were filed by the Department of Justice and the attorneys general of
forty states in the federal court for the Southern District of New York
alleging violations of federal and state antitrust law by the Partnership and
the partners in PRIMESTAR Partners. Five additional states and the District of
Columbia filed similar complaints in the same court on August 18, 1993. The
defendants agreed to settle the allegations in all of the complaints for, and
the Partnership paid $4,750 without any admission of wrongdoing. Final consent
judgments were entered by the District Court (over the objections of certain
third parties and attempted intervenors) in all of the state actions on
September 14, 1993. The time to appeal the judgments in the state actions has
expired. The final consent judgment in the Department of Justice matter was
entered by the District Court (over the objections of certain third parties)
on April 5, 1994. The time to appeal the judgment expired on June 4, 1994. The
consent judgment on the states expires as of October 1997.
On March 16, 1994, the Partnership received a Civil Investigative Demand
(CID) from the Antitrust Division of the Department of Justice (DOJ) relative
to the DOJ's investigation of restraint of trade. The CID
F-44
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
issued by the DOJ does not identify the Partnership as the subject of the
investigation. Management does not believe that the Partnership has engaged in
any unlawful conduct, but has cooperated with the DOJ in its investigation.
The DOJ informed the Partnership on January 24, 1996 that it had concluded
that it would not take any further action at that time nor did it presently
intend to institute any legal proceedings against the Partnership. The DOJ
further informed the Partnership that the investigation would remain open and
that it would continue to monitor developments in this area; management,
however, does not reasonably foresee any additional activity on this matter.
In complying with the Satellite Home Viewer Act of 1994, the Partnership is
required to discontinue network service to certain of its subscribers who are
able to receive network services over the air. The Partnership has received
challenges from certain network affiliates. In response to such challenges,
the Partnership has disconnected the challenged broadcast network service from
certain subscribers. None of the networks or affiliates has asserted any claim
for damages under applicable law against the Partnership. Discussions are
continuing between representatives of the Partnership and representatives of
the networks and their affiliates concerning reporting and signal measurement
issues under the Act, and both parties will be continuing negotiations toward
a final written agreement. If a written agreement is reached, management
believes that it is unlikely that the networks and their affiliates will
initiate litigation against the Partnership. In the event a written agreement
is not reached, management believes it is likely that the networks and their
affiliates will initiate litigation against the Partnership. The Act provides
for remedies which can include actual damages, injunctions, and statutory
damages. Statutory damages per claim are limited to five dollars per
subscriber, per month, or $250 in a six month period. At present the
Partnership remains unable to determine upon what basis such damages would be
calculated or what their amount might be. Therefore, management is unable at
this time to assess the impact, if any, of the unasserted claim on the
Partnership's results of operations, financial position or cash flows.
On April 16, 1996, the Partnership was served with a complaint from a third
party, now pending in the United States District Court. The Plaintiff claims
that the Partnership has infringed a patent on an "audio storage and
distribution system," supposedly involving the Partnership's digital satellite
TV systems. No specific amount of damages is claimed, but the plaintiff
requests compensatory damages (trebled), attorneys' fees and costs, and
injunctive relief. This is one of at least 18 similar cases pending against
different defendants. The Partnership has made a claim for indemnification
against a subsidiary of the equipment provider, which sold the systems in
question to the Partnership. Management is unable at this time to assess the
impact, if any, of the aforesaid claim on the Partnership's results of
operations, financial position or cash flows.
On April 25, 1996, the Partnership received oral notification of a claim
from a third party for alleged patent infringement in an unspecified amount
or, in the alternative, a claim for past and future license fees in an amount
to be negotiated, arising out of the Partnership's (and its distributors)
utilization of DigiCipher Equipment for the provision of the Partnership's
service to its distributors (and their customers). The Partnership has made a
claim for indemnification against the supplier of the DigiCipher Equipment to
the Partnership. Management is unable at this time to assess the impact, if
any, of the aforesaid claim on the Partnership's results of operations,
financial position or cash flows.
The Partnership is currently involved in a contractual dispute with a multi-
channel program provider, with respect to whether the Partnership has a
contractual obligation to add four (4) additional programming channels upon
the transition of its service to GE-2. The program provider has threatened
litigation if the matter is not successfully addressed. The parties are
currently in discussions to settle the matter. Notwithstanding a failure by
the parties to successfully resolve this matter, management believes the
matter will not have a material effect on the Partnership's results of
operations, financial position or cash flows.
F-45
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On November 21, 1996, the International Bureau of the Federal Communications
Commission ("FCC") granted EchoStar Satellite Corporation, a consolidated
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 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
and commence operations at that location at a power level of 130 watts, it
would likely cause harmful interferences to the reception of the Partnership's
signal by its customers.
On December 23, 1996, an affiliate of a Partner and the Partnership
separately requested reconsideration of the International Bureau's
authorization for EchoStar to operate at 83 degrees. These requests were
opposed by EchoStar and others. These reconsideration requests currently are
pending at the International Bureau. In addition, the affiliate and the
Partnership have attempted to resolve potential coordination problems directly
with EchoStar. It is uncertain whether any coordination between the
Partnership 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.
Management is unable at this time to assess the impact, if any, of the
aforesaid matter on the Partnership's results of operations, financial
position or cash flows.
13. SUBSEQUENT EVENTS
On February 19, 1997, the Partnership amended its four year unprotected
satellite service agreement with an affiliate of a Partner for service on GE-2
(see Note 10). This amendment revised the agreement to a six year protected
arrangement with an option to extend to the end of life, if the option is
exercised by December 31, 1997. Under the amendment, annual payments increase
to $69,840 from $46,800. If, however, the Partnership exercises the End of
Life option of the agreement on or before December 31, 1997, the annual rate
will be $62,640. GE-2 became commercially operational on March 1, 1997.
The affiliate is constructing a spare satellite (GE-3) for this medium power
satellite, whereby effective upon the commercial operation date of GE-3, the
satellite would be available to the Partnership for the purpose of providing
orbital location protected service. Launch of GE-3 is scheduled for the fourth
quarter of 1997.
On March 8, 1997, Satellite No. 2 was successfully launched and is currently
undergoing deployment to its orbital location but awaits final checkout on the
number of transponders operating in accordance with the specifications (see
Note 6).
Effective March 9, 1997, each of the Partners/Partner Affiliates issued
letters of credit totaling $20,000, which increased the total credit facility
to $585,000 (see Notes 2 and 8).
F-46
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLIC-
ITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH
OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward Looking Statements............................................... 4
Available Information.................................................... 5
Prospectus Summary....................................................... 6
Organization............................................................. 23
Risk Factors............................................................. 24
The Exchange Offer....................................................... 38
Use of Proceeds.......................................................... 46
Capitalization........................................................... 47
Selected Financial Data.................................................. 48
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 49
The Digital Satellite Television Industry................................ 58
Business................................................................. 61
Regulatory Matters....................................................... 83
Management............................................................... 86
Security Ownership of Certain Beneficial Owners and Management........... 93
Certain Relationships and Related Transactions........................... 97
Description of Certain Indebtedness...................................... 103
Description of the Exchange Notes........................................ 105
Certain Federal Income Tax Considerations................................ 150
Plan of Distribution..................................................... 154
Validity of Exchange Notes............................................... 155
Experts.................................................................. 155
Glossary of Terms........................................................ 156
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
---------------------------------
TCI SATELLITE ENTERTAINMENT, INC.
10 7/8% SENIOR SUBORDINATED NOTES
DUE FEBRUARY 15, 2007
AND
12 1/4% SENIOR SUBORDINATED
DISCOUNT NOTES
DUE FEBRUARY 15, 2007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
(the "DGCL"), provides that a corporation (in its original certificate of
incorporation or an amendment thereto) may eliminate or limit the personal
liability of a director (or certain persons who, pursuant to the provisions of
the certificate of incorporation, exercise or perform duties conferred or
imposed upon directors by the DGCL) to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that
such provisions shall not eliminate or limit the liability of a director (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which the director derived an improper personal benefit. The
Company's Certificate of Incorporation limits the liability of directors
thereof to the extent permitted by Section 102(b)(7) of the DGCL.
Under Section 145 of the DGCL, in general, a corporation may indemnify its
directors, officers, employees or agents against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any action, suit or proceeding
brought by third parties to which they may be made parties by reason of their
being or having been directors, officers, employees or agents and shall so
indemnify such persons if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. The Company's
Certificate of Incorporation and its By-Laws provide that the Company shall
have the power to indemnify its officers, directors, employees and agents to
the full extent permitted by Delaware law.
In addition, pursuant to an Indemnification Agreement dated December 4,
1996, TCI has agreed to indemnify Gary S. Howard, President and Chief
Executive Officer of the Company, in accordance with the terms and conditions
set forth therein.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------
<S> <C>
2.1* Reorganization Agreement, dated as of December 4, 1996, among Tele-
Communications, Inc. ("TCI"), TCI Communications, Inc. ("TCIC"), Tempo
Enterprises, Inc., TCI Digital Satellite Entertainment, Inc., TCI K-1, Inc.
("TCI K-1"), United Artists K-1 Investments, Inc.
("UA K-1"), TCISE Partner 1, Inc. ("TCISE 1"), TCISE Partner 2, Inc. ("TCISE
2") and TCI Satellite Entertainment, Inc. (the "Company").
3.1+ Amended and Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Specimen certificate representing shares of Series A Common Stock of the
Company.
4.2+ Specimen certificate representing shares of Series B Common Stock of the
Company.
4.3* Indenture dated as of February 20, 1997 between the Company and Bank of New
York, as Trustee, with respect to $200 million principal amount of 10 7/8%
Senior Subordinated Notes due 2007.
4.4* Indenture dated as of February 20, 1997 between the Company and Bank of New
York, as Trustee, with respect to $275 million principal amount of 12 1/4%
Senior Subordinated Discount Notes due 2007.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------------------------
<S> <C>
4.5* Registration Rights Agreement--Senior Subordinated Notes, dated as of February
20, 1997 among the Company and Donaldson, Lufkin and Jenrette Securities
Corporation; Merrill Lynch, Pierce, Fenner and Smith Incorporated; Nationsbanc
Capital Markets, Inc.; and Scotia Capital Markets (USA) Inc.
4.6* Registration Rights Agreement--Senior Subordinated Discount Notes, dated as of
February 20, 1997 among the Company and Donaldson, Lufkin and Jenrette
Securities Corporation; Merrill Lynch, Pierce, Fenner and Smith Incorporated;
Nationsbanc Capital Markets, Inc.; and Scotia Capital Markets (USA) Inc.
5.1 Opinion of Baker & Botts regarding legality of securities being offered.
10.1* Indemnification Agreement dated as of December 4, 1996, by and between the
Company and TCI UA 1, Inc.
10.2* Indemnification Agreement dated as of December 4, 1996, by and between the
Company and TCIC.
10.3+ TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan.
10.4* Qualified Employee Stock Purchase Plan of the Company.
10.5* Indemnification Agreement dated December 4, 1996, by and between TCI and Gary
S. Howard.
10.6* Option Agreement, dated as of December 4, 1996, by and between the Company and
Gary S. Howard.
10.7* Option Agreement, dated as of December 4, 1996, by and between the Company and
Larry E. Romrell.
10.8* Option Agreement, dated as of December 4, 1996, by and between the Company and
Brendan R. Clouston.
10.9* Option Agreement, dated as of December 4, 1996, by and between the Company and
David P. Beddow.
10.10+ 1996 Ancillary Agreement Among Partners dated as of October 18, 1996, among
PRIMESTAR Partners, L.P., the Participating Partners named therein, GE
American Services, Inc. and its affiliate GE American Communications, Inc.
10.11+ Annex A to the 1996 Ancillary Agreement Among Partners.
10.12+ Equipment Sale Agreement, dated as of October 21, 1996, between ResNet
Communications, Inc. ("ResNet") and the Company.
10.13+ Subordinated Convertible Term Loan Agreement, dated as of October 21, 1996, by
and between ResNet, as Borrower, and the Company, as Lender.
10.14+ Option Agreement, dated as of October 21, 1996, between ResNet and the
Company.
10.15+ Standstill Agreement, dated as of October 21, 1996, by and between LodgeNet
Entertainment Corporation ("LodgeNet") and the Company.
10.16+ Stockholders' Agreement, dated as of October 21, 1996, between LodgeNet and
the Company.
10.17+ Subscription Agreement, dated as of October 21, 1996, between ResNet and the
Company.
10.18+ Limited Partnership Agreement dated February 8, 1990, among ATC Satellite
Inc., Comcast DBS, Inc., Continental Satellite Company, Inc., Cox Satellite,
Inc., G.E. Americom Services, Inc., New Vision Satellite, TCI K-1, UA K-1,
Viacom K-Band, Inc. and Warner Cable SSD, Inc.
10.19+ Amendment to Limited Partnership Agreement dated September 1, 1993.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------
<S> <C>
10.20+ Amendment to Limited Partnership Agreement dated December 15, 1993.
10.21+ Amendment to Limited Partnership Agreement dated October 18, 1996.
10.22+ Tag Along Agreement dated as of February 8, 1990, among Cox Enterprises,
Inc., Comcast Corporation, Continental Cablevision, Inc., Newhouse
Broadcasting Corporation, Company Satellite, Inc. ("Tempo"), TCI
Development Corporation and TCI.
10.23+ Option Agreement dated February 8, 1990, between Tempo and K Prime
Partners, L.P.
10.24+ Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to FSS.
10.25+ Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to BSS.
10.26+ Amended and Restated Reimbursement Agreement dated March 1, 1995, between
TCI UA 1, Inc., Chemical Bank and The Toronto Dominion Bank.
10.27+ TPO-1-290 BSS Construction Agreement dated as of February 22, 1990,
between Tempo and Space Systems/Loral, Inc.(c)
10.28* U.S. $750,000,000 Credit Agreement dated as of December 31, 1996 among the
Company, The Bank of Nova Scotia, Nationsbank of Texas, N.A., Credit
Lyonnais New York Branch, and various financial institutions.
10.29* First Amendment to Credit Agreement dated as of February 19, 1997 among
the Company, certain financial institutions, and the Bank of Nova Scotia,
as Administrative Agent for the Lenders.
10.30* Trade Name and Service Mark License Agreement dated as of December 4,
1996, between TCI and the Company.
10.31* Transition Services Agreement dated as of December 4, 1996, between TCI
and the Company.
10.32+ Fulfillment Agreement dated as of August 30, 1996, between TCIC and the
Company.
10.33+ Tax Sharing Agreement effective July 1, 1995, among TCIC and certain other
subsidiaries of TCI.
10.34+ First Amendment to Tax Sharing Agreement dated as of October 1995, among
TCIC and certain other subsidiaries of TCI.
10.35* Second Amendment to Tax Sharing Agreement dated as of December 3, 1996,
among TCIC and certain other subsidiaries of TCI.
10.36* Amended and Restated Credit Agreement dated as of February 19, 1997
between TCIC and the Company.
10.37* Share Purchase Agreement dated as of December 4, 1996, between TCI and the
Company.
10.38* Option Agreement dated as of December 4, 1996, between TCI and the
Company.
12.1 Statement Re: Computation of ratios.
21.1* Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of Baker & Botts, L.L.P. (contained in Exhibit 5.1).
25.1 Statement re: eligibility of trustee.
99.1 Form of Transmittal Letter to holders in Connection with Exchange Offer.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------
<S> <C>
* Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission ("SEC") on March 28, 1997 (SEC
File No. 0-21317).
+ Incorporated by reference to the Company's Registration Statement on Form 10
filed with the SEC on November 15, 1996 (Registration No. 0-21317).
(a) This document has been redacted in part and the Company has been granted
Confidential Treatment by the SEC with respect to redacted portions thereof.
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
Company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 20 above or otherwise, the
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of their counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by them is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ENGLEWOOD, STATE OF
COLORADO, ON APRIL 9, 1997.
TCI SATELLITE ENTERTAINMENT, INC.
/s/ Gary S. Howard
By: _______________________________
Name: Gary S. Howard
Title: Chief Executive Officer
Dated April 9, 1997
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS GARY S. HOWARD, KENNETH G. CARROLL AND
ELIZABETH M. MARKOWSKI, ESQ. AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-
IN-FACT AND AGENTS WITH FULL POWER OF SUBSTITUTION AND RE-SUBSTITUTION FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR
ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION
STATEMENT AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS AND EACH OF THEM FULL POWER AND
AUTHORITY, TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE OR
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, TO ALL INTENTS AND PURPOSES
AND AS FULLY AS THEY MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR THEIR SUBSTITUTES MAY
LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1933, THIS REPORT HAS BEEN SIGNED
BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURES TITLE DATE
/s/ Gary S. Howard President and Chief April 9, 1997
- ------------------------------------- Executive Officer
(Gary S. Howard) (Principal
Executive Officer);
Director,
/s/ John C. Malone Director April 9, 1997
- -------------------------------------
(John C. Malone)
/s/ David P. Beddow Director April 9, 1997
- -------------------------------------
(David P. Beddow)
/s/ Kenneth G. Carroll Senior Vice April 9, 1997
- ------------------------------------- President and Chief
(Kenneth G. Carroll) Financial Officer
(Principal
Financial Officer
and Principal
Accounting Officer)
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
----------- DESCRIPTION
-----------
<C> <S>
2.1* Reorganization Agreement, dated as of December 4, 1996, among
Tele-Communications, Inc. ("TCI"), TCI Communications, Inc.
("TCIC"), Tempo Enterprises, Inc., TCI Digital Satellite
Entertainment, Inc., TCI K-1, Inc. ("TCI K-1"), United Artists K-1
Investments, Inc. ("UA K-1"), TCISE Partner 1, Inc. ("TCISE 1"),
TCISE Partner 2, Inc. ("TCISE 2") and TCI Satellite Entertainment,
Inc. (the "Company").
3.1+ Amended and Restated Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
4.1+ Specimen certificate representing shares of Series A Common Stock
of the Company.
4.2+ Specimen certificate representing shares of Series B Common Stock
of the Company.
4.3* Indenture dated as of February 20, 1997 between the Company and
Bank of New York, as Trustee, with respect to $200 million
principal amount of 10 7/8% Senior Subordinated Notes due 2007.
4.4* Indenture dated as of February 20, 1997 between the Company and
Bank of New York, as Trustee, with respect to $275 million
principal amount of 12 1/4% Senior Subordinated Discount Notes due
2007.
4.5* Registration Rights Agreement--Senior Subordinated Notes, dated as
of February 20, 1997 among the Company and Donaldson, Lufkin and
Jenrette Securities Corporation; Merrill Lynch, Pierce, Fenner and
Smith Incorporated; Nationsbanc Capital Markets, Inc.; and Scotia
Capital Markets (USA) Inc.
4.6* Registration Rights Agreement--Senior Subordinated Discount Notes,
dated as of February 20, 1997 among the Company and Donaldson,
Lufkin and Jenrette Securities Corporation; Merrill Lynch, Pierce,
Fenner and Smith Incorporated; Nationsbanc Capital Markets, Inc.;
and Scotia Capital Markets (USA) Inc.
5.1 Opinion of Baker & Botts regarding legality of securities being
offered.
10.1* Indemnification Agreement dated as of December 4, 1996, by and
between the Company and TCI UA 1, Inc.
10.2* Indemnification Agreement dated as of December 4, 1996, by and
between the Company and TCIC.
10.3+ TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan.
10.4* Qualified Employee Stock Purchase Plan of the Company.
10.5* Indemnification Agreement dated December 4, 1996, by and between
TCI and Gary S. Howard.
10.6* Option Agreement, dated as of December 4, 1996, by and between the
Company and Gary S. Howard.
10.7* Option Agreement, dated as of December 4, 1996, by and between the
Company and Larry E. Romrell.
10.8* Option Agreement, dated as of December 4, 1996, by and between the
Company and Brendan R. Clouston.
10.9* Option Agreement, dated as of December 4, 1996, by and between the
Company and David P. Beddow.
10.10+ 1996 Ancillary Agreement Among Partners dated as of October 18,
1996, among PRIMESTAR Partners, L.P., the Participating Partners
named therein, GE American Services, Inc. and its affiliate GE
American Communications, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
----------- DESCRIPTION
-----------
<C> <S>
10.11+ Annex A to the 1996 Ancillary Agreement Among Partners.
10.12+ Equipment Sale Agreement, dated as of October 21, 1996, between
ResNet Communications, Inc. ("ResNet") and the Company.
10.13+ Subordinated Convertible Term Loan Agreement, dated as of October
21, 1996, by and between ResNet, as Borrower, and the Company, as
Lender.
10.14+ Option Agreement, dated as of October 21, 1996, between ResNet and
the Company.
10.15+ Standstill Agreement, dated as of October 21, 1996, by and between
LodgeNet Entertainment Corporation ("LodgeNet") and the Company.
10.16+ Stockholders' Agreement, dated as of October 21, 1996, between
LodgeNet and the Company.
10.17+ Subscription Agreement, dated as of October 21, 1996, between
ResNet and the Company.
10.18+ Limited Partnership Agreement dated February 8, 1990, among ATC
Satellite Inc., Comcast DBS, Inc., Continental Satellite Company,
Inc., Cox Satellite, Inc., G.E. Americom Services, Inc., New
Vision Satellite, TCI K-1, UA K-1, Viacom K-Band, Inc. and Warner
Cable SSD, Inc.
10.19+ Amendment to Limited Partnership Agreement dated September 1,
1993.
10.20+ Amendment to Limited Partnership Agreement dated December 15,
1993.
10.21+ Amendment to Limited Partnership Agreement dated October 18, 1996.
10.22+ Tag Along Agreement dated as of February 8, 1990, among Cox
Enterprises, Inc., Comcast Corporation, Continental Cablevision,
Inc., Newhouse Broadcasting Corporation, Company Satellite, Inc.
("Tempo"), TCI Development Corporation and TCI.
10.23+ Option Agreement dated February 8, 1990, between Tempo and K Prime
Partners, L.P.
10.24+ Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to FSS.
10.25+ Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to BSS.
10.26+ Amended and Restated Reimbursement Agreement dated March 1, 1995,
between TCI UA 1, Inc., Chemical Bank and The Toronto Dominion
Bank.
10.27+ TPO-1-290 BSS Construction Agreement dated as of February 22,
1990, between Tempo and Space Systems/Loral, Inc.(a)
10.28* U.S. $750,000,000 Credit Agreement dated as of December 31, 1996
among the Company, The Bank of Nova Scotia, Nationsbank of Texas,
N.A., Credit Lyonnais New York Branch, and various financial
institutions.
10.29* First Amendment to Credit Agreement dated as of February 19, 1997
among the Company, certain financial institutions, and the Bank of
Nova Scotia, as Administrative Agent for the Lenders.
10.30* Trade Name and Service Mark License Agreement dated as of December
4, 1996, between TCI and the Company.
10.31* Transition Services Agreement dated as of December 4, 1996,
between TCI and the Company.
10.32+ Fulfillment Agreement dated as of August 30, 1996, between TCIC
and the Company.
10.33+ Tax Sharing Agreement effective July 1, 1995, among TCIC and
certain other subsidiaries of TCI.
10.34+ First Amendment to Tax Sharing Agreement dated as of October 1995,
among TCIC and certain other subsidiaries of TCI.
10.35* Second Amendment to Tax Sharing Agreement dated as of December 3,
1996, among TCIC and certain other subsidiaries of TCI.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
----------- DESCRIPTION
<C> <S>
10.36* Amended and Restated Credit Agreement dated as of February 19,
1997 between TCIC and the Company.
10.37* Share Purchase Agreement dated as of December 4, 1996, between TCI
and the Company.
10.38* Option Agreement dated as of December 4, 1996, between TCI and the
Company.
12.1 Statement Re: Computation of ratios.
21.1* Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of Baker & Botts, L.L.P. (contained in Exhibit 5.1).
25.1 Statement re: eligibility of trustee.
99.1 Form of Transmittal Letter to holders in Connection with Exchange
Offer.
99.2 Form of Notice of Guaranteed Delivery.
- --------
* Incorporated by reference to the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission ("SEC") on
March 28, 1997 (SEC File No. 0-21317).
+ Incorporated by reference to the Company's Registration Statement
on Form 10 filed with the SEC on November 15, 1996 (Registration
No. 0-21317).
(a) This document has been redacted in part and the Company has been
granted Confidential Treatment by the SEC with respect to the
redacted portions thereof.
</TABLE>
<PAGE>
April 9, 1997
EXHIBIT 5
---------
Board of Directors
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Dear Sirs:
As counsel to TCI Satellite Entertainment, Inc., a Delaware corporation
(the "Company"), we have examined and we are familiar with the Registration
Statement on Form S-4 (the "Registration Statement") which relates to the
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of the offer by the Company to (i) exchange up to an aggregate principal
amount at maturity of $200,000,000 of its 10 7/8% Senior Subordinated Notes due
February 15, 2007 ("Senior Subordinated Exchange Notes") for an equal principal
amount of its outstanding 10 7/8% Senior Subordinated Notes due February 15,
2007 (the "Senior Subordinated Notes"), and (ii) exchange up to an aggregate
principal amount of $275,000,000 of its 12 1/4% Senior Subordinated Discount
Notes due February 15, 2007 ("Senior Subordinated Discount Exchange Notes," and,
together with the Senior Subordinated Exchange Notes, the "Exchange Notes") for
an equal principal amount of its 12 1/4% Senior Subordinated Discount Notes due
February 15, 2007 (the "Senior Subordinated Discount Notes," and, together with
the Senior Subordinated Notes, the "Notes"), The Debentures were initially
issued and sold to certain holders on February 20, 1997, through the Initial
Purchasers for the purpose of placing the Notes in transactions complying with
Rule 144A under the Securities Act.
In connection with the delivery of this opinion, we have examined and
relied upon originals, certified copies or copies otherwise identified to us, of
the Restated Certificate of Incorporation and By-Laws of the Company, each as
amended to date; records of proceedings of the Company's Board of Directors,
including committees thereof, with respect to the filing of the Registration
Statement, the issuance and sale of the Notes and related matters (the "Board
Resolutions"); the Company's Offering Circular, dated February 20, 1997 (the
"Offering Circular"), which describes the issuance and sale of the Notes; the
Indentures dated as of February 20, 1997 between the Company and The Bank of New
York,, as trustee (the "Indentures"); and such other documents, records and
certificates of public officials.
<PAGE>
TCI Satellite Entertainment, Inc.
April 10, 1997
Page 2
In rendering this opinion, we have relied, to the extent we deemed such reliance
appropriate, on certificates of officers of the Company as to certain factual
matters. We have assumed the genuineness of all signatures (except those on
behalf of the Company or its subsidiaries), the correctness of all certificates,
the authenticity of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such copies, and the accuracy
and completeness of all records made available to us by the Company and its
subsidiaries. We have further assumed that there will be no changes in
applicable law between the date of this opinion and the time that the Notes are
exchanged for Exchange Notes.
Based upon the foregoing, we are of the opinion that:
1. The Notes and the Exchange Notes are duly authorized, and the Notes are,
and upon their issuance to holders of Notes upon such holders' valid tender of
the Notes in exchange for Exchange Notes, the Exchange Notes shall be, validly
issued and shall be legal, valid and binding obligations of the Company, except
(A) to the extent enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or affecting
the rights of creditors generally and (B) that the remedy of specific
performance and injunctive and other forms of equitable relief are subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to our firm contained therein under
the heading "Legal Matters." In giving the foregoing consent, we do not admit
that we are in the category of persons whose consent is required under Section 7
of the Securities Act or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
BAKER & BOTTS, L.L.P.
<PAGE>
EXHIBIT 12.1
TCI SATELLITE ENTERTAINMENT, INC.
CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS, EXCEPT FOR RATIOS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
--------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Loss before income taxes.......... $(185,941) (69,365) (20,560) (7,339) (4,818)
Add:
Interest on debt.................. 10,498 9,888 3,374 -- --
Interest portion of rentals....... 698 419 8 -- --
--------- ------- ------- ------ ------
Loss before deducting fixed
charges.......................... $(174,745) (59,058) (17,178) (7,339) (4,818)
========= ======= ======= ====== ======
Fixed charges:
Interest on debt.................. 77
Interest expense from TCI
Satellite Entertainment, Inc. ... 1,946 -- -- -- --
Less than 50%-owned affiliates
with debt for which TCI Satellite
Entertainment, Inc. is
contingently obligated (1)....... 8,475 9,888 3,374 -- --
--------- ------- ------- ------ ------
10,498 9,888 3,374 -- --
Interest portion of rentals....... 698 419 8 -- --
--------- ------- ------- ------ ------
Total fixed charges............... $ 11,196 10,307 3,382 -- --
========= ======= ======= ====== ======
Ratio of earnings to fixed
charges.......................... -- -- -- -- --
========= ======= ======= ====== ======
Deficiency........................ $(185,941) (69,365) (20,560) (7,339) (4,818)
========= ======= ======= ====== ======
</TABLE>
- --------
(1) TCI Satellite Entertainment, Inc. has agreed to reimburse TCI UA 1, Inc.,
an indirect consolidated subsidiary of TCI Communications, Inc., for any
amounts drawn under an irrevocable transferrable letter of credit issued
for the account of TCI UA 1, Inc., which supports a credit facility of a
less than 50%-owned affiliate of TCI Satellite Entertainment, Inc. Fixed
charges related to such agreement of $8,475,000, $9,888,000 and $3,374,000
for the years ended December 31, 1996, 1995 and 1994, respectively, have
been included in fixed charges.
<PAGE>
EXHIBIT 23.1
The Board of Directors
TCI Satellite Entertainment, Inc.:
We consent to the inclusion in the registration statement on Form S-4 of TCI
Satellite Entertainment, Inc. of our report dated March 25, 1997, relating to
the balance sheets of TCI Satellite Entertainment, Inc. (as defined in note 1
to the financial statements) as of December 31, 1996, and 1995, and the related
statements of operations, equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, and to the reference to our firm
under the headings "Experts," "Summary Financial and Other Data," and "Selected
Financial Data."
KPMG Peat Marwick LLP
Denver, Colorado
April 9, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of TCI Satellite Entertainment, Inc. of our
report dated February 14, 1997, except as to Note 13, which is as of March 9,
1997, relating to the financial statements of PRIMESTAR Partners, L.P., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
April 9, 1997
<PAGE>
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
TCI SATELLITE ENTERTAINMENT, INC.
(Exact name of obligor as specified in its charter)
Delaware
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
8085 South Chester, Suite 300
Englewood, Colorado 80112 (Address of
principal executive offices) (Zip code)
______________________
10 7/8% Senior Subordinated Notes due February 15, 2007
(Title of the indenture securities)
================================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT
IS SUBJECT.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Name Address
- -----------------------------------------------------------------------------------
<S> <C> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7A-
29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND RULE 24 OF THE
COMMISSION'S RULES OF PRACTICE.
1. A copy of the Organization Certificate of The Bank of New York (formerly
Irving Trust Company) as now in effect, which contains the authority to
commence business and a grant of powers to exercise corporate trust powers.
(Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration
Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration
Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 4th day of April, 1997.
THE BANK OF NEW YORK
By: /s/ Mary LaGumina
-----------------------
Name: Mary LaGumina
Title: Assistant Vice President
-4-
<PAGE>
EXHIBIT 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1996, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin.............. $4,404,522
Interest-bearing balance........................................ 732,833
Securities:
Held-to-maturity securities..................................... 789,964
Available-for-sale securities................................... 2,005,509
Federal funds sold in domestic offices of the bank:
Federal funds sold.............................................. 3,364,838
Loans and lease financing receivables:
Loans and leases, net of unearned income..............28,728,602
LESS Allowance for loan and lease losses.................584,525
LESS Allocated transfer risk reserve.........................429
Loan and leases, net of unearned income, allowance and reserved. 28,143,648
Assets held in trading accounts.................................. 1,004,242
Premises and fixed assets (including capitalized leases)......... 605,668
Other real estate owned.......................................... 41,238
Investment in unconsolidated subsidiaries and associated
companies....................................................... 205,031
Customers' liability to this bank on acceptances outstanding..... 949,154
Intangible assets................................................ 490,524
Other assets..................................................... 1,305,839
-----------
Total assets.................................................... $44,043,010
===========
LIABILITIES
Deposits
In domestic offices............................................ $20,441,318
Noninterest-bearing...................................8,158,472
Interest-bearing.....................................12,282,846
In foreign offices, Edge and Agreement subsidiaries, and IBFs.. 11,710,903
Noninterest-bearing..................................... 46,182
Interest-bearing.....................................11,664,721
Federal funds purchased in domestic offices of the bank
Federal funds purchased........................................ 1,565,288
Demand notes issued to the U.S. Treasury........................ 293,186
Trading liabilities............................................. 826,856
Other borrowed money
With original maturity of one year or less..................... 2,103,443
With original maturity of more than one year................... 20,766
Bank's liability on acceptances executed and outstanding........ 951,116
Subordinated notes and debentures............................... 1,020,400
Other liabilities............................................... 1,522,884
-----------
Total liabilities............................................... $40,456,160
===========
EQUITY CAPITAL
Common Stock.................................................... 942,284
Surplus......................................................... 525,666
Undivided profits and capital reserves.......................... 2,129,376
Net unrealized holding gains (losses) on available-for-sale
securities..................................................... (2,073)
Cumulative foreign currency translation adjustments............. (8,403)
-----------
Total equity capital............................................ 3,586,850
-----------
Total liabilities equity capital................................ $44,043,010
===========
I, Robert E. Keilman, Senior Vice President and Comptroller of the above-named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and the true to the best of my knowledge and belief.
Robert E. Keilman
We the undersigned directors attest to the correctness of this Report of
Condition and declare that it has been a examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot )
Thomas A Renyl ) Directors
Alan R. Griffith )
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
OFFER FOR ANY AND ALL OUTSTANDING 10 7/8% SENIOR SUBORDINATED NOTES DUE
FEBRUARY 2007 AND 12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE FEBRUARY 2007
IN EXCHANGE FOR 10 7/8% SENIOR SUBORDINATED NOTES DUE FEBRUARY 2007 AND 12
1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE FEBRUARY 2007 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 PURSUANT TO THE PROSPECTUS DATED
, 1997
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON _________ ____, 1997, UNLESS THE OFFER IS
EXTENDED. TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY
TIME, ON THE EXPIRATION DATE.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
By Hand or Overnight Facsimile Transmissions: By Registered or
Delivery (Eligible Institutions Only) Certified Mail:
The Bank of New York (212) 571-3080 The Bank of New York
101 Barclay Street 101 Barclay Street
New York, New York To Confirm by Telephone New York, New York
10286 or for Information Call: 10286
Corporate Trust Corporate Trust
Services Window Services Window
(212) 815-6333
Ground Level Ground Level
Attention: Attention:
Reorganization Section Reorganization Section
Arwen Gibbons Arwen Gibbons
Delivery of this letter, transmittal to an address other than as set forth
above or transmission of this letter of transmittal via facsimile to a number
other than as set forth above does not constitute a valid delivery.
The undersigned acknowledges that he, she or it has received the Prospectus,
dated , 1997 (the "Prospectus"), of TCI Satellite Entertainment, Inc., a
Delaware corporation (the "Company"), and this Letter of Transmittal, which
together constitute the Company's offer (the "Exchange Offer") to exchange an
aggregate principal amount of up to $200,000,000 of the Company's outstanding
10 7/8% Senior Subordinated Notes due February 15, 2007 which have been
registered under the Securities Act of 1933, as amended (the "Securities Act")
(the "10 7/8% Exchange Notes"), for a like principal amount of the Company's
outstanding 10 7/8% Senior Subordinated Notes due February 15, 2007 ("Old 10
7/8% Securities") and to exchange an aggregate principal amount at maturity of
up to $275,000,000 of the Company's 12 1/4% Senior Subordinated Discount Notes
due February 15, 2007 which have been registered under the Securities Act (the
"12 1/4% Exchange Securities," and together with the 10 7/8% Exchange
Securities, the "Exchange Securities"), for a like principal amount at
maturity of up to $275,000,000 of the Company's outstanding 12 1/4% Senior
Subordinated Discount Notes (the "Old 12 1/4% Securities," and together with
the Old 10 7/8% Securities, the "Old Securities"), from the holders thereof.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
DESCRIPTION OF OLD SECURITIES
- -------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED
HOLDER(S)
(PLEASE FILL IN, IF BLANK) 1 2 3
- -------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AT
CERTIFICATE OF OLD 10 MATURITY
NUMBER(S)* 7/8% OF OLD 12
SECURITIES 1/4%
SECURITIES
TENDERED**
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* Need not be completed if Old Securities are being tendered by book-entry
holders.
** Old Securities may be tendered in whole or in part in denominations of
$1,000 and integral multiples of $1,000 in excess thereof. See
instruction 4. Unless otherwise indicated in the column, a holder will
be deemed to have tendered all Old Securities represented by the Old
Securities indicated in Column 2 and Column 3. See Instruction 4.
<PAGE>
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed by holders of Old Securities
(as defined below) either if Old Securities are to be forwarded herewith or if
tenders of Old Securities are to be made by book-entry transfer to an account
maintained by The Bank of New York (the "Exchange Agent") at The Depository
Trust Company (the "Book-Entry Transfer Facility" or "DTC") pursuant to the
procedures set forth in "The Exchange Offer-Procedures for Tendering" in the
Prospectus.
Holders of Old Securities whose certificates (the "Certificates") for such
Old Securities are not immediately available or who cannot deliver their
Certificates and all other required documents to the Exchange Agent on or
prior to the Expiration Date (as defined in the Prospectus) or who cannot
complete the procedures for book-entry transfer on a timely basis, must tender
their Old Securities according to the guaranteed delivery procedures set forth
in "The Exchange Offer--Procedures for Tendering" in the Prospectus.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[__] CHECK HERE IF TENDERED OLD SECURITIES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ________________________________________________
Account Number _______________________________________________________________
Transaction Code Number ______________________________________________________
[__] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD SECURITIES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holder(s)
Window Ticket Number (if any) ________________________________________________
Date of Execution of Notice of Guaranteed Delivery ___________________________
Name of Institution which Guaranteed Delivery ________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution ________________________________________________
Account Number _______________________________________________________________
Transaction Code Number ______________________________________________________
[__] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD
SECURITIES ARE TO BE RETURNED BY CREDITING THE BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER SET FORTH ABOVE.
[__] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD SECURITIES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES
(A PARTICIPATING BROKER DEALER) AND WISH TO RECEIVE 10 ADDITIONAL COPIES
OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
2
<PAGE>
LADIES AND GENTLEMEN:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company, (i) the above described aggregate
principal amount of the Company's 10 7/8% Senior Subordinated Notes due
February 15, 2007 in exchange for a like aggregate principal amount of the
Company's 10 7/8% Senior Subordinated Notes due February 15, 2007 which have
been registered under the Securities Act, and (ii) the above described
aggregate principal amount at maturity of the Company's 12 1/4% Senior
Subordinated Discount Notes due February 15, 2007 in exchange for a like
aggregate principal amount at maturity of the Company's 12 1/4% Senior
Subordinated Discount Notes due February 15, 2007 which have been registered
under the Securities Act, upon the terms and subject to the conditions set
forth in the Prospectus dated , 1997 (as the same may be amended or
supplemented from time to time, the "Prospectus"), receipt of which is
acknowledged, and in this Letter of Transmittal (which, together with the
Prospectus, constitute the "Exchange Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Securities tendered herewith in accordance with the terms
and conditions of the Exchange Offer (including, if the Exchange Offer is
extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby sells, assigns and transfers to or upon the
order of the Trust all right, title and interest in and to such Old Securities
as are being tendered herewith. The undersigned hereby irrevocably constitutes
and appoints the Exchange Agent as its agent and attorney-in-fact (with full
knowledge that the Exchange Agent is also acting as agent of the Company in
connection with the Exchange Offer) with respect to the tendered Old
Securities, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with an interest) subject only to
the right of withdrawal described in the Prospectus, to (i) deliver
Certificates for Old Securities to the Company together with all accompanying
evidences of transfer and authenticity to, or upon the order of, the Trust,
upon receipt by the Exchange Agent, as the undersigned's agent, of the
Exchange Securities to be issued in exchange for such Old Securities, (ii)
present Certificates for such Old Securities for transfer, and to transfer the
Old Securities on the books of the Company, and (iii) receive for the account
of the Company all benefits and otherwise exercise all rights of beneficial
ownership of such Old Securities, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
SECURITIES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE,
THE TRUST WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE
AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE
OLD SECURITIES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR
PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE
NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF
THE OLD SECURITIES TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ITS
OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ
AND AGREES TO ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old
Securities tendered hereby should be printed above, if they are not already
set forth above, as they appear on the Certificates representing such Old
Securities. The Certificate number(s) and the Old Securities that the
undersigned wishes to tender should be indicated in the appropriate boxes
above.
If any tendered Old Securities are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Old Securities
than are tendered or accepted for exchange, Certificates for such nonexchanged
or nontendered Old Securities will be returned (or, in the case of Old
Securities tendered by book-entry transfer, such Old Securities will be
credited to an account maintained at DTC), without expense to the tendering
holder, promptly following the expiration or termination of the Exchange
Offer.
The undersigned understands that tenders of Old Securities pursuant to any
one of the procedures described in "The Exchange Offer--Procedures for
Tendering Old Securities" in the Prospectus and in the instruction, attached
hereto will, upon the Company's acceptance for exchange of such tendered Old
Securities, constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Exchange Offer.
The undersigned recognizes that, under certain circumstances set forth in the
Prospectus, the Company may not be required to accept for exchange any of the
Old Securities tendered hereby.
3
<PAGE>
Unless otherwise indicated herein in the box entitled Special Issuance
Instructions below, the undersigned hereby directs that the Exchange
Securities be issued in the name(s) of the undersigned or, in the case of a
book-entry transfer of Old Securities, that such Exchange Securities be
credited to the account indicated above maintained at DTC. If applicable,
substitute certificates representing Old Securities not exchanged or not
accepted for exchange will be issued to the undersigned or, in the case of a
book-entry transfer of Old Securities, will be credited to the account
indicated above maintained at DTC. Similarly, unless otherwise indicated under
"Special Delivery Instructions," please deliver Exchange Securities to the
undersigned at the address shown below the undersigned's signature.
BY TENDERING OLD SECURITIES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (II) ANY EXCHANGE SECURITIES TO BE RECEIVED BY THE
UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (III)
THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
EXCHANGE SECURITIES TO BE RECEIVED IN THE EXCHANGE OFFER, AND (IV) IF THE
UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND
DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE
SECURITIES ACT) OF SUCH EXCHANGE SECURITIES. BY TENDERING OLD SECURITIES
PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL, A
HOLDER OF OLD SECURITIES WHICH IS A BROKER-DEALER REPRESENTS AND AGREES,
CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE
DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO
THIRD PARTIES, THAT (A) SUCH OLD SECURITIES HELD BY THE BROKER-DEALER ARE HELD
ONLY AS A NOMINEE OR (B) SUCH OLD SECURITIES WERE ACQUIRED BY SUCH BROKER-
DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER
TRADING ACTIVITIES AND IT WILL DELIVER THE PROSPECTUS (AS AMENDED OR
SUPPLEMENTED FROM TIME TO TIME) MEETING THE REQUIREMENTS OF THE SECURITIES ACT
IN CONNECTION WITH ANY RESALE OF SUCH EXCHANGE SECURITIES (PROVIDED THAT, BY
SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH BROKER-DEALER WILL NOT
BE DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE
SECURITIES ACT).
AND THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE
REGISTRATION RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR
SUPPLEMENTED FROM TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER
(AS DEFINED BELOW) IN CONNECTION WITH RESALES OF EXCHANGE SECURITIES RECEIVED
IN EXCHANGE FOR OLD SECURITIES, WHERE SUCH OLD SECURITIES WERE ACQUIRED BY
SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-
MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD ENDING 90 DAYS
AFTER THE EXPIRATION DATE (SUBJECT TO EXTENSION UNDER CERTAIN LIMITED
CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS) OR, IF EARLIER, WHEN ALL SUCH
EXCHANGE SECURITIES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING BROKER-DEALER.
IN THAT REGARD, EACH BROKER-DEALER WHO ACQUIRED OLD SECURITIES FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER"), BY TENDERING SUCH OLD SECURITIES AND EXECUTING
THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE
COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH
MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS
UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE
A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR
INCORPORATED BY REFERENCE THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH
THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS
SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-
DEALER WILL SUSPEND THE SALE OF EXCHANGE SECURITIES PURSUANT TO THE PROSPECTUS
UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH
MISSTATEMENT OR OMISSION AND HAVE FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE
4
<PAGE>
EXCHANGE SECURITIES MAY BE RESUMED, OR SUPPLEMENTED THE PROSPECTUS TO CORRECT
SUCH MISSTATEMENT OR OMISSION AND HAVE FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE EXCHANGE SECURITIES MAY BE RESUMED, AS THE
CASE MAYBE. IF THE COMPANY GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE
EXCHANGE SECURITIES, THE COMPANY SHALL EXTEND THE 90-DAY PERIOD REFERRED TO
ABOVE DURING WHICH PARTICIPATING BROKER DEALERS ARE ENTITLED TO USE THE
PROSPECTUS IN CONNECTION WITH THE RESALE OF EXCHANGE SECURITIES BY THE NUMBER
OF DAYS DURING THE PERIOD FROM AND INCLUDING THE DATE OF THE GIVING OF SUCH
NOTICE TO AND INCLUDING THE DATE WHEN PARTICIPATING BROKER-DEALERS SHALL HAVE
RECEIVED COPIES OF THE SUPPLEMENTED OR AMENDED PROSPECTUS NECESSARY TO PERMIT
RESALES OF THE EXCHANGE SECURITIES OR TO AND INCLUDING THE DATE ON WHICH OR
THE TRUST HAS GIVEN NOTICE THAT THE SALE OF EXCHANGE SECURITIES MAY BE
RESUMED, AS THE CASE MAY BE.
Holders of Old Securities whose Old Securities are accepted for exchange
will not receive accrued interest on such Old Securities for any period from
and after the last date to which interest has been paid or duly provided for
on such Old Securities prior to the original issue date of the Exchange
Securities or, if no such interest has been paid or duly provided for, will
not receive any accrued interest on such Old Securities, and the undersigned
waives the right to receive any interest on such Old Securities accrued from
and after such Interest Payment Date or, if no such interest has been paid or
duly provided for, from and after February 20, 1997.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Securities tendered hereby. All
authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD
SECURITIES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE
OLD SECURITIES AS SET FORTH IN SUCH BOX.
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2,5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 7)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Old Securities hereby tendered or on the register of
holders maintained by the Company, or by any person(s) authorized to become
the registered holder(s) by endorsements and documents transmitted herewith
(including such opinions of counsel, certifications and other information as
may be required by the Trust or the Trustee for the Old Securities to comply
with the restrictions on transfer applicable to the Old Securities). If
signature is by an attorney-in-fact, executor, administrator, trustee,
guardian, officer of a corporation or another acting in a fiduciary capacity
or representative capacity, please set forth the signer's full title. See
Instruction 5.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5
<PAGE>
TO BE COMPLETED BY ALL TENDERING SECURITY HOLDERS
(SEE INSTRUCTION 9)
- --------------------------------------------------------------------------------
PAYER'S NAME: THE BANK OF NEW YORK
- -------------------------------------------------------------------------------
PART 1--PLEASE PROVIDE TIN: ____________________
YOUR TIN IN THE BOX AT Social Security Number
THE RIGHT AND CERTIFY orEmployer
BY SIGNING AND DATING Identification Number
BELOW.
SUBSTITUTE ---------------------------------------------------------
PART 2--TIN Applied For [_]
FORM W-9 ---------------------------------------------------------
Certification--Under penalties of perjury, I
certify that:
(1) the number shown on this form is my correct
taxpayer identification number (or I am
waiting for a number to be issued to me).
DEPARTMENT OF THE TREASURY,
INTERNAL REVENUE SERVICE
(2) I am not subject to backup withholding either
because (i) I am exempt from backup
withholding, (ii) I have not been notified by
the Internal Revenue Service (IRS) that I am
subject to backup withholding as a result of
a failure to report all interest or dividends,
or (iii) the IRS has notified me that I am
no longer subject to backup withholding, and
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER ("TIN")
AND CERTIFICATION
(3) any other information provided on this form
is true and correct.
SIGNATURE: _______________________ DATE: __ , 1997
- -------------------------------------------------------------------------------
You must cross out item (iii) in Part (2) above if you have been notified by
the IRS that you are subject to backup withholding because of underreporting
interest or dividends on your tax return and you have not been notified by the
IRS that you are longer subject to backup withholding.
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES
RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT
TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or
delivered an application to receive a taxpayer identification number to
the appropriate Internal Revenue Service Center or Social Security
Administration Office or (2) I intend to mail or deliver an application
in the near future. I understand that if I do not provide a taxpayer
identification number by the time of payment, 31% of all payments made
to me on account of the Exchange Capital Securities shall be retained
until I provide a taxpayer identification number to the Exchange Agent
and that, if I do not provide my taxpayer identification number within
60 days, such retained amounts shall be remitted to the Internal
Revenue as backup withholding and 31% of all reportable payments made
to me thereafter will be withheld and remitted to the Internal Revenue
Service until I provide a taxpayer identification number
Signature: ____________________________________________ Date: __ , 1997
6
<PAGE>
(Signature(s) of Holder(s)) ____________________________________________________
Date: ___________________________________________________________________ , 1997
Name(s) ________________________________________________________________________
- --------------------------------------------------------------------------------
(Please Print)
- --------------------------------------------------------------------------------
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
- --------------------------------------------------------------------------------
Area Code and Telephone Number _________________________________________________
Taxpayer Identification or Social Security Number(s) ___________________________
GUARANTEE OF SIGNATURE(S)
(See Instructions 2 and 5)
Authorized signature(s) ________________________________________________________
Date: ___________________________________________________________________ , 199_
Name of Firm ___________________________________________________________________
Capacity (full title) __________________________________________________________
(Please Print)
Address ________________________________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number _________________________________________________
7
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 )
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the To be completed ONLY if Exchange
Exchange Securities or Old Securities or Old Securities not
Securities not tendered are to be tendered are to be sent to someone
issued in the name of someone other than the registered holder
other than the registered holder of the Old Securities whose
of the Old Securities whose name(s) appear(s) above, or such
name(s) appear(s) above. registered holder(s) at an address
other than that shown above.
Issue
[_] Old Securities not tendered Mail
to: [_] Old Securities not tendered
[_] Exchange Securities, to: to:
[_] Exchange Securities, to:
Name(s) ___________________________
Address ___________________________ Name(s) ___________________________
----------------------------------- Address ___________________________
(Include Zip Code)
-----------------------------------
Area Code and Telephone Number (Include Code)
- ----------------------------------- Area Code and Telephone Number ___
(Tax Identification or Social
- ----------------------------------- Security Number(s))
(Tax Identification or Social
Security Number(s))
8
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed either if (a)
Certificates are to be forwarded herewith or (b) tenders are to be made
pursuant to the procedures for tender by book-entry transfer set forth in "The
Exchange Offer--Procedures for Tendering" in the Prospectus. Certificates, or
timely confirmation of a book-entry transfer of such Old Securities into the
Exchange Agent's account at DTC, as well as this Letter of Transmittal (or
facsimile thereof, properly completed and duly executed, with any required
signature guarantees, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to the Expiration Date. Old Securities may be tendered in
whole or in part in the principal amount of $1,000 and integral multiples of
$1,000 in excess thereof.
Holders who wish to tender their Old Securities and (i) whose Old Securities
are not immediately available or (ii) who cannot deliver their Old Securities,
this Letter of Transmittal and all other required documents to the Exchange
Agent on or prior to the Expiration Date or (iii) who cannot complete the
procedures for delivery by book-entry transfer on a timely basis, may tender
their Old Securities by properly completing and duly executing a Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer--Procedures for Tendering" in the Prospectus. Pursuant
to such procedures: (i) such tender must be made by or through an Eligible
Institution (as defined below); (ii) a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form made available by the
Company, must be received by the Exchange Agent on or prior to the Expiration
Date; and (iii) the Certificates (or a book-entry confirmation (as defined in
the Prospectus)) representing all tendered Old Securities, in proper form for
transfer, together with a Letter of Transmittal (or facsimile thereof,
properly completed and duly executed, with any required signature guarantees
and any other documents required by this Letter of Transmittal, must be
received by the Exchange Agent within five New York Stock Exchange, Inc.
trading days after the date of execution of such Notice of Guaranteed
Delivery, all as provided in "The Exchange Offer--Procedures for Tendering" in
the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Old Securities
to be properly tendered pursuant to the guaranteed delivery procedure, the
Exchange Agent must receive a Notice of Guaranteed Delivery on or prior to the
Expiration Date. As used herein and in the Prospectus, "Eligible
Institution"means a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as "an eligible guarantor institution," including (as such terms
are defined therein) (i) a bank; (ii) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (iii) a credit
union; (v) a national securities exchange, registered securities association
or clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance
of such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in
DTC whose name appears on the register of holders maintained by the
Trust as the owner of the Old Securities) of Old Securities tendered
herewith, unless such holder(s) has completed either the box entitled
"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" above, or
(ii) such Old Securities are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
9
<PAGE>
3. INADEQUATE SPACE. If the space provided in the box captioned "Description
of Old Securities" is inadequate, the Certificate number(s) and/or the
principal amount of Old Securities and any other required information should
be listed on a separate signed schedule which is attached to this Letter of
Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Old Securities will be
accepted only in the principal amount of $1,000 and integral multiples of
$1,000 in excess thereof. If less than all the Old Securities evidenced by any
Certificate submitted are to be tendered, fill in the principal amount of Old
Securities which are to be tendered in the box entitled Principal Amount of
Old Securities Tendered (if less than all). In such case, new Certificate(s)
for the remainder of the Old Securities that were evidenced by your old
Certificate(s) will only be sent to the holder of the Old Security, promptly
after the Expiration Date. All Old Securities represented by Certificates
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated.
Except as otherwise provided herein, tenders of Old Securities may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at one of its addresses set forth above or in
the Prospectus on or prior to the Expiration Date. Any such notice of
withdrawal must specify the name of the person who tendered the Old Securities
to be withdrawn, the aggregate principal amount of Old Securities to be
withdrawn, and (if Certificates for Old Securities have been tendered) the
name of the registered holder of the Old Securities as set forth on the
Certificate for the Old Securities, if different from that of the person who
tendered such Old Securities. If Certificates for the Old Securities have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such Certificates for the Old Securities, the tendering
holder must submit the serial numbers shown on the particular Certificates for
the Old Securities to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case
of Old Securities tendered for the account of an Eligible Institution. If Old
Securities have been tendered pursuant to the procedures for book-entry
transfer set forth in the Prospectus under "The Exchange Offer--Procedures for
Tendering," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of Old Securities, in which
case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written, telegraphic, telex or facsimile transmission. Withdrawals of
tenders of Old Securities may not be rescinded. Old Securities properly
withdrawn will not be deemed validly tendered for purposes of the Exchange
Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described in the Prospectus
under "The Exchange Offer--Procedures for Tendering."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in
their sole discretion, whose determination shall be final and binding on all
parties. None of the Company, any affiliates or assigns of the Company, the
Exchange Agent or any other person shall be under any duty to give any
notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Old Securities which
have been tendered but which are withdrawn will be returned to the holder
thereof without cost to such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Old
Securities tendered hereby, the signature(s) must correspond exactly with the
name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Old Securities tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Securities are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are
different registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and must submit proper evidence
satisfactory to the Company, in its sole discretion, of each such person's
authority so to act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Old Securities listed and transmitted hereby, no endorsement(s) of
Certificate(s) or separate bond power(s) are required unless Exchange
Securities are to be
10
<PAGE>
issued in the name of a person other than the registered holder(s).
Signature(s) on such Certificate(s) or bond power(s) must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Old Securities listed, the Certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also
must be accompanied by such opinions of counsel, certifications and other
information as the Company or the Trustee for the Old Securities may require
in accordance with the restrictions on transfer applicable to the Old
Securities. Signatures on such Certificates or bond powers must be guaranteed
by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Securities are to
be issued in the name of a person other than the signer of this Letter of
Transmittal, or if Exchange Securities are to be sent to someone other than
the signer of this Letter of Transmittal or to an address other than that
shown above, the appropriate boxes on this Letter of Transmittal should be
completed. Certificates for Old Securities not exchanged will be returned by
mail or, if tendered by book-entry transfer, by crediting the account
indicated above maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time
of receipt) and acceptance for exchange of any tender of Old Securities, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for which, may, in the
view of counsel to the Company to be unlawful, and the Company also reserves
the absolute right, subject to applicable law, to waive any of the conditions
of the Exchange Offer set forth in the Prospectus under "The Exchange Offer--
Certain Conditions to the Exchange Offer" or any conditions or irregularity in
any tender of Old Securities of any particular holder whether or not similar
conditions or irregularities are waived in the case of other holders. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Old Securities will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. federal income
tax law, a holder whose tendered Old Securities are accepted for exchange is
required to provide the Exchange Agent with such holder's correct taxpayer
identification number ("TIN") on Substitute Form W-9 below. If the Exchange
Agent is not provided with the correct TIN the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Old Securities
exchanged pursuant to the Exchange Offer may be subject to 31% backup
withholding.
The box in Part 2 of the Substitute Form W-9 may be checked if the tendering
holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future. If the box in Part 2 is checked, the holder or
other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN
is provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60 day period following the date of the Substitute Form W-
9. If the holder furnishes the Exchange Agent with its TIN within 60 days
after the date of the Substitute Form W-9, the amounts retained during the 60
day period will be remitted to the holder and no further amounts shall be
retained or withheld from payments made to the holder thereafter. If, however,
the holder has not provided the Exchange Agent with its TIN within such 60 day
period, amounts withheld will be remitted to the IRS as backup withholding. In
addition, 31% of all payments made thereafter will be withheld and remitted to
the IRS until a correct TIN is provided.
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Old Securities or of the last transferee appearing on the transfers
attached to, or
11
<PAGE>
endorsed on, the Old Securities. If the Old Securities are registered in more
than one name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the
face thereof, to avoid possible erroneous backup withholding. A foreign person
may qualify as an exempt recipient by submitting a properly completed IRS Form
W-8, signed under penalties of perjury, attesting to that holder's exempt
status. Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. federal income tax. Rather, the
U.S. federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
11. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Old Securities,
by execution of this Letter of Transmittal, shall waive any right to receive
notice of the acceptance of their Old Securities for exchanges.
Neither the Company, the Exchange Agent nor any other person is obligated to
give notice of any defect or irregularity with respect to any tender of Old
Securities nor shall any of them incur any liability for failure to give any
such notice.
12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Old Securities have been lost, destroyed or stolen, the holder
should promptly notify the Exchange Agent. The holder will then be instructed
as to the steps that must be taken in order to replace the Certificate(s).
This Letter of Transmittal and related documents cannot be processed until the
procedures for replacing lost, destroyed or stolen Certificate(s) have been
followed.
13. SECURITY TRANSFER TAXES. Holders who tender their Old Securities for
exchange will not be obligated to pay any transfer taxes in connection
therewith. If, however, Exchange Capital Securities are to be delivered to, or
are to be issued in the name of, any person other than the registered holder
of the Old Securities tendered, or if a transfer tax is imposed for any reason
other than the exchange of Old Securities in connection with the Exchange
Offer, then the amount of any such transfer tax (whether imposed on the
registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
12
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
ANY AND ALL OUTSTANDING
10 7/8% SENIOR SUBORDINATED NOTES DUE 2007 AND
12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007
OF
TCI SATELLITE ENTERTAINMENT INC.
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Company's (as defined below) 10 7/8% Senior Subordinated
Notes due 2007 and 12 1/4% Senior Subordinated Discount Notes due 2007
(collectively, the "Old Securities") are not immediately available, (ii) Old
Securities, the Letter of Transmittal and all other required documents cannot
be delivered to The Bank of New York (the "Exchange Agent") on or prior to
5:00 p.m. New York City time, on the Expiration Date (as defined in the
Prospectus referred to below) or (iii) the procedures for delivery by book-
entry transfer cannot be completed on a timely basis. This Notice of
Guaranteed Delivery may be delivered by hand, overnight courier or mail, or
transmitted by facsimile transmission, to the Exchange Agent. See "The
Exchange Offer--Procedures for Tendering" in the Prospectus. In addition, in
order to utilize the guaranteed delivery procedure to tender Old Securities
pursuant to the Exchange Offer, a completed, signed and dated Letter of
Transmittal relating to the Old Securities (or facsimile thereof) must also be
received by the Exchange Agent prior to 5:00 P.M. New York City time, on the
Expiration Date. Capitalized terms not defined herein have the meanings
assigned to them in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
By Registered or Facsimile Transmissions: By Hand Or Overnight
Certified Mail: (Eligible Institutions Only) Delivery:
The Bank of New York The Bank of New York
101 Barclay Street, 7E (212) 571-3080 101 Barclay Street
New York, New York 10286 Corporate Trust Services
Attn: Reorganization Confirm By Telephone: Window
Section (212) 815-6333 Ground Level
Arwen Gibbons New York, New York 10286
For Information Call: Attn: Reorganization
(212) 815-6333 Section,
Arwen Gibbons
Delivery of this Notice Of Guaranteed Delivery to an address other than as
set forth above or transmission of this Notice of Guaranteed Delivery via
facsimile to a number other than as set forth above will not constitute a
valid delivery.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to TCI Satellite Entertainment, Inc., a
Delaware corporation (the "Company"), upon the terms and subject to the
conditions set forth in the Prospectus dated 1997 (as the same may be
amended or supplemented from time to time, the "Prospectus"), and the related
Letter of Transmittal, receipt of which is hereby acknowledged, the aggregate
principal amount of Old Securities set forth below pursuant to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The
Exchange Offer."
Aggregate Principal Amount Name(s) of Registered Holder(s): _____
Amount Tendered: $____________________ ______________________________________
Certificate No(s)
if available): _______________________
: ____________________________________
(Total Principal Amount Represented
by Old Securities Certificate(s))
$ ____________________________________
If Old Securities will be tendered by book-entry transfer, provide the
following information:
DTC Account Number: __________________
Date: ________________________________
- -------
* Must be in denominations of $1,000 principal amount and any integral
multiple thereof.
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<PAGE>
- -------------------------------------------------------------------------------
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs personal representatives, successors
and assigns of the undersigned.
- -------------------------------------------------------------------------------
PLEASE SIGN HERE
X _________________________________ _________________
X _________________________________ _________________
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number:________________________________________________
Must be signed by the holder(s) of the Old Securities as their name(s)
appear(s) on certificates for Old Securities or on a security position
listing, or by person(s) authorized to become registered holder(s) by
endorsement and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian, attorney-in-
fact, officer or other person acting in a fiduciary or representative
capacity, such person must set forth his or her full title below.
Please print name(s) and address(es)
Name(s): ______________________________________________________________
______________________________________________________________
______________________________________________________________
Capacity: ______________________________________________________________
Address(es): ______________________________________________________________
______________________________________________________________
______________________________________________________________
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<PAGE>
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms as defined therein): (i) a bank; (ii) a
broker, dealer, municipal securities broker, municipal securities dealer,
government securities broker, government securities dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association
or learning agency; or (v) a savings association that is a participant in a
Securities Transfer Association recognized program (each of the foregoing
being referred to as an "Eligible Institution"), hereby guarantees to deliver
to the Exchange Agent, at one of its addresses set forth above, either the Old
Securities tendered hereby in proper form for transfer, or confirmation of the
book-entry transfer of such Old Securities to the Exchange Agent's account at
The Depositary Trust Company ("DTC"), pursuant to the procedures for book-
entry transfer set forth in the Prospectus, in either case together with one
or more properly completed and duly executed Letter(s) of Transmittal (or
facsimile thereof) and any other required documents within five business days
after the date of execution of this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Securities tendered hereby to the Exchange Agent
within the time period set forth above and that failure to do so could result
in a financial loss to the undersigned.
- ------------------------------------- -------------------------------------
Name of Firm Authorized Signature
- ------------------------------------- -------------------------------------
Address Title
- ------------------------------------- -------------------------------------
Zip Code (Please Type or Print)
Area Code and Telephone No. _________ Dated: ______________________________
NOTE: DO NOT SEND CERTIFICATES FOR OLD SECURITIES WITH THIS FORM. CERTIFICATES
FOR OLD SECURITIES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
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